If you can’t pay for stock, does the supplier have the right to reclaim the goods? The rights of a supplier to demand the return of goods or forcibly remove stock will be determined by a retention of title clause in the contract, although there are variations of the clause which will impose different limitations.
Can a supplier reclaim their stock if it hasn't yet been paid for?
Transactions between businesses often work via a line of credit extended to you by the company you are purchasing from. Typically with payments terms of around 30 days, this means you can take receipt of the goods and begin integrating them into your production or distribution process before you actually hand over the money for them. For many companies this assists with cash flow ensuring a huge financial layout is not required up front.
Usually this process works well for both parties. But what happens if you are unable to pay for the goods after delivery has already been made?
You may think the easiest option would be to return these goods back to the supplier; however, it may not be as easy as this. For instance, some stock may have been sold on to your customers already, while raw materials may have begun to be processed or incorporated into other products thereby altering their original state.
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Firstly, a retention of title clause within a contract means that the ownership of the goods in question will remain that of the supplier until full payment is made. As a result, should you fail to pay for the goods as agreed in the contract, your supplier is within their right to remove them from your premises. Even if you haven’t signed a formal contract, if your supplier can prove that you were aware of their terms and conditions before agreeing to purchase the goods, for example if you’ve done business with them before and have signed their purchase contracts in the past, then the clause may still be enforceable.
If there was no retention of title clause in your contract then the Sale of Goods Act 1979 means that the items become yours (or your company’s depending on who the contract was made with) once you take receipt of them. This means the supplier is not able to reclaim the goods should you fail to pay for them. If you’re late paying, then they will have to find alternatives ways to try and recover the money you owe them. Turning up to your premises to remove the goods could see them being charged with theft and criminal damage.
What are the limitations to retention of title?
While it may seem as though a retention of title clause gives the supplier all the power in the event of late or non-payment, there are several limitations to this type of contract which may prevent your supplier taking possession of the goods should you fail to pay for them on time.
Identifying the goods - While some retention of title clauses permit the supplier entering your premises to recover goods, once inside, the supplier will have to identify their own stock and differentiate it from any other items present. This may be tricky if it is stored in a warehouse housing a large amount of similar goods. Identification may be able to be done through serial numbers or by the packaging if it hasn’t yet been opened, but simply put - if they can’t prove that the stock is theirs, they can’t take it away.
Goods being processed - Once the goods enter the production process, any retention of title is usually unenforceable. This is especially the case once the goods have been incorporated into other products; separating them without causing damage is extremely tricky and in many cases impossible.
Perishable goods - Retention of title typically doesn’t work very well for perishable goods such as fresh food and other produce. On standard 30 day payment terms, by the time payment is overdue, it is likely that the goods will have spoiled and will therefore be worth nothing to the original supplier even if they could be recovered.
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Variations of retention of title clause
Retention of title is not a one size fits all clause. They come in many guises depending on the situation and the level of security required. These include “simple” clauses that apply to the goods supplied under that particular contract, “all monies” clauses whereby the supplier has ownership of all the goods they’ve supplied to you until you’ve paid for them all – this includes goods supplied under the contract and any other goods supplied by them, regardless of how the debt occurred.
There is also a “proceeds of sale” clause that gives the supplier the right to any proceeds if you’ve sold the stock. There are other more complex clauses too, but it’s worth noting that generally speaking, the more complex and extensive a clause is, the harder it is for the supplier to enforce it.
The retention of title clause should still remain in place even if your company goes into liquidation or enters any other formal insolvency procedure. In this event the supplier will need to speak to the insolvency practitioner handling the case about reclaiming their stock. If there isn’t a retention of title clause in place, then the supplier will be treated the same as any other ordinary creditor.
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