The risk for business of non-payment for goods supplied is an ever increasing problem. The supply of goods on credit can be particularly harmful to a business if a customer becomes insolvent but there are measures that can be taken to limit your exposure to the risk on non-payment. A valid and properly incorporated clause providing for reservation of legal title to goods can be a useful method of protection. The aim is to allow the unpaid seller to reclaim possession of their goods and the clause may be used in its most basic form or with additional clauses such as an all monies clause, proceeds of sale clause or mixed goods clause.
Below is an overview of how Retention of Title clauses, also known as Romalpa clauses after the first leading case on the subject, may assist a supplier and deals with the issues that a supplier should consider to ensure that any Retention of Title clause they attempt to rely on is enforceable.
Incorporate your Terms and Conditions into all contracts
To rely on a contractual term your terms have to be incorporated into the contract with your supplier.
You will need to be able to demonstrate that the terms have been validly incorporated into the contract which may be by written confirmation; showing that your terms are incorporated through a course of dealings or by the supplier winning the “battle of the forms”.
Basic form of Retention of Title clause
The basic clause provides that title to the goods is retained by the seller until it has received full payment for the goods. A Retention of Title clause gives the purchaser an implicit right to deal with the goods supplied in accordance with the commercial relationship between the buyer and seller. Suppliers need to ensure that both legal and beneficial title to the goods are retained until they are paid for.
All monies clause
Under an all monies clause, 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 and has repaid all other monies owed to the seller.
Proceeds of sale clause
Where the goods supplied are to be sold on by the buyer, the object of a proceeds of sale clause is to enable the seller to assert rights in the proceeds of sale in order to satisfy the purchase price of the goods.
Such a clause giving the seller rights over the sale proceeds of goods resold by the buyer was held to be valid in the Romalpa case on the basis that there was, on the facts before the Court, a fiduciary relationship between the buyer and the seller and the buyer as a fiduciary was under a duty to account for the sale proceeds to the seller as beneficiary.
However, since the Romalpa decision the Courts have distinguished the facts of the cases before them and it has been held that clauses of this kind create a charge by the buyer in favour of the seller which will be void if not registered at Companies House.
Mixed goods clause
Where the seller is selling goods for the use in the manufacturing process (e.g. selling components rather than finished items) and the goods supplied may be mixed or combined with other goods owned by the buyer or a third party, a basic Retention of Title may not be sufficient.
Whether a mixed goods clause is valid is a question of fact of whether the goods retain their identity through the manufacturing process.
A severance clause should be included in a contract containing a Retention of Title clause to make sure that if a clause is found to be invalid then that clause can be severed from the contract leaving the other clauses intact.
The Courts decisions have restricted the effectiveness of some clauses. The best that a well drafted Retention of Title clause may achieve for a seller is: –
- A right to enter the buyer’s premises without trespassing;
- The ability to recover goods stored at the buyer’s premises which are identifiable;
- Possibly an action for damages for conversion against a Receiver or Liquidator who sells goods which were identifiably the seller’s.
Relying only on a Retention of Title clause can be risky and they are not a substitute for a proper credit control system and sellers should consider: –
- Reducing the credit period allowed to buyers;
- Taking alternative security such as Personal Guarantees from the Directors of the purchaser;
- Obtaining credit insurance. The existence of a satisfactory set of Terms and Conditions is likely to be a pre-condition of such insurance.
The above is only an outline guide and specific advice should be obtained in relation to your individual business.
Should you require advice on the validity of a Retention of Title clause or any other points raised please contact Mark Edwards, Solicitor and Director, on 01922 700730 or by e-mail at firstname.lastname@example.org