December 8, 2017

Enforcement of Retention of Title Clauses

For ease of reference, we shall refer below to the manufacturer/supplier as the ‘seller’ and the defaulting customer as the ‘buyer’.

A common misconception is that goods remain the property of a manufacturer or supplier until a customer has paid for them. Often this misconception is only dispelled when the customer enters into an insolvency process and the manufacturer or supplier finds, to their horror, that they do not retain ownership of the goods.

Retention of title clauses can help in these cases. Retention of title clauses seek to preserve a seller's rights of ownership over goods so that the seller has priority over secured and unsecured creditors in the event that the buyer fails to pay for the goods and enters into an insolvency process. Depending on the circumstances of the case, a retention of title clause might mean that a seller has a right to enter the buyer's premises without trespassing to recover the goods which they can identify, or that the seller has a potential claim against an insolvency practitioner if they sell goods which were identifiably the seller's.

It is important to note that retention of title clauses are not always effective. Below, we will examine the type of retention of title clauses which, in our experience, tend to work and those which tend not to work.

Retention of title clauses which work

In our experience, such clauses tend to work well in the following situations.

  1. Where the seller seeks to retain title until its invoice for the particular goods in question have been paid.
  2. Where the seller seeks to retain title to all the goods it has supplied to the buyer (even those goods which the buyer has already paid for) until the entire debt owed to the seller has been paid.

Retention of title clauses which are unlikely to work

In our experience, retention of title clauses tend not to work so well in the following situations:

  1. When the buyer has already sold on the goods. An retention of title clause can seek to grant a seller a right of ownership over the proceeds of sale; however the court has only approved this type of clause once (and that case has not been followed since).
  2. When the goods lose their identity during the manufacturing process by being mixed with other goods. In those cases, the seller will no longer be able to identify its goods and, therefore, will lose its title to those goods.
  3. When the goods have a low resale value or the costs of collecting the goods is disproportionate to their value.
  4. When the retention of title clause creates a company charge (in simple terms, a company charge is a type of security which must be registered with Companies House in accordance with the Companies Act 2006). If the charge is not registered, it will not be enforceable.

Managing risk

Clearly, retention of title clauses are not a complete solution to the risk of a buyer’s insolvency. However, they can form one part of a broader risk-management strategy.

In addition to using retention of title clauses, it is worth keeping an eye on the signs that a buyer may be in financial difficulties, for example the late filing of statutory accounts, poor balance sheets or profit and loss accounts, outstanding county court judgments and low credit scoring from credit checks.

If these signs are present, a seller may wish to do the following.

  1. Reduce the amount and/or period of credit.
  2. Take security such as a letter of credit or bank guarantee.
  3. Obtain insurance against the risk of a defaulting customer.
  4. Require the customer to take out insurance upon receipt of the goods and to have the seller's interest noted on the policy.

Conclusion & comment from a litigation solicitor in the industry

Contrary to popular belief, a buyer may obtain ownership of goods even before it has paid for the goods. As a result, in the event of a buyer’s insolvency, a seller can find it difficult to retrieve those goods. ROT clauses can help in such case; however, great care should be taken in drafting the clause to ensure it is likely to suit the circumstances of the case. If in doubt, seek expert legal advice and assistance from Holmes & Hills' team of manufacturing solicitors.

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