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?

In Israel, RT is a contractual instrument based on the freedom of contract and the right of parties in a commercial transaction to shape the content of their engagement as they please. The RT relies on Article 33 of the Sale of Goods Act, which establishes a default that ownership over merchandise transfers to the buyer upon its delivery to such buyer, unless the parties agreed on a different date or another way to transfer ownership of the merchandise.

RT is used in order to allow sellers to supply merchandise to retailers on credit terms, without the concern that in the event of insolvency of the retailer the seller may lose its money by preserving ownership over the merchandise until it is paid for in full or sold to a third party in a manner enabling its full payment.

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

The RT rules of Israel, as a common law jurisdiction, are defined by case law of the judicial system, since the particular rules applying to the RT (apart from the general rule of Article 33 of the Sale of Goods Act) are not regulated by law.

In practice, there are no formal requirements for RT clauses and there are no clear characteristics to the RT rules. However, over the years the Supreme Court of Israel has defined the scope of RT rules and the manner in which RT should be formulated and used.

Some 25 years ago the validity of RT was first examined by the Supreme Court in the case of Colombo vs. Commercial Bank¹. In that case, the Supreme Court overruled the RT’s legitimacy, stating that in the said case the RT was an artificial transaction and the real intention of the parties was to ensure that the seller would have a disguised lien on the merchandise in the event that the buyer could not pay its debt to the seller. Therefore, it was determined that RT is not valid and that the Pledges Law would apply to these situations. Thus, in the absence of registration, such lien is invalid vis-à-vis the buyer’s creditors. According to this reasoning, in the event of liquidation, if no pledge has been registered, the goods become part of the total assets of the buyer and the seller becomes an unsecured creditor, equal in rank to the other unsecured creditors.

Several decades later, the Colombo ruling was overturned in the Northern Drilling case², where the Supreme Court determined that RT’s validity should be acknowledged and should be interpreted as such, and not just as a disguised lien. The Supreme Court re-qualified the use of RT
[Page134:]
and determined that each case must be examined on its merits according to the following tests: the first is a subjective test — examination of parties’ intention in the transaction; the second is an objective test — examination of the economic logic of the transaction according to the agreement and the external circumstances.

A relatively new ruling of the Supreme Court, which was set in the Vita Pri HaGalil case³, led to another re-examination of the manner of implementing the conditions of RT. In Vita Pri HaGalil, the Supreme Court determined that the RT should be examined through the two tests established in the Northern Drilling case, and through two additional sub-tests that are “rules of thumb” that have taken root in the rulings of the District Courts, and are mainly aimed at substantiating the existence of a “true” RT: The first test concerns the transaction’s term, and the existence of a specific written RT embedded in the agreement between the parties. The Supreme Court draws a distinction in this regard between long-term transactions that include an ongoing supplier-retailer relationship, and incidental one-time transactions. With respect to ongoing business relationships, parties must explicitly state the RT clauses in a detailed written agreement, as opposed to a mere notation on an invoice or delivery certificate or in an oral manner. The second test concerns the essence of interest a seller has in the asset it transfers to a certain buyer’s possession. Since the RT is of a possessive nature and affects a buyer’s creditors, a seller has to maintain supervision and control mechanisms over the assets that are in the buyer’s possession.

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?

Although RT is not generally regulated in Israel by law, it is regulated by the case law of the judiciary, as described above, and where applicable, under the Companies Law — 1999 (Companies Law). In 2012, amendment 19 of the Companies Law entered into force and set some ground rules and guidelines for assets in liquidation or reorganizations that the RT governs over, the actions the appointed court officer is authorized to make in these assets and the protection that the RT owner receives.

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 relation between RT and passage of risk in the Israeli legal system. RT clauses do not regulate the passage of risk, and the passage of risk is to be agreed upon between the parties to a commercial transaction, separately from the matter of transfer of the ownership over the merchandise.

There are two conventional methods to determine risk allocation between the parties in our system: the first is by drafting a detailed contract that indicates all the issues involved with respect to the goods that are being sold in the transaction and details the manner in which the risk is allocated between the parties. The second, and more common one, is through reference to
[Page135:]
the International Chamber of Commerce Incoterms® rules or the United Nations Convention on Contracts for the International Sale of Goods that govern these issues.

After the passage of risk, a seller may protect its interests by using contractual mechanisms that will enable it to control the goods and the way they are maintained and protected, as well as by determining that it will be entered as a beneficiary of the insurance of the goods.

