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?

Article 449 of the German Civil Code (Bürgerliches Gesetzbuch — BGB) contains one article on RT, paragraph 1 of which reads: “If the seller of a movable good has retained title until payment of the purchase price, then in case of doubt it is to be assumed that ownership is transferred subject to the condition precedent that the purchase price is paid in full (retention of title).”

However, this article does not constitute the most important rule governing RT in German law. In Germany, RT has developed quite naturally outside the framework of special statutory provisions, as it can be based on the rules and principles of the general law of obligations and law of property.

One of the principles of German law which facilitated the development of RT is the principle of abstraction, the so-called Abstraktionsprinzip, which is based on and closely linked with the separation principle,Trennungsprinzip. According to the German principle of abstraction, the parties to an ordinary sales contract to be immediately performed by the parties (in cash) should have concluded three different agreements: (i) the sales contract itself, (ii) the transfer of title to the goods, and (iii) the transfer of title to the money provided by way of purchase price.

Article 925 BGB stipulates that an agreement on the transfer of a title to real property cannot be subject to conditions, but there is no such provision in German law regarding movable goods. According to article 929 BGB, the transfer of title to movable goods requires merely an agreement on the transition of the title and the transfer of the possession and it is thus commonly understood that an agreement on the transfer of title to movable goods can be subject to conditions, in particular the full payment of the purchase price. According to the principle of abstraction, however, an agreement on transfer of title concluded subject to a condition may be considered a breach of a sales contract stipulating the unconditional transfer of title and therefore the parties must also set out any conditions for the transfer of title in the sales contract.

RT is an extremely widespread legal tool in Germany, and contractual practice has developed ever more detailed scenarios and clauses. Parties intending to conclude an agreement on RT under German law are strongly advised to contact a German lawyer specialized in this field of law.

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

As RT has mostly developed by contractual practice and the response of jurisprudence to it, the most important developments of German contractual practice are set out in (a) and the underlying rules and their scope under (b).

1. Contractual practice has developed a variety of types of RT. Some deal with the extent or the scope of the condition upon which the title is retained or
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   transferred (see (i) below). Others focus on the buyer’s authorization to carry out measures or activities which might lead to a loss of the seller’s property. Therefore, these clauses also make provisions for cases in which the seller might lose the retained property (see (ii) below).

1. The normal condition (precedent) in RT is the full payment of the purchase price. This type of RT is referred to as simple or ordinary RT (einfacher Eigentumsvorbehalt).

In an ongoing business relation between buyer and seller there are always sales contracts, for which the purchase price has not been settled and there are always goods subject to RT. Sometimes goods, the purchase price of which is still unsettled, are already sold to third customers, while other goods, for which the purchase price has already been paid, are still in the possession of the buyer. Thus German contractual practice has developed the enlarged RT. Under such an enlarged or comprehensive RT (erweiterter Eigentumsvorbehalt) the property is retained by the seller upon the condition precedent that the buyer has settled all the open obligations towards the seller.

2. If the buyer has bought the goods for its business, the normal course of business may lead to a loss of the retained property, either by processing (A) or by sale to a third party (B).

1. If goods are processed, they will be connected to or mixed with other goods, or transformed. According to Articles 947, 948 and 950 BGB, the property rights in connected, mixed or transformed goods may be lost. In case of connection or mixing, the owners of the connected or mixed goods may acquire co-ownership of the goods, or one of the original owners may retain full property rights but must indemnify the owners of the transformed goods.
   Contractual practice has developed clauses, which stipulate that transformation or processing is carried out in the name of and for the benefit of the seller. In such cases the seller retains property rights in the transformed goods.
   In case of connection or mixing, the clauses can provide for a transfer of the claims against the new owner of the connected or mixed goods from the buyer to the seller. They can also provide that co-ownership rights are transferred from buyer to seller. This type of clause is often referred to as RT with processing clause (Verarbeitungsklausel). Sometimes they are also referred to as a form of a prolonged or extended RT. To avoid confusion in the present text, the term extended RT will only be used for cases which are presented under (B).
2. If the buyer acquires the goods in order to resell them, clauses authorizing the buyer to sell the goods with retained property rights to third parties are frequently used. The seller grants this authorization, because the buyer will only
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   be able to generate the funds to pay the purchase price by selling the acquired products.
   As the seller loses its retained property rights when the buyer sells the goods to a third party, contractual practice has also developed some clauses, which aim at extending the protection of the seller in case of such a loss of the retained property rights.
   One possibility to secure the seller’s retained property rights consists in disclosing the RT to the third-party buyer. The third party buyer will then acquire possession of the sold goods but has to honour the retained property rights of the seller. Such clauses are referred to as forwarded RT (weitergeleiteter Eigentumsvorbehalt). Such forwarded RT clauses are uncommon in German contractual practice as they oblige the buyer to disclose the retained title to third-party buyers, which in practice impedes sales to third-party buyers.

