How to use and enforce retention of title to protect your business from bad debt.
What is a ‘retention of title’ clause?
A ‘retention of title’ clause permits a supplier to legally retain ownership of the goods they have supplied, until certain conditions (such as payment) have been met. This provides the supplier with some protection against losses in the event of a customer defaulting on a payment, or becoming insolvent. ‘Retention of title’ clauses are also sometimes called ‘romalpa’ or ‘reservation of title’ clauses.
Why is retention of title important now?
Retention of title can be an extremely helpful form of security if you are concerned about a customer’s ability to pay, or when trading conditions are particularly uncertain, as they are at the moment. Customers and suppliers who were once creditworthy may now not be, or the level of credit risk may not be clear due to the Corporate Governance and Insolvency Act 2020. This temporary government legislation seeks to mitigate the likely rise in insolvencies.
Retention of title may be especially useful if you are operating in one of the industries worst hit by the crisis, like hospitality or manufacturing. These industries are desperate to get back to business, but are unlikely to be able to absorb a significant loss at this time. If your business has a high sales churn and low margins, a retention of title clause can help to protect you against losses that could otherwise be catastrophic for your business. But any business supplying goods on credit (which is around 90% of UK firms) would be wise to review their terms and conditions of sale post-lockdown, and double check that they include a retention of title clause.
How do I make sure my retention of title clause is valid?
To be valid, a retention of title clause must appear in the contract issued at the time when the goods are supplied. If the retention of title clause is present, the supplier may remain entitled to the goods until full payment for them has been received. The supplier’s claim to the goods may still take precedence over that of any trustee or liquidator in the event of legal proceedings.
Four kinds of retention of title clauses
Broadly, there are four types of ‘retention of title’ clause:
1. A straightforward retention of title clause through which a supplier strives to retain entitlement to specific goods supplied under the contract until full payment has been made.
2. ‘All monies’ or ‘all accounts’ retention of title clauses, through which the supplier seeks to remain entitled to all goods supplied to a customer.
3. A ‘proceeds of sale’ retention of title clause allows the customer to sell the goods but seeks to retain a right to the proceeds of any such sales.
4. A ‘mixed goods’ retention of title clause allows the customer to combine the supplied goods, but entitles the supplier to the new item or proceeds of its sale. This is a common form of retention of title in manufacturing.
How to avoid disputes over retention of title clauses
Remember that whilst retention of title clauses can prove crucial in many cases, the more elaborate the rights you claim, the more difficult it will be for you to enforce those rights in the event of a customer default. Here are a few tips to bear in mind when using retention of title clauses:
Take steps to give your customer reasonable notice of your terms, and document the incorporation of the clause into your contractual agreement and subsequent trading relationship. A retention of title clause on an invoice won’t be binding: the clause must appear in your contract.
Check for consistency
Which leads on to another sticking point for suppliers looking to use retention of title: inconsistency with other contractual terms. When drafting your contract, make sure it states that if your customer becomes insolvent, they must immediately make any remaining goods in their possession known to you. Check that none of your contractual terms are contradictory, so that you can enforce them if required.
Your entitlement to the goods will also be invalidated if it is not obvious that the goods in question came from you. So it’s best practice to use clearly branded packaging, tagging or marking to avoid any confusion should you need to reclaim the items down the line. If this is impossible, consider using a clause in your terms and conditions that requires customers to store supplied goods separately from other items, so that they can still be easily identified should an insolvency occur.
Get permission to enter
If your customer does end up becoming insolvent, you’ll most likely need to enter their premises in order to reclaim your goods. So it’s important to specify this in your terms and conditions of sale. Without this permission, entering your customer’s premises could put you at risk of complaint of trespass and a damages claim.
How to get retain your goods in the event of a customer insolvency
The type of insolvency will determine your ability to recover the goods. A voluntary liquidation does not involve a ‘statutory moratorium’ (a period during which debtors cannot pursue payment), and you’ll be able to recover your goods.
But if your customer enters administration, you won’t be able to recover your goods during the moratorium period without special dispensation from the insolvency administrator or court. Typically a court will only lift the moratorium if this will not impede the administration process, so the administrator is your best bet.
How to work with the administrator
Move quickly to provide the administrator with a copy of the terms and conditions of the sale, and a schedule of goods supplied to your customer. If you don’t, the administrator may sell your goods as part of the insolvency proceedings.
If you’d rather not take that risk, you can always insure your invoices with Nimbla, and in the event of a customer insolvency, we’ll pay you 90% of the value of your invoice (subject to T&Cs).