Even if the wording of a retention of title clause is effective, the enforcement of it will still exist within practical and commercial limitations.
Reclaim the goods v. debt claim
Broadly, when a buyer fails to pay for goods delivered, the choice will be whether to seek to enforce the retention of title clause – with the end result of getting the actual goods back – or to bring a debt action for the outstanding monies.
Whether to exercise retention of title is a decision that must be made swiftly but always with a view to where the greatest benefit for the seller lies.
Often the preferred course of action will be to regain the goods. Many sellers are themselves a link in the supply chain and will have their own commercial pressures, such as the need to pay their own supplier.
As a general rule, buyers, who fail to make payments, are not paying because they do not have access to the funds to satisfy the debt and no court action is going to change this situation so will merely amount to throwing good money after bad.
Also, if a seller is successful, retention of title is a fairly immediate remedy, whereas the most simple debt action will take around 6 months and an application for bankruptcy or wind up of the customer will result in a free for all with other potential creditors.
However, these issues must be balanced against the probability of reselling the goods and their potential resale value.
A retention of title clause, however, well drafted will be of limited use in certain market sectors. For instance, perishable goods. It is of no benefit to a seller to take back produce which will be rotting or expired by the time its back in their hands.
By the time a seller seeks to rely on the retention of title clause, the buyer may no longer have the goods. The retention of title clause, while effective against the original buyer, will have no effect against a third party purchaser who acquired the goods for value in good faith and without notice of the clause and trying to trace into sale proceeds is fraught with difficulty and likely to be prohibitively expensive.
Alternatively, the goods may no longer be in the form in which they were supplied. This area is complicated and the case law makes clear that each retention of title clause will stand or fall upon its own terms.
However, as a general rule, where goods as part of an irreversible process become part of a more complex product, for instance, chemicals used in a manufacturing process then it is likely to be deemed that the goods to which title retained was have ceased to exist.
Therefore, in what may fairly be seen as the theme of this article, it is important not to stand at the crossroads for too long. Move quickly or any opportunity may be lost.
What’s mine is mine!
- You have a clause you believe is effective,
- You think the clause has been incorporated, and
- The goods should still be with the customer,
when a customer does not pay is it a simple matter of attending their premises (in force) and demanding the goods back?
Unfortunately life’s not always as straightforward as we’d like it to be.
This wholly depends on the reaction of the customer and whether they are solvent or insolvent.
If rumours on the grapevine that a customer who has recently been delivered goods is in difficulties and contemplating insolvency then you should consider the exercise of your rights. Attendance at a customer’s property with some tough negotiation may lead to the customer, albeit reluctantly, agreeing to release the goods but if they refuse then caution is advised.
A black and white clause may give you a right on paper to enter the premises and remove the goods but if the customer refuses you entry then the contract does not give you the right to break down doors and engage anybody who seeks to stop you. Any attempt to do so is likely to cause more legal problems than it would solve and could result in a trip to the local police station.
Whether to put the customer on notice by attending the premises for an initial attempt at recovery should always be judged on individual circumstances, such as the amount of goods being held by the customer, the strength of the evidence of impending insolvency, the type of goods and the potential reaction of the customer.
Entering insolvency takes time and if you are committed to reclaiming the products, you can apply to the Court for an injunction to remove them without delay.
Solvent or insolvent
If a customer has entered an insolvency process, in a sense the horse has already bolted as it will be far more difficult to reclaim the goods delivered. In particular, once a company has entered administration, there is a moratorium during which creditors cannot take independent enforcement action without the administrator’s permission.
If a company ceases to exist as a going concern, unsecured creditors’ pence per pound owed recovery rate is notoriously low, as even with recent reforms, fixed and floating charge holders claim the lion’s share of any funds remaining in a company leaving an empty shell. Therefore, swift action to try and get the actual goods back can be all the more important.
With all forms of insolvency – take advice as to your position but as a rule the sooner you put your hand up the better!
You should approach the liquidator, receiver or administrator of the business as soon as possible – an insolvency practitioner will on appointment send out a form of questionnaire to all known creditors but if you know an insolvency practitioner has been appointed – you should not wait.
