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?

The RT is regulated by the Hungarian Civil Code (Act V. of 2013, § 6:216).

In the case of real property, the procedural rules pertaining to the registration of RTs are laid down in the Land Registry Act [Act CXLI of 1997, § 17. (1) 21. § 50(2) c, § 50(2a)].

In the case of movable property, the RT shall be registered in the Collateral Registry or if the property is listed in other official register, then it shall be registered there. (See Act CCXXI of 2013 on the Collateral Registry, § 9., § 10(5), § 16 — 17.).

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

While concluding the contract, the seller has the possibility to retain its title of ownership in writing, until the purchase price is paid fully (§ 6:216(1) of the Civil Code). In the case of real property, the RT shall be recorded in the Land registry, while in the case of movable property it shall be registered in the Collateral Registry or into another public registry (§ 6:216(3)-(4) of the Civil Code).

The RT protects the seller, as it prohibits the buyer from disposing of the item until he or she has paid the full purchase price. Consequently, in case of breach of contract by the buyer, the seller has the possibility of restoration that cannot be invalidated by a third person acquiring title to the item.

When concluding a contract which contains an RT provision, the right of use and enjoyment is transferred to the buyer upon the transfer of possession of the item; the buyer has to bear the costs related to the use of the item.

The RT is valid if in writing, regardless of any other formal requirements for the validity of a contract. It shall be highlighted that the RT cannot be maintained after the purchase price has been paid in full.

The RT has effect against third parties only if it is registered in the Land Registry, Collateral Registry or other official registry. If the registration is implemented then a third party may not acquire ownership of the property from the buyer. In the absence of registration, the third-party transferee acquires ownership over the movable property, if such acquisition takes place in good faith and for consideration.

Note the possibility of criminal law aspects: depending on the facts of the case, a breach of RT may
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have criminal law consequences and the possibility of defraud, deceit or conversion of funds. (See § 372, 373 and 376 of the Act C of 2012 on the Criminal Code).

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 Hungary.

The other legal arrangement used very often in practice is the restraint on alienation and encumbrance, usually combined with mortgage. It is preferred if it is important for the parties to transfer the ownership and the seller needs protection for the purchase price. Such a right can arise from the transaction underlying the transfer of the ownership right (e.g. payment of a purchase price, granting of a repurchase/purchase option), or in connection with other legal transactions (e.g. loan, credit, etc.).

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?

The transfer of ownership under Hungarian law consists of two phases. The first phase requires an adequate contract or other legal title, and the second requires the transfer of the tangible property or registration in the Land Registry in the case of real property. To acquire the right of ownership over movable property, a contract or other legal grounds for the transfer, and the related transfer of possession of the property, are necessary. To acquire ownership over real property, a contract or other legal grounds for the transfer and the related registration in the Land Registry are necessary. The chief rule is that the owner must bear the cost of damage to the good, if others cannot be obliged to do so. The Civil Code is based on the Roman law principles of casum sentit dominus or its equivalent casus nocet domino. The owner can demand compensation from others for damage to the good based on contractual and non-contractual damage liability and indemnification rules, while contracts may also shift the damage onto others. But this main rule is corrected in case of the transfer of ownership.

Concerning the sale of a real estate property (§ 6:217 of the Civil Code) and of movables, the same rule is applicable, i.e. the buyer bears the risk after the transfer of possession.

The Roman law principles of brevi manu traditio and constitutum possessorium are applicable to the Civil Code in stating that agreement between the parties is sufficient to transfer possession if the person acquiring possession is already a secondary possessor of the thing (brevi manu traditio), and the transferor maintains possession as the secondary possessor of the thing (consitutum possessorium). Since both the possessor and secondary possessor are considered possessors, there is no actual transfer of possession, only a change in the legal title of the possessor, which is effective only in the internal relationship between the possessor and the secondary possessor. The corporal element is also missing when the transfer of possession takes place with a simple agreement and the relinquishing of power over the thing by the transferor. This complies with the Roman law principle of longa manu traditio. The legal situation is similar if the transfer of possession takes place upon the transfer of a claim for recovery of the thing, for which agreement
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between the parties is sufficient (cessio vindicationis). In this case, it is not the possession but the right to claim possession that is transferred; however, based on the regulatory logic of the Civil Code, this is also considered a transfer of possession because someone who does not have physical power over the thing but is otherwise entitled to possession qualifies as a possessor (§ 5:3 of the Civil Code).

