If you’ve been unable to pay a creditor and they’re no longer willing to wait for their money they may approach you or even turn up at your premises advising they have ROT and demand to remove their goods!
It should be noted that the courts have repeatedly confirmed that the onus is on the supplier to ensure the clauses are validly constructed, incorporated and enforced. Therefore, if they are being overly aggressive they may be trying to ensure that you don’t have time to take advice.
This guide will advise you on the common ROT pitfalls and how to deal with them if they arise.
The first piece of advice would be, don’t allow them to remove anything unless they have a writ of delivery or you’re certain that they have valid retention of title. You should advise them that you’re obtaining advice and request that they provide all paperwork to support their claim.
The first thing that must be established is the type of clause the supplier is trying to enforce – there are two types of clause:
- A simple ROT clause
- An all monies clause
A simple ROT clause will read something like: “The goods shall remain the property of the seller until they have been paid for.”
This clause will only apply to the specific items the payment in question refers to. If a supplier is unable to identify goods that are subject to a simple clause from goods that have been paid for, they will not be able to remove them.
The all monies clause is more common and will read something along the following lines: “The seller remains the owner of the goods until such time as these and all other sums owed by the buyer to the seller are paid in their entirety.”
This means that the title doesn’t pass on all goods from that supplier until the full balance has been cleared.
These clauses apply if there’s been a nil balance at any point during the supply, the supplier will not be able to remove goods supplied prior to this date and will need to identify how they can be differentiated from newer supply.
There are often serious limitations on the supplier in terms of how they can enforce their clauses which should be noted as follows:
Forward Sale of Goods
Where goods are supplied they will generally not prohibit the forward sale of goods, unless they are sold without the intention of forward sale, as this would not allow funds to be generated to allow for the payment of invoices.
Therefore if you sell goods on to a new party and have received payment for them then the title will have also passed to that third party.
Some suppliers may include a clause that they hold title to the proceeds of the sales, however these do not grant any security unless the proceeds are paid into a designated client account specifically in favour of the supplier or if they have been granted a charge which has been registered at Companies House.
Conversion of Goods
Conversion of goods is where they are incorporated into other products. Depending on the type of conversion this can result in the transfer of title over the goods. This depends on whether the goods in question can be removed without damaging the other parts.
Some examples would be as follows:-
In the supply of chemicals, if the product purchased is mixed with other chemicals to make a new compound then the original product will no longer be identifiable and therefore title will pass.
In the sale of metallic parts to a car manufacturer, whilst they are still likely to be identifiable, it is likely that these will be welded to the vehicle. In this circumstance it would be impossible to remove the parts without damaging the rest of the product, therefore title would also pass.
In the supply of camera lenses these are usually removable and interchangeable. If these have been attached to other camera stock, providing they remain identifiable they can be removed and title will not pass. Therefore the supplier should be allowed to remove them.
Some suppliers may try to include a clause that if the goods cannot be removed from a new product then they will have an interest in it, however this again cannot be enforced without a charge which has been registered at Companies House.
There are certain items that may be mixed with the same type of product from a different supplier.
An example of this may be fuel kept in a large storage tank. Where there are numerous suppliers claiming title to this, the court’s recent position on this is that they retain title in direct proportion to the level of supply they have provided.
It’s therefore important to ensure that whilst a supplier would be able to lay a claim to this, the amount which would be only proportionate to their supply and they cannot be allowed to remove everything.
An early stage of review for any retention of title clause is that the supplier must be able to identify the goods they have provided and differentiate them from goods which may belong to other third parties or goods where title has passed. Where there is identical stock detail such as serial numbers may be required so it can be established who has title to the same.
In order to assist with identification a number of sellers may include the below clauses to place additional onus on you as to how the goods are stored:
- To store them separately from goods where title has passed or belonging to other third parties.
- To mark the goods as the seller’s property.
- To allow access to the premises to the seller to ensure the terms are complied with.
If it’s not possible to establish the difference between goods where title has passed and where it has not, the supplier should not be allowed to proceed.
Another major pitfall in the use of ROT clauses is valid incorporation of the clause into the contract for the sale of goods.
Some common pitfalls on the parts of suppliers include:
Putting the ROT clause on the invoice – These are post-sale documents; all terms and conditions must be agreed before the sale has taken place.
Putting the terms on conditions on their website without notification – Although they are available in the public domain the purchaser has not been directed to them specifically.
Verbal Contracts – Although retention of title can be included as a part of the verbal contract, unless the conversation is recorded there is no real way to prove its existence.
Purchase Orders – If goods are supplied using purchase orders with the buyers terms and conditions which stipulate title passes on delivery rather than first going back confirming other terms of business it would be deemed the buyers terms and conditions stand in relation to the sale.
Savvy suppliers will generally request that before goods are supplied, that you sign a copy of their full terms and conditions along with any further copies as and when these change.
Where you receive a regular supply and the clause is only on invoices they have a strong argument that the established relationship brings the clause into effect on latterly delivered goods.
A final point to establish is when does the retention of title clause crystalise?
Crystalise means the point that you no longer have the right to sell the goods on or incorporate them into other products.
The supplier must firstly have the right under the contract to call on the clause. If the payment is not late then they will generally not be permitted to rely on the clause and need to allow the payment terms to expire.
Many clauses will specify that this is enforceable on receiving notification of the insolvency of your business. At this point however this will no longer be your concern and will be a matter that an insolvency practitioner will be advising on and likely dealing with on your behalf.
In order to crystallize the clause, the supply will need to give formal notice of the same and specify that there is now a prohibition from selling the goods.
In the absence of this prohibition it should be assumed that matters should be business as usual.
Now that you have the legal basics of what a supplier can and can’t do when claiming retention of title it’s important to remember which key steps to take when you’re approached in relation to the same:-
- Request copies of all documentation relating to their claim.
- Allow the supplier to identify, but not remove goods.
- Ensure the clause has been validly incorporated.
- If in doubt obtain legal advice.
After all of this, if it’s possible then try to do a deal with the supplier.
They will incur costs in attempting to recover their goods and would prefer to receive a reduced payment than have to incur the time and risk of recovering the goods.
In the alternative, we find that if a supplier has reached the stage where they are seeking to enforce retention of title then there may be a bigger issue with the business which needs to be dealt with.
If this is the case feel free to contact us directly and we’ll review your options and potential actions.