Commercial Considerations for the Buyer Regarding Retention of Title Clauses

A retention of title (ROT) clause is a term in a contract for the sale of goods that allows the seller to retain legal ownership of the goods until the buyer fulfils certain obligations, including, but not limited to paying the full purchase price.

ROT clauses protect sellers, allowing them to repossess the goods if the buyer fails to pay or fulfil any other relevant term of the contract, for example, the buyer becoming insolvent. They are typical in business-to-business contracts.

As specialist litigation solicitors we don’t draft these agreements or clauses, however our commercial litigation team at Helix act in many situations where something has gone wrong with a contract including a purchase or commercial deal. These situations often have an element of professional negligence- where their solicitors instructed to advise might have failed to note risk or advise fully. If you are dealing with a dispute or are looking for advice regarding a difficult situation with a contract, reach out to our team today. We are happy to help.

Why Buyers need to be wary of a Retention of Title Clause

It is important for buyers to understand that there are restrictions on their use of the goods and therefore serious risks associated with an ROT clause if they don’t pay for goods in full on receipt and/or satisfy the other terms of the contract .

In summary,an ROT clause protects the seller, not the buyer.

Key Terms Buyers Should Understand

ROT clauses may impose obligations and risks on the buyer that they must fully understand before entering into contracts on those terms.

Some ROT clauses don’t allow for resale or incorporating the goods into other products until the item is paid for in full, which can make business operations challenging. 

The contract may grant the seller the right to enter the buyer’s property to ensure that any contractual obligations are being complied with and/or other remedies. It is therefore important that you carefully read the terms of the contract and take appropriate advice before signing. Something we often see is buyers being told these are ‘standard clauses’, there really is no such thing, in legal/commercial terms a clause in a contract is something that is negotiated and agreed to deal with the specific business transaction the parties are entering into. .

One type of clause that a seller will frequently seek to use is that the goods are ‘identifiable’ from other stock or stored separately so that repossession for them is straightforward. Mixing the seller’s goods with other stock could be a breach of contract and can lead to disputes over identification.

Some ROT clauses give the seller the right to enter the buyer’s premises to recover the goods if payment is not forthcoming. These goods may be vital to your business operations or have already been sold to customers, so you need to carefully think through the consequences for your business of agreeing to them..

Even if you have made most of the payment, this may not be enough if full payment is required before the ownership of the goods pass. This frequently causes issues, where a buyer may not have the money to complete payment until they can use/sell the goods, but find that they cannot use/sell them as they have not paid for them. Again, you need to carefully read and consider the consequences of the clauses you agree/have agreed.

The situation can be even more difficult for buyers where sellers seek to use ‘all-monies’ clauses, which means they retain title until the buyer has paid all outstanding amounts owed to them, not just for that delivery.

Negotiating Power: How Buyers Can Shape ROT Clauses

Contracts are all about negotiation. No buyer wants to be on the end of an onerous or unduly restrictive ROT clause. Poorly drafted or ambiguous ROT clauses can lead to costly litigation surrounding interpretation and enforceability. Buyers should understand how to avoid a potential breach of contract and protect their position when negotiating terms.

All contracts are negotiable, but the leverage depends on the relative strengths of the buyers’ and sellers’ commercial positions.

Large buyers with high-volume orders will be able to push back on onerous ROT clauses. If you have a choice of suppliers, then this can also exert pressure on a particular seller to reduce or remove terms. 

Some buyers are prepared to pay a slightly higher price for a change or reduction in the scope of the clause. However, small businesses often find they have no option but to agree to the seller’s standard terms. This is the unfortunate commercial reality of negotiations, sometimes you have to agree to something that you do not want to, all you can do in this situation is to properly understand your position and consider worst case scenarios and how you would deal with them. Then weigh up the risks v rewards of signing that contract or not..

It’s always worth seeing if there is a way to negotiate terms; even minor adjustments can improve a buyer’s position.

