Coface strongly recommends building a Retention of Title clause in your sales contracts which gives you rights if a customer fails. Here’s why every company needs to make this a priority.
Winning a major new order from a high profile customer is exciting news for you and your team but it’s not the end of the story: it’s only a success story when you can count the money.
If a customer goes bust before you receive payment, you could find yourself in big trouble.
And the situation could get even worse: if you signed-up to your customer’s terms and conditions in order to secure that business, you could find you have surrendered your own rights in the process as this unfortunate supplier discovered.
The nightmare scenario…
A supplier was celebrating after a prestigious retail customer placed an order for 1,000 units of their new product which had taken two years to get to market.
Certain that consumers would love the product, the supplier agreed the retailer’s terms of business and stretched their usual credit terms. They delivered the goods in plenty of time for the summer season and then waited for feedback. In the meantime, several other retail chains expressed interest in the product and everyone was buzzing with enthusiasm.
But the due date for payment came and went. A chasing phone call from the accounts department was met with reassuring noises but after another 30 days, there was still no money.
Then alarm bells really started to ring as rumours surfaced on social media that the retailer was in trouble and calling in the administrators.
The supplier decided it had no choice but to go to the depot and collect its merchandise for resale. It was then they realised that the retailer’s terms included a clause which transferred the title of the goods on despatch.
As well as being out of pocket for the goods, the supplier had missed the chance to reduce its losses. To make matters worse, it discovered that the administrators were going to include its products in a fire sale with 70% off the RRP. Unsurprisingly, other retailers were angry at being undercut and seeking their own discounts.
What can you do?
If you don’t want to be left powerless in the event of an insolvent customer, follow our three rules:
1. Incorporate an effective Retention of Title (RoT) clause into your sales contracts
An RoT clause allows you to retain ownership of goods supplied until you have been paid and ensures you rank ahead of an insolvent company’s unsecured creditors.
There are two types of RoT clause:
- A ‘simple clause’ states that title to the goods will pass to the customer once they have paid for those goods.
- An ‘all monies clause’ states that title to the goods will pass to the customer when they have paid for those goods and settled any balances owed for previous deliveries.
To help ensure your RoT clause is enforceable you should:
- Act quickly. Ideally, RoT clauses should be enforced as soon as you receive notice that a customer is considering insolvency. If the customer has already entered insolvency, you will need to notify the relevant Insolvency Practitioners of your claim.
- Use the correct wording. It’s helpful to set out: your right to enter the customer’s premises to repossess your goods; the customer’s obligation to ensure your goods can be identified; what triggers the RoT clause. Seek legal advice on your current or proposed wording.
- Show that you have made reasonable efforts to inform your customer of your terms and conditions before or at the time the sales contract is concluded. Best practice is to include the RoT clause in all your sales and contract documents (from quotes and order forms to new account forms and sales contracts).
- Be able to identify your goods to the person on site eg by use of barcodes or serial numbers.
2. Read the small print in customers’ terms and conditions
Only sign up to a customer’s terms and conditions if you have read and are comfortable with the contents. Be wary if there is a clause which transfers the ownership of your goods on despatch rather than payment: it means signing away your own Retention of Title rights.
It may be possible to negotiate the omission of this clause so seek legal advice first.
Always consider whether the business reward is worth the financial risk. With no form of redress, a bad debt would have a disproportionate effect on your cash flow and spell disaster for your business.
3. Seek peace of mind with a reputable credit insurance company
A credit insurance policy protects your cash flow by reimbursing losses arising from a credit customer’s bad debt. It gives you peace of mind that your business can recover if the worst happens and a customer defaults or becomes insolvent.
Credit insured businesses are able to focus their time and effort on financially healthy customers and their financial security makes them more attractive for investors. They also have the reassurance they need to pre-order stock, explore new domestic and overseas markets and extend credit.
Coface credit insurance is trusted by over 50,000 clients worldwide, from start-ups to multi-nationals. This makes sense when you consider that we operate in 100 countries around the world, making more than 10,000 underwriting decisions every day. Most importantly, Coface pays domestic and overseas claims within 30 days and settles claims of up to £5,000 within five days.
Coface support – and a happy ending
We strongly advise our clients to seek independent legal advice about incorporating an RoT clause into their sales contracts and business terms as this enables us to support them if the worst should happen.
Thanks to our years of experience in dealing with insolvency situations and good working relationships with the major insolvency practitioners, Coface can often provide practical assistance to clients who have difficulties enforcing their RoT clause.
For example, when the groceries wholesaler, Palmer & Harvey collapsed in 2017, a Coface client had stock in more than 50 warehouses around the country which would have made enforcing their RoT clause expensive and difficult. Coface liaised with the insolvency practitioner and a third party to secure the sale of the stock as a job lot, ensuring our client’s business was able to make a swift recovery.
To discover how Coface can support your company’s credit management and our range of credit insurance options, call 0800 085 6848 or email firstname.lastname@example.org
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Bad debt is as an unavoidable risk and there is a way to seize the initiative.