Retention of title is a security right whereby the seller remains the owner of delivered goods until the buyer has paid in full. Under Dutch law, this is simply regulated in Article 3:92 of the Dutch Civil Code. Internationally, this classic clause does not always work as you might expect. In our practice, we see Dutch exporters taking their standard retention of title to Germany or France without modification — with major consequences in the event of the buyer's bankruptcy.
What is the legal problem?
Retention of title stipulates that ownership only passes after payment. Internationally, this is complex: as soon as goods cross the border, the property law of the country where they are located applies (lex rei sitae). Formal requirements and publication or registration requirements differ significantly from country to country. A clause valid under Dutch law cannot be effective in the country of destination, with bankruptcy or resale being the greatest risks.
What does the law say?
Under Dutch law, single retention of title is valid under Article 3:92 of the Dutch Civil Code. German law also recognizes extended (Section 449 BGB and case law) and extended retention of title (verlangerter and erweiterter Eigentumsvorbehalt). Under French law, registration is required (Articles 2367-2372 Code Civil) or a written agreement prior to delivery.
Italy has strict formal requirements (Article 1523 Codice Civile); Spain requires a notarial deed for effectiveness in the event of bankruptcy. The Vienna Sales Convention does not regulate the transfer of ownership (Article 4(b) CISG); National law provides supplementation.
What risks do companies face?
If the retention of title is not valid in the country of destination, you lose your claim in the event of bankruptcy or resale. Resale proceeds may prove uncollectible. Without extension to processed products, you lose rights as soon as goods are processed (creation of a new object). Problems of proof arise if the clause only appears on the invoice and has not been accepted prior to delivery.
Practical example from our practice
We represented a Dutch supplier of raw materials to a German manufacturer under a single Dutch retention of title. The manufacturer processed the material and went bankrupt. Under Section 950 BGB, ownership passed to the manufacturer through the creation of a new object. Our client lost 420,000 euros as an unsecured claim. Upon renegotiation, we incorporated a retention of title clause (on resale claims) and an extended retention of title clause (on all claims) under German law. In the event of a subsequent bankruptcy, this resulted in full execution.
What can you do?
Align the retention of title with the law of the country of destination. Use the retention of title and extended retention of title clauses in Germany. Ensure written acceptance prior to delivery. Register where required. Combine with a right of retention (Article 6:52 of the Dutch Civil Code) and invoice assignment where possible. Have general terms and conditions reviewed per market. See also our article on How to prevent payment problems through your contract?