Suppliers supply. But should they continue to do so?
On Wednesday, Sir Keir Starmer, leader of the opposition, said in prime minister’s questions that the collapse of Arcadia threatened to “rip the heart out” of UK high streets. He called upon the prime minister to bring forward a comprehensive plan to save retail jobs.
Coming after the successive failures of Arcadia, Debenhams, Bonmarché, the comments are understandable. But alongside the retail jobs highlighted by Sir Keir, it is the case that suppliers have suffered a triple whammy this week.
Given previous history – and speculation (was JD Sports touted as a buyer of Debenhams in order to try and squeeze a higher offer from Frasers Group?) – it would be reasonable to ask why suppliers continued to supply to the fallen. Various commercial reasons would be put forward, and at the heart is the willingness to accept commercial risk.
But going forward, even suppliers that are prepared to take commercial risk should consider:
- Retention of title [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]
- Credit insurance [provides cover for businesses if customers who owe money for products or services do not pay their debts]
- The use of pro formas [a method of calculating financial results using certain projections or presumptions]
None are necessarily easy. The acceptance of any by a fashion retailer reflects how keen it is to contract with a particular supplier.
While credit insurance is dependent on the willingness of the credit insurer to accept risk, retention of title is dependent on:
- The terms used in the retention of title provision; and
- The proper incorporation of the retention of title provision into the sale contract
Unfortunately, it is the case that in many instances retention of title provisions are poorly drafted, or even when properly drafted are not incorporated into the sale contract.
For a supplier to be able to retain title against a retailer, it is necessary:
- For the retention of title to be drafted to ensure that title to the goods, which are the subject of the sale contract, is clearly and expressly retained by the suppliers.
- For the retention of title clause not to extend to cover the resultant proceeds of sale of the goods. If it does then it will need to be registered as a charge at Companies House. However, this will create a problem if the retailer has already given a debenture [a medium- to long-term debt instrument used by large companies to borrow money, at a fixed rate of interest] to, for example, its bank. Also, suppliers will often forget to register at Companies House within the prescribed 21-day time limit after the contract is made. If the retention of title provision covers proceeds of sale and is not registered, the whole retention of title provision will be void – not just the element over the follow-on proceeds.
- For the goods that are the subject of the retention of title provision to be marked so as to show that title in the goods remains with the supplier until payment for the goods is made by the retailer. This is difficult in fashion retail. However, before going into store or online it is usual for the contract in which the retention of title provision is included to:
- Require the goods to be kept separate from other goods so as to make them more easily identifiable; and
- Allow the seller’s representative access to the warehouse where the goods are located so as to recover the goods.
But, however well drafted the retention of title provision is, it will have the aerodynamic qualities of an anvil if it is not properly incorporated into the sale contract. Often retailers will have terms and conditions of purchase, one objective of which will be to ensure that the supplier is not able to retain title to the goods supplied. This situation is often referred to as the “battle of the forms”.
Given what has happened to Arcadia, Debenhams, and Bonmarché, consideration should also be given to two other groups.
Brands with concessions in fashion retailers are a sort of supplier. The use of, for example, pro formas is not open to them. However, ring-fenced bank accounts to hold the proceeds of sale through concession may be capable of being negotiated.
Employees also are suppliers – of their labour. The reintroduction on 1 December 2020 of Crown preferences (deferred in 2003) means that the government is effectively favouring taxpayers over employees: something Sir Keir failed to raise…
This article was first published in Drapers.