Retention of Title Clause: Romalpa Agreements and Asset-based Lending

What is a Retention of Title Clause

A Retention of Title clause is a contractual provision where the seller retains legal ownership of goods until the buyer fulfils specific obligations, usually full payment.

Retention of Title Clauses: A Comprehensive Overview

The Retention of Title (RoT) clause plays a fundamental role in commercial transactions. It is a provision that allows sellers to retain ownership of goods until the buyer meets certain conditions, typically full payment.

A Retention of Title clause is a provision in a contract of sale stipulating that the title to the goods remains vested in the seller until the buyer fulfils certain obligations (usually payment of the purchase price).

While the buyer may possess the goods, the seller retains legal ownership.

Purpose and Benefits of Retention of Title Clauses

  • Security for Sellers: The primary purpose of a RoT clause is to protect the seller against the buyer’s insolvency or non-payment. If a buyer enters liquidation before paying for the goods, the seller can reclaim them, ensuring they are not left out of pocket.
  • Enhanced Credit Terms: Sellers might be more willing to offer buyers favourable credit terms if they have a RoT clause’s security.
  • Negotiation Power: In disputes, having a RoT clause can give the seller a stronger negotiating position.

Types of Retention of Title Clauses

  • Simple RoT Clauses: They stipulate that the title to the goods remains with the seller until the buyer pays the specific goods’ purchase price.
  • All Monies RoT Clauses: Here, the title to the goods remains with the seller until the buyer has paid all amounts owed to the seller, not just for the specific goods.
  • Extended RoT Clauses: These allow the seller to claim the proceeds of the sale of the goods by the buyer.

Challenges and Limitations of Retention of Title Clauses

  • Enforceability: The enforceability of RoT clauses varies by jurisdiction. Some courts may view them as an attempt to circumvent insolvency laws.
  • Third Party Rights: If the buyer sells the goods to a third party before the title has passed, the third party may acquire good title to the goods, making it difficult for the original seller to reclaim them.
  • Storage and Identification: If goods are mixed with similar goods, it may be challenging to identify which ones are subject to the RoT clause.

Jurisdictional Differences

RoT clauses are recognised in many jurisdictions worldwide, but their treatment can vary:

  • United Kingdom: RoT clauses are commonly used, especially in the manufacturing and wholesale sectors. However, their effectiveness can be limited by insolvency laws.
  • United States: While RoT clauses are recognised, they are subject to the Uniform Commercial Code (UCC) Article 9 provisions and may need to be publicly registered to be enforceable.
  • Australia: The Personal Property Securities Act has introduced a registration system where interests under RoT clauses should be registered to ensure priority.

Can A Buyer Sell Goods That Are Under A Retention Of Title Clause?

If a buyer sells goods under a Retention of Title agreement, they may breach the contract with the original seller.

However, in some jurisdictions, if the third party who buys the goods does so in good faith without knowing the Retention of Title clause, they may acquire good title to the goods, complicating the original seller’s ability to reclaim them.

Can A Seller Reclaim Goods If Mixed With Those Not Under A Retention Of Title Clause?

Reclaiming them becomes complex if goods subject to a Retention of Title clause are mixed or combined with other goods not under the clause.

The ability to reclaim depends on whether the goods can be separated without damaging their value.

If inseparable, the seller might lose their claim to the goods.

Additionally, jurisdictional laws and the specific wording of the RoT clause play crucial roles. Sometimes, the seller may claim a proportionate interest in the mixed goods or their proceeds.

RoT Best Practices

  • Clear Drafting: The clause should ensure both parties understand their rights and obligations.
  • Separate Storage: Buyers should store goods subject to a RoT clause separately to ensure they can be easily identified.
  • Regular Audits: Sellers should conduct regular audits to ensure that goods are correctly stored and identified.

Conclusion

The Retention of Title clause offers sellers a valuable tool to protect their interests in commercial transactions.

However, its effectiveness can be influenced by various factors, including the specific wording of the clause, the buyer’s actions, and the relevant jurisdiction’s legal framework.

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