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Retention of Title (RoT) gives suppliers valuable legal rights to protect their ownership of the delivered goods. If the buyer goes bankrupt, Retention of Title can help the supplier recover the goods or receive payment for them, thereby significantly reducing losses.
While many countries recognise RoT to some extent, there are no uniform laws governing RoT internationally. In fact, RoT laws vary significantly across countries in their enforceability, covered rights and required special terms. Therefore, businesses need to understand the use of RoT in specific jurisdictions to protect themselves.
Of all countries, Germany is known for its robust application of RoT, which is regarded as almost routine for German businesses. In this article, we will use RoT in Germany as an example to explain how RoT can mitigate risks for suppliers.
A Retention of Title clause, also known as a reservation of title clause, is a legal provision that allows the supplier to retain ownership of, or title to the delivered goods until they are paid for. However, it’s not without limitations.
First, the rights only apply to the goods that are in the buyer’s posession, which makes reclaiming them challenging when the buyer resells, processes, or integrates the goods into other products. In reality, insolvency may occur when the buyer’s inventory is low, e.g. in industries with short/fast stock turnovers. Therefore, RoT rights cannot guarantee in each case a high recovery quota. Nevertheless, in Germany, RoT clauses offer highly promising recovery prospects with an average recovery quota of around 40-45% (supported by a ‘supplier pool’), but in other countries the quota could be significantly lower.
Second, RoT clauses require suppliers to prove the existence and applicability of the clauses, which can be complex, especially in international trade. Generally, suppliers have to agree on RoT rights that are enforceable in the buyer’s country, because it’s usually the place where the goods are located and where the insolvency case is handled. For example, a German insolvency administrator representing an insolvent German buyer would most probably reject a Chinese supplier’s request to enforce its RoT rights subject to Chinese law.
Despite the theoretical protection RoT clauses offer, practical limitations and legal complexities can undermine their effectiveness in insolvency situations. In practice, businesses may adopt complementary risk mitigation measures, such as credit insurance, to safeguard against the risk of non-payment and ensure better financial security in the event of insolvency.
Each country recognising RoT handles it in its own unique way. In Germany, RoT has proved essential in significantly minimising losses caused by a buyer’s insolvency.
Different jurisdictions allow the use of different types of RoT clauses. Under German law, there are three types of RoT clauses that can be used to obtain recoveries in various complex situations:
The supplier keeps the ownership of the delivered item until it’s fully paid for. If the buyer does not pay, the supplier may claim the item back.
The supplier retains the ownership of all goods sold under a contract until the buyer has paid for those goods as well as any other items or debts resulting from this business relationship.
The supplier retains the ownership – or co-ownership – of the delivered products if the buyer processes and mixes them with other products to make a finished product (manufacturing clause). In the case where the buyer resells the product to someone else, the third party becomes the legal owner of the product and the supplier loses the ownership.
In order to maintain supplier’s security, the receivables resulting from the onward sale are assigned in advance to the supplier (assignment in advance clause). As long as the buyer makes regular payments to the supplier, the buyer may collect the receivables in his own name. However, in the event of insolvency, the collected receivables need to be seperated for the preferred satisfaction of the supplier.
In other countries, the applicable types of RoT clauses broadly share some characteristics with these three types, but have their own distinctive features or enforcement conditions. Businesses should seek legal advice to understand the specific RoT rights in each relevant jurisdiction.
RoT clauses have to be properly included in the contract of sale, because RoT rights do not automatically become part of the contractual relationship between supplier and buyer by operation of law.
The easiest and most common way to include RoT clauses is to incorporate them in the supplier’s general terms and conditions. These terms should be sent to the buyer with the order confirmation at the latest to be made part of the sales contract. Any terms printed on post-contractual documents alone, such as invoices or delivery notes, will not be valid.
To be on the safe side, it’s recommended to obtain a separate written agreement with the buyer or at least the buyer’s confirmation explicitly stating that he accepts the supplier’s RoT rights. This is important in case the buyer uses contradictory purchase conditions, which may render the RoT invalid under German law.
It’s also essential to make sure the goods are distinguishable as much as possible. Suppliers should specify which goods are covered and how they will be identified. For example, by using a serial number and requiring the buyer to store the goods separately from those supplied by others, if possible. If the goods cannot be traced, enforcement of RoT will normally be difficult or impossible. In such situations, the supplier can benefit from a joint enforcement of RoT rights through a ‘supplier pool’ (see below).
In general, a well-drafted RoT clause is divided into a number of sub-clauses, each of which deals with a different right that the supplier wishes to assert, such as the proceeds of sale and/or resale rights. In some countries, such as Germany, trade associations offer sample wordings of RoT clauses for specific branches, e.g. textiles trade, machine engineering.
The example company is a German food logistics specialist. It offers essential warehousing and logistics services to major customers, including popular bakery chains, sandwich suppliers, and steakhouse operators.
In the early days of the coronavirus pandemic, the nationwide lockdown led to a significant decline in the company’s turnover. While bakery chains maintained stable operations, restaurant sales plummeted by around 80%. The takeaway businesses could not compensate for the decline in service orders. Eventually, the company was forced to declare insolvency.
Two Atradius policyholders, one from Germany and one from the UK, had outstanding amounts of approximately EUR 1.438 million with the insolvent company. As both companies had properly incorporated RoT clauses in their sales contracts, they were protected by their RoT rights. In addition, Atradius initiated a ‘supplier pool’ to help enforce their RoT rights.
Ultimately, EUR 538 thousand was recovered through RoT, corresponding to a recovery quota of 37% of the total outstanding amounts. Under the credit insurance policy, the two customers shared a portion of this recovery with Atradius as a benefit, in addition to the EUR 1.180 million paid by credit insurance.
In this case, the strategic application of RoT clauses, backed up by a 'supplier pool', ensured the suppliers' ability to protect their assets.
Credit insurance protects your business as a supplier from the risk of non-payment of invoices. Its services include checking the creditworthiness of your prospects or customers, collecting your debts, and covering your outstanding invoices through claim settlement.
As a condition of cover, credit insurers usually require the insured to incorporate a valid and comprehensive Retention of Title clause in the sales contract. In this way, businesses’ legal rights are ensured to be effectively exercised.
In Germany, specifically, credit insurers can also arrange for all potential RoT rights to be grouped together into a ‘supplier pool’, which offers additional benefits to suppliers if the insolvency of a German buyer affects multiple policyholders protected by RoT clauses. In general, pooling allows for a more efficient realisation of RoT rights and thus often a better payment of the goods. More benefits of the ‘supplier pool’ are listed below:
The group of affected suppliers gain a unified front against the insolvency administrator.
Specialised pool administrators will be mandated to help optimise the realisation of the goods delivered under RoT (usually operated by the insolvency administrator).
The formation of a supplier pool eliminates the need to trace goods to original suppliers. Instead, it’s sufficient to show that the goods are delivered subject to RoT by any of the suppliers represented in the pool. This is particularly helpful when goods from several suppliers are mixed together by the buyer.
Benefits resulting from a pool are not limited to possible indemnification payments from the supplier’s credit insurer. Suppliers that participate in the pool, with their full amount of receivables secured by RoT rights, can benefit proportionately from distributions beyond trade credit insurance coverage (e.g. self-retention, claims from deliveries in excess of the credit limit).
Atradius is one of the world’s leading credit insurance companies, a trusted provider of trade credit insurance, surety and collections services in more than 50 countries worldwide. As a unique service, our Special Risk Management (SRM) unit has international experts in underwriting, legal affairs, claims and recoveries, who stand by you to help you recover outstanding debts when extraordinary cases occur.
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