Case 8: Supply of material to manufacturer (II)

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the proceeds of the claim’s realisation according to § 805 ZPO.5 Serick6 states that an action pursuant to § 771 ZPO is unnecessary, because the assigned claim is held by the assignee. Any attempt by the assignor’s (B’s) creditors to execute against it will be in vain. The only action that the assignee might bring would be an action for a declaratory judgment.

(d) If the parties have not included a combined products and proceeds clause as described under part (c), the monies already paid to B as well as the claim against E will be the property of B and thus subject to distribution amongst his insolvency creditors. A would not have any rights to the money or the claim.

If the contract contains a combined products and proceeds clause, A can claim preferential payment out of the claim against E (see §§ 50 s. 1, 51 n. 1, 166 ff. InsO).7 However, the monies paid by D to B are still lost to A.8

a u s t r i a

(a)As the contract contains only a simple retention of title clause, the monies paid by D belong to B. A does not, therefore, have any real rights to the monies deposited in B’s bank account. The bailiff can, therefore, execute against the monies.

(b)As the contract contains only a simple retention of title clause, B’s claim against E belongs to B; the bailiff can therefore execute against this claim.

(c)Only an extended retention of title clause would afford A adequate protection.9

(d)This makes no difference; the answers to parts (a) and (b) are the same, as the monies or the claims are assets belonging to B.

5 Baumbach/Lauterbach/Hartmann § 771 ZPO n. 26; Münchener Kommentar/Roth § 398 BGB n. 86.

Serick, Eigentumsvorbehalt und Sicherungsübertragung III § 34 III 1. See further supra, German report, case 6(b).

Cf. Reinicke/Tiedtke, Kreditsicherung n. 742 and supra, German report, case 5(c). For details see supra, Austrian report, case 5(c).

g r e e c e

(a)C may execute against the monies deposited in B’s bank account, since the claim against D, and hence the proceeds of its realisation, belongs to B, so long as this does not infringe bank secrecy. Only an extended retention of title clause would grant to A rights in the claims arising from the sub-sales. When the purchaser is a retailer, common business practice is to combine the retention of title agreement with an assignment to the vendor of the future claims of the purchaser arising from the resales (extended retention of title, a proceeds clause).10 In such a case, since D must be notified of the assignment, D would be obliged to make payment to A, not to B. Thus, if he had nevertheless paid B, A’s claim against D would remain undischarged. D would be able to claim back the money paid to B on the basis of unjust enrichment (article 904 A.K.).

(b)The claim arising from the sub-sale belongs to B. Since, in the present case, the parties have not included a proceeds clause (see below, part (c)), it is clear that the claim may be subjected to execution by the bailiff.

(c)Only an extended title clause would grant to A rights in the claims arising from the sub-sales. If the purchaser is a retailer, it is common business practice to combine the retention of title agreement with an assignment to the vendor of the future claims of the purchaser arising from the resales (a proceeds clause). This form of assignment is, in reality, a fiduciary one because it ensures that the vendor’s claims against the assignor are satisfied. No further prerequisites are imposed, except that the debitor cessus, E, must be notified of the assignment.

(d)The claim arising from the sub-sale belongs to B, as do the collected monies; they therefore form part of the insolvency estate. Hence, the answers to parts (b) and (c) do not change. It should be mentioned that, according to the prevailing view, in case of extended retention of title, if B went bankrupt after the assignment, the assigned claim does not form part of the insolvency estate, irrespective of whether the debitor cessus

10For a treatment of extended retention of title, see Roussos, in: Miscellany in Honour of Michailidis -- Nouaros 397.

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(i.e. E) has been notified of the assignment. The claim has been separated from the assignor’s property.11

f r a n c e

(a) In principle, the seller’s (A’s) claim to the proceeds would be as good as his claim over the goods sold under retention of title, because his interest in the goods is, by means of real subrogation, transferred to the proceeds.12 C. com, article L. 621-124 expressly refers to the proceeds of the assets as defined in C. com, article L. 621-123.13 Yet, two cases have upheld a court action by the seller against the sub-buyer to the sale proceeds despite the transformation of the assets.14 In 1984, the Court of Appeal of Toulouse held that the unpaid seller of wool could not require the return of the wool, which had since been knitted into pullovers; but could claim the proceeds of the sale to the sub-buyer.15 Yet, the decision was repealed by the Cour de cassation.16 Since then, various decisions have refused to accept the claims of sellers to the proceeds of sub-sales, when the assets have been transformed.17

Assuming that the court would adopt a liberal approach to this question, it is necessary to consider whether A will have any claim over the price already paid by D to B for the curtains. Although the writer is

11The prevailing view is supported by Georgiadis, Empragmato Dikaio II 267; Kornilakis,

I katapisteutiki ekchorisi ton apaitiseon 126.

