In depth

Coronavirus: retention of title

Gateley Legal

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Sellers are rightly concerned that their customers may not pay for goods supplied. With the current Covid 19 outbreak, this concern is magnified.

Credit terms are a commercial necessity for many buyers, particularly in a market where many businesses cannot operate at all or are only trading on a limited basis, and few buyers will have the ability to pay in advance.

How might a seller guard against a buyer’s inability to pay?

One device, used in standard form terms of sale and in bespoke supply contracts, is the retention of title (RoT) clause. This will not extract payment from a delinquent debtor, but it can provide a right to recover the goods supplied in certain circumstances.  It provides damage limitation rather than a cure, but if your terms of sale do not already include an RoT it is worth considering inserting one to off-set the risk of non-payment. Moreover, if your terms of sale have not been reviewed for a while, it would be worthwhile getting them checked over more widely as the law has a habit of changing as new cases are decided by the courts and an ineffectual clause in terms and conditions may only offer false comfort.

An RoT clause is used in a contract for the sale of goods to give the seller priority over other creditors in an insolvency situation to the extent of the value of the goods supplied.  It enables an unpaid seller to recover their goods from the buyer on the basis that the seller remains the owner of the goods supplied until they are paid for.  A well drafted clause will give rights to access and collect the goods which may then be offered for re-sale. 

How does a retention of title (RoT) clause work?

Sellers are rightly concerned that their customers may not pay for goods supplied. With the current Covid 19 outbreak, this concern is magnified. Credit terms are a commercial necessity for many buyers, particularly in a market where many businesses cannot operate at all or are only trading on a limited basis, and few buyers will have the ability to pay in advance.  

What should be included in an RoT clause?

  • a term that goods supplied remain in the ownership of the seller until all sums due are paid (even if specific goods have been paid for)
  • the right to enter premises where the goods are stored (which may not always be the buyer’s premises) to collect goodsobligations on the buyer to:
  • store goods separately from any others they own or that were supplied by a third party;
  • mark the goods as the supplier’s property; and 
  • allow access to enable verification that the above has happened.

Your clause may include the right to claim proceeds of any sub-sale of the goods.  However if the buyer becomes insolvent this will need to be registered as a charge against the buyer or that part of the clause will be ineffective. 

Retention of title clauses do not require formal insolvency of the buyer to be put to work and they can be relied on simply in the event of non-payment.

When can't Rot clauses be relied upon?

  • if your goods have been re-sold title is likely to have passed.

  • if they are used by the buyer in a manufacturing process you may find that title has passed depending on the extent to which they have been intermingled with other goods or can still be readily identified and recovered
  • recovery of goods may not be as straightforward as written in the RoT clause. Consider the reputational risk to your business if you seek to enforce a retention of title clause at this time.  a climate where people are being encouraged to “pull together” there might be long term damage to relationships if you are too heavy-handed in your approach.  This is not a reason to shy away from invoking your rights under terms & conditions of sale, but weigh up the impact first.
  • you also need to think about practical issues:
    • what will you do with the goods you recover?  Is there a market to re-sell them?  If the buyer has offered part payment now or even wholly deferred terms that may be a better solution overall
    • would you want to take back goods that had been placed in a location considered to be high risk, such as a hospital? 
    • can goods be identified as your property? It is not always easy to identify generic goods as belonging to you 
    • how do you get access to the buyer’s (or a third party’s) premises to inspect and recover them?  Many business premises are shut and secured
    • who is going to go out to the buyer’s premises to identify and  recover the goods?  How do they maintain effective social distancing?
    • where are your goods?  Are they at one site or multiple sites?  If the buyer has ceased to trade for the time being with staff furloughed who is going to provide you with information?

Finally, you need to consider if the recovery of goods would be classed as permitted business activity or would it be in contravention of the Health Protection (Coronavirus, Restrictions) (England) Regulations 2020? 

 

Health Protection (Coronavirus Business Closure) Regulations 2020 – revoked and replaced

Overview

  • From 21st March 2020 some businesses (pubs, cinemas, theatres and casinos etc.) are required to shut, this is part of the Government programme and plan aimed at reducing the spread of Coronavirus, protecting the NHS and saving lives.

Operation

  • It is an offence for a business to operate in contravention of the Health Protection (Coronavirus, Business Closures) Regulations 2020 from 21st March 2020 and in contravention of the Health Protection (Coronavirus, Restrictions) (England) Regulations 2020 from 26th March 2020. 
  • Prohibition notices will be issued to businesses who do not follow COVID-19 restrictions, any business which fails to comply can be issued with a fine. Businesses who do not comply may also face the revocation of their alcohol license.

Enforceability

  • Compliance will be monitored by Environmental Health and Trading Standards officers. 
  • Officer have the power to prosecute for breach of regulations.

Suppliers 

  • Consider the contracts you have with your suppliers, can you press pause on them?
  • Can you rely on contractual clauses to aid your business interruption such as force majeure or the common law doctrine of frustration? 
  • When your business is back up and running will you be able to source the goods or services you need to if your supply chain has been interrupted? 

Staff 

  • Consider the employment implications of having to close 
  • Look at the government assistance packages 
  • How will you staff once you are able to re-open? 

Customers 

  • Are you able to diversify your business to continue to keep some income? 
  • If so how does this impact your requirement for a work force? 
  • If you can still trade, does your supply chain still work, do you need different suppliers? 
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