Does a retention of title clause help?
Given the ever-increasing rate of construction company failures, we have seen a rise in the volume of instructions from clients who have not been paid and fear that the industry is heading for recession. They ask about any protection that suppliers to the construction industry can obtain, through the use of retention of title clauses. In fact today, we had instructions to recover the sum of £90,000 relating to the supply materials.
The last twelve months have been a torrid time for the construction sector, with the collapse of an estimated 943 construction companies in Q3 2018 alone according to Creditsafe; an increase of nearly 80% compared to the same period in 2017. The failure of some of the major players within the industry, such as Carillion and Dawnus, has left SME supply chains in crisis, causing the insolvency of many and leaving millions of pounds of bad debt for others.
All too often, goods are sold to construction companies on the buyer’s standard payment terms, with the goods being delivered before payment is made. In the event of non-payment and the insolvency of the buyer, the seller will rank as an unsecured creditor of the buyer with limited prospect of obtaining payment; irrespective of the status of the goods at the time.
An example of one method by which the seller may seek to protect itself against the risk of non-payment and buyer insolvency at the time the contract of sale, is the retention of title clause.
A retention of title clause can be incorporated into a contract for the sale of goods to give the seller priority over both the secured and unsecured creditors of the buyer should the buyer fail to pay for the goods and becomes insolvent.
The clause can take a variety of different forms, but the basic clause states that beneficial and legal title to the goods is retained by the seller until they have received full payment. For the clause to be effective in practical terms, it’s important to incorporate supplemental clauses that, for example, entitle the seller to enter the buyer’s premises in order to take possession of the goods in the event of non-payment. Additional clauses will be required if the goods are likely to be used in a manufacturing process, or resold.
Although retention of title clauses has the potential to substantially improve the position of a seller in the event of buyer insolvency, there can be limits to their effectiveness.
A buyer’s standard terms may provide that title to the goods will pass to the buyer upon delivery, as opposed to on payment. A retention of title clause will not necessarily take priority over the buyer’s standard terms so any terms which purport to pass title to the buyer prior to payment should be expressly rejected by the seller.
In addition, it is important to ensure that the retention of title clause is properly incorporated into the contract of sale in order to be enforceable as a contract term. The sensible and careful seller should seek legal advice on the incorporation of the retention of title clause at the time of contracting to ensure its validity, rather than waiting until the buyer defaults on payment to take advice.
Our specialist construction team regularly receives instructions to advise on contract terms including JCT contracts, together with representing clients involved recovering their goods and debts.