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Retention of Title Clauses

What is a retention of title clause?

Some businesses that sell goods on credit use what is known as a "retention of title" clause (or ROT clause) as part of their trading terms. A basic retention of title clause provides that ownership of the goods supplied does not pass to the customer until payment has been made for those goods. That is the supplier retains title in the goods. This give the supplier the right to reclaim the goods supplied if the customer does not pay for them.

A retention of title clause is often referred to as a Romalpa Clause, being named after the leading case in the area, Aluminium Industrie Vaasen B.V. -v- Romalpa Aluminium Ltd.

Why are they used?

The Sales of Goods Acts in the various States provide that title to (ownership of) goods passes "when intended". This usually is interpreted as when possession of the goods is passed to the customer.

On a credit sale, ownership of an item would then pass before payment has been received. A retention of title clause stops ownership from passing with possession - the intention now being ownership passing when the invoice is paid. This gives the supplier some protection when customers cannot pay for the goods.

Where are these clauses usually located?

Retention of title clauses generally have to be in writing - otherwise how do you prove what the terms are?. They are usually located on credit applications as part of the standard credit supply terms, but may also be printed on the invoices and statements. Where ever it is located, it must be communicated to and be accepted by the customer before the supply of goods, or it may not be enforceable. That is, just inserting the clause on an invoice after the supply has been made will generally not suffice as an enforceable clause.

How does a supplier retake possession of the goods?

As the goods still belong to the supplier, they are entitled to get their goods back. A well written retention of title clause will state that the supplier has the right to enter the customer's premises and recover the goods if the customer does not pay for them within some stated time period. Without this access provision, taking possession of the goods may be difficult or delayed or may be trespass on the customer's property.

Is it really that easy?

Not always. Some issues are:

1. The supplier must be able to identify the actual goods that fall under the retention of title clause. That is, they must be able to identify the relevant goods and match these to an unpaid invoice covered by the clause. The supplier may not be able to collect just any goods.

2. The supplier must act within the rights given by the wording of the clause.

3. The goods collected usually have to be ones that were sold under invoices that remain unpaid. Subject to some exceptions, once that invoice is paid title will pass to the customer and the supplier will not be able to collect them, even if other money is owed under other unpaid invoices.

4. the supplier will have to determine whether the clause is valid against an external administrator. Clauses that create unregistered charges may be invalid, in whole or in part.

5. the goods will have to be in a collectable condition. If they cannot be physically separated and collected, the clause will not be effective. The goods also must be in the possession of the customer. If they have been on-sold, possession and title would have passed to another entity and they will not be collectable.

How does a supplier identify their goods?

A supplier must be able to identify the goods as ones they supplied and also as being supplied under an invoice that remains unpaid. Some suppliers use serial numbers or other identifying marks and are able to match goods to particular invoices. The onus of proving that particular goods are sold under specific invoices lies with the supplier.

What if the supplier cannot identify the goods?

The retention of title claim may not be effective if the goods cannot be identified. If the same type of goods have been supplied under two invoices, one that has been paid and one that remains unpaid, the supplier will have to identify which goods were supplied under the unpaid invoice or they may lose the right to reclaim any goods.

What if the goods have been on sold?

The goods must be still with the customer. If they have been on-sold to a third party, title would have passed to that third party and collection of the goods will not be possible. The customer can pass good title to a third party in the normal course of trade. That is, if the goods are no longer there, they cannot be collected.

What if the gods have been 'used'?

The goods must be able to be identified and separated to be collected. If the goods have been used or improved as part of the manufacturing process, the improved good or the newly manufactured unit may not be recoverable. There are two main possibilities:

(a) The goods are a part of a larger item, being affixed to the larger item (e.g. an engine in a car); or
(b) the goods have been mixed into or applied to another item (e.g. glue used to make particle board).

The Court decides between what is collectable, and what is not, based on the method of affixation or mixture. They look at whether the item is a part of something bigger and but be removed without damage to either item, and to what extent the item has lost its separate identity when being mixed with other goods.