12Com 27 May 1986, Bull civ IV, No 102; D 1988, Som, 63, obs. Derrida; Com. 15 Dec. 1992, Bull civ IV, No 412; D 1993, Som, 293, obs. Pérochon.

13Com 3 Jan 1995, Bull civ IV, No 3; RTDC 1997, 166, obs. Zénati; D 1996, Som, 121: A machine sold under reservation of title had been resold by the buyer to a sub-buyer and installed on a production line. The Court held that, since the installation documents noted that the machine would be able to work even if disconnected from the chain, the machine was still to be found in kind according to C. com, article L. 621-124, and thus the claim to the sale proceeds was successful.

14Lyon, 29 Apr. 1983, Juris-Data No 041 412; Toulouse, 27 Nov. 1984, D 1985, J. 185, note Mestre.

15See obs. Pérochon, D 1993, Som, 293, note (1). The return of the transformed assets that remain in the possession of the buyer is impossible because then only the initial seller would reap the benefits of the manufacturing process, at the expense of the creditors as a whole. However, because the interest of the seller in the sale proceeds (owed to the buyer by the sub-buyer) would be limited to the amount of the outstanding debt, no creditors would suffer by this. It would simply be a case of real subrogation.

16Com 27 May 1986, Bull civ IV, No 102; D 1988, Som, 63, obs. Derrida.

17Com 15 Dec. 1992, Bull civ IV, No 412; D 1993, Som, 293, obs. Pérochon; Com 17 Mar. 1998, Bull civ IV, No 108; D 1999, Som, 72, obs. Honorat; JCPédE 1998, No 37, 1398, obs. Pétel.

unaware of any cases dealing with this question, A will probably not be able to claim the money, for the simple reason that as the claim had already been paid, the real subrogation provided by C. com, article L. 621-124 will be inapplicable. The money, a fungible asset, has now been mixed in B’s bank account with other monies, thus extinguishing the title of A.

(b)Here again, the question of transformation arises, with the same consequences as explained in part (a). In contrast with (a), when claims arising from sub-sales remain outstanding, the courts have taken the view that, based on real subrogation, the proceeds of sale are assigned to the seller as soon as the original buyer and sub-buyer have concluded the subsale. It is, therefore, irrelevant whether either the assets are then sold again18 or the claim to the proceeds is charged by the original buyer.19 In fact, the sub-buyer would not be able to refuse to pay the seller because of default in the sold assets.20 The fiction is that the claim to the sale proceeds never passes into the estate of the original buyer.

So A will certainly be entitled to claim payment from E. As the claim against E is unlikely to equal the amount outstanding between A and B, A will continue to be a creditor of B for the remainder.21

(c)The existence of A’s right depends on the asset subject to retention of title remaining untransformed. Fabrics are meant to be transformed during the course of manufacturing, hence the use of a retention of title clause is inherently inapposite. French law has not, however, adopted a more suitable approach.

(d)The claim will only be admissible if the sum owing between B and E has not been paid prior to the commencement of insolvency proceedings, i.e. it was paid after they commenced. It is up to the first seller to bring evidence of this.22 The sub-buyer who pays the price with

18Com 8 Mar. 1988, Bull civ IV, No 99; RTDC 1989, 348.

19See Com 20 June 1989 (D 1989, 431, note Pérochon; RTDC 1990, 121, obs. Brandac), where the creditor-seller’s claim prevailed over the claim of a bank, to which the claim over the sale proceeds had been charged.

20Com 3 Jan. 1995, Bull civ IV, No 3; RTDC 1997, 166, obs. Zénati; D 1996, Som, 121.

21According to Com. 15 Jan. 1991, Bull civ IV, No 31; JCPédE 1991, I, 102, No 10, if the sale proceeds exceed the outstanding debt between the original seller and buyer, the claim is limited to the quantum of the outstanding debt.

22Com 2 Nov. 1993, Bull civ IV, No 375, D 1994, IR, 7. Confirmed for the new wording of article 122 in Com 11 July 1995, JCPédE 1995, Pan, 1141.

exercise his rights. In fact, according to Portuguese law, it is possible for any creditor to claim payment from anyone indebted to the debtor in question, by virtue of a subrogation action (acç˜ao subrogatória -- article 606o C.C.). This action does not, however, grant any priority in payment, as it is made available for the benefit of creditors generally (article 609o C.C.).

