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 Articles 2367, 2368, 2369, 2370, 2371 and 2372 of the French Civil Code.

In the case of bankruptcy proceedings, a special rule will apply, which is set forth in Article L.624- 16 al.2. of the French Commercial Code.

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

Pursuant to the Articles listed above, the RT clause is a contractual instrument, which can be used in civil and commercial contracts. It is a lien which applies to every kind of goods (material and immaterial, fungible and non-fungible).

  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 France.

  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?

Pursuant to Article 1196 of the French Civil Code, risk passes to the party who has ownership over the goods. In practice parties frequently agree otherwise. For example: transfer of risk with delivery of the goods.

Should the buyer fail to compensate the loss of value suffered by the seller, an insurance coverage might be imposed on the buyer in the sale contract.

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

This security works as a contractual agreement under French Law. In other words, the RT clause does not secure the interest of the creditor with respect to third-party creditors. Its effectiveness is limited to the parties who agreed to it.

In that respect and pursuant to Section 2368 of the French Civil Code (and Section L.624-16 al.2. of the French Commercial Code applying in case of bankruptcy proceedings) the clause must be agreed in writing to be valid.
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In case of bankruptcy (see below § 6. d.) a declaration of the RT clause is required.

A separate signature by the purchaser on the clause is not required since the unconditional acceptance of the goods implies acceptance of the clause, if the clause has been previously notified in written form to the buyer.

Regarding timing, the clause is generally set forth in the sale contract or the general conditions of sale. Section L.624-16 al.2. of the French Commercial Code allows the parties to a sale contract to agree on the RT clause at the time of delivery of the goods at the latest.

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

Yes, if the third party acquires the goods under RT and is unaware that title to the goods has remained with the seller.

The so-called bona fide purchaser is protected under French law by section 2276 French Civil Code, whose application consequently jeopardizes the effectiveness of the RT clause.

The RT clause applies even if the goods under RT have been incorporated or transformed/ processed with other materials, if the following conditions are fulfilled:

  1. the goods sold under RT can be identified, i.e. if they are materially a separated part of the material they were mixed, transformed or processed with; and
  1. no damage will be caused by separating/dismantling the goods from the material with which it was incorporated.

This rule applies even if there is no bankruptcy proceeding (see section 2370 of the French Civil

Code and section L.624-16 of the French Commercial Code).

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

In case of a sale to a third party, the RT will “transform” into a claim for payment that the delinquent buyer has against the third party.

The seller under RT can claim direct payment against the third party as long as the third party acting as a bona fide purchaser has not paid the price to the buyer. In any case the third party cannot be required to pay more to the seller under RT than what it agreed to pay under its contract with the buyer.

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

Depending on the obligation which is secured by the RT, the procedure will consist either of (i) summary proceedings or (ii) proceedings on the merits.

Summary proceedings

Generally the RT secures the payment of invoices in sale contracts. In that case the enforcement of the RT will be claimed before the court having jurisdiction to decide on the default of due payment. Should neither the obligation of payment nor the contractual validity of the RT clause be contested or be reasonably challengeable, the enforcement of the RT might be required before the court having jurisdiction for summary proceedings.

The procedure will typically last between 2 and 3 months.

A judgment can be rendered giving the authority to a bailiff to seize the goods under RT.

Proceedings on the merits

If the RT secures the payment of debts that the court should appraise on the merits, then the claim for performance of the RT clause will have to be raised before the same court having jurisdiction on the merits.

In that case the proceedings might last one to two years and the court can render a judgment recognizing the creditor’s right and the RT clause securing it.

In both cases the bailiff can seize the goods directly under RT once the judge has recognized the validity of the RT. No other proceedings are required to enforce it.

It should be noted that it is theoretically possible to bifurcate the proceedings by initiating first proceedings on the obligation secured and secondly, proceedings on the RT, but it is generally not advisable from a financial and timing point of view.

Also to be noted is that the enforcement of an RT on goods transferred to a third party requires the third party to be part of the proceedings, which will typically extend the duration of the proceedings.

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

If the goods under RT are used as a security by the buyer towards its creditors, the RT will prevail if
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the creditors knew about its existence.