A much more common type of RT clause — aiming to secure seller’s interests in case of sales to third parties — is the extended RT clause (verlängerter Eigentumsvorbehalt). Under such clauses, the buyer transfers its claims to the purchase price, which he or she can demand from his or her buyers (third-party buyers), to the seller. As long as the buyer sells the products (with the retained property rights) in the ordinary course of business, the buyer will not be obliged to disclose the transfer of the claim to the purchase price. The buyer will even be authorized to collect the purchase price during normal business procedures. The buyer is usually obliged to inform the seller of all relevant data regarding the sales contracts and respective third-party buyers. If, however, the buyer strays from the ordinary course of business, the seller is entitled to inform third-party buyers of the transfer of the claims to the purchase price. As a result, the seller is then entitled to collect the purchase price and the buyer then forfeits its right to collect these claims.

The case in which the buyer sells the product (with the retained title) to a third-party buyer without disclosing the retained title of the seller while providing for RT for the buyer, is referred to as a secondary or subsequent RT (nachgeschalteter Eigentumsvorbehalt). Such secondary or subsequent RT clauses are quite rare as buyers do not like to disclose that they bought under an RT clause and that RT is still effective. If the buyer pays the purchase price to the seller, the buyer becomes owner of the goods, and if the third-party buyer pays his or her purchase price to the buyer, the third-party buyer becomes owner.

1. Article 449 paragraph 1 BGB does not have great legal impact, as it is just a legal presumption. Nevertheless, it ensures that even the simplest RT clause has legal effects. German sales contracts often contain the phrase: “Title to the sold goods is retained.” (Das Eigentum an der verkauften Sache bleibt vorbehalten.) However, the more complex issues relating to RT require more sophisticated contractual drafting.
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   For years it was possible under the German Civil Code that a seller could exercise its rights to the retained title without any further legal statement. This resulted in situations in which the seller got back the possession of the sold good while the buyer still had to pay the purchase price. To correct such situations, a further paragraph was added (today’s article 449 paragraph 2 BGB), which states that the seller may only reclaim its retained property rights if it rescinds the sales contract. In German law, a rescission of a sales contract requires delay in the payment of the purchase price or one of its instalments and the setting of a grace period (Nachfrist). The seller is allowed to rescind the contract and reclaim its retained property rights only after the expiration of this grace period.

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 has been described above, there is statutory regulation of RT in Germany and there are general principles and an extensive set of court decisions which also regulate RT.

However, German law provides another and largely equivalent type of security not mentioned in the German Civil Code as it has been developed by contractual practice. There are many court decisions concerning this type of security.

RT provides security without possession. The types of security expressly provided for movable goods in German property law require possession by the person. RT is a type of security through which a person needing a loan/the buyer may grant security without transferring possession of the related goods. In commercial practice this is of great importance as the debtor can still work and do business with the goods which he or she has given as security.

In the case of RT the creditor is the seller and the debtor is the buyer. The seller grants a loan to the buyer. If an enterprise needs further loans, the RT may not be of use for a mere creditor who has not sold goods to its debtor. For such cases German contractual practice has developed a security transfer of title (Sicherungsübereignung). Transfer by way of security means that a debtor passes the title to a movable good to a creditor upon the condition that the creditor must re-transfer (or automatically re-transfers) the title to the debtor upon the debtor’s full payment of the secured debt. While in an RT transaction, the collateral (i.e. the thing which is the subject-matter of the security interest) is equally the subject-matter of the commercial transaction from which the creditor’s credit risk exposure results, in a transaction involving a security transfer of title, there is usually no overlap between the subject-matters of the commercial transaction and the transaction through which the security interest is granted.

