There's nothing like a major event to make businesses pause and dust off their standard terms and conditions – see Covid 19 and force majeure, or spiralling inflation and price increase mechanisms.

More recently, the collapse of high-street retailer Wilko (Wilko goes bust with 12,000 jobs at risk as rescue talks collapse | Evening Standard), and the difficult economic environment more generally, has retail suppliers asking themselves how effective their standard terms are at protecting them against the financial insecurity of their customers.

Supplier-friendly standard terms for the supply of goods will often include a retention of title (ROT) clause. ROT clauses are commonly accepted – to some degree at least - by customers across the market, but what purpose do they serve? ROT clauses can protect the interests of a supplier if a customer defaults, but they need to be carefully considered and crafted to provide any protection in practice.

What is a ROT clause? 

In supply of goods contracts, there is usually a clause which explicitly governs when legal ownership in the goods transfers from the supplier to the customer. Under a basic ROT clause, until payment has been made for the goods the legal ownership in those goods remains with the supplier – even if those goods are delivered to the customer prior to payment.

Customers sometimes want legal ownership to pass earlier, particularly in a re-sale environment. Customers might therefore try to instead include a clause stating that title passes on the earlier of payment and delivery, so that non-payment, or longer payment terms, does not prevent the customer from owning the goods.

Is a ROT clause on its own enough to protect suppliers?

There are several extensions to a basic ROT clause that can be included, being:

• "All monies" clauses – suppliers may seek to retain title not only until payment for the goods has been made, but also until payment of "all monies" due from the customer to the supplier has been made. This is intended to protect a supplier in a customer insolvency, or-near-insolvency, situation, whereby the customer is defaulting across all of its contracts with a supplier. Simple ROT clauses without the “all monies” provisions can cause difficulties from a supplier's perspective where, for example, it is difficult to correlate specific goods to the matching unpaid invoices.
• Proceeds of sale clauses – these clauses act as a mechanism to allow the supplier to assert ownership in the proceeds of the sale of the goods (where the customer is reselling) to satisfy the purchase price. These have been held to be valid by an English court in very specific circumstances but are usually found to create a charge in favour of the supplier which, if not registered at Companies House, is void. Suppliers should exercise caution when including these types of clauses, as being caught out by legal formalities could impact the validity of not just the "proceeds of sale" clause, but the ROT clause as a whole.
• Mixed good clauses – these clauses intend to protect suppliers where the goods are being sold to the customer for use in a manufacturing process and may be mixed or combined with other materials. In this scenario, a basic ROT clause may be ineffective unless the supplier's good(s) can be easily removed from the other materials used in the manufacturing process.  The "mixed good" clause therefore asserts ownership in the product created by the manufacturing process.  Again, like proceeds of sale clauses, these types of clauses will usually create a charge which, if not properly registered, is deemed void.

What does this mean for suppliers?

It means that the effectiveness of a ROT clause may in fact be limited – not only for the reasons outlined above but also due to rules that apply when a customer enters insolvency. Context is key. To further bolster the ROT clauses in a set of standard terms, suppliers should also consider:

• including key practical rights, such as:
  • a right for the supplier to enter the customer's premises to repossess the goods;
  • obligations on the customer to store the goods separately, mark the goods as the supplier's property, and submit to audits to monitor compliance;
• drafting the ROT clause in separate sub-paragraphs and including an express "severance" clause, to increase the likelihood that any void sub-paragraphs can be "severed" from the rest of the ROT clause, preserving the remainder's enforceability.

Finally, ROT clauses should only be one weapon in a supplier's arsenal when managing credit risk. Financial due diligence and properly policed credit periods and payment terms should also play a key role.