On the contrary, if the creditors (including carriers) did not know about the RT and accepted a lien on the same goods in good faith, then the lien granted to the buyer’s creditors will prevail over the RT.

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

  1. Goods still with buyer

The goods under RT will be restituted to the creditor if the creditor regularly files a claim for ownership over the goods under RT in due time (see iii.)

  1. Goods already sold by buyer

In this case the creditor, who benefits from the RT on the goods re-sold, will lose the ownership of the goods, if the purchaser to whom the debtor sold the goods under RT bought them in good faith.

But the creditor might not be deprived of all protection regarding the RT depending on the time of the re-sale.

If the re-sale occurs after the opening of the bankruptcy proceedings, then the creditor will have a priority right in the re-sale price with respect to other creditors who claim payment before the official receiver. In that way, creditor’s claim for ownership will be somehow converted into a claim for payment of the re-sale price paid by the end purchaser. This mechanism counterbalances the loss of title.

In order to obtain payment of the re-sale price, the claim for payment must be filed with the administrative receiver within 3 months after the opening of the bankruptcy proceedings (as well as the claim for ownership, which has to be filed as well).

It is also recommended that a separate claim for payment of the invoices unpaid by the debtor be filed before the court appointed receiver (so-called mandataire judiciaire) as well.

  1. Time limits to declare title to receiver

Pursuant to Article L.624-9 of the French Commercial Code, the creditor must claim ownership over the goods under RT before the court-appointed administrative receiver (administrateur judiciaire) within three months after publication of the judgment opening the bankruptcy proceedings.
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If no official administrative receiver has been appointed by the court, then the claim is to be filed with the debtor directly.

The declaration of claim consists of a registered letter to be sent in a way that proves its delivery on time.

The French Bankruptcy Law provides for two types of receivers. One is in charge of the past, whereas the second one deals with the present and the future of the company in bankruptcy.

The first one (called mandataire judiciaire/official receiver) will control the debts and check the related claims for payment filed by the creditors. It has no authority to decide on an RT clause.

The second (called administrateur judiciaire/administrative receiver) will reorganize the business, eventually sell parts of it or maintain the activity. The administrative receiver has the authority to decide on the RT clause because he or she gathers all information to appraise the related situation.

Once the administrative receiver is appointed by the court, it establishes a list of all belongings of the bankrupt company and is consequently aware of the goods stored in the debtor’s premises. Furthermore and as long as the bankruptcy proceedings last, he or she will receive all payments made by third parties to the debtor, including the payment of any re-sale price for goods sold under RT, which he or she will transfer to an escrow account to secure the interest of the creditors who filed a claim for ownership as well as for payment of any related resale price paid by third parties.

Note that in some cases and for very small companies the court might waive appointing an administrative receiver for reasons of costs. If so, the court will let the debtor manage its company without further assistance. In that case, the filing must be made directly before the debtor.

Finally and in case of the liquidation of the company, the court will appoint only one receiver (liquidataire judiciaire/liquidator), who will have full authority to decide on any claim, including the RT clause.

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

The costs for storing the goods under RT and insurance are included in the proceedings’ costs, whereas the costs for transporting the goods under RT back to their owners must be paid by the owners.

  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.

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The title of delivered goods shall remain with XXX until complete payment of the invoices. Until then, the Customer shall not dispose of the goods as a security (pledge, mortgage…).

The following paragraph might be added to the clause:

The Customer is entitled to resell the goods under retention of title in the ordinary course of business. On the occasion of this resale, the Customer is obliged to inform its own client that the product is under retention of title. At this point the Customer shall already assign to XXX all of its claims resulting from this resale and up to the sum due to XXX. XXX accepts this assignment. The Customer is entitled to collect the assigned claim. This authorization to collect can be rescinded if the Customer is in delay of payment.

The clauses should be printed in bold type on all contractual documents: commercial offer, order confirmation, general conditions of sale, etc., by indicating on the front page: goods sold under RT.

A reference to the seller’s website which contains the Terms & Conditions and the RT clause is still not accepted as sufficient for an agreement by the French courts.