Put simply, the object of a retention of title clause is to give the seller of goods priority over secured and unsecured creditors of the buyer if the buyer fails to pay for the goods and aims to allow the seller to reclaim possession of the goods. The clause may be used in its basic form (supplemented by certain other standard clauses) or with one or more additional clauses, as Paul Newbon discusses in his latest article.

Basic clauses

A basic clause provides that the seller retains title to goods until they have been paid for in full.  This clause will need to be drafted so both the legal and the beneficial title are retained, as the reservation of the beneficial title alone will not be sufficient.  These clauses should be supplemented by the following provisions:

1. A right for the seller to repossess the goods and a right to prevent the buyer from selling or using the goods.
2. A right for the seller to enter the buyer’s premises to repossess the goods.
3. An obligation on property and store the goods separately from other goods, mark them as the seller’s property, and allow the seller access to the buyer’s premises to verify that this has been done.

These first two provisions are normally exercisable on a specific event, e.g. non-payment of invoices but could also be exercisable at any time.  However, it should be noted that following an amendment to the Insolvency Act 1986[1], a supplier is prevented from relying on a retention of title clause and ceasing to supply the buyer simply because the buyer has gone into insolvency proceedings.  Any contract term that provides for automatic termination of the supply contract, or which allows the supplier to terminate, which is based on the buyer going into insolvency proceedings becomes, in effect, inoperable.  The amendment also renders inoperable any other contractual consequence that is triggered by the buyer’s entering insolvency proceedings.  There are exceptions, this does not apply to contracts for the supply of goods and services where either the company or the supplier is involved in financial services.  Financial services include where the company or the supplier is an insurer, bank, electronic money institution, investment bank or investment firm, payment institution, operator of payment systems or a recognised investment exchange.

If goods are physically attached to the buyer’s premises (as may be the case with heavy plant or machinery), it is recommended that a provision is included prohibiting the annexation of the goods to the buyer’s premises without the seller’s consent.  If the goods are annexed, then the permission of the owner of the premises will be required for the goods to be repossessed.

All monies clauses

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 and has repaid all other monies owed to the seller, regardless of how such indebtedness arose.

Proceeds of sale clauses

A proceeds of sale clause allows the seller to make a claim against the proceeds of sale for goods supplied in satisfaction of the purchase price.  However, the courts have recently construed that such clauses 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.

Mixed goods clauses

These are useful when a seller sells goods for use in a manufacturing process, e.g. components to be inserted into a final product.  In these 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. In this case, the seller retains title to their goods, so a basic retention of title clause is likely to still be effective.
• Whether goods maintain their identity after being attached to other goods is a question of fact. Relevant factors include:
• whether the goods are in their original form; and
• whether the goods can easily be removed from other products.
• Goods that lose their identity in the manufacturing process. In this situation, the seller’s title in the goods is lost, and title in the resulting product vests with the buyer.  A basic retention of title clause is likely to be ineffective here.

A mixed goods clause is sometimes added to a basic retention of title clause to enable the seller to assert rights of ownership in any new product resulting from the manufacturing process.

However, the Courts have held that any retention of title clause which gives a seller rights over new goods will create a charge which will be ineffective if not registered.  Sellers of products that are used within a manufacturing process should therefore consider other means of securing their purchase price, such as credit insurance.

Limits on the effectiveness of retention of title clauses

There are some limits on the effectiveness of retention of title clauses as follows:

• Company in administration. If the buyer is a company in administration, the consent of the administrator or the Court is required before goods can be repossessed.  This also applies during any interim moratorium in administration, for example, if a notice of intention to appoint an administrator has been filed.
• A moratorium under Part A1 of the Insolvency Act 1986. This is designed to allow financially distressed companies a short breathing space from enforcement action by certain types of creditors whilst the company organises their affairs to try and make the business viable.
• If a buyer is subject to a Part A1 moratorium, the seller may not repossess goods in the buyer’s possession without the Court’s permission which is likely only to be given if the court thinks it will support the rescue of the company as a going concern.
• During the moratorium, the buyer may dispose of goods in its possession that are subject to a retention of title clause with the Court’s permission.
• Incorporation of the retention of title clauses. Retention of title clauses must be properly incorporated into the contract between the buyer and the seller in order to be enforceable.  However, as retention of title clauses are not unusual, no special notice needs to be given in respect of them.
• Inconsistent with the trading relationship. A retention of title 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 if goods are supplied for immediate resale.
• Low resale value. Retention of title clauses is unlikely to be of any practical value where the goods supplied are perishable or have a low scrap value.
• Changing case law. Retention of title is an area of the law where the decisions made by the Courts can change on a relatively frequent basis.  Particular clauses can become ineffective because of a Court decision.
• Therefore, it is important to review retention of title clauses on a regular basis.

Alternatives to retention of title clauses

Retention of title clauses should be considered as an addition to a proper credit control system, not as a substitute. Where a seller has doubts about the buyer’s financial position, 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 payment upfront before the goods are supplied.
• Asking the buyer to obtain some form of insurance policy that covers the risk of the buyer not being able to pay the seller. Sellers should ensure their interest in the goods is noted on the policy.

Conclusion

Retention of title clauses can help recover goods if a buyer fails to pay.  However, retention of title clauses should sit alongside a proper credit control system which may hopefully avoid the need to rely on a retention of title clause.

If your current terms and conditions do not contain such a clause, you may want to consider whether your business would benefit from the inclusion of a retention of title clause.  Our Corporate and Commercial Team can review your terms and conditions and discuss with you the inclusion of a retention of title clause.

Similarly, if you have supplied goods to a buyer subject to a retention of title clause and the buyer has failed to pay for those goods our Litigation Department can assist in the recovery of your goods.

If you are looking for advice and assistance on any aspect of the law relating to your business, our friendly and knowledgeable team is here to help you. Talk to us today by calling 01482 325242 or email enquiries@andrewjackson.co.uk.