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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
by International Chamber of Commerce (ICC)
In the Republic of Croatia, RT is governed by Article 462 and 463 of the Obligations Act, regulating that “The seller can, by a particular contractual clause, withhold the ownership right after handover of the goods to the buyer until the buyer pays the purchase price in entirety.“.It is also envisaged that “In doubt, the ownership of the goods is deemed transferred under the postponed effect coming into force when the purchase price is paid, whereas the seller is entitled to terminate the sale and purchase agreement in case the buyer comes into delay with its payment obligation.” The provisions of the Obligations Act cited hereinabove are, to a great extent, default ones, while it is subject to the parties’ contractual freedom to agree otherwise and/or to agree on more specific terms than those envisaged by default provisions.
The provisions of the Obligations Act regarding RT can be applied in both civil and commercial matters. The scope of RT provisions is not explicitly limited to the movables or real estate. However, having in mind the nature of the RT and the manner of acquiring the ownership right of real estate under Croatian law, the RT provisions of the Croatian Obligations Act primarily refer to movable goods. Specifically, only the inscription of the buyer’s ownership in the competent land registry can allow acquiring the ownership of real estate in the Croatian legal system. Such inscription can be provided only based on the seller’s explicit, written and unconditional consent, whereas depending on the will of the parties such consent will be provided immediately or after the purchase price has been paid. Therefore, the moment of the acquisition of real estate ownership is governed by specific land registry rules rather that by the Obligations Act RT provisions. Regarding movable goods, contracting for RT is limited to one explicit restriction: movables registered with the public books can be objects of RT only in cases where law regulating these public books explicitly allows such possibility.
Further, the Obligations Act does not limit contracting for RT depending on whether the goods in question are consumable or not. Also, the Obligations Act does not put any constraints as to whether the goods are replaceable or irreplaceable. However, should the seller come into a situation to enforce the RT by filing a rei-vindicatio lawsuit, it should bear in mind that it will be successful only if it inter alia specifies the individual goods over which it claims its ownership right, notwithstanding whether such goods are irreplaceable or replaceable.
RT is regulated in the Republic of Croatia, while the parties are free to contract for more specific or different provisions as explained under question No. 2.[Page47:]
The Obligations Act explicitly regulates that the buyer bears the risk of accidental damage or destruction of the goods as of the moment the goods are handed over into its possession, unless the parties agree otherwise. In order to protect its interest after passage of risk, the seller may agree with the buyer to enter into an insurance contract, under which the seller would be the insurance beneficiary if the goods in the buyer’s possession are damaged or destroyed.
There are no such specific formal requirements under the Obligations Act, including timing, apart from the general ones. The general formal requirements mostly refer to the prescribed form of the contract, meaning that in case a specific form is required, the RT would be validly concluded only if it is in prescribed form. However, in order to have an effect toward third parties, particularly toward the buyer’s creditors, the sale and purchase with an RT clause needs to be agreed in the form of a legal deed notarized by a notary public before the bankruptcy procedure is commenced against the buyer, or before the goods are seized from the buyer during enforcement proceedings.
With respect to timing, the RT can be contracted for as a specific clause within the main sale and purchase contract, as well as in the amendment to the contract. However, the RT clause should always be contracted for before possession of the goods is transferred to the buyer, since by transferring possession the buyer regularly acquires the ownership right. Further, the parties are time-barred in contracting for such a clause after a bankruptcy or enforcement procedure is commenced regarding the buyer, when the RT is not preliminarily contracted for in a manner explained above.
The question of whether the sale to a third party breaks RT is determined on a case-by-case basis. Specifically, according to the Act on the Ownership Right and Other Rights in Re, a third party lawfully acquires the ownership of the goods if the following three prerequisites are cumulatively fulfilled: (i) the third party at the time of the sale acted in good faith, (ii) the ownership right is acquired on the basis of a reciprocal consideration contract, and (iii) the buyer comes into independent possession of the goods.
