In the face of the current recession and mounting numbers of insolvencies, many purchasers and suppliers of goods will be paying extra attention to the terms of the contracts they are entering into.

A clause commonly included in contracts for the sale of goods is a retention of title clause (also known as a Romalpa or an RoT clause). An RoT clause displaces the usual position that ownership (or "title") to goods passes on delivery. Instead, the supplier retains ownership until certain obligations (usually payment) are fulfilled.

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In the face of the current recession and mounting numbers of insolvencies, many purchasers and suppliers of goods will be paying extra attention to the terms of the contracts they are entering into.

A clause commonly included in contracts for the sale of goods is a retention of title clause (also known as a Romalpa or an RoT clause). An RoT clause displaces the usual position that ownership (or "title") to goods passes on delivery. Instead, the supplier retains ownership until certain obligations (usually payment) are fulfilled.

In theory, the benefit for the supplier is that they have some protection against insolvency: if the purchaser goes into liquidation or administration before the goods are paid for, then the supplier can claim the goods back (rather than being left with an unsecured debt claim in the insolvency of the purchaser). However, the reality is that the position is often less clear-cut.

Step One: Can the supplier prove that the purchaser accepted the RoT clause as part of the contract?

The first hurdle for a supplier is establishing that the terms and conditions of contract were communicated to the purchaser before the goods were delivered.

In the case of P4 Limited v Unite Integrated Solutions plc, a supplier of equipment for emergency lighting systems (P4) supplied light fittings to a mechanical and electrical sub-contractor (Tudor). The M&E sub-contractor had been making applications for payment and been paid by the contractor (Unite). When the M&E sub-contractor became insolvent, it owed the supplier a considerable sum of money. The supplier was of the opinion that it was entitled either to: 1. recover the light fittings from the contractor or 2. claim payment from the contractor on the basis that their terms and conditions contained an RoT clause.

One of the issues for the judge was whether the supplier contracted with the M&E subcontractor on terms which included an RoT clause. The judge held that the M&E sub-contractor did not become bound by the supplier's terms and conditions (by the contractor passing the initial quotation they had received from the supplier to the M&E sub-contractor), as:

  1. He was not satisfied that the supplier's conditions were on the reverse of the initial quotation sent by the supplier to the contractor - the document provided to him did not have any conditions on the reverse
  2. Even if the supplier's conditions had appeared on the reverse of the initial quotation, the subsequent faxed correspondence between the supplier and the M&E sub-contractor (during which an order was placed) did not make any reference to the supplier's conditions. Therefore there was nothing to link the two documents and insufficient notice that the supplier's conditions applied to the subsequent quotation

The supplier was unsuccessful in establishing that an RoT clause was contained in their terms and conditions and ultimately claiming back the light fittings they had supplied from the contractor.

Step Two: Are there any other relevant circumstances that might render an RoT clause ineffective?

Even if a supplier is able to establish that their terms and conditions contained an RoT clause, there still might be circumstances where it might not be effective. Examples of where this might occur are as follows:

  • The suppliers' goods have been used in the manufacturing process and are no longer identifiable. However, if the goods are identifiable (for example through the use of bar codes or serial numbers) and can be removed without causing too much damage, then it is likely that a supplier's RoT claim will succeed
  • The supplier's goods (such as plant and machinery) have become part of the land for legal purposes. Even if the contract contains a right for the supplier to enter the purchaser's property to repossess goods, timing will be crucial to whether or not this is successful
  • There is a steady supply of goods from the supplier to the purchaser, making it difficult to work out which goods are attributable to a particular invoice. In this situation, if the contract contains an "all monies" clause (which provides that title passes only when the account between the parties is paid off), the RoT clause might still be effective
  • The goods have been sold on, as it will be very difficult for the supplier to enforce the RoT clause against someone buying in good faith without notice. It will also be hard for the supplier to establish a claim in respect of the proceeds of sale, as the supplier's interest may constitute a charge on the proceeds that will be void if it is not registered at Companies House

Conclusion

Where a supplier supplies materials to a purchaser who goes bust and a tussle ensues between them over who owns those materials, unless the requisite legal and practical elements outlined above are present, it will be difficult for a supplier to successfully establish that he owns the goods (and therefore be able to recover them from site in lieu of payment).

Here are some practical tips for purchasers and developers when thinking about RoT clauses:

  • Before the contract for the supply of goods is entered into, check the terms and conditions of sale. Ideally they won't contain an RoT clause but if they do, then try to negotiate it out of the contract
  • If you are paying for goods upfront, make sure it is clear in the documentation that title passes at the same time
  • Make sure (where possible and appropriate) that goods are insured and held off-site at a secure location

Reference: P4 Ltd v Unite Integrated Solutions Plc [2006] EWHC 2640 (TCC)

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 27/03/2009.