Given the ever-increasing rate of construction company failures, Gavin Hoccom, Senior Associate at Berry Smith, considers the protection which suppliers to the construction industry may obtain through the use of retention of title clauses.

The last 12 months have been a torrid time for the construction sector, with the collapse of an estimated 943 construction companies in Q3 2018 alone according to Creditsafe; an increase of nearly 80% compared to the same period in 2017. The failure of behemoths of the industry, such as Carillion and Dawnus, has left SME supply chains in crisis, causing the insolvency of many and leaving millions of pounds of bad debt for others.

All too often, goods are sold to construction companies on the buyer’s standard payment terms with the goods being delivered before payment is made. In the event of non-payment and the insolvency of the buyer, the seller will rank as an unsecured creditor of the buyer with limited prospect of obtaining payment; irrespective of the status of the goods at the time.

An example of one method by which the seller may seek to protect itself against the risk of non-payment and buyer insolvency at the time the contract of sale is entered into is the retention of title clause.

A retention of title clause is a clause which can be incorporated into a contract for the sale of goods to give the seller priority over secured and unsecured creditors of the buyer if the buyer fails to pay for the goods and becomes insolvent. In principle, the clause will allow the seller to enter the buyer’s premises and take possession of the goods irrespective of any other creditor claims in the insolvency.

A retention of title clause can take a variety of different forms; however, the basic clause provides that beneficial and legal title to the goods is retained by the seller until it has received payment in full. For the clause to be effective in practical terms, it will be necessary to incorporate supplemental clauses that, for example, entitle the seller to enter the buyer’s premises in order to take possession of the goods in the event of non-payment. Additional clauses will be required if the goods are likely to be used in a manufacturing process, or resold.

Although retention of title clauses has the potential to significantly improve the position of a seller in the event of buyer insolvency, there can be limits to their effectiveness.

A buyer’s standard terms may, for example, provide that title to the goods will pass to the buyer upon delivery, as opposed to on payment. A retention of title clause will not necessarily take priority over the buyer’s standard terms and, as such, any terms which purport to pass title to the buyer prior to payment ought to be expressly rejected by the seller.

In addition, it is important to ensure that the retention of title clause is properly incorporated into the contract of sale in order to be enforceable as a contract term; an issue which may involve an analysis of the law relating to contract formation. The prudent seller should, therefore, seek legal advice on the incorporation of the retention of title clause at the time of contracting to ensure its validity, rather than waiting until the buyer defaults on payment to take advice

As the failure rate of both SME and Plc. construction companies shows no signs of slowing, any business owner involved in the sale of goods to the construction sector should review the terms on which they trade and ensure the incorporation of enforceable retention of title clauses as a priority, whilst rejecting any standard terms that provide for title to goods to pass to the buyer on delivery, as opposed to on payment. As the manner in which goods may be used by a buyer can vary significantly, rarely will a standard form retention of title clause be satisfactory, and its terms ought to be reviewed for each contract of sale. Nevertheless, the protection which a retention of title clause can offer the well-advised seller is unrivalled. Taking the time to ensure an appropriate clause is in place at the time of contracting may elevate the seller above all other creditors in the event of buyer insolvency; an attractive prospect given the high rate of failure in the construction industry today.