Retention of Title (RoT) clauses have for decades been a standard inclusion in well drafted terms and conditions for the supply of goods.
In essence, under an effective RoT clause the purchaser of goods will not acquire ownership of them until they are paid for. If the purchaser defaults the unpaid supplier still owns the goods and should be able to demand their return.
This goes some way towards alleviating the “raw deal” that the Courts have recognised that unsecured creditors receive in insolvency.
However the inclusion of an effective RoT clause is only part of the story. The purchaser may have on-sold the goods or incorporated them into a new product, in which case a claim by the supplier to repossess the goods or claim the proceeds of sale will almost certainly not succeed.
If the goods supplied are trading stock intended for re-sale by the purchaser in the ordinary course of business then the end buyer will in most cases get legal title to the re-sold goods and the supplier will not be entitled to demand their return.
A well drafted RoT clause will give the supplier the right to terminate the contract in the event that the purchaser becomes insolvent, such as by going into administration or liquidation.
However it is at that point that many suppliers can become unstuck. It is not merely enough for the supplier to have the right to terminate the contract if the purchaser becomes insolvent, to protect the supplier’s rights it must actually do so. If the supplier does not terminate the contract immediately that the purchaser goes into administration, then it is likely that the purchaser’s administrator will still be entitled to continue to sell the goods and the supplier’s rights to the goods will be lost.
If the purchaser is in administration then – even if it still has the goods and the supplier has terminated the contract – the supplier must either obtain the consent of the administrator or permission of the Court before it can repossess the goods – the supplier cannot simply march in and take them. If the goods are essential to the success of the administration, then the Court may impose terms as an alternative to delivery-up, such as the supplier being paid the market value of the goods.
What steps can a supplier take to best protect its position?
First, get your terms and conditions of trading reviewed to check that they meet your objectives. Does your RoT clause extend to “all monies”? Do you have the right to terminate the contract immediately if your purchaser becomes insolvent? Have your purchasers signed their agreement to your terms and conditions? More fundamentally, are you trading under your terms and conditions or those of your purchaser? Perhaps it is time for a re-draft?
Secondly, if your purchaser does become insolvent, take immediate action to protect your position. Check that your terms and conditions do give you the right to immediately terminate the contract and demand the return of goods where title has not passed. Notify the purchaser (as well as the administrator / liquidator, if known) immediately that the contract has been terminated and that their permission to deal with the goods has been revoked – remember that swift action is essential! At the same time make arrangements to inspect the goods still held by the purchaser so that a signed inventory can be agreed and they can be stored separately pending final agreement. Collate all the documents (signed terms and conditions, purchase orders, delivery notes, invoices and statements) supporting your claim.
Thirdly, consider carefully what your end objective is. Do you really want the goods back? If so, are you going to be able to resell them and at what price (this may particularly be an issue if the goods were manufactured bespoke for the purchaser)? Can a deal be done with the administrator / liquidator or any potential purchaser of the insolvent company’s assets?
Finally, remember that RoT is not a stand-alone solution to the commercial risks that suppliers face but should be seen as an integral part to an overall trading strategy.
To review your terms and conditions and any issues associated with customer insolvency contact Neil Harrold at email@example.com.