The principles applying to the RT and to the security transfer of title are quite similar in German law. However, German law grants slight advantages to a seller selling under RT as compared to a creditor who is granted security by security transfer of title. In cases of conflict between retained title and security transfer of title, the retained title frequently prevails.

4. What is the relation of RT and passage of risk in your system? How may a
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   seller protect its interest after the passage of risk?

German law disconnects the passage of risk from the RT as the latter solely deals with the passage of title. However, in response to question 2, section (a) above we already outlined some risks of the seller regarding the transfer of possession which often includes the transfer of risks. The types of clauses presented above should be regarded as a response by German contractual practice to these risks.

Of course, there is still the risk of damage to the sold goods the title of which is being retained. These damages are generally insured. Therefore, RT agreements frequently contain clauses which oblige the buyer to insure the acquired goods against contractually defined risks. In this manner the seller is able to protect its interests.

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

In order to perfect the RT under German law, there are usually no special formal requirements to be met. In theory, an oral contract (consent between seller and buyer) would be sufficient. However, for the purposes of proof, it is advisable to conclude a written agreement.

Timing and formal requirements play a role when the seller wants to reclaim its retained property. In response to question 2, the formal requirements for reclaiming retained property have already been outlined in section (b) (article 449 paragraph 2).

6. Effectiveness

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

There are two cases to be distinguished here: sale in full accordance with the provisions of the RT agreement (1) and mala fide sale or a sale which is not covered by the RT agreement (2). Thirdly, a case in which goods have been transformed will be illustrated under (3).

1. If the buyer is a commercial reseller, it will for commercial reasons require that the agreement on RT (or any corresponding clause) authorize the buyer to sell the purchased goods, if this is conducted within the ordinary course of the buyer’s business. As illustrated in response to question 2, German RT agreements authorize the buyer to sell acquired products (with the retained title) to a third-party buyer, provided that this is carried out in the ordinary course of the buyer’s business. Such sales are fully valid and, therefore, the title retained by the seller is lost through such a sale to a third-party buyer subject to the full payment of the purchase price by the third-party buyer. If the third-party buyer is not able to pay the purchase price immediately, there are several scenarios in which the seller does not immediately lose its retained property right through the conclusion of
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   the sales contract with the third-party buyer.
   In the case of a forwarded RT clause, the seller only loses its retained property right when the obligations which the retained title secures are fully paid. In case of a secondary RT the seller loses its retained title when either the buyer or the third-party buyer pays the seller fully.
   In the case of any other RT clause, the seller loses its retained property right with the sale of the good by the buyer to a third-party buyer. This is also true for cases with extended RT clauses. In these cases, however, the seller acquires at the same time another security which replaces the RT. This replacement security constitutes the claim against the third-party buyer to the payment of the purchase price which the buyer transfers (as a security) to the seller.
2. In the case of a mala fide sale, or a sale outside the ordinary course of business, the seller can also lose the retained title under German law. This is due to the rules of acquisition in good faith as defined under articles 932 ss BGB.
   Generally, under German property law (Sachenrecht), a bona fide buyer (gutgläubiger Erwerber) can acquire a proper title to goods from an unauthorized person (Nichtberechtigter). Therefore, a third-party buyer, who acts bona fide and trusts that the buyer holds property rights in the goods sold can acquire the title according to Article 932 BGB. Thus, the seller may lose its retained title if the buyer sells the involved good to a third party, even if this sale is not conducted in the ordinary course of business and provided that the third-party buyer acquires it in good faith. However, the German law of property stipulates acquisition in good faith if the (third-party) buyer trusts in the property of the seller but not if the (third-party) buyer only trusts in the power of disposition of the seller. This may create legal problems which are outside the scope of this publication.
3. The response to question 2 indicates that transforming, processing, connecting or mixing a good may result in the loss of the retained title in its entirety or parts thereof. This can occur irrespective of the good or bad faith of the person(s) who transform, process, connect or mix the respective good. Inthis regard, German contractual practice has developed RT clauses which include processing clauses in order to extend or re-establish the retained property right in cases of transforming, processing, connecting or mixing.

