Getting your goods back if you aren't paid

If payment is overdue on goods you have provided to customers on credit, you should have a ‘retention of title’ clause in your trading terms that entitles you to take your goods back for non-payment.

The circumstances are crucial

But no matter how well drafted and clear they are, your retention of title clauses may be difficult to enforce, because every case depends on the particular circumstances. And a debtor who knows the tricks of the trade can take advantage of you if you aren’t clear on your legal rights, or don’t act as quickly as other creditors.

Your retention of title clause will be particularly hard to enforce if your debtor is in trouble and a liquidator, administrator or receiver is appointed. If that happens, you are likely to have a fight on your hands if you want your goods back. See the special section on ‘Dealing with liquidators and other appointees’ below.

Always take legal advice before attempting to recover goods under a retention of title clause.

Check what your retention of title clause says

At its simplest, your retention of title clause will say you continue to own goods you have supplied until you are paid, and you can enter the customer’s premises to recover them once payment is overdue. But you will need a more sophisticated retention of title clause if, for example, your customers may have:

• sold your goods
• processed them in some way
• incorporated them into other products
• both incorporated them into other products, and sold them

Check the wording in your terms carefully to see what is covered.

Make sure it applies

Check that you contracted with the customer on your trading terms, so the retention of title clause applies. An offer must have been made to contract on your trading terms; the offer must have been accepted for your terms to apply. You must be able to prove that was what happened. Check that:

• Your terms were in writing. If there’s nothing in writing there will still be a contract, but it will be difficult to prove the retention of title clause was included in it.
• Your customer agreed your terms before the contract was concluded. If a customer didn’t see them until afterwards, your terms may not apply.
• You have evidence of the customer’s agreement, such as a signature on an order form, a written confirmation, or a note made by you at the time.

If an established customer claims he did not see your terms before he entered into the particular contract, you can sometimes argue that he is to be treated as accepting them because he has dealt with you for a long time – he has a ‘course of dealing’ with you. But if your procedures are good, you shouldn’t have to rely on this.

Make sure it’s worth recovering your goods

Your goods may be perishable – food, for example. If the payment period in your terms of business is 30 days from invoice, your goods may not be worth recovering.

Make sure you can tell which goods are yours

If you can’t tell your goods from other similar goods at the debtor’s premises, you can’t take them back. Your trading terms should require the debtor to store your goods separately until you are paid. In practice, debtors rarely comply, so mark your goods in some way – with your name or logo, or batch or serial numbers – so you can identify them even if they are mixed in with other goods.

It’s better to mark the goods themselves, rather than any packaging, because debtors in the know may deliberately unpack and mix unmarked goods from different suppliers to prevent them identifying their specific goods.

Make sure you can identify goods that have been paid for and those that haven’t (unless you have an ‘all monies’ provision so it doesn’t matter)

A debtor who has paid for some of your goods, or for some instalments but not others, may claim that the specific goods you are trying to take back have been paid for, so he now owns those. Unless you can prove him wrong, you can’t take those goods.

But an ‘all monies’ provision in your retention of title clause means you retain ownership of all your goods until all monies owed to you by the debtor have been paid – as long as the debtor owes you some money, you can take back the goods you find at the debtor’s (provided you supplied them) whether or not those particular goods have been paid for.

Know your rights

You can now try to enforce your retention of title clause. Here is an outline of your position in five common scenarios:

Scenario A. The debtor still has your goods, in their original state

If payment is late, and the debtor still has your goods in their original state, a simple retention of title clause – saying the goods remain yours until you are paid, and you can enter the debtor’s premises to recover them – means you can go and collect your goods from the debtor. In the meantime, the debtor has a duty of care to safeguard them for you.

Scenario B. The debtor has incorporated your goods into another product, but they can be detached

If your goods have been incorporated into another product, the same simple retention of title clause will allow you to take back your goods, if they can be detached from the other product. For example, if you have supplied tyres that have been fitted to tractors, you can remove them and take them back.

Scenario C. The debtor has incorporated your goods into another product, and they can’t be detached

You can’t take back goods if it would be physically impossible to detach them – if your flour has been used to make bread, for example. You can’t take back your goods if you would have to destroy, or do serious damage to, the other product to do so. For example, you can’t recover your glue from a sofa if you would have to destroy it in the process. In both cases, ownership of your goods passes to the debtor when they are incorporated into the other product.

