What is retention of title? A complete business guide

16 February 2022

  • Retention of title is inserted into contracts to reduce losses if a customer defaults or refuses to pay.
  • It is only effective if implemented correctly. It works best in sectors like retail and is much less valuable in industries such as construction.
  • It works best in tandem with trade credit insurance, not as a replacement.

 

Retention of title can be a useful contractual tool for reducing financial damage if a major customer collapses. With insolvencies rising, it could be a valuable safeguard — but only for specific industries, and if implemented properly.

There's a lot of legal detail to master to ensure the protection has value. More than 40 years ago, an eminent judge in a retention of title case famously described it as "a maze, if not a minefield", and it has become even more complex since then.

And it’s certainly not a substitute for trade credit insurance. Annalise Saib, Claims Team Manager at Euler Hermes UK & Ireland, comments: “Retention of title and trade credit insurance work in tandem. But really, trade credit insurance is more beneficial.”

This article is for information purposes only and is not a substitute for legal advice.

What is retention of title?

Also known as reservation of title, retention of title is a clause in a sales contract - usually for the sale of physical products - which means supplied goods belong to your firm until paid for. By retaining title to goods, if the customer refuses to pay or becomes insolvent, you can, in theory, visit their premises and take your goods back, reducing their debt accordingly.

Without this clause, the law in the UK and Ireland states ownership of goods passes to your customer on delivery, even if they never pay for them. Without retention of title, goods supplied by you to an insolvent customer would be sold, and the proceeds distributed to all creditors through the usual formula. As an unsecured creditor, you're likely to be at the end of the queue.

There are a variety of guides written by law firms and accountants  that explain the legal formalities. There is also helpful information in the government's guidance to official receivers. One key message is that the buyer must agree to the terms as part of the contract; adding it to an invoice or delivery note later won’t have legal effect.

What is all-monies retention of title?

Retention of title clauses have evolved as firms seek to strengthen their protection.

  • All-monies retention of title is now the most common clause. This allows you to seize any goods if payment is outstanding for just a proportion. For example, suppose you supply a customer with two products, metal primer and paint. If they collapse having paid for the paint and not for the primer, you could still seize the paint to recover your losses. However, what if the paint has now been applied to a product the customer holds in stock? Can you seize that product? Legally, the answer is no.
  • Proceeds of sale retention of title seeks to fix a different problem, entitling you to the proceeds if the goods you supplied have been resold. The reality, however, is that if your customer’s business has failed, then their bank account is likely to be in the red and there will be no proceeds to seize.
  • Mixed goods retention of title seeks to help if your goods have been mixed with those from other suppliers, such as fuel piped into a tank. This clause would potentially allow you to reclaim a proportion of the intermingled product, but only if it doesn’t damage the goods supplied by others.

One caveat added by all the legal guides is that recovery must be made legally, with no Oceans 11-style heist to recover your goods. This guide, produced by consultants and insolvency practitioners Begbies Traynor, has additional advice to get the wording regularly reviewed; a court judgement could render your current clause ineffective.

Examples of retention of title

A look back at high-profile insolvencies shows where the clause can have an impact — and when it doesn’t.

Woolworths Camberwell - 2004 - Exterior
The original uploader was Secretlondon at English Wikipedia., CC BY-SA 3.0.via Wikimedia Commons

Annalise says the collapse of Woolworths UK in 2008 was an important milestone. Some firms supplying the retailer didn't have retention of title and saw significant losses. However, much of its stock was saleable, and suppliers with retention of title could make substantial recoveries.

Recoveries were lower during the collapse of Carillion in 2018, the UK’s biggest failure in a decade, that left debts of £7bn. Receivers PwC immediately contacted all suppliers and asked about retention of title clauses. However, recovery was modest. Subcontractors who supplied labour had no goods to reclaim and those who provided raw material often found it had been incorporated into buildings and could not be seized.

Trade credit insurance and retention of title

Annalise says that as a condition of cover, Euler Hermes requires that clients add all-monies retention of title into their contract. If they fail to do so and this reduces the amount recovered, then their claim payout will be reduced.

However, she says Euler Hermes takes a practical and flexible approach that acknowledges the commercial realities. For example, recovering goods and transporting them back to your premises may be costly. If it costs £1,000 to recover £10,000 of goods, then Euler Hermes will take that into account when calculating other payments that may be due. They also don't insist on marginal recoveries, such as spending on transport £1,000 to recover £1,100 of stock.

There is also an understanding that goods recovered may have diminished in value. For example, a fashion company client had a customer collapse and discovered they held substantial old stock.

What is the domino effect of insolvency video

"They didn't want to take the stock back because it was last season's, " says Annalise. Instead, they reached an agreement with Euler Hermes to accept a nominal sum and have the stock properly disposed of, rather than having to take it back and arrange disposal themselves.

Is retention of title useful?

There is no downside to retaining title to goods, but the practical value is highly uncertain. Comparing trade credit insurance is instructive. Trade credit policies have precise payment schedules; policy documents give transparency on terms and payouts. With a leading insurer such as Euler Hermes, part of the global Allianz group that had 2020 revenues over €140bn, there is a certainty of payout if the policy conditions are satisfied.

In contrast, when using retention of title, your logistics team may wait weeks to drive 150 miles to seize goods, only to find their value is much lower than expected because they got wet or damaged by a forklift during storage. And that's assuming the exercise is facilitated by an administrator or liquidator. If the firm is still trading, it may mean an expensive trip to court and a "battle of the forms" where your paperwork will be scrutinised to see whether the retention of title has legal validity. And if the firm is in administration, you will usually be unable to press your claim, because of the moratorium against legal action.

“It’s quite rare to get all your stock back, to be honest” says Annalise.

For the best cover, trade credit insurance and retention of title should work together, she says. "If you're credit-insured, retention of title will reduce your claim. And that's a benefit because there will be a deductible."

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