Customer Non-Payment
It might not be the end of the world
Most businesses who supply goods don't get paid on delivery. What happens if your customer goes bust before you get paid? You are unlikely to get the money but you may be able to recover the goods you supplied if you follow these guidelines.
What is a Retention of Title Clause?
A retention of title clause in a seller's terms and conditions of business aims to give the seller priority over both secured (for example, the bank) and unsecured creditors of its customer, in the event that the customer fails to pay in full for goods supplied. In the event of non-payment, the seller has the right under a retention of title clause to repossess the goods. This is possible because the seller retains title or ownership to the goods after delivery and until the goods have been paid for. Therefore, a carefully drafted retention of title clause could provide sellers of goods with important protection, especially in the current economic climate.
The Sale of Goods Act 1979 (as amended) provides that title to goods which are sold passes to the buyer on delivery, rather than on payment. Accordingly the seller's right to recover goods in the event of non-payment is lost as soon as they have been delivered unless a specific right is included in the contract.
The Basic Retention of Title Clause
At its most basic, a retention of title clause ensures that legal and beneficial ownership of the seller's goods does not pass to the customer until the seller receives full payment for those goods.
In order for a retention of title clause to be effective, the seller must ensure that it has a number of additional rights and that its customer assumes a number of obligations in respect of the goods. These include for example:
1. a right of entry to the customer's premises to repossess the goods (otherwise the seller will be trespassing);
2. restrictions on how the goods should be stored and marked;
3. insurance requirements.
Finally, the retention of title clause should include a list of events which will give the seller the right to demand immediate payment for the goods and repossess them. These will mainly be insolvency-related events i.e. liquidation of the corporate customer or bankruptcy of an individual customer. Without such a provision, the seller may have to wait for the relevant invoice to become due before action can be taken.
Enhancing the Basic Retention of Title Clause
Sellers may wish to go one step further and retain title to the goods until all monies which the customer owes to the seller are paid in full. For example, if the seller has supplied goods to the customer previously, this clause would allow the seller to retain title to all goods supplied to the customer while any monies are owed to the seller.
There are a number of further enhancements to the basic clause which could be considered but due to the court's current stance in relation to these clauses expert advice should be sought before these are implemented.
Incorporating your Retention of Title Clause into your Contract
A retention of title clause will only be legally binding if it forms part of the contract entered into between the seller and its customer. It is therefore important that the seller of goods does business with a customer on the basis of the seller's terms and conditions (which include the retention of title clause) and that these are brought to the attention of the customer at the commencement of the transaction i.e. on the seller's quote or order form. In an ideal world the seller would retain a copy of those terms and conditions signed and accepted by the customer but this is not always feasible. If the first time the customer sees the seller's terms and conditions is on the back of the seller's invoice (which is sent to the customer after delivery of the goods) this is too late!
On the other hand, any customer will want to ensure that its own terms and conditions apply when it buys goods and that these provide for title to those goods to pass on delivery and not on payment.
What happens if the customer becomes insolvent?
Time is of the essence! If an Insolvency Practitioner (IP) is appointed, he will look to realise funds quickly from the sale of stock. If the goods are sold to a third party then enforcement of a retention of title clause becomes logistically more difficult.
Therefore, it is vital that the seller acts quickly to notify the IP that the customer has not yet paid for the goods and that title remains with the seller. The IP should also be provided with details of the goods, a copy of the relevant terms and conditions and the invoice for the goods.
We are here to help!
Due to the evolving and uncertain nature of the law relating to insolvency generally and retention of title in particular, it is important that legal advice is sought at the first opportunity.
If you are a seller of goods, it is crucial that you have proper terms of trading, including a retention clause if this is possible for your business. We can prepare the terms for you and advise if retention of title will work for you
If you are a customer, it is important it is crucial that you know what terms apply to your purchase. If you are compelled to do business on the seller's terms, consider what these terms are, whether the seller retains title to the goods after delivery, what obligations have been conferred on you and what this all means for your business. You could find yourself in breach of contract without even realising!
If you would like to speak to a member of Trethowans' corporate team about retention of title, terms and conditions of business or if you have any other queries regarding your business please contact Louise Thompson on 023 8082 0486.
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