Retention of Title
Deliver goods – but with conditions attached:
What only seems a possibility can soon become reality: you have delivered the goods according to your contract but, to your surprise, the customer fails to pay when due date comes around. It seems clear what now happens, on the face of it, since every prudent company has a retention of title provision in its Conditions of Sale and Delivery. In principle, all that is needed is the simple sentence “The goods delivered remain the property of the seller until they are paid.” But beware! Things are all too often not as simple as they seem.
Simple Retention of Title:
From a legal point of view, the contract of sale and the passing of property (title) in the thing sold are two different things. The contract of sale only evidences the claim to the passing of property in the thing sold. The precondition for such passing of property, however, is that the goods are actually given by the seller into the possession of the buyer, and that both of them are in agreement that the buyer is the owner.
But, in contrast to a cash on delivery purchase (goods against money), the buyer in a sale on credit terms receives the goods without paying immediately. In order to retain the right to take possession of the goods until final payment is effected, the seller can “retain title“. For this, however, he must stipulate clearly in the contract of sale the conditions on which the property in the goods will pass to the buyer. This is normally contained in the “General Terms and Conditions of Sale and Delivery” which are an integral part of the contract of sale.
In principle, one sentence: “The goods delivered remain the property of the seller until they are paid” suffices to secure the property rights of the seller. But this so-called simple retention of title only covers the seller’s rights to the goods as delivered, in their original state. If they are processed, mixed or mingled with other products, the right of the seller may expire (§ 946 ff BGB).
All Monies retention of title clause:
The seller can retain property in goods which have already been paid for until the full payment of all the goods delivered by him. In this case the goods delivered and already paid for serve as security for the as yet unpaid goods. This form of retention of title is known as “Bal-ance outstanding or current account retention of title“.
Example: “Until the payment of all monies due under the business relationship including any finance bills or return bills which may exist, the seller retains title in the goods delivered by him, which may only be sold on in the course of the buyer’s normal business dealings.“
Expanded retention of title clause:
In order to exclude the danger that his title in the goods may expire through processing of them, the seller can in addition agree clauses which expand the situations covered by his retention of title or provide for the retransfer to him of property rights which have already passed to the buyer. In this case we speak of “expanded retention of title“.
Examples of such clauses:
Manufacturer and Processing Clause
“Processing of these goods does not mean that title in the partially or completely finished new product passes to the buyer; such processing is done without charge and exclusively for the seller. Should the seller’s retention of title nevertheless expire through the operation of any circumstances whatsoever, the seller and the buyer now already agree that the title to the goods produced through processing shall pass to the seller, who hereby accepts such transfer of title. The buyer remains the custodian of such goods without claim to payment.“
Processing and Mingling Clause
“The seller shall acquire joint property in the new products which are the result of processing and/or mingling the goods with goods owned by others. The extent of such joint property is calculated in the proportion of the invoice value of the goods delivered by the seller to the invoice value of the other goods.“
Advance Assignment
„The buyer hereby assigns to the seller the proceeds due from any selling on of the goods covered by retention of title, also to the extent that such goods are processed and/or mingled. If the goods produced by processing and/or mingling contain, besides the goods covered by the seller’s retention of title, only such objects which are the property of the buyer or which were only delivered under so-called simple retention of title, then the buyer hereby assigns to the seller the entire proceeds due from such sale. In the other case, i.e. that advance assignment to several suppliers is involved, the seller is entitled to a pro rata share of the proceeds in the proportion of the invoice value of the goods delivered by him to the invoice value of the other processed goods.“
Release Clause
„The seller agrees, at the request of the buyer, to release at his discretion the latter from the security due to the seller under the terms and conditions set out above as soon as the realizable value of the security exceeds the value of the secured purchase price by more than ten percent.“
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Euler Hermes Group
