When can a company recover its goods under a retention of title clause?

If the company you are dealing with has entered insolvency (or even if it hasn’t) and you are owed money for unpaid invoices, you may be able to recover your stock under retention of title.

In this article, Liz Russell explains when and how you may be able to take advantage of retention of title provisions in your standard terms of supply.

What is a retention of title clause?

Retention of title (ROT) provides assurance to a supplier of goods that if the customer does not pay, it may in certain circumstances be able to recover the goods. It is particularly helpful if the customer becomes insolvent, as otherwise the goods will be sold by the administrator or liquidator and the proceeds shared between all creditors.

By incorporating a ROT clause in the customer agreement you (as the supplier of goods) may retain title to your goods supplied until those goods, and potentially all other monies owed to you, have been paid by your customer (and if the customer does not pay, the goods must be returned).

How does a ROT claim work?

There are three parts to a valid ROT claim:

1. a properly worded retention of title clause
2. the ROT clause must be incorporated into the contractual relations
3. the goods to which the clause relates must be identifiable.

Practical considerations when looking at a ROT claim

• Incorporation: A ROT clause needs to be properly incorporated in the contractual relations between the parties. A contract signed before the first order that incorporates the supplier’s standard terms and attaches a copy of them is best. The credit account application form is often the best place for this. Otherwise you risk losing out in the ‘battle of the forms’ where the parties keep exchanging their own standard terms with each other and a judge needs to decide whose terms were in place at the moment the contact was actually formed. Remember that invoices are usually supplied after a contract has been entered into, so any ROT clause contained in them will not normally apply. The exception may be if a course of dealing argument has built up over time.
• Course of dealing: Where there has been a trading relationship, have the actions of both parties been consistent with the provisions of the ROT clause/ agreement? If the conduct conflicts with the provisions of the agreement, then the ROT clause may be ineffective.
• Identification: For a simple ROT clause to be effective, specific goods must be identifiable against specific unpaid invoices. This could be done by reference to serial numbers but will often be very difficult with small or fast-moving goods. If you cannot link the goods that haven’t been paid for back to the unpaid invoices then the ROT clause will fail. For an all monies ROT clause to be effective you only need to identify goods that you supplied to the customer. If you were a sole supplier of particular goods then this will be straightforward.
• Value of goods: Is there any economic benefit in pursuing goods under an ROT clause if the goods are low value? It may be better for administrators or liquidators to sell them and pay you a proportion of the proceeds.
• Ever-changing case law: Given that particular clauses can be rendered ineffective by the courts at any time, frequent reviews of your ROT clauses (and other standard terms) should be regular practice.

How to pursue an ROT claim

Retention of title – seeking legal advice

Establishing ROT can be a complex legal process. Legal advice from solicitors used to dealing with IPs will greatly improve your chances of successfully recovering the goods.

What are the alternatives to retention of title?

Given the ever-changing case law around ROT provisions and their enforceability, there is still no substitute for a sound credit control system to identify when customers are becoming an increased risk. Bank guarantees or credit insurance can offer alternatives in some scenarios, though for most credit insurance policies, there is a pre-condition that you have a satisfactory set of standard business terms (and may require a review process prior to obtaining).