One of the ways in which sellers can protect their business against buyers that do not pay for goods, is to incorporate a Retention of Title (ROT) clause in their Terms and Conditions of sale.
The purpose of this blog is to highlight some of the pitfalls of ROT clauses and how they can be overcome.
ROT clauses must be expressed
The general law will not imply a ROT clause into a trading relationship in the same way that, in any relationship, there are implied terms regarding fitness for purpose and satisfactory quality. If a seller wishes to reserve legal title to his goods, then he must expressly say so.
A ROT clause need be nothing more than say, “legal title to the goods shall not pass to the buyer unless the seller has been paid in full.”
Is an ROT clause desirable?
There are some industries where a ROT clause is not desirable and in some cases could cause damage if one were to exist. For example, it is pointless for a sandwich manufacturer having a ROT clause.
Similarly, Terms and Conditions of many of the concrete suppliers provide that if concrete is ordered, it is going to be delivered on the day and time that delivery was ordered whether or not the buyer is ready for the concrete or not.
Incorporating the Terms and Conditions of Sale into the Contract
Terms and conditions of sale will usually have clauses relating to the price that is paid for goods, interest for late payment, delivery, and warranties.
To be enforceable, ROT clauses must form part of the contract between the parties. This does not mean that the first time the buyer sees the ROT clause is on the invoice, which is submitted at the time of delivery. The court would disregard such a clause, as it would be regarded as a post contract clause and therefore not enforceable.
If a seller’s Terms and Conditions are to be incorporated in the contract, then it is best for the buyer to have either signed an acknowledgement that the sellers Terms and Conditions will apply in respect of this contract and/or all future contracts. However, this is not always possible and therefore sellers should ensure that their Terms and Conditions appear on price lists, brochures, quotations, invoices and delivery notes. If this occurs, then the court will look far more favourably on a “course of dealing argument” whereby the seller maintains that his Terms and Conditions apply, simply because he has been trading with the buyer over a number of years and can demonstrate that the buyer has had sight of the Terms and Conditions on many occasions.
Once trading commences
Assuming you have protected your position as far as you are able, and have incorporated your terms into the contract, what further steps should you take?
Are the goods identifiable?
One of the problems that arise when enforcing a ROT clause is whether the seller can identify which goods are those that have not been paid for.
If possible, the goods should be able to be identified by serial numbers, batch numbers or marked pallets.
All monies clauses
Consider using an “all monies” clause which effectively reserves title to goods until all sums that are outstanding have been paid for. An example would be “legal title in the goods shall not pass to the buyer until all sums due on the sellers account have been paid.”
The clause does not release title until all sums due have been paid.
Receivers, Administrators and Liquidators. What’s their view when dealing with ROT clauses?
The answer is they challenge them. Most liquidators/receivers will invariably always tell you that your ROT claim is invalid.
One insolvency practitioner told me that 80% of people that claim retention of title usually went away when he told them that he thought their clause was invalid.
Bear in mind the liquidator/administrator/receiver has a vested interest in defeating all ROT claims, simply because there will be more assets to realise when proceedings are concluded, so that secured creditors/debenture holders can be paid.
Quite often enforcing a ROT clause can be a battle of wills. The receiver/liquidator will call your bluff. Do not blink! If you are sure of your position, threaten legal action and if necessary, issue proceedings. One of the last things any receiver wants to do is risk precious funds in paying lawyers to defend a claim that has merit!
Arguments used by Receivers/Liquidators
There are two principal arguments that those seeking to enforce a ROT clause will face: -
- That the clause is invalid.
- The goods that are subject to the clause have been incorporated into another product or fixed to the land.
Receivers/liquidators will often argue that the goods have been incorporated and therefore are not identifiable and as a result, the ROT clause is invalid.
If the goods are mixed/manufactured in such a way so that they cannot be separated without serious injury or destruction to the finished product, a ROT claim can be defeated. One case, which dealt with this problem, concerned the supply of resin to a chipboard manufacturer. The resin was used to hold the chipboard together and had been used in the manufacturing process. Perhaps somewhat understandably the court was unwilling to allow the resin manufacturer to break up the chipboard to get it back!
If the materials supplied have become part of the land and lost their identity, then a ROT clause will not apply. The courts have decided that to become a fixture, an item has to have “substantial connection” to the land as opposed to resting on it.
Charges over the buyers assets
Most buyers will be opposed to granting charges to a seller as it makes it difficult to raise additional finance (if numerous charges are registered), and also it is difficult to keep the charges register up-to-date as theoretically the charge would have to be renewed every time additional product was supplied.
Proceeds of sale clause
Where the goods supplied are to be sold on by the buyer, the object of a proceeds of sale clause is to enable the seller to assert rights in the proceeds of sale in order to satisfy the purchase price of the goods.
A clause giving the seller rights over the sale proceeds of goods resold by the buyer was held to be valid in a case called Romalpa. This was on the basis that there was, on the facts before the court, a fiduciary relationship between the buyer and the seller, and the buyer as a fiduciary was under a duty to account for the sale proceeds to the seller as beneficiary.
Since the Romalpa decision, the courts have distinguished the facts of the cases before them from the facts in the Romalpa case, and in a series of cases have held that clauses of this kind create a charge by the buyer in favour of the seller which will be void if not registered at Companies House.
As a result, it is now extremely difficult, if not impossible, to draft a proceeds of sale clause without it being construed as a charge over the goods (and therefore unenforceable unless registered as such).
Retention of Title Checklist
- That legal title is retained by the seller
- The seller reserves the right to enter onto company premises to recover goods in default of payment (NB such a right would not extend to entering on to the premises of a third party)
- Provide that the buyer must store his goods separately from other goods until paid for
- The seller should ensure that the goods are identified by serial/ batch number
- Is it appropriate to include a term that the goods cannot be attached to land without the seller’s consent?
- Negotiate with the Receiver/Liquidator/Administrator if you do not want the goods back
- Attend the premises as soon as possible and repossess immediately
A final word of warning a ROT Clause is no substitute for adequately checking out customers in advance.
If I can assist with helping people resolving commercial contract disputes I am more than happy to try to do so.
Please contact me on: -
Tel: 01295 661434
Mobile: 07896 938126
E-mail: davidrichards@brethertons.co.uk
David Richards is a Partner at Brethertons and works exclusively in the Dispute Resolution Team.