If payment is overdue on goods you have provided to business customers on credit, a 'retention of title' clause in your trading terms entitles you to take your goods back for non-payment.
(Different rules apply for goods sold to individual consumers on credit.)
Why is payment overdue?
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 of the transaction. A buyer who knows the tricks of the trade can take advantage of the situation if you aren't clear on your legal rights, or don't act as quickly as other businesses that are owed money by the buyer.
Your retention of title clause will be particularly hard to enforce if your buyer is in financial difficulties 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, or to receive any payment. See the section on 'Dealing with liquidators and other appointees' below.
Always take legal advice before attempting to recover goods under a retention of title clause.
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What does your retention of title clause say?
At its simplest, your retention of title clause will say your business continues 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 detailed retention of title clauses if, for example, your customers have:
- sold your goods
- processed them in some way
- incorporated them into other products
- both incorporated them into other products, and sold them
A basic retention of title clause can be complimented by standard clauses specifying:
- The buyer must mark/identify them as the seller's goods and store them separately from other goods.
- The buyer must insure the goods on delivery and note the seller's ownership on the insurance policy.
- The seller's right to access to the buyer's premises to ensure these steps have been complied with.
- A list of insolvency-related events which trigger the seller's right to demand payment for the goods if not already due and to repossess them.
- The seller's right to enter the buyer's premises to repossess the goods without trespassing.
- An 'all monies clause' reserves the ownership of the goods until the buyer has paid not only for those particular goods, but also for any other goods supplied by the seller to the buyer.
- A 'proceeds of sale' clause gives the seller a right to the money gained by the buyer when selling on the goods.
Check your trading terms
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; and the offer must have been accepted for your terms to apply.
You must be able to prove that was what happened. A paper trail of events is the most effective evidence.
- 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.
- The customer did not send you their terms and conditions after you sent them yours and before the contract was signed. If they did, the customer's terms will usually be the terms that apply to the contract.
If an established customer claims they did not see your terms before they entered into the particular contract, you can sometimes argue that they are to be treated as accepting them because they have dealt with your business for a long time, therefore they have a 'course of dealing' with you. However, if your terms and conditions have altered and long-standing customers have not been notified expressly of the alteration, there could be a problem. If your procedures are good, you shouldn't have this issue to deal with.
Recovering your goods
Your goods may be perishable - food, for example. Or the goods may have low resale values. So if the payment period in your terms of business is 30 days from invoice, your goods may not be worth recovering.
Consider altering your credit terms for these customers, especially if they have no trading history with your business. Rather than reclaiming good that have not been paid for, not extending credit in the first place may be the best strategy for avoiding a bad debt.
Identifying your goods
If you can't tell your goods from other similar goods at the buyer's premises, you can't take them back. Your trading terms should require the buyer to store your goods separately until you are paid. In practice, buyers 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, or your customer may deliberately unpack and mix unmarked goods from different suppliers to prevent anyone identifying their specific goods.
Which goods have been paid for and which haven't?
A buyer who has paid for some of your goods, or has paid some instalments but not others, may claim that the specific goods you are trying to take back have been paid for, so they now own those.
An 'all monies' provision in your retention of title clause (as mentioned above) means you retain ownership of all your goods until all monies owed to you by the buyer have been paid. So as long as the buyer still owes you some money, you can take back your goods in lieu of payment, whether or not those particular goods have been paid for.
Your rights to reclaim goods not paid for
An outline of your position in five common scenarios:
Scenario A. The buyer still has your goods, in their original state
If payment is late, and the buyer still has your goods in their original state, a simple retention of title clause - saying the goods remain yours until you are paid, and that you can enter the buyer's premises to recover them - means you can go and collect your goods. In the meantime, the buyer has a duty to safeguard them for you.
Scenario B. The buyer 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 buyer 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 your buyer when the goods 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 can be effective but usually require legal intervention as the suppliers of all the other goods used in the manufacture of the bread and the sofa, for example, 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 buyer has sold your goods, in their original state
If your goods have been sold by the buyer, in their original state, your retention of title clause may 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. It would be unusual for you to succeed, no matter how well-drafted your retention of title clause is, without court intervention. But 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 buyer 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 buyer into your 'fiduciary' - so they are treated much as if they were selling your goods as your agent rather than in their 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 buyer'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 buyer's own money to evidence the fact the buyer is effectively holding the money on trust for you.
- The buyer 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 buyer 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 buyer 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 mainly because many other sellers may also be making the same claim.
In this scenario the most practical route is to limit the credit terms in the first place, or cover the risk by using alternative forms of security such as guarantees or letters of credit.
Dealing with liquidators and other appointees
Your retention of title clause will be particularly important if the buyer is in financial trouble and a liquidator, administrator or receiver (all of which we will collectively refer to as liquidator) is appointed. If that happens, or you suspect it might happen, take legal advice on your position immediately.
Your buyer may not have told the liquidator of your rights. Protect yourself by immediately sending the liquidator:
- a copy of your trading terms
- a statement of the buyer's account
- copy invoices
Ask the buyer (or liquidator) to confirm receipt in writing. Ask to see your goods, to make sure they are in good condition and are marked as your goods, and get the buyer (or liquidator) to sign an inventory. Try to persuade them to store the goods separately. Contact them 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 30 days for example. So your retention of title clause should operate immediately on the appointment of a liquidator.
The liquidator will usually challenge your retention of title clause, even if it is valid. And if your buyer is now a company in administration, no steps can be generally be taken without the consent of the administrator or the permission of the court.
If you accept this challenge, you become an unsecured creditor. This often means that your business will get nothing when the proceeds of sale of the business are distributed - leaving more money for secured creditors (and for the fees of the liquidator).
If your advice is that your retention of title clause is valid, take, or threaten to take, legal action straightaway. Acting swiftly is important. There is no incentive for a liquidator to deal with your claim unless they know that they will have to incur legal costs if they don't. Don't let the liquidator stall you - creditors who know their rights and pursue them vigorously are more likely to recover their goods than those who delay.
A liquidator is unlikely to defend against your claim if it is valid, as legal costs will reduce the assets available for creditors, and they are liable to pay your damages if you win.
Has the buyer created a charge over the goods, in your favour?
If a retention of title clause fails, so ownership of your goods passes to the buyer, you can sometimes claim that the clause creates a charge (a mortgage) in your favour over the goods now owned by the buyer.
If you succeed, you become a secured creditor and can take possession of the goods if they are not paid for. If the buyer becomes insolvent, you rank higher than the unsecured creditors when a liquidator is paying out any money that has been recovered.
But 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.