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 the Slovenian legal system, RT is governed by Article 520 of the Code of Obligations (Uradni List RS (UL RS; Official Gazette of the Republic of Slovenia) No 97/07 as amended) as a variation of a sales contract:

  1. Under the first paragraph of Article 520 of the Code of Obligations, the seller of certain movable goods may use a special clause to retain its title even after the goods have been delivered to the buyer, until the entire purchase price is paid.
  2. Under the second paragraph, RT can be exercised against the buyer’s creditors only if the buyer’s signature on the contract containing the RT clause was certified by a notary prior to the buyer becoming bankrupt or prior to the attachment on the goods.
  3. Under the third paragraph, title to goods subject of entry into special public records may only be retained if the regulations on the keeping of such records so provide (see item 2 below).

Therefore, in Slovenia, only a simple RT clause is regulated by law. However, due to the deficiencies of the simple form of RT, the autonomous commercial law in Slovenia has also, through business practice, developed derived forms of RT identified in more detail in item 6.c.

Moreover, a seller’s claim for the return of goods if the purchase price is not paid, is also indirectly governed by the Law of Property Code (UL RS No 87/02 and 91/13 as amended), the Claim Enforcement and Security Act (UL RS No 3/07 as amended), and the Financial Operations, Insolvency Proceedings and Compulsory Winding-up Act (UL RS No 13/14 as amended).

A seller may exercise RT under Article 92 of the Law of Property Code, which provides that an owner may demand the return of a specific item from anybody if the owner proves (i) its property right to such an item, and (ii) that the item is in the possession of the defendant. Under Article 64 of the Law of Property Code, the seller’s claim regarding RT expires if the buyer sells the item with a transfer of title to a bona fide third party, even though the buyer does not have the right of disposition over such an item:

  1. as part of their activities involving putting such items on the market,
  2. at a public auction, or
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  3. if the transferor (the buyer) has the item in its possession with the owner’s (the seller’s) permission.

The seller may exercise RT in enforcement proceedings against the buyer under Article 64 of the Claim Enforcement and Security Act, which provides that whoever proves presumptively that they have a right to a subject of enforcement which bars enforcement, may challenge the enforcement order and demand that the court declare enforcement over such an item inadmissible.

The seller may also exercise RT under Article 22 of the Financial Operations, Insolvency Proceedings and Compulsory Winding-up Act against an insolvent debtor (buyer) as a creditor having a right to segregation by requesting that the goods subject to RT be segregated from the bankruptcy estate (right to segregation; see item 6.d. below).

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

In addition to the aforementioned definitions and characteristics described in item 1, the main characteristics of RT and its legal bases in Slovenia may be recapped as follows.

Under Article 520 of the Code of Obligations, the seller may use an agreement on RT to retain the ownership of the sold goods until the buyer pays the full purchase price. It is, in fact, a sales contract under a condition precedent of paying the purchase price. RT is considered a form of security of payment in rem, which differs from a lien in the fact that during the term of security the debtor (the buyer) already has the goods in its possession.

General rules of contract law, provided under the Code of Obligations, must be observed with regard to the expiration of RT. An RT clause does not mean that the time limit for payment of purchase price is of essence (referred to as a fixed contract), i.e. that upon the expiration of such time limit a contract would automatically be considered rescinded. If the time limit for payment of purchase price is of the essence, such a provision must be expressly agreed upon in the contract. If the buyer is in default of payment, the seller is not required to rescind a contract — it may file an action demanding a performance of the contract, whereby the seller keeps its RT. Under Slovenian law and regardless of the fact that the law does not specifically provide that RT also applies to interest on late payment, the entire seller’s claim is secured under RT, including any potential interest on late payment.

However, more than with regard to the relationship between the seller and the buyer, RT is significant with regard to the relationship between the seller and other buyer’s creditors in the event of bankruptcy or attachment on the goods. As aforementioned, in such instances, RT can be exercised against the buyer’s creditors only if the buyer’s signature on the contract containing the RT clause was certified by a notary prior to the buyer becoming bankrupt or prior to the attachment on the goods, an issue the seller must pay special attention to. Only under such a condition does the seller have the right to segregation under the Financial Operations, Insolvency Proceedings and Compulsory Winding-up Act or the right to challenge the enforcement order under the Claim Enforcement and Security Act (see items 1 and 6.d.)
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As mentioned above, Article 520 of the Code of Obligations provides that a title to goods that are the subject of entry into special public records may only be retained if the regulations on the keeping of such records so provide. Under Slovenian case law, this refers to such public records where entry has a constitutive effect on the formation of a property right by means of a legal transaction. Pursuant to case law, the Register of Motor Vehicles is not a public record kept for the purpose of recording rights in rem on motor vehicles as it is kept only for administrative purposes. Moreover, RT is not allowed with regard to vessels or aircraft, because the regulations on keeping such records do not provide for RT.

