A retention of title (ROT) clause is a contractual provision that allows a seller to keep legal ownership of goods until they are fully paid or specific conditions are met. This protects the seller if the buyer becomes insolvent or bankrupt.
Without a ROT clause, the seller would be treated like any other creditor in bankruptcy proceedings, risking receiving little or none of what is owed.
Key points:
- ROT clauses are included for the seller’s financial security.
- They allow sellers to retain ownership until full payment.
- Some clauses specify how goods should be stored for easier repossession.
- Enforcement varies by country, even within the EU.
What is Retention of Title (ROT) Clause?
In the formulation of a sales contract involving credit-based trade of goods, sellers often incorporate a Retention of Title (ROT) clause to safeguard their financial interests. Typically, these clauses grant the seller the right to maintain ownership of the goods or equipment until full payment is received, or in the case of an “all monies” clause, until all owed invoices are settled by the buyer. In scenarios where the buyer fails to fulfil payment obligations, the ROT clause empowers the seller to repossess and resell the goods for their own benefit.
These clauses instil sellers with greater confidence in extending credit, providing a legal foundation to repossess goods if the buyer faces insolvency or declares bankruptcy. Validity of the ROT clause as recognised by the court overseeing the transaction places the seller in a superior position compared to other creditors during the buyer’s bankruptcy proceedings, where available assets are divided among creditors.
The fundamental principle of an ROT clause—seller retention of title until full payment — is straightforward. However, practical enforcement of these provisions can pose challenges. For instance, certain raw materials acquired by a manufacturer on credit might become irretrievable once blended with other materials, as seen in the case of a commercial bakery using purchased sugar as an ingredient. Once combined, reclaiming the sugar becomes infeasible.
Complications may also arise if the purchaser resells items before completing payment to the supplier. This scenario occurs when, for example, a retailer sells apparel acquired on credit. Here, the seller’s capacity to reclaim the products diminishes significantly, if not entirely, as the goods have changed hands through a legal transaction.
Components of a ROT Clause
A standard ROT clause typically contains language establishing the legal ownership of goods with the seller until the buyer completes full payment. Such clauses commonly stipulate the seller’s right to repossess the items by entering the buyer’s premises, emphasising that failure to do so could constitute trespassing.
Moreover, beyond these fundamental provisions, a ROT clause may entail specific directives regarding the storage of goods to facilitate repossession. This might include guidelines on marking the goods for clear identification of the seller and storing them separately. The clause might also grant the seller access for inspections of the storage facility to ensure compliance with contractual storage requirements.
Additionally, ROT clauses often allocate the risk of damage or theft to the buyer upon goods delivery. Sellers commonly impose a requirement for buyers to insure the goods upon delivery, sometimes with the condition that the seller approves the insurance provider offering coverage.
How is a ROT Clause set up?
Incorporating the ROT Clause is essential within the contract linking the buyer and supplier. Ideally, this inclusion occurs at the onset of their trade relationship by integrating the ROT Clause into the Supplier’s Credit Account Application and Terms of Trade. Alternatively, it can be implemented on a transactional basis by including it within the supplier’s tax invoice to the buyer.
ROTs and the Personal Property Security Act (PPSA)
The Personal Property Security Act 2009 transformed the perception of ROT clauses. Under the PPSA, the supplier’s title is disregarded, equating the arrangement to a secured loan. Consequently, the buyer is recognised as the goods’ owner who has provided security over them to the supplier. This right, termed as a “security interest” under the PPSA, specifically falls under the category of a purchase money security interest or PMSI. However, this interest is solely categorised as a PMSI as long as it secures unpaid amounts – it will not be a PMSI if the goods are fully paid for. This confines an “All monies” ROT Clause solely to securing unpaid goods.
The PPSA introduces specified enforcement regulations if goods remain unpaid for. Unless these regulations are excluded, the supplier can no longer enforce the ROT Clause by repossessing goods from a buyer who is late or does not make payments.
