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 540-541 of the Serbian Code of Obligations of 1978 (the Law of Obligations).

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

Pursuant to Article 540.1 of the Serbian Code of Obligations, RT is a clause which may be included in the contract of sale of movable goods, providing that the goods shall remain the property of the seller until the full payment of the price by the buyer.

The RT clause is used in order to secure the seller’s claim against the buyer, since the buyer, not being the owner of the purchased goods, may not dispose of them until full payment has been made. Until the moment of full payment, the seller may file an action for the recovery of title in order to recover the goods, not only from the buyer, but from any third person that may be in possession of the goods. If no time limit for payment has been agreed, it is deemed that the buyer is obligated to make payment at the time the notice is issued.

Legal consequences of RT depend on whether or not the payment of the price has been made. Once the buyer has paid the price, it acquires the title over the goods without the seller making any declaration to that effect. The goods are already in the buyer’s possession, thus by virtue of paying the price, it becomes the owner of the goods (traditio brevi manu). In contrast, if the buyer has failed or refused to perform the obligation to pay the price on time, this raises the issue of the legal position of the seller. First of all, it is entitled to all the rights available to the creditor in case of default of the debtor. This means that the seller is entitled to claim performance or to terminate the contract, and has the right to claim damages due to delay or non-performance. In case of contract termination, the seller may claim restitution of the goods in the condition in which the goods were handed over to the buyer. The seller may also achieve restitution of the goods by taking action for the recovery of title. Apart from the obligation to return the goods, the buyer who is not in default does not have to pay compensation for the benefits it may have derived from the goods, just as the seller is not obliged to pay interest on the instalment of the purchase price it may have received. In other words, the buyer is treated as a possessor in good faith until the moment of default. The seller may demand compensation only in the event of deterioration or damage to goods that occurred through the fault of the buyer.

Only movable goods may be subject to RT. Serbian law takes the stand that RT over immovables does not conform to the principles of the land registration law, according to which a conditional right may not be entered into land registers. However, in terms of Article 540.3 of the Code, RT on movable items which are filed in special public records may be stipulated only if so provided by regulations governing the system of filing of such records.
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  1. 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 Serbia.

  1. 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, the risk of accidental destruction or the damage to the goods is borne by its owner (res perit domino). However, Article 456 of the Code of Obligations, regulating sale contracts in general, provides that the risk of accidental destruction or damage to goods until delivery to the buyer shall be borne by the seller, and on delivery of the goods the risk shall pass to the buyer.

With respect to RT, the seller, even though it has delivered the goods to the buyer, remains the owner of the goods until final payment of the price by the buyer. However, due to the peculiarities of this kind of sale, the Code of Obligations provides in Article 541 for a special rule for RT, whereby the risk of accidental destruction or damage to the goods shall be borne by the buyer from the moment the goods have been handed over to it.

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

One of the basic principles of the Serbian Code of Obligations is the principle of conclusion of contracts solo consensu. The principle of consensualism is incorporated in the Code by providing that a contract is not subject to any requirement as to form, except as otherwise provided for by law. Accordingly, most contracts in the Serbian legal system, including the contract for sale of movable goods, fall into the category of informal contracts.

In that respect, when it comes to the validity and effectiveness of an RT clause in a contractual relationship between the seller and the buyer (relation inter partes), an RT clause need not meet any formal requirements. In practice, this clause is normally concluded by the parties in writing, not because this is a condition of its validity, but rather because this serves to prove its existence and content.

In contrast, with regard to the effects an RT clause produces on third parties, the Code adopts a special rule. Under Article 540.2, an RT clause produces effects against creditors of the buyer only if it is made in the form of a certified document, prior to the bankruptcy of the buyer or prior to the seizure of its property.

Finally, as indicated in point 2 of this report, in terms of Article 540.3 of the Code, an RT clause on movable items which are filed in special public records may be stipulated only if so provided by regulations governing the system of filing of such records.
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There are no specific requirements in Serbian law regarding the timing for the parties to agree on RT.

