Meaning
Contractual provisions that delay the transfer of ownership until the purchase price is paid in full serve to protect suppliers against the insolvency of a buyer. In a standard sale, title usually passes when the goods are delivered. However, a retention of title clause ensures that the seller remains the legal owner while the goods are in the possession of the buyer.
This allows the seller to reclaim the inventory if the buyer fails to pay.
Credit Protection
Security for the unpaid balance of a shipment is the primary function of this agreement. By maintaining ownership, the seller avoids becoming an unsecured creditor in the event of a bankruptcy. The clause must be clearly stated in the terms of trade to be effective.
It provides a path to repossessing the specific items sold.
Inventory Control
Management of goods within a production facility requires clear markers of ownership. When raw materials are delivered, the retention of title clause limits the ability of the buyer to use the items as collateral for other loans. The readiness question is whether the goods can still be identified as belonging to the seller.
Mingling with other inventory can sometimes extinguish the right to reclaim the property.
Priority Status
Production yield calculations often assume that all inputs are owned by the manufacturer. If a supplier exercises their right under the clause, the demonstrated rate of output may drop as materials are removed. The cost of calling a production start early is the risk that essential components are still legally owned by third parties.
Demonstrating a capability to produce at scale depends on having unencumbered title to all necessary supplies. Final audits of a company’s assets must distinguish between items held and items owned.