If the items have simply been attached to something else, but have not lost their identity and can be easily separated, they may be recoverable. It they cannot be separated or have lost their identity, they generally cannot be recovered.

What are the types of retention of title clauses?

There are 3 common types of retention of title clauses, all having slightly different effects on the rights of the supplier to retake possession of goods. These are known as:

1. Title of Goods clauses
2. All Monies clauses
3. Tracing clauses & Fiduciary or Trust Relationships

1. Title of Goods clauses

These are the most basic clauses and state that title or ownership does not pass until payment has been made in full. Coupled with a provision to allow access for collection, they allow suppliers to collect goods that were supplied under invoices that remain unpaid, but not goods that were supplied under invoices that have been paid, or collect monies that have been generated from the on-sale of the goods.

2. All Monies clauses

These have the same effect as the Title of Goods clause, but also retain title in goods that has been supplied under invoices that have been paid. This clause provides that title to any goods supplied does not pass until all indebtedness has been paid. Suppliers will be able to collect any of their goods if there is any unpaid debt, regardless of whether the debts relates to the good collected or not.

Depending on the wording, these clauses may be deemed to be unregistered charges and may be difficult to enforce against insolvency practitioners. Suppliers also lose these rights when the customer reduces their indebtedness to nil at any time, as title in all of the goods supplied will pass to the customer.

If the supplier attempts to collect goods supplied under later unpaid invoices, they will have to identify the actual goods supplied under those later unpaid invoices or supplied after the account was nil. They cannot collect the earlier goods.

3. Tracing clauses & Fiduciary or Trust Relationships

These have the same general provisions of the first two clauses, but also include what are known as "tracing" provisions. They provide that money from the sale of the goods supplied must be kept in a separate bank account or on trust for the supplier. This is the trust or fiduciary part. For this type of clause to work, the customer must keep any funds received in a separate bank account or identified as monies held on trust.

If the monies are not kept separately, a properly drafted clause will allow a supplier to trace the proceeds from the on-sale of their goods into the bank account of the customer. For this to be successful, the supplier must be able to show that at least part of the current monies in the customer's bank account was generated from the sale of the goods under the clause. That ability to trace does not apply if the money is paid into an overdraft account - being effectively a payment of the money to the bank [Bishopsgate Investment Management (In Liquidation) v Homan & Ors [1995].

Do retention of title clauses affect insolvency practitioners?

Yes. Insolvency practitioners will have to deal with retention of title clauses from time to time. They will require information from the supplier before any goods are released and will generally return any goods that are subject to valid retention of title clauses.

The information required will include a copy of the terms and conditions that evidence the clause and copies of all unpaid invoices. This will allow the practitioner to identify and return any items that fall under the conditions of the clause. The supplier is usually involved in this process and can usually be resolved with the cooperation of both parties.

What can insolvency practitioners do?

The insolvency practitioners may:

(a) return any goods held by the insolvent customer under a valid retention of title clause; or
(b) sell the goods in the ordinary course of business and pay for any retention of title stock. This generally assists both the practitioner (in attempting to complete work in progress etc.) and the supplier (in selling the goods and having guaranteed payment for at least as much as the sale proceeds).

But sometimes a voluntary administrator will sell items that are held under retention of title clauses for less than is owed to the supplier. Is the administrator liable for that amount?

No, as long as the administrator acted reasonably and in the ordinary course of business. The supplier has the right to claim for the shortfall against the company, by lodging a proof of debt. But they do not have a personal claim against the administrator.

Disclaimer
The enclosed information is of necessity a brief overview and it is not intended that readers should rely wholly on the information contained herein. No warranty express or implied is given in respect of the information provided and accordingly no responsibility is taken by Worrells or any member of the firm for any loss resulting from any error or omission contained within this fact sheet.

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Last Updated: 16.3.2010