Things to bear in mind when retaining title to goods sold | In Principle

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Things to bear in mind when retaining title to goods sold

A seller may secure payment of the purchase price by reserving title to goods in the sale agreement, even if the goods are delivered to the buyer. Reservation of title must be made in writing with a certified date.

This method of security against unreliable traders has its pluses and minuses under Polish law, which are helpful to know about, particularly in the case of businesses that regularly conduct such transactions. What should the seller bear in mind when reserving title to sold items?

Specifics of the sale agreement

Firstly it should be remembered that in the case of delivery of goods to the buyer, the sale agreement should be in writing, and reservation of title by the seller is effective against the buyer’s creditors only if the agreement bears a certified date (Civil Code Art. 589 ff). Otherwise, the reservation of title will not protect the seller against execution commenced by the buyer’s creditors or declaration of the liquidating bankruptcy of the buyer.

A certified date is a specific form of legal act in which the notary officially certifies the transaction referred to in the document. If a transaction is certified in any official document, the transaction also obtains a certified date, as of the date of the official document, or if any notation is made in the document testifying to the transaction by a state or local governmental authority or by the notary, as of the date of the notation. In the event of the death of any of the persons who signed the document, the date of death is regarded as the certified date of the signature.

If execution is commenced against the buyer, the seller may effectively opposite execution on items held by the buyer as to which title has not passed to the buyer because of failure to pay the purchase price. If the goods are seized by the bailiff, the seller may assert a claim for release from execution of the goods which it owns (Civil Procedure Code Art. 841). However, the seller may not rely for this purpose on a reservation of title without a certified date, because in that case the reservation of title is ineffective against the buyer’s creditors.

A certified date is also vital in the case of declaration of the liquidating bankruptcy of the buyer. Under Art. 101(1) of the Bankruptcy Law, a reservation of title in a sale agreement will survive the declaration of the buyer’s bankruptcy only when it is effective against the buyer’s creditors under Civil Code Art. 590—i.e., when made in writing with a certified date.

 Problems connected with use of reservation of title

It should be pointed out that use of this method of security may give rise—particularly in the case of ongoing commercial relationships—to a certain pathology in which the buyer prefers to return the goods rather than pay for them, which is not beneficial from the point of view of the seller, whose business after all is to sell goods. Nonetheless, if there is delay in payment of the purchase price for goods and title has not yet passed to the buyer, the seller will have the option of seeking payment of the price or rescinding the sale agreement and seeking return of the goods.

Generally speaking, either a claim for payment or a claim for return of the goods will be pursued through a judicial proceeding. The institution of a confession of judgment, in which the buyer voluntarily submits to execution, and which is increasing popular in Poland, makes life somewhat easier for the seller, because the confession of judgment constitutes a writ of enforcement under Civil Procedure Code Art. 777 §5. Holding such a writ, the creditor may obtain an enforcement clause and then proceed directly to execution against the debtor’s assets. In this situation, a reservation of title by the seller may not necessarily prove to be beneficial to the seller, as, when enforcing a confession of judgment, the creditor cannot seize items as to which title has not yet passed to the buyer because the seller has reserved title until the purchase price is paid. If title to the goods had already passed to the debtor, the creditor could then satisfy its claim for payment of the purchase price through an execution sale of seized movables of the debtor. When the creditor has reserved title to the goods, it may not seize the goods and conduct an execution sale of the goods, but may only apply to the court for return of the goods.

Problems also arise under framework agreements or supply agreements, under which sales do not occur until specific orders are placed—often electronically. In such situations, a batch of goods the buyer has not paid for may be difficult to distinguish from another batch the buyer has paid for, effectively frustrating enforcement of the reservation of title. This is particularly a problem with fungible goods, which are identified only by type and indistinguishable from other goods of the same type, as opposed to goods that are marked in some way that enables them to be individually identified.

How then may a seller secure its interests? Based on guidelines from recent decisions by the Polish Supreme Court, an invoice issued to the buyer may serve as proof of reservation of title, and in that case the certified date should be found on the invoice. This position appears to be correct.

Reservation of title and third parties

It is important to bear in mind that sale of goods with a reservation of title will not always protect the seller against resale of the goods by the buyer to a third party. In such case, under the general rule, ownership of the good should not pass to the third party because the holder of the goods cannot transfer greater rights than it holds. However, the Civil Code protects good faith purchasers in such situations. Under Civil Code Art. 169 §1, if a third party acquires goods from a seller that does not own them, takes possession of the goods, and is acting in good faith, the third party acquires ownership of the goods; consequently, the original seller loses title to the goods. In such case, the original seller may seek damages from the original buyer, but will be unable to require the third party to turn over the goods.

Reservation of title can be an effective instrument to protect creditors from unreliable debtors. Nonetheless, the issues discussed above should be borne in mind when entering into an agreement with a reservation of title, so that the seller may use this institution to its fullest advantage in the specific situation.

Natalia Kobyłka, Corporate Law, Restructuring and Business-to-Business Contracts practices, Wardyński & Partners