What is a retention of title clause?
If you include a retention of title clause in your terms and conditions, you will retain ownership of any goods you sell until you receive payment. Without a retention of title clause, ownership of goods will pass to the buyer when the goods are handed over and not at the point at which payment is received.
A retention of title clause, often also known as a Romalpa clause due to a very important case on such clauses, is quite common and very important when supplying goods either in terms of volume or individual value, which are not quickly perishable and which may not necessarily quickly be used to manufacture a larger piece of equipment.
In effect, such clauses provide that legal title in the goods supplied does not pass to the buyer until payment has been made, such that if payment is not made on time, the seller can act rapidly and recover the goods supplied. It is also highly significant that with such clauses the seller of goods will get priority over both secured and unsecured creditors of the buyer on insolvency of the buyer.
What to include in a retention of title clause
It is very important to have a professionally drafted retention of title clause that specifically deals with your circumstances, since a very basic clause will rarely suffice. If you need help or advice, please do get in contact.
Things which need to be considered in the drafting process by solicitors include :-
- A right to enter the debtor’s premises to repossess the goods, as otherwise any visit would be trespass and this has potentially expensive legal consequences.
- A crucial agreement from the buyer that your goods will be separately stored and marked and agreement for inspection shortly after delivery and possibly thereafter to check compliance with this.
- A specific list of trigger events which may be separate from the usual terms agreed for payment and which may be short of formal insolvency which will allow you to demand immediate and full payment for the goods and in the case of default permits you to swiftly attend at the buyer’s premises and recover the goods.
Can ownership of goods be retained after they have been delivered?
Yes, contract law principles allow you to ‘retain’ the title (ownership) of goods. In many instances, the supplier will choose to retain ownership up until payment for the goods is received. In absence of terms retaining title, ownership ordinarily passes at the point of sale or when the goods are handed over.
Limitations on retention of title
Difficulties arise where a buyer goes into administration as this creates a moratorium on creditor’s taking action without the consent of the administrator or the court.
A retention of title clause may be found to be void or partially void by a court. Whilst courts intervene in commercial contracts far less than with a business to consumer contract, a court can intervene where a clause makes the whole contractual relationship between the parties unworkable or where one party, in this case the supplier, is a big company and is dealing with a small company where there is consequently inherent inequality of bargaining position.
Retention of title clauses are of little or no practical use where the goods supplied have a limited shelf life, need to be quickly integrated or repackaged or which have a low residual resale value.
Alternatives to a retention of title clause?
The first point worth noting is that use of these clauses does not reduce in any way the need to have an effective system for overall credit control. Decent due diligence before agreeing to sell a volume of goods to a buyer or where the goods sold are individually high value is also very important. Practical steps in addition to proper background and credit checks include :-
- To reduce the credit terms given to the buyer, or the amount of credit, or both.
- Insisting on types of security, whether bank guarantees or letters of credit.
- Taking out credit insurance although, as with any insurance policy, read the small print very carefully, and you may still need some retention of title clauses in your contract.
For drafting assistance, advice on contracts generally or help where you are in dispute over a sale of goods contract, call or email Debbie Serota. We always look for the best, most cost effective solution.
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