We commonly find, in contracts for the purchase and sale of movable property, and even in more generic documents (for example in General Conditions of Sale), the existence of the so-called “retention of title” (reserva de domínio) clause, the purpose of which is to ensure that the seller continues as owner of the goods sold until the price for the said goods has been paid in full by the purchaser.
Although the insertion of such a clause in credit sales is a common practice and is even to be recommended, it is important to emphasise that the contractual provision of a retention of title clause does not by itself guarantee the protection desired, and may not produce the practical effect expected.
Brazilian law contains certain rules that must be complied with in order for the title retention clause to be effective, but many international contracts do not in fact observe such rules, which can cause disagreeable surprises for the seller when it tries to exercise its rights in relation to the retention of title.
In most cases, this occurs because foreign sellers simply enter into contracts and/or establish general conditions of sale based on their own laws, and choose to submit any disputes to the jurisdiction of their own country.
It is understandable that the foreign seller may often prefer to choose the law and jurisdiction of its own country in order to govern its contracts, on the assumption that such choice offers it more facilities and security. However, in matters involving international business, this may prove to be a serious problem if the seller is not aware of the legal rules that exist in the country of the purchaser.
In this respect, it should be pointed out that, in certain cases, the simple choice of foreign law and jurisdiction may not be the best option, even though foreign companies may have the false impression that such option will always be the one that best meets their interests. It must be remembered that, taking as an example a retention of title clause, any legal action to recover possession of the goods in the event of the purchaser’s default, will take place in the country of the purchaser, and for this reason it is essential to know whether such action is likely to cause conflict with the laws of that country.
In Brazil, the choice of law in itself is frequently the subject of controversy and must be considered on a case-by-case basis, since Brazilian law imposes certain restrictions on the parties’ freedom of choice on this topic. There are cases where there exists an imposition of the law of the country of the offeror, while in others there are special Brazilian laws regarded as being rules of public policy.
The choice of forum must also be considered very carefully, because even if it is possible to take advantage of a foreign jurisdiction, it must be remembered that any foreign decision needs to undergo a process of validation by the Brazilian Superior Court of Justice in order to be recognised and be enforceable in Brazil, which could lengthen the procedure.
With specific reference to the retention of title, Brazilian law establishes, among other requirements, that the contract containing such clause must be registered at a notary’s office (Deeds and Documents Registry) of the purchaser’s domicile, within a period of 20 days as from its signature. Late registration does not invalidate the contract, but retention of title is only effective as from such registration.
If the contract is written in a foreign language, it is also necessary to have the document officially translated into Portuguese by a sworn public translator before applying for registration.
Absence of registration of the contract at a notary’s office does not guarantee protection to the seller, whether vis-à-vis the purchaser or third parties. Thus, the seller cannot claim the property if the purchaser has sold it to a third party, or pledged it to a third party as security, or if the seller becomes insolvent, as in cases of judicial restructuring, where the clause will not be effective against other creditors, and the seller may end up as an unsecured creditor.
Apart from the need to register the contract at a notary’s office, it is also essential to put the debtor officially in default, by notification or protest of the “security”, as only then will the seller be able to claim recovery of the property. Here too there is another peculiarity of Brazilian law, since the exercise of the right to repossess goods sold subject to retention of title presupposes the existence of a debt represented by an enforceable instrument (for example, a promissory note, bill of exchange or even a contract containing characteristics of an enforceable instrument under Brazilian law).
In addition, Brazilian law now allows contracts to establish the rules relating to procedural matters that may arise between the parties and, in this respect, it is recommended that contracts containing a title retention clause provide, for example, for the possibility of search and seizure of the goods in the event of non-payment, the manner of appraising the goods for the purpose of calculating a debit balance, who will be responsible for the cost of such appraisal, the possibility of sale or assignment of the goods to a third party to avoid the risk of deterioration, among others.
Apart from the measures referred to above, special care must be taken when General Conditions of Sale are concerned. This is because such documents have a generic characteristic and, unlike specific contracts of purchase and sale, do not contain a description of the merchandise, which is essential for the effectiveness of the retention of title, because the Brazilian Civil Code stipulates that “An object that cannot be described perfectly cannot be the subject-matter of a sale with retention of title”. In principle, there exist means of complying with the legal requirements even in cases of retention of title in General Conditions of Sale (for example, registration of the said general conditions together with the invoice containing a description of the merchandise sold, inclusion of an express reference to the general conditions in the invoice itself, among others), but this must be evaluated in each specific case.
These brief comments make it clear that protection of the seller’s rights as regards title to the goods requires more careful consideration than the mere inclusion of a retention of title clause. A wider examination of the issue is always to be recommended, taking into consideration the peculiarities of the laws of the country of the purchaser, in order to ensure maximum legal protection for the seller.
Frederico Amaral Filho and Charles Wowk
Associate lawyer and Partner in the Civil Area – São Paulo