This post addresses the question of how retention of title (“ROT”) provisions are effectively agreed to as part of the contractual relationship between a supplier and its German customer under German law. In previous posts, we have introduced the general concept of ROT provisions as a means to protect suppliers when they are creditors in the insolvency of their customers and explained some important aspects of the contents of ROT provisions, in particular the concept of extended retention of title.

It is the practice in the German market that ROT provisions are incorporated in the general terms and conditions of sale (“GTCS”), which are widely used by suppliers in many industries. Most suppliers incorporate their GTCS in each of their specific customer agreement. It is required that the supplier and the customer agree to the GTCS as part of the contractual relationship.

In many cases, a supplier who provides a quote to a prospective customer will explicitly state in its quote that it is made subject to the acceptance by the customer of the supplier’s GTCS, and a copy of the GTCS will be included with the quote or a link will be provided to the GTCS on its website. If the customer accepts such quote without explicitly objecting to the applicability of the supplier’s GTCS, these will be regarded as agreed to, and the supplier will be protected by the ROT provisions contained therein. Also, suppliers will often repeat references to their GTCS on each delivery notice or invoice, to remind the customer that these are part of the contractual relationship (or to incorporate them in the business relationship in case this had not been done previously).

The situation may get more complicated, however, if the customer uses its own general terms and conditions of purchase (“GTCP”). Usually, GTCP do not explicitly recognize any ROT provision for the supplier or may be silent on this issue. Even more problematic, in many cases, the GTCP state that all orders are exclusively made under the customer’s GTCP, and that the GTCS of the seller shall not apply and are rejected (unless explicitly agreed to in writing). In case of potentially conflicting terms and conditions, the question arises as to which terms are applicable and what levels of protection a supplier can achieve. Absent an agreement among the parties about a ROT provision, it would not be surprising if the answer to this question was that there is no ROT provision in such contract.  However, German courts have found another way to address this issue and have ruled that no purchaser can reasonably expect its supplier to transfer title to goods before having been paid and, therefore, the purpose of clauses in the GTCP defending against the use of the supplier’s GTCS will fail. Thus, the simple ROT provision in the GTCS of the supplier will still be recognized, but any extended ROT protection could be lost in cases where the GTCP reject the applicability of the supplier’s GTCS.

This is good news for the supplier, as it gives him at least a minimum level of protection in the event of the customer’s insolvency.