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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)
Under EU law, the RT clause is provided for in Directive 2011/7/EU, where the European Union stipulates the minimum content to be implemented in the national laws of each EU Member State, leaving the specific wording of the relevant legal provisions up to each Member State, as is the case with the Czech Republic.
The provisions on the ownership title are systematically included in the part of the Civil Code governing rights in rem. The Civil Code conceives the acquisition of ownership on the principle of consensual acquisition of ownership title.
The general provisions on RT are stipulated in Section 2132 of the Civil Code as follows:
(1) A stipulation on a reservation of repurchase obliges the buyer to transfer, upon request, a thing back to the seller for consideration. The buyer shall return the thing to the seller in an undeteriorated condition, and the seller shall reimburse the purchase price paid by the buyer; this shall also settle the revenues of money and fruits of a thing which may have been acquired.
(2) The reservation of repurchase is binding on heirs; the right of repurchase may be alienated only if expressly stipulated.
The statutory wording of the clause is stipulated in the New Civil Code with effect since 1 January 2014.
The fact that RT is provided for under supplementary agreements, concluded in the framework of a sale purchase contract, does not prejudice the possibility of the parties to agree on such a clause in other legal relations and to incorporate it in other contracts. An RT clause may be either incorporated in the text of the contract itself, or concluded as a separate agreement and attached to the main contract; in the latter case, the parties must adequately identify the contract to which the clause relates, specify the thing being sold, including its price, and determine the maturity date thereof or define in detail some other condition for acquisition of the ownership title.Another option is to incorporate the clause in the general terms and conditions, which must form part of the main contract, or reference must be made in the contract to other general terms and conditions known to the other party.
Any unilateral declaration of the owner about an RT clause is invalid and devoid of any legal effects, unless the other party agrees to it (Czech Supreme Court, Rv I 662/26).
No formal requirements are generally prescribed for such an agreement. For things that are subject to registration in a public registry (Section 2134 of the Civil Code), the agreement[Page53:]must be made in writing (where the provisions of Section 582 (1) of the Civil Code apply to the requirements of form) and since 1 January 2014, RT may be registered even for real estate, which is a substantial novelty. Whether the clause shall have the nature of a contractual obligation or be a right in rem is up to the discretion of the parties. If the parties agree on the clause as a mere contractual obligation, it is validly concluded if made in writing and it need not be documented in the Real Estate Registry; in case of a breach of such clause by one of the parties, a settlement is possible only between the parties in the framework of their contractual liability. If the seller wishes to ensure that the RT remains in effect even in case of enforcement or bankruptcy proceedings, the clause must be agreed upon as a deed or in writing with officially authenticated signatures, in which case the clause is also applicable against the buyer’s creditors and thus effective even beyond the contractual relationship between the parties.
The subsidiary agreement can be agreed to even for a subject of purchase that does not yet exist upon conclusion of the RT clause and the title can be reserved for a thing that is to be created or obtained by the seller only after execution of the supplementary clause, even where it relates to a sale purchase contract (Czech Supreme Court, 29 Cdo 3863/2009).
RT can be validly agreed upon only for things that are to be supplied by the seller; the title cannot be reserved for things to be manufactured from the provided things, specifically upon a contract of work. To determine whether or not RT has been terminated it is essential to ascertain whether the nature of the relevant thing has changed, since the RT terminates when a new thing is created from the subject of the contract and the value of processing of the thing — the added value — is not lower than the value of the material (Czech Supreme Court R 81/2004).
The RT clause can also be agreed to for consumable things, in which case RT terminates upon their consumption; this however does not release the buyer from the obligation to pay the purchase price as the payment obligation follows from the main contract rather than from the side agreement. The obligation to pay the purchase price also survives accidental destruction of a thing.
Where a thing is mixed with another, i.e. where the buyer and a third person combine their things in such a manner that the things can no longer be separated, the buyer and the third person jointly acquire ownership over the mixed thing, in which case it is most appropriate to arrange for the seller to become a co-owner (of the mixed thing), or to assign the buyer’s receivable from the third person to the seller (Czech Supreme Court Rv II 361/27).
