Switzerland. Benedict F. Christ. David Jenny. Vischer. 1. General remarks about retention of title

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1 Published in "Retention of Title in and out of Insolvency" by Globe Law and Business Ltd, 2015 (Consulting editor: Marcel Willems, on behalf of the International Bar Association) Switzerland Benedict F. Christ David Jenny Vischer 1. General remarks about retention of title Swiss law recognises the concept of retention of title, but provides for restrictive requirements. Namely, the retention of title must be registered in a special registry to become valid and, irrespective of the registration, the retention of title cannot be enforced against a good faith acquirer of the asset. Due to this registration process and the prevailing rights of a good faith third party, retention of title has only limited practical relevance in Switzerland. For instance, in the Canton of Zurich with a population of around 1.5 million and a gross domestic product of roughly CHF 140 billion, only 521 new retentions of title for an aggregate value of CHF 33,767,815 were registered in Starting at CHF 25 for assets with a value of CHF 1,000 or less and CHF 50 for assets between CHF 1,000 and CHF 5,000, the minimum registration fees are relatively high, making retention of title expensive for assets of minor value, although the maximum fee cannot exceed CHF 150. Accordingly, to the extent that retention of title is used, the registered assets mainly comprise movable assets of significant value such as machinery and cars sold in a business-to-business context. 1.1 Transfer of title As a basic rule, under a purchase contract, ownership of a movable asset passes to the purchaser upon delivery, that is, upon the transfer of the asset's possession from the seller to the purchaser. The parties can agree on a retention of title and, thereby, postpone the transfer of title from the time of transfer of possession to any later moment. Typically, the transfer of title will be delayed until the payment of the purchase price, but other conditions may be agreed on as well. A retention of title can be agreed on in connection with purchase contracts and any other contract that has a delivery of asset component, such as contracts for work and labour that include the delivery of an asset as work product. 1.2 Retention of title In Switzerland, retention of title is governed by statutory law. The key rules are set out in Article 715 and following of the Swiss Civil Code. Article 715 of the Civil Code provides that a retention of title is only valid if it is registered in a public register at the domicile or corporate seat of the purchaser. No retention of title is permitted for cattle (livestock). Also, the rules regarding retention of title only apply to movables (chattels), while the transfer of ownership of immovable property (real estate) is governed by different rules. Further statutory rules relevant in connection with retention of title are:

2 two ordinances governing the procedural and administrative aspects of registration in the retention of title register and its maintenance - the Ordinance Regarding the Registration of the Retention of Title dated December and the Ordinance Regarding the Maintenance of the Retention of Title Register dated March ; the Federal Consumer Credit Act, which refers in Article 10(d) to retention of title; Articles 102 and following of the Federal Act on Private International Law which govern the rules applying to retention of title in the international context, in particular regarding goods in transit through, imported to, or exported from Switzerland; Article 214(3) of the Code of Obligations, confirming the principle that a seller may only reclaim an asset sold from a defaulting purchaser if a retention of title has been expressly agreed on; Article 884 of the Civil Code (see also Article 717 Civil Code) providing for the general principle that a pledge over movable assets in the debtor's possession is not valid under Swiss law. This general principle explains the very restrictive, mandatory rules applying to the retention of title. 1.3 Foreign and international law As a basic rule under Swiss private international law, the transfer of movable property is governed by the law of the jurisdiction where the asset is located at the time of transfer of title. Therefore, the retention of title for assets located in Switzerland at the time of transfer from the seller to the purchaser is governed by Swiss law. Accordingly, a choice of law is not permitted for any in rem aspects of the retention of title (such as the transfer of title, the rank of the retention of title in relation to the rights of other preferred or secured creditors, the possibility to take security over the goods which are subject to a retention of title) while the contractual agreement regarding the retention of title could be governed by foreign law. Special rules apply to assets in transit through, or being imported to, or exported from Switzerland: Rights in rem, including any retention of title, regarding an asset in transit through Switzerland from a foreign origin to a foreign destination are governed by the laws of the jurisdiction at the asset's destination. An asset entering Switzerland from abroad that has been subject to a valid foreign retention of title prior to entering Switzerland will remain subject to such foreign retention of title in accordance with the foreign rules, even if the requirements for a valid retention of title in Switzerland are not met. The foreign law governed retention of title will lapse within three months of the asset having entered Switzerland. However, even during that period, the retention of title cannot be enforced against a good faith purchaser of the asset. Retention of title regarding an asset leaving Switzerland for a foreign destination is subject to the laws of the jurisdiction at the asset's destination. 1.4 Retention of title in insolvency If the retention of title is not registered in the competent official register prior to the opening of Swiss insolvency proceedings concerning the purchaser then a subsequent registration of retention of title has no effect in the pending proceedings. If insolvency proceedings concerning the purchaser are opened outside Switzerland and no proceedings concerning the Swiss establishment or Swiss assets of the purchaser have been opened in Switzerland, then a registration of retention of title may still be effective in subsequent Swiss proceedings.

