A retention of title (ROT) clause is a contractual provision that allows the seller to retain legal ownership of commercial goods until they are paid for in full or other conditions are met. A ROT clause is a way to protect suppliers if the buyer becomes insolvent or declares bankruptcy.
Without a ROT clause in the sales contract, the seller of the goods would have to get in line with other creditors if the buyer files for bankruptcy, potentially getting little—if anything—that it was owed.
- A retention of title (ROT) clause is sometimes included in a sales contract as a form of financial security for the seller.
- These clauses allow the seller to retain the legal ownership over goods or equipment until they are paid for in full.
- ROT clauses may contain stipulations about identification and storage of the goods sold to make repossession easier for the seller.
- Enforcement of ROT clauses largely depends on the statutes and case law of the individual countries involved, even within the European Union (EU).
What Is a Retention of Title (ROT) Clause?
When drafting a sales contract in which goods are traded on credit, a seller may include a ROT clause to protect its financial interests. Typically, such clauses enable the seller to retain the title to the goods or equipment until the items have been paid for in full or—in the case of an “all monies” clause—until the buyer has paid all invoices owed to the seller. Should the buyer lack the funds to pay the seller in accordance with the purchase agreement, the ROT clause allows the seller to seize the goods and resell them for its own benefit.
Such clauses give sellers greater confidence when extending credit to buyers because they have a legal basis to take the goods back if, for example, the buyer becomes insolvent and has to file for bankruptcy. As long as the ROT clause is considered valid by the court with jurisdiction over the transaction, the seller is in a stronger position than the other creditors, who will have to split whatever assets are available in the buyer’s bankruptcy estate.
The basic intent of a ROT clause—that the seller retains the title until payment is complete—is fairly clear, but in practice, enforcing these stipulations can become tricky. For example, certain raw materials that a manufacturer purchases on credit from the supplier may be mixed with other materials, in which case the original item is no longer salvageable. An illustration of that would be a commercial bakery that purchases sugar as an ingredient for its products. There’s no way for the seller to reclaim that sugar once it has been combined with other ingredients.
Difficulties can also arise when the purchaser resells the items before it paid the supplier. This can happen when a retailer sells apparel that it acquired on credit, for instance. In this case, the seller’s ability to reclaim the products is greatly diminished, if not eliminated, because the goods have changed hands through a legal transaction.
ROT clauses are sometimes referred to as “Romalpa clauses,” after a pivotal U.K. court case in which a plaintiff successfully asserted its right to reclaim aluminum foil—and proceeds from the sale thereof—from a buyer that was going into liquidation.
Components of a ROT Clause
A typical ROT clause will include language that gives legal ownership of the goods to the seller until the buyer has paid for them in full. The clauses often will also state that the seller has a right to enter the buyer’s premises to retake possession of the items; otherwise, doing so could constitute trespassing.
In addition to these basic provisions, a ROT clause will sometimes include specific requirements about how the buyer is to store the goods to make repossession easier. This may include requirements about marking the goods in a way that makes clear who the seller is and storing the items in a separate location. The clause may also grant the seller access to inspections of the storage facility to make sure they are kept in accordance with the contract’s requirements.
ROT clauses will often have verbiage that forces the buyer to assume risks of damage or theft once the goods are delivered. In addition, the seller will often include a requirement that the buyer insure the goods upon delivery, often with a proviso that the seller approves the insurance company providing the coverage.
Treatment in Different Countries
ROT clauses fall under the umbrella of property law, and as such, their validity in the courts depends largely on local laws. In the United States, the Uniform Commercial Code (UCC), which regulates commerce in all 50 states, largely supports the ability of sellers to include ROT clauses in purchase contracts.
To be upheld, however, the seller must provide notice to the buyer’s other creditors that it has a security interest in the property covered by the clause. To do this, the seller must file a financing statement with the appropriate secretary of state office. This can be in the state either where the property is located or where the buyer is incorporated.
ROT clauses are also fairly common in Europe, where they’re often referred to as “Romalpa clauses,” after a famous court case in 1976. However, countries within the European Union (EU) have not fully harmonized their property laws, and some jurisdictions look on such clauses more favorably than others.
In the United Kingdom, the Sale of Goods Act 1979 upheld the right of sellers to withhold the title on goods sold as long as the sales contract contained clear language about the transfer of ownership. However, the ROT clause may be deemed invalid by the courts if, for example, the buyer is in administration (similar to a Chapter 11 bankruptcy in the U.S.) or the goods in question are perishable.
What is a retention of title (ROT) clause?
A retention of title (ROT) clause allows the seller of goods to retain ownership of them until they are fully paid for or other stipulated conditions are met. If the buyer fails to fulfill the conditions of the clause, then the seller may repossess the goods.
What conditions may be stipulated in a ROT clause?
Aside from requiring full payment for the goods in question, a ROT clause can also impose other conditions upon the buyer. These include paying all invoices with the seller in full, dictating how the buyer must mark and store the goods, allowing the buyer to inspect the storage facility, and giving the buyer the right to enter the facility to repossess the goods if necessary.
Is a ROT clause always legal?
All ROT clauses must be upheld by the courts, and in some cases, they have been determined not to be binding. In the U.S., they are usually governed by local property law. It is incumbent upon the seller to make the buyer’s other creditors aware of the ROT obligation, as it allows the seller to regain the goods in question in the event of a bankruptcy, rather than split their value with the other creditors. The seller does this by filing a financing statement with the secretary of state office in the state where either the property is stored or the buyer is incorporated.