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

As a general rule, only the owner can legally transfer the right of ownership to a third party under Serbian law. In terms of sales with an RT clause, the buyer, until the moment of payment of the price, does not acquire the right of ownership, but only has possession of the goods. This means that it cannot validly sell the goods in its own name and for its own account, nor can it constitute another right in rem (real right) to the goods for the benefit of a third party. If the buyer has de facto transferred the goods to a third party, the seller as the owner is entitled to their restitution. The RT clause also applies where the goods under RT have been incorporated or transformed with other materials.

The RT clause is not enforceable only if the third party has become the owner through the application of the rules on acquiring property rights from non-owners, provided by Article 31 of Serbian Property Law, which requires inter alia that the third party was acting in good faith, i.e. that it did not know and could not have known in the given circumstances that the seller was not the owner (bona fide purchaser).

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

The seller and the buyer, on the basis of party autonomy, are free to provide in the contract for the effects that a sale of the goods to a third party would produce on their inter partes relations (relations between the first seller and the first buyer). However, the parties should take into consideration that under the general rules such contractual provision cannot be contrary to public policy, mandatory rules and boni mores.

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

There is no specific judicial procedure for the enforcement of RT, so this procedure is governed by the general Serbian civil procedural rules.

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

As indicated in point 5 above, according to Article 540.2 Code of Obligations, an RT clause is enforceable against third-party creditors of the buyer insofar as such clause is made in the form of a certified document, prior to the bankruptcy of the buyer or prior to the seizure of its property.
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Where this condition has been met, the seller, as the owner, may request a restitution of the goods under RT from any third party in possession of the goods.

  1. Bankruptcy — interaction of RT (which is not contract law) and bankruptcy law
  1. Goods still with buyer

In the case of bankruptcy of the buyer the goods under RT should not be included in the bankruptcy assets and should be returned to the seller.

If the buyer becomes bankrupt, the seller under RT acquires the status of the “excluding creditor” governed by the Serbian Law on Bankruptcy. Pursuant to Article 50 of the Law on Bankruptcy:

  1. An excluding creditor shall be an entity which, on the basis of its property right or personal right, has the right to request a certain asset to be excluded from the bankruptcy estate.
  2. The excluding creditor shall not be deemed a bankruptcy creditor.
  3. The asset from paragraph (1) of this Article shall not be deemed part of the bankruptcy estate.”

The bankruptcy administrator is obliged to return the asset to its owner. It may do so even when the owner of the asset has made no request to that effect, if it has reliably established that such asset is not part of the bankruptcy debtor’s estate. If the bankruptcy administrator fails to do so of its own accord, the owner of the asset is entitled to submit the request for restitution of its asset in accordance with Article 112 of the Law on Bankruptcy. The request submitted to the bankruptcy administrator should include a description and a detailed definition of the asset whose restitution is sought. The request should also include proof of the existence of the excluding creditor’s right or indicate the reference number of the public records where this right is registered. Upon receipt of the request, the bankruptcy administrator is obliged to exclude the asset which is subject to the excluding right from the bankruptcy estate. If the bankruptcy administrator fails to act upon the request for restitution, the excluding creditor may exercise its right by filing a lawsuit.

The Law on Bankruptcy provides for a special rule with regard to goods in transit which allows the seller to request return of the goods. Pursuant to Article 100 of the Law on Bankruptcy: “The bankruptcy debtor’s counterpart, or a seller or its commission agent, to whom the price has not been paid in full, may request the return of the goods that have been dispatched to the bankruptcy debtor from another place, without reaching the point of destination by the date of opening of the bankruptcy proceeding, i.e. without the bankruptcy debtor taking them over, be returned to him — the right to demand return. If the bankruptcy debtor has taken over the goods that have arrived at their destination before the opening of the bankruptcy proceedings, only for the purpose of preserving them, the seller shall not be entitled to demand return, but may exercise its rights as an excluding creditor
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according to general rules.”

