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 Articles 2023, 2311, 2312, 2313 and 3069 of the Mexican Federal Civil Code (Código Civil Federal).

In case of bankruptcy, Articles 70 and 71 of the Law of Insolvency Proceedings (Ley de Concursos Mercantiles) govern the mechanisms over goods subject to RT that are in possession of the bankrupt entity.

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

RT is a contractual instrument in commercial and civil agreements in which the transfer of the title of property is subject to the suspensory condition of the buyer fulfilling all its contractual obligations — usually referring to the fulfilment of payment. Therefore, the seller reserves its property title over the goods, while the use and enjoyment of the goods is commonly transferred to the debtor upon execution of the agreement.

Article 2312 of the Mexican Federal Civil Code establishes that: “The buyer may validly agree to reserve title of goods until the purchase price is paid in full.”

Articles 2311, 2313, 2314 and 2315 of the Mexican Federal Civil Code set forth the general characteristics and scope for RT in Mexico. These general principles include:

1. The seller may not sell the goods subject to RT, as per applicable legal and express prohibition.
2. The buyer may not sell the goods subject to RT as it has no right to dispose of the goods.
3. If the obligations are not fulfilled and termination of the agreement occurs, the parties must:
1. restitute the payments made by the seller to the buyer;
2. the seller may request a rental fee for the use and enjoyment of the asset while it was in possession of the buyer; and/or an indemnification for the deterioration of the goods, which shall be determined by experts before a court of law; and,
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3. the buyer that has paid through instalments has a right to be paid the legal interest on the monies deposited to the seller.
4. Article 2311 expressly states that the freedom of contract of the parties to any RT is limited as the parties may not agree to more burdensome or onerous conventional penalties than those determined by the law, and described under point 3 above.

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 Mexico per the provisions stated above.

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 general principle under Mexican law is that should anything happen to the goods, the loss and risk are attributed to their owner. Therefore, risk remains with the owner party. Nevertheless, it is common practice that the parties agree otherwise, and transfer the risk with the delivery of the goods.

Furthermore, Article 2023 of the Mexican Federal Civil Code establishes the possibilities of passage of risk under any disposal/sale of goods subject to RT. These shall be governed:

1. By the agreement of the parties;
2. If the loss of or damage to the goods results from the negligence of either party, that party is to assume the risk.

A seller may protect its interest by establishing the passage of risk to the buyer upon delivery of the goods per contractual agreement, and furthermore by requiring the buyer to obtain insurance coverage under which the seller is the direct beneficiary.

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

The RT in any civil or commercial sale agreement must comply with all the formalities of a sale agreement required by Mexican law.

The requirements for the effectiveness and enforceability of a sale agreement in Mexico are:

1. When dealing with goods

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Pursuant to Article 2316 of the Mexican Federal Civil Code, sale agreements over mobile assets do not require any formalities; however it is best practice, for sale agreements over high value mobile assets to be vested with the formalities required for real property.

2. When dealing with real property

Pursuant to Article 2317 of the Mexican Federal Civil Code, sale agreements over real property, whose value surpasses 365 times the minimum wage in Mexico City — which to the date of this publication is approximately MXN 80.00 (Mexican pesos) per day and reflects the minimum legally permitted income for a worker in the country — must be granted under public deed “escritura pública” before a Notary Public.

The sole execution of a sale agreement does not provide evidence with respect to third parties. Therefore, it is best practice to register the agreement in the relevant public registry — usually, the Public Registry of Property and Commerce (Registro Público de la Propiedad y Comercio) — in order to obtain this evidence. However, pursuant to Article 3069 of the Mexican Federal Civil Code, the registration of RT sale agreements over mobile property is mandatory and a formal requirement.

6. Effectiveness

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

Pursuant to Article 2313 of the Mexican Federal Civil Code, the sale of goods under RT is prohibited. Furthermore, the Article establishes that this prohibition of sale is to be noted in the inscription at the corresponding registry, providing evidence with respect to third parties.

However, it is imperative to note, that if the sale with RT is not registered, and a bona fide third party acquires the goods, unaware of the RT modality, the sale to the unaware third party is valid. In this case, the damaged party may request before a court payment of damages and compensation for the actions of the party that sold the goods in bad faith.

In case the goods have been transformed, the RT prevails as long as the goods subject to this modality:

1. can be clearly identified and;
2. no damage is caused by the extraction of the goods from their modified state.

