RETENTION OF TITLE ('R.O.T.

') CLAUSES - WS1

STRUCTURE
1) IDENTIFY RELEVANT TERMS?
State Type of Clause/Explain clause (see below)

2) INCORPORATED?
Valid contract? (go into formation issues if needed on facts)
• If NOT signed; did B KNOW of the terms?
• If did not KNOW, ought B have known? = Did S take reasonable steps to bring to B’s
attention before contracting
• Or, was there a previous course of dealings? (ie “5 years” & “always used standard
conditions” would be clear suggestions)

3) IDENTIFY BREACH OF CONTRACT or TRIGGER of ROT clause?

i.e. should be in the clause (non-payment, or, insolvency)

4) REMEDIES?
•Action for the price - if non-payment (Clause in contract? Or could use s49 SGA79) & any
interest (base rate is 0.5%)
• DAMAGES (but no interest available like above) & there will be a duty to mitigate (plus Hadley
v Baxendale remoteness (loss flowing naturally from breach and that ought to have been in
contemplation) - OFTEN NO POINT AS BUYER INSOLVENT
NOTE – RUN THRU THESE QUICKLY w/o getting bogged down in them

5) IS THERE AN R.O.T. CLAUSE?

Does it work?
1) STATE AUTHORITY:
s17: SGA says property pass when the parties intend it to pass,
s19: Allows S to reserve title until certain conditions are fulfilled

2) PULL THE CLAUSE APART AS:

i. Essential elements of an ROT clause (REQUIRED TO BE VALID)

(1) Reserving Title
(2) Rights of entry, seizure and re-sale

ii. Optional but useful

(1) All monies clause
(2) Passing of risk
(3) Insurance
(4) Separate Storage
(5) Detachable goods

iii. Bluff value

(1) Tracing into the proceeds of sale
(2) Claiming ownership of mixed goods
(3) Tracing into mixed or manufactured goods

3) Apply these to facts?

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NOTE - If one of these three has taken place - then ownership has passed to the B:
1) Full payment
2) Re-sale to a third party (s25)
3) Mixing

TYPES OF R.O.T. CLAUSES:

ESSENTIAL FOR THE CLAUSE TO WORK:

CLAUSE 6.1 Ownership of the Goods remains with the seller and will not pass to the
RESERVING buyer [until one of the following events occurs:]
LEGAL TITLE
EXPLANATION • LEGALLY EFFECTIVE
• ESSENTIAL
DRAFTING * The S should make it clear he will remain owner of the goods and that legal
ownership will not pass to the B until one of the two described events takes place.
* With it, the ROT will only create a charge, ineffective against 3rd p’s unless regd.
* Reserving "beneficial" or "equitable" title will create a charge - not valid against a
3rd party unless registered as a charge.

RIGHTS OF 6.4 If the Buyer is overdue in paying for the Goods or any other goods supplied
ENTRY, by the Seller, the Seller may, if still the owner of the Goods, recover and resell them.
RECOVERY The seller may enter the Buyers premises for this purpose and may, if necessary,
AND RESALE detach or remove the Goods from any other goods. This does not affect any other
right of the Seller.
EXPLANATION • LEGALLY EFFECTIVE
• ESSENTIAL
• Often expressed as arising when payments overdue
DRAFTING * Reserving title is of no use to S without it.
* It avoids actions for trespass and breach of contract.
* Should contain a right to enter B's premises for the purposes of seizure of the goods
and subsequent re-sale.

USEFUL BUT NOT ESSENTIAL:

SEPARATE 6.3 The buyer must store the goods separately from any other goods until:
STORAGE * they become buyer's property; or
* they are attached to, or incorporated in other goods; or
* they are delivered to a purchaser from the buyer.
EXPLANATION • LEGALLY EFFECTIVE
• Useful
• should be twinned with an insure clause (see below)
• PRACTICAL precaution, seller should mark goods up with batch numbers
DRAFTING * It is intended to help the seller identify the goods if it is necessary to recover them.
* May help the S in negotiations if the B does not comply.
* If the seller cannot identify the goods then its only remedy is to claim damages,
which may be of little value. (Some sellers include a provision allowing them to
inspect the buyer's premises to check that the clause is being complied with - but few
sellers actually bother to carry out the checks).

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RISK PASSES 6.6 Risk in the Goods passes to the buyer on delivery in accordance with
ON DELIVERY condition 4.
EXPLANATION • LEGALLY EFFECTIVE
• Non-essential
• Useful as overrides s20
DRAFTING s20 says risk passes upon ownership, which may leave S exposed to financial risk if
there is accidental damage or loss following delivery. So this clause ensures risk
passes as soon as the goods are delivered.