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

As above in response to question 2, there are certain possibilities to transform the RT into another type of security. This transformation is carried out through so- called extended RT clauses. Extended RT clauses permit the transfer of the buyer’s claim to the purchase price against thirdparty buyers. In case of a secondary RT, the seller loses its retained title only when the buyer pays the seller fully or when the third-party buyer pays the buyer fully.
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The extended RT clause results in a transfer of buyer’s claim to the payment of the purchase price against the third-party buyer. The transfer of this claim (as a security) constitutes a replacement security for the seller. Under sections b. and d. below it will be illustrated how this replacement security can secure the interests of the seller.

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

The enforcement of RT if the buyer is delinquent but not insolvent depends on whether the sold good can still be located at the buyer’s (1) or at a third-party buyer’s (2).

1. If the sold good is still located at the buyer’s, the seller can assert its rights towards the buyer. As has already been outlined in response to question 2 under section b., Article 449 paragraph 2 BGB requires that the seller must first rescind the sales contract before it can claim its rights deriving from the retained property. For such a rescission, the seller must set a grace period (Nachfrist) for the buyer. Depending on the amount of the purchase price which is still unpaid and the circumstances of the case, such a grace period is often one or two weeks. The seller is allowed to declare the rescission of the sales contract only after the expiry of this grace period.
   The seller may then reclaim the sold good. If the buyer does not meet the seller’s request to surrender the sold good, the seller will usually have to ask for judicial assistance in order to obtain an enforceable title based on which the sold good can be recovered. This title can also take the form of an interim order (with some modifications), which the seller can obtain under certain conditions. In German courts, interim orders can be obtained within a few days and, under exceptional circumstances, even in the span of hours. Only under exceptional circumstances is the seller allowed to take the law in its own hands and to bring the good under the retained title into its own possession.
2. If the sold good is no longer in the buyer’s possession but in the possession of a third-party buyer, the seller has lost the security granted by a simple or ordinary RT. However, in the case of a forwarded RT, a secondary RT or an extended RT, the seller still has a security. It can then assert its rights against the third-party buyer.
   In all of these three cases, the seller has to rescind the sales contract before it can assert its rights deriving from the retained title. This rescission must be exercised as described in section (1). At this stage, the third-party buyer may be informed about the RT and the rescission of the sales contract with the buyer.
   In case of a forwarded or a secondary RT, the third-party buyer will frequently use the opportunity to pay the buyer’s debts in order to obtain full title. As a
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   result, informing the third-party buyer may already have the effect of securing the seller’s interests.
   In the case of a forwarded RT, the seller can re-claim the sold good from the third-party buyer.
   In the case of a secondary RT, the seller can also re-claim the sold good from the third-party buyer. In most cases, the third-party buyer still has the option to pay the full purchase price (as agreed in the contract between the buyer and the third-party buyer) to obtain full ownership of the sold good. If the third-party buyer does not pay, the seller can enforce the retained title against the third-party buyer in the manner described under (1).
   In the case of an extended RT, the seller can claim payment of the purchase price (as agreed in the contract between the buyer and the third-party buyer) from the third-party buyer. The third-party buyer is then obliged to pay directly to seller. To achieve this, the seller must inform the third-party buyer of the transfer of the claim to the purchase price. The seller also has to inform the third-party buyer that the condition upon which the seller may demand payment directly from the third-party buyer has been fulfilled. This usually means that the seller has to inform such buyer about the rescission and its grounds. If the third-party buyer does not pay, the seller must seek judicial aid against the third-party buyer. Since the seller seeks to obtain payment there is generally no possibility to get interim relief. A regular court procedure will last several months.

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

Different types of conflicts might arise between RT and a buyer’s creditor’s rights, depending on the type of RT and the type of rights that the buyer’s creditor has. Sometimes, there might even be a conflict between the rights deriving from different retained titles (1). More frequent are conflicts between a retained title and a security transfer of the same good (2). In case of an extended RT, a conflict may also arise in relation to the claims against third-party buyers. Such a conflict may arise if the buyer transfers the claim on the purchase price against the third-party buyer to a third creditor (3). A conflict might also arise when a third creditor seizes the good, which is under RT, or the claim to the purchase price against the third-party buyer (4).

