Retention of title clauses afford security against buyer’s default – Caractère magazine, January 2021
2020 was marked by an unprecedented health crisis, which has had a devastating impact on the world’s economy. In France, government aid has avoided a massive surge in business failures.
Paradoxically, this overprotection, born out of the “whatever it takes” approach, has also caused business failures to drop lower than their 2019 level. But no one is fooled. Although forecasts are difficult, this bubble has to burst one day and the most fragile and unprepared businesses are in for a rude awakening.
Vendors should take advantage of this uncertain standstill to protect themselves against customer default. The retention of title clause is one of the most easy-to-use legal protection tools at their disposal and has many advantages. And yet, many vendors have never used it or taken steps to actually ensure its validity or effectiveness.
The French Civil Code defines the retention of title clause as one that “suspends the transfer of ownership of the goods sold until full payment of the agreed consideration”.
Under a retention of title clause, the buyer and seller agree that the transfer of ownership of the goods sold to the buyer will be deferred until full payment of the purchase price. To claim ownership, the vendor must prove that the retention of title clause agreed to by the buyer was written on or before the time of delivery.
If the buyer defaults, this express agreement will save the vendor the hassle of contending with the court-appointed trustee or liquidator to establish an implicit agreement. This first tip will shield the vendor from legal uncertainty.
However, it is also best to require the relevant customers to regularly update their inventory of goods under retention of title, pending full payment.
While sales with retention of title clauses are not subject to any public notice requirements, public notice makes it much easier for vendors to later obtain legal remedy, since they no longer have to claim ownership within three months but can merely demand that the goods be returned to them at any time.
This tip is largely unknown and therefore very rarely put into practice. Yet public notice is relatively easy to obtain.
Click HERE to read the column by our Restructuring partners Numa Rengot and Arnaud Pédron, published in Caractère magazine in January 2021 (editor: Guillaume Prudent).