Introduction
A seller's conditions of sale will normally include a retention of title ("ROT") clause (provided that the seller's product is capable of being recovered).
A ROT clause states that, "the goods supplied remain the seller's property until paid for", or something similar.
A seller may either retain title to specific goods listed in a particular invoice until those specific goods are paid for (such a clause is known as a "simple" clause) or to all goods supplied until all goods supplied have been paid for (such a clause is known as an "all monies" clause).
The general rule, set out in Section 17 of The Sale of Goods Act 1979, is that ownership of goods passes from a seller to a buyer when the seller and the buyer intend it to pass. Because parties are able to prevent title in goods passing from a seller to a buyer until those goods have been paid for, the seller becomes able to recover those goods (or the invoiced value of those goods) from the buyer if the buyer becomes insolvent.
An insolvency practitioner only has the power to deal with the assets that are the property of the company over which he has been appointed. If a seller has effectively retained title to goods, then the insolvency practitioner will have no right to retain possession of those goods, because they have not become the company's property.
In order to successfully enforce a retention of title clause a seller must ensure:
- that the ROT clause is properly drafted;
- that it forms part of the contract between the seller and the buyer; and
- the goods that are the subject matter of the claim are identifiable.
Interpretation
A typical ROT clause will
- reserve ownership of goods supplied until those goods are paid for;
- prevent dealings with goods other than in the ordinary course of the buyer's business;
- give the seller a right to repossess the seller's goods; and
- require the buyer to store the goods separately from other similar goods.
Incorporation
Even though retention of title clauses are now very common many claims still fail, often because the retention of title clause never became a term of the contract in the first place. The question of incorporation of the clause is very often the major issue.
Undoubtedly, the best way of ensuring that a seller's terms of trading are duly incorporated is for the seller to enter into an express agreement with the buyer that all contracts to be entered into between them will governed by the seller's terms.
Ideally, that agreement should be recorded in writing, either by both parties signing a written contract, by an exchange of letters or by the seller obtaining a written acknowledgment from the buyer that the seller's conditions are to apply to dealings. That acknowledgment might be contained in an application for credit.
On many occasions, a buyer merely places a written order for goods with a seller and the seller communicates the seller's terms and conditions to the buyer either by issuing an order acknowledgment or by reproducing the seller's terms on a delivery note or on an invoice.
The terms which appear on orders, order acknowledgments, delivery notes and invoices are rarely read, discussed or considered and yet where there is no express agreement between the parties, these documents have to be considered to determine the parties' intentions.
The guiding principle is that any party who intends to impose his terms on another party must have given that other party sufficient notice of those terms before or at the time when the contract is made. Unilateral attempts to introduce further terms after that time will be ineffective.
The normal way in which a party gives the necessary notice is by printing that party's standard terms in a contractual document.
The buyer's terms may appear on the buyer's purchase order and the seller's terms may appear on the seller's order acknowledgment.
Therefore, if a buyer places a written order for goods, and that order is expressed to be subject to the buyer's terms of purchase, and the seller supplies the goods without any further contractual documentation passing, then the buyer's terms govern the contract. If before supplying the goods the seller sends the buyer an order acknowledgment and the buyer sends no further contractual documents, then the seller's terms govern the contract.
So far, so good. Things become a bit more complicated where a seller's terms of sale only appear on post contractual documents, such as delivery notes and invoices.
Delivery notes and invoices only come into existence after a contract has been made. At the time when delivery notes and invoices are produced, the contract must have been concluded, because delivery is not part of the negotiation process. Delivery is part of the performance of the contract. Similarly invoices are prepared after the contract has been performed.
Where the contractual documentation consists of a written order subject to a buyer's terms, a delivery note subject to the seller's terms and an invoice subject to the seller's terms, the buyer's terms and conditions will prevail.
The position is less straightforward where a number of transactions have occurred between the buyer and the seller.
If the seller has terms printed on delivery notes and/or invoices and the buyer's orders are silent as to whose terms apply, then after several transactions the seller's terms will be deemed to govern any subsequent transaction, the buyer having received sufficient notice of the terms on which the seller is prepared to do business.
Identification
To make a successful claim the seller must be able to identify his goods in the buyer's possession.
If the buyer has disposed of the goods the claim will normally fail.
The seller's identification exercise will be simpler if the seller has an "all monies" clause, rather than a "simple" clause. The seller who has an all monies clause needs to demonstrate that he has unpaid invoices and can identify goods he has supplied. The seller with a simple clause needs to show, in addition, that the goods he has identified are the goods to which the unpaid invoices relate (unless the buyer is under a contractual obligation to keep goods belonging to the buyer separate from the seller's goods).
If the buyer has incorporated the goods into a new product as part of a manufacturing process the claim will fail provided that the goods cannot be removed from the new product with minimal effort and without damaging the new product.
If the seller's goods have been mixed with other identical goods (either supplied by the seller and paid for or supplied by others) then the claim should succeed, although it will be necessary to determine who owns what element of the combined stock.
Making a claim
To make a claim a seller should write to the Insolvency Practitioner terminating the insolvent company's authority to deal with goods and requiring payment for the goods or immediate "delivery up" of those goods.
As early as possible after a seller is put on notice that an Insolvency Practitioner has been appointed, steps should be taken to establish exactly what goods are at the premises of the insolvent company. A representative of the seller should go to the premises of the company as early as possible. Ideally, the seller's representative will attend on the day on which the seller learns of the buyer's insolvency.
If the seller's representative does not attend immediately, then the Insolvency Practitioner may dispose of the seller's goods. It may be difficult for the seller to pursue an action against the Insolvency Practitioner for payment for the goods disposed of in the period between his appointment and the seller's attendance at the premises.
When attending at the buyer's premises, the seller's representative should make an inventory of all of his goods which are on site. If possible, the inventory should be agreed as being an accurate record of what is actually on site and identifiable. The description of the goods contained in the inventory should be sufficient to allow a comparison to be made between the goods appearing on the inventory and the goods appearing on unpaid invoices. Wherever possible, the same description should be used. When the inventory is completed, if possible, the seller's representative and the Insolvency Practitioner's representative should sign the completed inventory.
The seller's representative may choose to take a camera with him and take photographs so as to record the position and condition of the goods at the buyer's premises. He may also take a pack of labels with him which, with the consent of the Insolvency Practitioner's representative, he can attach to the goods to mark the goods as the property of the seller.
It is unlikely that the Insolvency Practitioner's representative would be willing to agree the seller's claim on the day of the preparation of the inventory. It is possible that other sellers will attempt to make a claim to the same goods. It is also possible that the Insolvency Practitioner needs the goods in order to carry on trading.
It is likely that the Insolvency Practitioner will continue trading the business if the buyer is in receivership or in administration. It is unlikely that the Insolvency Practitioner will carry on trading the business if the buyer is in liquidation.
If the buyer is in receivership and the seller is willing to allow the receiver to use or to sell the goods listed in the inventory, then it is likely that the receiver will be prepared to give an undertaking to pay for the goods he uses at the invoiced price or to return them in the event that they are not needed, in either case provided that the retention of title claim is valid.
If the buyer is in administration, then the seller is prevented, by Section 11 of the Insolvency Act 1986, from taking steps to repossess the seller's goods. However, the seller should still identify the seller's goods and prepare an agreed inventory, because if an administrator disposes of goods that are the subject of a valid reservation of title claim, the seller's claim attaches to the proceeds of the disposal of those goods.
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