What is Retention of Title (ROT)?
A retention of title clause is a provision in a contract which allows the seller to retain title to goods which it has delivered to a buyer until the buyer has paid for them in full or, where permitted to do so, sold them on to a third party.
The purpose of a retention of title clause is to protect the unpaid seller against the buyer’s insolvency, giving it priority over other creditors in respect of the goods concerned.
How ROT Clauses Are Enforced in Insolvency
ROT clauses are enforced by reclaiming goods supplied to a buyer who becomes insolvent before the goods are paid for in full, provided that the clause is validly incorporated into the contract and properly drafted.
In insolvency, the supplier with the benefit of a valid ROT clause becomes a secured creditor and can potentially reclaim the goods or the proceeds of the sale of those goods.
Defending ROT Claims
There are limits to the effectiveness of ROT clauses which may lead to the following defences:
- If the buyer of the goods is a company in administration, the consent of the administrator or the permission of the court is required before the goods can be repossessed. This prohibition also applies during any interim moratorium in an administration, for example if a notice of intention to appoint an administrator has been filed with the court.
- If the buyer is subject to a moratorium under Part A1 of the Insolvency Act 1986, the seller may not repossess goods in the buyer's possession without the permission of the court. During the moratorium, the buyer may, with the court's permission, dispose of goods in its possession that are subject to an ROT clause. The court may only give permission if it thinks it will support the rescue of the company as a going concern.
- The ROT clause must be properly incorporated into the contract between the seller and the buyer to be enforceable as a contract term. However, the courts have held that an ROT clause is not so unusual that special notice needs to be given of it.
- An ROT clause may be ineffective if its operation is inconsistent with the overall trading relationship between the parties. For example, an all-monies clause is unlikely to be effective in the context of an agreement to supply finished goods for immediate resale.
- Retention of title will be of little or no practical benefit where the goods supplied are perishable or have a low scrap value.
- Section 25 of the Sale of Goods Act 1979 (Section 25) allows a buyer in possession of the goods to pass effective title to the goods to a third party acting in good faith without notice of the original seller’s rights, even though the buyer has not yet obtained title to the goods. A seller who retains title to the goods but who allows the buyer to take possession of them could nonetheless lose their title under Section 25 if the buyer wrongfully disposes of the goods to an innocent third party.
- If the goods are consumables that can be consumed during the credit period, and there is an ROT clause, the contract may not be a contract of sale within the scope of the Sale of Goods Act 1979. Instead, the contract is held to be a bailment coupled with a licence to consume the goods.
- Retention of title is an area that has generated a changing body of case law on a relatively frequent basis. Particular clauses are liable to be rendered ineffective by a court decision at any time and so the review of ROT clauses is a particularly important aspect of the overall review of standard terms and conditions of trade which sellers should be carrying out on a regular basis.
Common Disputes and Legal Tests
ROT clauses, designed to protect sellers by retaining ownership of goods until they are paid for, are prone to disputes and legal tests, particularly once the buyer of the goods has entered a formal insolvency process.
Common points of contention include the incorporation of the clause into the contract, its construction and interpretation, and the identifiability of goods, especially when mixed or processed.
Legal tests often focus on whether the clause is clearly worded, properly incorporated into the contract, and whether the goods can be identified and separated from other goods.
Retention of Title Claims FAQs
What types of ROT clauses are there?
There are different types of ROT clauses as follows.
A basic ROT clause provides that title to the goods is retained by the seller until it has received full payment for the goods. When drafting a basic clause, it is important to ensure that both legal and beneficial title to the goods are retained as the reservation of the beneficial title alone will not be sufficient. Basic ROT clauses should be supplemented by other more advanced ROT clauses.
An all-monies ROT clause is one where the seller reserves ownership of the goods supplied until the buyer has paid not only for those particular goods but also for any other goods supplied by the seller to the buyer. An all-monies clause may give rise to a charge by the buyer in favour of the seller, which would be void against any liquidator or administrator or any creditor of the buyer unless registered at Companies House in accordance with the relevant requirements under the Companies Act 2006. Although possible in theory, registering a charge at Companies House is, for a number of practical reasons, unlikely to be a realistic option. Therefore, all-monies ROT clauses should be separated out from other types of ROT clauses.
A proceeds of sale clause enables the seller to assert rights in the proceeds of sale of the goods to satisfy the purchase price of the goods. However, in light of recent case law, it is now extremely difficult, if not impossible, to draft a proceeds of sale clause without it being construed as a charge over goods which would be unenforceable unless registered as a charge at Companies House. Specialist legal advice should be obtained on the inclusion of a proceeds of sale clause in standard terms and conditions of trade.
A mixed goods clause is useful when a seller sells goods for use in a manufacturing process (e.g. the seller is selling components rather than a finished product). In such circumstances, a basic retention of title clause is unlikely to be sufficient. The case law on mixed goods clauses is complicated but essentially distinguishes between goods that maintain their identity (even if attached to other goods) and goods that lose their identity in a manufacturing process. An appropriate ROT clause should be drafted to take into account the specific circumstances. Furthermore, sellers of products that are used within a manufacturing process should also consider other means of securing their purchase price, such as credit insurance.
What are the alternatives to an ROT clause?
An ROT clause should be regarded as an adjunct to a proper credit control system, not as a substitute for it. Where the seller has doubts as to the financial standing of the buyer, the seller should consider:
- Reducing the period of credit allowed to the buyer, or the amount of credit, or both.
- Taking alternative forms of security, such as a bank guarantee or letter of credit.
- Obtaining credit insurance.
- Requiring some form of deposit or fund that is set aside or reserved, and which is regularly topped up, which can be used if the buyer faces financial difficulty.
How We Can Help
- Our Commercial Law team can help draft effective ROT clauses.
- Our Insolvency and Restructuring team acts for both suppliers and insolvency practitioners in enforcing or defending the effect of ROT clauses once the buyer of the goods has entered a formal insolvency process.
- We have significant experience in negotiating settlements in relation to goods which are subject to an ROT clause.
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Retention of Title Claims Case Studies
Acting for cash and carry wholesaler
We acted for a cash and carry wholesaler in respect of an ROT claim against a hardware company that had entered administration.
The administrators of the hardware company resisted our client’s ROT claim on the basis that our client’s terms and conditions had not been incorporated into the contract and also because our client’s stock was not identifiable.
Our client’s claim was resolved by our client being able to collect the unpaid stock it had supplied to the hardware company.
Acting for till system supplier
We acted for a till system supplier in respect of an ROT claim against a well-known camera retailer that had entered administration.
We advised our client on the terms of its ROT clause and also assisted our client with the process whereby our client had to enter a number of premises leased by the retailer in administration in order to recover the tills that had been installed.
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