Investment and commercial law General Terms and Conditions (GTC) and retention of title - a few words on how to protect your interests against counterparty insolvency
Why are T&Cs and GTCs so important?
The T&Cs or General Terms and Conditions of Sale is a document that allows the trader to define the rules of cooperation with the customer, which in turn minimises the risk of misunderstandings and conflicts. Well drafted T&Cs allow the trader to:
• Unifying the rules for working with contractors, which significantly simplifies and shortens the negotiation process.
• Minimise legal risks by defining key provisions such as payment terms, liability of the parties or the possibility to withdraw from the contract.
• Facilitate the enforcement of debts by establishing a law and court in our favour, especially when the contract involves a long-term relationship or the sale of high-value products.
It is worth remembering here that the effectiveness of the provisions of the T&Cs or GTCs depends not only on their content, but also on whether they have been effectively incorporated into the contract. It is particularly important that the parties were properly represented at the conclusion of the contract and that the contract itself complies with formal requirements, including being signed by authorised persons. If this is not the case, the security clauses may be deemed invalid and the seller's interests unprotected.
Retention of title - what is it and when is it worth using it?
Retention of title to goods is a contractual provision that allows the seller to retain ownership of the goods sold until the buyer has paid in full. In practice, this means that even after the goods have been delivered to the buyer, the seller remains the owner of the goods until the full price has been paid.
By retaining title, the seller is able to recover the goods in the event of the counterparty's insolvency, thereby protecting itself against the risk of not being paid, including in the event that the counterparty declares insolvency.
When the buyer defaults, the seller may enforce its rights by demanding the return of the goods or by taking other actions specified in the contract or in the T&Cs. This institution is particularly useful in commercial transactions, especially in the case of the sale of fixed assets such as cars, machinery or other equipment. For such goods, security in the form of a retention of title can be not only a financial protection tool, but also a significant element of risk management. Unfortunately, in the case of food products, the retention loses its value, due to its nature - by the time we know and decide that we want to exercise a possible retention of title, the shelf life may have been reduced so much that it is simply uneconomic or even impossible to reuse or re-sell such goods.
From a legal point of view, without retention of title, the thing sold already passes to the buyer at the time of the conclusion of the contract (when it concerns things marked as to identity, such as machines with individualised characteristics), or at the time of delivery (in the case of things marked as to type, such as standard tools or semi-finished products). Importantly - regardless of whether the price has been paid. Consequently, the buyer can dispose of the goods, e.g. sell, pledge or lose them, before the seller has received the payment due.
In the event of an effective reservation, the seller retains ownership of the item until the full price is paid. In addition, if the contract containing such a reservation is dated by a notary public, this security may also be effective against the buyer's creditors - both in enforcement and insolvency proceedings.
An example from the firm's practice
Our law firm was approached by an entrepreneur with a problem concerning the absence of a retention of title in a sales contract. A Polish entrepreneur with German capital, sold a machine to a Polish company, and although he had a T&C which was part of the contract concluded with the buyer, these T&Cs did not include a provision on retention of title. The machine was delivered to the buyer, but payment was ultimately not made.
In the meantime, the buyer has declared insolvency and the machine has been placed in the insolvency estate. If a retention of title clause had been included in the T&Cs of this trader, the trader would have been able to successfully claim the return of the machine and continue to dispose of it without suffering any loss in practice (we are not considering here the decrease in value of such a machine due to the passage of time). In this case, due to the lack of appropriate provisions, it became impossible to recover the machine and the entrepreneur managed to recover only a small part of his claim, remaining after other claims having priority over the entrepreneur's claim (taxes, social security contributions, employees' salaries) were satisfied in the insolvency proceedings. A reservation of title could safeguard the entrepreneur's interests and allow him to recover it.
Summary
Traders who sell high-value products should particularly consider including a retention of title in their general terms and conditions of sale. This is an effective way of safeguarding financial interests and minimising risk in situations where a counterparty becomes insolvent.
The correct drafting of T&Cs, in line with current regulations and market practice, is a step towards a safer, more predictable business. Our law firm advises on the drafting and optimisation of T&Cs and GTCs so that they best meet the needs of entrepreneurs and protect their interests in international business. We look forward to hearing from you!
