BALDWINS • FoodLegal

Australian Lawyers and Consultants

Suppliers Need to Protect Themselves

October-November 2000

People in the business of supplying goods ought to consider a ‘retention of title’ (“ROT”) clause. Its inclusion in your standard supply terms and conditions can allow legal ownership of the goods to be retained by you until full payment is received.

The benefit of a ROT clause can become critical where the customer goes broke. This is because if the ownership of the goods can be said to have been retained by the supplier, the liquidator can be prevented from treating them as part of the company’s assets. By contrast, if ownership has passed out of the supplier’s hands, the supplier is left to recover the debt and can only line up with other creditors to get whatever cents in the dollar are left for the liquidator to distribute (or even less if a secured creditor has priority).

Legal disputes are more likely to arise when the supplied goods have been used by the recipient in a manufacturing process, causing the goods to lose their separate identity. In May 2000, the High Court, in the Associated Alloys case, held that the ROT clause in question would fail in part against the liquidator although the court held such a clause could create a trust in favour of the supplier for the proceeds of the goods arising out of the manufacturing process. In previous court cases, it was held that ROT clauses created an unregistered charge over the assets of the recipient which (because of non-registration) could not give extra protection for the supplier against a liquidator.

Although the High Court held that a ROT clause might not always succeed, the court’s reasoning would permit a supplier (under principles of equity) to ‘trace’ the proceeds of sub-sales in some situations. For products in their original supplied state, a ROT clause has a better chance of succeeding.

Baldwins’ policy is to recommend a ROT clause, though ideally, further security (such as a debenture, or guarantee and indemnity) should also be sought if possible. We can review your supply terms, including the security for payment issue.

For further information, contact Joe Lederman at BALDWINS, Australian Lawyers & Consultants.

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