Incoterms_® and Commercial Contracts

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 governed by Article 134 of the Contract Law of the People’s Republic of China (Contract Law) and Articles 34 to 37 of the Interpretations of the Supreme People’s Court on Issues relating to Application of Law in Hearing Cases regarding Disputes over Sales Contracts (Sales Contract Interpretation).

In bankruptcy proceedings, RT will be governed by such special rules as Article 38 of the Enterprise Bankruptcy Law of the People’s Republic of China (Bankruptcy Law) and Provisions of Supreme People’s Court on Several Issues relating to Application of the Enterprise Bankruptcy Law of the People’s Republic of China (II) (Bankruptcy Law Interpretation II).

2. Please describe the characteristics and scope of your country’s RT rules
1. RT rules apply only to movable property

According to Article 34 of the Sales Contract Interpretation, RT only applies to movable property.

Immovable property is excluded from the application scope of RT rules because the registration and pre-registration mechanism for immovable property can well protect the rights of the buyer and the seller. Please refer to Question 3 for details.

2. The seller’s right to take back the goods

As a security for the seller’s rights, the seller has the right to take back the goods under the Contract Law and the Bankruptcy Law.

Under Article 35 of the Sales Contract Interpretation, the seller may take back the goods under the following circumstances:

1. the buyer failed to pay the price per the agreement;
2. the buyer failed to satisfy the specific conditions per the agreement;
3. the buyer sold, pledged or improperly disposed of the goods otherwise.

However, the seller’s right to take back the goods is subject to two exceptions as prescribed under Article 36 of the Sales Contract Interpretation, i.e. where the buyer has paid over 75% of the total
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price and where a bona fide third party obtained the title or other property rights in respect of the goods.

Under Article 38 of the Bankruptcy Law Interpretation II, the seller may take back the goods if the receiver of the buyer decides to terminate the sales contract. The seller may also take back the goods in transit directly, provided that the buyer neither paid the entire price nor intends to pay the price in exchange of the goods.

3. The buyer’s right to redeem the goods

The sales contract remains effective when the seller takes back the goods in accordance with Article 35 of the Sales Contract Interpretation. Article 37 of the Sales Contract Interpretation provides for the buyer’s right to redeem the goods by eliminating the grounds underlying the seller’s right to take back the goods, within a redemption period agreed by both parties or designated by the seller.

Upon expiry of the redemption period, the seller is entitled to resell the goods. If there is any balance after deducting the expenses for taking back the goods, the storage expenses, expenses arising from the resale, interests and the unpaid price from the resale price, it should be returned to the buyer; if there is a shortfall the seller can claim it from the buyer, unless the buyer can prove that the resale price is obviously lower than the market price.

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

As mentioned above, there are rules regulating RT in the sales of movable property in China.

As for sales of immovable property, Article 9 and Article 20 of the Property Law of the People’s Republic of China (Property Law) provide for registration and pre-registration mechanisms that can well protect the rights of the buyer and the seller.

The transfer of title in immovable property normally takes effect upon registration per Article 9 of the Property Law. Accordingly, the title of the immovable property under the sales contract rests with the seller before registration of the title transfer. If the buyer wants to secure its rights under the sales contract for immovable property, it can rely on the pre-registration mechanism under Article 20 of the Property Law by which the seller shall not dispose the immovable property without the consent of buyer upon pre-registration; otherwise, the disposition shall be ineffective. After the seller registers the transfer of title of the immovable property, the seller can protect its rights by making a mortgage on the immovable property.

4. 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?

There is no direct link between RT and passage of risk under the PRC legal system.
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According to Article 142 of the Contract Law, the risk of the goods being damaged or lost shall pass from the seller to the buyer upon delivery of goods, except where the law provides or the parties agree otherwise. For goods in transit, risk shall pass to the buyer upon conclusion of the contract as prescribed under Article 144 of the Contract Law.

After the passage of risk, the seller with an RT can protect its rights in the following ways:

1. by activating its rights to take back and further resell the goods (if applicable);
2. by purchasing trade credit insurance to cover the risk of non-payment of the trade receivables by the buyer; or
3. by terminating the contracts and recovering the goods.

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

RT under the law of the People’s Republic of China (PRC) is a contractual provision and there is no formal requirement to perfect the seller’s right.

The general rules for contract will apply to the RT clause in China. An RT clause can be agreed in any form, written or oral. The conclusion of an RT clause is governed by general contractual rules of offer and acceptance. However, in judicial practice the people’s court would ask for evidence from the party claiming rights under an RT clause and the party usually has to produce a written RT clause in order to fulfil the burden of proof.

Because RT is a contractual provision and there is no formal requirement for perfecting the seller’s right, RT will not prevail over the rights of a bona fide third party who has obtained the title or other property rights in respect of the goods.

