The retention of title of goods in sales contract dispute
- Handling cases
The German company (“the seller”) and the Chinese factory (“the Chinese buyer”) signed the international purchase goods contract, which agreed that the seller would sell the products (“the subject matter”) to the Chinese buyer. The payment method was that the Chinese buyer would pay by T / T within 60 days after receiving the goods, and the ownership of the goods would be transferred to the Chinese buyer at the time of delivery.
After the delivery, the Chinese buyer failed to pay the remaining amount on time after receiving the goods, resulting in disputes. Our analysis shows that the subject matter is transferred to the buyer at the time of delivery, which is unfavorable to the seller. Due to the buyer’s poor business operation and insufficient funds, we suggest that the seller should sign a supplementary agreement with the buyer to retrieve and retain the ownership of the unpaid part of the subject matter, and the buyer can get the subject matter only after paying for the goods. In addition, in the supplementary agreement, the two parties agreed on new dispute resolution clause. The disputes related to the subject matter will be governed by Chinese court, so that the seller has right to sue the Chinese buyer in China.
After the signing of the supplementary agreement, we assist them in the unified registration and publicity system for movable financing of the credit investigation center of the people’s Bank of China (“the publicity system of the credit investigation center”). At the time of registration, we submitted the list of the subject matter as the supporting documents of the guaranteed property.
Through the retention of ownership, the seller obtained the guarantee of receiving the payment for goods, while the Chinese buyer also obtained some time for the payment for goods. The seller finally received the arrears. Both parties avoided settling disputes through time-consuming judicial procedures and protected their respective rights and interests.
- Retention of title transaction
Retention of title refers to that in the sales contract (including other commodity transactions transferring property ownership), although the buyer first takes possession of the subject matter for use and income, the ownership of the subject matter still belongs to the seller before the specific conditions agreed by both parties (usually part or all of the price) are fulfilled. After the conditions are fulfilled, the buyer can obtain the ownership of the subject matter.
Retention of title, as guarantee for creditor’s rights, is the most common in installment sales. In the era of rapidly developing market economy, the retention of title system adapts to the economic development and embodies its own advantages. For the seller, it is expected that its creditor’s rights can be realized with reliable guarantee, so the retention of title not only avoids the unreliability of the seller’s guarantee, but also avoids the complexity of establishing a guarantee on other things. Its establishment and implementation procedures are very simple, taking into account the safety and rapidity of the transaction; For the buyer, he can obtain the use of the subject matter in advance before he has fully performed his contractual obligations, thus saving money. Therefore, the ownership reservation has become the best system to solve the distribution of rights and interests between installment buyers and sellers.
The transaction under the retention of Title sale contract is special transaction with the functions of sale and guarantee. On the one hand, there is a sales contract between the seller and the buyer whose ultimate purpose is to transfer the ownership of the subject matter. The seller transfers the possession of the subject matter to the buyer, and the buyer shall pay the price of the subject matter as agreed. On the other hand, before the buyer pays the price, the ownership of the subject matter still belongs to the seller. When the buyer cannot pay the price as agreed, the seller can exercise the right to retrieve the subject matter based on its ownership of the subject matter. Article 388 of the property title of the Civil Code stipulates that guarantee contracts include mortgage contracts, pledge contracts and other contracts with guarantee functions. Here, retention of title (contract) is covered by “other contracts with guarantee function”. Article 641 of the contract part of the Civil Code stipulates that both parties to the contract may agree on the retention of title in the sales contract, that is, if the buyer fails to perform the payment or other obligations, the ownership of the subject matter belongs to the seller.
(1) The seller’s right to retrieve the subject matter
The first paragraph of article 642 of the Civil Code stipulates three circumstances. If any of these circumstances triggers and causes damage to the seller, the Seller shall have the right to take back the subject matter: a. the seller fails to pay the price as agreed and fails to pay within a reasonable period of time after being urged; b. Fail to complete the specified conditions as agreed; c. Selling or pledging the subject matter or giving other improper sanctions. Paragraph 2 of article 642 stipulates two ways for the seller to retrieve the subject matter: negotiated retrieval and legal retrieval. Negotiated retrieval means that the seller and the buyer can negotiate to retrieve the subject matter; Legal recall means that when the two parties fail to reach an agreement, the seller can exercise its recall right by referring to the realization procedure of the security interest.
(2) The buyer’s right to redeem the subject matter
Paragraph 1 of article 643 of the Civil Code stipulates that after the seller takes back the subject matter, if the buyer eliminates the cause for the seller to take back the subject matter within the reasonable redemption period agreed by both parties or specified by the seller, it may request the seller to redeem the subject matter. Paragraph 2 of article 643 stipulates that if the buyer fails to redeem the subject matter within the redemption period, the seller may sell the subject matter to a third party at a reasonable price. If there is still any surplus from the sale price after deducting the unpaid price and necessary expenses from the buyer, it shall be returned to the buyer; The insufficient part shall be paid off by the buyer.
(3) Registration and publicity of ownership retention
The registration of retention of title is very important for the seller to safeguard its own rights and interests. Paragraph 2 of article 641 of the Civil Code stipulates that the ownership of the subject matter retained by the Seller shall not be against a bona fide third party without registration. The current ownership reservation system in China adopts the registration antagonism. When the ownership reservation is not registered or cannot be proved to be exclusive, the court may think that because the ownership reservation is not open, it can only bind both parties to the contract, and reject the seller’s lawsuit or execution objection.
- The registration measures
In order to implement the requirements of the decision of the State Council on implementing the unified registration of chattels and guarantees of rights (“the decision”) and standardize the unified registration service of chattels and guarantees of rights, the measures for the unified registration of chattels and guarantees of rights (“the registration measures”) issued by the people’s Bank of China officially came into force on February 1, 2022.
The registration measures include the typical movable property and right guarantee businesses commonly used in enterprise financing in the decision into the registration scope of the unified registration system. Specifically, it includes mortgage of production equipment and raw materials, pledge of accounts receivable, pledge of certificates of deposit, warehouse receipts, bills of lading and other typical movable property and right guarantee businesses, and transactions with guarantee functions such as financial leasing, factoring, ownership retention, etc.
Article 2 of the registration measures includes “retention of title” into the security types within the scope of unified registration of movable property and right security. According to Article 4 of the registration measures, the guarantee of rights, including retention of title, needs to be registered independently through the publicity system of the credit investigation center. The registrant shall be responsible for the authenticity, integrity and legality of the registration contents, and the credit reference center will not conduct substantive examination on the registration contents. According to Article 9 of the registration measures, when registering the retention of title, the registrant needs to register the basic information of the secured party and the guarantor, the description of the secured property, the registration period, etc. The secured party may agree with the guarantor that items such as the amount of the principal creditor’s right, the scope of security, the secured property prohibited or restricted from transfer, etc. shall be registered. If a general description of the secured property is made, it is necessary to be able to reasonably identify the secured property.
Therefore, when registering the retention of title, the seller should ensure that the description of the subject matter is clear and accurate, which can be used to specify and confirm the subject matter. At the same time, the sales contract containing the retention of title clause, the list of serial numbers of the outer packaging labels can be uploaded at the time of registration, so that the relevant subject matter can be determined in case of potential disputes, and it can prove that the seller has made appropriate and necessary publicity for the retention of title of the subject matter under the sales contract. It should be noted that in contracts for the sale of international trade in goods, if adopts the foreign laws, maybe the law is different with Chinese laws. Therefore, the seller of goods needs to pay special attention to the validity of the retention of title clause when the contract applies to foreign laws.
Author of this article：Attorney of Win & Win Law Firm