The contractual position

Unless otherwise agreed in the contract, title to goods passes on delivery. Accordingly, the onus is therefore on the supplier to incorporate other terms. However the intention as to when title will pass must be agreed, or be deemed to be agreed, by both parties, not merely imposed by the supplier.

Although the courts have taken the view that ROT conditions are common place it is advisable for a supplier to ensure that a customer is aware of the conditions especially if they are out of the ordinary.  Accordingly, the supplier should take reasonable steps to give notice of its terms of trading to the customer before any contract is made and the customer should indicate, either actively or passively, that it accepts those terms.  

The supplier, in taking reasonable steps, should if possible:

• Write to the customer setting out the ROT conditions and requesting written acceptance of those conditions by the customer, ideally when a credit account is opened.
• Avoid entering into any contract with the customer until the written acceptance is received. 
• Examine the customer’s conditions of trade and, where those conditions conflict, obtain written confirmation that the supplier’s conditions prevail.
• Obtain renewed acceptance of the conditions if they are subsequently altered in any way.
• Incorporate the conditions in every document pertinent to each transaction, particularly the document establishing the contract. An invoice is a post-contractual document and incorporation of the conditions in that document alone is ineffective.

The insolvent customer

Subject to any contrary conditions a supplier that has entered into an agreement to sell but has retained title to the goods until payment is made is entitled to recover its goods.  However in the ordinary course of trade the supplier will assume that payment will be made eventually.

An Insolvency Practitioner has a duty to safeguard the assets of the company to which he has been appointed. He will assume that all goods on the company’s premises and in the company’s possession belong to that company and any other person claiming to be the owner of any of those goods must prove his title.

An Insolvency Practitioner will require to be satisfied on the following:

• That the customer agreed to the supplier’s retention of title conditions and to the waiver of any conflicting conditions in its own terms of trade.
• That the goods claimed can be conclusively identified as having been supplied by the supplier.
• That the goods claimed were supplied under the conditions quoted by the supplier.
• That the goods claimed can be identified specifically to unpaid invoices, or that the retention of title clause extends to goods supplied at any time.

The simple clause retaining title in goods until payment is made has given way to clauses that purport to give title to goods that are no longer the goods that were supplied, to the proceeds received by the customer from the sale of those goods and to various combinations of both. The various types of clause are outlined below:

• Claims to original goods - Where the supplier simply retains legal ownership of the specific goods until payment is made and goods can be identified against specific unpaid invoices its claim is likely to be successful and its goods should be recoverable.
• Claims to altered goods - When goods are mixed up with other goods or change in any way it becomes more difficult for the supplier to trace its title in those goods as it cannot claim title to something that it never had. Where goods are destined to lose their identity almost immediately after delivery the supplier cannot claim that the customer was holding those goods for the benefit of the supplier and there can be no right to trace where the original goods lose their character and what emerges is a wholly new product.

So if it is known that goods are to be used in a manufacturing process before they are paid for a supplier cannot rely on a simple ROT claim. Where goods are incorporated into something else but retain their separate identity and can be removed without undue harm to other goods, the retention claim may succeed.

Claims to proceeds of sale

In order for a claim to the proceeds of sale to be successful, it appears that the following requirements should be met:

• It should be agreed between the parties that the customer is bailee for the supplier and that a fiduciary relationship exists (i.e. that the customer is effectively trustee for the supplier’s good).
• The customer should be stated as being the supplier’s agent if the customer sells the goods.
• There should be a requirement that the proceeds of the sale of goods be banked separately from other income of the customer.

The treatment of proceeds leads to a number of problems:

• If the supplier does not insist on separate banking but allows the proceeds of the sale of goods to mix with other income it is creating an interest over the customer’s assets and must register that interest as a charge under section 860 of the Companies Act 2006.
• If the supplier requires separate banking but fails to ensure that the customer is complying with that requirement it may be construed that it has consented to a breach of the contract.
• If the contract incorporates a credit period there is the inference that, within that period, the customer is free to use the sale proceeds and this defeats the supplier’s interest in those proceeds.

How to claim ROT

You would be amazed how many suppliers have perfectly valid ROT claims they could make but simply don’t bother. If you hear that a customer has gone bust and think you have a claim:

• Make your claim quickly in writing to the Insolvency Practitioner.
• Visit the trading premises to identify your goods. List them and make sure your representative and the insolvency practitioner’s representative sign the list.
• Answer the Insolvency Practitioner’s ROT questionnaire demonstrating your terms were incorporated.

Don’t take no for an answer

Conclusion

ROT is a perfectly valid concept upheld in law in particular:

• A simple ROT clause is likely to succeed if specific goods can be identified as being unpaid for.
• Goods that have been mixed cannot be held by the customer as bailee because it cannot give them back to the supplier. In such circumstances, it is likely that title will have passed, and a charge will be required for the supplier to maintain any further interest.
• Where goods are incorporated into something else but retain their identity and can be separated, a claim to ROT is likely to succeed.
• An all monies clause may succeed.
• Where the supplier lays claim to the proceeds of sale, it must ensure strict adherence to specific conditions and the customer must be seen to be an agent bailee for the supplier and usually the supplier will need to have a registered charge at Companies House.

From a practical point of view, it is essential for the supplier to ensure that its retention of title conditions are known to and accepted by the customer and that, when making a claim, the supplier can identify its goods beyond doubt, preferably against specific unpaid invoices. 

The Courts have expressed the view that ROT clauses have become commonplace and that they will use their best endeavours to ensure that the intentions of the parties are upheld. 

For further information on this or any other business rescue or insolvency related matter please contact us on 0800 331 7417

The information provided in this report is of a general nature and should not be relied upon in specific circumstances. Always take your own independent legal or other professional advice.  

Last updated September 2017