In consumer sale contracts, where the seller is a business undertaking and the buyer is a consumer, and the seller undertakes to dispatch a good to the buyer, risks shall pass to the buyer when it, or a third party named by the buyer, has acquired the physical possession of the good. At the time of handing over the good to the carrier, risks shall pass to the buyer if the carrier was hired by the buyer, provided that the carrier was not recommended by the seller (§ 6:219 of the Civil Code).

The seller may protect its interest by an insurance contract in which the seller will be the beneficiary in case of loss in the transferred property.

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

The agreement on the RT shall be in writing, failing this the RT will not be valid. In relation to timing, the RT may exist only until the payment of the total purchase price.

Before the conclusion of the sale agreement (e.g. in the preliminary contract) the parties may already agree to apply RT in the final contract. After the conclusion of the sale contract, RT applies only until the buyer acquires ownership and for this, the consent of the buyer is required. Therefore theoretically it can happen that the parties supplement their agreement with the RT after the conclusion of the contract, but before the transfer of possession in the case of movables or registration of ownership, in the case of real property.

The RT will have effect against third parties only if it is registered.

6. Effectiveness

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

1. The effect of RT

As a main rule, ownership can only be acquired from the owner (the principle of nemo plus iuris). An exception from this is a buyer acquiring movable property in good faith from commerce, in exchange for consideration. Other exceptions are applied to transfer in exchange for money or a bearer instrument.

The basic rule is that third party may not acquire ownership from the buyer if RT exists and
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is registered. The failure to register the RT creates an exception such that in the absence of registration, a third person acquiring from the buyer for consideration in good faith shall acquire the ownership. In this context, good faith means that the buyer did not know and with proper caution, he or she would not have known that the item was under RT. In this case the lien (mortgage, pledge) established by the buyer on the item for a third party shall also come into existence. Nevertheless, if the buyer transfers the title of the item to a third party during the RT, the buyer breaches the contract, and thus the seller may lodge claims only against the buyer to recover the damages.

Judicial practice is consistent in considering sales contracts as valid despite the fact that the seller is not yet the owner of the property of the transaction at the time of contract conclusion. In such cases, the contract is not aimed at an impossible service, nor is it in breach of any law, as the seller may acquire the ownership right of the property of the transaction before the fulfilment date stated in the contract. If this fails to materialise, the seller has committed a breach of contract. Of course in cases where the transfer of the item of the sales contract is impossible to begin with (e.g. property that not eligible for sale or subject to RT), the sales contract is qualified as null and void due to the breach of law or the impossible service.

2. Transformation of the item during RT

There are several particular rules of transformation in the Civil Code.

Processing and conversion are regulated in the following way:

1. A person who manufactures a new thing for himself in good faith by processing or converting another person’s thing shall reimburse the value of the thing or surrender ownership of the new thing in return for reimbursement of the value of his work, whichever is chosen by the owner of such thing.
2. If the value of the work significantly exceeds the value of the processed or converted thing, the owner of the thing may demand compensation for the value of the thing.
3. If the person performing the processing or conversion has acted in bad faith, the right to choose shall accrue to the owner of the material.
4. If the owner of the material opts to acquire ownership of the new thing, he shall pay compensation only up to the extent of his actual gains.
5. If ownership of the new thing is acquired by the person performing the processing operation, the rights of any third party on the thing shall cease. If title to the new thing belongs to the owner of the material, any right on the material shall apply to the new things as well”. (§ 5:65 of the Civil Code)

