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 Article 491 of the Russian Civil Code, The Preservation of the Right of Property for the Seller. This Article stipulates that in cases where the contract of sale provides that the right of property in the goods handed over to the buyer is preserved for the seller before the payment for the goods or the onset of other circumstances, the buyer shall not have the right to alienate the goods or dispose of them in any other way before the transfer of the right of ownership to buyer, unless otherwise stipulated by the law or the contract or unless the contrary follows from the designation and property of the goods.

In cases where the transferred goods are not paid for within the period specified by the contract or where other circumstances emerge under which the right of property passes to the buyer, the seller shall have the right to demand the return of the goods to it, unless otherwise stipulated by the contract.

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

RT is a clause included in the contract of sale of movable goods stipulating that the right of property shall stay with the seller until the full payment of the price for the goods by the buyer. Article 491 of the Russian Civil Code governing this type of clause does not limit the variety of circumstances under which the right of property in goods already sold and handed over to the buyer stays with the seller. In practice, however, the parties normally agree that the transfer of right of ownership will depend upon the full payment of the sales price.

An RT clause is generally intended to be used for the sale of movable goods. Insertion of an RT clause into the contract assumes that the goods pass to the buyer under a kind of lease from the time the buyer acquires the right to use and possess the goods until the moment of full payment of price in one or several instalments. The goods become buyer’s property after all the payments for the goods are made.

The RT clause is not applicable to the sale of so-called non-documentary securities and shares (see Articles 28 and 29 of the Federal Law of the Russian Federation No. 39-FZ dated 22 April 1996 “On the securities market”).

The RT clause cannot be used for the sale of immovable property since under Russian law, when the alienation of the property is subject to state registration, the right of property shall pass to the buyer at the moment of such registration (see Articles 223 and 551 of the Russian Civil Code).

Russian legislation does not prohibit parties to use an RT clause in the event of sales of movable goods which will be later resold by the buyer to a third person or will be used in the production
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of another movable object by means of processing. In such cases the buyer shall pay the price for these goods from the income it receives from the onward sale of such goods or of a new movable object produced from the original goods. In case of such onward sale the seller with the RT clause loses its right of ownership from the moment the buyer sells or processes the goods. The interests of the seller are usually guaranteed by a so-called extension of the RT clause. For example, the parties may agree that the seller shall keep the right of property over the new thing produced from the processed original goods sold to the buyer. The Russian legislation is silent on such situations and it is up to the parties to decide how to secure the seller’s rights in such cases of onward sale or processing.

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 the Russian Federation by the provisions of the Russian Civil Code mentioned 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?

Pursuant to the general rule contained in Article 211 of the Russian Civil Code the risk shall be borne by the owner of the goods, unless otherwise stipulated by the law or by the contract.

However, pursuant to the specific provision of Article 459 of the Russian Civil Code in relation to sales contracts, unless otherwise stipulated by the contract of sale, the risk shall be transferred to the buyer — according to the relevant law or the contract the seller is deemed to have performed its duty of handing over goods to the buyer.

The risk of accidental destruction of, or accidental damage to, goods sold when they are in transit is transferred to the buyer on conclusion of the contract of sale, unless otherwise stipulated by such contract or the customs of business turnover.

Since Article 491 governing RT is located in Chapter 30 of Part Two of the Russian Civil Code named “Purchase and Sale” as are Articles 459 and 211, the specific rule of Article 459 shall prevail over the general rule of Article 211. This means that the risk passes together with the handing over of the goods.

After the passage of risk if the buyer does not fulfil its obligations to pay the contract price the seller is entitled to:

• claim the goods back pursuant to Article 491 of the Russian Civil Code;
• unilaterally terminate the contract. This can be done, however, only provided the contract was concluded in the course of performing the business activity (see Article 310 of the Russian Civil Code).

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The seller may also use the mechanism of insurance provided for by Article 960 of the Russian Civil Code, which provides that in case of assignment of the rights to insured property from the person in whose interest the insurance contract was concluded to another person, the rights and obligations under the insurance contract shall be transferred to the person to whom the rights to property have passed. This means that if the goods were insured in the interest of the seller, the rights and obligations under such insurance contract shall pass to the buyer only upon transfer of the right of ownership to the goods and not upon the moment of physical transfer of the goods.

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

In accordance with Article 491 of the Russian Civil Code the RT should be specifically provided for by the parties in the sale contract. This means that the RT clause should be specifically and clearly agreed upon by the parties in writing at the time of conclusion of the contract.

There are no specific requirements regarding the timing for the parties to agree on RT. As a general rule, this condition should be included into the contract at the time of its signature. However, as a general rule stipulated by Article 450 of the Russian Civil Code the parties are free to agree on the amendments of the contract. Practically this means that the parties to the sale contract can agree an RT clause at any time until the goods are handed over to the buyer.

