Retention of Title (ROT) clauses play an important role in commercial contracts. These clauses ensure that sellers retain ownership of goods until certain obligations—usually full payment—are met by the buyer.
What Is a Retention of Title Clause?
A Retention of Title clause is a contractual provision allowing the seller to retain ownership of goods until the buyer has fulfilled specific obligations, most commonly payment.
This clause provides sellers with a degree of security, offering a mechanism to reclaim goods if a buyer fails to pay.
However, ROT clauses must be properly drafted and incorporated into contracts to be legally enforceable. They are not one-size-fits-all and often need tailoring to suit the nature of the transaction and goods involved.
Key Types of Retention of Title Clauses
ROT clauses vary depending on the nature of the goods and the intended protection for the seller. Common types include:
Basic ROT Clause
A basic ROT clause ensures that both legal and beneficial ownership of the goods remains with the seller until payment is made. This clause should include:
• The right for the seller to repossess goods in specific circumstances, such as non-payment.
• A provision preventing the buyer from selling or using the goods without full payment.
• A right to access the buyer’s premises to retrieve goods.
All Monies Clause
An all monies clause reserves ownership of all goods supplied by the seller to the buyer until the buyer settles all outstanding invoices.
While practical, these clauses risk being deemed a charge under UK law, rendering it unenforceable against a liquidator, administrator or other creditor unless registered requiring registration at Companies House.
To mitigate this risk, such clauses should be drafted as separate subclauses to allow severance if deemed invalid.
Proceeds of Sale Clause
This clause allows the seller to claim proceeds from the resale of goods. However, these clauses are often construed as charges and are unenforceable against a liquidator, administrator or other creditor without registration. Therefore, they are best avoided unless accompanied by specialist legal advice.
Mixed Goods Clause
Where goods are used in manufacturing processes and lose their identity, a mixed goods clause can reserve rights in the resulting product.
However, courts may classify these clauses as charges, making them invalid against a liquidator, administrator or other creditor unless registered.
Sellers in manufacturing contexts might consider alternative protections, such as credit insurance.
Drafting Effective Retention of Title Clauses
To ensure enforceability and avoid unintended complications, ROT clauses must be carefully drafted with the following considerations:
Incorporation into the Contract
An ROT clause must be explicitly included in the terms of the contract and agreed upon by both parties. While common in business contracts, sellers should ensure that the clause is clear and unambiguous.
Severance Provisions
Contracts should include severance provisions to ensure that if any subclause is deemed invalid, the rest of the clause remains enforceable.
Risk and Insurance
ROT clauses should clarify when the risk of loss or damage to the goods transfers to the buyer. Typically, risk passes on delivery, even if title does not. Contracts should also obligate the buyer to insure the goods, noting the seller’s interest in the policy.
Termination Rights
ROT clauses should include specific events that allow the seller to terminate the contract, such as insolvency-related triggers. This ensures sellers can act swiftly to recover goods or demand payment.
The Tort of Conversion
The tort of conversion arises when a buyer deals with goods in a way that is inconsistent with the seller’s rights.
For example, reselling goods without payment constitutes conversion if the seller retains title. While courts have upheld the coexistence of ROT clauses and a buyer’s right to sell goods, it’s crucial for sellers to avoid any contractual terms or conduct that might imply consent to resale.
The safest approach is to include clear prohibitions on resale until payment is made, safeguarding against potential claims of implied consent.
Limits of Retention of Title Clauses
While ROT clauses provide sellers with significant protections, they are not fool proof. Key limitations include:
• Insolvency Proceedings: Under the Insolvency Act 1986 as amended by the Corporate Insolvency and Governance Act 2020, sellers may require court permission to enforce ROT rights if the buyer is in administration or under a Part A1 moratorium.
• Perishable Goods: For goods with low resale value or short-term perishability, ROT clauses may have limited practical utility.
• Evolving Case Law: Legal interpretations of ROT clauses continue to evolve, making it essential to review contract terms regularly.
Alternatives to Retention of Title Clauses
While ROT clauses are valuable tools, they should complement, not replace, robust credit control measures. Sellers can consider:
• Reducing credit periods or requiring upfront payments.
• Obtaining credit insurance or alternative forms of security, such as bank guarantees.
• Using deposit systems or letters of credit for additional security.
Get in Touch
Retention of Title clauses are an essential safeguard for businesses selling goods on credit. However, their effectiveness depends on careful drafting, regular legal review, and their integration into broader credit management strategies.
Nick Goodman is the Head of the Insolvency team and specialises in all aspects of insolvency, including corporate recovery and personal bankruptcy.
If you’d like to talk to our Insolvency team, you can get in touch by filling us out our online contact form or by calling us on 0330 111 3131.