In case all three requirements listed above have been met, the seller cannot successfully file the rei-vindicatio lawsuit against the third party since the third party lawfully acquired the ownership of the goods. Therefore, the seller’s RT would be broken in such cases. However, this does not deprive the seller from filing an indemnification lawsuit against the buyer who unlawfully transferred the ownership of the movables to a third party. In a different situation, where the[Page48:]requirements listed above have not been met cumulatively, the third party would not acquire the ownership right. Therefore, the seller would be entitled to file the rei-vindicatio lawsuit against the third party.
By transforming the goods, the buyer does not acquire their ownership. In such cases the seller has a right to claim restitution in kind of the goods or indemnification of the damage incurred thereby, as the case may be. Generally, the seller can request restitution in kind in cases where restitution can be done without unreasonably high costs. When transformation is done by virtue of mixing or conjoining the seller’s goods with the buyer’s or other goods, the seller can request the separation of its goods when it is possible and this can be done without unreasonably high costs. On the other hand, the seller can request the indemnification of damages incurred when the goods cannot be re-transformed in the initial state. Exceptionally, when the goods are transformed in a manner by which they have a particular cultural or artistic value, the buyer can request from the court not to order the restitution in kind, but instead order the indemnification of the damage incurred, notwithstanding the possibility to re-transform the goods into their initial state with reasonable costs.
If yes, is there a possibility to transform the RT in case of a sale to a third party?
The Obligations Act is silent on this possibility. This means that the seller, the buyer and a third party can contractually transform the RT so that the seller has an RT effective against the third party to whom the buyer transferred the goods, whereas at the same time the third party has an obligation of payment toward the seller. The parties are also free to agree on which implications such assignment would have toward the buyer, whereas the buyer can completely step out of the contractual relationship between the seller and a third party or can guarantee the payment obligation undertaken by the third party.
When the buyer has not paid the purchase price to the seller within due time, causing the sale and purchase agreement to be terminated by the seller, the seller as the owner of the goods is entitled to file a rei-vindicatio lawsuit against the buyer in order to protect its ownership right.
Once the seller wins the rei-vindicatio lawsuit, it is declared in the judgment that the goods are in the ownership of the seller and the buyer (or the third party, as the case may be) is ordered to transfer the possession of the goods to the seller. When such judgment becomes final and binding and the buyer (or the third party) does not fulfil those obligations willingly, the seller may commence the enforcement of the obligations contained in the judgment.
According to the Croatian Enforcement Act, enforcement of the seller’s ownership of movables is conducted in a way that the competent court, upon the enforcement creditor’s proposal, issues the enforcement decision. Based on the enforcement decision, a designated judicial executor is ordered to take over the movables from the enforcement debtor and to hand them over to the[Page49:]enforcement creditor. If the movables cannot be found in the possession of the enforcement debtor or the third parties, the court evaluates the movables in question upon the enforcement creditor’s proposal, and issues a decision by which the enforcement debtor is ordered to make an analogous payment to the enforcement creditor.
With respect to the buyer’s carrier, the Obligations Act regulates that it has the pledge over the goods while the goods are in its possession or while it has a document by which it can dispose of the goods. The same regulation applies to a freight forwarding agency. When there is a conflict between those pledges, the pledges of the carrier and the freight forwarder have a higher priority ranking than the commission agent’s pledge. In case of conflict between the carrier’s and the freight forwarder’s pledges, the higher priority ranking belongs to the party who acquired the pledge more recently.
In respect of other creditors of the buyer, the Obligations Act explicitly regulates that RT has an effect toward the buyer’s creditors in case the parties had contracted for the RT in the form of a legal deed notarized by a notary public before a bankruptcy procedure for the buyer was commenced or before the goods were seized from the buyer during enforcement proceedings.
Pursuant to the Bankruptcy Act provisions, the seller, as a party claiming its ownership of the goods in the possession of the bankruptcy debtor, bears the burden of proving that the bankruptcy debtor is not the owner of the goods and that, consequently, the goods do not represent bankruptcy assets to be sold in bankruptcy proceedings. In order to prove this, the seller and the buyer need to conclude that the RT agreement is dated earlier than the date of the commencement of the bankruptcy proceedings, in the form of a legal deed notarized by a notary public as explained above.