6. Effectiveness

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

Yes, if a third party acquires the goods under RT as a so-called bona fide purchaser (or purchaser in good faith), i.e. being unaware (and without the possibility to be aware) that the title to the goods had not passed from the seller to the buyer. Pursuant to Article 302 of the Russian Civil Code reclamation of property from the bona fide acquirer is possible only if the goods have been acquired gratuitously from the person who had no right to alienate it. In all other cases the seller is not entitled to reclaim the goods from a third party.

The buyer has the right to transform the goods in any case if this follows from the goods’ designation and characteristics (i.e. perishable goods).

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

The Russian law is silent on such a possibility, so, such possibility may only be specifically agreed by the parties in their sale contract.

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

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There is no specific judicial procedure for the enforcement of RT. The seller shall bring a claim against the buyer in accordance with the general Russian civil procedural rules.

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

There are no specific provisions in the Russian Civil Code regarding such situations. As a general rule, the seller has a right to file a claim with the court for release of distrained property (goods) belonging to it where such goods were distrained by the buyer’s creditors with the aim of satisfaction of their claims by way of sale of such goods.

This general rule is set out in Para. 50 of the Resolution of the Plenum of the Supreme Court of the Russian Federation No. 10, Plenum of the Supreme Commercial Arbitration Court of the Russian Federation No. 22 dated 22 April 2010, “On issues arising in the judicial practice on consideration of the cases connected with the title and other property rights protection” (as revised by the Resolution of the Plenum of the Supreme Court of the Russian Federation No. 25 dated 23 June 2015). In accordance with this Resolution, in case of imposition by the arbitration court of arrest relating to security for a claim on property not belonging to the debtor, a property owner has a right to appeal against such arrest.

By implication of Article 119 the Federal law of the Russian Federation No. 229-FZ dated 2 October 2007 “About executive production”, if an arrest is imposed relating to security for a claim or execution of executive documents on property not belonging to the debtor, a property owner has a right to file a lawsuit about the release of such property from an arrest.

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

1. Goods still with buyer

The goods under RT shall be restored to the creditor (the seller), since in case of insolvency of the buyer goods under RT should not be included in the bankruptcy assets. Pursuant to Article 131 of the Federal Law of the Russian Federation “On Insolvency (Bankruptcy)” dated 26 October 2002 No. 127-FZ only the assets belonging to the debtor are included in the bankruptcy assets.

If the goods are still included in the bankruptcy assets, the creditor has the right to bring a claim for exclusion of the goods from the bankruptcy assets.

2. Goods already sold by buyer

As already mentioned in 6.a., if a third party acquires the goods under RT being the purchaser in good faith, the seller loses the ownership of the goods. In such a case the seller should file a claim for recovery of price of the goods under the general procedure stipulated by the Federal Law of the Russian Federation “On Insolvency (Bankruptcy)” for all creditors.
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3. Time limits to declare title to receiver

The claim for restitution of goods should be brought within two months from the date of publication of information on declaration of the debtor insolvent and opening of liquidation procedure [Para. 1 of Article 142 of the Federal Law of the Russian Federation “On Insolvency (Bankruptcy)”].

The same time limits are applicable where the goods were already sold by the buyer. If the seller misses this time limit, its claim shall be met after claims of all the creditors who met the time limit and whose claims were included in the register of creditor’s claims [Para. 4 of Article 142 of the Federal Law of the Russian Federation “On Insolvency (Bankruptcy)”].

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

The costs for storing and insurance of the goods are at the buyer’s disposal after the acceptance of an application for declaring a debtor bankrupt pursuant to Para. 1 of Article 5 of the Federal Law of the Russian Federation “On Insolvency (Bankruptcy)” are deemed to be the so-called “current payments”. They shall be repaid from the debtor’s estate as top priority [Para. 1 of Article 134 of the Federal Law of the Russian Federation “On Insolvency (Bankruptcy)”].

The costs for storing and insurance of the goods for the period before the acceptance of an application for declaring a debtor bankrupt are not deemed to be current payments and can be recovered from the debtor’s assets in accordance with the bankruptcy procedure together with all other debts.

The costs for transporting the goods under RT back to the creditor (as well as the costs for insurance of the goods during their transportation back to the creditor) shall be borne by the creditor (owner 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.

Or

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The provision regarding the possibility to dispose of the goods might be added to the clause, especially in the case of perishable goods:

If the parties do not want to provide the seller with the right to reclaim the goods in case of non-payment, the following provision might be used:

In order to avoid uncertainty whether the seller is entitled to reclaim the goods and claim penalties in case of non-payment the following provision might be added:

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