If the buyer is in arrears for payment of the purchase price, the seller may withdraw from the contract either on the basis of the general provisions set out in Section 2001 et seq. of the Civil Code, or on the basis of the special provision set out in Section 2133 of the Civil Code, which stipulates specific conditions in relation to the general provision on substantial and non-substantial breach of contract under Section 2002 of the Civil Code and can only be invoked in case of withdrawal from contract where the purchase price is payable in instalments and an RT clause has been agreed. Nonetheless, it must be noted that its applicability depends on the amount of the agreed instalments since if any instalment exceeds one-tenth of the purchase price, the provision does not apply and the seller may withdraw from the contract. If the parties have made the acquisition of the ownership title subject to a condition other than payment of the[Page54:]purchase price in instalments, the general provisions on withdrawal apply.
Since an RT clause is a bilateral agreement, the parties can also agree on the termination of the RT clause. Most commonly, an obligation terminates by fulfilment. Fulfilment will, as a rule, consist in payment of the purchase price, upon which the ownership title passes to the other party.
If the buyer is in delay in payment of the purchase price, the seller can, in principle, exercise two possible remedies: either the seller withdraws from the contract and claims return of the thing, or the seller insists on payment of the purchase price together with the agreed punitive instruments, if any, such as a contractual penalty or other instruments. The two aforementioned subjective rights cannot be exercised simultaneously (Czech Supreme Court 29 Cdo 1028/2007). The decision remains entirely in the seller’s discretion as to which subjective right to exercise.
The general provisions on RT (see above Section 2132 of the Czech Civil Code as statutory wording) can be freely modified and adapted by the parties according to their needs, as the provision is non-mandatory.
One of the modifications commonly used in practice consists of a prolonged RT. Unless an RT clause is registered in a public registry as a right in rem, the clause is only effective between the parties to the (main) contract and it is thus possible for the buyer to transfer the relevant thing to a third person without having paid the purchase price and acquired the ownership title. Based on the clause (on prolonged RT), the seller waives its ownership title in exchange for another security for payment of the purchase price. If the seller waives its ownership title for the benefit of the buyer, the third person obtains the thing from an authorised person and thus acquires the ownership title. Simultaneously, the (buyer’s) receivable from the third person is assigned to the seller, who thereby obtains a security for payment of the purchase price, which is also important in bankruptcy proceedings. In terms of Section 1886 of the Civil Code, the parties may agree that the assigned receivable shall be enforced by the buyer in its own name, which can be beneficial for the seller if the latter wishes to avoid and has no time to engage in any dealings with the third person.
To provide for cases where a thing is processed or mixed with another thing, upon which the RT over the relevant thing terminates, the seller may conclude a processing clause with the buyer, enabling the seller to become the owner or co-owner of the thus-created new thing instead of the buyer. The processing clause forms part of the RT clause and is effective only in the above-described cases.
The statutory wording can further be modified through an extended RT clause. As a rule, acquisition of the ownership title in cases where an RT clause has been agreed upon is subject to payment of the purchase price for the subject of contract. Accordingly, the ownership title passes upon the payment of the purchase price; however, the acquisition of the ownership title can also be subject to (payment of ) other receivables of the seller from the buyer, that are in no way related to the main contract for which the RT has been agreed and must therefore be clearly[Page55:]specified; this means that the specified receivables must already exist and therefore acquisition of the ownership title cannot be subject to (payment of ) potential future receivables.
The last clause described here in more detail is a subsequent RT, whereby the seller requests that in case of resale of the thing, the buyer secure the payment of the purchase price from the person purchasing the item from the buyer, if there are concerns that the third person will not have sufficient funds to pay for the transferred thing. The seller may, thus, require that the buyer resell the subject of contract only on condition that the buyer himself concludes an RT clause for the subject of the contract. Through the aforementioned supplementary clause, the owner (seller) authorises the buyer to retain the title to the subject of contract even where the buyer has not yet become its owner. Such act may be performed on the basis of a proxy issued to the buyer.