1. In German law, conflicts may even arise between various retained titles, in particular in case of retained titles with a processing clause. This can happen when a manufacturer buys several goods under RT with a processing clause and then processes these goods in order to manufacture a new product. If all or several of the processed goods were acquired with a retained title under a processing clause, the question of title to the manufactured good will arise. A seller, who is not secured by a processing clause, will lose its retained title during the processing. If several sellers have sold components under RT with
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   processing clauses, they will become co-owners of the manufactured good, sometimes along with the buyer. If the buyer pays one of its suppliers (who has delivered with retained title and processing clause), the buyer will acquire the co-ownership share of this supplier. In most cases, processing clauses stipulating that the seller will acquire full ownership of the manufactured good will be considered void under German law.
2. Conflicts between a retained title and a security transfer of property have brought about many decisions of the German Supreme Court as well as a lot of legal analysis in Germany. Usually, a buyer is not entitled to grant a security transfer of property of the good, on which the seller has retained the title. Under German law, the buyer of a good for which the seller has retained the title is considered to have an expectant right, called Anwartschaftsrecht in German legal terminology. In German legal theory, such an expectant right may be assigned and disposed of almost in the same way as a property title. Thus, a security transfer of title to a good, for which the seller has retained the title, will be considered a security transfer of the corresponding expectant right in most cases.
   In case of an individual transfer of a security title to a specific good, there may be cases in which the third-party creditor may acquire bona fide the title transferred in security. However, such cases are quite rare.
   More relevant are instances of a global security transfer of title to all goods in one warehouse of the buyer or a particular part of it. Such a security transfer of title will mostly be agreed upon between the buyer and its bank. In Germany, often a distinction is made between financial credits and goods credits. Legal writing and the practice of the Supreme Court tend to favour the creditor of a goods credit. Thus, in conflicts between a retained title and a security transfer of title, the retained title will often prevail. A bona fide acquisition of a security transfer of title of the goods in an entire warehouse or part of it will generally not be admitted by German courts.
   In case of an enlarged or comprehensive RT there may be instances where the retained title might be considered excessive in terms of security for the credit and thus void. A security transfer of title may prevail in such cases. Therefore legal practice has tended to avoid excessive security for the seller by retention of excessively enlarged title.
   These rules do not only apply to a security transfer of title agreed between the seller and its creditors, but also to statutory liens on the goods for which title is retained. Usually, bona fide acquisition of a legal lien is excluded in German law. However, article 366 para. 3 of the German Commercial Code stipulates that a carrier’s legal lien may be acquired bona fide under certain circumstances.
   If the carrier is chartered by the buyer and the buyer believes bona fide that the buyer is already full owner of the goods being transported, then the carrier may
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   acquire bona fide a lien on the transported goods and not only on the expectant right of the buyer on the transported goods. However, this case seems to be quite hypothetical. As RT is quite widespread, at least in Germany, a carrier has to expect the possibility of retained title on the goods, which it carries. Therefore, only in rare cases a carrier might actually acquire a legal lien on the transported goods and not only a legal lien on the expectant right on the goods, which it transports for the buyer.
   If the carrier is chartered by the seller, who sold under RT, the carrier may acquire a legal lien on the retained title. He will lose this lien when the buyer pays the purchase price in full to the seller.
3. In case of extended RT clauses the seller will acquire a security right on the purchase price of the buyer against the third-party buyer. Such a security transfer of the claim to the purchase price may conflict with a security transfer of the claim to the same purchase price. Under (1), the case of conflicting RT clauses with processing clauses has already been presented. If the processing clause is combined with an extended RT, the sellers of the goods who manufactured the product, sold to the third-party buyer, may become co-owner of the claim to the purchase price against the third-party buyer.
   A conflict is also possible between an extended RT clause and a security transfer of the claims to the purchase price. In case of individual security transfers of specific claims to the purchase price the priority principle will apply. The first (security) transfer of this claim will be valid, whereas the second is not valid, as the transferring buyer is no longer the owner of this claim. A bona fide acquisition of a claim is not possible under German law.
   Banks often secure credits by a global security assignment of claims of the creditor against third parties. In most cases such a global assignment has been carried out prior to a sales agreement with a clause on an extended RT. Applying the priority principle will mean that the global security transfer of claims to the purchase price in favour of the bank would prevail over the extended RT, i.e. the security transfer of the claim on the purchase price in favour of the seller. In Germany, this is not considered equitable, perhaps due to a general tendency in Germany to favour goods creditors over financial creditors. According to legal theory, such a global transfer of claims of a creditor would misguide the debtor to breach its contracts with its suppliers who generally sell under an extended RT. As a result, banks in Germany are obliged to include partial waiver clauses in their agreements on a global security transfer of claims. As a consequence, in German law an extended RT clause of a seller, will, in most cases, prevail over a global security transfer of claims of a bank.
4. A creditor of the buyer might want to satisfy its demand for the payment of its claims by obtaining the seizure of goods in the possession of the buyer. If the bailiff seizes goods on which the seller has retained the title, the seller
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   can motion for the suspension of the seizure. If the creditor does not have any further rights on the seized good, but merely on the seizure, the seizure must be lifted.