3 If the seller is subject to insolvency proceedings in Switzerland, then the estate will exercise all rights with regard to a retention of title. If the seller is subject to insolvency proceedings outside Switzerland, then the foreign officeholder has no power to assert any rights concerning retention of title on Swiss territory. To exercise such rights foreign proceedings will have to be recognised in accordance with Article 166 and following of the Private International Law Act unless an international treaty applies. 2. Retention of title 2.1 Validity and formal requirements There are no formal requirements for entering into an agreement regarding a retention of title outside consumer credit agreements, but any retention of title must be registered in an official register to become effective against third parties. There is no retention of title by operation of law. Retention of title is entered into by way of agreement (that is by mutual consent). The retention of title must be agreed on prior to the delivery of the assets. Under Swiss law, as a general rule, there are no formal requirements (such as an agreement in writing) for a retention of title and, therefore, it could be entered into by way of oral agreement. Also, there is no specific wording that must be used to agree on a retention of title. As long as the parties' intention to defer the passing of title is evident from the agreement, there will be a valid retention of title. However, for practical purposes, it is recommend to use clear language in the agreement by referring explicitly to a Eigentumsvorbehalt, pacte de réserve de propriété or patto di riserva della proprietà (retention of title) and providing that the seller is entitled to register the retention of title. A retention of title can also be agreed to validly in general terms and conditions (provided the general terms and conditions become part of the contract between the parties in accordance with the general rules applying to general terms and conditions). There is one exception and one practical consideration to the general rule that a retention of title agreement requires no particular form: If the retention of title is agreed on as part of a consumer credit agreement, the Consumer Credit Act requires in Article 10(d) that the agreement be in writing and disclose the identity of the original owner and the conditions under which title to the assets passes to the purchaser. Upon registration of the retention of title in the register, in the case of a consumer credit contract, the registrar is required to check whether all formal requirements under the Consumer Credit Act have been complied with. In practice, retentions of title are rarely registered in connection with consumer goods given the comparatively small amounts involved and the high registration costs for assets of minor value. A written document evidencing the retention of title will be necessary unless the parties jointly appear in person at the registry for the registration to declare the retention of title. Once agreed, to perfect the retention of title, it must be registered in the official register of retention of title. The filing for registration can be made at any time even after the delivery of the assets as long as payment for the assets has not occurred, but it becomes effective only upon registration and will have no effect if made after bankruptcy. The request for registration can be filed in writing or submitted in person either by both parties jointly or one party with written confirmation from the other party. There is no national register; the registries are organised on a cantonal level as part of the debt enforcement and bankruptcy administration. Depending on the structure in the respective canton, there may be one cantonal register or several registries at district level, but never more than one per municipality. The filing must be made with the competent registry of the purchaser's domi-

