Retention of Title and Insolvency Clauses.
About ‘Retention of Title and Insolvency Clauses’ and UK law.
The original test case in Law: Known as “Romalpa case“. “Aluminium Industrie Vaassen BV v Romalpa Aluminium Ltd”.
A successful ROT clause gives the seller a proprietary right in insolvency.
However, how can an unsecured creditor claim tile to goods when others remain unpaid?
Suppose a company provides goods to customers in terms of credit. Then, payment not made, as agreed by the terms accepted. Possibly due to cash flow issues or more importantly, insolvency of the recipient company. Therefore the clause titled Retention Of Title comes into play.
Suppose liquidation is the only option for their customer? In that case, the supplier ranks as an ‘unsecured creditor’.
To mitigate risk, include a retention of title (ROT) clause within a contract of sale. It’s essential to get professional direction when drafting a clause as retention of title is a complicated legal area, confused by situations that could transpire.
What is a retention of title clause?
A “retention of title” (ROT) clause, however, permits suppliers to retain ownership over the goods supplied until certain conditions are met, thus providing the supplier with a form of security against the buyer’s default or insolvency. Often referred to as the ‘Romalpa Clause’ and ‘A reservation of title clause’.
Under the Sale of Goods Act 1979, If a contract exists for specific goods sold, then the seller may retain a right to ownership of those goods even after delivery to the buyer. However, all those parties to the contract must agree to the provision of the clause. Therefore, once proven valid. Then, the supplier retains title to the goods supplied until receiving full payment in full. Thus, the supplier’s claim to any unused goods remains binding against an appointed liquidator.
Other ROT clauses, may be used under the relevant situations.
If the clause is defined clearly and specifically in the contract, and the agreement signed by both parties, It y then remains as documentary proof that the title should remain with the supplier.
The goal of a Retention of Title contract?
For suppliers who turn into creditors of a company until paid, any insolvency of a notable customer threatens a supplying company itself. Bad debts can sink a company quickly. Therefore, suppliers use retention of title clauses to narrow their risks of not being paid. However, the clause needs to clearly state the clause on every piece of paper and ensure it is not open to more than one interpretation.
Before any commencement of delivery of goods takes place. The purchaser needs to be made aware of the ROT clause before agreeing on sales terms. Once approved and signed, then delivery may take place ensuring every step of the way, with every document, clearly stating the clause and that goods supplied may be identified as to those delivered on the terms agreed.
If noted on an invoice, then the customer would need to sign it before delivery of the goods. The signature is then expressing acceptance of the terms by the purchaser.
Retention of title (ROT) clause Examples
Primary retention of title clause stating the title to the specific goods as per delivery note and invoice belongs to the seller and ownership does not pass until payment made in full.
ROT: All Sums or Current Account
Exists when the supplier retains ownership of the goods until all debts remain paid or any other obligation paid.
ROT Proceeds of sale.
Applies to goods already sold by the buyer and then claiming monies from the sale.
ROT for Various goods.
Items supplied, then used in some aspect of manufacture and combined with other goods then may enable the supplier to demand the right of ownership over the original raw materials supplied. Fraught with issues as challenging to split if now part of manufactured goods and possible damage to other goods subject to a ROT claim.
Do any potential limitations on the effectiveness of ROT clauses in commercial law?
- The ordinary course of trade: Supplier has knowledge of buyer’s ‘normal course of business,’ and sold before payment made, therefore a ROT clause may well be worthless.
- The balance on the purchaser’s account – Only goods delivered after the date on which there is a nil or credit balance on the buyer’s account are eligible for retention of title.
- Buyer in administration – Moratorium protects the insolvent company.
- Perishable goods are difficult to enforce.
Making retention of title clause claim
To avert the liquidation of goods involved in the retention of title clause. The Liquidator then should be informed as quickly as possible to avoid any confusion.
The Liquidator may request the supplier to file retention of title questionnaire with the IP allowing a more evident opinion of the circumstances and ascertain if the clause mentioned satisfies the requirements needed? Additionally, the evidence required showing the clause on documents duly signed such as
- Delivery Notes
- Sales leaflets
The Liquidator may want to know of any previous trading history along with any prior acceptance of these clauses.
Liquidators considering a claim
Before accepting a claim from a supplier, a liquidator must be satisfied with each of the following:
- The wording of the clause includes the goods specifically, or monies claimed;
- That the clause clearly shows as being included in the contract;
- That goods claimed can be specifically identified; and
- When the clause is not an “all sums” clause, that the goods provided correlate specifically to an unpaid invoice.