When an Administrator is appointed, it is imperative that the supplier acts quickly in order to obtain payment in priority to what may be a long list of creditors.

What Is A 'Retention Of Title' (ROT) Clause?

A ROT is intended to offer protection to a supplier by retaining the supplier's title to the goods. This means that even after delivery of the goods, ownership does not pass to the purchaser until payment has been made.

What Is The Purpose Of ROT?

The purpose of ROT clauses is two fold. Firstly, it is designed to prevent the assumption that title passes to the buyer on delivery. Secondly, it is designed to allow the seller to re-take possession of goods for which payment has not been made. A ROT clause is typically useful when a buyer becomes insolvent (eg a liquidator or administrator is appointed to the purchasing entity).

If properly constructed ROT clauses may enable a seller to recover, in priority to other unsecured and secured creditors, goods to which a valid ROT claim attaches. The validity of a ROT clause is often challenged and the law is not only contentious but has been labelled by the Court as being "a maze, if not a minefield".

What Are The Most Common Reasons For A ROT Clause To Be Determined As Invalid?

  • Poorly Drafted Terms

    Poorly worded clauses will fail for many reasons. Typically, this includes ambiguity in its terms as the supplier attempts to cover all possible scenarios or it creates a charge that will fail if not registered with ASIC.

  • Not Making The ROT Terms Part Of The Contract Of Sale

    The ROT clause becomes invalid if it is not incorporated as a term before, or at the time of, execution of the contract of sale. Simply issuing a notice of ROT on the bottom of an invoice will often not suffice, as the invoice is normally issued after the contract of sale is negotiated. For this reason, the ROT clause should be included in the sale agreement with the purchaser. However, the Courts may hold that if invoices given over a consistent period of trade contain a ROT clause, then at some point in the trading relationship ROT would be inferred as a term of the sale.

  • Inability To Identify Goods Subject To ROT

    To claim ROT, the supplier needs to be able to identify actual goods as those listed on the unpaid invoices. This can be a real problem if goods are generic, supplied by various suppliers or do not have a unique identifier, such as a serial number. It is also a problem if the goods are converted, or used as a component in the manufacture of other products.

Entities trading in the supply of goods need to ensure that their ROT clauses are validly worded, and likely to be upheld should a purchaser become insolvent.

The Moore Stephens Corporate Recovery Team can assist you assert your ROT rights.

Footnotes

1. Source: Hendy Lennox (Industrial Engines) Ltd v Grahame Puttick Ltd [1942] 2 All ER 1952

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.