Improving protection of goods: Retention of title clauses

The popularity of retention of title (ROT) clauses has, given the economic climate, been steadily on the rise for a number of years. This guide provides a brief overview of Retention of Title clauses, their alternatives and supplementary clauses, and the limits on their effectiveness that have led some to question their suitability in modern agreements.  

What is a retention of title clause?

A retention of title clause (also referred to as a Romalpa clause) seeks to give the seller of goods priority over both secured and unsecured creditors of the purchaser in the event the purchaser of the goods fails to pay for them.  

Permitted by the Sales of Goods Act 1979, it is hoped that this priority will allow the supplier to reclaim the possession of the goods supplied. A validly drafted and incorporated clause offers enhanced protection to the supplier in the event of non-payment by the buyer due to solvency or bankruptcy issues.  

A basic retention of title clause will ensure that the title of the goods will remain with the seller until it has received full payment for the goods. Crucially, both legal and beneficial title must be retained by the supplier as beneficial title alone may not be enough to mount a sufficient claim. It is therefore seen as good practice to supplement a standard Retention of Title clause with further protections. These may include, but are not limited to: 

• A right for the seller to enter the buyer’s property to repossess the goods; 
• A right for the seller to prevent the buyer from using the goods in the event of non-payment; or 
• Enhanced obligations on the buyer such as to mark the goods as the seller’s property or to store the seller’s goods separately to those of third parties. 

Types of retention of title clauses 

Changes in case law have required the reinforcing of basic retention of title clauses. Therefore, to further protect a supplier’s interest in their goods, the following are seen as supplementary protections to be used alongside a basic retention of title clause. 

• The all monies clause: where there is an ongoing buyer/supplier relationship, an all monies clauses seeks to reserve ownership with the supplier, regardless of whether the goods have been paid for at that juncture or not, until the buyer settles all invoices with the supplier. The validity of such clauses has been the subject of much debate. It has been suggested by some commentators that this effectively places a charge on the goods and will therefore be void unless registered Companies House. Registration in this instance is unlikely to be feasible and, although not a binding decision in England, it has been held in the Scottish courts does not create a charge on the goods.  
• Proceeds of sale clause: where the goods are to be sold on by the buyer this clause will enable the supplier to assert rights over the proceeds of a subsequent sale of the goods, where the buyer has not already paid for them. Proceeds of sale clauses will, due to recent case law, almost certainly require a charge to be registered by the buyer in favor of the supplier.   
• Mixed goods clause: this clause enables the seller to retain rights over a new product that results from the manufacturing process using the seller’s goods and those from another third party. Complexities arise as to at what point the goods take on a new identity during the manufacturing process and the speed of the transformation from one good to another. As with a proceed of sale clause, this is also likely to require a charge been registered in order to be effective.  

Effectiveness 

Whilst they are a useful tool and, in many circumstances, a powerful deterrent, inclusion of a retention of title clause will not automatically guarantee a supplier’s right to the goods in question.  

There are many other factors, aside from the Companies House registration requirement in the examples above, that must be considered in order to maximise the effectiveness of these clauses: 

• The Court’s or administrator’s permission will need to be sought if the supplier intends to repossess goods, under a retention of title clause, where the buyer is already in administration or is subject to a moratorium under Part A1 of the IA 1986 (i.e a statutory period protecting the company against creditor action). 
• The clause itself must be effectively incorporated, including being sufficiently brought to the purchaser’s attention. If it has not, it may not be enforceable. Similarly, where a retention of title clause is inconsistent with the trading relationship, this will also reduce its effectiveness and, consequently, any ability to bind the purchaser.  
• Finally, consider the clauses actual necessity. If the goods are consumables, perishable or have low scrap value, a retention of title clause will be of little practical benefit to the supplier.  

The case law in this area is constantly changing in a post-Brexit & post-COVID business landscape, suppliers will be looking to protect their goods by any means necessary.  

However, a one-size fits all approach is unlikely to be useful here. Instead, only a carefully considered and drafted clause(s) will best protect the business in the event of defaults on payments owed.  

A regular review of supplier contracts and/or standard terms and conditions will help the business stay current and could greatly mitigate the large costs associated with deliberating on the validity of the clause, further down the line. 

Watch our webinar on Retention of Title Clauses and Insolvency