Retention of Title – The Insurance Policy

The last 12 months has seen the firm dealing with an influx of Retention of Title (ROT) issues, following a series of high profile business insolvencies.  It is more important than ever that any supplier of goods on credit has a well drafted ROT clause in its terms and conditions, and pushes for a ROT provision when negotiating a contract.

So how can a ROT arrangement help? 

Unless ROT arrangements are in place, legal title to goods passes to the buyer on delivery, even if the buyer hasn’t paid for them.  This can leave a seller in the position where they haven’t been paid and also can’t get their goods back. In the event of the buyer’s insolvency it would mean that the seller is simply an unsecured creditor. This leaves the supplier in a weak position and has little to negotiate with. Statistically, unsecured creditors of distressed businesses recover less than those with security or claiming ROT.

A valid ROT agreement flips this, meaning that the creditor has leverage to negotiate with the buyer or any insolvency practitioner appointed, and can in extreme cases take steps to take back possession of the goods.  This is because the ROT agreement means that the seller retains legal ownership of the goods until the buyer has paid for them in full. It also means that in most cases the ROT clause gives the seller priority over secured and unsecured creditors in respect of the goods, if the buyer fails to pay or is insolvent. A good ROT provision should be seen as an insurance policy, there to be used if things go wrong. The opportunity to use ROT should not be overlooked, either when preparing a contract or looking to recover money that is due.