What is retention of title?

A retention (or reservation) of title clause is a clause in an agreement whereby a party selling goods seeks to reserve to itself the title in those goods until certain conditions have been met by the buyer, usually payment. The key reason for including a retention of title clause is to give the seller of goods priority over secured and unsecured creditors of the buyer, should he becomes insolvent.

The basic clause provides that title to certain goods is retained by the seller until it has received full payment for those goods. However, in order to be in a position to give full effect to this protection, additional clauses should also be included. For example, in order to avoid committing a trespass, an express right to enter the buyer's premises in order to repossess the goods is necessary. In addition, a clause requiring the buyer to store the seller's goods separately from other goods, to mark them as the seller's property, and to allow the seller access to the buyer's premises to verify that this has been done is also helpful. You may also want to include a list of insolvency related events which will trigger the seller's right to demand payment for the goods (if not already due) and to repossess them.

Sometimes retention of title provisions seek to obtain additional protection through the inclusion of some or all of the following clauses:

  • an all monies clause (i.e. the supplier reserves title in certain specified goods until all monies due to it has been received, rather than monies due for those goods only);
  • proceeds of sales clauses (providing that the supplier retains a right of ownership over funds received by the buyer on resale of the goods in question);
  • mixed goods clause (providing that the supplier will be able to assert rights in any product which incorporates the good supplied notwithstanding that the product in question contains goods owned by third parties).

Depending on how they are drafted, however, such clauses may be found by courts to be charges, and if not registered, will fail and cease to be effective. If included, these additional clauses should be drafted separately from the basic retention of title clause along with a "severability" clause, to ensure the basic retention of title clause will remain in effect, even if these other clauses are struck out or otherwise found to be ineffective.

Their effectiveness in construction

In the construction context, a key factor lessening the efficacy of retention of title clauses is the fact that goods and materials supplied, typically by subcontractor or suppliers to the main contractor, become integrated into the works being constructed. Where goods are "mixed" with other goods to produce a new good, the courts distinguish between:

  • new goods in which it is possible to identify the "original" goods and separate it without damage, and
  • new goods in which that separate identity no longer exists (e.g. the provision of cement to create concrete).

In the former case, a general retention of title clause will operate to retain title in the "original" good supplied. In the latter, any title to the goods will be lost and if there is a mixed goods clause, this would fail to give protection if not registered as a charge. In many cases, construction products fall into the second category and are simply "lost" in the new product. In addition, a retention of title clause may fail to give protection where goods are attached to land or property for the benefit of the owner of that property, and where goods are deemed to be fixtures and forming part of the land, a retention of title clause will be ineffective to allow the supplier of that good to assert title and to be able to remove the good in question. The contractor effectively provides a gratuitous benefit on the landowner as title to its materials, or more to the point, the materials of subcontractors, "vanish" as they are transformed into land. Case law distinguishes between "chattels" and "fixtures", with the former being deemed not to form part of the property and therefore capable of being subject to a retention of title clause. The onus of establishing whether an item is a fixture or a chattel is on the party attempting to show it is the least likely of those two alternatives (see Holland v. Hodgeson (1872) L.R. 7 C.P.328). Generally, if an item is not annexed to land (i.e. it is attached only by its own weight), the onus is on the landowner to prove the item in question is a fixture. To the extent an item is attached, the onus shifts to the other party. In attempting to prove that an item is a chattel and not a fixture, of relevance is the ease with which the item may be detached from the relevant structure, and in particular the extent of damage that would be caused to that structure were the item removed.

Another issue is the extent to which many goods are manufactured on a bespoke basis for incorporation into specific projects. A right to take back possession of a good for non-payment is of little practical use if that good cannot be resold, or can only be resold in part.

Conclusion

Retention of title clauses are clearly full of pitfalls and great care needs to be taken in drafting to ensure their effectiveness. Whether you are an employer, contractor or subcontractor on a construction project, it is important at all times to consider the impact of a retention of title clause on other contractual relationships - for example, their effect on main contract provisions that grant an employer title in materials, including sub-contactors' materials, on payment being made to the contractor. Finally, as a supplier of materials, a retention of title clause is not an alternative to undertaking an appropriate credit check on your customers, negotiating advance or staged payment schedules before delivery of a product, or securing other forms of protection against non-payment, such as bonds or letters of credit.

This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.