Derived forms of RT are determined in item 6.c.

  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 as above.

  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?

The passage of risk of loss of, or damage to, the goods from the seller to the buyer is independent of the passage of property rights.

With regard to the passage of risk of loss of or damage to the goods, general rules on sales contracts apply to a sale with RT. Under Articles 436 and 521 of the Code of Obligations, the risk of loss of or damage to the goods passes to the buyer the moment the goods are delivered to the buyer. With regard to the burden of risk, under the Code of Obligations as well as under the 1980 United Nations Convention on Contracts for the International Sale of Goods (CISG), the decisive factor is who has possession of the goods and not who owns them. The buyer must, therefore, pay the purchase price regardless of whether the goods delivered with RT are lost or damaged before the payment of the purchase price is due.

A seller may protect its interest after the passage of risk by agreeing with the buyer that the insurance contract (for cargo/transport insurance of goods) must include an assignment clause, under which, in the event of loss of or damage to the goods after the passage of risk to the buyer, the insurance company must pay the insurance payment to the seller up to the amount of the unpaid purchase price, regardless of the fact that the seller does not bear the aforementioned risk.

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

Pursuant to Article 520 of the Code of Obligations, the seller and the buyer must expressly agree on RT.

No formal requirement regarding the form applies to an agreement on RT, therefore, the rules
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which normally apply to a sales contract also apply to such an agreement (the principle of no form required). RT may, therefore, be agreed orally, in writing or it may be part of the seller’s general terms and conditions. The aforementioned applies to RT between the seller and the buyer (the parties to a sales contract).

However, the “principle of no form required” does not apply when the seller wishes the RT to be effective erga omnes, i.e. against third parties (the buyer’s creditors). Such effect of RT is significant in the event of bankruptcy or enforcement against the buyer. With regard to such effect of the RT, the law requires the buyer’s signature on the contract containing the RT clause to be certified by a notary prior to the buyer becoming bankrupt or prior to the attachment on the goods (the second paragraph of Article 520 of the Code of Obligations).

Usually, the agreement on RT is made upon the execution of a sales contract; however, there is nothing preventing such an agreement being made later on, up until the title to the goods is transferred to the buyer.

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

If the buyer disposes of the goods under RT as an owner, it is in violation of the fundamental principle that no one may transfer more rights than it has. As explained in item 1, in such a case, the seller could exercise RT even against the buyer’s buyer, but only if seller proves that the latter acted mala fide (mala fide is not assumed, the burden of proof is on the seller). However, if the third party acted bona fide and the buyer sold them the goods a) as part of their activities involving putting such items on the market, b) at a public auction, or c) with regard to the fact that the buyer has the goods in its possession with the owner’s permission, the RT expires.

RT also expires if the goods lose their individual nature or become part of another item. Under Article 57 of the Law of Property Code, the person who produces a new movable item from another person’s material becomes the new item’s owner, provided that the value of labour is not significantly lower than the value of the material. In such an event, the seller may only use a claim for damages against the buyer, pursuant to the general provisions of the law of obligations.

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

As explained above, a simple RT clause does not protect the seller from subsequent sale of goods to bona fide third parties. However, the parties may produce such an effect by expressly agreeing on one of the derived versions of RT described in item 6.c.

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

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The seller’s (RT holder) basic right is to demand, based on its title, a handover of goods if the purchase price is not paid. The seller, therefore, can file a petitory (or possessory) action.

If the buyer disposes of the goods (resale of goods to a bona fide third party), the seller’s property right expires, as does RT. Due to the fact that the seller has no petitory claims against a bona fide third party, it may only claim reimbursement of damages from the buyer due to a violation of the sales contract.

The seller may also file claims against the buyer under general principles of contract law. Therefore, the seller may insist on the performance of the contract and file an action against the buyer for the payment of the purchase price (claim of performance). If conditions allow so, the seller may rescind the contract due to the default in payment (non-performance) and demand a return of the goods; in such an event, the seller must repay the buyer any amount of the purchase price that was already paid. On top of the aforementioned claims, the seller may also file a claim for damages.