Composites and compounds are regulated in the following way:
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1. If the objects of several persons are merged or combined in a way that the separation of such objects may only be accomplished by inflicting substantial damage or unreasonably high cost, or if it cannot be accomplished at all, ownership of the final product shall be claimed jointly by the persons affected in proportion to the value of the objects in existence at the time when merged or combined.
2. If, based on its value, quality, economic function or for any other reason, either of the merged or mixed things should be considered as a main component of the new thing created by merging or mixing, the owner of such thing shall have the option to either retain ownership of the thing created by merging or mixing and compensate the other owners, or to surrender it to them in return for compensation.
3. The right to choose may not be claimed by the person who himself caused the merger or mixing in bad faith. In that case the mala fide former owner may demand compensation only up to the extent of actual gains.
4. If the thing created by merging or mixing is given to joint ownership in accordance with the relevant provisions of this Act, the rights of third parties on the things affected by the merger or mixing shall accrue to the ownership shares replacing those things. If there is a right on one of the things, and the thing created by merging or mixing becomes the property of the person who owns the other thing, the right on the thing shall cease, unless otherwise provided for in this Act. Any right on the thing shall pass to the thing created by merging or mixing, if it becomes the property of the same person who owned the thing on which the right existed. (§ 5:66 of the Civil Code)

The rules for the sale of converted, processed, merged or compounded things are the following:

1. If ownership of a converted, processed, merged or compounded thing is claimed by neither of the parties, it shall be sold, and the received price shall be divided among the entitled parties in accordance with their ownership share.
2. In that case, the party who is entitled to claim compensation only up to the extent of his actual gains shall be entitled to no more than that part of the received price which remains after the satisfaction of those entitled to full indemnification. (§ 5:67 of the Civil Code)

In the case of annexation, the following rules shall apply:

1. If any person who, using his own material, in good faith builds an annex attached to the building of another, and thereby considerably increases the value of that building, ownership of the final product of such building shall be claimed jointly by the builder and the owner of the building, unless there is an agreement to the contrary (hereinafter referred to as ”annexation”). The ownership shares shall be determined based on the value of the whole property and the attached building
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   section, in the percentage the attached section represents in the whole building at the time when the annexation is finished.
2. Consideration for construction works which are not treated as annexation may be demanded according to the principle of unjust enrichment.
3. The provisions on mala fide builders shall also apply to mala fide annexation. (§ 5:68 of the Civil Code)

In case of in-building the following rules shall apply:

1. If a person uses another person’s material for building on land, upon which the materials used shall become permanently attached to the land, such material shall become the property of the land owner, unless there is an agreement to the contrary between the owner of the material and the owner of the land.
2. If a person uses another person’s material for construction, upon which the materials used shall irretrievably become part of the building, such material shall become the property of the owner of the building, unless there is an agreement to the contrary between the owner of the material and the owner of the building. (§ 5:69 of the Civil Code)

Finally, in case of building on the land of another, the following rules shall apply:

1. If a person builds a structure in good faith on another person’s land without entitlement, ownership of the structure shall be acquired by the owner of the land, however, he shall reimburse the builder to the extent of his actual gains. The court shall be entitled to compel such builder to buy the land or a part thereof (if the land is divisible) at the request of the land’s owner.
2. The builder shall acquire ownership of the land or an adequate part thereof if the value of the building considerably exceeds the value of the land or the relevant part of the land. At the request of the land owner, the court may resolve that the builder has acquired ownership of the building alone; in such a case, the builder shall have right of use on the land.

and

1. If the builder has acted in bad faith or if the owner of the land protested against the construction at a time when the restoration of the original state would not have caused unreasonably great damage to the builder, the provisions on encroachment shall be applied.
2. A builder shall be considered to have acted in bad faith if before the beginning of
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   construction works he knew or should have known under the circumstances that such building infringes upon the owner’s ownership rights. (§ 5:70 — 5:71 of the Civil Code)

The transformer acquires the ownership right of the thing through an original mode of acquisition as transformation gives rise to a new thing. The legislator thus declares that any third-party rights on the thing are terminated once the transformer acquires the ownership right. In the event that the material’s owner becomes the owner of the new thing, third-party rights may still apply to the thing.

