The economic impact of the Covid-19 pandemic is being felt by businesses across the Globe and many will be considering how to limit their financial exposure and potential losses.
In circumstances where your clients and customers will likely be encountering financial difficulties you should consider advance payment, reducing credit terms and reviewing credit limits.
Where goods have already been supplied but not paid for, businesses should look to see if they have a Retention of Title clause ( also referred to as R of T Clause or ROT clause) in their contracts. Retention of Title Clauses can protect sellers from the insolvency of a buyer where goods are supplied before full payment is received. Retention of Title Clauses are designed to enable an unpaid seller to recover any goods supplied in the absence of full payment.
What are Retention of Title Clauses?
Retention of Title Clauses are provisions in a contract for the sale of goods which, if properly drafted, ensures title to any goods supplied remains with the seller until the goods are paid for in full.
Typically Retention of Title Clauses fall into two main categories:
- The first type of Retention of Title Clause reserves ownership in a particular batch or shipment of goods supplied until the seller has paid for those particular goods in full.
- The second type of Retention of Title Clause is more expansive and allows a seller to retain ownership of all and any goods supplied until the buyer has settled each and every outstanding invoice in full (often referred to as an ‘all monies’ Retention of Title Clause). Under this type of Retention of Title Clause it would potentially be possible to recover goods that have been paid for in full where subsequent shipments of goods supplied remain unpaid. In certain circumstances, all monies Retention of Title Clauses can be problematic to enforce and it is important to take advice when seeking to do so.
What should be included within Retention of Title Clauses?
The wording of Retention of Title Clauses can vary considerably, however to be effective any clause should:
- State that title to the goods is reserved to the seller until full payment is received;
- Provide the seller with a right of access to the buyer’s premises to recover the goods. Careful consideration should be given as to how such clauses can be meaningfully enforced and exercised during periods of the Government’s lockdown restrictions and social distancing;
- Stipulate that the buyer must keep the goods separate from those belonging to third parties. A key way to ensure goods can be identified is to include and track serial numbers, shipment numbers or at the very least to brand and include logos on any products supplied;
- Include an obligation that the buyer must store any unpaid goods separately and not to remove any identifying features which distinguish the goods as belonging to the seller;
- Where the goods supplied used in a manufacturing process, include provision parts can only be incorporated with other goods following full payment or with the seller’s written consent;
- Provide specific ‘trigger events’ which will allow the seller to enforce any R of T Clause, for example, on an insolvency event.
What if the buyer has already sold goods to a third party?
It is not uncommon for a buyer to sell goods to a third party before final payment has been made. A well drafted Retention of Title Clause will account for this situation by including a ‘proceeds of sale’ clause. This clause will stipulate that if goods are sold by the buyer before full payment has been made to the initial seller, then the initial seller will be able to claim the proceeds from the onward sale to settle any debt owed.
What if the contract does not include any Retention of Title Clause?
If there is no Retention of Title Clause in the contract, the default position is that ownership of any goods will automatically pass to the buyer on ‘delivery’, even if no payment has been received. ‘Delivery’ when referred to in this context, does not mean physical transport to a buyer but when title passes. In the absence of any specific term in the contract, delivery will take place at the seller’s premises. This could be before goods have left the premises.
Where there is no Retention of Title clause, a seller cannot reclaim any goods supplied and will prove as an unsecured creditor in any insolvency. In that scenario, it is highly unlikely a seller will recover any debt owed to it or any meaningful part of any sums owed.
What steps should a seller take?
All suppliers should review their contractual terms and consider whether they have sufficient protection to enable them to get paid and if not, to recover any unpaid goods following an insolvency event of the buyer.
Where contracts include Retention of Title Clauses and a buyer suffers an insolvency event, sellers should act quickly to recover any unpaid goods supplied.
At Furley Page, we have a wealth of experience in both drafting and enforcing Retention of Title Clauses and can provide commercial advice to assist you to take steps to protect your business during the Covid-19 Pandemic.
If you require assistance, please contact Deborah Geering by email at firstname.lastname@example.org or by telephone on 01227 763939.