What is retention of title?

 

In commerce, goods are often supplied on credit. For example, a business might deliver machinery to a factory before it has been paid for those goods.

Retention of title clauses are how the business protects itself in the event of a default on the payment. These are also known as Romalpa Clauses after the case in which the rules that operate them were decided.

Operation of the clause

Retention of title clauses allow the supplier of goods to retain ownership until certain conditions are met - normally, that the goods have been paid for in full. On the face of it this may appear reasonable; however, it can cause problems when there are more than two parties to a transaction.

For example, a company may agree to sell some machinery to a factory. Once it has received payment, the company purchases the machinery from a third party on credit.

However, before the company can deliver the machinery to the factory, it goes into insolvency. The factory may try to claim that they own the machinery, given they have paid for it, but if there was a retention of title clause, the machinery is still owned by the third party.

Since there is no contractual relationship between the factory and the third party, they have no right to the machinery.

This of course could result in considerable hardship to the factory. They may have paid a large sum of money on the basis that the machinery would help them make it back. They are now looking at a significant loss. For this reason, whenever purchasing goods for significant sums, it is important to have a full understanding of the nature of the deal.

Our commercial law pages have more information about similar subjects.

Enforcement and limitations

Retention of title clauses will normally specify how they may be enforced. It is common for them to permit the supplier to enter the premises of the defaulting buyer to recover their property. They will not however, normally be permitted to enter the property of an innocent third party.

In the example above, had the factory taken delivery of the machinery, the retention of title clause would probably cease to operate. However, the law in this area is complex and legal advice should always be sought in these situations.

Consumers have less to fear. In business-to-business dealings, the law will usually enforce whatever is written in the contract, even if it turns out to be unfair to one party.

Freedom of contract includes the freedom to make a bad deal. Consumers, however, are given much more protection by the law. Unfair terms are not normally enforceable unless very specific measures are taken to draw the consumer’s attention to them.

Visit our contract law pages to learn more about this subject.

If you require advice regarding a retention of title clause, particularly if one is operating against you, Contact Law can put you in touch with a cost effective specialist solicitor free of charge. Please call us on 0800 1777 162 or complete the web-form above to speak to an advisor.

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