Member Article

As more companies feel the effects of the recession, suppliers must ensure they are properly protected should customers struggle to pay their bills, fall into financial decline or, worse, insolvency.

A common form of security is a Retention of Title (RoT) clause in the supplier's contract.

This aims to afford the seller the ability to recover goods that have not been paid for, and/or to give precedence over other creditors should the worst happen.

How should a RoT clause be drafted?
A basic clause specifies that title to goods supplied will only pass from the supplier when the customer has paid in full for those goods.

There are many variations; for example, an 'all monies' RoT prevents title passing in the goods until the customer has also settled all outstanding balances for previous goods delivered to it by the supplier.

Whilst an 'all monies' clause might appear attractive, there can be technical legal issues associated with the drafting and enforcement of them. It may be prudent to seek legal advice about the use of such a clause before drafting.

What obligations should the RoT clause contain?
For a RoT clause to be effective, it must be properly incorporated into the contract with the customer, be a valid term, and the goods supplied must be readily identifiable and be capable of being recovered and sold on. For the best chance of protection, the basic wording of a RoT clause should be supplemented with the following:

• an obligation for the customer to store the supplier's goods separately, mark them as the property of the supplier, and to insure them; together with a further obligation allowing the supplier access to the customer's premises to verify that has been done
• a list of insolvency-related events that will trigger the supplier's right to demand payment (if not already due) and to repossess the goods
• a right for the supplier to enter the customer's premises in order to repossess the goods (so that you will not commit a trespass). You may also want to consider a provision for the costs of repossession if this is likely to be significant (although bear in mind that if the customer becomes insolvent, there is a very real chance those costs will not be recovered).

How should the clause be brought to the customer's attention?
A common mistake made by suppliers wanting to rely on RoT is that their terms of business (containing the RoT clause) are only printed on the reverse of their purchase invoice. In that instance, the RoT will often be invalid, because the invoice was issued after the contract was made.

A supplier should take all reasonable steps to bring a RoT clause to its customer's attention before or at the time the contract is made. Consider including your standard terms in all sales and contract documentation; for example quotations, order forms, acceptances, confirmations, and even account opening forms.
tip
The best way to evidence a customer's agreement to a RoT clause is for a supplier to obtain signed acceptance of its terms before an order for goods is processed. If a faxed version of any order document is sent to the customer, always remember to send a copy of the print on the reverse side and keep evidence of when all documents were faxed or posted.

What happens if a customer gets into financial difficulty?
If you receive notice that a customer is in financial difficulty, you should notify that customer - or insolvency practitioner if one has been appointed - of your RoT claim immediately.

It is essential to act quickly and to seek assurances that your goods are being preserved - be ready to produce copies of all contractual documentation to establish your claim.

If your claim is refused or delayed in any way, seek urgent legal advice and be mindful that you may have to pursue your claim through the courts. We can help you to pursue your claim against the customer or insolvency practitioner and/or make an appropriate application to the court, by way of injunction if necessary.

tip
If signed terms are not available, a supplier should at least have a provision in its general terms of business stating that its terms will prevail over any terms relied upon by the customer.

The dangers?
There is always a danger that a RoT clause will not be effective.

There are also obvious practical limitations where, for example, goods have been sold on or 'mixed' in a manufacturing process. In these situations the right to recover goods may be frustrated and a supplier should be mindful of the need for alternative options to secure its goods, such as credit insurance, bonds or a guarantee from the customer. Protection is by no means guaranteed and timing is crucial once it is known that a customer is in difficulty.

what does this mean?

RoT clauses can lull a supplier into a false sense of security. They can be an effective tool against any customer who does not pay for goods. However, they should only be used in conjunction with a proper credit control system, so do not forget other basic credit control steps - consider your credit period, taking alternative forms of security and insurance options.

what should you do?

• Review the standard terms of your contract on a regular basis. RoT is an area that generates a rapidly changing body of case law, which means particular types of clause or approach may be rendered ineffective.
• Obtain signed acceptance of your terms and ensure they are brought to the attention of the buyer pre-contract. If faxed, always include a copy of the terms and conditions and keep fax confirmations. Consider sending periodic reminders of your terms to long-standing customers.
• Seek legal advice if in any doubt. Do not risk your RoT clause being invalid by reason of mis-drafting or otherwise. Be mindful that if you need to pursue your rights through the courts to ensure the removal of your goods, you will be required to prove your right to recovery.

 

Link to article