The sale of all goods involves legally transferring the title of the goods from the seller to the buyer. When the title actually transfers is a matter of negotiation and circumstance. Regardless if you are the seller or buyer, your contract should have an express clause that specifies exactly when the title transfers. This article will explain how a retention of title clause can protect sellers in a commercial transaction. <\/p>\n\n\n\n
Any agreement you make with a buyer involves the transfer of the title to the goods in exchange for payment. Absent any express term in the contract, your buyer will obtain title to the goods when the contract is executed. As a seller, this is rarely to your advantage.<\/p>\n\n\n\n
The effect of the title passing from you to the buyer is that you now have no right to repossess the goods once the buyer has them in their position. This is the case even if the buyer still needs to pay you. This often is a problem because, in most industries, sellers sell their goods to the buyer on credit. <\/p>\n\n\n\n
The contract permits the buyer to pay you after you deliver the goods to them. If the buyer becomes insolvent between the point they obtain the title to the goods that are now in their possession, you have no right to repossess the goods. Instead, under insolvency law, you become an unsecured creditor. This means you have no guarantee that you will be repaid after the buyer is liquidated. <\/p>\n\n\n\n
To illustrate the commercial effect of the default position, consider the following case study. Suppose you sell 1,000 widgets to ABC Ltd for \u00a310,000. <\/p>\n\n\n\n
You may have negotiated the contract in advance of actually selling the goods. Alternatively, there may not be a written agreement in place. Instead, the contract arises when you sell the goods, such as if you have a retail shop. Regardless, the position is the same. Absent any express clause in the sale agreement, ABC Ltd obtains the title to the goods when the contract is executed. <\/p>\n\n\n\n
Before you deliver the goods to the buyer, you have limited rights to refuse delivery even if the title has passed legally. For instance, if you realise the buyer is insolvent, you may not have to deliver the goods. However, when you lose control of the widgets, such as when the buyer physically has possession, you have no rights over the goods anymore. <\/p>\n\n\n\n
Instead, you must join the insolvency proceedings<\/a> as an unsecured creditor. In many cases, insolvency results in the buyer\u2019s liquidation. This takes months to resolve. In ABC Ltd\u2019s case, it may only have \u00a3100,000 worth of assets to meet \u00a3500,000 worth of unsecured claims. In this case, you would only receive \u00a30.20 for every \u00a31.00 ABC Ltd owed you for the widgets. <\/p>\n\n\n\n The best way to avoid the worst-case scenario outlined above is to negotiate the retention of title clause<\/a> in your contract with the buyer<\/a>. Importantly, it should contain the following provisions. <\/p>\n\n\n\n The contract should expressly state that you, the seller, retain the legal title to the goods sold. This is important because the law recognises other forms of non-legal ownership, such as beneficial and equitable ownership.<\/p>\n\n\n\n Specifically, the provision should give you the right to:<\/p>\n\n\n\n The effect of such a provision entitles you to enter their premises without trespassing. You can then inspect the state of the goods. If they have used the goods in a way that breaches the retention of title clause, you can document the breach to bring a claim against the buyer later. You can likewise enforce your right of repossession without trespassing on the buyer\u2019s property. <\/p>\n\n\n\n An all monies clause reserves the title to any other goods you have sold to the buyer. This is important where you may have sold the buyer previous goods under a contract that did not contain a retention of title clause. An all monies clause effectively enables you to retain the title of any other goods the buyer has in its possession so long as the buyer owes you money. <\/p>\n\n\n\n An all monies clause means you do not have to keep a running tally of items the buyer has paid for that remain unpaid.<\/p>\n<\/div>\n\n\n\n Such a provision has a practical effect: if you need to repossess the goods, you will not need to sift through the buyer\u2019s inventory to locate the goods. <\/p>\n\n\n\n Retention of title clauses loses its effect once the goods are used in such a way that prevents you from recovering them. For instance, if you sell a buyer paint, you cannot repossess the paint if the buyer has painted the walls. Likewise, if the buyer attaches the goods to other goods, you lose the right to repossess the goods. <\/p>\n\n\n\n A provision that prevents the buyer from mixing the goods with other goods creates a contractual obligation which, if the buyer breaches, entitles you to claim against the buyer for damages.<\/p>\n<\/div>\n\n\n\n A severance clause allows the court to separate different provisions if one is found to be ineffective. Absent a severance clause, the court may treat the entire clause as unenforceable. <\/p>\n\n\n\n\n\n Continue reading this article below the form\n <\/i>\n<\/a>\nMitigating the Risk of an Insolvent Buyer<\/h2>\n\n\n\n
1. Reservation of the Legal Title <\/h3>\n\n\n\n
2. Reserve the Right of Legal Entry Onto the Buyer\u2019s Premises <\/h3>\n\n\n\n
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3. \u201cAll Monies Clause\u201d<\/h3>\n\n\n\n
4. The Buyer\u2019s Obligation to Keep the Goods Separate from Other Goods <\/h3>\n\n\n\n
5. No Mixing With Other Goods<\/h3>\n\n\n\n
6. Severance Clause <\/h3>\n\n\n\n