Some retention of title clauses purport to allow you to claim ownership of the product that your goods have become part of. In the above examples, you would claim ownership of the bread or the sofa. These clauses are rarely effective – if they were, the suppliers of all the other goods used in the manufacture of the bread and the sofa would be claiming ownership of them too.

Similarly, if you supply a material such as leather, and it is used to make, say, handbags, you can’t usually claim ownership of the handbags.

Scenario D: The debtor has sold your goods, in their original state

If your goods have been sold by the debtor, in their original state, your retention of title clause may purport to give you the right to recover your goods from the third party buyer.

Whether that right is enforceable depends on the application of the specific wording in your retention of title clause to the specific circumstances. But it would be unusual for you to succeed, no matter how well-drafted your retention of title clause. Even if the clause is upheld in court, you do not have the right to enter the premises of the third party to recover your goods.

You are also unlikely to succeed if, in fact, you knew the debtor was going to sell your goods before you were paid, even if your retention of title clause forbids this.

Your retention of title clause may purport to give you rights over the proceeds of sale of the goods. To be effective, it must turn the debtor into your ‘fiduciary’ – so he is treated much as if he were selling your goods as your agent rather than in his own right, and must therefore account to you for the proceeds. As a minimum, your retention of title clause must include wording that makes it clear the nature of the fiduciary relationship, and must also require that:

• Your goods are kept separate from the debtor’s own stock before they are sold.
• The proceeds of sale of your goods are kept in a separate bank account, or are otherwise clearly kept separately from the debtor’s own money.
• The debtor can’t use those sales proceeds.

Again, the law is complex, and such clauses are often not upheld by the courts if, in fact, you have not behaved as if you were agent and principal, or other circumstances are inconsistent with an agent/principal relationship.

Scenario E: The debtor has sold your goods after they have been incorporated into another product

It is extremely rare to succeed in a claim that your retention of title clause allows you to recover products incorporating your goods, if they have been sold by your debtor to a third party buyer. The same is true of a claim that your retention of title clause entitles you to the proceeds of that sale.

Dealing with liquidators and other appointees

Your retention of title clause will be particularly important if your debtor is in trouble and a liquidator, administrator or receiver is appointed. If that happens, or you suspect it might, take advice on your position immediately.

Your debtor may not have told the liquidator or other appointee of your rights. Protect yourself by immediately sending the liquidator or other appointee:

• a copy of your trading terms
• a statement of the debtor’s account
• copy invoices

Ask him to confirm receipt in writing. Ask to see your goods, to make sure they are in good condition and marked as yours, and get him (or his representatives) to sign an inventory. Try to persuade him to store them separately. Contact him every few days to check they are still in good order, and safely and separately stored.

Your trading terms should provide that, on an insolvency, all debts due to you immediately become payable, even if your payment period is normally, say, 30 days. So your retention of title clause should ‘kick in’ on his appointment.

But the liquidator or other appointee will usually challenge your retention of title clause, even if it is valid. If you accept this, you become an unsecured creditor of the debtor – which often means you get nothing when the proceeds of sale of the business are distributed – leaving the liquidator with more for secured creditors (and his own fees).

If your advice is that your retention of title clause is valid, take, or threaten to take, legal action straightaway. There is no incentive for a liquidator to deal with your claim unless he knows that he will have to incur legal costs if he doesn’t. Don’t let him stall you – creditors who know their rights and pursue them vigorously are more likely to recover their goods than those who delay.

He is unlikely to defend your claim if it is valid – legal costs will reduce the assets available for creditors, and he is liable for your damages if you win.

Has the debtor created a charge over the goods, in your favour?

If a retention of title clause fails, so ownership of your goods passes to the debtor, creditors sometimes claim that the clause creates a charge (a mortgage) in their favour over the goods now owned by the debtor.

If they succeed, they become a secured creditor and can take possession of the goods if they are not paid. If the debtor becomes insolvent, they rank higher in the pecking order when a liquidator is paying out than they would as an unsecured creditor.

Such claims are complex, expensive and rarely succeed. Even if you successfully argue you have a charge over the goods, the charge is likely to be unenforceable because it has not been registered at Companies House.

This factsheet outlines law and practice relating to retention of title clauses, but always take legal advice on your specific circumstances.