Supplier Credit: what security rights does the supplier have?

Supplier Credit: what security rights does the supplier have?

For many suppliers, it is standard daily practice: delivery first and receiving payment afterwards. In The Netherlands, the period between delivery and payment carries considerable risk. If a supplier has not arranged any safeguards, ownership (by operation of law) transfers at the moment of delivery and the buyer becomes the owner of the delivered goods. But what if the purchaser fails to pay? Or if the purchaser is declared bankrupt? In bankruptcy proceedings, the supplier often finds itself at the back of the line of creditors. In most cases, the supplier is left empty-handed. However, there are several instruments by which suppliers can mitigate this risk. This blog discusses two such instruments.

Retention of title: ownership until payment

One of the best-known and most commonly used securities for suppliers is delivery subject to retention of title (“eigendomsvoorbehoud”) (Article 3:92 of the Dutch Civil Code). In short, this means that the supplier retains ownership of the delivered goods until the purchaser has paid the invoice or invoices in full. What should suppliers pay attention to?

General Terms and Conditions

A retention of title clause must be agreed upon between the supplier and the purchaser prior to delivery. This may be done in the agreement itself; however, it is more common to include the retention of title clause in the supplier's general terms and conditions. In this regard, it is important that the general terms and conditions are declared applicable in the correct manner so that they actually form part of the agreement. This requires that the general terms and conditions are declared applicable before or at the time the agreement is concluded, for example by including a provision in the quotation stating that the general terms and conditions apply. In practice, this regularly goes wrong, for instance where the reference to the general terms and conditions is first and only made on the invoice.

It also occurs that both the supplier and the purchaser each refer to their own general terms and conditions (the "battle of forms"). As a general rule, the general terms and conditions of the party who referred to them first shall apply (Article 6:225(3) of the Dutch Civil Code), unless the other party explicitly rejects the applicability of those terms.

Extended Retention of Title

In addition to the "standard" retention of title, it is also possible to agree upon an "extended" retention of title (“uitgebreid eigendomsvoorbehoud”). In that case, the supplier retains ownership of all delivered goods until all outstanding invoices have been paid. This therefore applies not only to goods for which the invoice has not yet been paid, but also to goods for which the invoices have already been paid. If an extended retention of title has been agreed, the supplier can therefore invoke ownership rights over all delivered goods. This may be advisable for supplier contracts that are entered into for a longer period, where multiple invoices are issued and deliveries take place. There is, however, a limitation on the type of claims for which retention of title can be agreed. Examples of categories of claims for which this is not possible are discussed in this blog. Whilst a (extended) retention of title significantly strengthens the supplier's position, it makes the precise drafting of the retention of title clause in the general terms and conditions all the more important.

The right of reclamation: dissolution and recovery of the goods

Even where a supplier has not validly agreed upon a retention of title clause, the law still provides a means of recovering the goods, namely by invoking the right of reclamation (“recht van reclame”) (Article 7:39 et seq. of the Dutch Civil Code). This right allows suppliers to reclaim delivered goods if they have not yet been paid for, even where no retention of title has been agreed. This statutory right therefore operates independently of any contractual arrangements or general terms and conditions.

Operation of the Right of Reclamation

In order to exercise this right, the following conditions must be satisfied: the goods must have been sold and delivered and the purchase price must not have been paid in full, while the payment term has expired. As with the retention of title, the goods (the product) must still be in the same condition as at the time of delivery (Article 7:41 of the Dutch Civil Code). The goods must therefore not have been modified, processed or mixed with other goods. Where these conditions are met, the supplier may exercise the right of reclamation by means of a written declaration addressed to the purchaser demanding return of the goods.

Limitations and Time Periods

The right of reclamation is subject to a number of limitations. The two most important limitations are the time periods within which the right must be invoked and the requirement that the delivered goods be identifiable. The supplier must invoke the right in a timely manner; failure to do so results in forfeiture of the right. There are two applicable time periods: within six weeks of the purchase price becoming due and payable, or no later than sixty days following delivery of the goods. Upon the expiry of these periods, the right of reclamation lapses.

Furthermore, the right of reclamation applies only in respect of unpaid goods. If multiple goods have been delivered, only those goods that remain unpaid may be reclaimed. This differs from the position under an (extended) retention of title clause. It is therefore advisable to clearly mark all goods, so that each delivered item remains identifiable at a later point in time.

Operation in practice: a purchaser is declared bankrupt

Consider the following scenario: a supplier delivers machinery to a purchaser. The purchaser fails to pay the invoices on time, does not respond to payment reminders, and the supplier ultimately learns from the bankruptcy trustee that the purchaser has been declared bankrupt. In such a case, the first step is to ascertain whether, and if so how, a retention of title clause has been agreed upon. If the retention of title clause has been incorporated into the general terms and conditions, and those conditions have been properly declared applicable prior to the conclusion of the agreement, the retention of title clause has been validly agreed upon and the goods remain the property of the supplier until payment is received. It is, however, required that the goods remain identifiable and must not have been processed or resold.

The supplier may also invoke the right of reclamation. This may be done in addition to invoking retention of title, but is particularly relevant where no valid retention of title has been agreed. Given the short statutory forfeiture period, it is crucial that the supplier invokes this right in time.

Further matters to consider

Urgency: in a bankruptcy situation, it is advisable to act quickly. Goods may be resold, processed, mixed or transformed into new goods (“zaaksvorming”). This can affect or even extinguish your rights. Speed is also essential due to the short time limits for invoking the right of reclamation.

Identifiability: Upon delivery, it is important to clearly mark the goods with a code or logo. In insolvency proceedings, a supplier must be able to demonstrate which goods belong to them. Where another supplier has delivered similar products, this will generally be impossible if the goods have not been marked. In some cases, the supplier must even demonstrate to which specific invoice the goods relate.

Cooling-off period: In insolvency proceedings, the supervisory judge (“rechter-commissaris”) may impose a cooling-off period (“afkoelingsperiode”). During this period, the ability of suppliers to invoke the retention of title or right of reclamation — and thereby to reclaim their goods — may not be exercised.

Estate contribution: In insolvency proceedings, the bankruptcy trustee may request a contribution in exchange for cooperation with the return of goods. Such contribution must be reasonable in proportion to the time and effort incurred by the insolvency administrator in facilitating the return. It is therefore important to carefully consider any arrangements made with the insolvency administrator before providing consent.

In conclusion: seek timely legal advice

As a supplier, you will always bear a degree of risk; however, with the right contractual arrangements, properly drafted general terms and conditions, and prompt action in the event of payment difficulties, significant losses can be prevented.

Should you wish to know how to better protect your position as a supplier, or should you be dealing with a non-paying or insolvent purchaser, we are pleased to assist you with the drafting of terms and conditions, the invocation of your rights, or representation in insolvency proceedings. Please feel free to contact us.