Commercial and technology contracts legal A-Z: R is for retention of title

A retention of title clause (ROT clause) is a clause that reserves a seller’s title to (i.e. ownership of) goods after they have been delivered and prevents ownership passing to the buyer until the goods are paid for.

A ROT clause can have a number of different components and variations, including those set out below. As detailed the nature of the ROT clause may affect its enforceability.

• A basic ROT clause provides that the seller retains ownership to the goods until those goods have been paid for in full.
• An “all monies” clause provides that the seller will retain ownership to the goods until all amounts owed by the buyer to seller (not just amounts owed for the goods) have been paid. This avoids the need to relate specific goods to the unpaid invoices. However, such a clause can be attacked as an (unenforceable) unregistered charge. In practice, the basic ROT clause is commonly included in a separate sub-clause alongside the all monies clause in case the latter is found to be ineffective.
• The ROT clause may give the buyer the right to resell the goods to third parties before ownership has passed, if this is the commercial intention. This may lead to the inclusion of a “proceeds of sale clause” which seeks to enable a buyer to take the proceeds of goods sold on to a third party before the purchase price has been paid. Again this clause may be difficult to enforce in practice.
• In order to help the seller physically recover the goods (for example in the case of insolvency), a ROT clause will often include some obligations on the buyer to store the seller’s goods separately from other goods and ensure that they are identifiable, as well as a right for the seller to lawfully enter the buyer’s premises to repossess them. Clearly there may be issues with repossession if the goods are used as a component to a product manufactured by the buyer, or where they are perishable.

In summary the ROT clause may mitigate risks associated with delivery of goods prior to receipt of payment, but the ROT clause may need to be tailored to the specific relevant goods, and other circumstances, in order to seek to ensure it is effective. In addition the ROT clause is unlikely to be a substitute for having a proper credit control system in place to ensure prompt payment.

For more information, please contact any member of the commercial contracts team at Stevens & Bolton LLP.