The Czech Civil Code stipulates generally in Section 2010 para. 1, that any debt can be secured by a commitment of a third party as a promise to a creditor, or in favour of a creditor for the debtor’s performance and under this provision one can forge a debt agreement by a contractual penalty or an acknowledgment of debt, while Sections 2012 to 2047 specifically constitute the forms of a security, i.e. Guarantee (záruka, Section 2012 to Section 2011), Security of a debt (jistota, Sec. 2012 to Sec. 2017), Warranty (ručení, Section 2012 to Section 2017). Generally, RT as a contractual agreement does not secure the interest of the creditor with respect to third-party creditors.
Pursuant to Section 2121 (1) of the Czech Civil Code, the risk of damage to a thing passes to the buyer upon transfer of possession, and after Section 2121 (2) the same consequences shall occur if a buyer fails to take over a thing although he or she is allowed by the seller to dispose of it.
The case where the subject of contract can be transferred without breaching the RT clause agreed to by the parties follows from the purpose of the purchase. The buyer may validly dispose of the subject of contract if the seller knew for which purpose the buyer intended to use the thing being sold.
There are no mandatory rules as to the perfection of the security interest.
RT in no way prejudices acquisition of the ownership title by a third person, provided that the third person acted in good faith and the RT has not been registered in a public registry.
If yes, is there a possibility to transform the security in case of a sale to a third party?
Relations between Protection of Good Faith and Protection of Ownership Title are dealt with in the decisions of the Czech Constitutional Court, II. ÚS 165/11-1 and IV. ÚS 4684/12-1, according to which, while the ownership title must be granted appropriate protection against infringement, it is not an absolute right and can be consequently limited under the applicable statutory conditions. In this respect, Section 2005 (1) of the Czech Civil Code applies, which stipulates that withdrawal from a contract in no way prejudices any third-party rights incurred in good faith, which to a large extent solves any issues that could have arisen under the previous legal regulation. There are other remedies available to the seller, allowing it to obtain compensation for an alienated thing.
The validity of the RT clause is in no way prejudiced by an enforcement order (against the buyer) and the seller therefore remains the owner of the relevant thing.
An entitled person, who has claims against a buyer in bankruptcy, may prevent satisfaction of claims of another creditor of the buyer from the entitled person’s assets by lodging an action for exempting a thing from the bankruptcy estate, which is intended to protect interests of third parties (Czech Supreme Court, 20 Cdo 1977/2009). For a collective thing (universitas rerum), RT may only be agreed upon with respect to things that have not been paid for in the framework of the enforcement proceedings, which means that the action must specify to which parts of a collective thing it applies. In addition to an action for exempting a thing from the bankruptcy estate, the seller may also file a motion to remove a thing from the list of assets in terms of Section 68 of the Distraint Rules.
Lodging an action for exempting a thing from the bankruptcy estate is not conditional upon a previous motion to remove a thing from the list of assets (Czech Supreme Court Cdo 418/2012). If the relevant thing has already been sold and another creditor satisfied without the seller’s action for exempting the thing being granted, the seller may lodge an action for surrendering unlawful benefit (“action under better legal title”) against the creditor whose claim has been satisfied; while this type of action is not expressly provided for in the law, it is by its nature an action for performance as it is aimed against an economic benefit obtained without legal title (Czech Supreme Court 30 Cdo 1509/2009).
