Supplying Goods on Credit – A word of warning.
In many industries goods are supplied on credit, the standard credit terms being 30 days. With more and more businesses closing as a result of bad debts, businesses need to protect themselves now more than ever when supplying goods on credit. Sellers should always check the history of the buyer they are dealing with to ensure they are solvent and also ensure that title to the goods supplied does not pass to the buyer until they have paid for the goods in full. To achieve this a retention of title clause should be inserted in the sellers standard terms and conditions of sale and any subsequent documentation such as order forms, invoices etc. The retention clause should be communicated to the purchaser prior to releasing the goods to them so that it is clear between the parties that title to the goods does not pass to the purchaser until such time as the purchaser has paid in full for the goods.
In the event that the seller is not paid for the goods, then the seller can either move to repossess the goods under the retention of title clause or in the alternative, attempt to sequester the proceeds of the sale of those goods.
In a liquidation scenario there are secure and unsecured creditors. The retention of title clause in the sellers terms and conditions of sale is effectively a mechanism to ensure that the seller moves up the pecking order when it comes to trying to get paid where a company has become insolvent.
The Sale of Goods Act provides under Section 91, a seller may “reserve the right of disposal of the goods until certain conditions are fulfilled”. The section goes on to say that “the property and the goods does not pass to the buyer until conditions imposed by the seller are fulfilled”.
What is critical in dealing with such matters is to first of all ensure that the sellers standard terms and conditions of sale are properly drafted to include the retention of title clause. Second of all, it is critical that the buyer is made aware of the retention of title clause and effectively the contracts should be drafted in such a way that there should be some acceptance by the buyer of the existence of the clause and the fact that he/she is willing to be bound by it.
One of the big issues relating to retention of title clauses is where the goods that are supplied are going to be incorporated into another product. Traceability is an essential feature of potential title clauses and it must be possible to identify the goods distinctly and separately. A retention of title clause can be rendered null and void where the goods either fail to be identifiable anymore or where they are now identifiable but irretrievable.
It should also be noted that in respect of retention of title clauses, that a buyer who purchases the goods over which it is purported a retention of title clause exists, can take good ownership of the property provided that the goods are (a) paid for in full and (b), the buyer is a buyer in good faith i.e. the buyer was not aware of the existence of a retention of title clause and genuinely believed he was purchasing the goods from the actual owner of the property.
