1. What rules, if any, govern retention of title (RT) in your country? In the absence of rules, what are the principal mechanisms, if any, on which RT is based in your country?

RT is the object of a dedicated subsection of the Civil Code entitled “Sale with Retention of Title” (Venda com reserva de domínio), Articles 521 through 528.

Prior to the enactment of the new Civil Code in 2002, Decree-Law No. 1027/39 and Statute No. 6015/73 on Public Registers (art. 129, 5) already provided for the necessity of registration, with the Public Register, of civil and commercial sales contracts with RT, as a condition for their enforceability against third parties.

Specific aspects of RT are also regulated by other rules, such as the Bankruptcy Act No. 11.101/2005 or regulations on economic crimes (Decree-Law No. 869/38, art. 3, IV, and Statute No. 1521/51, art. 2, X1), for the protection of customers.

With the entry into force of the new Code of Civil Procedure on 18 March 2016, the regulatory landscape has evolved regarding the enforcement of RT. While the previous Code provided for specific rules and procedures2, the new Code is silent on the subject (see item 6.b.)

This document does not contemplate property held in trust (propriedade fiduciária)3 or sales with fiduciary lien (alienação fiduciária)4

  1. Please describe the characteristics and scope of your country’s RT rules

RT is an adjustment of the ordinary rules of transfer of property in sales agreements, in application of the principle of contractual freedom of the parties.

RT is only applicable to the sale of non-fungible, movable goods. The goods must be perfectly identified.

RT is analyzed as a condition precedent: the full payment of the price in the agreed terms is the condition precedent to the transfer of property.

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  1. If RT is not regulated in your country, are there similar or commercially equivalent forms of security preserving seller’s rights to the goods?

RT is regulated in Brazil.

  1. What is the relation of RT and passage of risk in your system? How may a seller protect its interest after the passage of risk?

In sales agreements with RT, risk and ownership are independent of one another: the Civil Code expressly provides that risks pass to the buyer upon delivery of the goods.

The seller may protect its interest until full payment of the price and transfer of title with (i) specific language in the contract to impose obligations of conservation and good care to the buyer (see item 7), (ii) an insurance policy, or (iii) a preliminary injunction from a civil court in case of pericolum notice and risk of serious and irreparable damage.

  1. What are formal requirements, if any, including timing, to perfect the seller’s right?

There are two formal requirements for the perfection of the seller’s right:

for its validity, the RT clause shall be in writing;

for its enforceability against third parties, the contract shall be registered with the Public Register (Cartório de Títulos e Documentos) of the place of the purchaser.

  1. Effectiveness
    1. Does sale to a third party break RT? What if goods have been transformed or sold?

The right of the seller in case the good is sold to a second buyer depends on the prior publication of the contract at the Public Register:

If the contract was published, RT is enforceable against third parties and the seller remains with the title. Title will pass to the second buyer upon payment of the full price to the seller.

If the contract was not published, RT is not enforceable against third parties. The second buyer is presumed bona fides and acquires the title from the second sale.

In both cases, the seller may participate in the second sale and the second buyer can expressly substitute the first buyer in all its rights and obligations, including the RT.

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If the good has been transformed and sold to a third party, the right of the second buyer will prevail until proven mala fides.

If yes, is there a possibility to transform the RT in case of a sale to a third party?

In the cases where RT becomes unenforceable, it transforms into a right to compensation against the buyer for its loss.

  1. Enforcement of RT if delinquent buyer is not insolvent — What is the judicial procedure and what is its likely timeline?

The enforcement of RT is a two-step procedure:

  1. The seller shall formally and publicly inform the buyer of buyer’s default, by means of notice handed out by a Notary Public Office (protesto do título) or by court formal notice (interpelação judicial).

These formalities are an express requirement of the law and may not be substituted with other means of notification, such as extrajudicial notices.

  1. Only after such formality is accomplished, the seller may enforce the RT through a judicial claim to recover the part of the price that already fell due or the good itself.

In the latter case, the seller shall refund the buyer the part of the price already paid, after deduction of the expenses incurred and depreciation of the good.

Under the former Code of Civil Procedure, enforcement of RT was subject to specific provisions aiming to guarantee its effectiveness: the seller could seek an injunction in court for the search and seizure of the good, to secure its right. The delinquent buyer could accept, oppose on the merit or, if it had already paid at least 40% of the price, request a 30-day suspension period to pay the amounts due (including related costs) and recover the good.

With the entry into force of the new Code of Civil Procedure on 18 March 2016, in the absence of specific provisions on the enforcement of RT ordinary rules shall apply. This gives more freedom to the parties, in that they may contractually provide for specific enforcement procedures.5 In the absence of any such express provisions, the ordinary procedure shall apply.

