When a business supplies goods to customers on credit, suppliers always run the risk that payment won’t be received as agreed. This situation poses a considerable risk for suppliers and their own cash flow, particularly if their customer's financial position has declined to the point of insolvency.
If liquidation is the only option for their customer, the supplier becomes an unsecured creditor and takes their place at the bottom of the payment ‘hierarchy.’ In the vast majority of insolvent liquidations, unsecured creditors unfortunately tend to get very little of the money back that they are owed by the insolvent entity.
There is a way for suppliers to mitigate this risk, however, and that is by including a retention of title (ROT) clause within a contract of sale.
It’s crucial to obtain professional guidance when drafting a clause of this type, as retention of title is a complex area, made more complicated by the many possible scenarios that could occur.
In simple terms, a retention of title clause within a contract of sale states that ownership of the goods supplied remains with the supplier, until full payment for the goods has been received.
If the clause is clearly defined - and the contract signed by both parties - it can be used as proof that the goods held by the insolvent company actually belong to the supplier, who can put their case to the appointed liquidator in order to recover the items covered by the ROT.
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What is the purpose of a retention of title agreement?
Insolvency is a threat for many businesses, but for suppliers, the insolvency of a major customer poses a significant threat to their ongoing survival. Suppliers can use retention of title clauses to limit their chances of not being paid for goods delivered, but the wording needs to be clear and unambiguous.
The customer should be made aware of any retention of title clause before, or when a contract is agreed, in order for it to be enforceable. It’s advisable to include these clauses in the overall terms and conditions of trade, rather than an invoice.
If they were to be used within an invoice, the customer would need to sign it prior to delivery of the goods - the signature then denoting acceptance of the terms by the purchaser.
Different types of retention of title clause
‘Simple’ ROT clause
This is a basic retention of title clause that states title to specific goods is retained by the supplier until payment has been received in full for those specific goods only.
‘All monies’ clause
A valid ‘all monies’ clause is more expansive, and allows for retention of title of all goods supplied, until all monies due from the debtor are paid to the supplier. This contrasts with the order-by-order basis of a simple retention of title clause. An ‘all monies’ clause is often included separately, but in addition to, a ‘simple’ retention of title clause within a contract.
‘Proceeds of sale’ clause
This type of ROT clause addresses the problem of goods having already been sold on, and may entitle the original supplier to the proceeds of sale.
‘Mixed goods’ clause
If the goods supplied were used in the manufacturing process, and mixed with other goods, a ‘mixed goods’ clause may allow the supplier to claim right of ownership over the original raw materials. This can be a problematic situation depending on whether the goods can be separated without causing damage to the third party goods.
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Are there any potential limitations on the effectiveness of ROT clauses in commercial law?
Normal course of trade - If the supplier is aware their goods will be used in the buyer’s ‘normal course of business,’ and naturally sold on before payment has been made, then an ROT clause may well be ineffective.
Perishable goods - Perishable goods are, by their very nature, going to make an ROT clause unenforceable.
Balance on the purchaser’s account - Only goods delivered after the date on which there is a nil or credit balance on the buyer’s account, are eligible for retention of title.
Retention of Title cannot be enforced where the goods have 'changed form' - such as through a manufacturing process, or where they cannot be easily separated or removed from a product which has already been constructed.
Enforcing a retention of title clause
To prevent the liquidation of goods included in a retention of title clause, the Official Receiver or appointed insolvency practitioner should be notified as soon as possible of its existence.
The office-holder may ask the supplier to complete a retention of title questionnaire in order to give them a better understanding of the situation, and establish whether the clause meets the necessary requirements. The supplier will also need to provide documentary evidence to support their claim letter.
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Ongoing developments in retention of title case law means that suppliers should regularly evaluate ROT clauses, and their likely effectiveness in each instance. Our experts at Real Business Rescue can help in this respect by providing professional advice on whether a clause has been correctly drafted, and the likelihood of its successful enforcement in commercial law.
Real Business Rescue are experts in retention of title issues, and have extensive experience of dealing with retention of title claims and disputes. Call one of the team to arrange a free same-day consultation.
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