Legal advice should be sought when dealing with complex ROT clauses.
The Retention of Title Minefield – how to avoid potential disasters on insolvency
by Harry Fehily, Managing Partner, Commercial Litigation Department
An important task of a receiver or liquidator appointed to an insolvent company is to assess and deal with claims made by suppliers under retention of title (“ROT”) clauses. This can be a difficult task. The complexity of ROT clauses often contained in perceived ‘standard’ terms and conditions in commercial contracts present a minefield in terms of the application of insolvency law and practice that need to be navigated with caution and no shortage of dexterity. A valid claim under a ROT clause allows the supplier to stand outside the liquidation or receivership and claim title over goods that would otherwise be deemed assets of the company. A ROT clause, simply stated, is a clause that prevents ownership of goods passing to the customer until the supplier has been paid in full. Without a valid ROT clause, title in the goods will usually pass on delivery.
Why use a ROT clause?
The main attraction of ROT clauses is that they can provide suppliers with considerable protection in the event of a customer becoming insolvent before the goods supplied are paid for. A valid ROT clause may be relied upon against a liquidator in the course of the winding up of a company or a receiver attempting to realise security over assets subject to a floating charge. Where the company is insolvent and a valid ROT clause exists, the goods should be returned to the supplier or paid for, otherwise the receiver or liquidator runs the risk of a claim in conversion by the unpaid supplier. The supplier can also take steps to prevent any party dealing with the goods by way of injunction. In the absence of a valid and enforceable ROT clause, the supplier joins the list of unsecured creditors who invariably receive only a small proportion of the sum due, if even that.
Drafting a valid ROT clause
Care should be taken in drafting a ROT clause as the effectiveness of the clause can vary significantly according to what the clause is aiming to achieve. The ROT clause should reflect the supplier’s individual circumstances and also take into account the current law in this area. Typically, there are two main types of ROT clauses: a ‘simple’ clause, which simply purports to reserve title in specific goods supplied until those goods are paid for and an ‘all sums due’ clause, which usually provides that the supplier retains title to any and all goods supplied until all outstanding monies owed to the supplier has been discharged.
A ‘simple’ ROT clause poses little difficulty so long as the goods supplied and in the possession of the receiver or liquidator are readily identifiable and have not been mixed with or absorbed into other products, such as in the manufacturing process. The ROT clause is generally ineffective in such cases where goods have been mixed, as the goods are no longer capable of identification as originally supplied. Even where a ROT clause purports to create proprietary rights in the manufactured product or follow the proceeds of sale of the goods supplied difficulties may still arise, as the Courts have tended to view these clauses as ostensibly creating a charge over the goods. Where the customer is a limited company, such a charge should be registered pursuant to section 99 of the Companies Act 1963 to be effective. If it has not been registered as a charge, the clause or sub-clause, as the case may be, is void and cannot be relied upon on insolvency.
Incorporation of the ROT clause
It is vital, particularly in the context of insolvency, that the ROT clause forms part of the contract of supply. A receiver or liquidator may dispute the validity of the ROT clause where there appears to be any ambiguity. Crucially, the onus is on the party attempting to rely on the ROT clause to show that it had been effectively incorporated into the contract between the parties. In essence, there must be evidence that the terms and conditions of sale and any alterations in terms (including notice of new ROT clauses) had been brought to the attention of the other party during the contract or supply stage.
Thus, where possible, the supplier’s standard terms and conditions should be set out and incorporated in all order acknowledgements, delivery notes, invoices, credit notes and statements of account. If the standard terms and conditions are printed on the back of a document, there should be clear reference made on the front of the document to the effect that the supply of goods is subject to the conditions printed on the reverse. In short, the customer should be left in no doubt as to the terms and conditions of sale and supply.
The law on retention of title can be quite complex with serious financial consequences for the supplier if a ROT clause is incorrectly drafted and/or not properly incorporated into the contract of sale. Suppliers should regularly review their terms and conditions of sale to ensure adequate protections are in place if a customer becomes insolvent. Legal advice should always be sought when entering into new arrangements with customers to ensure that an appropriate ROT clause forms part of the terms of trade. Insolvency practitioners, whether acting as a receiver or liquidator, should be familiar with the law on ROT clauses and seek specialist legal advice when faced with claims made under complex clauses. Please contact our Business Department for further details of our corporate and insolvency advice services.
The effectiveness of a ROT clause can vary significantly according to what the clause is aiming to achieve
You may need to register the ROT clause as a charge pursuant to S. 99 of the CA 1963 when dealing with a private limited company
The ROT clause must form part of the contract of supply to be effective