Retention of Title Clauses: protecting sellers in the face of buyer insolvency 

In commercial transactions, particularly those involving the supply of goods on credit, sellers always face the risk of buyer default. When a buyer becomes insolvent or fails to pay, the supplier may be left out of pocket with limited practical recourse.  

One of the most effective tools available in such scenarios is the Retention of Title (RoT) clause. Properly drafted and implemented, a RoT clause can give sellers a contractual and legal right to recover goods or assert ownership, potentially making the difference between suffering a financial loss and reclaiming valuable assets or their proceeds. 

What is a Retention of Title Clause?  

A Retention of Title clause is a contractual provision stating that ownership (or “title”) of goods supplied does not pass to the buyer until certain conditions, typically full payment, are met. While the buyer may take physical possession of the goods, legal ownership remains with the seller until those conditions are satisfied. In the absence of such a clause, title passes when the goods are delivered, subject to the parties’ intentions under the Sale of Goods Act 1979, particularly sections 16 to 19. This statute governs when property in goods is transferred under a contract and presumes that title passes when the parties intend it to, which in practice often means on delivery, unless the contract provides otherwise. 

The foundational case law in this area includes Aluminium Industrie Vaassen BV v Romalpa Aluminium Ltd [1976] 1 WLR 676. In this landmark decision, the Court of Appeal upheld a clause that reserved title in aluminium supplied by a Dutch manufacturer until payment had been made. The court recognised that the clause created a fiduciary duty on the part of the buyer to account for the proceeds of sale of those goods and allowed the seller to recover both unsold goods and trace proceeds.  

How do Courts Scrutinise Retention of Title Clauses?  

Subsequent case law has shown that English courts will scrutinise these clauses carefully, particularly when the seller attempts to assert rights over proceeds or goods that have been transformed. In Re Bond Worth Ltd [1980] Ch 228, the court held that a clause which purported to retain title in goods once they had been incorporated into a new product (in that case, carpet underlay) was ineffective, and instead created an equitable charge requiring registration under the Companies Act. Because it had not been registered, the clause was void against the liquidator. This highlights a recurring theme in RoT litigation: clauses attempting to go beyond simple reservation of title, such as those claiming proceeds of sale or rights in transformed goods, may fall foul of company charge registration rules under Companies Act 2006. If not registered, such clauses are unenforceable in insolvency. 

What Makes a Legally Effective RoT Clause?  

A RoT clause can be legally effective only if it is properly incorporated into the contract. This means the clause must be agreed upon at the time the contract is formed, not afterwards. Simply placing it in the terms and conditions on the reverse of an invoice is typically insufficient, especially if the invoice is issued after delivery. Courts look for clear, timely incorporation, such as inclusion in a signed contract, acknowledgement of terms in a purchase order, or consistent practice between parties with prior dealings.  

Even when a RoT clause is valid and incorporated, its enforceability often depends on practicalities. The seller must usually be able to identify their goods, something that can be difficult once goods are mixed, resold, or incorporated into other products. For example, if raw materials are combined or transformed into finished products, as in Borden (UK) Ltd v Scottish Timber Products Ltd [1981] Ch 25, the original title is lost. In Borden, the court held that once resin was mixed into chipboard, it was no longer possible to assert a proprietary claim over it. This means that a retention of title clause will not assist unless the goods are still intact, segregated, and clearly identifiable. 

Moreover, RoT clauses offer limited protection if enforcement is not swift. Once a buyer enters insolvency, goods may be seized or sold by administrators or liquidators. While a valid RoT clause can give a seller priority over certain goods, insolvency practitioners will often resist claims, especially where the goods are not clearly identifiable or the clause contains defects. Sellers asserting such claims must often apply quickly to court for an injunction or declaration of title. Delays reduce both leverage and the chance of recovery. Time is particularly sensitive in these situations due to the possibility of third-party sales and the risk of goods being used or processed. 

It is also crucial to distinguish between simple and complex RoT clauses. A simple clause merely reserves title in the goods until payment is received. These are more likely to be enforceable if properly incorporated. A “proceeds of sale” clause attempts to give the seller rights in the money the buyer receives when it sells the goods on. These clauses are much riskier, as they may constitute a charge and require registration. In Clough Mill Ltd v Martin [1985] 1 WLR 111, the court held that the retention of title extended only to the original goods supplied and did not create a charge on the proceeds of sale unless specifically worded and registered. The lesson is clear: the broader or more ambitious the clause, the more likely it is to be struck down unless carefully drafted and compliant with statutory requirements. 

In light of this, it is essential that businesses review the wording of their retention of title clauses and the procedures they use to incorporate them into contractual relationships. Sellers should ensure that their standard terms and conditions clearly include the RoT clause, and that those terms are referenced in quotes, order confirmations, and delivery notes, not just invoices. They should also keep robust records of delivery and maintain systems that enable the physical identification of goods, such as serial numbers, batch numbers, or labelling systems. 

RoT Clauses in the Context of Disputes 

When a dispute arises, whether due to non-payment or insolvency, swift legal advice can be invaluable. Enforcing a RoT clause may require negotiations with insolvency practitioners, issuing letters before action, or applying to court for declaratory relief or recovery orders. Where goods cannot be reclaimed, alternative remedies such as personal claims for debt or unjust enrichment may be explored, although these are less likely to succeed in insolvency scenarios where the seller ranks as an unsecured creditor. 

A retention of title clause is not a silver bullet, but it can be a powerful tool when used properly. Businesses that supply goods on credit, particularly in sectors such as manufacturing, construction, engineering, and wholesale, should treat RoT clauses as a core part of their commercial risk strategy. The legal landscape around RoT clauses is complex and evolving, and careful drafting combined with proper commercial practice is key to ensuring they deliver meaningful protection.