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Possession is 9/10 of the law: how to protect title in your goods

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In a normal contract to purchase goods, property in goods supplied passes on the delivery of the goods to the purchaser by the seller not as most would commonly believe when payment of the goods has been made.

The difficulty with that is if the purchaser becomes insolvent, the purchaser ultimately gets the benefit of the goods for which they have not paid and the seller is out of pocket for the value of the goods. The seller then becomes an unsecured creditor of the purchaser and lines up after all secured creditors to collect payment.

One way the law has developed to assist in protecting the seller is by the creation and inclusion of a retention of title clause which is included in the contract of sale, or what is otherwise known as a “ROT” clause.

A retention of title clause is essentially a clause which forms part of a contract to purchase where the purchaser expressly agrees that they are purchasing the goods subject to a retention of the title to the goods in favour of the seller, until the goods are paid for in full.

The advantage of an effective ROT clause is that it will allow a seller to retrieve their unpaid goods from a purchaser in an insolvency event situation.

An ROT clause will not however be effective against the purchaser if:

  • It has not been properly drafted
  • It is not brought to the express attention of the purchaser – it is not enough to simply insert a clause on an invoice or in an agreement without reference to the purchaser
  • It has not been properly incorporated as a term into the contract of sale
  • The good can not be identified by reference to a particular invoice which remains unpaid as opposed to previous invoices which have been paid
  • It does not incorporate a provision to enable the seller to enter onto the property of the purchaser to retrieve the goods in order to avoid being charged with trespass

There is no doubt that a properly drafted retention of title clause can be effective to assist in the retention of title to goods in favour of a seller against a buyer, so that the old saying that “possession is 9/10 of the law” is prevented. The most important thing is to make sure you get the ROT clause right!

For further information please contact one of our Dispute Resolution & Litigation lawyers.

Author: Mary Nemeth