If the sale and purchase agreement including an RT clause is undisputed, the bankruptcy manager has the right to choose whether to fulfil the bankruptcy debtor’s payment obligation or to terminate the sale and purchase agreement and to re-transfer the possession of the goods to the seller. If the bankruptcy debtor chooses to terminate the sale and purchase agreement, it is expected that the bankruptcy manager is, because of the contract termination, due to retransfer the possession of the goods to the seller. However, according to the provisions of the Bankruptcy Act, the seller in such cases has the status of a regular creditor. This means that if the bankruptcy manager has not willingly retransferred the possession of the goods to the seller, the seller can only report the monetary claim to the bankruptcy debtor. On the other side, if the bankruptcy manager decides to keep the respective sale and purchase agreement in force, the seller, as RT beneficiary, has a claim toward the bankruptcy debtor having higher priority settlement ranking[Page50:]with respect to other claims.
In light of the provisions of the Bankruptcy Act explained above, the conclusion can be drawn that the commencement of the bankruptcy proceedings breaks the seller’s RT, in the sense that the seller has no possibility to file a rei-vindicatio lawsuit against the bankruptcy debtor any more, but can request the settlement of its monetary claims toward the buyer in a manner which depends on the abovementioned bankruptcy manager’s choice.
It primarily depends on whether such a sale and purchase can be challenged under specific Bankruptcy Act provisions. Specifically, legal actions undertaken by the bankruptcy debtor within three months before the commencement of the bankruptcy proceedings where the bankruptcy debtor was insolvent and the third party was aware of the insolvency can be challenged before the court.
If the abovementioned lawsuit is successfully conducted and the goods are consequently retransferred to the bankruptcy debtor, then the bankruptcy manager has a right to the choice as explained in the answer to the question 6.d.i., i.e. either to fulfil the bankruptcy debtor’s payment obligation or to terminate the sale and purchase agreement and to re-transfer the possession of the goods to the seller.
On the other side, if such a lawsuit cannot be successfully filed, the seller can report the monetary claim to the bankruptcy manager as the regular bankruptcy debtor. In that case, the seller can also consider whether the third party lawfully acquired the ownership of the goods as explained above in the answer to the question No. 6.a. If the third party did not, the seller is entitled to file the reivindicatio lawsuit against the third party.
According to the Bankruptcy Act, the regular creditors’ claims should be reported within 60 days as of the day when the decision on commencement of the bankruptcy proceedings is published on the web page of the competent court.
RT, i.e. the ownership right, might be evidenced in the public books. In such case, even if the RT beneficiary had not reported to the bankruptcy manager, the bankruptcy manager must have had knowledge of the existence of an ownership right in favour of a legal subject different from the bankruptcy debtor. Therefore, the bankruptcy manager’s omission to recognize the RT, i.e. to recognize the ownership right in favour of a legal subject different from the bankruptcy debtor, may lead to the bankruptcy manager’s liability for damage incurred thereby. Following that reasoning, failure to comply with the deadline to report the RT does not necessarily lead to the loss of all the rights of the RT beneficiary, depending on whether the bankruptcy manager should have had independent knowledge of the existence of an RT.[Page51:]
The Bankruptcy Act provides that all costs arising as a consequence of bankruptcy manager actions are settled from the value of the bankruptcy assets, whereas it does not specify which particular costs regarding the RT can be compensated. Even more, such costs have a higher priority ranking in settlement than other claims, i.a. the claims reported by regular bankruptcy creditors.
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.
The seller withholds its ownership of the goods for the entire period running until the date when the purchase price is paid to the seller in its entirety, notwithstanding the seller’s obligation to transfer the possession of the goods to the buyer in a manner agreed herein.
The purchase price will be paid in [*] equal monthly instalments which come due each [*] day of the month, starting as of [month], whereas the seller withholds its ownership right until the total purchase price is paid in a manner agreed herein, notwithstanding the fact that the object of sale and purchase will have already been in the buyer’s possession.