Retention of Title (or Reservation of Title)
Retention of Title (or “ROT”) is the term used for a clause in a contract which allows a seller to retain ownership of assets (“title”) until the buyer has paid in full. It is mainly used by suppliers because by ensuring they have a Retention of Title (“R.O.T.”) clause they ensure that they are protected from customers not paying their debts.
There are two main types of R.O.T. clauses, they are:-
1. A Simple Clause – This is usually where the buyer only retains title to the assets which are listed on the specific invoice that remains unpaid.
2. An All Monies Clause – This is where the seller retains title over all the products that they have provided to the buyer, as opposed to only retaining title to certain assets.
What Does Having a Valid R.O.T. Clause Mean in an Insolvency Situation?
If a Company is placed into an Insolvency process (like Liquidation or Administration) then part of my role as the Liquidator or Administrator is to consider whether any creditors of the Company have a valid R.O.T. clause. If a creditor does have a valid R.O.T. clause then it would mean that they would either be allowed to collect their products/stock back (up to the value of their debt or whatever is left to reduce their debt from the Company). Alternatively, if the buyer has funds available then the creditor may also wish to accept an offer from the buyer for the products/stock which again reduces their debt.
What Usually Makes an R.O.T. Clause Valid?
Get a solicitor to draft the R.O.T. clause.
- Ensure that the R.O.T. clause is within contract terms & conditions put in place before both parties start trading with each other rather than only being on the back of the invoice provided to the buyer.
- Ensure that both parties have signed in agreement to the terms of the R.O.T clause.
- Make sure that the seller/creditor confirms that they have an R.O.T. clause before the products are sold or utilised by the buyer.
- Make sure that the products provided by the seller are easily identifiable because if they can’t be differentiated from ones provided by their competitors then their clause will be considered invalid.
- If you, or your client becomes aware of an insolvency event, them make a claim under the R.O.T. clause as soon as possible.
What Further R.O.T. Advice may be Relevant to Me?
If you, or any of your clients, need further advice on this topic, or any related issues, then feel free to give our Midlands based office in Rugby Warwickshire a call on 01788 544 544 and either me or our partner solicitors would be more than happy to help.
However, to summarise – The following are the 3 main instances where you, or your clients, may be at risk of falling foul of R.O.T issues:-
1. Where a debtor is placed into an insolvency process leaving an unpaid debt but no R.O.T. clause was in place.
2. Where the stock provided is not identifiable.
3. Where only simple clauses are used on the back of invoices and not in terms signed beforehand.