13 July 2021 #Corporate
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:
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.
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 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