INSURANCE 6.7 The Buyer must insure the Goods against all insurable risks for the price due
CLAUSE to the Seller for the Goods
6.8 If the Goods are destroyed by an insured risk before the Buyer has paid for
them. the Buyer shall hold the insurance proceeds as the Seller's trustee
EXPLANATION • LEGALLY EFFECTIVE
• Non-essential
DRAFTING If the buyer fails to insure then the seller's only remedy is to claim damages, which
may be of little value.

It is useful to provide that the buyer will hold the proceeds of any insurance claim on
trust for the seller, as this will help the seller if the buyer becomes insolvent.

ALL 6.1 Ownership of the Goods[...] will not pass to the buyer until one of the
MONIES following events occurs:
6.1.1 the Buyer pays the seller for all of the goods and owes no other amounts
CLAUSE to the Seller in respect of other goods supplied by the Seller.
EXPLANATION i. LEGALLY EFFECTIVE
ii. Non-essential for the whole of the clause to work
iii. Useful to ensure title does not pass until all goods have been paid for
DRAFTING If all goods at the B's premises will belong to S, this clause makes it less likely that
the S will have to work out which goods belong to themselves.
If there is a long-term contract paid in instalments, B may always owe money to S.

GOOD TITLE 6.1 Ownership of the Goods[...] will not pass to the buyer until one of the
WHEN B following events occurs:
RESELLS 6.1.2 the Buyer sells the goods in accordance with this agreement in which case
ownership in the Goods will pass to the Buyer immediately before the
Goods are delivered to the Buyer's customer.
EXPLANATION i. LEGALLY EFFECTIVE
ii. Non-essential
iii. Useful to give B the freedom to trade onwards
iv. s25 SOGA79 implies this anyway.
DRAFTING An express clause is much clearer.
A tracing/proceeds of sale clause is necessary to back this clause up.

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(Next – Detachable goods)
DETACHABLE 6.2 Where the goods are attached to or incorporated in other goods or are
GOODS altered by the Buyer, ownership of the Goods shall not pass to the Buyer by virtue
of the attachment, incorporation or alteration if the Goods remain identifiable and,
CLAUSE where attached to or incorporated in other goods, can be detached or removed from
them.
EXPLANATION • Legally effective
• Non-essential
• Useful together to ensure S can get goods back
DRAFTING Note the clause makes no attempt to retain title over the mixed or manufactured
goods - so likely to be upheld by the court. However the goods must be readily
detachable WITHOUT DAMAGE.

BLUFF VALUE - worth putting in as still a term of the contract if agreed. Enforceable against any party
who agree's to it.
TRACING INTO 6.5 Until the Buyer has paid the Seller for the Goods and all other goods which
PROCEEDS OF the Seller has supplied to the Buyer:
SALE CLAUSE 6.5.1 if the Buyer sells the Goods, the Buyer shall hold the proceeds of sale on
trust for the Seller in a separate bank account;
6.5.2 the Seller may trace the proceeds of sale that the Buyer receives into any
bank or other account which the Buyer maintains;
6.5.3 if the Buyer sells the Goods, the Seller may, by written demand, require the
Buyer to assign to the Seller the Buyer's rights to recover the price from its
purchaser; and,
6.5.4 the Buyer must not assign to any other person any rights arising from a sale
of the Goods without the Seller's written consent.
EXPLANATION • Likely to be effective against the B themselves (It worked in Romalpa [1976] but
because there was a fiduciary duty element to the relationship between B and S.
• Potential bluff value against others - it may exert commercial pressure on a B who
does not take legal advice on it.
• Cannot ever trace to innocent buyer
DRAFTING • Creates a charge, which is not enforceable against 3rd parties unless it is
registered as so.
• Need to claim to enforce - 6.5.1 requires B to hold funds in separate bank
account. 6.5.2 enables B to trace the payment if it goes into any other
account.

MIXED GOODS • NO EXAMPLE

CLAUSE
EXPLANATION • MAY BE EFFECTIVE AGAINST THE BUYER
• MAY HAVE 'BLUFF' VALUE AGAINST 3RD PARTIES
DRAFTING Purports to retain title over the mixed goods.
Courts have concluded can only ever be effective in creating a charge over the mixed
goods. Therefore not effective against 3rd parties unless registered.
However if goods simply attached - can be detached - see 6.2

MANUFACTURED • NO EXAMPLE
GOODS CLAUSE

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EXPLANATION • May be effective against B only
• Possible 'BLUFF' VALUE against 3rd parties
DRAFTING Not legally effective against a 3rd party unless registered as a charge, which is
unlikely to be practicable.