The seller must submit its claims by filing an action before a competent court. Such judicial proceedings usually last up to three years.

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

With regard to RT, the seller’s priority is to ensure a more favourable position with regard to other buyer’s creditors in bankruptcy proceedings against the buyer, where the seller can execute a right to segregation, or in enforcement proceedings against the buyer, where the seller can challenge the enforcement order, both subject to the fact that the buyer’s signature on the contract containing the RT clause was certified by a notary prior to the buyer becoming bankrupt or prior to the attachment on the goods. In other instances, where the buyer sold the goods under RT to bona fide third parties, the seller cannot claim RT against such third parties, but only damages against the buyer, who unduly disposed of the goods before the purchase price was paid.

Bona fide is also required to establish a lien. Under Article 156 of the Law of Property Code, a bona fide lienholder obtains a lien regardless of the fact that the lienee did not have a right of disposition over the goods, provided that the lienee has the movable property in its possession with the owner’s permission, which applies in the case of RT. Therefore, the lienholder’s right takes precedence over the seller’s RT if the lienholder did not know about the RT; otherwise, the RT takes precedence.

The rules differ in the case of a statutory lien, which, pursuant to Article 134 of the Law of Property Code, is established at the moment the statutory conditions are met. Furthermore, Article 86 of the Road Transport Contracts Act (UL RS No 6/2016) provides that a carrier’s lien established on the cargo received for transportation for the purpose of securing its claims under the transport contract also includes due claims from the previous transport contracts, provided that the person liable for payment and the consignor are the same. In such cases the seller’s RT does not affect the carrier’s statutory lien, because a statutory lien is not subject to whether or not the carrier knew
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that the consignor was not the owner of the cargo — the statutory lien is established automatically (ex lege) under the transport contract. The same applies by analogy to other statutory liens obtained under the Code of Obligations by the forwarder, warehouse keeper or contractor for the costs they incur with regard to the services performed for the customer.

Various contractual variations of derived RT developed in Slovenian business practice as a response to the shortcomings of the simple form of RT with regard to third parties. On the one hand, their aim is to protect the seller’s interest in receiving the purchase price, and on the other hand the interest of the buyer to be able to use the bought goods for business purposes and thus obtain liquid funds for their business transactions. Certain derived forms of RT are recognised under Slovenian legal doctrine, however, no case law exists yet with regard to such forms:

  1. The contracting parties may agree on a prolonged RT, where the buyer assigns, in advance, their claims concerning the payment of purchase price obtained by reselling the goods, so that such claims are automatically assigned to the seller immediately after they are created. RT is therefore substituted by a fiduciary assignment as security. The seller must ensure that such fiduciary assignment of receivables is agreed upon in the form of a notarial record, so that they can challenge enforcement of such a claim or exercise a right to separate settlement as a holder of a secured claim in bankruptcy proceedings against the buyer. The contracting parties usually agree that the buyer must notify the seller immediately of such a claim.
  2. Another form used in practice is an extended RT, which does not expire even after the purchase price is paid in full if the seller has other unsatisfied claims against the buyer.
  3. By agreeing on an RT with a processing clause, the seller gives the buyer permission to build the sold goods into their product and the seller becomes a joint owner of such a product up to a certain percentage until the purchase price is paid.
  4. By agreeing on a transferred RT, the contracting parties agree that the buyer may dispose of the sold goods, provided that they establish an RT with their subsequent buyer. Such derived form of RT has two sub-forms: subsequently established RT, which requires the buyer to notify the subsequent buyer of a previous RT, and an added RT, which does not require the buyer to do so. The key difference with the added RT is that a bona fide buyer’s buyer becomes the owner of the goods when their purchase price is paid.
  1. Bankruptcy — interaction of RT (which is not contract law) and bankruptcy law
  1. Goods still with buyer

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As already explained above, an RT can only be enforced against the buyer’s creditors in bankruptcy proceedings if the buyer’s signature on the contract containing the RT clause was certified by a notary prior to opening of bankruptcy proceedings against the buyer. In such a case, the seller (creditor) as the owner of the goods has the right to segregation in bankruptcy proceedings. The right to segregation is provided in Article 22 of the Financial Operations, Insolvency Proceedings and Compulsory Winding-up Act and entitles the owner of goods to segregate assets from the bankruptcy estate, which do not belong to the debtor. Therefore, the right to segregation entitles the seller as the owner of goods to segregate the goods, which do not belong to the buyer from the bankruptcy estate (because the property right was not transferred to the buyer due to the RT).