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

Sale to a third party may break RT provided that the third party is a bona fide purchaser according to Article 36 of Sales Contract Interpretation.

According to the relevant laws, a third party is a bona fide purchaser when it acquires the goods in good faith (without knowledge of the RT clause) at a reasonable price and the goods have already been delivered to it.

In case the non-bona fide third party resells the goods to another purchaser, the seller has no right
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to invoke RT against the purchaser, as long as it is a bona fide purchaser.

There is no specific provision in PRC laws regarding whether the seller can still retain the title of the goods when the goods have been transformed. However, in judicial practice the people’s court would normally consider the following elements to decide whether the seller can take back the goods or get paid instead:

1. Whether there is an agreement reached between the seller and the buyer;
2. Whether the seller or the buyer or a non-bona fide third party is in default;
3. Whether the original goods are independent or can be identified and separated without affecting the use value of the transformed goods.

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

As mentioned before, the seller may claim its title over goods against a third party, if the latter is a non-bona fide purchaser.

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

There is no specific judicial procedure for the enforcement of RT. The seller may bring a lawsuit against the buyer before the competent court. The general civil procedures will be applied, potentially with the use of some interim measures, e.g. property preservation before or during the litigation.

The hearing may normally take up to six months to one year in the first instance.

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

In general, RT will prevail in case of conflict between RT and the buyer’s creditors’ rights, since it represents the seller’s ownership of goods. In this case, the seller has the preferential right to either take back the goods or claim payment in respect of the goods. However, as mentioned above, if the buyer has already paid 75% of the total price it cannot take back the goods but can only claim payment instead.

An exception to the seller’s preferential rights under an RT clause is prescribed in Article 36 of the Sales Contract Interpretation as applicable to sales of goods to a bona fide third party. According to this Article, the creditor’s rights will prevail if they are secured by a property right over the goods by way of mortgage, pledge and liens, and if the creditor is a bona fide third party and its
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rights are perfected by registration. In such case, the buyer’s creditor can enjoy preferential rights in respect of the goods.

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

1. Goods still with buyer

Articles 37 and 38 of the Bankruptcy Law Interpretation II provide for the rights of the seller and the buyer under an RT arrangement in bankruptcy proceedings of the buyer.

The bankruptcy proceedings per se do not entail the immediate termination of the sales contract. Rather, the receiver is free to elect whether to perform or terminate the sales contract.

If the receiver elects to perform the sales contract, the buyer’s obligations under the sales contract would be deemed mature for performance by the buyer upon acceptance of the bankruptcy petition. In this case, the buyer’s receiver shall pay the price and perform other contractual obligations. The seller can still exercise its rights related to RT as above mentioned, including the right to take back the goods.

In case the buyer fails to pay the price or perform other obligations of the sales contract, or sells or pledges or improperly disposes of the goods, causing damages to the seller, such damages shall be listed as common benefits debts to be paid off with the buyer’s property at any time during the bankruptcy proceedings.

If the receiver elects to terminate the sales contract, the seller can take back the goods from the receiver while returning the buyer’s previous payment. If the seller suffers any losses due to the evident decrease in the value of the goods, such losses can be deducted from the buyer’s previous payment and in case of inadequacy, be further listed as common benefit debts of the buyer.

2. Goods already sold by buyer

Article 36 of the Sales Contract Interpretation relating to bona fide third parties also applies in bankruptcy proceedings. In other words, the seller can exercise its right to take back the goods from the third-party purchaser per the relevant laws, unless it is a bona fide third-party purchaser.

In case the third party is a bona fide purchaser, the seller has no right to take back the goods but can claim payment from the buyer in the following ways as prescribed in Article 30 of the Bankruptcy Law Interpretation II:

1. if the goods were sold prior to the acceptance of the bankruptcy petition, the seller’s right to payment due to property loss shall be liquidated as “general creditor’s rights” in bankruptcy proceedings; or
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2. if the goods were sold after the acceptance of the bankruptcy petition, the damages incurred by the seller due to the performance by the receiver or related personnel shall be liquidated as common benefit debts.

3. Time limits to declare title to receiver

Pursuant to Article 26 of Bankruptcy Law Interpretation II, the seller should declare its title to the receiver before the bankruptcy property sales plan, the settlement agreement or the draft reorganization plan is submitted to the creditors’ meeting for voting. Otherwise, the seller should bear the related costs incurred by its delayed declaration.

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

There is no specific provision regarding the payment of storage, insurance and transport in respect of the RT goods during the discussions with the receiver.

In case an agreement is reached between the seller and the buyer, such agreement shall be honoured. Otherwise, the payment should be decided under the principle of fairness. Storage should thus be paid by the buyer before the seller is able to take back the goods. Insurance and transport related to taking back the goods should be paid by the buyer.

7. 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.

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