Understanding Retention of Title including insolvency, ownership and claims

When a business supplies goods to customers on credit, it’s a possibility that payment won’t be received as agreed. This situation poses a considerable risk for suppliers, but most specifically if their customer declines to the extent 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.’ This introduces further issues, with the strong possibility of being able to secure little or no return.

There is a way of mitigating 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.

What is a retention of title clause?

A straightforward retention of title clause within a contract of sale essentially means that ownership remains with the supplier, until full payment for the goods has been received. There are also a number of other ROT clauses which may be used under the appropriate circumstances.

If the clause is clearly defined, and the contract signed by both parties, it may be used as documentary proof that title should remain with the supplier, who can put their case to the appointed liquidator and enforce the clause accordingly. 

What is the purpose of a retention of title agreement?

Insolvency is an all too credible 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.

‘All monies’ clause

A valid ‘all monies’ clause is more expansive, and allows for retention of title 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.

Are there any potential limitations on the effectiveness of ROT clauses in commercial law?