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 188 of the Civil Code of Georgia (hereinafter Civil Code). According to this Article the transfer of title to the buyer may be conditioned with a payment of a price for the goods. In such a case, it is presumed that the ownership shall be transferred to the buyer only after the price has been paid in full.

If the buyer delays the payment of the price, and the seller terminates the contract, then the parties shall bilaterally return the performance already rendered.

The condition for transferring the ownership may be deemed fulfilled if the seller is satisfied in any manner other than by payment of the price or if the buyer relies upon the limitation period of the claim.

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

RT allows the seller to transfer the possession of the goods to the buyer, grant buyer the right to use the goods and sell them only upon its prior approval. In the sense of Article 188 of the Civil Code, buyer’s ownership of the goods on possession is conditioned, which means that the seller remains the owner of the goods until the buyer pays the full price, as agreed between the parties. Nevertheless, even though still remaining the owner of the goods, the seller is not entitled to use them and any action from its side that might obstruct the buyer’s possession over the goods or its payment obligation is prohibited.

In most cases the basis for applying RT is under instalment sale agreements, wherein the seller delivers the goods to the buyer before the price is paid in full and the payment of the price is made in periodic instalments at fixed intervals.

Although Article 188 of the Civil Code is provided under the chapter named “Acquiring Ownership of Movable Property”, RT can also be used for immovable property as a contractual instrument securing the payment for the property. Based on the freedom of contract and parties’ right to freely determine the terms of the contract, the seller and the buyer may agree that the immovable property will be transferred to the possession of the buyer after the conclusion of the agreement, while the title will pass and the buyer will become the registered owner only after paying the final instalment of the agreed price of the immovable property.

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?

RT is regulated in Georgia, under the Civil Code provision described above.

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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 in the law. Generally, according to the Civil Code, the possessor of the goods/movable assets bears the risk. Pursuant to Article 482 of the Civil Code, upon delivery of the sold goods the risk of accidental perishing or spoiling of the goods shall pass to the buyer, unless otherwise agreed upon by the parties. Hence, the passage of risk is linked to the factual delivery/possession and not to the transfer of title. Parties to the contract may also regulate the passing of risk otherwise included in the contract.

After the passage of the risk, a seller may protect its interest by providing a loss pay clause in the insurance contract or requesting the securing of the buyers’ obligations with collateral or a bank guarantee.

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

Parties should agree on the RT at the time of contract formation. However, parties are not excluded from providing an RT clause in the amendment of the contract, provided that it is executed before handing over the goods to the buyer. Consequently, parties may agree on the RT any time before delivering the goods to the buyer.

In relation to immovable property, it is obligatory that the RT clause was agreed upon in writing. As for the sale of goods, parties may also agree on it orally. However, it is not recommended, since it will considerably aggravate the burden of proof of existence of such a condition.

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

The sale to a third party breaks RT, if the sub-buyer was unaware of the fact that the seller was not an owner of the goods at the time of concluding the contract. A bona fide purchaser is protected under Article 187 of the Civil Code, which provides that a buyer shall become the owner of property even if the seller was not the owner, but the buyer was in good faith with respect to this fact. The buyer shall not be deemed to have acted in good faith if he or she knew or should have known that the seller was not the owner.

Where the seller sells the goods to another buyer, the new buyer will obtain the ownership over the goods; however, this ownership will be encumbered with the first buyer’s conditional ownership, which means that if the first buyer pays the price in full, he or she becomes the owner of the goods, pursuant to Article 485 of the Civil Code, as the goods were transferred to his or her possession first. In the event of non-payment of the full purchase price, the new buyer will remain the owner of the goods.
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The transformation of the goods breaks the RT, pursuant to Article 196 of the Civil Code, which states that if ownership is transferred under Articles 193-195 (i.e. if (i) something became an essential component part, (ii) a plot of land or several movable things merged, creating an integral new item, or (iii) a new movable object is created by processing or altering material), all other existing rights to that new entity shall be cancelled.

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

Georgian law does not cover such a possibility.

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

If the buyer breaches its payment obligation under the contract, the seller may invoke the RT clause, terminate the contract and demand a bilateral restitution. If the buyer refuses to return the goods or compensate their value (in cases where the goods are already out of buyer’s control), the seller will need to seek to institute ordinary court proceedings under the Civil Procedural Code of Georgia, advisably with the use of interim measures. Court proceedings in the first instance may take up to one year.

It is essential that the seller may enforce RT only within the prescribed limitation period, which amounts to three years for claims related to movable property and six years for claims related to immovable property, pursuant to Article 129 of the Civil Code. The limitation period commences from the moment the seller becomes aware of the buyer’s breach. If the seller does not submit a claim during this period, the condition for transferring the ownership may be deemed fulfilled and the buyer will become the holder of the title over the goods.

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

There is no specific provision in the Civil Code regarding such competing considerations. However, generally, the seller has a right to file a claim in court for the discharge of property from attachment in favour of the buyer’s creditors.

According to Article 32 of the Law of Georgia on Enforcement Proceedings, if a third party claims any right to an object of enforcement, the third party may file a claim with the court within the jurisdictional territory of which enforcement is pending. If the attached property has already been sold, the third party may claim damages from the debtor, due to whose obligation the third party’s property was sold.

Hence, the seller may address the court with the claim of release of the property from attachment or with the compensation claim against the buyer, if the attached goods are already sold.
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4. Bankruptcy — interaction of RT (which is not contract law) and bankruptcy law

1. Goods still with buyer

In the course of bankruptcy proceedings seller may address the court and claim its property back from the creditors. Pursuant to Article 11(1b) of the Law of Georgia on Insolvency Proceedings, any third party has the right to address the court during the insolvency proceedings regarding claims related to the debtor’s property and this case will be discussed by the same court considering the bankruptcy case. According to Article 4(52), if the creditors’ meeting decides that the property, which is disputed, represents the subject of their interest, the bankruptcy court will hear the claim.

2. Goods already sold by buyer

As stated above in Paragraph 6a, if the buyer sells the goods to a sub-buyer acting in good faith, the seller will lose the ownership over the goods. However, the seller may still claim the price of the goods following the standard procedures of the Bankruptcy Law, established for the creditors.

3. Time limits to declare title to receiver

The Law of Georgia on Insolvency Proceedings does not expressly stipulate the time limit for declaring the title to receiver. However, Article 4(5) of this law provides that any dispute regarding the property of the debtor shall be transferred to the court discussing the bankruptcy case, within 20 days from the issuance of a ruling of the court regarding acceptance of the statement on insolvency. Consequently, broad interpretation and analysis of this provision will lead to the result that claims regarding the property of the debtor cannot be submitted after expiration of this 20-day period. Pursuant to Article 11(4) of the same law, after receiving the claim regarding the debtors’ property, the court is obliged to accept it within the following 5 days and complete the proceeding of the case within 20 days.

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

Costs such as storage and insurance can be considered as costs of proceedings and should be recovered from the debtor’s assets. According to Article 40(1) of the Law of Georgia on Insolvency Proceedings, coverage of proceeding costs has a priority over other costs.

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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