If the extraction and recovery of the RT goods is impossible, the damaged party may request before a court payment of damages and compensation for the actions of the counterparty.

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

Not applicable

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

There are two different kinds of proceedings by which actions can be initiated to obtain the rescission or enforcement of a sale agreement with RT and the subsequent order to repossess the goods: the Ordinary Commercial Procedure (Juicio Ordinario Mercantil) and the Executive Commercial Procedure (Juicio Ejecutivo Mercantil). The eligibility to pursue one or the other will depend on the form in which the obligations of the debtor are documented given that the Executive Commercial Procedure is only eligible when such obligations have been documented through a public instrument — which, under Article 1237 of the Commerce Code, is any such document referred to as public by the laws of Mexico (which include any documents either issued by a public officer acting in its capacity as public officer or executed before a public officer with sufficient capacity to certify its authenticity, such as a notary public), as well as any commercial agreements executed before a commercial notary public (known as “corredor publico”).

The main differences between these two kinds of proceedings are that (i) the latter is resolved within shorter statutory periods, and (ii) the plaintiff is able to obtain a cautionary order for the securing of assets sufficient to guarantee the value of its claim from the commencement of the proceedings, thus providing reassurance that upon issuance of a firm and final judgment the indemnity obligations of the debtor will be able to be met in full.

Interim relief measures can be sought before a court as provided in the Commercial Code (Código de Comercio). A guarantee is generally required by the courts to guarantee the potential damages that the interim remedies could cause to the defendant. This guarantee is generally requested to cover approximately between 10 and 20 percent of the amount of the claim.

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

As mentioned above, RT provides evidence with respect to third parties, as long as:

1. an express RT provision appears in the sale agreement; and
2. it has been registered before the corresponding Registry.

Therefore, goods under RT will prevail before other creditors. However, if there is no evidence with respect to third parties, creditors, including carrier’s liens over the RT goods will prevail, given that under Mexican law preferential payments are subject to the following order:
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1. fiscal and labour credits;
2. security interests holders with a registered guarantee or in rem rights over the goods; and
3. unsecured and ordinary debtors.

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

1. Goods still with buyer

Pursuant to Article 70 of the Law of Insolvency Proceedings (Ley de Concursos Mercantiles), goods that are in possession of the bankrupt entity, to which no definitive title has been granted, may be separated from the bankruptcy assets by their effective title owners. The effective owner may start proceedings through a separatory procedure (acción separatoria) before the insolvency court, under which the owner must provide full evidence of the legal title over the goods.

The rights of the seller, under an RT sale agreement during an insolvency proceeding would be preferential to the rights of other creditors. Subject to no objection by the bankrupt entity, the conciliator (conciliador), or the receiver (interventor), the judge shall order the separation of the goods from the insolvency estate.

2. Goods already sold by buyer

As mentioned above, the sale of goods subject to RT is prohibited by Mexican law; nevertheless, the Law of Insolvency Proceedings (Ley de Concursos Mercantiles) regulates the procedure to recover amounts for the goods illegally sold by the buyer. Pursuant to Article 72, sub-clause III of the cited law, no separatory action may proceed over goods that have been alienated by the buyer, prior to the commencement of insolvency proceedings. Therefore, the amounts paid may not be granted directly to the seller. However, if these amounts have not been paid by the bankrupt entity, the creditor may be subrogated to the rights of the acquiring third party.

3. Time limits to declare title to receiver

Pursuant to Article 122 of the Law of Insolvency Proceedings, (Ley de Concursos Mercantiles) creditors may declare title to a receiver within twenty calendar days after the publication of the commencement of insolvency proceedings (concurso mercantile) in the Federal Official Gazzete (Diario Oficial de la Federación). Once the separatory action is filed by the creditor, the debtor has twenty business days, or as differently agreed by the parties, to determine whether it shall comply with its obligations under the contract or agree to terminate the agreement. If the debtor opts to terminate the agreement, the insolvency court would order the separation of the goods from the insolvency state.
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4. Who pays storage, insurance and transport during discussions with receiver?

All expenses incurred during the insolvency process are considered proceedings’ costs which must be covered by the debtor party. Furthermore, during insolvency proceedings, the bankrupt entity becomes depositary of all assets in its possession, including creditor’s assets, and must assume all the costs of storage, insurance and transport for the preservation of the goods.

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.

Main clauses to include:

1. Retention of title:

2. Passage of risk:

3. Assurance of payment in case of loss for acts of God or Force Majeure:

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