4 eile (in the case of individuals) or registered seat (in the case of corporations). Typically, the registries have standard forms that can be used for the registration, but there is no online filing available. If filed in writing, the filing itself or the attached agreement should set out: the identities of the parties; a description of the assets subject to the retention of title; the location of the assets; the amount of the unpaid part of the purchase price for which the assets serve as security; and details regarding any down-payments. The filing or the documents creating the retention of title must be signed by all parties not physically present at the registry and must be filed as an original or as a certified copy. In addition, in the case of a consumer credit agreement, the items required by the Consumer Credit Act must be contained in the written agreement to be submitted with the filing. If the debtor (purchaser) changes its domicile or registered seat, the retention of title must be reregistered in the registry at the new domicile or registered seat and a new registration fee must be paid. The former registration survives only for a period of three months from the change of domicile or registered seat. Normally, in the context of a retention of title, the asset is directly transferred from the seller to the purchaser. However, the asset could also be delivered to a third party (such as a warehouse company). In this case the third party could be instructed to hold the asset on behalf of the purchaser and a retention of title could be created. Alternatively, the third party could be instructed to hold the asset on behalf of the seller until delivery to the purchaser. In this case, the seller could retain its property rights without need fora registered retention of title until such delivery. Thereafter, a retention of title needs to be registered if a continued retention of title is required. 2.2 Scope of retention of title Under Swiss law, a retention of title has the following scope. Even in the absence of a specific clause or agreement (and provided there are no special circumstances or an agreement to the contrary), the retention of title agreement includes an implicit covenant by the purchaser not to frustrate the retention of title. Therefore, the purchaser is liable to avoid any act that could compromise the property rights of the seller such as selling the asset, processing or changing the asset, or commingling or combining the asset with other goods. In the event of a breach of this implicit covenant (or any explicit covenant in this respect), the purchaser becomes liable for any damages caused thereby to the seller (including, any damages caused by forfeiture of the retention of title). The in rem effects of such a breach on the retention of title depend on the circumstances and are determined by the general rules regarding movable property. The following rules apply independently of whether the purchaser or a third party is processing, commingling or combining the assets, and independently of whether the combined or commingled assets belong to the purchaser or a third party: In the event of a sale of an asset subject to a retention of title, the purchaser cannot validly transfer the property to a third party as it has no title. Therefore, while a contractual agreement to sell is possible, the purchaser is not able to perform. However, a third party that is, in good faith, not aware of the retention of title can still acquire the property and obtain ti-

5 tie. In the event of a transfer to a good faith third party, the retention of title will be forfeited and the seller can only claim damages. Further, the parties can agree that the purchaser may sell the asset subject to the original retention of title and subject to entering into a second retention of title with the third-party purchaser. This second retention of title again must be registered in the register of retention of title with the original seller as owner. In addition, the original seller may request an assignment from the purchaser of its claims against the third-party purchaser. In the event of processing (involving alteration or change) of the asset, the allocation of property will depend on the value of the asset and the value of the effort used for the processing. The property will belong to the party that has contributed the higher value, be it the asset or the processing. If the processing has the higher value, the retention of title will be forfeited. In the event of a person processing an asset subject to a retention of title in bad faith, the court may allocate the property to the owner of the asset regardless of the values contributed. Furthermore, the parties could agree that, despite the processing's higher value, the processed asset becomes subject to the retention of title. Flowever, in the absence of any case law on the issue, it is disputed in the legal doctrine whether such a retention of title is enforceable (even if registered). in the event of a combination, that is a mixing of assets where the asset can be separated easily, the parties contributing will remain owners of their respective assets. In this case, the retention of title remains valid. In the event of a commingling, that is a mixing of movable assets where the asset cannot be separated easily, the parties contributing will become joint owners of the commingled assets (unless one asset becomes a minor accessory of the other asset). Consequently, where one of the assets is subject to a retention of title, the seller will have a surrogate retention of title in the joint ownership of the combined assets. In the event of a commingling where one asset becomes a minor accessory of the other asset, the property of the entire combined assets remains with the owner of the main asset. In this case, if the minor asset was subject to a retention of title, the retention of title will be forfeited or, inversely, if the main asset is subject to a retention of title, the retention of title will apply to the entire asset. In the event of attaching an asset that is subject to a retention of title to immovable property (real estate), the asset becomes part of the real estate. Consequently, the retention of title is forfeited. Apart from the exceptions mentioned, the rules regarding sale, processing, combination and commingling are strict in rem rules that cannot be changed by way of contract and, therefore, apply regardless of what the parties have agreed among themselves or with any third parties. To the extent that the retention of title is forfeited there is no surrogate right in rem over the asset, the only remedies remaining being claims for damages. Where the retention of title survives, but the combination or commingling changes the description of the asset, the respective entry in the retention of title register must be amended to reflect the new situation and a new registration fee must be paid. Retention of title serves as security for the payment of the purchase price. In the absence of any case law, it is disputed in the legal doctrine whether a retention of title can secure further claims of the seller against the purchaser. 2.S Legal effect of retention of title

