In commercial transactions, ROT clauses are used as a protection for the seller of good if the purchaser becomes insolvent. Inserting a ROT clause into a contract of sale will allow the vendor to retain title in the goods sold. In cases where the purchaser has entered into insolvency, the clause will allow the vendor to retain title recover the goods and avoid becoming an unsecured creditor of the failed company.

The enforceability of ROT clauses have been subject to litigation, most recently in the case of Management 3 Group Pty Ltd (in Liq) v Lenny’s Commercial Kitchen Pty Ltd [2011] FCA 663. Lenny’s Commercial Kitchen Pty Ltd (Lenny’s) included a ROT clause in their purchase agreement with Management 3 Group Pty Ltd (M3G). Lenny’s retained title until ‘all monies’ was paid by M3G.

Subsequent to this agreement, and purchase of goods, M3G went into voluntary administration. Lenny’s subsequently took possession of the goods and M3G commenced action for conversion and wrongful detention. M3G alleged that Lenny’s did not have an immediate right to possession and were in breach of s 440C Corporations Act.

The court upheld the ROT clause, which entitled Lenny’s to take possession due to failure to pay for the goods in full by the due to date or possibly on the grounds of the entry into insolvency or associated circumstances.

This case demonstrated that a well-drafted ROT clause can be a useful tool to protect vendors in commercial transactions.