Start the RoT

Summary
• RoT clauses are an integral part of supply contracts.
• They should be sufficiently detailed, yet simple.
• Ideally they should be tailor-made for the specific business relationship.
• BPE can offer initial free advice to TTF members.

Since their introduction into English law from Europe in the mid-1970s, retention of title clauses (RoTs) have become an integral part of supply contracts. Such clauses represent a weapon in the seller’s armoury in cases of the buyer’s insolvency, although they have often been used too eagerly and drafted too widely for effective use.

In the prosperous days of easy-to-obtain credit insurance, there were always other options open to the seller, and RoTs became less fashionable. However, the withdrawal of easy credit, and the drying-up of insurance, has caused many sellers to reconsider their position.

In a world where more is usually better, RoTs are anathema. There is nothing inherently wrong in the short-sharp clause: “Title to the goods shall remain with the seller until the seller receives payment in full for the goods from the buyer”. If the goods are easily identifiable as the seller’s property, then such a clause would serve the seller perfectly adequately.

However, it is the various ‘bolt-on’ bits to the clause that can have a detrimental effect on the seller’s protection – while the clause may appear, on first glance, to fully protect the seller, the often quirky nature of English law could infer that the seller is only reserving a beneficial interest in the goods, as opposed to reserving the legal interest. To do this actually moves the clause from a simple RoT to a legal charge, and such a charge would be void and unenforceable unless registered against the buyer at Companies House within 21 days of creation.

While creating a registered charge is a good idea for a seller, it does add cost and inconvenience, and is not wholly practical in today’s business environment.

Therefore, RoTs must be sufficiently detailed in order to protect the seller as much as possible, but not so detailed as to cross the Rubicon into the realm of registrable charges. Hence “one-size-fits-all” is far from the truth.

So, what is safe?

For the seller, a right to access the buyer’s premises to recover the goods helps – as is stating, while title is reserved, that risk in the goods passes on delivery. Should the buyer be obliged to keep the goods separate and identified as the seller’s property? And why not impose on the buyer an obligation to insure the goods until such time as title does pass? All these points can be incorporated into a well-drafted clause without verging into registrable charges.

Problems start when the buyer purchases goods for the purpose of resale, often meaning the buyer cannot pay the seller until his customers have paid him. In practice, the seller may have little option but to permit the buyer to resell the goods prior to title passing, but there can be benefits in expressly stating that the buyer resells to his customers as the seller’s agent. However, such an arrangement can sometimes work against the seller by creating a direct contract for sale between the seller and the buyer’s customer.

It is perhaps here that a seller is best advised to stop – but this ignores the follow-on problem of the seller then losing rights to the goods themselves, which are now in the possession of the buyer’s customer. The seller may look towards retaining title over the sale proceeds. Certainly the seller has no legal claim over the sale proceeds without an express contractual right, but any such right over sale proceeds is certainly more akin to a charge over the buyer’s book debts, which is void unless registered. The same applies where the buyer alters or incorporates the original goods, for example, by converting timber into bookcases.

There is no reason why “all monies” clauses (ie title to the goods does not pass until all money owed by the buyer to the seller, whether for those goods or otherwise, is received by the seller) would not work. However, they have their own problems – it is entirely possible that title may never pass until the business relationship ceases (particularly if orders are regular, and payment terms are generous), which certainly does not work in the buyer’s favour.

As you can see, RoTs are not necessarily as simple and straightforward as they may initially seem. Ideally, each such clause should be tailored to the specific business relationship, particularly in international trade where the laws of other countries interpret such clauses differently. As credit insurance implodes, there has never been a better time to review your business’s contractual position.

Iain Garfield is head of BPE Solicitors’ commercial team. He advises businesses in relation to trading terms, international contracts, agency and distribution. His team has years of experience in the timber trade and has been involved in resolving a number of high-profile industry disputes. Mr Garfield is a member of, and lectures for, the Chartered Institute of Purchasing and Supply.

BPE is happy to offer advice in relation to RoT clauses. For members of The Timber Trade Federation, BPE can (via The Federation) provide initial advice without charge under the terms of membership.