Business owners may be aware of a need to include ‘Retention of Title’ (ROT) clauses within their contracts and it is held that if properly drafted,  these can offer a good level of protection. But, what are these clauses and how do they work?

What is a Retention of Title Clause (ROT)?

An ROT clause is a straightforward concept – the supplier allows physical delivery of the goods to the customer but only transfers legal ownership when they are paid for. Even though a buyer has possession of the goods, the supplier remains the owner and is able to stipulate certain obligations, such as how they are stored, marked and can insist on insurance being taken out. Once payment has cleared, the buyer takes on the legal title and is released from the obligations.

Benefits

ROT clauses can be particularly useful if the customer becomes insolvent as they mean the supplier can seek to regain possession of the goods. They can also potentially make sense for suppliers which require higher levels of protection as they have larger dealings with relatively few customers and so are more reliant on these for their revenue.

Advantages

An ROT clause is not infallible but they can mean the supplier is in a stronger position over other creditors. But, this is a complex field and companies should ensure they take specialist advice from an expert in insolvency and legal matters on what ROT is most relevant for their products – and that the contract drafting is as watertight as possible. Importantly, there should be a clear ‘trigger’ within the contract that when it comes to insolvency,  possession is returned to the supplier.

In the case of insolvency, an ROT clause should give the supplier an advantage over other creditors, and they should contact the liquidator at an early stage to put their case forward.

An ROT clause  must be transparent in the way it is drafted and the contract should be signed by both parties. A customer should also be informed of the clause’s existence explicitly, rather than it just being included within an invoice where it may be overlooked. A signature is always needed to demonstrate that the terms are accepted.

Types 

Broadly, these fall into four areas as follows:

  • Simple ROT clause

These are provided on an individual sale basis with the supplier seeking to retain title on goods until full payment is received.

  • All monies – also known as all sums – clause

This is a much wider clause and the supplier seeks to retain title to all goods supplied with full payment for every invoice.

  • Proceeds of sale clause

The customer is able to sell the goods but the supplier retains a right to the proceeds of any sales until they are paid.

  • Mixed goods clause

This applies where goods are sold for use in a manufacturing process and means the customer can mix or combine the supplied goods with others but has the right to retain rights to the new item and proceeds of its sale.

  • Right of Entry

Inclusion of this means a supplier is able to enter a customer’s premises to repossess the goods without being accused of trespass.

In the case of more complex ROT clauses, such as proceeds of sale and mixed goods, drafting is particularly important and it may be less easy to seek redress. For this reason, legal experts have suggested that a simple ROT clause should also be included separately to ensure the best coverage possible in the event of liquidation.

Furthermore, ROT clauses are only part of a supplier’s armoury – the most crucial part of this remains strong credit control. If there is late payment, a supplier should immediately be on their guard in terms of placing further business, take early action to pursue payment and be ready to terminate a business relationship if they believe insolvency is likely.

Suppliers should also be aware that if the customer enters administration they will not be able to exercise their rights under an ROT clause as there is a moratorium period, unless they have the permission of the insolvency practitioner who is acting as administrator.

Are Retention of Title Clauses Enforceable?

ROT clauses can be an effective tool but they are not completely enforceable – matters can go awry if there are errors in drafting or if other areas of the contract have not been followed. Because business circumstances can change, contracts should be reviewed regularly.

Risks

The key purpose of ROT clauses is to reduce the risk for the supplier. However, their inclusion does not necessarily mean that the supplier will be able to repossess the  goods and so minimise their losses. ROT clauses are a part of contractual terms and the supplier should ensure these are accepted. In the case of P4 Ltd v Unite Integrated Solutions, it was ruled that because terms were on the reverse of contract documents and as such were not binding.

Further, in the event of goods being sold on, it may be particularly difficult for these to be traced and repossessed, even if an ROT clause exists, which is why suppliers should be clear on where goods will be stored and what their purpose is.

What Happens in Insolvency?

If a company is insolvent, it is the insolvency practitioner’s responsibility to deal with any suppliers claiming their retention to a title on goods within company premises. Before releasing anything, the IP would have to be confident of the suppliers claim, the veracity of his retention of title conditions, and that the claims can be matched specifically to unpaid invoices (unless the clause extends to goods ‘supplied at any time’).

Going into Administration Protects Against Repossession

Although administration offers no statutory protection against retention of title, the Insolvency Act 1986 does offer companies in administration some protection against the repossession of goods. The law stipulates that, if an administration order is in force, suppliers are unable to repossess goods based on a retention of title agreement without a court order or the consent of the administrative receiver.

Company administrators are required to check all contractual documentation relating to goods in the possession of an insolvent party. This includes seeking the views of the directors in identifying any goods which may be subject to a retention of title claim.