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How to protect your business from the insolvent customer

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How to protect your business from the insolvent customer

How to protect your business from the insolvent customer

It is always a concern for any business to discover that a customer is rumoured to be insolvent or struggling financially, especially when that customer has received credit.

It is common for many businesses to provide goods on a delayed payment basis in order to assist cash flow between the delivery of goods and the sale to the end consumer. As a result this can leave suppliers in a difficult position if the goods are not in their physical possession and they are yet to receive payment. The supplier will usually be an unsecured creditor should the customer become insolvent. There is, however, a contractual remedy for these suppliers and it is known as a "Retention of Title" (RoT) clause.

What is a RoT Clause?
The general presumption in English law under the Sale of Goods Act 1979 is that title (i.e. ownership) of the goods passes when the parties intend the title to pass. Consequently, the parties can agree within a RoT clause that the title will not pass with the physical delivery of the goods, but at an agreed later date. A RoT clause can act as a barrier to prevent the further sale of the goods in possession of an insolvent customer and can necessitate the delivery of the goods by an administrator or liquidator. As a result it significantly improves the supplier's position if the customer enters administration or liquidation. In order to retain title of the goods after delivery, several contractual principles must be observed.

Is the RoT clause incorporated?
Although the supplier's terms of business may contain appropriate RoT clauses, the clause will only take effect if the supplier's terms are the terms on which the sale contract is concluded. This is known as the battle of the forms. In order for the supplier's terms to conclude the sale contract the supplier must have appropriate mechanisms in place to ensure their terms prevail over the customer's terms.

What does the RoT clause cover?

The RoT clause could apply to goods under a particular sales invoice. This might be the case where the customer is unlikely to buy other goods. In contrast, an "all monies" RoT clause will cover all goods supplied to the customer until all monies owing to the supplier are discharged. An all monies RoT clause would be useful in the scenarios whereby the customer orders from the supplier regularly and through a credit facility.

Prevention of Sale
In order to be effective the RoT clause must actively prohibit the onward sale of goods after insolvency of the customer and/or permit recovery of those goods by the supplier immediately following insolvency of the customer.

Identifiable Goods
The sale contract terms should stipulate that the goods are to be stored on their own to prevent the goods supplied becoming contaminated with other goods bought by the buyer from another supplier. A supplier will be in a stronger position upon the insolvency of the buyer if their goods are clearly identifiable. This can be achieved by branding the goods or placing markings on boxed goods to enable identification.
Steps a supplier can take to protect their goods

Review Standard Terms and Conditions
A supplier should have its standard terms and conditions reviewed regularly to make sure that they are legally enforceable and suited to the supplier's needs. The supplier could also have different terms and conditions drafted to be tailored to the customer's needs, in other words having separate terms and conditions depending on the customer. Furthermore the review will also indicate whether the supplier's current RoT clauses are effective.

Identification of Goods
As previously stated above, the supplier should endeavour to ensure that its goods are identifiable from other goods held by the customer so that the goods are capable of recovery by the supplier. The supplier may wish to include a right to audit the storage of its goods to ensure that they are stored separately from other goods held by the customer or a third party to further improve the supplier's chances of recovery.

Reviewing the credit facilities
The supplier should check that all invoices are paid within the stipulated time limit and ensure all invoices that remain outstanding after that time are chased. This will give the supplier early warning if the customer is potentially in financial difficulties and prevent delivery of further goods until the outstanding amount is paid.

Public procurement update
The Government has published new draft regulations to govern procurement of goods and services by central government and other public authorities. Once approved by Parliament (assuming the current draft) and brought into force later this year, the Public Contracts Regulations 2015 will replace the 2006 version (except for public works and services concession contracts) and add to the law in this area.

Contracts between £10,000 (for central government) and £25,000 (for other public authorities) up to the current threshold limits (£111,676 for goods and £172,514 for services) are to benefit from a requirement for the authority to advertise on the government's Contracts Finder website and the absence of any pre-qualification questionnaire or separate pre-qualification stage.

For more information, contact Damon Watt.