Insolvency: right to supply

In these uncertain times, suppliers need to protect themselves against losing their biggest clients, say Jonathan Wheeler and John Adams.

Insolvency special report: right to supplyIn recent months we have seen the demise of some of our best-known high street retailers such as Woolworths and MFI. With the closure of further high street names likely as more companies feel the affect of the recession, suppliers of these companies need to ensure they have the best protection in place. One such protection is to supply on retention of title terms and suppliers should be aware as to how best to enforce their retention of title clause if their customer should go into administration.

In order to give a supplier the best protection, the supplier should have an “all monies” retention of title clause which provides that the supplier retains title to all goods it has supplied until all monies owing to the supplier have been paid in full. This contrasts with a ‘simple’ retention of title clause which only provides for the supplier to retain title to the goods supplied until those particular goods have been paid for.

Should a supplier’s customer go into administration the supplier should, as soon as it becomes aware of the administration, notify the administrator of its retention of title claim. If the administrator then sells or otherwise deals with those goods, the administrator can be held personally liable to the supplier. Notification should therefore ensure that the supplier’s goods are not dealt with. If an administrator wants to sell the goods, the administrator must get the consent of the supplier or apply to court for an order under paragraph 7.2 of Schedule B1 to the Insolvency Act 1986 and pay the market value to the supplier.

Once the supplier has notified the administrator of its claim, the administrator will consider if the retention of title clause is valid and seek evidence that the clause was incorporated into the contract between supplier and customer. That should be capable of being dealt with fairly easily, by providing the administrator with the supplier’s terms and conditions signed by the customer. If the supplier is not able to provide signed terms and no other single document signed by the customer evidences incorporation, the supplier will need to show evidence that the customer was or should have been aware of the terms and that those terms prevailed over any terms of the customer. There may then be a “battle of the forms”. In the absence of signed terms, it is well worth a supplier having a provision in its terms stating that its terms should prevail over any others and for a supplier to ensure its terms are the last produced when an acceptance of an order is made. If the supplier can evidence incorporation or show it would win a battle of the forms on the ‘last shot’ doctrine, then the supplier should be home and dry.

If the administrators delay in considering the retention of title claim or in allowing the supplier to collect its stock, an application under paragraph 43 of Schedule B1 of the Insolvency Act 1986 for delivery up and/or under section 4 of the Torts (Interference with Goods) Act 1977 should be considered. Administrators often use delaying tactics such as saying a retention of title clause creates a charge, which is void for want of registration. That argument has been dead and buried for many years.

Further, there is a commonly held misconception concerning the need for a supplier to identify its goods. If the supplier is the exclusive supplier of a particular item or if there is a mark on the goods which identifies those goods as belonging to that supplier, this should never be an issue. However, where identical goods of two or more suppliers have been mixed it has been a commonly held misconception that title to those goods will have been lost. This is an argument which has been put forward occasionally by administrators seeking to defeat retention of title, but it is a bad argument.

The law is that where goods have been mixed so as to become incorporated or consumed to make a new product, it is most likely that title to those goods will have been lost. This is because the goods supplied have been altered. However, where the goods have merely been mixed together and not altered, the law is clear that title will not be lost. So, for example, where two suppliers have each supplied the same CD and the two deliveries have been mixed together at the warehouse, title to the goods in the mixed pool will not be lost as the goods have not been altered; they have merely been mixed together.

The suppliers’ rights in relation to the mixed pool of goods will depend on whose goods have been mixed and whether the mixing by the customer has been consensual, accidental or wrongful. If the mixing has been of different retention of title suppliers’ goods or has been consensual or accidental and goods of the innocent supplier have been mixed with identical goods belonging to the customer (which may be the case if, for example, identical goods were supplied to the customer but not on retention of title terms) then each will receive an interest in the mixed pool as tenants in common with its share of the mixed pool being proportionate to the amount of goods it has supplied (Mercer v Craven Grain Storage Ltd (1994)).

However, if the mixing has been wrongful and goods of the innocent supplier have been mixed with identical goods belonging to the customer, the innocent supplier will be entitled to a share of the mixed pool up to the amount of goods it has supplied rather than a share proportionate to the amount of goods that it has supplied.

It should also be noted that a supplier may well retain title to goods supplied on by the customer to a sub-purchaser on retention of title terms if that second retention of title provision has also not been satisfied by the sub-purchaser (Highway Foods International Ltd (in administrative receivership) (1995)). Further, a properly worded clause may give a supplier a right in any sale proceeds of its stock (Associated Alloys Pty Limited v ACN 001 452 106 Pty Limited (2000)), although this is a more difficult argument and, even if the clause is properly worded, difficulties as to tracing the supplier’s money are likely to arise.

Jonathan Wheeler is a partner and John Adams an associate at Morrison & Foerster.