What is the Effect of a Retention of Title Clause in a Business Contract?

If you are negotiating a contract with a supplier of goods, one of the contract terms may include a retention of title clause. Depending on how the term is drafted, you may owe special obligations to the supplier upon receipt of the goods. Likewise, if you are selling goods to a customer, you can use retention of title clauses to improve your chances of repayment if your customer defaults. This article will explain the purpose of retention of title clauses, how they operate, and what this means for your business. 

Supply of Goods and the Law of Ownership 

As you may know, many businesses do not immediately pay their suppliers when they receive goods. Instead, customers rely on their credit with the supplier to pay them after taking control of the goods. 

You might be surprised to know that even if you do not immediately pay for goods in a commercial transaction, you obtain the legal title to the goods at the point you take control of them. For example, you obtain legal title as soon as the supplier delivers the goods to your office or warehouse. 

Despite the law’s default position, you are free to negotiate an express provision into your contract that says otherwise. 

Retention of Title 

You can create a contractual term that states you retain the legal title to the goods until you are repaid. This is called a basic form retention of title clause. The effect of this clause is that if your customer goes insolvent, the goods you deliver to the customer do not form part of their assets. This means you have a legal right to reclaim the goods because you own the title to them. 

Limits to a Retention of Title Clause 

Inserting a basic form retention title of clause is not a bulletproof solution to protecting your interests should your customer go insolvent. Several circumstances can frustrate your ability to assert your rights in the delivered goods. For example, a retention of title clause will not have any effect if your customer proceeds to use the goods in such a way that changes their fundamental nature. Consider the following example. 

Nevertheless, you can add specific terms in the basic clause that will improve your position. However, before you do so, you should seek advice from an experienced business lawyer. 

Key Takeaways 

A retention of title clause is an express term in a contract for the sale of goods. It entitles the seller to keep the legal title in the goods until the buyer pays the seller. This protects the seller if the customer goes insolvent by giving you the right to repossess the goods. If you need help with your business contract, our experienced business lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. So call us on 0808 196 8584 or visit our membership page.

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