When customers are given credit on goods, there is always the risk that the company will not receive the payment, even when it is agreed. If the customer becomes insolvent the supplier becomes an unsecured creditor and may not receive anything.
One way this risk can be managed is by the implementation of a Retention of Title (ROT) clause within the contract of sale. This ensures that the supplier retains ownership of the goods prior the sale. Be sure that when you do this, you take professional advice, as the process of drafting a ROT clause can be complex.
What is a Retention of Title clause?
This clause allows ownership of any good within the contract of sale, to be with the supplier, rather than the customer, until full payment for the goods has been received.
So long that the clause is clearly defined, and the contract is signed by both parties, it can be used as documentary proof to the appointed insolvency practitioner, that a retention of title claim can be made.
Why is this needed?
For businesses, insolvency is a threat but for suppliers especially, insolvency of a key customer is a more significant threat to their survival. Hence, such a clause is used by suppliers, to protect them and limit their chances of not being paid for goods delivered. It acts as a form of security against the buyers default.
ROT clauses are used by many industries. It is customary to be used for clothing and record industries. For example, the ownership of rights for a pair of Nike trainers, remains with Nike, until they are sold to the customer. Additionally, it is often used in the construction industry, especially if materials have been delivered to the site, but not yet used.
What types of retention of title clause are there?
- Simple – a basic clause which states title to specific goods is retained by the supplier until full payment has been received. This works on an order-by-order basis.
- All Monies – this is more expansive and included separately, but in addition to, a simple ROT clause in a contract. It allows retention of title until all monies due from the debtor are paid to the supplier.
- Proceeds of Sale – this addresses the issue of goods already being sold on; hence it can give the original supplier the proceeds of sale.
- Mixed Goods – if the goods supplied were used in the manufacturing process or mixed with any other goods, this clause allows the supplier to claim the right of ownership over the original raw materials. The issue here is that it depends if the goods are able to be separated without damage being caused to third parties.
Sometimes the types of clauses are combined. This is so that if the liquidator decides a part of the clause is invalid, the supplier is still able to recover the goods, just under another element of the clause.
Limitations to ROT clauses
- Perishable goods make a ROT clause unenforceable
- If a buyer enters administration, the supplier is unable to enforce such a clause because of the moratorium period which protects insolvent companies from any legal action
- Only the goods which are delivered after the date of a nil or credit balance on the buyers account are eligible
- If the supplier is aware that their goods are used in the buyers’ normal course of business, naturally being sold on before payment is made, the ROT clause is ineffective
- When posing the clause, it must be clearly worded and ambiguous. To ensure it is effective, the clause should regularly be evaluated and assessed.
- The customer needs to be aware of the clause before, or when a contract is agreed or else it is not enforceable. Rather than putting this clause in an invoice, it should be among the terms and conditions of trade. This is because if it was within the invoice, the customer would need to sign it before the goods were delivered.
- To prevent the liquidation of goods among the ROT clause, the appointed IP must become aware of its existence as soon as possible. Office holders may request a retention of title questionnaire to be completed by the supplier as well as documentary evidence, to give them an understanding of the situation, to see if the clause meets the necessary requirements and to support their claim.