By Whitney Whitfield, restructuring and insolvency senior manager, Armstrong Watson
If your business supplies goods, there is always a risk that you will not get paid.
By default, once you sell goods they belong to the customer, whether or not they have paid for them, and the customer owes you the purchase price.
But what if your customer refuses to pay or becomes insolvent. This is where the existence of a retention of title (ROT) clause is vital.
What is a retention of title clause?
An ROT clause is a condition in a sales contract which means that goods supplied belong to your firm until they have been paid for.
This means that if your customer cannot pay for your goods, or becomes insolvent, you can visit their premises and take your goods back.
Different types of retention of title clauses
Basic clause
This provides that title to goods is retained by the seller until full payment has been received. This type of clause has its limitations. The clause can be rendered useless where goods are not individually identified and it is not possible to prove which have been paid for and which have not.
All monies clause
This is where the seller retains ownership of goods until the buyer has paid not only for specific goods but also for any other goods supplied by the seller.
Common ROT clause pitfalls to avoid
Badly worded clauses
An ROT clause should be clearly worded and unambiguous. It should explicitly state that the seller retains ownership until full payment is received. Poorly worded clauses can lead to disputes, and costly legal and court fees in resolving matters.
Failure to incorporate into contract
The ROT clause should be properly incorporated into the contract. This means it should be part of the terms and conditions agreed upon by both parties.
It is vital that both parties sign and date the contract to prove agreement to the terms of sale. Simply referring to ROT on your sales invoice is generally not sufficient for it to be incorporated into the contract.
Inability to identify goods
Your goods must be identifiable and separable from other goods. Where possible your sales contract should allow for your goods to be stored separately and clearly marked in case you need to collect them. You can go a step further and incorporate into the ROT clause the right to enter your customer’s premises to reclaim goods.
Failure to enforce
If the buyer fails to pay or becomes insolvent, you must take timely action to enforce the ROT clause. Any delay can lead to difficulties in recovering the goods.
By being aware of these pitfalls, sellers can take steps to ensure that their ROT clauses are effective and enforceable.
