What is a retention of title?

If you sell goods, as part of your credit control arrangements your business to business terms and conditions should include a retention of title clause. Such a clause will assist in giving you priority over secured and unsecured creditors of your buyer should your buyer fail to pay for the goods because it is insolvent, or for some other reason which may be specified in the clause.

There are several variations on the clause ranging from basic (title to the goods is retained by the seller until it has received full payment for the goods) to basic with the addition of an all monies clause, mixed goods clause or proceeds of sale clause.

However, court decisions have severely restricted the effectiveness of complex mixed goods and proceeds of sale clauses, so in some cases basic retention clauses or clearly separate clauses are the better option. often the best that a welldrafted retention of title clause is likely to achieve for a seller is:

• The right to enter the buyer's premises without trespassing
• The ability to recover goods stored at the buyer's premises which can be identified as the seller's, possibly to the extent of all sums owed by the buyer to the seller
• A possible action for damages for conversion against a receiver or liquidator personally who sells goods which were identifiably the seller's

In some circumstances this may actually be quite valuable, especially if you are providing large quantities of products or the products are particularly valuable. However, the effectiveness of a retention of title clause may be affected if its operation is inconsistent with the overall trading relationship between the parties and will be of little or no benefit where the goods supplied are perishable or supplied in completed form for immediate resale.

When including a retention of title clause a seller should also be aware that in standard terms of sale, risk in the goods is usually stated to pass at the time of delivery of the goods. this is on the basis that the seller will not wish to remain responsible for loss or damage to the
goods up to the time when title passes, given that the effect of the basic retention of title clause is that title does not pass until the buyer has paid for the goods. the result is that, if the goods are destroyed after delivery, the buyer will remain liable for the price.

To guard against the risk of the buyer being unable to pay, the seller should include a provision requiring the buyer upon delivery to insure the goods with a reputable insurance company and to ensure that the seller's interest in the goods is noted on the policy. if, due to the value of the goods, such a provision is key to a seller, it should be aware of the battle of the forms, since the buyer’s purchase terms may provide for the passing of risk to be delayed until, for example, payment has been made, which would leave the risk with the seller.

A seller might consider other credit control arrangements to help protect cashflow, particularly where there are doubts as to the financial
viability of a buyer, such as: 

• Reducing the period of credit allowed to the buyer or the amount of credit, or both
• Taking alternative forms of security, such as a bank guarantee or letter of credit
• Obtaining credit insurance. Note, it is likely to be a precondition to obtaining such insurance that you have a satisfactory set of standard terms of business in place.

Retention of title is an area which is regularly considered by the courts, with the result that particular clauses are liable to become ineffective by a court decision at any time, so a review of retention of title clauses is a particularly important aspect of the overall review of standard terms which sellers should be carrying out on a regular basis.