A retention of title clause can be a useful way to protect yourself in business if you supply goods on credit, as it provides you with a form of insurance if your customers fail to pay you. Depending on how the clause is drafted you will either have the right to take your goods back or to claim a stake in any money the customer has received from selling them on. Used appropriately they can be very effective.
Nick Guinness, commercial lawyer with Forrester Sylvester Mackett, explains how they work and why the strict rules governing their enforceability means that you should always use a solicitor to help you prepare them.
Basic retention of title clauses
A basic retention of title clause provides that any goods you supply will remain your property until they have been paid for in full. Where payment is not made you will, in principle, have the right to take the goods back.
To be valid, this type of provision needs to be clear and in writing and so it is best included within your terms and conditions of sale.
More complex retention of title clauses
To address the possibility that your goods may have been sold on to a third party by your customer or incorporated with other goods as part of a manufacturing process, it is possible for more sophisticated retention of title provisions to be used. These include adding to a basic retention of title clause:
- a proceeds of sale clause, which will entitle you to the monies your customer will receive for your goods when sold on to someone else;
- a mixed goods clause, which will either entitle you: (a) to retain ownership of your goods where they have been mixed with other goods, provided they remain identifiable and can be easily removed without causing damage; or (b) where this is not possible, to claim a share of the value of the ultimate product your goods have been used to create; and
- an all monies clause, which will allow you to retain ownership of your goods, not just until they have been paid for but until all debts owed to you by the customer have been settled.
Additional provisions required
To support retention of title clauses you also need to include additional provisions to, among other things:
- allow you to enter your customer’s premises to retrieve your goods;
- require your customer to keep your goods separate from similar goods supplied by someone else;
- require your customer to mark up your goods so they can be easily identified; and
- require your customer to insure your goods while they are in their possession.
Do retention of title clauses work?
If drafted correctly, used appropriately and registered where required, retention of title clauses can be effective in most cases. There are, however, some circumstances where they will not work. This includes where they are inserted into contracts for the sale of perishable goods or when used with a customer you know will have to sell your goods on before you are paid because this is something they do in the normal course of their business. It is also not possible to use a retention of title clause against a buyer if you have a credit on their account or against a corporate customer who is in administration, unless you have permission from the administrator or an order from the court.
Proceeds of sale and mixed goods clauses must also be registered as charges at Companies House in the case of corporate customers, so that anyone looking to buy products from your customer will know about the existence of your rights.
What happens if my customer becomes insolvent?
If your customer becomes insolvent you will need to notify the Official Receiver or appointed insolvency practitioner about the terms of your retention of title provisions as soon as possible. You should also provide them with a copy of your terms and conditions of sale and an inventory of all the goods you claim still belong to you. Once notice of your claim of entitlement has been received your goods should not be disposed of without an order from the court.
To protect you in the event of an insolvency, and to ensure you rank as a secured creditor with the right to get your goods back, you should also include provision within your sale conditions for your contract with your customer to be automatically terminated in the event of their bankruptcy or insolvency and for all monies due to you at that point to become immediately payable. This should enable you to rely on your retention of title clause straight away and without having to go through the usual route for unsecured creditors.
Retention of title clauses can be a useful weapon in your business’s armoury against customers who fail to pay their debts, but they need to be drafted by an experienced solicitor who understands all the additional provisions and arrangements to ensure that they are enforceable.
For advice on all aspects of business contracts, please contact Nick Guinness on 01225 755621.