Time to review your retention of title clause?

With more and more retailers facing financial difficulties in a volatile and quickly-evolving market and even household names struggling to keep afloat, now is the time to review your contractual relationships. For an overview of the key issues for retail suppliers to consider in this recent retail downturn, see our article here.

A good place to start your review is by looking at your retention of title (ROT) clause (or possibly, lack of one) and determining whether it is likely to protect you, should you ever need to rely on it.

ROT clauses are often central in disputes between suppliers and customers. This means that the law on the area is regularly changing, as judges frequently make decisions on their effectiveness. It is important to keep revisiting your ROT provisions to ensure the law has not been updated since they were drafted.

What is an ROT clause?

Put simply, a basic ROT clause will (if drafted effectively) allow suppliers to recover specific goods if they have not been paid for them. Contracts should contain provision for parties to physically collect the goods (i.e. to allow you to enter your customer's premises without trespassing) and practical obligations on the customer to facilitate this, for example, requiring your goods to be easily identifiable, kept separate from others' goods and marked as yours, and to allow you to check that these requirements have been fulfilled.

Many contracts go further than this and include an "all monies" clause. This widens the scope, allowing a supplier to retain ownership of all goods provided until the buyer has settled all outstanding debts (whether the debt is related to the specific goods retained or not).

Each ROT provision should also be kept in a separate clause in your contracts; to avoid the entire clause being deleted if a change in law renders part of the contract unenforceable.

Why are they important?

In the event of the insolvency of your business customer, your retention of title provisions may be your only recourse to recovering the money owed to you. Often, when a business is in crisis, there is little money left over to return to third party creditors. If you have an effective ROT clause, you may be entitled to reclaim your goods and recover a much higher proportion of the debt owed to you.

Additionally, when a business customer is sold (perhaps due to insolvency or for any other reason), your ROT clause may be crucial in establishing your bargaining position with the purchaser or new owner of the company. Having the right to collect your goods may place you in a stronger position where you are able to demand more favourable contractual provisions upon entering a new contract. We have recently advised a number of suppliers to House of Fraser on precisely this issue.

Limitations to consider

There are limits on the effectiveness of ROT clauses in certain situations. For example, those businesses selling component products will struggle to recover goods which have been mixed with the goods of others, i.e. have been manufactured into a finished product since the supply. Goods can only be recovered in these circumstances if they can be removed from finished products without causing damage.

If you supply finished goods for immediate resale, you should also be aware that an 'all monies' clause is unlikely to be effective in this context.

What are the next steps?

If you wish to review your contractual position with customers, both our Commercial team and our Restructuring & Insolvency team have extensive experience in ROT clauses (and other essential contractual safeguards).

If you are concerned about a customer in financial difficulty, or experiencing issues with your own business, it is crucial that you seek advice as soon as possible.

If you would like to further understand how we can help you, or for advice on any of the issues we raise in this article, please contact David Thompson, Partner and specialist in issues of commercial contracts or Douglas Hawthorn, Partner and specialist in insolvency issues.