In import-export transactions across Europe, it is common for sellers to protect the assets they have sold by retaining the ownership title until the buyer has paid the full purchase price. Retention of title allows sellers to reclaim the assets if the buyer fails to pay, and even if the buyer goes bankrupt before payment is made. In Hungary, however, such an arrangement can lead to unpleasant surprises for sellers.
Retention of title in Hungary is subject to registration. If there is no registration, which is usually the case in such agreements, the asset to be returned to the seller may be encumbered with a pledge without the buyer's intention or knowledge. This risk may arise for anyone with a commercial relationship in Germany who routinely buys from Germany in large quantities, whether they are an SME or large corporation.
Retention of title offers significant benefits for both sellers and buyers
It gives sellers the opportunity to maintain ownership until the purchase price is paid in full, effectively reducing the risk of default by the buyer. Even if the buyer fulfils all other conditions for acquiring the assets, if they do not pay, the seller can remain the owner. This is a key protection for the seller, especially if the buyer resells the asset or establishes a pledge on it.
According to Hungarian law, the agreement must be recorded in writing, even if the contract of sale is concluded orally or by implied conduct. There is no requirement that title can only be retained at the time the sales contract was concluded. This means title can be retained at other times too, such as when the buyer encounters unexpected payment difficulties.
In the case of movable assets, the retention of title is valid if the sales contract contains the necessary details. If the retention of title is not registered, the buyer may behave in trade as if they owned the goods, which could jeopardise economic security.
Rules to consider when trading with Germany
If a sales contract contains foreign elements, the effects of the retention of title will be governed by the law of the country where the asset is located, unless the parties choose the law of the asset's future destination.
If the retention of title under foreign law is governed by Hungarian law based on the above, the lack of registration does not affect its legal validity and it remains in force between the parties. However, the validity of the retention of title vis-à-vis third parties may be dubious.
In the German legal system, the registration of the retention of title into any register is not mandatory. It is not usually done in the Hungarian Collateral Register either.
A predicament often arises by accident, as a result of the relation of the laws applied. The German seller, who regards the retention of title as security for payment of the purchase price, does not always take into account that the buyer automatically creates a pledge on the asset when it takes possession of it, if the buyer has previously granted a pledge to one of its banks as a security for a loan that also covers assets to be acquired in the future. This is quite common in Hungarian banking practice. As a result, the seller's claim for payment of the purchase price may rank behind the claim of the security beneficiary bank.
Hungarian law currently has no solution to this anomaly. The best and most effective way to avoid legal risks can only be determined by individual analysis.
What might be the solution?
How to resolve these potentially undesirable situations that may have national economic implications? Clearly it cannot be expected that retention of title governed by German law will be registered in the Hungarian Collateral Register or into the pertinent register. Besides the fact that these registers are only available in Hungarian, a language most German companies are unlikely to operate in, the administrative burden involved is unacceptable.
Nor is amending the legislation a welcome solution. Adapting legislation based on strict doctrinal principles to such a specific situation may be fraught with pitfalls, even if increased caution is exercised. A possible modification may do more harm than good if the general safety of market transactions is compromised.
A more detailed definition of the pledged assets in creditors' pledge agreements may seem to be a solution. Such a definition would leave out of scope movable assets that are subject to unregistered retention of title and therefore cannot become pledged assets in any case. This requires a high degree of awareness by the security provider, i.e. the Hungarian buyer. Large Hungarian corporations might possess this, but medium-size companies, which constitute the bulk of Hungarian-German economic relations, are unlikely to. Even if they did, the possibility of negotiating financing contracts individually is very limited, as medium-size companies typically use general terms and conditions and standard form contracts from creditors.
So, while this is an anomaly of national economic importance, none of the possible solutions to this potentially delicate situation is attractive.
By Gergely Szaloki, Partner, Schoenherr Hungary