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  1. What happens in case of conflict between RT and a buyer’s creditors’ rights, including carrier’s liens?

Until full payment of the price and insofar as the conditions of validity and enforceability of RT are fulfilled (see item 5 above), RT prevails as if the title had never been transferred to the buyer.

  1. Bankruptcy — interaction of RT (which is not contract law) and bankruptcy law

In case of bankruptcy, three situations shall be distinguished in which different sets of rules apply, according to the Bankruptcy Act (Law No. 11.101/2005): (i) reorganization under the supervision of the court — recuperação judicial, (ii) out-of-court reorganization — recuperação extrajudicial, and (iii) winding up by decision of the court — falência.

  1. Goods still with buyer

In case of reorganization under the supervision of the court, the seller with RT is not, in principle, subject to the effects of the reorganization and may seek repossession of the good under ordinary rules in case payments are not honoured. This even applies during the 180-day stay period starting at the opening of the reorganization procedure.

Yet, if the good qualifies as an asset essential to the business (bem de capital essencial à atividade empresarial)6, the right of the seller will be suspended during the time of the stay period.

In case of out-of-court reorganization, goods sold under RT are not subject to the reorganization plan and RT is enforceable according to ordinary law (i.e. no bankruptcy law).

In case of winding up, the receiver (administrador judicial) may, upon consultation of the creditors’ committee and depending on the interest of the good for the activity, decide whether to pay the balance of price and acquire the title, or return the good and receive the part of the price already paid.

In case payments are not honoured according to the sale contract, the seller may seek repossession of the good under the specific procedure of restitution provided by the Bankruptcy Act.

  1. Goods already sold by buyer

In all three procedures, ordinary rules will apply to the respective rights of the seller and the
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second buyer (i.e. no bankruptcy law).

  1. Time limits to declare title to receiver

The 15-day time limit as of the opening of the procedure for declaration of the claims to the receiver does not apply to a seller with RT. Its right is not affected by the opening of the procedure (see 6.b.i above).

  1. Who pays storage, insurance and transport during discussions with receiver?

All the assets in possession of the debtor under court supervised reorganization or winding up are deemed to be the buyer’s and treated without distinction, regardless of the title. The check of the actual title is performed later, in court.

Accordingly, while the goods remain with the buyer, the receiver is responsible for their conservation.

  1. Model clause(s) — Drafting tips

NOTE: The following language is based on contractual provisions commonly seen in this country, but readers should always consult legal counsel before including an RT clause in a contract.

Cláusula XX. Da Reserva de Domínio

XX.1.

Fica reservada ao Vendedor a propriedade do [Bem Vendido] até o pagamento integral do Preço pelo Comprador conforme disposto neste instrumento, nos termos dos artigos 521 e seguintes do Código Civil.

XX.2.

Em até 10 dias a contar da sua assinatura, o presente instrumento será registrado no cartório de registro de títulos e documentos do domicílio do Comprador, para todos efeitos legais perante terceiros.

XX.3.

Até a transferência do domínio conforme item XX.1., acima, o Comprador compromete-se a preservar a integridade do [Bem Vendido], ficando à suas custas a sua perfeita manutenção e conservação, zelando pelo seu bom funcionamento, sendo vedada a alteração da sua estrutura, funções, ou aparência.

XX.4.

Em caso de não pagamento do Preço conforme disposto na Cláusula YY, o Vendedor poderá, após constituir o Comprador em mora e sem prejuízo de qualquer outro meio que lhe é assegurado pela lei ou este Contrato, requerer em juízo a entrega do [Bem Vendido], inclusive mediante mandado de busca e apreensão, nos termos dos art. 806 e seguintes do Código de Processo Civil, constituindo
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este instrumento título executivo extrajudicial para os fins do artigo 779 do mesmo diploma.

1
Both provisions qualify as offense against the law the fact for sellers of withholding a higher value than that of the actual depreciation of the good when enforcing an RT clause upon non-payment by the buyer.

2
Code of Civil Procedure of 1973, Chapter XIII — Credit Sales with Retention of Title (in Book IV on specific procedures), art. 1070 and 1071.

3
Civil Code, art. 1361 through 1368-B.

4
Decree-Law No 911/69 on fiduciary lean and Law No. 9514/97, on the real estate financing system and fiduciary lien on immovable property.

5
Art. 190 of the new Code of Civil Procedure provides that, in what concerns rights susceptible of private agreement or relinquishment, the parties may contractually change the ordinary procedure to adjust it to the specificities of the case and agree upon the parties’ rights, obligations, and procedural duties before or during the proceeding.

6
Such goods are defined as those tangible assets that are directly or indirectly employed in the production chain, such as premises, machinery, equipment, tools, and vehicles, among others.