In the current financial climate, while maintaining sales is more important than ever, it is also necessary to consider protection against bad debts.   A very effective method of protection is to take out some security such as a Bank Guarantee or Letter of Credit or obtaining Credit Insurance.

Another way of protecting the seller is a retention of title clause in the Terms and Conditions for the Supply of Goods.   This type of clause was tested in the leading Court of Appeal case of Aluminium Industrie Vaassen BV –v- Romalpa Aluminium Limited in 1976.   Such a clause if effective, gives the seller priority over secured and unsecured creditors if there is a failure to pay for the goods for specific reasons.  

The basic provision is that title to the goods is retained by the seller until he has received full payment of the goods and they will not be included in any security given to other parties.   Additional detail would provide the right of the seller to enter the buyer’s premises to repossess the goods, an obligation of the buyer to store the sellers goods separately from those belonging to third parties, to mark them as such, and to permit access for verification.  

There will need to be a list of events specified relating to insolvency which would trigger the seller’s right to recover the goods.   There are additional clauses which can be included, but the Case Law has evolved in certain of these clauses to render them unenforceable.   An example is the “Proceeds of Sale Clause” (extending the seller’s rights to the actual proceeds of sale of the goods even if they have been sold).  This was the basis of the original “Romalpa Case” decision where the buyer was under a duty to account to the seller with the proceeds of sale.   If this is not carefully drafted it may be ruled a charge over book debts and may be void in an insolvency unless registered with Companies House.   This could affect the validity of the remaining retention of title clauses.  

Another type is the “mixed goods clause” regarding the sale of goods in the manufacturing process where they may be mixed or combined with goods owned by third parties.   Such a clause may create a charge over manufactured goods and be ineffective if not registered as happened in one case where leather had been incorporated into handbags (Re: Peachdart).  This may render the remaining clauses also unenforceable so great care must be taken in drafting the appropriate terms and conditions.

One important element is the question of insurance of the goods once they have been delivered but not yet paid for.   An insistence on a form of effective insurance should be included in the Terms and Conditions.

In conclusion the Retention of Title Clauses included in the Standard Terms and Conditions of a Supply Contract can provide a very useful protection to sellers including the right to enter premises to recover the goods and to ensure that they are kept separately and identified as belonging to the seller. There is also the possibility of tracing the goods against a receiver or liquidator. Whilst it is useful it should be regarded as one of a number of defences against bad debts in an overall credit control system.