What can a supplier do if you don’t pay for stock?

Can suppliers reclaim stock for non-payment?

If you can’t afford to pay for stock, can the supplier take back the goods? The supplier’s ability to reclaim goods or take back stock depends on the retention of the title clause in the contract. Different versions of this clause may have various limitations.

What can a supplier do if you don’t pay for stock? Can he reclaim it? 

In business transactions, a line of credit is commonly provided by the company you’re buying from. Usually, payment terms span around 30 days. 

This allows you to receive the goods and start using them in your operations before making payment. Such arrangements help companies manage cash flow, avoiding significant upfront expenses.

Typically, this process benefits both parties. However, if you’re unable to pay for the goods after delivery, the situation can vary. 

Returning goods to the supplier may seem like the simplest solution, but it’s not always straightforward. 

For example, some stock may have already been sold to your customers. Additionally, raw materials might have been processed or used in other products, changing their original condition. This complicates the return process.

Even if the goods stay untouched, are you obliged to return them? Does your supplier possess the right to request their return or forcibly take them from your premises?

This depends on two key factors:

1. If a retention of title clause was included in the contract you signed.

2. If the goods have been processed or used in other products.

What are the Retention of Title (ROT) Clauses?

A retention of title clause in a contract means the supplier retains ownership of the goods until full payment is received. Therefore, if you don’t pay for the goods as per the contract, the supplier can rightfully take them back from your premises. 

Even without a formal contract, if your supplier can demonstrate that you were aware of their terms and conditions before agreeing to purchase the goods – perhaps through previous business dealings where you signed their purchase contracts – then the clause may still be enforceable.

If your contract didn’t include a retention of title clause, according to the Sale of Goods Act 1979, the items become yours (or your company’s, depending on the contract’s terms) once you receive them. 

This implies that the supplier cannot reclaim the goods if you fail to pay for them. If you’re late with payment, they’ll need to explore other avenues to recover the money owed. Attempting to remove the goods from your premises could lead to charges of theft and criminal damage against them.

Exploring the Limitations of retention of title clauses

Although retention of title clause might appear to favour the supplier in cases of late or non-payment, there are limitations to this contract type that could prevent the supplier from taking possession of the goods if you fail to pay on time.

1. Identifying the goods: 

While certain retention of title clauses allow the supplier to enter your premises for goods recovery, they must distinguish their own stock from other items once inside. 

This can be challenging, especially in warehouses with many similar goods. Identification may rely on serial numbers or unopened packaging. In essence, if the supplier can’t prove the stock is theirs, they can’t take it away.

2. Goods undergoing processing

When goods enter the production process, any retention of title typically becomes unenforceable. This is particularly true once the goods are integrated into other products. Separating them without causing damage is extremely challenging and often impossible.

3. Perishable goods 

Ownership retention usually doesn’t function effectively for perishable items like fresh food and produce. On usual 30-day payment conditions, when payment is late, the goods might have spoiled, rendering them worthless to the original supplier even if recovered.

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How many types of retention of title clauses are there? 

Ownership retention isn’t a single standard clause. They vary depending on the situation and the needed level of security. 

These include “simple” clauses for goods provided under a specific contract, and “all monies” clauses where the supplier owns all supplied goods until payment for everything – this covers goods from the contract and others, regardless of the debt’s origin.

There’s also a “proceeds of sale” clause granting the supplier rights to proceeds if you’ve sold the stock. More complex clauses exist too, but generally, the more intricate and extensive a clause, the tougher it is for the supplier to enforce.

The retention of the title clause should stay intact even if your company faces liquidation or any formal insolvency process. 

In such cases, the supplier must consult the insolvency practitioner managing the situation to reclaim their stock. Without a retention of the title clause, the supplier is treated like any other regular creditor.