Can’t Pay? We’ll Take It Away! – Retention of Title Clauses, Do they Work?
In a B2B contract for the purchase of goods, if a customer fails to pay for the goods that have been delivered to it, it seems logical that the supplier should be entitled to take back anything that hasn’t been paid for. However, as a supplier, if you don’t have a retention of title or “RoT” clause in your contract, legal ownership of the goods might transfer to the customer at the point of delivery and your only remedy will be to sue for damages.
In scenarios where the customer is a company in liquidation, an RoT clause can be fundamental in ensuring that a supplier isn’t left out of pocket.
The basic premise of an RoT clause, is that legal and beneficial title to any goods delivered under a supply contract is retained by the supplier, until it has received payment in full for those goods. In an insolvency situation, this gives the supplier priority over both secured and unsecured creditors of an insolvent customer to the extent that its goods can be identified and repossessed.
Liquidation isn’t the only scenario where an RoT clause can become enforceable. Non-payment of invoices for an extended period could also be included. In some circumstances, simply re-taking possession of the goods will be quicker and more cost effective than bringing a claim against the customer through the courts.
In order to ensure that the clause works from a practical perspective, the supplier will also need to include a right of access to the customer’s premises in its RoT clause and an obligation on the customer to store goods separately and label them as property of the supplier until they’ve been paid for.
Rebecca Gardner, Corporate & Commercial Partner at Howat Avraam Solicitors comments: Retention of Title clauses can be very effective in protecting suppliers where their goods are stand alone, non-perishable products that can be stored separately and clearly identified as the property of the supplier. However, where a supplier provides components for a more complex product, bespoke or personalised products with a low resale value or perishable items, an RoT clause may not be of that much benefit. In these scenarios, suppliers should look for other ways to limit their exposure under their supply contracts. For example, by offering shorter credit terms or by taking another form of security such as a bank guarantee or a letter of credit.
Howat Avraam Solicitors provide Corporate, Commercial, Employment, Real Estate and Contract Dispute advice to companies, business owners and individuals. As business owners ourselves, we have a pragmatic in-house approach to resolving issues before they arise, by working alongside our clients as part of their team. We are commercial, practical and entrepreneurial in our approach to legal services.
To discuss any Commercial or Contractual matter with us on a no obligation basis, please contact Rebecca Gardner on 020 3735 6700 or email Rebecca at Rebecca.Gardner@hasolicitors.co.uk. Alternatively, visit our website at www.howatavraamsolicitors.co.uk for more information.