Are your retention of title provisions effective?

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Retention of title clauses are found in most contracts for the sale of goods.  The concept of retention of title is a simple one whereby the supplier of goods seeks to protect itself against non-payment by retaining ownership of goods until payment is received from the customer.

What is retention of title?

The concept arises from the Sale of Goods Act 1979.  The Act provides that property in goods will only pass when the parties to the transaction intend it to pass, thus allowing a supplier to retain title to goods after delivery of those goods to the customer.  A supplier wishing to retain title to goods until payment is made must ensure that this intention is expressly stated in their terms and conditions with the customer; otherwise it is implied by the Act that title will pass on delivery.

Retention of title clauses can be a powerful weapon for suppliers.  This is particularly so where a customer enters into an insolvency process since generally they can be enforced against insolvency office-holders (such as liquidators) and hence can, in roundabout terms, improve a supplier’s position compared to other creditors of their customer (including secured ones).  This is because the goods will not form part of the customer’s insolvency estate.  In corporate insolvencies there is rarely enough money to pay all creditors and hence the opportunity to obtain goods back can be an effective remedy for a supplier.

Where should a retention of title clause be incorporated?

Although a relatively simple concept, in practice, many suppliers get retention of title wrong.  A common reason for this is a failure to properly incorporate the terms and conditions which contain retention of title clauses into a contractual relationship with a customer.  I have lost count of the number of suppliers I have seen who have simply referred to their terms and conditions in their invoices to customers and expect this to be sufficient.

Incorporation is a matter of contract law.  The most effective way of a supplier evidencing incorporation is by producing terms and conditions signed by the customer confirming its assent to the terms.  Other modes of incorporation include taking steps to give reasonable notice of the terms prior to the goods being supplied.  Retention of title clauses commonly fail where a supplier seeks to rely on terms and conditions referred to or printed on an invoice or delivery note, where no written contract was in place before the goods were supplied.  Invoices and delivery notes are generally viewed as post-contract documents, meaning before the supplier has offered to supply goods and the customer has accepted that offer. 

What to do next

Businesses supplying goods on credit would be well advised to take a close look at their standard terms and conditions to check that they include a valid retention of title clause.  They should then ensure that their contracting techniques validly incorporate these into contracts with customers.  This may well require sales staff to be advised on how to effectively achieve this.

If you require legal assistance regarding terms and conditions or insolvency, please do not hesitate to contact Christopher Buck, Associate Partner in our Business Services team, on 01908 660966 / 01604 828282 or by email at christopher.buck@franklins-sols.co.uk who will be happy to assist.