How Can a Retention of Title Clause Protect Sellers?

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. 

Understanding the Risk of Selling to an Insolvent Buyer

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.

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.

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. 

Case Study 

To illustrate the commercial effect of the default position, consider the following case study. Suppose you sell 1,000 widgets to ABC Ltd for £10,000. 

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. 

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. 

Instead, you must join the insolvency proceedings as an unsecured creditor. In many cases, insolvency results in the buyer’s liquidation. This takes months to resolve. In ABC Ltd’s case, it may only have £100,000 worth of assets to meet £500,000 worth of unsecured claims. In this case, you would only receive £0.20 for every £1.00 ABC Ltd owed you for the widgets. 

Mitigating the Risk of an Insolvent Buyer

The best way to avoid the worst-case scenario outlined above is to negotiate the retention of title clause in your contract with the buyer. Importantly, it should contain the following provisions. 

1. Reservation of the Legal Title 

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.

2. Reserve the Right of Legal Entry Onto the Buyer’s Premises 

Specifically, the provision should give you the right to:

• enter the buyer’s premises; 
• inspect the goods; and
• repossess the goods.

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’s property. 

3. “All Monies Clause”

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. 

4. The Buyer’s Obligation to Keep the Goods Separate from Other Goods 

Such a provision has a practical effect: if you need to repossess the goods, you will not need to sift through the buyer’s inventory to locate the goods. 

5. No Mixing With Other Goods

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. 

6. Severance Clause 

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. 

Further Considerations

The terms outlined above represent an ideal contract for the seller. However, you may not have sufficient bargaining power to negotiate them into your contract. Therefore, you should obtain the advice of a commercial lawyer experienced in representing sellers. They can ensure your contract contains the most favourable terms. 

Likewise, an experienced lawyer can ensure that the terms are appropriately drafted. This is important because the legal effect of retaining title clauses can create unintended consequences carefully worded. 

Key Takeaways 

A retention of title clause is designed to mitigate the seller’s risk of a buyer becoming insolvent before the buyer has paid for the goods. Well-drafted retention of title clauses contains several provisions that strengthen the seller’s position. They are quite common in practice, but the extent to which you can negotiate retention of title clause depends on your bargaining position. You should obtain the advice of a commercial solicitor to draft a retention clause in any sales agreement effectively. 

If you need help drafting a retention of title clause, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.

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