For the reasons I outlined earlier, the sooner you can stop the use of your goods the better. As the sections on this slide state, once an insolvency practitioner knows that you are asserting title he is bound not to dispose of any property being claimed. However, until you assert your right to ownership of the goods he can dispose of them without incurring any liability to you.
Insolvency practitioners are renown for being tough negotiators and every claim they agree to is less for their pot for creditors at large.
Any communication to an insolvency practitioner should:
(1) identify the contractual clause you are seeking to rely on and the goods you supplied which you are claiming for,
(2) state how the clause was incorporated into your contract with the purchaser and provide evidence of acceptance, and
(3) state how your goods can be identified – you can seek to arrange a site visit if necessary.
You should give as much detail as possible and include all relevant supporting documentation, such as delivery notes and contracts.
The burden of proving the existence and effect of the retention of title clause is on you and an insolvency practitioner must be satisfied that you have a valid claim before he will inform you that you are entitled to come and remove your goods.
A comprehensive communication will hopefully act as a single shot and shortcut the process. However, if the insolvency practitioner raises issues in respect of the wording of your clause or practical matters such as the identification of your goods then at this stage, you should consider carefully what net benefit is likely to be obtained by continuing.
If the insolvency practitioner is refusing to honour the retention of title clause because of problems with identification then you may want to explore whether you can join together with other suppliers of the same goods. You can use the common sense argument that class of goods must have originated from one of you and therefore all those goods should be ring fenced.
While you will have to agree a split of the goods with the other suppliers, this approach could see you get something rather than nothing.
You may be faced with a situation where an administrator has been appointed and effectively sells the business overnight – sometimes to the management of the previous business.
These type of sales are referred to as “pre pack” sales. The most recent high profile example of this may be in the fashion industry where Mosaic, which was owned by Baugur, entered administration and almost immediately afterwards Warehouse, Coast, Oasis and Karen Millen were all sold to a new company formed by Kaupthing and the previous management of Mosaic.
While in theory your proprietary rights derived from a retention of title clause should survive a sale as a purchaser is likely to have to give an indemnity to the insolvent business and insolvency practitioner to honour these claims, in practice you may end up being given the run around as the new owner of a business refers you to the insolvency practitioner and the insolvency practitioner refers you back to the new owner, while your goods disappear.
You may hold extra cards in this situation if the new owner is reliant on future supplies of goods from you.
If an insolvency practitioner is refusing to co-operate – you can place some pressure on him by threatening to sue him for conversion of your goods. An action for conversion is based upon the idea of a buyer only having possession of your goods but not the full ownership of your goods that would allow him to do as he wants with them.
Gathering sufficient evidence for conversion claims can be difficult but the threat may be enough to obtain some payoff to get you to go away!
It’s better to have a retention of title clause than not to have one.
However, it should be that there is no silver bullet in these situations. A retention of title clause should one of many weapons in your arsenal rather than the only weapon.
You should keep your ear to the ground. Trade rumours can be the first sign of trouble and particularly, in these current economic times, it is crucial to regularly and proactively monitor your exposure to debtors.
Prevention is better than cure!
If a customer appears to be struggling, you may wish to consider
- shortening your credit terms, and/or
- reducing the amount of credit available, or
- requesting that the customer pay some or all of the value of an order pro forma or on delivery, or
- asking for some form of security or guarantee to cover the debt.
Again, negotiations with a customer have to balance the importance of getting paid against the risk of the customer refusing to deal with you in the future.
Consider the reasons that you are being given for non payment and your relationship with that customer.
While it may commercially be worth sharing some risk with a major customer of your business, you must consider whether you want to risk going down with them if it all goes wrong.
Alternatively, you could explore taking out credit insurance, for example, in respect of key customers.
The credit insurance industry has reacted to the recession and some retailers have reported that the level of their insurance has been reduced or withdrawn entirely.
However, it is still worth approaching providers, although you should be aware that they will require substantial amounts of commercially sensitive information from you on an ongoing basis and could draw adverse inferences from any refusal by you to provide it.
Written by Rachel Cook