A retention of title clause is a term within a contract for the sale of goods which states that the seller retains ownership of the goods until specified obligations are fulfilled by the buyer.
Without such a clause, ownership of the goods is likely to pass to the buyer on delivery, even if the goods have not yet been paid for.
By retaining title, the seller obtains priority over secured and unsecured creditors of the buyer if the buyer fails to pay (subject to the provisions of the Corporate Insolvency and Governance Act 2020 – see below)
What rights does a retention of title clause give?
A basic retention of title clause simply states that title remains with the seller and therefore, in order to be of practical assistance it is also often coupled with some or all of the additional clauses.
|Retention of title||Enables the seller to retain title (ownership) of the goods until the buyer has fulfilled a specified obligation – usually the obligation to pay.|
|Right to repossess||This gives the seller the right to enter the buyer’s premises to repossess the goods. Without this clause, the seller is potentially committing a trespass.|
|Right to prevent sale||A restriction on the buyer which stops them from selling the goods on to a third party until such time as the obligations to the seller have been met.|
|Proceeds of sale clause||This provides for the buyer to account to the seller for the price of the goods in the event that they are sold on to a third party. Such clauses have been considered to imply that the seller has a charge over the goods, rather than retained title and therefore inclusion of this clause needs to be carefully considered.|
|Obligation for separate storage||A seller may wish to stipulate that the goods be kept separate to other goods belonging to the buyer or third parties so that the goods owned by the seller can be easily identified if it becomes necessary to repossess. This clause may also stipulate labelling of ownership and a right for the seller to enter the premises to inspect and confirm whether this step has been taken.|
|Obligation not to annex goods||This clause states that the buyer is not allowed to annex the goods to the buyer’s premises without the consent of the seller.- such as where the goods are heavy plant and machinery.|
|All monies clause||This clause retains title in all the goods supplied by the seller, rather than just those to which the unpaid invoice or unfulfilled obligation relates. It avoids the need to match specific invoices to specific goods if it becomes necessary to repossess any goods for non-payment.|
|Mixed goods clause||This may be used where the goods supplied are then used or coupled with other goods to manufacture a new item, particularly where the goods supplied cannot be easily separated from the new item. This clause gives the seller an interest in the new item – often in the form of a charge.|
It is a general principle of contract law that one clause, if found to be unenforceable, can invalidate the entire contract. Contracts often therefore include a severance clause which states that all clauses and sub-clauses stand alone and that in the event one clause is found to be unenforceable, it does not impact upon the validity of the remaining clauses.
|Risk and insurance provision||It is sensible to stipulate who is responsible for the goods during transit and following delivery. When the seller retains title in the goods, such a clause can stipulate that the risk is transferred to the buyer upon delivery and not upon transfer of title. Depending on the nature of the goods, the seller may also wish to consent to the choice of insurer, the level of cover, and have its interest in the goods communicated to the insurer.|
|Termination||This clause may give the seller the right to terminate the contract in the event that the seller believes a listed event is about to occur, such as the buyer going into administration/liquidation. This right is however subject to the new provisions introduced by the Corporate Insolvency and Governance Act 2020.|
Limitations of retention of title clauses
There are many contracts in which it will be sensible to have a retention of title clause, however, it is not necessarily a complete solution to non-payment with the following limitations:
|Company is in administration||If the buyer goes into administration or liquidation, no steps can be taken to repossess the goods without the permission of the administrator, insolvency practitioner or the court.|
|Part A1 Moratorium||If the buyer is subject to a moratorium under Part A1 of the Insolvency Act 1986, the seller will not be able to exercise it’s right of repossession without the permission of the court, and the court may give the buyer the right to sell the goods despite the existence of an ROT if it will aid the rescue of that company.|
|Incorporation of the retention of title clause||A retention of title clause will only be enforceable if It has been incorporated into the contract. The clause must form part of the communications with the seller and not be countered by the seller prior to conclusion of the contract. Communicating a ROT clause after the goods have been delivered is likely to be too late.|
|Inconsistent with trading relationship||A retention of title clause may not always be consistent with the wider agreement with the buyer and therefore other options may be more suitable – see below|
|Low resale value||A retention of title clause is unlikely to be of much practical assistance where the goods are perishable or have a low resale value.|
Retention of title clauses can be a helpful means of taking steps to recover goods if the buyer fails to pay, however, as mentioned above, retaining title is only one element and therefore the accompanying clauses should also be considered.
Any retention of title clause should also sit alongside a proper credit control system which, if implemented properly, will hopefully avoid the need to rely on the retention of title clause.