Retention of Title clauses explained: 5 essential tips for businesses

Retention of title (‘ROT’) clauses can be a saving grace if incorporated properly into contracts. The purpose of a ROT clause is essentially to make it clear when the title, i.e. ownership, of goods transfers from the seller to the buyer in a transaction. A common type of ROT clause will state that the title in the goods does not transfer from the seller to the buyer until the buyer has paid for them in full.

A clear ROT clause can avoid disputes further down the line, particularly where a buyer becomes unable to pay or insolvent. The main remedy under a ROT clause is usually to reclaim possession of the goods, however this is not always possible where the goods have been combined with other goods (for example during a manufacturing process) or sold on to third parties. If you are in this situation, we are able to advise on alternative options, such as whether pursuing the proceeds of sale from the buyer is appropriate.

Although ROT is an intricate topic, it is worth considering these 5 key points if you intend to rely on a ROT clause:

1. Has the clause been validly incorporated into the contract? As with all contractual clauses, an ROT clause can only be relied upon if it has been validly incorporated into the contract. In the best-case scenario, the ROT clause would be set out in written terms which were signed before there was any exchange of money or goods between the parties. Although in the real world this does not always happen, you run the risk of being unable to rely on your terms if you send them after the fact, for example in an invoice.
2. Is the buyer storing the goods separately from others and are they identifiable? Goods can only be recovered under a ROT clause if they are identifiable. If you intend to be able to rely on a ROT clause, it is vital to make sure that the contract stipulates that relevant goods are being held separately from others the buyer holds and that this requirement is being followed.
3. Does the clause wording inadvertently create a charge? Previous cases have shown the importance of ensuring the wording of ROT clauses is clear. In some instances, clauses have been held to create a charge over goods rather than a retention of title. Unfortunately, since charges need to be registered, such a clause may therefore be unenforceable.
4. Can you enter the buyer’s premises to reclaim the goods? A ROT clause can be worded to give the seller a right to enter the buyer’s premises to reclaim unpaid goods. However, care needs to be taken in certain circumstances, such as where the buyer is on leased land or the goods are fixed to the land, as consent may be needed from the owner of the land to enter.
5. Is there an alternative way to protect myself? It is worth considering other steps you could take if it becomes apparent a buyer may become unable to pay, even if you are in an existing contractual relationship with a buyer with no ROT clause. For example, you could consider seeking payment ahead of delivery or reducing your credit periods/limits.

A final point to note in the case of buyers who become insolvent is in relation to legislation brought in during the pandemic. Section 233B was added to the Insolvency Act 1986 in 2020 and raises a number of issues. For example, this section can prevent suppliers to a company from relying on contractual terms to terminate their contract where the buying company has entered into certain insolvency procedures. This is, however, a developing area of law and if your client goes into insolvency and you require any specific advice, please contact us.

If you have any questions about contracts or ROT clauses, please contact our Commercial and Technology team or our Dispute Resolution team.