200905.05
Off
0

Protecting the interest of Suppliers

The turbulence caused by the demise of some household names has made many suppliers take a look at the risk of failure by their customers.  Where you are not in the envious position to demand cash upfront or cash on delivery, how do you protect yourself against non-payment or insolvency of your customer?  This can be done by variation in the general rule relating to the transfer of title in the goods supplied.  Generally, title in goods pass to the buyer once the goods have been delivered; hence if the buyer becomes insolvent after delivery, the liquidator has good title to the goods, though the supplier has not been paid.  The supplier is left in the unsavoury position of unsecured creditor.  There are a few things that suppliers can do to reduce such risk.  Suppliers could seek trade or bank references.  They could purchase appropriate insurance against bad debts, they could ask for cash on delivery or advance payment.  The reality is that some of these are either inappropriate or expensive to obtain.  However, suppliers should always have a “retention of title” (“ROT”) clause in all their standard terms and consideration must be given to negotiating such clause into the non-standard term.A valid ROT provides that the title to the goods will not pass to the buyer until payment has been received by the supplier.  Firstly, this will allow the supplier to recover the goods in the event of the buyer’s default.   Secondly, the supplier will have priority over secured and unsecured creditors of the buyer if the buyer fails to pay for the goods because it is insolvent, or for some other reason which may be specified in the clause.  As a general rule, a ROT must be combined with the right of access.  There is no point having the right to recover goods, if you do not have the right enter the buyer’s premises.  A standard ROT clause should also contain the following obligation on the buyer:

  • Duty to keep the supplier’s goods separate from goods belonging to the buyer or third parties and mark them as the supplier’s property. If the goods are to be attached to a buyer’s premises (for example, in the case of heavy plant or machinery) a provision prohibiting the buyer from annexing them to such premises without the supplier’s consent should be included. If goods do become attached to the premises, the permission of the owner of the premises, who might not be the buyer, will be needed if the seller is to be entitled to repossess them
  • allow the seller to enter the buyer’s premises to check that the above marking for identification has been done
  • specify which events will trigger the seller’s right to demand immediate payment for the goods and repossess them

Where possible, the supplier should consider adding a separate “all monies” clause to reserve ownership of all the goods supplied to a buyer, until all monies due to the supplier have been paid, not just payment of a particular invoice. This allows the supplier to recover enough goods to cover the cost of recovery, storage, and resale.In standard terms of sale, risk in the goods is usually stated to pass at the time of delivery of the goods. This is to ensure that if the goods are destroyed or damaged after delivery, risk passes to the buyer who will remain liable for the purchase price. A seller should also include a provision requiring the buyer to insure the goods upon delivery and ensure that the seller’s interest in the goods is noted on the policy.In all cases, where the supplier is insolvent or looks likely to become so, the supplier should act quickly to recover the goods with or without first demanding immediate payment.