Express Clauses and Risk Allocation: When Title Transfers and Who Bears Risk

Typically, title to the goods transfers when the full purchase price is paid. So, if the buyer has possession of the goods for a period without full ownership, who bears the risk?

To protect the seller, most ROT clauses state that the risk of damage or loss to the goods is assumed by the buyer immediately on delivery. The risk doesn’t remain with the seller.

Repossession Rights: What a Seller May and May Not Do

An ROT clause should detail what a seller may do if one or more events on a specified list occur or the seller believes they are about to happen. These include factors such as payment defaults and buyer insolvency.

The seller has the right to terminate the contract or to repossess the goods. However, if the buyer is already in an administration process or a compulsory winding up, the seller may be restricted to exercising their rights in the insolvency process..

Insurance, Proceeds, and Charges: Drafting ROT Provisions that Protect Buyers

ROT clauses often require the buyer to insure the goods, and there may be a right of pre-approval of the choice of insurer given to the seller.

This type of clause can also require the buyer to note the seller’s interest in the goods on the policy, ensuring that the proceeds of a payout in the event of a claim are passed to the seller.

The buyer bears the risk of damage or destruction of the goods; therefore, the provision regarding insurance coverage must also reflect any loss to them in the event of partial payment.

From the buyer’s perspective they should seek to negotiate an ROT clause that permits them to use or sell goods, even though technically, they don’t have the title to do so. 

A complication that can arise is if the seller agrees to pass legal title to the goods to the buyer, but seeks to retain an interest in the goods, for example by way of legal charge, where those goods can be reclaimed if the buyer does not fulfil certain obligations.

Drafting Checklist: Reducing Disputes and Strengthening the Buyer’s Position

The seller’s contract and ROT clause have a significant impact on the buyer’s ownership of goods, including their rights and responsibilities, risk management, and ultimately, business operations.

The seller initiates a contract for the sale of goods, so any ROT clause will protect their position even though this may be detrimental and onerous to the buyer.

It may not be in the buyer’s best interests to agree to this. At the very least, buyers must be aware of precisely what they’re signing up to and the likely commercial consequences.

In many instances, a buyer may need to sell the goods on, to be able to pay for them, a typical supplier-retailer-customer chain, so a clause enabling this is essential. It also covers incorporating the goods into other products, which may be crucial in that line of business.

Buyers should consider avoiding or seeking to re-negotiate ‘all-monies’ clauses, and confine retention of title to monies owed on just those particular goods.

Most ROT clauses include the right to enter the buyer’s premises to repossess the goods; this is to avoid the legal charge of trespass. However, this term must be clearly defined with notice required.

Avoid broad-ranging and vague terms, as these cause confusion and uncertainty.

Frequently Asked Questions

What Is a Retention of Title Clause?

A retention of title clause is a term in a contract for the sale of goods that allows the seller to retain legal ownership or title to the goods until the buyer fulfils specified conditions. Typically, title passes when the goods are paid for in full. The clause protects the seller from the buyer’s default or insolvency.

Does Title Pass on Delivery or Payment?

It depends on the precise wording of the clause, but frequently title to goods passes on receipt of full payment, not on delivery or partial payment. The seller retains title to protect their position and the right to reclaim the goods if the buyer defaults or the business becomes insolvent. Broad-ranging ROT clauses can change the nature of the arrangement, so title passes to the buyer with the seller retaining a charge.

How Does a Retention of Title Clause Work?

A retention of title clause keeps the ownership of goods with the seller even though they’re in the possession of the buyer. As a result, the seller can use this clause to impose conditions on the buyer regarding matters such as storage and insurance. ROT clauses protect the seller, not the buyer.

Contact Helix Law for Commercial Dispute Resolution

If you’re a seller who needs to force or a buyer to do something we’d love to assist you. Early intervention and legal advice can be really powerful in helping protect and improve your position. 

If you are facing or are in dispute over contractual terms, contact our expert commercial litigation team at Helix Law. We act nationally and would love to assist you