Additionally, the PPSA introduces an extinguishment rule permitting a customer of the buyer, who acquires goods in the regular course of business, to obtain ownership of those goods free from the supplier’s security interest in them.
Supplier protections under the PPSA
The PPSA introduces the Personal Property Securities Register (PPSR), a statutory registry for recording security interests in personal property, specifically goods not primarily intended for personal or household use. It establishes a hierarchy among competing security interests, generally favouring earlier registered interests over later ones and prioritising registered interests over unregistered ones. A PMSI, if registered, holds a super priority—a status an ROT enjoys.
Registration emerges as pivotal. While a lack of registration doesn’t nullify the supplier’s rights, it carries significant implications:
- The supplier’s ability to enforce its security becomes secondary to a higher-ranking (earlier registered) security interest covering the buyer’s personal property.
- If the buyer faces liquidation or voluntary administration, the supplier’s unregistered security interest transfers to the buyer. Consequently, the supplier forfeits its security interest in the goods subject to the ROT and must pursue its debt as an unsecured creditor during insolvency proceedings.
Measures for the supplier protecting their ROT rights under PPSA
Registration with the PPSR registration is critical to secure ROT protection. Once the ROT clause is enlisted on the PPSR, it earns a superior priority compared to regular security interests. Registering an ROT clause offers several benefits: it allows the supplier to maintain security over goods, even if they are combined with or attached to other items, and under specific circumstances governed by the extinguishment rule, the supplier may still hold an interest in the proceeds from the goods’ sale.
However, a crucial consideration with ROT registrations pertains to their timing. When goods supplied constitute inventory (i.e., items held by the buyer for resale, consumption, or are raw materials or work in progress), the supply contract must be registered before the subsequent delivery of goods. Failure to register before delivering inventory risks forfeiting the PMSI super priority, potentially causing the supplier to lose priority to an earlier registered security interest, such as that held by the buyer’s bank. For non-inventory goods, registration must occur within 15 days of the goods’ delivery.
To ensure protection through registration, a written agreement encompassing the ROT Clause between the supplier and buyer is vital. The buyer’s signature on a Credit Account Application and Terms of Trade incorporating the ROT clause, applicable to all future supplies, is an ideal approach. Integrating the ROT clause into the supplier’s tax invoices is also crucial.
When the buyer signs the Credit Account Application and Terms of Trade, the supplier can perform a single PPSR registration. In the absence of such documentation but with the presence of the ROT Clause in the supplier’s tax invoice, the supplier must make separate PPSR registrations for each tax invoice to secure PPSA protection for its ROT clause, which may be a tedious process.
Treatment in Different Countries
Under the domain of property law, the validity of ROT clauses hinges significantly on local legal frameworks. In the USA, the Uniform Commercial Code broadly supports sellers’ inclusion of ROT clauses in purchase agreements. However, for these clauses to hold weight, sellers must notify the buyer’s other creditors about their security interest in the covered property. As such, the financing statement is filed with the state government office in the state where the property resides or where the buyer is incorporated.
In Europe, ROT clauses hold prominence but inside the European Union (EU), property laws lack full harmonisation, leading to varying perspectives on such clauses among different jurisdictions.
In the United Kingdom, the Sale of Goods Act 1979 safeguards sellers’ rights to retain title on sold goods provided the sales contract expressly outlines the ownership transfer. However, courts may invalidate the ROT clause if circumstances such as the buyer’s administration or perishable goods are involved.
FAQs
What terms might be specified within a ROT clause?
In addition to mandating complete payment for the specified goods, an ROT clause may enforce additional obligations on the buyer. These may encompass settling all invoices owed to the seller, specifying guidelines on how the buyer should label and store the goods, permitting buyer inspections of the storage facility, and granting the buyer the authority to access the facility for repossession of goods, if required.
Is a ROT clause always legal?
ROT clauses are recognised under Australian law, as long as the seller is clearly able to identify the items covered by the clause.
DISCLAIMER: This article is for informational purposes only and does not constitute official business legal advice. Please consult your solicitor.
