Posted by Stephen Welfare, Partner
Contributing authors: Bharat Nahar
What is retention of title clause, and what does it mean for retailers?
Basically a clause included in a sale of goods contract that where particular goods are sold on an order-by-order basis (i.e. on credit) legal title does not pass to the buyer until the goods have been paid for. The ordinary rule is otherwise that ownership transfers to the buyer upon delivery of the goods. A prudent seller will have retention of title clauses included in its terms and conditions.
What effect does a retention of title clause have
If valid then retention of title clauses will enable a supplier to recover the unpaid goods in the event of the retail customer going into administration or other insolvency. The goods remain the property of the supplier, and do not form part of the ‘assets’ of the insolvent customer, thus preventing the administrator from selling them on. The supplier, provided it has notified the administrator of the clause, may attend the retailer and recover the goods. The effect upon the retailer (in administration) is that it cannot sell the goods in order to reduce the level of debt and so recover anything for the creditors, and in turn reduce the level of any personal guarantee.
Purchase of retail business in administration
The acquisition of a business in administration or the assets of such a business can very often represent good value for the acquirer; who may pay a significantly lower price compared with a solvent corporate acquisition. But, if the goods, or some of them, are subject to a retention of title clause the purchaser does not get title and will have to deliver up to the original supplier.
Typically the purchaser is also likely to indemnify the administrator for any liability he may incur as a result, such as costs of dealing with the third party claim and any resultant legal fees. It is therefore essential that the purchaser undertaken all due proper due diligence before concluding the purchase of either a business in administration or an asset sale.
In order for retention of title clauses to be enforceable the following limitations must be overcome.
- The clause must be properly incorporated into the terms of the contract for the sale of the goods which exists at the time of the supply. If it is not incorporated it is not enforceable
- such a clause may be deemed invalid if it contains provisions that are otherwise inconsistent with the general commercial relationship between the parties
- where the retail company is in administration, no steps can be taken by the original supplier to recover any goods without first obtaining the permission of the appointed administrators, or an order of the court.
The law on enforceable retention of title clauses is constantly changing. Such clauses are often drafted in a variety of forms, some narrow and some broad and given their considerable effect upon suppliers, and purchasers of a business and/or assets from an administrator specific legal advice should be sought.
This article originally appeared in RetailJeweller.com
Contact Stephen if you have any questions about a retention of title clause
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