Contractual Clause
Payment security is a major concern when high-value components or materials are shipped to assembly plants on credit. A retention of title clause specifies that ownership of the supplied items remains with the seller until the buyer has paid the invoices in full. In the circuit assembly industry, this provision prevents raw boards, processors, and connectors from becoming part of the buyer’s asset pool during insolvency.
This legal mechanism protects the seller from becoming an unsecured creditor in bankruptcy, ensuring they can retrieve their inventory before any liquidation. The provision is standard in most supply agreements and is agreed upon before delivery.
Operational Execution
Integration of the supplied components into finished products can complicate the seller’s claim on the assets. The retention of title agreement must include language that extends the seller’s claim to the finished assemblies or to the proceeds of their sale. If the components are soldered onto boards, the clause allows the supplier to claim co-ownership of the finished product.
This extension is necessary because separating individual chips from a printed board often destroys their commercial value.
Recovery Claim
Enforcement of the claim requires the seller to monitor the payment status and inventory levels of the buyer. The seller must register their interest in the materials to assert their right to repossess them if the buyer defaults. This registration involves filing public notices to warn other creditors of the seller’s security interest.