Where bankruptcy proceedings are initiated against the buyer who has the subject of contract in his possession, the seller can defend its ownership title by several means. Two remedies available to the seller in case a thing still owned by the seller is included in the bankruptcy estate are set out by Section 225 of the Bankruptcy Act. The seller may request that the bankruptcy trustee pay the purchase price and if the trustee does so, the seller’s claim is satisfied and the subject of the RT becomes part of the bankrupt estate. If the trustee does not pay the purchase price in full or does not pay the outstanding balance thereof, the seller may enforce a claim for surrendering the thing on the basis of its ownership title and the existing RT to the subject of contract, whereby the seller withdraws from the contract and is thus obliged to return to the bankruptcy trustee any proceeds obtained for the thing concerned, to the relevant date. If the bankruptcy trustee does not grant any of the aforementioned seller’s requests, the seller may proceed pursuant to Section 225 of the Bankruptcy Act and lodge an action for exempting a thing from the bankrupt estate, which will then be resolved by the (bankruptcy) court with jurisdiction in a contingent dispute (in the framework of the bankruptcy proceedings).
In the case where bankruptcy proceedings are initiated against the seller, the buyer has, in principle, two options. The first option is to pay the purchase price or fulfil any other condition, as appropriate, upon which the ownership title passes to the buyer and the buyer can then keep the subject of RT; the second option is to return the subject of the RT to the bankrupt estate and subsequently register the seller’s receivable in the bankruptcy proceedings to collect the part of the purchase price already paid by the buyer, if any.
It can be recommended that while lodging an action for surrendering the subject of contract on the basis of the seller’s ownership title (and RT), the seller simultaneously registers its receivable following from its claim for payment of the purchase price for the subject of contract in the bankruptcy proceedings, as if the RT no longer existed.
If the buyer sells a thing that is subject to RT, the seller may also enforce its claim against any payments obtained by the buyer for the thing sold. Further, the seller and the buyer are free to agree, in the RT clause itself, that the subject of the contract may not be alienated in any way whatsoever. Such a prohibition is, however, only effective between the parties to the agreement as third persons may not be bound with obligations without their will, this may have consequences for the buyer under criminal law. (Re)sale of the subject of contract does not affect the seller’s claim for compensation for damage or a contractual penalty, if agreed. In principle, the buyer may not alienate the subject of the contract until he or she has acquired the ownership title thereto (Czech Supreme Court 29 Cdo 1028/2007 and Czech Supreme Court 6 Tdo 861/2010).
[Page58:]Time limits apply to an action within bankruptcy proceedings. Section 19 (2) of the Bankruptcy Act maintains that the court shall impose on the claimant who asserts that the case should not be included in the inventory, to bring an action within a time limit set by the court. If the action is not filed in due time, the case is deemed to be legitimate in the inventory.
Thus, an entitled person who has claims against a buyer under bankruptcy may prevent satisfaction of claims of another creditor of the buyer from the entitled person’s assets by lodging an action for exempting a thing from the bankruptcy estate (exclusion action), which is intended to protect interests of third parties (Czech Supreme Court, 20 Cdo 1977/2009).
For a collective thing (universitas rerum), RT may only be agreed upon with respect to things that have not been paid for in the framework of the enforcement proceedings, which means that the action must specify to which parts of a collective thing it applies. In addition to an action for exempting a thing from the bankruptcy estate, the seller may also file a motion to remove a thing from the list of assets.
Filing an action for exempting a thing from the bankruptcy estate is not conditional upon previous motion to remove a thing from the list of assets (Czech Supreme Court Cdo 418/2012). If the relevant thing has already been sold and another creditor satisfied without the seller’s action for exempting the thing being granted, the seller may lodge an action for surrendering unlawful benefit (“action under better legal title”) against the creditor whose claim has been satisfied; while this type of action is not expressly provided for in the law, it is by its nature an action for performance as it is aimed against an economic benefit obtained without legal title (Czech Supreme Court 30 Cdo 1509/2009).
Unless otherwise expressly agreed by the parties, these costs are to be borne by the seller.
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.
An RT clause may also be part of general conditions of sale/purchase, but attention needs to be paid to making the conditions available to the contracting partner before contracting as described above.
The basic form of an RT clause in ordinary business legal acts is as follows:
Property in the goods does not pass to the buyer until the seller has received the purchase price in full.