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

There are no formal requirements in order to perfect the seller’s right. The validity of the RT shall be examined on its merits and the requirements might change from case to case depending on the relevant circumstances. The factual examination is flexible and adapted to commercial life, and not formal and predetermined. Nevertheless, it is possible to point to a number of elements, which, if present, provide a strong presumption that the RT is valid (see Vita Pri HaGalil case):

First, there should be an explicit RT clause in a detailed written agreement (as opposed to simply registering it on invoices or delivery certificates). This condition refers mainly to an ongoing supplier-retailer relationship, as opposed to an incidental one-time transaction, to which this requirement is not necessarily as strict.

Second, the seller must maintain a mechanism of supervision and control over the property held by the buyer, according to the type of goods being sold. In the event of a limited number of goods, a one-time visit to the seller’s warehouse might be sufficient to ensure that the assets have not been transferred to a third party. However, in the event of large volume of inventory, it is usually required that the buyer’s warehouse be separated and that proper reporting be given in the buyer’s and seller’s books. In such cases, the seller will be required to show that he or she has regularly monitored the goods delivered to the buyer through a report given by the buyer regarding the sales made, or by frequent entry into the buyer’s warehouses or by marking the goods and separating them from the other goods in the buyer’s warehouses.

In addition, the seller may determine different contractual mechanisms that will restrict the buyer’s ability to sell the goods to third parties until payment of the full consideration.

6. Effectiveness

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

No, the sale of the goods to a third party generally does not break the RT in Israel, unless the third party acquiring the goods under RT is a bona fide purchaser who is unaware that the title of the goods remained with the original seller and who paid reasonable consideration for the goods.
[Page136:]

Market overt,⁴ which is regulated in Article 34 of the Sale of Goods Act, determines that in the event that a property was sold by a person who engaged in the sale of assets of the type of the property sold, and the sale was in the regular course of their business, the ownership is transferred to the purchaser, free of any lien, encumbrances or any other right in the property, even if the seller was not the owner of the property or was not entitled to transfer the property, provided that the purchaser bought and received the property in good faith.

Therefore, in the event that goods have been transformed or sold the RT may apply to the third party that received those goods, unless such third party proves the fulfilment of the aforesaid conditions. In case the above requirements were met, market overt will prevail over the RT, and the RT shall no longer apply to the goods in the sense that the ownership over the goods will pass to the bona fide purchaser.

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 that is a bona fide purchaser, there is no possibility to transform the RT and the original seller’s sole remedy is to claim payment for the goods from the original buyer.

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

Since the RT is not regulated under law in Israel, there are no specific procedures for enforcing the RT, and the general procedural rules would apply to it — i.e. the owner of the RT will have to file a claim in court, and in the relevant circumstances, accompany the claim with a motion for interim relief.

Although the timing for any interim relief is usually short, the main claim may take anywhere between 12-36 months to be adjudicated.

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

In case of a conflict between RT and a buyer’s creditors’ rights, the RT will usually prevail over the rights of such creditors, as long as the RT precedes the other liens in time. However, this general position may vary depending on the relevant circumstances and the good faith of the parties.

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

[Page137:]

1. Goods still with buyer

To the extent that the RT is valid and it was agreed between the parties prior to the bankruptcy proceedings, the goods under the RT are not included in the liquidation fund and the seller has a right over them as if he or she were a secured creditor. As described above, the Companies Act includes several sections that apply to the sale or use of the goods by the liquidator or trustee of a company, but these are unusual situations and generally, the RT will lead to an exclusion of the goods from the liquidation fund.

2. Goods already sold by buyer

As mentioned before, sale to a third party that is a bona fide purchaser breaks the RT and it shall have no effect on such sale. In such event, the owner of the RT will lose the ownership of the goods. However, in certain cases, they might have the right to step into the shoes of the buyer and re-claim ownership over the goods or claim the balance of the consideration for the goods from the sub-buyer, provided that the sub-buyer did not pay the full amount to the buyer.

3. Time limits to declare title to receiver

There is no specific time limit to declare title (since the relevant time limits apply to the filing of proof of claims to the receiver and to assets in the liquidation fund, and do not apply to assets excluded from it), and the RT will be subject only to principles of prescription law and laches, as well as to principles of estoppel.

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

Usually the receiver shall pay the storage, insurance and transport, unless the court orders otherwise.

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.

---

---