Contracts of Supply: Retention of Title Clauses
With the government beginning to lift some of the restrictions imposed after the COVID-19 outbreak, a number of businesses are able to trade again for the first time in three months.
However, the severity of the economic downturn caused by the pandemic is likely to hit many businesses hard and some will not survive.
When businesses or companies go bust, in addition to the employees whose jobs are at risk, suppliers who have supplied goods to those businesses are likely to receive only a fraction, if any, of the value of those goods. That is unless their contracts of supply contain a retention of title (ROT) clause.
A ROT clause allows the seller to retain title to goods which have been delivered to a buyer until the buyer has paid for the goods in full. These clauses are designed to protect the unpaid seller against a buyer’s insolvency by giving the seller priority over other creditors in relation to the goods concerned.
Under the Sale of Goods Act 1979, title in goods passes to the buyer when the contracting parties intend it to pass and the seller can, as a term of the contract, reserve the right of disposal.
A ROT clause in the contract is evidence that the parties did not intend for title in the goods to pass to the buyer prior to full payment even though the goods have been delivered to the buyer.
Although a ROT clause enables the seller to recover good which have been delivered, that will only be possible if the goods are identifiable and have not been mixed or incorporated into other goods as part of a manufacturing process.
Some ROT clauses contain an “all monies” clause. Whereas a simple ROT clause only prevents title passing in goods which are the subject of a particular contract, an all monies clause reserves title to the seller in respect of goods that have been supplied to the buyer by the seller in other contracts until all of the goods have been paid for.
The advantage of an all monies clause is that it avoids the need for the seller to allocate the goods delivered to specific invoices as title to the goods does not pass until the buyer has paid all sums due to the seller.
For a retention of title clause to be effective the seller must ensure that it is incorporated into the contract between the parties and that the buyer is contracting on the seller’s terms and conditions and not the buyer’s terms as it is highly likely that the buyer’s terms will specify that title passes upon delivery.
A clause in the seller’s terms and conditions will be ineffective if the contract is based on the buyer’s terms.
If the seller needs to enforce ROT clause then he needs to act promptly once he discovers that a buyer has become insolvent or insolvency appears likely.
If you require assistance with the preparation of agreements to include ROT clauses or to enforce such a clause or on any COVID-19 related issue, please email or call us on 0113 227 9316 today.