If the person who supplied the goods to the company had incorporated a decent ROT clause into the supply contract but hadn't been paid, then the stock may well have been sitting on a pallet in the company's warehouse, but in fact it would still be owned by the supplier and not by the company.
A well-drafted ROT clause will do two key things:
- state that 'title' (or legal ownership) to the goods will not pass from the seller to the buyer until the buyer has paid for the goods; and
- contain a right for the seller to enter the buyer's premises to repossess the goods in certain circumstances.
On the face of it, therefore, a ROT clause works simply enough - I supply two tons of flour to your bakery, you don't pay by a certain date and I come and take the flour back. That all sounds fine in theory until it turns out that you've used the flour to bake some bread which has in turn been sold to the local supermarket. The flour's gone and I'm left claiming that I either have an interest in the proceeds of the sale to the supermarket or some kind of interest in the bread (which by now has probably been sold on again, to the customers of the supermarket). You can see the problem.
Another likely scenario is that you have two flour suppliers and when flour is delivered to your bakery, it's all stored in the same hopper. It means that even if the flour is still there and hasn't yet been turned into bread, both flour suppliers claim that the flour is theirs.
Human ingenuity has led to the development of additional clauses to try and protect against these situations (eg an obligation on the bakery to store my flour separately, to mark it as belonging to me, and to insure it on my behalf). The problem is that in the real world, these things don't always happen and when a company goes into some form of insolvency proceedings there can be an almighty squabble over who owns what. Two of my early 90s Newcastle experiences probably illustrate this quite well:
- in one case, the supplier had delivered posh ironmongery (door-handles, hinges, letterboxes and the like), using ROT, to a house-builder that had gone bust. Some of the ironmongery was still in boxes, unused, but quite a lot of it had been attached to the doors of the part-built houses. A 'lively legal debate' ensued about whether or not those items had become legally incorporated into the houses (which were owned by the house-builder). The debate was brought to an abrupt (and actually quite merciful) end when the supplier sent a gang of workmen to the building site, under cover of darkness, armed with screwdrivers, who stripped the houses of posh ironmongery in much the way that the piranhas strip the carcass of the evil henchman in 'You Only Live Twice';
- in the other case the items in question were one-armed bandits and pinball machines that were sold to pubs and clubs and paid for by instalments under ROT. When one of the chains of clubs went bust, the supplier of the machines wanted them back, but it turned out that the club owners cannibalised parts from other machines to keep them working. By the time the supplier sent his Transit van round to collect 'his' machines, it became clear that most of the machines had the name of the supplier embossed on the case, but in fact the inner workings of the machines were owned either by the company itself or by other suppliers of pinball machines. It was actually very similar to the example of the bakery and the two flour suppliers and it was virtually impossible to say who owned what.
So what's the moral of this blog?
Well, if you're supplying tangible things and you aren't being paid up front or on delivery, make sure your terms and conditions have a solid ROT clause. It may not always work in practice, but at least you'll have a fighting chance if your buyer fails to pay.