Skip to content

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

Table of Contents

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. 

If you sell your goods to a customer, you deliver them (and transfer legal title) on the presumption that you will be repaid. But if your customer goes insolvent, these goods would form part of their assets. Without a retention of title clause, you do not have a right to the goods themselves. Instead, you only have a general claim on the customer’s assets. Hence, the liquidator can sell the goods and repay the customer’s creditors. Alternatively, if you had retained title to the goods, you could reclaim the goods ahead of any other creditors if your customer became insolvent.

Continue reading this article below the form
Need legal advice?
Call 0808 196 8584 for urgent assistance.
Otherwise, complete this form and we will contact you within one business day.

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. 

Suppose you deliver £1,000 worth of paint to a customer. The customer uses the paint to paint the products it manufactures. In this instance, the law is unlikely to help you if the customer later goes insolvent without paying you. This is because the law will say that your paint has been dispersed and, therefore, your legal title was destroyed.

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.

Frequently Asked Questions

What is a retention of title clause?

A retention of title clause prevents the law from automatically transferring the legal title from the seller to the buyer at the point the buyer takes control of the goods.

What is the effect of a retention of title clause?

If you retain the title to the delivered goods, you can repossess the goods if they do not repay in the event your customer becomes insolvent.

Register for our free webinars

Sweat Equity: Helping Your Startup Grow

Online
Discover how sweat equity can support your startup’s growth. Register for our free webinar today.
Register Now

Selling a Business: Tips for a Successful Sale

Online
Selling your business? Learn essential tips to reduce risk and achieve a successful sale. Register for our free webinar today.
Register Now

How to Recover Unpaid Debts from Customers and Suppliers

Online
Struggling with unpaid debts? Discover your options. Register for our free webinar today.
Register Now

Preventing Employee Competitors: How to Protect Your Business

Online
Learn how to protect your business from employee competitors. Register for our free webinar today.
Register Now
See more webinars >
Jake Rickman

Jake Rickman

Read all articles by Jake

About LegalVision

LegalVision is an innovative commercial law firm that provides businesses with affordable, unlimited and ongoing legal assistance through our membership. We operate in Australia, the United Kingdom and New Zealand.

Learn more

We’re an award-winning law firm

  • Award

    2024 Law Company of the Year Finalist - The Lawyer Awards

  • Award

    2024 Law Firm of the Year Finalist - Modern Law Private Client Awards

  • Award

    2023 Economic Innovator of the Year Finalist - The Spectator

  • Award

    2023 Law Company of the Year Finalist - The Lawyer Awards

  • Award

    2023 Future of Legal Services Innovation - Legal Innovation Awards