Meaning
A contractual clause stipulating that ownership of goods remains with the seller until full payment is received protects suppliers against buyer default. Including a reservation of title in sales agreements ensures that the seller has a stronger legal claim to the goods if the buyer becomes insolvent. This clause is a standard credit management tool used across many industries.
Title Retention
Ownership does not transfer to the buyer upon delivery, even though they take physical possession of the products. When a supplier uses a reservation of title, they retain the right to reclaim the goods if payment is not completed within the agreed terms. This mechanism prevents the goods from being distributed to other creditors in a bankruptcy scenario.
Default Recovery
Reclaiming the items requires that they remain identifiable and have not been mixed with other inventory or altered in a manufacturing process. The effectiveness of a reservation of title depends on the seller’s ability to locate and retrieve the specific items from the buyer’s premises. If the items have been sold to a third party, the claim may attach to the proceeds instead.
Contractual Enforcement
Sales invoices and terms of service must explicitly contain the retention clause to be legally binding.