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

1. Goods still with buyer

Until 1999, when a new bankruptcy act entered into force in Germany, the retained title authorized the seller to re-claim its property during every stage of the insolvency proceedings. After the 1999 insolvency act (Insolvenzordnung hereinafter InsO) entered into force, this has changed substantially. Depending on the type of RT clause, it grants the seller the right to segregation or to separation against the insolvent receiver. A segregation right authorizes the seller to demand restitution of the product from the insolvency receiver whereas a separation right does not. The insolvency receiver may liquidate the product at its own discretion. The receiver is then obliged to transfer the liquidated amount to the person[s] entitled to the good at issue (after deduction of the receiver’s costs, often compounded by 5 per cent of the value of the good, in many cases plus VAT). Thus, if the seller is the only person who has a right of separation concerning the good, the insolvency receiver is obliged to pay the seller the liquidated proceeds (after deduction of costs).

As already illustrated in response to question 3, German law privileges the RT over a security transfer of title. As a result, a retained title leads to a right of segregation whereas a security transfer of title only results in a separation right according to article 51 no. 1 InsO. However, this favourable treatment of the RT is only granted for a simple or ordinary RT. As a general rule, it has to be stated that any right deriving from an RT clause which surpasses the rights stemming from a simple RT clause falls within the scope of article 51 no. 1 InsO which consequently leads only to a separation right and not a segregation right.

The enlarged or comprehensive RT can entail the necessity of a detailed assessment in the case of the buyer’s insolvency. Only the condition (precedent) of the payment of the purchase price results in a segregation right, whereas a condition (precedent) of the fulfilment of further-reaching obligations of the buyer is considered similar to a security transfer of title. As a consequence, any further-reaching condition will only result in a separation right according to Article 51 no. 1 InsO. Therefore, the seller is granted a segregation right if the buyer has not paid the (full) purchase price upon the beginning of the insolvency procedure. If, however, the purchase price has already been paid at the beginning of the insolvency procedure but no further-reaching obligations have been secured by the comprehensive RT, the seller is only granted a separation right.

The same rules apply for RT with processing clauses, which also surpasses a simple or ordinary RT. As a result, the proprietary rights deriving from a processing clause are considered similar to a security transfer of title. Therefore, these proprietary rights only give rise to a separation right and not a segregation right.
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The response to point d.ii. below will illustrate in more detail how the rules deriving from the application of Article 51 no. 1 InsO affect forwarded, secondary or extended RT clauses.

First, it will be outlined how the seller can assert a segregation right deriving from a retained title (1) and then, how it can assert a separation right deriving from such a title (2).

1. If the seller has rescinded the sales contract before the start of the insolvency proceedings (including preliminary insolvency proceedings), the seller may claim its retained property from the insolvency receiver. If it was not possible to declare rescission before the start of the insolvency proceedings, the seller has forfeited its right to rescind the sales contract. After the start of the insolvency procedure the insolvency receiver has the right to decide whether it wishes to honour and continue the execution of the contract or to terminate it. If the insolvency receiver does not make such a declaration, the seller may request it. However, according to article 107 InsO, the insolvency receiver is not required to make such a declaration before the first meeting of the creditors. As a result, the insolvency receiver may still use the sold good at least until the first creditors’ meeting. The seller is not entitled to start legal procedure for the surrender of the sold product before this first creditors meeting.
   If the insolvency receiver decides to honour the sales contract, it has to pay the agreed purchase price (in full and not only a quota). The receiver then becomes proprietor of the sold good. If it decides to terminate the contract, it is obliged to respect the seller’s segregation right by surrendering the sold product to the seller. The seller may demand judicial relief if the insolvency receiver does not respect these obligations. Such judicial relief must be demanded before the (ordinary) civil or commercial courts.
2. If the seller is only granted a separation right which, for example, derives from a comprehensive RT, the seller has to inform the insolvency receiver about its retained title and to prove its existence. The seller will then become a separate creditor in the insolvency procedure. The insolvency receiver has to pay the seller the proceeds which it obtains from the liquidation of the good secured through the title (after deduction of costs). If the insolvency receiver does not respect these obligations, the seller can demand judicial relief. Such relief has to be asserted before the court which administrates and controls the insolvency procedure (and not before the ordinary civil or commercial courts).