Practical Advice
• Mark all goods with batch numbers in case B fails to store them separately
• It may not be practical to test the strength of R.O.T. clause in court if disputed by receivers /
liquidators. The court’s decision could also affect S’s dealings with other B’s.
• All is not lost though – if business to be sold as a going concern then relationship will be
preserved.

Possible situations:

Where goods UNUSED / still in warehouse

1) ISSUE: Are they identifiable from other products?
APPLY TO FACTS – IE. PARAPHRASE FACTS, APPEARS THEY ARE DIFFERENT PRODUCTS, LIKELY TO HAVE
BRANDED LABEL AND BATCH NUMBER ON IT
2) Relevant clauses? IE. 6.3 - B SHOULD STORE SEPARATELY UNTIL
6.3.1 – THEY BECOME B’S OWN PROPERTY
6.1.1 – NOT YET B’S PROPERTY
6.4 – S CAN ENTER & SEIZE THEM
NOTE – 6.3 IS BREACHED, BUT PURSUING DAMAGES IS POINTLESS AS B ARE GOING INSOLVENT

Where goods have been sold on to retailers

1) ISSUE: can the proceeds of sale be traced?
2) Look at clauses in the contract, i.e. 6.5.1 B holds on trust for S
6.5.2 S may trace into it
3) Need to find out if B has separate bank account. Issue will be whether the funds have been mixed,
which may make them harder to identify.

Unlikely to be traceable in law as the business relationship is not fiduciary in nature – Romalpa [1976].
The tracing clause creates a charge (from case law) which is void against liquidators unless registered.
Only remedies: * to sue for price (& interest) if not yet insolvent or damages.
* 6.5.3 gives S a chose in action to recover the funds from any
purchaser who has not yet paid for the goods.

Where goods have been ALTERED/INCORPORATED or RUINED

ALTERED/INCORPORATED
1) Identify relevant clauses in contract (ie. 6.2 - Ownership not passing if goods remain identifiable
& detachable)
RUINED
1) Identify relevant clauses in contract
IE. 6.6 RISK PASSES ON DELIVERY
NOTE: 6.6 overrides s20 SGA79 which says risk passes when title passes.
So, If no 6.6, then S will retain risk in the damaged goods then S could have a action for TORT OF NEGLIGENCE or
CONVERSION.
6.7 B MUST INSURE AGAINST INSURABLE RISK (SO WILL BE COVERED IF INSURED)
6.8 INSRANCE PROCEEDS ARE HELD ON TRUST FOR S

product mixed irrevocably with other product

1) ISSUE: Can the oil be identified? Almost impossible.

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2) Identify relevant clauses in contract
6.2 - GOODS ARE INCORPORATED BY VIRTUE OF BLENDING x WITH y
THEREFORE, ON FACTS, TITLE HAS PASSED.
3) S's only option to sue for the price

BUSINESSES CAN BACK THESE UP WITH OTHER PROTECTION TECHNIQUES:

(1) Keep a tight credit control system
Basic rule of good business is to establish and maintain a pattern of ensuring immediate and full payment.
A reputation for tight credit control could be the best protection of all. Debtors will pay first the creditor
who will cause the most trouble.

i. Make frequent checks on Bs creditworthiness

ii. Establish credit limits and ensure staff know them & stick to them
iii. Chase debts before they become problematic
If any Bs do fall behind then consider:
iv. Insisting on cash up front or refuse to sell to them until all debts are settled
v. Remove the goods at the first sign of trouble/first opportunity.

Removing the goods first is a way of acting before other creditors notice there is a problem. If S relies on
claiming the goods back from a liquidator, it could be a timely process.

(2) Debt factoring ( costs up to 15% of face value )

A factoring company could buy the debt for a discount, so it’s an expensive option. The riskier the debt, the
more discount the factoring company will require.
NOTE: The factoring company can only enforce the debt if the debtor had notice of the asssignment of the
debt under s136 LPA 1925.

(3) Credit risk insurance

Insure against default by the B (can be expensive)

(4) Provide in the contract for interest (implied also by Late Payment of Commercial Debts (Interest)
Act 1998 even if not in contract).
It is easier and clearer if there are express provisions in the contract.