Customer Insolvency - Protecting Your Interests

November 2008

During these difficult economic times, it has never been more important for businesses to ensure that they are protected against the consequences of their customers falling into financial trouble or worse, facing insolvency.

A common scenario which can occur is that under which goods have been supplied to a customer for resale. In many cases, payment will not be made for those goods right away. This should not present any problems; however in the event that the customer becomes insolvent, they cannot pay the outstanding balance to the supplier. This is where retention of title clauses are useful.

A retention of title clause will assist suppliers in retaining a claim to what is rightfully theirs. The effect of such a clause, therefore, is to provide security. In the event that the customer becomes insolvent, any goods covered by a retention of title clause will remain the property of the supplier and may be claimed back from the trustee in bankruptcy or liquidator.

The Two Flavours of ROT Clauses

In its simplest form, a retention of title clause will cover the goods supplied under the contract into which the clause has been incorporated. In other words, once an invoice has been paid, the goods in that invoice become the property of the customer.

An “all monies” retention of title clause is rather more comprehensive. Under such a clause, no property in goods passes to the customer until all outstanding sums are paid, irrespective of whether those sums relate to a particular consignment of goods.

The terms of such clauses can go further. It will often be the case that suppliers will sell to customers whose objective is to then sell those goods on to its own customers. Consequently, there will be no goods for the supplier to retain title in. Properly worded however, a retention of title clause can ensure that the supplier retains the right to the proceeds of sale of such goods. As is explained below, a retention of title clause so worded must be registered in order to be effective.

Incorporation is Key

No such clause will be effective unless it is fully incorporated into the contract. A retention of title clause will be deemed incorporated provided that it is either part of a contractual document which has been signed by the customer; forms part of an unsigned document containing terms and conditions of which the customer was aware, even if they did not understand their effect; or forms part of a document which the supplier had used their best and reasonable efforts to bring to the customer’s attention prior to entering into the contract.

Furthermore, it is also important to note that it may be possible to incorporate such a clause after entry into the contract, provided the customer is made fully aware of the clause and its effect, and agrees to its incorporation into the contract.

In the case of many websites, the book is not closed once the site is finished. Maintenance and ongoing support services are often required. Simply-docs therefore provide both a Website Support Services Agreement and a Website Maintenance Agreement to cover such situations.

Registration

Generally speaking, retention of title clauses will be effective without any further action provided the supplier ensures that the clause is fully incorporated into the contract of sale (note that this can be as simple as including it in the “small print” or terms and conditions on an invoice). This only applies insofar as a supplier wishes to retain title in the actual goods. If the proceeds of sale are sought, further action is necessary to protect the supplier in the event of the customer’s insolvency. Failure to register the clause will result in the supplier being treated as nothing more than an unsecured creditor and will thus have no priority above the customer’s other creditors.

In cases where the customer is a company, any retention of title clause which seeks to claim proceeds of sale must be registered as a charge against the company.

Your Next Steps

Simply-docs currently offers a wide range of documents and clauses in this area. From individual retention of title and all monies clauses to full sets of terms and conditions for the sale of goods and services, our documents will enable you to trade safely in the toughest of times.

The contents of this Newsletter are for reference purposes only and do not constitute legal advice. Independent legal advice should be sought in relation to any specific legal matter.

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