Retention of Title - Protecting Ownership of Your Goods

All businesses should be aware of the importance of including a well drafted retention of title clause within their term and conditions. Ordinarily, ownership of goods will pass to a buyer upon a seller parting with those goods, and not upon receipt of payment. However, ownership of goods can be retained until such time as payment is received, provided that a retention of title clause is incorporated into the contract which could be in a seller’s terms and conditions. If payment isn’t made on time the seller can recover the goods as well as having priority over a buyer’s secured and unsecured creditors if the buyer fails to pay for the goods because it is insolvent.

Businesses should avoid the most basic retention of title clauses (for example: ‘Title to the goods is retained by the Seller until it has received full payment for the goods’). Instead it is best to include one specifically drafted to suit the circumstances. Further clauses should be added so that repossession of the goods, where necessary, is as easy as possible. Terms and conditions should ensure that the buyer must store the goods separately, label them clearly and allow the seller to access the buyer’s premises to check that this is happening. There should also be a list of insolvency related events which will trigger the seller’s right to demand payment for the goods (if not already due), and to repossess them.

Whilst the principle behind retention of title clauses is relatively straightforward there are a number of possible variations. In addition to the basic retention of title clause there are the following;

• An ‘all monies’ clause

This grants even stronger protection for the supplier of goods, as the seller retains ownership of goods not only until those goods have been paid for but also until any other goods supplied have been paid for and/or any other sums generally owed are received, notwithstanding how the indebtedness arose.

• A ‘proceeds of sale’ clause

In this form of clause the supplier permits the buyer to sell the goods but retains a right to claim the proceeds of any such sales. This clause will normally include a requirement that on the sale of the goods, the proceeds of sale should be retained for the benefit of the seller until full payment has been received. Such clauses are unlikely to be successful unless worded to specifically provide that the sale proceeds are retained in a separate account for the seller’s benefit. Otherwise, it is not possible to identify which payments relate to which particular contracts or goods and funds cannot be readily identified as belonging to one seller or another. There have been a number of cases where the courts have held that a proceeds of sale clause created a charge granted by the buyer in favour of the seller which would be unenforceable if not registered at Companies House. It is extremely difficult to draft an effective proceeds of sale clause and it is inadvisable to include a clause of this nature in terms and conditions or a contract without taking specialist legal advice.

• A ‘mixed goods’ or ‘manufacture’ clause

In this form of clause, the seller sells goods to the buyer for use in a manufacturing process, permits the buyer to mix or combine the supplied goods with other goods and seeks to retain rights to the new item or rights to the proceeds of sale from the new item.   If the goods have been mixed or combined with other goods while in the buyer’s possession, then it is necessary to consider whether the original goods can be separated from the product or process in which they have become incorporated. If the goods can be separated, then a correctly worded retention of title clause should mean that the seller retains title to the goods. If the goods have been used in such a way that the original goods no longer exist, in principle this type of clause enables the seller to assert rights of ownership in any new product resulting from the manufacturing process. However such a clause which purports to reserve rights in the new goods to the seller will create a charge which will be ineffective without registration at Companies House.

Regardless of the type of retention of title clause used, it is important that the clause is drafted in a manner which is consistent with the terms and conditions as a whole or consistent with the general purpose of the contract with the buyer.

Businesses should also be aware of the following circumstances which limit the protection afforded by retention of title clauses:

• If the buyer is a company against which an application for an administration order has been made, no steps can be taken by the seller to repossess goods under a retention of title clause without the consent of the court prior to the hearing of the application.
• If an administration order is made against a buyer company no steps can be taken by the seller to repossess goods under a retention of title clause while the order remains in force.
• Where the goods supplied have a limited shelf life, have a low residual resale value or need to be quickly integrated or repackaged.
• A court could hold that, although a retention of title clause has been successfully incorporated into a contract, it is ineffective if its operation would be inconsistent with the rest of the contract.

On a practical note, in the event of a buyer entering liquidation or administration any supplier who has incorporated a retention of title clause should notify the administrator or liquidator of its claim to retain title to the goods. If practicable it should also arrange a visit to the company’s premises to identify the goods.

In summary, businesses should seek to incorporate a well drafted retention of title clause into their terms and conditions, tailored to suit their specific requirements and to afford them the best protection in the face of all eventualities.