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The importance of a Retention of Title clause in a contract for the sale of goods
Businesses involved in the sale of goods on credit will at one time or another need to grapple with the problem of their purchasers failing to make payment on time or at all, in accordance with the sale contract. In these circumstances, the business may be able to negotiate for the payment of the outstanding invoice or, if that fails, it may consider that it has no option but to issue court proceedings for the monies due. However, litigation can be costly and time consuming and, whilst the seller may obtain a judgment, the judgment does not guarantee that the seller will recover the judgment debt; it must still be enforced. The seller may also find that the purchaser has other creditors, all seeking to get paid, and in the event of the buyer’s insolvency or bankruptcy, the problem is compounded.
However, if the sale contract has a retention of title clause, the seller’s interests are better protected and the risk associated with sale of goods on credit is significantly reduced.
Retention of title clause
A retention of title clause (also known as a Romalpa clause) should be incorporated in your contract if you sell actual goods to your customers. It provides security to a seller of goods in circumstances where the buyer takes the goods but defaults on payment. Furthermore, in the event of the buyer’s bankruptcy, the clause can give the seller priority over other creditors. This means that the seller can reclaim his goods without having to join the line of unsecured creditors.
For a retention of title clause to be enforceable, it must be properly incorporated into the contract. It is therefore key that there is agreement that the seller's terms of business, which include the retention of title clause, apply and prevail over the buyer's terms.
Retention of title provisions
The clause, in its simplest form, provides that title to the goods is retained by the seller until it has received full payment for the goods. The clause should also include wording that deals with the following (subject to the particular circumstances of the relevant contract):
- Both legal and beneficial title are retained by the seller.
- The seller has the right to repossess the goods.
- The purchaser is prevented from selling or using the goods.
- The seller has the right to enter the purchaser’s premises for the purposes of repossessing the goods.
- The buyer must store the goods separately from other third party goods.
- The seller’s goods must be clearly marked.
- The goods supplied may not be annexed to the purchaser’s premises.
- If the goods are annexed to the premises, consent from the owner of the premises must be obtained to enable the purchaser to repossess.
All monies clause
An all monies retention of title clause provides that the seller retains title to the goods supplied until the purchaser pays not only for those particular goods (i.e. the goods for which the seller is retaining title), but also all other goods supplied by the seller to the purchaser. This addresses the potential problem of a buyer paying for and obtaining title to particular goods notwithstanding he has other goods which have still not been paid for.
Mixed goods clauses
In circumstances where the purchaser is selling components for use in a manufacturing process as opposed to finished goods, the seller can retain title under a basic retention of title clause provided that the goods maintain their identity. This depends on several factors, including: (i) whether the goods still retain their original form, and (ii) whether the goods can be removed easily from other products.
By contrast, the seller will lose title for goods that have lost their identity in the manufacturing process.
Where the relevant goods are likely to be mixed and could lose their identity in the process, a mixed goods clause is sometimes used to try to further bolster the seller’s position. It is intended to enable the seller to assert title to the new product (which incorporates the goods sold by the seller). However, this type of clause has been the subject of challenges in the courts and advice should be sought when seeking to add the clause to the contract and when seeking to enforce it.
Retention of title and insolvency
Should the purchaser company become insolvent the Official Receiver must consider the seller’s claim in the context of his duty to realise the assets of the insolvent company to enable the distribution of the money raised for the benefit of the creditors.
If the goods have been seized before the Official Receiver became aware that the goods may be subject to a retention of title clause, the goods must not be sold until the Official Receiver is totally satisfied that the seller’s claim is valid. If the goods have already been sold the Official Receiver must pass the net proceeds of the sale to the seller, regardless of whether the goods were undersold. In the event of the Official Receiver incorrectly selling the goods protected by a valid retention of title clause, a claim for damages can be made by the seller for wrongful interference with the goods. It is usual for the claim to be made for the market value of the goods, the claim cannot exceed the invoice value of the goods.
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oby Miller, a Partner, commented “A retention of title clause is a crucial tool for sellers to manage credit risk and protect their financial interests when offering goods on credit. However, care must be exercised in the drafting of the clause to ensure that it caters for the particular type of goods being supplied and how those goods are likely to be used. Businesses should also review their contracts, and specific clauses such as retention of title clauses, regularly to make sure that they take account of recent case law which can impact on the validity and application of these clauses. There are practical considerations too: it helps if goods are packaged with noticeable and easily recognisable branding, so that they can be easily identified and separated from other similar goods in the event repossession becomes necessary. Lastly, a retention of title clause should be seen as an extra layer of protection and part of an overarching approach to credit control, which includes credit insurance, other forms of security and strict control on periods of credit.”
oby Miller, a Partner, commented “A retention of title clause is a crucial tool for sellers to manage credit risk and protect their financial interests when offering goods on credit. However, care must be exercised in the drafting of the clause to ensure that it caters for the particular type of goods being supplied and how those goods are likely to be used. Businesses should also review their contracts, and specific clauses such as retention of title clauses, regularly to make sure that they take account of recent case law which can impact on the validity and application of these clauses. There are practical considerations too: it helps if goods are packaged with noticeable and easily recognisable branding, so that they can be easily identified and separated from other similar goods in the event repossession becomes necessary. Lastly, a retention of title clause should be seen as an extra layer of protection and part of an overarching approach to credit control, which includes credit insurance, other forms of security and strict control on periods of credit.”Giambrone & Partners commercial lawyers have a wealth of experience in assisting businesses to draft contracts with comprehensive clauses to protect the business in the event of a dispute. Our multi-jurisdictional lawyers advise on a wide range of transactions including cross-border dealings.
If you would like to know more about protective clauses, please contact us at clientservices@giambronelaw.com or please click here