Under Slovenian insolvency law, a sales contract containing an RT clause is considered a mutually non-performed bilateral agreement, to which the general rules on mutually non-performed bilateral agreements apply.

The seller can demand that the buyer who is the subject of bankruptcy proceedings perform its obligation of paying the purchase price under the contract.

With the opening of bankruptcy proceedings, the debtor in bankruptcy (the buyer) receives the option to rescind the mutually non-performed bilateral (sales) contract, provided that the bankruptcy court consents to such rescission. In practice, the creditor (the seller) will invite the bankruptcy debtor (the buyer) as soon as possible to give notice whether it intends to perform the contract or exercise its right to rescind. If a creditor requests such notification, the bankruptcy debtor must reply within three months of the decision on the opening of bankruptcy proceedings becoming final, or on the day the receiver in bankruptcy receives the creditor’s (the seller’s) notification of the fact that it has a claim against the bankruptcy debtor (the buyer) based on a mutually non-performed sales contract, whichever of the two time limits expires later. Two situations may, therefore, arise:

  1. If the bankruptcy debtor does not ask the court for consent to rescind the sales contract within the aforementioned time limit, the sales contract remains in effect and with it the RT.
  2. If the bankruptcy debtor, with the consent of the court, rescinds the sales contract, the contract is deemed rescinded and the seller can request the goods to be returned and claim reimbursement of damage suffered due to the rescission. The seller must lodge its claim for damages in bankruptcy proceedings and its claim is satisfied from the bankruptcy estate in accordance with the rules on ordinary creditors.
  1. Goods already sold by buyer

If the buyer already disposed of the goods, i.e. sold it to a bona fide third party (see item 6.a. above), the seller’s property right expires and so does the RT. In such a case, the seller must lodge its claim for the payment of the purchase price in bankruptcy proceedings in accordance with
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the general rules of the bankruptcy procedure on the lodging of claims (within three months of the announcement on the opening of bankruptcy proceedings being published) and is treated in bankruptcy proceedings as an ordinary creditor. If the creditor misses a time limit for lodging a claim, the claim expires.

  1. Time limits to declare title to receiver

The seller must notify its right to segregation in bankruptcy proceedings within three months of the announcement on the opening of bankruptcy proceedings being published. The legal consequence of a timely notification of a right to segregation is that the receiver cannot sell (liquidate) the assets which are the subject of the right to segregation.

If the seller misses the time limit for notification of a right to segregation, the receiver may sell the goods, which are the subject of the right to segregation, after the three-month time limit expires. The seller’s right to segregation thereby expires. However, the seller is entitled to claim the monetary amount received by the sale of such assets, reduced by the costs of sale. The seller must claim such monetary amount separately in bankruptcy proceedings, at the latest by the time the plan of the first general distribution is published, otherwise the right expires.

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

The costs of storage and insurance of goods during proceedings are deemed costs of bankruptcy proceedings. However, the transport costs of the goods segregated from the bankruptcy estate and sent to the seller (the owner) are borne by the seller.

  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 basic (simple) form of RT is so common in Slovenia that it became a standard clause of almost every sales contract or general terms and conditions, based on which the sellers put their goods on the market.

Here is an example of a simple RT clause:

The seller retains the title to the goods which are the subject of this contract until the purchase price is paid in full.

Practical recommendations
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  1. If a seller wishes to protect its position against third parties (the buyer’s creditors) in the event of bankruptcy or enforcement against the buyer, the seller should ensure that the buyer’s signature on the contract containing the RT clause is certified by a notary.
  2. If the RT clause is included in the seller’s general terms and conditions, the seller should ensure that the conditions for validity of general terms and conditions are cumulatively met, pursuant to Article 120 of the Code of Obligations, which is a requirement for the validity of RT contained therein:
  1. the sales contract must invoke the seller’s general terms and conditions;
  2. the seller’s general terms and conditions must be published in the usual manner;
    and
  3. the buyer must be able to take note of the seller’s general terms and conditions (these must be known or should have been known to the buyer at the time of executing the contract).

  1. A simple RT clause does not protect the seller from the subsequent sale of goods to bona fide third parties. However, the parties may produce such effect by expressly agreeing on one of the derived versions of RT described in item 6.c.