Title Retention Clause: Everything You Need to Know
A title retention clause is a provision in a contract under which ownership of goods does not transfer to the new owner until they are paid for in full. 3 min read
A title retention clause is a provision in a contract under which ownership of goods does not transfer to the new owner until they are paid for in full. This clause is usually found in industries where goods are sold on credit. They are sometimes called reservation of title clauses or Romalpa clauses, after the first well-known case on the subject in the English Court of Appeals.
Why Use a Title Retention Clause?
If a business sells goods on credit, it's important to take steps to limit the risk of losses in case a customer refuses to pay or goes into bankruptcy. When a title retention clause is correctly drafted, it provides some level of security if a buyer becomes insolvent. Even if the buyer is not insolvent, a Romalpa clause can still help the seller recover goods that have not been paid for in full.
Another benefit of a title retention clause is that the seller's bargaining position is improved because he can be more confident of getting paid. However, that doesn't mean that this should be the only form of credit control.
These provisions take their authority from the Sale of Goods Act of 1979, which states that sellers can keep the ownership of goods even after delivery to the buyer, as long as the contract includes a clause that the parties have agreed to.
What Should Be Included?
The language in a Romalpa clause doesn't have to be elaborate. It just needs to say that the goods are the property of the supplier until they are paid for in full. In other words, the legal title of the goods doesn't transfer to the buyer until they're paid for in full. If the customer doesn't pay, then the supplier can take the goods back. However, other terms can be included to improve enforceability and value.
- The reservation of title clause should include an agreement that the seller can enter the property to repossess the goods. Without it, the seller could be guilty of trespassing.
- The seller may also require that the goods are easy to find and identify to make reclaiming them easier. Some agreements may allow for the seller to enter the buyer's property to make sure this is happening.
- Some clauses are more complicated and include provisions that allow the seller to take the goods back if the buyer owes any debt at all. This is a specific type of reservation of title clause known as all monies. In these cases, the seller can take back any goods sold at any time to satisfy the buyer's debt. The seller doesn't have to provide unpaid invoices for specific goods. In an all monies contract, the seller should be cautious if the buyer's business model places the goods immediately for sale to customers. A title retention clause should include provisions for this; otherwise, the all monies language is ineffective.
- A mixed goods clause may be added if the goods are part of a manufacturing process where they are used to produce other goods. This only works if the goods can be easily taken out of the process without damaging them.
Why Was the Romalpa Case Unique?
This case gives its name to this type of case because it was the first known decision upholding a title retention clause. Two main points make it unique:
- Controversial at the time, the Romalpa case first proposed that the parties to a contract could agree that a seller of goods should have the option to retain ownership until all money due was collected. This included debt owed for transactions unrelated to the goods in question. This would allow sellers to take back goods from insolvent buyers, keeping the goods out of the hands of other creditors.
- The second unique point involved a trust provision in case the goods have already been sold to someone else at the time of default. In that situation, the buyer has sold goods that don't belong to him and must hold the proceeds in trust for the seller. Under the tantum et tale rule, if the buyer goes bankrupt, the seller still gets to reclaim the goods rather than having them become part of the insolvent estate. Such clauses are common, but very difficult to enforce.
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