Retention of title clauses are available to suppliers of products to insulate against failures to pay for goods by financially weak customers. We discuss some of the requirements for valid and enforceable retention of title clauses, and the default position regarding the passing of legal title in a sale of goods contract which may be changed by retention of title clauses.
The UK economy has been steadily improving through the course of 2014. This is good news; however for every glass half full there is a glass half empty.
Those who have experienced previous recessions will know that an increase in economic activity is usually accompanied by an increase in corporate insolvencies. This appears to remain the case this time over, which is a confounding factor which does not bode well for the medium term.
Record low interest rates have meant that the usual spike in corporate insolvencies following the upturn has been muted. It is estimated that there are around 100,000 ‘zombie’ businesses that may be toppled by even a slight increase in the cost of borrowing when it eventually rises. In the case of interest rates, what goes down must go up.
If businesses want to maintain a strong position for the sale of goods – and increase the options available to obtain payment, retention of title clauses are available to be incorporated in standard terms of business and contract of supply.
The default position for passing of legal title in sale of goods transactions is governed by the Sale of Goods Act 1979. Title to goods supplied passes upon delivery to the customer.
If a customer takes delivery of goods from a seller and it becomes insolvent before payment, the seller is generally classed as an ordinary unsecured creditor in any insolvency proceedings, and falls into the general pool of creditors. In those circumstances the seller lines up with every other unsecured creditor, which will almost certainly recover less than 100 per cent of the value of the goods, if anything at all, and even then with the hassle, distraction and expense of having to spend time chasing payment when the goods should have been paid for in the first place.
There is no reason why it has to be like this.
It is obviously in sellers’ best interests that title in goods does not pass to customers before payment is received, with the consequence that the seller is able to recover the goods if they are not paid for, and thereby sell the same goods to another customer.
The Sale of Goods Act enables the parties to agree an alternative point at which title is to pass – to a time other than deliver of the goods. This is done by including retention of title clauses in contracts for sale of goods.
Normally retention of title clauses used by sellers displace this default rule to one where title in the goods does not pass until payment has been received, even if those goods have already been delivered. In the event of insolvency of the buyer, this means that the goods will not form part of the buyer’s assets available to a liquidator to realise (in monetary terms) and distribute to the proceeds for the benefit of all of the unsecured creditors. This sets up the situation where the seller to is able to recover 100 per cent of the value of the goods.
Although it sounds simple in theory (as most things do), in practice it is not unheard of for retention of title clauses to fail to protect sellers when they are tested in court. Sellers therefore need to ensure that their terms of business are properly drafted by a specialist with a proper understanding of the business and how the business works. The ability to enforce the clause should also be set up in the retention clause so that enforcement can be executed expediently.
There are various grounds upon which to challenge the validity of retention of title clauses, and ways that they might not be up to the job which including:
It is too widely drafted, making it a legal charge or equitable charge over the goods. This renders the clause unenforceable if it is not registered. Having regard for the practicalities of businesses, it is usually unrealistic to expect to be able to register a charge with Companies House for each sale of goods;
Repossession is made impossible because:
The goods are indistinguishable from other goods (ie not labelled) and no provision was made in the contract for them to be marked differently or stored separately from other goods
The seller failed to include a separate licence to enable entry onto the buyer’s premises to recover the goods
The clause was only included in terms stated on a delivery note or invoice and not a contract preceding delivery. The point here is that once the contract has been formed by seller and buyer, it cannot be changed simply by adding words to an invoice or delivery note (this principle applies to other matters as well, such as the time for payment of an invoice – it should be in the contract of sale);
The retention of title clause is inconsistent with other contractual terms.
To add to these potential complications there are various types of retention of title clauses which may or may not be suitable for any particular business.
The improvement of the economy and continuing low interest rates has allowed thousands of companies to continue in business. To assist businesses with maintaining a strong position to recover payment for sales of goods, retention of title clauses are available to be included in contracts. If not, the default position under the Sale of Goods Act 1979 is that title to the goods can pass to the buyer upon delivery; with an increased risk that the goods will not be paid for.
To set up a valid and enforceable contractual regime to maximise prospects for protection against failures to pay for goods and invoices, and obtain specialist advice, contact Charles Goldblatt.
