How can retention of title provisions provide peace of mind for businesses that sell goods? Nicola Kirk, partner at law firm Pitmans LLP, explains.

For businesses that supply goods, there’s always a significant risk that they won’t get paid after they have done so, particularly if the goods are supplied on credit. Should a key customer become insolvent, it could have a severe impact on a business’s bottom line.

So it’s important to realise that there are a number of measures you can take to limit your exposure to the risk of non-payment. One useful method of protection is a validly drafted, and effectively incorporated, express clause, providing for reservation of legal title to goods supplied.

What is a retention of title clause?

Under the Sale of Goods Act 1979, a seller can retain ownership of goods, even after they have been delivered to the buyer, provided there is a contract specifically covering the sale of those goods, and all parties agree in a contract to the inclusion of a clause to this effect. This is a retention of title clause, which:

• provides an element of security, should a buyer enter insolvency
• allows the seller to recover the goods supplied, if they have not been paid for

However, it is important to remember that retention of title clauses must only be used in conjunction with other forms of credit control, and should not be viewed as a replacement.

Types of retention of title clauses

A basic retention of title clause provides that where particular goods are sold on an order-by-order basis, legal title does not pass to the buyer until the goods have been paid for in full. There are various terms that should be included in a basic retention of title clause in order to make it an enforceable and more valuable provision. A well-drafted retention of title clause should:

• provide for the seller to gain access to the buyer’s premises to repossess the goods; without this provision, the seller will be liable for trespass
• detail that the seller should require the buyer to ensure that the seller’s goods are easily identifiable and kept separate from goods belonging to third parties, so that they can be reclaimed more easily if the need arises
• allow the seller to access the buyer’s property to allow them to check that the obligations are being met, should there be concern that these provisions will not be complied with

 A basic retention of title clause will allow retention of ownership by a seller, but this only applies to the specific goods within that order.  In order to overcome this, it is prudent to extend the clause to an ‘all monies’ clause.

This clause does not permit title to pass in any goods supplied at any time until all sums owed, for any goods that have been supplied by the seller, have been paid in full.

In practical terms, this is a useful clause, as it prevents the need to identify specific unpaid invoices with the related goods. It is also worth considering, however, that where it is intended that finished goods are to be supplied, for the purpose of an immediate on-sale by the buyer to its customers, it is possible that an ‘all monies’ clause may be considered ineffective, unless an express provision has been made for the resale of the goods.

It is often necessary to consider the effect of a valid retention of title clause where there is likely to be a sub-sale to an end user – in particular, the frequently found addition of a clause which aims to attach a claim to the proceeds of sale paid on a sub-sale of the goods. This allows the seller to achieve payment for the goods through their sale to a third party. In practice, however, it may be difficult to enforce a proceeds of sale clause.

The addition of a mixed goods clause is also advisable in situations where the goods supplied are to be subject to a manufacturing process (where they are combined with other goods owned by third parties) to create a new product. This clause is only effective in law where the goods that are supplied retain their identity, and can be easily removed from the manufactured product, without causing damage.

But remember, contracts containing retention of title clauses should also contain severance provisions. This means that should any sub-clauses be deemed invalid, only those provisions that are invalid will be severed, and will not cause a strike out of the whole retention of title clause. 

This is particularly relevant where a clause has been drafted so widely as to create a charge which may be invalid and void against a creditor if it is not registered as a legal charge at Companies House, in accordance with the Companies Act 2006.

Limitations on enforcement of retention of title clauses

In order to enforce a retention of title clause, you need to consider the following limitations:

• the retention of title clause needs to be properly incorporated into the terms of the contract for the sale of the goods which exists at the time of supply, otherwise it will not be enforceable
• the retention of clause may be deemed invalid if it contains provisions that are inconsistent with the general commercial relationship between the parties
• where the buyer is a company in administration, no steps can be taken to repossess any goods supplied without first obtaining the permission of the appointed administrators or an order of the court
• if the goods supplied to the buyer are perishable, a retention of title clause may have little or no effect

The law is continually changing…

The law relating to retention of title provisions is constantly evolving. It is therefore important that parties seeking to rely upon the terms of a retention of title clause ensure that such provisions are regularly reviewed and updated. The key is to ensure that such clauses are not drafted so widely so as to render them unenforceable in any moment of need.

And of course, you must ensure that your terms govern the contract, so that however the goods are ordered, your written terms are those on which the contract is concluded by acceptance. A retention of title clause will only serve your purpose if it is included in the contract. 

About the author

Nicola Kirk is a partner at the leading law firm Pitmans LLP, and deals with all aspects of contentious and non-contentious corporate and individual insolvency, restructuring and refinancing arising in administrations, receiverships, liquidations, bankruptcies, voluntary arrangements and security issues. To find out more, visit the website, or follow on Twitter @Pitmanslawers.