2. Goods already sold by buyer

If the goods are already sold by the buyer to a third-party buyer (and if the property therein has been transferred unconditionally to the third-party buyer) upon the beginning of insolvency proceedings, the seller has forfeited any retained title based on an ordinary or simple RT agreement. However, the seller’s interests would still be secure if a forwarded or secondary RT or an extended RT had been concluded.
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If there is only a simple or ordinary clause of RT, the seller has lost its retained property right upon the transfer of the property to the third-party buyer. The seller then has the right to demand the insolvency dividend which is derived from the claim to the purchase price.

If the seller is beneficiary of a forwarded (1) or a secondary (2) RT or of an extended RT (3), and if the third-party buyer has not yet paid its purchase price (in full), the seller still benefits from some security, which is presented in the following paragraphs.

If the third-party buyer has paid the purchase price in full, the seller has lost its security even in the case of a secondary, forwarded or extended RT and is thus only entitled to demand the insolvency dividend deriving from the claim to the purchase price.

1. In the case of a forwarded RT, the third-party buyer knows that the title is retained for the seller and that the retention is subject to the full payment of the purchase price as agreed between the seller and the buyer. Consequently, the seller can directly address the third-party buyer, inform it of the failure of payment by the buyer and of the rescission the seller has declared. The seller may then claim the surrender of the good directly from the third-party buyer. If the seller had not been able to declare the rescission of the sales contract (to its buyer) before the start of the insolvency proceedings, the seller has to wait for the declaration of the insolvency receiver as to whether or not it wishes to fulfil the sales contract. If the insolvency receiver decides to honour the sales contract, there is no further need and possibility for the seller to claim the surrender of the good from the third-party buyer. If the insolvency receiver declares that it does not wish to honour the sales contract with the seller, the seller may, upon producing this declaration, demand that the third-party buyer surrenders the product to the seller. Cases of a forwarded RT are very rare as a third-party buyer does not usually want to depend on the fulfilment of a contract between other parties. Even rarer are the cases where an insolvency receiver declares that it does not wish to fulfil the sales contract with a seller who benefits from a forwarded RT. This is due to the fact that the third-party buyer may rescind its sales contract with the buyer and even demand damages if obliged to surrender the purchased good to the seller. In order to avoid such a situation, an insolvency receiver will rarely risk declaring the intention not to fulfil a sales contract.
   It is probably due to this that in German legal writing, if the case of a forwarded RT is treated at all, one finds only the statement that there are no reports of a seller having had special problems to assert its rights against a third-party buyer derived from a forwarded RT in case of the insolvency of the buyer.
2. In the case of a secondary RT, the seller does not have a direct right to claim the surrender of the good from the third-party buyer. Thus, if in the relation between buyer and third-party buyer a situation arises after the start of the insolvency proceedings in which the buyer may claim the surrender of the good from the third-party buyer, the insolvency receiver has to exercise such right. Generally, the seller has not yet forfeited its retained title in these cases. In most cases, this
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   retained title will result in a separation right of the seller. Only in exceptional cases is the seller granted a segregation right to the surrender of the goods. It can then assert this claim directly against the third-party buyer.
3. If the purchase price has not yet been paid (in full) by the third-party buyer in cases of extended RT, the seller is still the holder of the claim to the purchase price against the third-party buyer due to the transfer of the rights on this purchase price, which is contained in an extended RT agreement. However, such a transfer of the claim to the purchase price against the third-party buyer also falls within the scope of article 51 no. 1 InsO. As a consequence, the seller does not have segregation rights, but only separation rights. So upon the start of the insolvency proceedings the seller can no longer assert its right to the purchase price itself. It is the task of the insolvency receiver to assert these rights. As a result, the insolvency receiver is obliged to collect the purchase price from the third-party buyer. If the seller is the only person who has a right to claim the purchase price from the third-party buyer, the insolvency receiver will have to pay the seller the collected proceeds (after deduction of costs). Otherwise, the insolvency receiver will pay the collected proceeds (after deduction of costs) to all people having a right to claim the purchase price.

