A previous post introduced the general concept of ROT provisions as a means to protect suppliers as creditors in the insolvency of their customers. The basic principle of ROT under German law is that the supplier remains the owner of the goods which it has supplied to its customer until the customer has fully paid the purchase price for the goods. This sounds like an easy concept but, as is often the case, the devil lies in the details. This post will point out some of the important aspects to consider in the context of ROT provisions under German law.
In order to exercise any rights under ROT clauses, it is crucial that the supplier is able to identify the goods that are subject to his ownership rights.
For example, assume that the supplier delivers shipments of the same type of goods on a regular basis. Some invoices are paid, some are not. If the customer stores all the goods in the same warehouse (or, in case of liquids, in the same tank), it may be impossible to separate the goods for which the supplier has already been paid from those for which the customer has not yet paid. One solution for the supplierwould be to clarify that the ROT does not relate only to a specific delivery, but that title to the goods only passes over to the customer if all invoices for all deliveries have been paid. Furthermore, the ROT provisions could provide that in case the delivered product is comingled with goods belonging to the customer or a third party, the supplier will become co-owner of the comingled goods on a pro-rata basis, and that the ROT also covers this co-ownership.
As long as the customer has not paid for the goods, it is not the owner of the goods. How does this affect its rights? In case of a retail business, the usual business concept is that a retailer orders goods from the supplier with longer payment terms, so that it can sell the goods to end customers with a margin and pay the supplier out of the sale proceeds. This only works if the retailer is entitled to transfer legal ownership in the goods to the end customers. Can it do so although it is not yet the owner at the time of the onward sale? Yes, provided that the supplier, as part of the ROT provisions, authorizes the retailer to do so. Should there be any restrictions imposed to the retailer in the context of such authorization? Market standard provisions limit the right to the sale in the ordinary course of the business of the retailer, and sometimes explicitly require that the sale proceeds for such sale will not be for a value below cost. Also, in case the onward sale is not made against immediate cash payment, but the end customer is allowed to pay in instalments, the supplier often obtains a security assignment of the retailer’s payment claims against the end customer to further protect its position (so-called extended retention of title).
In case the goods are not delivered to a retailer, but to a production company, these goods may become part of a production process, in which case they often will be modified and/or combined with other goods from other suppliers. Again, it is important that the supplier authorizes such use of the products, protecting its ownership rights to the maximum extent possible.
Balancing the interest of the supplier to protect its legal position and the customer’s need to be able to use the product for its designated purpose is important. However, market standard provisions have been developed over time, which are regularly agreed in the German market without much negotiation. For foreign suppliers, it is important to be aware of this market practice and to use these provisions when dealing with their German customers.