In the current economic climate and the challenges posed to many businesses, it is important for businesses dealing with the sale or supply of goods to review the key terms of contracts of sale of goods with customers and suppliers. Specifically, it is important to check the terms of retention of title clauses in such contracts.
What is a Retention of Title Clause?
A Retention of Title (“ROT”) clause is a clause in the contract of sale of goods that prevents ownership of goods passing to the customer until the supplier has been paid in full. Without a valid ROT clause, title in the goods usually passes on delivery.
Application of ROT Clauses in Covid-19 Crisis
There are a very large number of businesses experiencing severe disruption due to temporary closures in response to restrictions imposed by government because of the Covid-19 crisis. This may result in some of these businesses, even in spite of support measures provided by banks and the State, experiencing severe cash flow difficulties. Some businesses may become insolvent in the short to medium term. The question then arises in relation to how goods held, for example, by retail businesses will be dealt with in such circumstances, particularly if a Receiver or Liquidator is appointed over the customer company.
Types of ROT Clauses
There are two main types of ROT clauses: a simple ROT clause and an all sums due clause. A simple ROT clause purports to reserve title in specific goods supplied until those goods are paid for. An all sums due clause usually provides that the supplier retains title to any and all goods supplied until all outstanding monies owed to the supplier have been discharged.
This simple ROT clause does not pose a difficulty if the goods supplied are readily identifiable and have not been mixed with or absorbed into other products, such as in the manufacturing process. The ROT clause is generally ineffective, however, where goods have been mixed, because the goods are no longer capable of identification as originally supplied.
If there is a valid claim under a ROT clause, this allows the supplier to stand outside of the liquidation or receivership and claim title over goods that would otherwise be deemed assets of the company. The supplier can thereby recover the goods that have not yet been paid for by the customer. Where the company is insolvent and a valid ROT clause exists, the goods should be returned to the supplier or paid for, otherwise a receiver or liquidator would run the risk of a claim in conversion by the unpaid supplier.
The supplier can also take steps to prevent any party dealing with the goods by way of an injunction. It is important to note that even though Court hearings are significantly curtailed at present, the Courts remain open to hear urgent matters and this includes injunctions and their enforcement.
If there is no valid and enforceable ROT clause, the supplier joins the list of unsecured creditors who will obviously find it more difficult to secure payment, if any, for the goods.
Even where a simple ROT clause purports to create proprietary rights in the manufactured product or follow the proceeds of sale of the goods supplied, difficulties may still arise because the Courts have tended to view these clauses as creating a charge over the goods. Where the customer is a limited company, such a charge should be registered pursuant to section 409 of the Companies Act 2014 to be effective. If it has not been registered as a charge, the clause or sub-clause, as the case may be, is void and cannot be relied upon on insolvency.
When can the ROT clause be invoked?
It is vital, particularly in the context of insolvency, to establish that the ROT clause forms part of the contract of supply. A receiver or liquidator may dispute the validity of the ROT clause where there appears to be any ambiguity. The onus is on the party attempting to rely on the ROT clause to show that it had been effectively incorporated into the contract. There must be evidence that the terms and conditions of sale and any alterations in terms had been brought to the attention of the other party during the contract or supply stage.
Help and Advice
The law on retention of title can be quite complex with serious financial consequences for suppliers if ROTs clauses are incorrectly drafted and/or not properly incorporated into the contract of sale. Legal advice should be sought by suppliers when invoking ROT clauses particularly where claims are being made under complex ROT clauses. Equally, customers should seek legal advice when a supplier attempts to invoke a ROT clause and where the customer believes the ROT clause has not been validly incorporated into the contract.
Professional advice should always be taken before acting on any of the matters discussed. Please contact a member of our team should you wish to discuss this topic further.