3. Time limits to declare title to receiver

The insolvency receiver may specify time limits by which the creditors should file their claims. These time limits only apply for insolvency creditors. So, once again, a distinction has to be made. First, the time limits for a seller who has a segregation right will be outlined (1), then those time limits which apply for sellers who have separation rights will be discussed (2).

1. If the retained property grants a segregation right to the seller, the seller is not considered an insolvency creditor. It is therefore not affected by the time limits laid down in the framework of the insolvency proceedings. This means that there is no provision in German insolvency law which determines a time limit for declaring the retained title to the receiver. Nevertheless, for practical reasons, an owner of retained property should declare its retained title as soon as possible as there is always the risk that the insolvency receiver might be inclined to sell or process the retained property. As long as the insolvency receiver is unaware of the retained title, there is the risk that a third party might acquire the property bona fide. It is also advisable to inform the receiver as soon as possible on a forwarded, secondary or extended RT.
2. If the retained title of the seller only results in a separation right, the seller is considered an insolvency creditor. It should therefore respect the time limits set by the insolvency receiver. However, these time limits are not entirely binding. Sometimes the insolvency receiver has to consider creditors’ rights which are declared even after the expiry of such time limits. However, when the proceeds from the liquidation of goods have been paid to the creditors who had been granted a separation right on such goods, or when the insolvency quota has
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   been paid out to all the insolvency creditors, it is too late for the seller to assert its rights.

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

As long as the insolvency receiver is still in possession of the goods on which the title is retained, the receiver has to advance the costs for storage and insurance. Whether or not the insolvency receiver is entitled to pass these costs on to the seller depends on whether the seller has segregation (1) or a separation (2) right.

1. If the seller has a segregation right and the insolvency receiver has to advance costs for storage and insurance, the insolvency receiver does not usually have the right to pass on these costs to the seller. However, in German law, the legal situation is quite complex. Under some conditions the rules of the agreement on RT between seller and buyer may still apply if they contain provisions for cases such as these. If these rules do not apply or do not contain any provisions of that kind, then articles 987 to 1007 BGB apply. According to these articles, the insolvency receiver is not entitled to recover any advanced costs for storage and insurance in most scenarios.
   If the seller wants to transport the good out of the buyer’s premises to a place which seller determines, the seller will have to advance the costs for transport. From this time onwards the seller will also have to advance the costs for storage and insurance. If the seller has demanded interim relief against the insolvency receiver, it is commonly only entitled to demand the surrender of the good to a bailiff. In this case, the seller has to advance the bailiff’s costs. If the seller is eventually enabled to liquidate the retained property, it may deduct the costs for storage and insurance from the proceeds of the liquidation. This is of practical relevance for the seller, if the proceeds are higher than the unsettled purchase price. The seller has to relinquish the surplus to the insolvency receiver, but is entitled to deduct all its expenses from this surplus.
2. In case of a separation right, the insolvency receiver liquidates the sold goods and has to pay out the proceeds from liquidation to the seller. The insolvency receiver is entitled to deduct all costs it incurred which include the reasonable costs for storage, insurance and transport.

7. Model clauses — 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.

In contracts with consumers it is mandatory to provide expressly formulated and clear information
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on the RT. In contracts with businesspeople, such a clear indication is not necessary and the RT may also be included in the general conditions of sale. However, there is a risk that such clauses in general conditions of sale may become ineffective, if the general conditions of purchase of the buyer state that RT will not be accepted. Therefore, it is advisable to include the provisions on RT in the contract itself and to include it in the negotiation process.

As the seller under RT is still the owner of a good, which is already in the buyer’s possession, it is advisable under German law to declare that the buyer possesses the good for the seller. There should also be some specification for this possession arrangement.

There are quite severe rules on excess security in German law. Therefore provisions on enlarged or comprehensive RT, RT with processing clauses or extended RT clauses for complex and longstanding supply relations between seller and buyer should always be drafted, or at least checked, by a German specialised lawyer.

Thus, the following sample is limited to situations involving a simple or ordinary RT clause for the RT on the good(s) for one individual delivery:

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