6 To be effective, retention of title has to be properly registered in the competent public register. As there is no general duty to consult these registers, third parties acting in good faith may acquire property (title) or other rights over the asset despite proper registration (Article 933 of the Civil Code). A third party does not act in good faith if it does not exercise the degree of diligence which is required under the given circumstances. Merchants of certain goods which are regularly sold subject to retention of title have a duty to check the register: for example used car dealers are subject to such a duty. Furthermore, a landlord wishing to be able to exercise rights granted by the landlord's special lien (Articles 268 and following of the Code of Obligations) should check the register to see whether objects in commercial premises are subject to a retention of title. If goods subject to a properly registered retention of title are subject to an enforcement of debts proceedings initiated by a third-party creditor (including governmental bodies such as tax authorities), then the seller will be treated as if the goods had been pledged to the seller. The seller has to assert its right in the third party's claim proceedings in accordance with Articles 106 and following of the Debt Enforcement and Bankruptcy Law. If the rights of the seller are recognised, then the seller is entitled to the proceeds from the realisation of the goods up to the amount of its claim. Such goods cannot be sold in a public auction, unless the "amount realised exceeds the sum of any secured claims having priority over the claim of the applicant creditor" (Article 126(1) Debt Enforcement and Bankruptcy Law). Alternatively, the seller has the possibility of reclaiming the goods. The seller can do so as long as the purchase price has not been fully paid. If the Federal Consumer Credit Act (Article 18(1)) is applicable then this option is not available if 90% or more of the cash purchase price has already been paid. In the event of reclaiming the goods, the seller has to reimburse any payments made for the goods by the purchaser after deduction of an appropriate rental charge and compensation for wear and tear (Article 716 of the Civil Code). As a general rule, Swiss law does not allow non-possessory security rights like floating charges. Conflicts between the rights of the seller and those of third parties are resolved by applying the rules regarding the acquisition of rights in rem by good faith third parties. S. Enforcement of retention of title The seller may ask the purchaser or third parties in possession of the goods directly to hand over goods subject to a retention of title. Should the purchaser or a third party refuse to do so then the seller has to resort to the civil courts. Whether a third party can invoke better rights is determined by applying the rules regarding acquisition of rights in rem by third parties acting in good faith, as described above. If the purchaser is in default then the seller may either withdraw from the contract and request the return of the goods (Article 214 of the Code of Obligations) or may ask for performance of the contract. If performance is requested then the seller has to set an appropriate time limit for the subsequent performance unless it is evident that a time limit would serve no purpose. If performance has not been rendered by the end of the time limit then the seller may either compel performance in addition to suing for damages or may forego subsequent performance and either claim damages or withdraw from the contract (Articles 107 and following of the Code of Obligations). Goods subject to retention of title are identified by their entry in the relevant register. A purchaser reclaiming such goods has to prove that the relevant goods have been entered into the register. Such an action can also be directed against third parties in possession of goods subject to retention of title. The third party may assert that they have acquired title in good faith.

7 If the purchaser is subject to insolvency proceedings, then the seller has to assert its title to goods under retention of title. Should the administrator of a Swiss bankruptcy estate reject such a claim then the seller has to commence proceedings with the court at the location of the insolvency proceedings within 20 days after having received notice from the bankruptcy administration (Article 242 of the Debt Enforcement and Bankruptcy Law). The administration may also opt to perform the contract between the seller and the purchaser. It will usually do so if most of the purchase price has already been paid. In this event the goods subject to a retention of title cannot be re-possessed and the seller's claim for payment becomes a claim against the estate. Whether performance by the estate can be prevented by a provision to this effect in the purchase contract has not yet been finally decided. The seller also has the option not to repossess the goods and to file its claim for the outstanding payment of the purchase price, which will then be admitted as a claim of the third class as with claims of other trade creditors (Article 219 of the Debt Enforcement and Bankruptcy Law).