This guide was last updated in August 2011.

A retention of title (ROT) clause is a provision in a contract for the sale of goods which means that the seller retains legal ownership of the goods until certain obligations are fulfilled by the buyer – usually payment of the purchase price. This guide looks at ROT clauses, specifically the relationship between such clauses and the tort of conversion (see below).

General issues to consider when drafting ROT clauses

A basic ROT clause will state that legal ownership, or title, to the goods will not pass from the seller to the buyer until the buyer has paid for the goods. A right for the seller to enter the buyer's premises to repossess the goods should be included. This is to ensure that the seller is not committing a trespass when doing so.

Other obligations can be included to ensure that repossession, if necessary, is made as easy as possible. These could include obligations to:

  • store the goods separately from goods belonging to third parties;
  • mark the goods as the seller's property;
  • allow the seller access to the buyer's premises to verify that the obligations are being complied with.

Although the idea behind ROT clauses is very simple, they have become increasingly widely drafted. This has resulted in cases where such clauses have been redefined as creating a charge over the goods rather than retaining title. Where a charge is created the buyer takes legal ownership of the goods but the seller retains the right to seize, and usually sell, the property to discharge the buyer's debt. This distinction may seem subtle but it can lead to problems as a valid charge is subject to certain registration requirements.

All monies clause: reserves title in all goods supplied to the buyer until the buyer has settled all outstanding invoices from the seller. This avoids the need to relate specific goods at the buyer's premises with specific unpaid invoices.

If used, this should be in a separate subclause from the basic ROT clause. This means that if the all monies clause was ever held invalid as an unregistered charge by a court it could be severed, and so would not invalidate the rest of the clause.

Proceeds of sale clause: allows the seller to claim the proceeds of any subsequent sale of which the goods have been the subject. This clause should be avoided as there is a danger it will be deemed a charge.

Mixed goods clause: allows the seller to claim an interest where the goods supplied under the contract are likely to lose their identity due to being used in the manufacture of another good. However, an attempt to reserve rights in new goods that belong to the buyer is likely to be deemed a charge by the courts.

Risk and insurance

ROT provisions should include:

  • a clause stating that risk of damage or loss will pass to the buyer on delivery, as opposed to passing with title as this is reserved to the seller;
  • an obligation on the buyer, on delivery, to insure the goods with a reputable insurance company;
  • reservation of a right to pre-approval of the insurance company, if necessary;
  • an obligation to note the seller's interest in the goods on any insurance policy.

Termination

The clause should provide a list of insolvency-related events which will trigger the seller's right to terminate, and therefore demand payment or repossess the goods. The seller should be given the right to terminate if it 'reasonably believes' that a listed event may be about to occur.

It is important that the seller has the right to terminate if it believers that the buyer may be about to become insolvent as this maximises its chances of receiving payment and being able to repossesses the goods. If the buyer is in administration or is compulsory would up, a seller will not be able to exercise its rights under an ROT clause unless it has the permission of the appointed insolvency practitioner or the court.

Severance

Severance provisions should be included in the contract to ensure that if any of the subclauses are found to be invalid they will not strike down the whole ROT. The provision should apply to parts of clauses as well as whole clauses to give the widest scope for severance.

Conversion

The tort of conversion occurs when a buyer intentionally does anything to goods belonging to the seller that is inconsistent with the seller's rights – for example, selling the goods on to a third party before they have been paid for and while the seller retains title. Conversion gives rise to a claim in damages for any loss suffered as a result.

It has been held by the courts that a ROT clause and the right to sell can co-exist. This means it is important, from the point of view of a seller, to ensure that contracts do not contain any express or implied terms allowing the buyer to sell products that are subject to an ROT. If a seller is deemed to have consented to resale by its customer, either through the terms of the contract or its conduct, then it would not be able to sue the buyer for conversion.

From a practical point of view it may be difficult to prevent a buyer selling on goods subject to an ROT as the buyer may need to use the funds generated from the sale to pay the seller for the goods. This is the reason why under some contracts buyers are permitted to sell goods on but the contract contains a proceeds of sale clause (see above). As this runs the risk that the clause will fail for being an invalid charge, the safest option for a seller is to include a provision in its terms and conditions clearly stating that the buyer is not permitted to sell goods on until they have been paid for and to ensure that its conduct does not inadvertently amount to implied consent to sell the goods.