Blog; Retention of Title – Practical Advice to Enable Recovery of Unpaid Goods

Supplying goods on credit can be a risky business. In the midst of tough economic times, it is more important than ever for businesses to protect themselves against the risk of a customer becoming insolvent.

A valid ROT clause allows a supplier to retain ownership over goods supplied until such time as certain conditions are met, often the payment to the supplier of all sums owed. The clause displaces the usual position that ownership/title of goods passes to the buyer on
delivery.

A ROT clause is sometimes known as a ‘Romalpa’ or reservation of title clause.

CProvided it has been carefully worded, the clause affords the supplier a further layer of protection against the buyer’s default. This means that on an insolvency, the supplier is potentially entitled to:

This is likely to be of greater value to the supplier than claiming for an unsecured dividend in the formal insolvency process.

It is essential that your clause is written correctly and that your systems operate in such a way as to maximise the prospects of recovering your stock. There is no guarantee that an ROT clause will work, as it depends not only on the wording of the clause but how the clause operates in practice.

There are three main areas that lawyers will usually investigate:

An ROT clause which is not effectively incorporated into the contract between the seller and insolvent buyer will ultimately fail. Incorporation is a legal term which, in this context, means that the seller’s terms and conditions of trade have been accepted by the buyer. A simple ROT clause imposed after the contract is made, for example terms stated on the back of a sales invoice, is likely to be rejected by a liquidator or administrator on the basis that it is a post-contractual document. Suppliers should ensure that a contractual document, such as a carefully worded credit application form containing the conditions of trade and the ROT clause(s) is signed by both parties before any goods are delivered.

ROT clauses are only effective if the supplier can identify which goods belong to him. This can be especially difficult where identical goods have been supplied by different sellers. It is sensible to ensure that your product is marked in a way that is easily identifiable. High value items such as plant and machinery should always be labelled with proper specification and serial numbers and manufacturers’ name plates. Lower value items should at least have a batch number or date stamped on their packaging and this should be referenced in your invoice.

If your supplies have been used in a manufacturing process which alters the goods so that they do not retain their original identity, it is unlikely that you will be able to claim ROT. In a well-known court case, a seller’s ROT claim was defeated as the resin supplied had been incorporated by the manufacturer into chipboard, thereby losing its identity. There is much case law in this area with each claim turning on its own facts and on the terms of the particular contract.

Can an administrator do whatever he wants with the ROT stock?
The simple answer is “no”. The moratorium created by an administration means that a supplier cannot take back his stock without the permission of the court or the administrator. However, if an administrator deliberately deals with property in a manner inconsistent with another person’s rights and deprives them of possession and use, he could be liable for damages under the tort of conversion. In practice, the administrator will usually invite the supplier to attend the site and identify their goods. Any stock used by the administrator after their appointment will then be paid for (usually at retail price which clearly benefits the supplier and avoids the need for collection and re-sale).

Assuming the ROT clause is valid, a supplier’s claim to any unused goods will be binding against any liquidator, administrator or trustee in bankruptcy, i.e. the office holder cannot dispose of the goods for the general benefit of the liquidation/ administration/bankruptcy estate.

Ensure that your ROT clause is effectively incorporated into the contract with your customer.

Thank you to our friends at Top Service and PKF GM for producing the facts around Retention of Title for our use.