Buyers may default or, even worse, enter into administration or insolvency. In this scenario, manufacturers often lose out, especially given the challenges of making a recovery from an insolvent estate.
To cater for that risk, manufacturers might consider incorporating into the contract for sale a retention of title clause or an “ROT”.
Our Manufacturing Solicitors explore why retention of title clauses remain a vital safeguard for manufacturers, helping them retain control over goods when buyers default or enter insolvency.
What is retention of title?
The intention is to ensure that, if a buyer defaults or becomes insolvent, the goods remain the property of the seller and therefore fall outside the buyer’s insolvent estate.
Different Types of ROT Clauses
ROTs can offer different levels of protection depending on risk to the supplier. Here are some ROTs to consider:
- The most common is the basic ROT clause. The seller retains ownership of specific goods until those goods have been paid for. Basic clauses are usually supported by obligations requiring the buyer to store the goods separately, label them clearly as the seller’s property, and allow the seller to access the buyer’s premises to verify compliance or repossess the goods if payment is not made. These measures help the seller identify the goods later when asserting an ROT claim.
- Another variation is the all-monies clause, which extends the seller’s retention of ownership to cover not only the goods in a specific invoice but all goods supplied until every outstanding debt has been cleared. The benefit of an all-monies clause is that it avoids the sometimes impossible task of matching particular items in a warehouse with particular invoices.
- A third type, the proceeds of sale clause, attempts to give the seller rights over the money the buyer receives if the goods are resold before payment.
- Finally, there is the mixed goods clause, which is particularly relevant to manufacturers. When raw materials or components are used in a manufacturing process, the original goods may lose their identity and with it, the seller’s title. That is not always straightforward to establish, see below:
- In Hendy Lennox (Industrial Engines), diesel engines retained their identity within generator sets, meaning the ROT clause worked.
- But in Borden v Scottish Timber Products, resin was absorbed into chipboard, and the seller’s title was lost. A mixed goods clause attempts to preserve rights in the new product.
How Effective Are ROT Clauses in Practice?
Some key points to consider are:
- An ROT clause must be properly incorporated into the contract between the supplier and the buyer to be enforceable as a contract term. It must also be drafted clearly and not too widely, or else it may be deemed void.
- 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.
- ROT will be of little or no practical benefit where the goods supplied are perishable or have a low scrap value.
- A basic ROT clause alone will be ineffective for goods that cannot be identified or are unidentifiable due to being mixed or processed with other goods, so consider whether a mixed goods clause would be more appropriate in that scenario.
- If an all-monies, proceeds of sale, or mixed goods ROT clause is incorporated, then it is likely that the clause will give rise to a charge in favour of the seller, which will need to be validly registered as a charge at Companies House.
- Finally, there is a potential limitation on ROT in Section 25 of the Sale of Goods Act 1979. That section allows a buyer in possession of goods to pass effective title to the goods to a third party who is acting in good faith without notice of the original seller’s rights, even though the buyer has not yet obtained title to the goods. Therefore, even if you have the benefit of ROT, you could nonetheless lose title to your goods if the buyer disposes of the goods to an innocent third party.
Alternatives and Additional Protections
This may include:
- Seeking payment upfront where possible
- Shortening credit terms
- Obtaining trade credit insurance
- Taking more robust forms of security, such as bank guarantees, letters of credit, or even personal guarantees from directors
- Maintaining accurate records of orders, deliveries, and stock movement to support any later ROT claim
What to Do if a Customer Enters Insolvency
You should notify the insolvency practitioner immediately and provide clear evidence to support your claim, including your contract terms, invoices, delivery notes, and any materials that help identify the goods.
With that information, negotiation may be possible, whether for the return of goods or for payment if the insolvency practitioner wishes to continue using them.
In rare circumstances, a seller may consider a claim for conversion against an administrator or liquidator who sells goods subject to an effective ROT clause, but such claims are difficult to prove and are very fact-specific.
Conclusion
However, given their limitations, these should be viewed as one layer of protection among many rather than a standalone safeguard.
The sooner the position is assessed, the greater the chance of preserving value.
Contact Our Manufacturing Lawyers
If you’re unsure whether your current terms offer adequate protection, or you need advice on enforcing an ROT clause, our specialist Manufacturing Team can help.
0161 941 4000
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Robert Brothers
Senior Associate
Rob has 7 years of experience acting as a Dispute Resolution solicitor. Rob has specialist expertise in professional negligence disputes, shareholder and partnership disputes, complex contractual disputes, intellectual property, reputation management and commercial agency claims.
About Robert Brothers