The Civil Code presumes good faith as a conceptual criterion for processing or conversion, so if the processor acted in bad faith, he or she does not acquire the ownership right of the new thing on the basis of processing. In this case, the owner of the material may decide to waive its claim to ownership of the new thing, in other words the processor’s acquisition of ownership is established based on the material owner’s legal declaration.

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

The RT will cease to have effect if a bona fide purchaser acquires the property, as such it is not transformed. The original seller may only claim the purchase price and only from the original buyer. In this case the seller does not have any in rem right, therefore he or she cannot claim the property from the third party.

The situation is different if the third party acquires the possession in bad faith or without any consideration (countervalue) from the buyer. In this case, the seller as owner may seek return of the property from the third party.

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

If the buyer fails to pay the purchase price it is a breach of contract. In this case the seller is entitled to require performance of the obligation at court. If in consequence of non-performance the buyer’s interest in contractual performance has ceased, he or she may withdraw from the contract, or if restitution cannot be provided in kind, he or she may terminate the contract (§ 6:140(1) of the Civil Code).

The seller may ask for an order of payment or sue the buyer at court. The order for payment procedure falls within the competence of notaries. It is mandatory in the case of overdue monetary claims not exceeding HUF 1 million to start with the order of payment by a notary, and the claimant is not allowed to file a suit at court. If the value of the claim is between HUF 1 million and HUF 400 million, the claimant may decide whether to take legal action at court or start an order of payment proceeding.

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The order of payment procedure is conducted fully in electronic form. It is a rapid and efficient method for the recovery of pecuniary claims. The order for payment is filed at any of the notaries. Afterwards the notary sends the order of payment to the debtor, who has 15 days to submit a statement of opposition. In the event of an opposition, the case is referred to a court. In the absence of an opposition, the claimant will have an enforceable instrument equivalent in effect to a court judgment, usually in three weeks (the detailed rules are available in the Act L of 2009 on the order of payment procedure).

In the case of judicial court proceedings, the rules of the civil procedure shall be applied (Act III of 1952 on the Code of Civil Procedure; the new Code of Civil Procedure [Act CXXX of 2016] will be in effect from 1 January 2018 and the limit is raised to HUF 3 millionfrom that time). Such court case may last for one to three years at first and another year at second instance.

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

The Civil Code does not contain a particular rule for this situation, but from the general regulation it is quite clear that the buyer’s creditors may lay claims only against the property of the buyer. This means that until the buyer acquires ownership, the property belongs to the seller and it is immune from the claims of buyer’s creditors.

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

1. Goods still with buyer

Liquidation

In case of the insolvency of a legal entity, the rules of liquidation are applied. At the beginning of the bankruptcy (liquidation) procedure, the liquidator seizes up the property situation of the debtor and lists the assets and contracts (§ 46(1) of the Act XLIX of 1991). The item with RT does not belong to the estate of the debtor (see the governing court decision in the Case Law Report [BH] No. 2003.293). Therefore the liquidator has neither right nor obligation relating to such property (see court decision in Repository of State Judicial Orders [BDT] No. 2009.1989).

The seller with RT is not party to the liquidation procedure, but can sue the debtor for restitution of possession in ordinary court process (see the governing court decision in Repository of State Judicial Orders [BDT] No. 2005.1233).

