With the effect of the global credit crunch hitting national and international trade, sellers should take a close look at their standard terms and conditions of sale to ensure that they have a valid retention of title (ROT) clause. If not, sellers will be unable to recover the goods they have delivered if payment is not made.
What does it do?
A valid ROT clause means that a seller will have priority over secured and unsecured creditors of the buyer if the buyer fails to pay for the goods because it is insolvent, or for some other reason which may be specified in the clause. If valid, it should operate to give a seller the right to take back goods if they have not been paid for. The ROT clause must be incorporated into the contract between the seller and the buyer to be enforceable as a contract term.
ROT clauses - the essentials
A ROT clause should:
- be incorporated into the contract – otherwise the world's best ROT clause will fail
- provide that title to the goods (both legal and beneficial) is retained by the seller until it has received full payment for the goods
- give the seller the right to enter the buyer's premises in order to repossess the goods. The seller could commit a trespass if no such provision is included
- require the buyer to keep the seller's goods separate from goods belonging to the buyer or third parties and mark them as the seller's property. If the goods are to be attached to a buyer's premises (for example, in the case of heavy plant or machinery) a provision prohibiting the buyer from annexing them to such premises without the seller's consent should be included. If goods do become attached to the premises, the permission of the owner of the premises, who might not be the buyer, will be needed if the seller is to be entitled to repossess them
- allow the seller to enter the buyer's premises to check that the above marking for identification has been done
- specify which events will trigger the seller's right to demand immediate payment for the goods and repossess them
Additional points to note
Mixed or combined goods. If goods sold are to be used by a buyer in a manufacturing process where they will be mixed or combined with other goods owned by the buyer or third parties as a result of the manufacturing process, the goods may not retain their original identity. In such circumstances a seller may not be able to assert rights of ownership in the new product(s) and attempting to reserve rights in the new goods to the seller will create a charge which will be ineffective if not registered. Failure to register may then also invalidate the basic ROT clause and any all monies clause, so care needs to be taken here.
All monies clauses. Sellers should consider adding a separate "all monies" sub-clause to reserve ownership of all the goods supplied to a buyer, until all monies due to the seller have been paid, not just payment of a particular invoice. Such a clause avoids the need to identify specific goods with specific unpaid invoices.
Passing of risk. In standard terms of sale, risk in the goods is usually stated to pass at the time of delivery of the goods. This is to ensure that if the goods are destroyed or damaged after delivery, risk passes to the buyer who will remain liable for the purchase price. A seller should also include a provision requiring the buyer to insure the goods upon delivery and ensure that the seller's interest in the goods is noted on the policy.
Act quickly. Even with a valid ROT clause in your contract, be prepared to act quickly if a buyer is insolvent or looks likely to become so.
Credit control. In addition to a ROT clause, keep a close eye on your credit control procedures. If you have doubts about the financial solvency of the buyer consider:
- reducing the period of credit allowed
- reducing the amount of credit
- seeking payment on delivery
- taking an alternative form of security such as a bank guarantee.