21/05/09

By Michael Twomey

In the first quarter of 2009, there were an alarming 4,941 liquidations in England and Wales, an increase of 56% on the same period a year ago. According to research by the Credit Management Research Centre at Leeds University Business School, 40,000 companies will suffer a similar fate by the end of the year. In the midst of the recession, many suppliers and buyers of goods and services will therefore need to pay extra attention to the terms of contracts that they are entering into.

Consider the following common situation with which you may well be only too familiar: a supplier delivers goods to a customer who shortly afterwards, goes into administration. Can the supplier recover the goods?

In 2007, a leading computer manufacture, Evesham Technology, went into administration owing nearly £7 million. A couple of months earlier, Viewsonic had supplied ten thousand monitors on credit to Evesham, worth around £300,000. As an unsecured creditor, Viewsonic was likely to receive little or nothing. However, it was able to recover the goods because it fortunately had a Retention of Title clause (ROT) in its terms and conditions and was also able to prove that its terms applied to the contract.
Retention of Title clause

The usual legal position is that ownership (or title) in goods passes from the seller to the buyer on delivery. This means that if the buyer goes into liquidation, the liquidator will sell the goods to raise funds to pay out to the company’s creditors, with the bank usually being paid first!

A ROT clause alters the usual position with the result that the supplier continues to own the goods until they are paid for. The supplier is therefore now in a position to ask the receiver to return the goods.

However, it is not enough to have a ROT clause in your standard terms and conditions. Firstly, you must be able to prove that the contract was made on your terms and not on the buyer’s terms. This is sometimes easier said than done, as explained below. Secondly, you must be able to identify the goods. If you cannot do so, you will not be able to recover them.

Whose terms apply?
In the case of P4 Ltd v Unite Integrated Solutions Plx [2006]), a supplier of emergency lighting systems, P4 Ltd, supplied light fittings to a mechanical and electrical contractor. When the contractor became insolvent, still owing the money for the goods, P4 claimed that it was entitled to recover the goods under the ROT clause in its terms and conditions.

The matter went to court where the judge decided that the contract between P4 and the buyer was not made subject to P4’s terms. P4 had sent a quotation to the buyer stating that the contract would be subject to the terms and conditions as set out on the back of the quote.

Unfortunately, only the top page of the quotation was faxed, with nothing on the back!

Another company, MGB Electrical Ltd, a wholesale distributor specialising in hazardous area equipment, had supplied goods in similar circumstances. When its customer went into receivership, MGB wrote to the receiver, pointing out that it had retained title over goods that it had recently delivered. Grace Tipson, the managing director, of MGB said “The receiver simply refused to allow us to recover the goods until we were able to convince him that our terms and conditions applied to the contract. Even then, we had to prove to him that we could identify our goods”. Fortunately, MGB had followed its procedures when entering the contract and had ensured that its terms had applied. It had also taken steps to ensure that the buyer had kept its goods separately stored and labeled.

Is Retention of Title effective?
Even if suppliers can establish that their terms and conditions contained an ROT clause, there are other considerations that can hamper its effectiveness:

• The goods may no longer be identifiable as they may have been used in a manufacturing process. If they can still be identified, they can be removed but only if no damage is caused, as otherwise it can result in a court case against the supplier with costly consequences! Your ROT clause should also give you a right to enter the buyer’s premises in order to recover your goods.

• If the supplier has supplied several consignments of goods over a period of time, and has received some part payment from the buyer, it may be difficult to establish which goods have been paid for and which have not. An “all monies” clause, which provides that ownership does not pass until all monies owed to the supplier have been paid, may prove effective in this case.

• Unfortunately, if the goods have been sold on, then your ROT clause is likely to be wholly ineffective and you will be left with an unsecured claim against the buyer.
So What Should You Do?
Below are some Practical Tips:

• Make sure that your terms and conditions contain an effective ROT clause.

• If your terms and conditions have not been reviewed recently, then seek some legal advice to ensure that they include an effective ROT clause. For example, do they require the buyer to store the goods separately with a licence for you to enter the premises to inspect them?

• Make sure that you will be able to identify your goods. In the case of MGB (see above) sales staff would go into the warehouse with labels to attach to the goods.

•Remember, your clause will only be incorporated into the contract if the contract was made on your terms and conditions. It is vital, therefore, to train your staff in simple, key elements of practical Contract Law. It is easy to get it right. But equally easy to slip up — with very costly consequences.

Michael Twomey is a Director and principal trainer at Legal & Commercial , a leading provider of training in business and law. For further information, visit www.legalandcommercial.com