Judicial enforcement

In case of judicial enforcement process against the buyer the situation is very similar. The bailiff seizes the debtor’s movable property if the debtor has not voluntarily performed its obligation as indicated in the enforcement order. Seizure is effected by drawing up a seizure report listing
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the debtor’s movable property for the purposes of seizure. Movable property in the debtor’s possession, custody or that which is evidently owned by the debtor, may be seized. Consequently, movable property in the possession or custody of the debtor, which is evidently not owned by the debtor, as evidenced by some affixed mark, sign or other circumstance, cannot be seized. Should such property be attached, an action for the recovery of goods wrongfully attached can be filed in the form of replevin (claim and delivery). Therefore the seller with RT may file an action at the court in 8 days against the bailiff’s seizure [Act LIII of 1994 on judicial enforcement, § 115(2)]. Similar regulations shall be applied in the case of a bank account [§ 79/C(3) and real property (§ 138(5)]. The demur postpones the judicial enforcement.

2. Goods already sold by buyer

Liquidation

If the buyer sells the property under RT, two different situations may occur. Firstly, if the third-party buyer was not a bona fide purchaser then the general civil law rules are applicable. In this case the owner may vindicate his property and sue the third party for the restitution of possession.

Secondly, if the buyer was a bona fide purchaser of the item under RT then such buyer acquires ownership. In this case the original owner may announce its claim for the reimbursement of the purchase price to the liquidator in 40 days after the beginning of the liquidation procedure. The original owner is only one among the creditors and the satisfaction of its claim depends on the measure of the property of the debtor legal entity (§ 38(3) of the Act XLIX of 1991 on the bankruptcy and liquidation procedure).

If the seller files its claim for the purchase price in the liquidation procedure, then he or she will be registered as a creditor. In this case, the seller may exercise creditor’s rights as follows:

1. He or she may institute a claim against the executive officers of the debtor company to compensate the creditor’s damage from their own assets, if the executive officers (at the time of commencement of the liquidation proceedings or 3 years before that time) did not manage the debtor company in the interest of the creditors while they were aware of the fact that the debtor company was insolvent or was threatened by insolvency (§ 33/A of the Act XLIX of 1991 on the bankruptcy and liquidation procedure).
2. Furthermore, the creditor (and the liquidator) may file a claim in court within 90 days from the notice and within one year from the receipt of notification of liquidation proceedings regarding:

• A debtor’s contract or other legal act that aims to reduce the assets of the debtor company or the debtor’s intent was to evade the creditors’ claims and the third party knew or should have known about it. Contracts or legal acts which arose a maximum of 5 years prior to the first Court action for liquidation can be contested;
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• A debtor’s contract or legal act that came into existence a maximum of two years prior to the first application to start liquidation proccedings arrived at the court, if the aim was to alienate or burden the debtor’s assets without consideration or with gross disparity in value;
• A debtor’s contract or legal act that came into existence within a maximum of 90 days prior to the application for the commencement of liquidation arrived at the court, if the aim of this was to prefer one of the creditors, particularly with amendment of a contract or giving collateral to a creditor.

Judicial enforcement

In the case of judicial enforcement procedures, the situation is very similar. In the case of a bad faith third party, the judicial enforcement procedure has no relevance as the owner may simply claim back the possession from the third party. However, if the third party was a bona fide purchaser, the original owner may use the judicial enforcement proceedings to enforce its claim.

3. Time limits to declare title to receiver

As the owner’s claim is enforced separately from the liquidation procedure, the general time limits are applied. Claims from obligations shall lapse in five years (§ 6:22(1) of the Civil Code), but the ownership claims shall not lapse (§ 5:35 of the Civil Code).

If the property under RT has been acquired by a bona fide third-party purchaser, then the original owner can file a claim for the unpaid purchase price to the liquidator 40 days after the publication of the liquidation process in the official journal (Magyar Közlöny). If this deadline lapses, but the claim is filed in 180 days after the publication, then it will be registered, but only in the last class of the creditors (§ 37(2) of the Act XLIX of 1991 on the bankruptcy and liquidation procedure).

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

These costs shall be covered by the assets of the debtor company as cost of the liquidation procedure, if the owner files a claim (see the deadlines above) and the liquidated company has sufficient assets to cover it (§ 37(2) of the Act XLIX of 1991 on the bankruptcy and liquidation procedure).

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.

In case of a real property:
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It can be extended for the land registry procedure:

In case of a movable property:

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