Retention of Title Clauses – Delivery to Third Parties

29 January, 2010

A well drafted retention of title clause is an important weapon in the armoury of a supplier when a customer has gone bust.  The clause will enable the supplier to have a first claim over any of its goods that have not been paid for and are still held by the customer.

However, the high cost of real estate and transportation, increasingly widespread geographical customer bases and the upswing in outsourcing in recent years mean that it is increasingly common for suppliers to be asked to deliver goods to an address that is not the primary trading address of their customer.  This may seem like a sensible commercial request, but there is a potential pitfall for suppliers hoping to rely on a retention of title clause in the event of the insolvency of their customer.

If the customer delivers or transfers the goods to a third party (the end customer), either directly or through an agent, then the end customer receives good title to those goods unless he has knowledge of the supplier’s retention of title clause.  This means that the supplier can no longer rely on the retention of title clause to recover those goods even if he has not been paid for them.

Most suppliers appreciate that there is a risk that the goods may be sold on to a third party before the customer has paid them and they will lose the benefit of the retention of title clause.  However, they are less likely to be aware that the delivery of goods to an address other than the primary trading address of their customer may mean that at no point do they ever have the benefit of the retention of title clause.

It is not unusual for a supplier to be asked to deliver goods to a warehouse and most suppliers would assume that the warehouse is simply their customer’s outsourced storage facility.  However, it may in fact be storage hired by the end customer.  That link can be disguised by the relative anonymity of a warehouse and the usual warning signs would be hidden. 

If the warehouse is the end customer’s storage facility then delivery to that warehouse by the supplier amounts to delivery to a third party through an agent, and title passes to the end party on delivery.  This is the case even where the supplier is not expressly told that he is acting as agent for the customer.

By way of example, if a manufacturer of taps is asked by a bathroom fittings wholesaler to supply 500 washbasin taps and is asked to deliver them to a well known DIY store, the manufacturer will be aware that he was not delivering to his customer but to a third party, and might therefore decide to take additional precautions to protect his position, such as asking for payment on delivery. 

However, if he is simply asked to deliver the taps to a warehouse, he will almost certainly assume that the warehouse is the customer’s warehouse.  He would then be surprised to find his request to be allowed to attend the warehouse and collect the goods in reliance on his retention of clause was rejected on the grounds that the goods had been delivered to a third party.

Whilst this is not a risk that can be entirely eliminated, a supplier can help to protect his position by asking for further information about the delivery address, by ensuring that his retention of title clause is an “all monies” clause and by clearly labelling his goods before they are sent out.