Forget getting paid!

The type of advice we are asked to provide is inextricably linked to the commercial climate in which we find ourselves. As businesses struggle, more and more of the advice we are giving is of a “distressed” nature – there are not only clients who need advice on their own insolvency, but also those who need it on issues related to another business’s insolvency. A key piece of advice for that second kind of client is: forget about getting paid – best to ensure title hasn’t passed without you getting paid.

It is trite law that title to goods passes with intention, and in many cases conclusion of a contract for the supply of goods is the time at which the buyer becomes owner of the goods, quite possibly before payment has been made. Should the buyer then be subject to any insolvency process, the goods in question can be sold as part of the buyer’s assets by the insolvency practitioner and the seller will be in the queue with the rest of the creditors.

Where a contract contains a retention of title (“RoT”) clause, the seller can retain ownership over the goods supplied, even if they have been delivered to the buyer, until certain stipulated conditions (such as full payment having been received) are met. The seller’s claim to the goods would be binding against any trustee or liquidator who might subsequently be appointed; the goods would not form part of the liquidator’s “pot” for raising funds to pay creditors and would have to be returned to the seller.

However, RoT clauses are notoriously difficult to enforce. Some of the main reasons for that are as follows.

Third party rights

The most difficult obstacle to overcome is that where a seller delivers goods to a purchaser and a third party then purchases the goods in good faith, the third party will take title to the goods – regardless of title not having passed to the original purchaser. The first seller in the chain will have no rights over the resale proceeds.

There are possible solutions, but none are straightforward. Trust and tracing clauses can provide that the purchaser or insolvency practitioner is bound to act as trustee of the seller in respect of the proceeds of resale. The drafting of such a clause should not be taken lightly – it must have all the essential ingredients to create a trust relationship to be valid, and the factual situation must be entirely consistent with the drafted wording to have any chance of it being upheld. It is certainly worth obtaining specialist advice to get it right.

Insisting that the contract make provision for the seller’s title to the goods to be notified to the third party buyer at the point of resale might also work. Clearly this would be difficult to enforce and control, particularly in sectors such as retail, but, if properly drafted, is worth a shot.

Accession and specification

The badly financially hit construction industry has its own particular difficulties. As a matter of course, goods are supplied by subcontractors and then incorporated into something else, triggering the doctrines of specification and accession. The owner of the large or combined property would become the owner of the constituent parts, regardless of the presence of a robust RoT clause.

Clauses which seek to get around this are very unlikely to be upheld and liquidators know this. Clients who could be affected should be advised and a practical solution sought for how to get around this – payment on delivery probably being the only certain way of getting paid.

Incorporation of clause

It is all well and good having strong, well-thought-out terms and conditions, but if they have not been properly incorporated into the contract, they are worthless – it is suggested 90% of RoT clauses fail for this reason. It is vital that terms and conditions have been made clear to the purchaser before the contract is entered into, form part of the offer to supply, and that the buyer’s acceptance doesn’t seek to impose its own terms and conditions, for them to be binding.

You can definitely be proactive! Suggest to your clients that they have their terms and conditions reviewed to make sure they include valid RoT provisions, and go through the process of how they incorporate their terms and conditions with them to make sure that they do, in fact, apply when they are contracting for the supply of goods.

RoT clauses need to be tailored to the circumstances of the contracting parties. One size certainly does not fit all and with it being likely that more businesses will actually go bust in a recovery period as cash comes back into the economy, it is an area of law that your clients ignore at their peril.

• Pamela Abbott, solicitor, CCW LLP