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 Section 25 of the Pakistan Sale of Goods Act, 1930 (SGA).

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

Subject to Section 25 SGA 1930, RT clauses in Pakistan are contractual terms that may be agreed and varied by the parties as per their contractual agreement. An RT clause in its simplest form is a clause in a contract for the sale of goods that states that, subject to a condition precedent (usually payment of price) the seller will retain title to the goods until that condition precedent is fulfilled by the buyer. This principle is in line with section 19 of the SGA which states where there is a contract for the sale of goods, the property in the goods is transferred to the buyer as per the intention of the parties. RT clauses may be constructed in a way, contractually, that property does not pass to the buyer until certain conditions are fulfilled. This would mean that the buyer would have physical possession of the goods or documents but the title in them would be retained by the seller.

According to section 25(2) and 25 (3) of the SGA, RT clauses may also be implied by the conduct of the parties. Where the seller has shipped or dispatched goods by bill of lading or railway receipt and makes them deliverable to the order of the seller or its agent, then the seller is prima facie deemed to reserve the right of disposal. Also, where the buyer receives the bill of exchange along with the bill of lading and if the buyer does not honour the bill of exchange, the buyer is bound to return the bill of lading and if he or she wrongfully keeps possession of the bill of lading, the property in the goods does not pass to the buyer.

3. If RT is not regulated in your country, are there similar or commercially equivalent forms of security preserving the seller’s right to the goods?

RT is regulated under Pakistani law.

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 rule for passage of risk in Pakistani law is that unless the parties agree otherwise, risk prima facie passes with property (section 26 SGA). The goods remain at the seller’s risk until property is transferred to the buyer, and risk would also transfer to the buyer at that stage.

Since an RT clause would effectively have the seller retain property in the goods, prima facie the risk would be with the seller. However, the parties may agree otherwise and can, for example, agree that risk is to pass with the delivery of the goods.

[Page164:]
Section 26 further clarifies that where delivery has been delayed through the fault of either the buyer or seller, the goods are at the risk of the party in fault as regards any loss which might have occurred but for such fault.

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

The only requirement to perfect the seller’s RT right is that the clause must be specifically stated and contractually agreed upon by the parties at the time of conclusion of the contract. There are no specific requirements as to the timing of when the RT right must be agreed upon.

6. Effectiveness

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

As a general rule under Section 27 of the SGA, no one can sell goods and give a good title to anyone unless he or she is the owner of the goods or is someone that has the owner’s authority or consent, e.g. an agent. However, there are exceptions to this rule and in some circumstances a sale to a third party will break an RT clause.

Section 30(2) of the SGA lays down the exception to the above-mentioned general rule. It states that where a person having bought or agreed to buy goods, obtains with the consent of the seller, possession of the goods or the documents of title to the goods, the delivery or transfer by that person, of the goods or documents of title to any person receiving the same in good faith and without notice of any lien or any other right of the original seller in respect of the goods, shall have effect as if such lien or right did not exist and the good faith receiver will obtain good title to the goods.

The law is silent as to the position where the original goods have been transformed subsequently.

It may be noted that in the absence of any law or judicial precedent, Pakistan Courts refer to the judgments of the superior Courts of common law countries, e.g. England and the USA, which have persuasive value.

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

Pakistani law is silent on this matter. However, as per the principle of privity of contract, anyone who is not party to a contract cannot sue or be sued upon the terms of a contract. The enforceability of a contract can only be done by and against parties to a contract and since the RT clause will be a contractual obligation between the buyer and the seller, it is difficult to imagine an RT clause being enforced against a third party.

2. Enforcement of RT if delinquent buyer is not insolvent — what
   [Page165:]
   is the judicial procedure and what is its likely timeline?

There is no specific judicial procedure for the enforcement of RT. The seller shall file a suit against the buyer for declaration (that the seller is the true owner of the goods) and possession of the goods in accordance with the general Pakistani Civil Procedure Code. It can take 12 to 24 months from the date of filing of the suit until judgment.

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

There are no specific provisions under Pakistani law dealing with a specific scenario of a conflict between RT and a buyer’s creditors’ rights.

However, some take the view that the seller’s claim to the unprocessed goods should prevail over the buyer’s creditors’ rights if the seller had effectively retained title by a provision in the sale contract.

Under the general law every common carrier has a particular lien on the goods carried for the freight payable. Apart from contract, express or implied, the carrier has no lien on the goods for any amount beyond the price of carriage.

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

1. Goods still with the buyer

There are no specific provisions under Pakistani law.

However, some take the view that, in the case of a valid RT clause, the goods under RT can be claimed by the seller to be his or her property and he or she may reclaim possession of them by commencing court proceedings.

2. Goods already sold by buyer

As discussed above, in the subsequent sale of the goods by the buyer to a third party in the conditions laid down in section 30(2) SGA, a valid title will pass to the third party and the RT clause will break. In such a case, the seller will be ranked as an ordinary creditor in an action to recover the price of the goods.

3. Time limits to declare title to receiver

The claim must be filed before the date of the order of adjudication by the Court.
[Page166:]

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

There are no specific provisions under Pakistani law. However, some take the view that the costs for storing the goods, insurance and transport should be included in the costs of the proceedings.

7. Model Clause(s) — Drafting tips

NOTE: The following language is based on contractual provisions seen generally in contracts containing RT clauses in this country, but readers should always consult legal counsel before including an RT clause in a contract.

Ownership of the Goods shall not pass until the Buyer has paid the purchase price in full.

A Seller may also want further protection of being able to reclaim the goods in case of non-payment.

An issue for RT clauses is that a seller may lose its useful right to bring an action for the price against the buyer under section 55 of the SGA 1930, as the action for price can only be brought against a buyer where property had passed to it and effectively an RT clause stops that from occurring. Therefore, it may be useful to put in a clause such as:

---