The current COVID-19 pandemic has resulted in potentially severe economic consequences being faced by many businesses. Sellers of products may be concerned as to whether their customers will continue to be in a position to adhere to credit terms for payment of goods supplied. In the event of non-payment, sellers may find themselves placing greater reliance on the terms of the contract which is in place with their customers.
Businesses, whether the seller or the buyer, should take the opportunity to review the terms of their current contracts to identify the entitlement of the seller to retain title to goods where they are not paid for in full, i.e. a retention of title (ROT) clause.
Such a clause, if valid, will mean for the seller the difference between being entitled to seek the return of specific unpaid goods in the buyer’s possession or simply being ranked as an unsecured creditor with little or no chance of achieving a dividend in the event an insolvency situation occurs.
A ROT clause, simply stated, is a clause that prevents ownership of goods passing to the customer until the seller has been paid in full. Without a valid ROT clause, title in the goods will usually pass on delivery of the goods.
Typically, there are two main types of ROT clauses: a ‘simple’ clause, the purpose of which is to reserve title in specific goods supplied until those goods are paid for in full; and an ‘all sums due’ clause, which usually provides that the seller retains title to any and all goods supplied until all outstanding monies owed to the seller have been discharged.
A typical ROT clause will usually:
Although in theory a ROT clause is quite straightforward, in practice they have been increasingly drafted in such a manner that it creates a risk that such a clause can be deemed to have created a charge over the goods, rather than simply retaining title. Where it is found that a charge has been created, this can lead to problems as a valid charge is subject to certain registration requirements. Some examples are outlined below:
All sums due clause. As mentioned above, this clause reserves title in all goods supplied to the customer until the customer has settled all outstanding invoices from the seller. This avoids the need to be able to identify specific goods at the customer’s premises relating to specific unpaid invoices.
If used, this should be in a separate subclause from the basic ROT clause. This means that if the all sums due clause was ever held to be invalid as an unregistered charge by a court, there is a possibility of severing the clause so as not to invalidate the rest of the ROT clause.
Mixed goods clause. This purports to allow the seller to claim an interest where the goods supplied under the contract are likely to lose their identity due to being used in the manufacture of another product. However, there is a strong likelihood that an attempt to reserve rights in new goods that belong to the customer would be deemed to be a charge by the courts and not a valid ROT clause.
Proceeds of sale clause. This allows the seller to claim the proceeds of any subsequent sale of the goods. There is a risk that this clause would be deemed to be a charge and it is advisable to avoid, where possible.
It is important that sellers have a carefully drafted ROT clause in their contracts, which takes account of the nature of the goods being supplied and the relationship between the parties.
It is also advisable to ensure that the ROT clause is properly incorporated into the contract with the customer by ensuring that the customer is aware of the clause and has accepted it at the outset of the relationship or ensuring that all correspondence confirms that all goods supplied are subject to the ROT.
If your customer is in financial difficulty, act quickly to recover your goods (while ensuring that you are adhering to the terms of the ROT clause). Thereafter, if the customer does go into liquidation, receivership or examinership, notify the liquidator, receiver or examiner as soon as possible, identifying the goods in question.
If drafted and incorporated correctly, having a valid ROT may mean that you will at least be able to recover something as opposed to little or nothing as an unsecured creditor in an insolvency situation.