Non-payment for goods supplied is an ever increasing risk for business, especially in light of the recent economic downturn. The provision of goods on credit will be particularly harmful to a business if a key customer becomes insolvent so it is important to realise that there are measures that you can take in order to limit your exposure to the risk of non-payment. A validly drafted and effectively incorporated express clause providing for reservation of legal title to goods supplied is a useful method of protection for non-payment in solvent and distressed situations alike.
Purpose of a Retention of Title clause
The Sale of Goods Act 1979 permits a seller to retain ownership of goods even after they have been delivered to the buyer, provided that there is a contract specifically covering the sale of those goods and all parties to the contract agree to the inclusion of a clause to this effect. This is achieved through a retention of title clause (sometimes alternatively referred to as a ‘Romalpa’ clause following the first leading case on the subject). A valid retention of title clause will:
- provide quasi security in the event of the buyer’s insolvency in respect of the goods supplied; and
- absent insolvency allow the seller to recover the goods supplied if they have not been paid for.
Such clauses, if enforceable, can greatly increase a creditor’s bargaining position and, as such, prospects of payment. It must be noted, however, that retention of title clauses must only be used in conjunction with other forms of credit control and should not be viewed as a replacement in this respect.
Types of Retention of Title clauses
A basic retention of title clause provides that legal title to particular goods sold (on an order-by-order basis) does not pass to the buyer until the goods have been paid for in full. There are various terms that should be included in a basic retention of title clause in order to make it an enforceable and more valuable provision. A well drafted retention of title clause should provide for the seller to gain access to the buyer’s premises to repossess the goods; unless this provision is included the seller will be liable for trespass by doing so. The seller should also require the buyer to ensure that the seller’s goods are easily identifiable and kept separate from goods belonging to third parties so that they can be reclaimed more easily if the need arises. If there is concern that these provisions will not be complied with, the clause should also allow the seller to access the buyer’s property to allow them to check that the obligations are being met.
In order to overcome the fact that the basic retention of title clause allows that retention of ownership only applies to the specific goods within that order, it is prudent to extend it to include an “all monies” clause. This does not permit title to pass in any goods supplied at any time until all sums owed – for any goods that have been supplied by the seller – have been paid in full. In practical terms this is a useful clause in that it prevents the need to identify specific unpaid invoices with the related goods. It is worth considering, however, that where it is intended that finished goods are to be supplied for the purpose of an immediate on-sale by the buyer to its customers it is possible that an “all monies clause” may be considered ineffective unless an express provision has been made for the re-sale of the goods.
It is often necessary to consider the effect of a valid retention of title clause where there is likely to be a sub-sale to an end user and, in particular, the frequently found addition of a clause which aims to attach a claim to the proceeds of sale paid on a sub-sale of the goods. This allows the seller to achieve payment for the goods through their sale to a third party. In practice, however, it may be difficult to enforce a proceeds of sale clause.
The addition of a mixed goods clause is advisable in situations where the goods supplied are to be subject to a manufacturing process (where they are combined with other goods owned by third parties) to create a new product. Such a clause is only effective in law where the goods supplied retain their identity and can be easily removed from the manufactured product without causing damage.
Contracts containing retention of title clauses should also contain severance provisions so that, should any subclauses be deemed invalid, only those provisions that are invalid will be severed and they will not cause a strike out of the whole retention of title clause. This is particularly relevant where a clause has been drafted so widely as to create a charge which may be invalid, and void against a creditor, if it is not registered as a legal charge at Companies House in accordance with the Companies Act 2006.
Limitations on the enforcement of retention of title clauses
In order to enforce a retention of title clause it is worth considering that the following limitations apply:
- The retention of title clause needs to be properly incorporated into the terms of the contract for the sale of the goods which exists at the time of supply, otherwise it will not be enforceable.
- The retention of title clause may be deemed invalid if it contains provisions that are inconsistent with the general commercial relationship between the parties.
- Where the buyer is a company in administration, no steps can be taken to repossess any goods supplied without first obtaining the permission of the appointed Administrators’ or an Order of the Court.
- If the goods supplied to the buyer are perishable a retention of title clause may have little or no effect.
The law is evolving
The law relating to retention of title is constantly evolving and changing. It is, therefore, important that parties seeking to rely upon the terms of a retention of title clause ensure that such provisions are regularly reviewed and updated. The key is to ensure that such clauses are not drafted so widely so as to render them unenforceable in any moment of need.