Suppliers – safeguard your business with this key clause

February 11, 2025

Suppliers – safeguard your business with this key clause

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By Siobhan Williams

The supply of goods on credit is an increasingly popular practice for many businesses, as it allows greater flexibility for buyers and ultimately brings in more sales. Every transaction entered into in this way, however, carries the risk of not getting paid, perhaps because the buyer becomes insolvent, or they simply decide that they do not want to pay. This leaves you, the seller, with neither the goods or cash, which is unlikely to be sustainable long-term.

Our commercial law expert, Siobhan, explores why a retention of title (ROT) clause is vital for any business dealing with tangible goods to understand and incorporate a ROT clause into its agreement with its customers.

What is a Retention of Title (ROT) clause?

A ROT clause is commonly included in commercial contracts to allow a seller to retain ownership of the goods supplied to a buyer until full payment has been received. In other words, despite the goods being delivered and in the possession of the buyer, legal ownership remains with you the seller until the agreed price has been paid in full.

This clause serves as a form of security for sellers, ensuring that you are not left with unpaid debts if the buyer defaults on payment or enters into insolvency proceedings. The ROT clause is a way of protecting your interest in the goods by making sure they can be reclaimed if necessary.

Why is it important to include a Retention of Title clause?

A ROT clause provides several benefits including:

1. Protection against non-payment. The most obvious benefit for including a ROT clause in your terms is to provide protection in the event of non-payment by the buyer. If the buyer fails to pay for the goods as agreed, the seller retains the right to reclaim the goods, even after they have been delivered.
2. Security in insolvency. In insolvency proceedings, the liquidator or administrator has a duty to realise assets for the benefit of any creditors, which might include the seller. If you can prove that the sold goods are subject to a valid ROT clause, then you have the right to reclaim possession. However, the onus is on you to prove to the insolvency practitioner that the clause exists and is valid, which is why clear drafting is so important.
3. Clarifying ownership disputes. In the event of disputes, particularly if a buyer sells or disposes of goods before paying for them, a well-drafted ROT clause can provide clarity on ownership rights. It can prevent issues relating to the goods being sold or transferred to third parties without the seller’s consent, thus protecting the seller’s legal position. Without a ROT clause, you may struggle to reclaim goods that have been resold or used in the buyer’s operations.

What to consider when drafting a ROT clause?

To ensure the ROT clause is enforceable, careful consideration must be given to its drafting. It’s crucial to include:

• Clear and unambiguous terms: The ROT clause must be clearly and specifically worded, and must clearly indicate when ownership of the goods passes from the seller to the buyer. Ideally, it should also address scenarios where the buyer resells, uses, or changes the goods;
• Incorporation into the contract: The clause must be expressly incorporated into the terms of the contract for the sale of the goods which exists at the time of supply.
• Right to repossess: The clause should enable the seller to gain access to the buyer’s premises in order to repossess the goods.
• Easily identifiable goods: An obligation should be placed on the buyer to ensure that the seller’s goods are easily identifiable and kept separate from goods belonging to other parties. This allows the goods to be reclaimed more easily if the need arises.
• Consistency with the parties’ relationship: In order to be deemed valid and enforceable, the ROT clause must not contain provisions that are inconsistent with the general commercial relationship between the parties.

Summary

Incorporating a ROT clause into your terms is an essential step in safeguarding your business against financial risks associated with non-payment or insolvency of your customer. The clause, however, will be defunct if not drafted correctly.

Given the difficulty and the many pitfalls that come with this, it is recommended that businesses seek legal assistance. Our experts can offer guidance on this and any other needs of your business. Get in touch with one of Darwin Gray’s expert commercial lawyers for a no-obligation chat about your options, contact us on 02920 829 100 or via our contact form.