Contract of Sale with Retention of Title Clause till Final Payment of the Price

The sale contract with retention clause until payment in full of the purchase price (Art 205 Contracts and Obligations Act) is a particular type of contract for the sale of goods and chattels. The main obligations of the seller under a typical contract of sale are two: to transfer the title of the item and to transfer the possession of the item. The obligations of the buyer include payment of the price and receipt of the goods and chattels /items/. In deviation from the general civil law principle for the simultaneous manifestation of the contractual and the property transmission effect of the contract of sale of specific chattels, with this type of contract the specified legal consequences of the legal relationship under the sale are set apart from one another in respect of time. At the moment of the valid conclusion of the contract, the seller takes on the obligation to transfer the right of ownership but this effect however, does not come into force immediately upon signing of the contract - it is dependant on one dilatory potestative condition: the payment of the price in full by the buyer of the transaction. The judicial practice allows the parties in the commercial sale by installments under Art.335 of the Commerce Act to negotiate retention of ownership until the full amount of the price is paid („pactum reservati domini”). When the transmission of the property is delayed until payment of the last installment, the transmissive effect of the property sold by installments becomes operative for the buyer when the price is paid in full (Decision as of 30th November 2010 under Commercial Case 69/2010 of the II Commercial Department of the Supreme Court of Cassation). The clause for retention of the title over the item until final payment of the price, represents an aberration from the classical principle of private law which posits that the risk of loss of the property is borne by the owner: pursuant to Art. 205, para 1 of the Obligations and Contracts Act, the risk passes to the buyer at the moment of transmission, not at the moment of the effective transfer of ownership. By virtue of Art 288 of the Commerce Act, this rule should also apply to the commercial sale by installments. The rule though is not imperative and is valid to the extent that the parties to the contract have not negotiated otherwise. With respect to both the civil law contract of sale with a retention of title clause (Art 206, para 1 of the Obligations and Contracts Act) and the Commercial Sale by Installments Allotment (Art 355, para 2 of the Commerce Act), the principle holds that the nonpayment of installments accounting for no more than one fifth of the price of the goods is not a reason to terminate the contract. The arbitration practice accepts that the norm of Art. 206, para 1 of the Obligations and Contracts Act has an imperative character, whereas the norm of Art 335, para 2 of the Commercial Act is a default provision, the reason being the higher requirements towards persons performing commercial activity by occupation (Decision as of 18th February 2008 under Domestic Arbitration Case 193/2007). Should the sale be avoided as a result of non-fulfillment on the part of the buyer, the judicial practice accepts that the seller cannot claim the outstanding as of the moment of the expression of will installments, but is entitled, pursuant to Art 335, para 3 of the Commerce Act (equivalent to Art. 206, para 2 of the Contracts and Obligations Act), to both a compensation for non-performance and a royalty for using the goods (Decision dated 03.07.2009 under Commercial Case 293/2009 of the II Commercial Department of the Supreme Court of Cassation). The time period in respect of which the royalty for the use of the goods is estimated covers the time from assuming possession of the goods by the buyer to the time of reinstating the seller in possession of same and during this period the buyer enjoys a legal status similar to that of a lessee (Decision dated 05.06.2008 under Commercial Case 289/2007 of the II Commercial Department of the Supreme Court of Cassation). Of great importance to the contract of sale with retention of title clauses till the final payment of the price is the question of its binding force as to third parties – creditors of the buyer to the contract. In the case of this particular type of sale contract, the possession of the property is exercised by the buyer. Thus competition can arise between the rights of its creditors who have attached the property under a writ of execution or a prejudgment attachment and the rights of the buyer who, until payment of the price, remains the owner of the property. The general rule introduced by Art.205 of the Obligations and Contracts Act is that the contract is applicable to the creditors of the buyer only on the condition that the contract has a valid date. The term “valid date” is explained in Art. 181, para 1 of the Code of Civil Procedure: “valid” for third parties is the date of authentication of the said document, the date of death or physical incapacitation for its signing by its user, the date of its reproduction into an official document, or the date of another event or fact “proving beyond doubt the preceding drafting of the document.” By virtue of Art.288 of the Commercial Act, the existence of a valid date for entering into the contract is also defining for the commercial transactions under Art.335 of the Commercial Act. The provision of Art.205 of the Obligations and Contracts Act however is applicable only to the extent that there is no reason to apply the special provisions of Art.12, para 2 of the Registered Pledges Act. According to the aforesaid text, no pledge on amounts receivable, no contract of sale with retention of title until payment of the purchase price, no lease contract, no attachment of property “shall prejudice the rights of a creditor in whose favor, pursuant to this Act, there is pledging on amounts receivable or on sold, leased or attached items, unless entered into the pledgor's record at the Central Registry of Special Pledges.” This means that in the event of a special pledge validly established under the conditions and procedure of the Special Pledges Act, on a property which is in possession of the buyer under a contract of sale with retention of title clauses until full payment of the price, and with the ownership of the property not acquired yet - the suspensive condition under the contract even with a valid contract date cannot prejudice the rights of the creditor in favor of whom the special pledge has been established, if the said contract has not been registered under the conditions and procedure of the Registered Pledges Act. In this case the special provisions of the Special Pledges Act excludes the norm of Art.205, para 2 of the Obligations and Contracts Act. According to these texts, the rights of the buyer who has retained the title of the property until the full payment of the price will be binding on the creditor who has recorded before that a pledge on a totality, though this binding effect operates only if the contract of sale is registered within 14 days of its signature in the Central Pledges Registry. The contract of sale with retention of title clauses is widely used in countries applying the Roman law. Under the German law, the conclusion of a contract with retention of title clauses until the final payment is permissible - § 449 German Civil Code. Void however is the condition which stipulates that the passage of possession to the buyer is dependent on the execution by the buyer of his obligations towards third persons - including towards companies related to the seller. The existence of a clause for retention of title of the property does not give the seller the right to take back the property except upon termination of the contract (§ 449, para 2 German Civil Code). In the English law, as early as the end of the 19th century, there appeared separate decisions arguing the permissibility of agreements for retention of title of property until full payment of the price by upholding the principle of the freedom of negotiation. Its absolute and direct acceptance as an independent legal provision the clause however receives with the indicative case Aluminium Industrie Vaassen B. V. v. Romalpa Aluminium [1976] 1 W. L. R. 676.rnAt present this particular type of clause is legislated in Art. 19 of the Sale of Goods Act 1979, para 1 which stipulates that in contracts of sale of specific goods, the seller can reserve the right of disposal of the property until the fulfillment of conditions agreed in the contract; and even in delivering the property to the buyer or to a third party for the account of the buyer, the ownership is retained by the seller until the fulfillment of the conditions stipulated in the contract.