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Retention of Title Claims by Creditors

A retention of title or reservation of title (“ROT”) clause is a clause in a contract for the sale of goods providing that ownership in the goods is retained by the seller until payment is made for the goods. These clauses gained much attention and became widely used following the caseAluminium Industrie Vaassen BV v Romalpa Aluminium Ltd [1976] 2 All ER 552, hence they are also known as “Romalpa” clauses. 

In normal circumstances, title in the goods passes to the buyer upon delivery even though the buyer may not have paid for the goods. The concept of retention of title is that the ownership is retained by the seller even though the buyer has contracted to buy and is in possession of the goods. ROT clauses become especially important to sellers of goods in the context of insolvency as they provide the seller an opportunity to recover the goods in priority to other unsecured and secured creditors if there is a successful ROT arrangement in place. Unfortunately this is where many sellers go wrong. The seller wrongly assumes that simply printing the words, “Ownership in the goods is retained by the seller until payment has been received in full” on an invoice or statement will be effective. Most sellers will be unaware that the law in relation to ROT clauses has been described by the Courts as “a maze, if not a minefield”.

First, a valid ROT clause has to be drafted. Such drafting must take into account the current law in this area as well as the seller’s individual circumstances. Second, the valid ROT clause has to be appropriately incorporated into the agreement or contract between the seller and the buyer. This should be thorough as Courts can be reluctant to uphold ROT clauses in the context of insolvency where there is doubt that the clause was ever a part of the contract between the parties. 

Sellers also need to be aware that there are circumstances where the seller’s title to the goods can be lost even if a valid ROT clause exists. This can occur when goods lose their identity, are irretrievably affixed to other goods, become affixed to land or when reliance has been placed on an all monies clause and a nil balance has occurred. Other problems can occur where the buyer has on sold the goods to a bona fide purchaser for value without notice – an innocent purchaser who was not aware the goods still belonged to the seller. An appropriate tracing provision in the valid ROT clause may assist the seller in this situation however this is subject to its own considerations beyond the scope of this short article. A valid ROT clause may also be of little assistance if the seller has failed to take adequate steps to protect their interests when insolvency occurs – in certain circumstances delay can be fatal to a seller’s claim.

To summarise: 

  • Retention of title is a complex area of the law with real financial consequences for sellers. 
  • If you are a seller of goods ensure that you have appropriate retention of title arrangements in place before problems occur. 
  • If you are a seller (creditor) and one of your buyers has become insolvent do not delay in seeking appropriate legal advice. 

If you have any specific or general questions in relation to this article, please do not hesitate to contact us.