  1. Goods already sold by buyer

Article 102 of the Law on Bankruptcy provides for special rules when the asset which is subject to an excluding right has been illegally sold by the bankruptcy debtor and draws a distinction between the sale prior to the opening of bankruptcy and the sale in the course of the bankruptcy proceedings. If an asset which is subject to an excluding right has been illegally sold by the bankruptcy debtor prior to the opening of bankruptcy, the excluding creditor is entitled to request that the right to collect the consideration for the asset thus (illegally) sold be transferred to it, if the consideration has not yet been executed. Otherwise, the excluding creditor is entitled to a compensation for damage as a bankruptcy creditor.

On the other hand, if an asset has been illegally sold in the course of the bankruptcy proceedings or during the preliminary bankruptcy proceedings, the Law allows the excluding creditor to opt for the request for compensation of the market value of the asset and the compensation for damage which is considered as an expense of the bankruptcy estate.

  1. Time limits to declare title to receiver

Article 50.2 of the Serbian Law on Bankruptcy explicitly provides that the excluding creditor shall not be deemed a bankruptcy creditor. Therefore, the general rules regarding the time limits for filling the claims under Article 111 of the Law on Bankruptcy do not apply to excluding creditors. The position taken by court practice in this regard is that “a claim by excluding creditor is not tied to a deadline, because it relates to the right in rem (property right)” (Decision of the High Commercial Court, No.115/09 of 31 March 2009).

The rules of bankruptcy proceedings relative to collective settlement of claims from the bankruptcy estate do not apply to excluding creditors. The excluding creditor is settled separately on the basis of exclusion of assets; such settlement may be achieved in other proceedings as well, and not only in bankruptcy proceedings. The excluding creditor is protected regardless of the outcome of the bankruptcy proceedings. Therefore, the right to a separate settlement can be exercised even when the bankruptcy proceedings must be terminated immediately upon commencement because the bankruptcy debtor has one only creditor. The same is true in cases when the bankruptcy proceedings are closed due to negligible value of the bankruptcy debtor’s assets which cannot cover the costs of the bankruptcy proceedings.

The Law on Bankruptcy (Article 112) provides for special rules on the excluding claims stipulating that:

  1. The excluding creditor shall submit the request for taking back his asset that is not included in the bankruptcy estate.
  2. The bankruptcy administrator shall inform the excluding creditor whether he/she will
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    honour or refuse the request within the time period of 20 days from its receipt, and shall specify the deadline within which the request shall be honoured.
  3. The deadline referred to in paragraph 2 of this Article may not exceed ten days from the notification of the intent to honour the request, unless otherwise excused by the bankruptcy judge.
  4. If the bankruptcy administrator refuses to exclude the assets from the bankruptcy estate, the creditor shall be entitled to file a complaint with the bankruptcy judge within five days from the day of notification of the administrator’s refusal.
  5. If the bankruptcy judge denies the right to asset exclusion, the creditor may enforce its rights in other court proceedings.
  6. If the excluding creditor fails to file a request for asset exclusion by the time the asset in question is being sold, the excluding creditor may enforce its rights only in other proceedings, in accordance with the law.”
  1. Who pays storage, insurance and transport during discussions with receiver?

The Law on Bankruptcy does not contain special provisions on the payment of storage, insurance and transport during discussions with receiver.

  1. 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.

The property in the Goods specified in Article ______ of this Contract shall not pass to the Buyer until the Seller has received payment in full of the price of the Goods. Until property in the Goods passes to the Buyer, the Buyer shall keep the Goods separate from those of the Buyer and third parties and properly stored, protected, insured and identified as the Seller’s property. The risk of accidental destruction or damage of the Goods shall be borne by the Buyer from the moment the Goods have been handed over to him.