Claims are assets subject to execution, so the claim arising from the sub-sale may be executed against by a creditor of B. The execution is performed by informing the debtor in question that the claim should be paid to the court.

(c)The only way for A to acquire a superior right to the claims arising from the sub-sales would be to execute against them.

(d)If B becomes bankrupt, the insolvency administrator would be entitled to the money paid by D and to claim the payment owing from E. A subrogation action brought by A would be ineffective, because it has no preferential status.

s p a i n

(a)The bailiff may execute against the monies paid by D to B.

(b)B may claim payment from E. The bailiff may execute against the claim arising out of the sub-sale.

(c)Legally, A has neither a real right to the money paid by D, nor any claim against E. Nevertheless, in the contract for the sale of the cloth, it would be possible for B, in order to provide security for A’s claim, to assign to A any claims that he (B) might acquire in the future against his customers. The wording of such a contract clause might be as follows: ‘B assigns to A as a guarantee of payment of the hire purchase price all credits which may accrue to B from future purchasers of the curtains.’ The assignment of future debts as a security is only admissible if their provenance can be identified as to their amount and origin, and if they result from the resale of the curtains.

(d)As to part (a): B’s goods fall into the insolvency estate and the bailiff may no longer execute against them.

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As to part (b): Only the insolvency administrator may demand payment from E. Insolvency proceedings have the effect of consolidating all individual executions into a single insolvency suit.24

As to part (c): An assignment of B’s claims against his customers would not be feasible, as they now form part of B’s insolvency estate. In spite of the fact that A has a reservation of ownership right over the curtains, this right does not extend to the proceeds that may arise from the resale of those curtains. A cannot recover directly from the insolvency estate, because A is merely an insolvency creditor. Eventually, A will collect what is due to him in accordance to the provisions governing insolvency proceedings. Since the commencement of insolvency proceedings stays all individual claims, A cannot claim payment from E.

i t a l y

(a) and (b) Since the curtains belong to the manufacturer, the price paid by D in respect of them belongs also to B. Therefore, the monies deposited in his bank account are subject to execution by the bailiff. The same is true of the claim B has against purchaser E.

(c) Let it be assumed, as required by our case, that the contract between the parties is a genuine sale, and not something else. That being so, A and B may still agree that A is to have an assignment of future claims owed to B by his customers. The situation would be the following: B owns the curtains, if we assume that the retention of title clause in favour of A cannot extend to the products produced with the cloth. Yet, A would still secure his claim for the purchase price by obtaining priority to the value of the product, by virtue of an assignment of future claims agreement relating to the claims arising from the sale of the curtains owned by B. The difficulty with this approach stems from the fact that A is neither a bank nor a factoring company (see below, case 12(a) and (b)). Hence the Civil Code rules on the assignment of claims apply to the facts of the present case (articles 1260 ff. c.c.). These rules allow for the assignment of future claims only in so far as it is possible to ascertain which claims are subject to the assignment.25 Therefore, the assignment of future claims agreement will not operate effectively if B’s customers

24See articles 161.3 and 1186 LEC.

25For a recent treatment of the topic: Troiano, La cessione di crediti futuri.

are persons who cannot be identified at the time of the assignment. But commercial partners may be identifiable in advance, in a number of circumstances. In any case, to prevail in a conflict with B’s insolvency creditors, A must comply with the rather burdensome requirements of the Civil Code governing how the assignment is made effective against them. According to article 2914, n. 2 c.c., the assignee will prevail against a creditor of the assignor who has attached to the claim, whenever the debitor cessus accepted the assignment or received adequate notice of it prior to attachment. Legal authors and case law hold that acceptance or notification only render the assignment effective as against the individual creditors (or the insolvency administrator of the assignor) if evidenced by documents that have a certain date prior to the execution or insolvency.26 According to some decisions assignment should be effective even if each of the assigned claims came into existence following execution against the assignor’s assets,27 or if the assigned claim came into existence following his insolvency, though the majority view favours the opposite conclusion.28

On the other hand, if the relationship between A and B was not one of sale, but rather an appalto (see case 7(c)), whereby the curtains are owned by A, it would be possible to maintain that payments received by B, or claims owed to him by third parties who bought the curtains, were received (or were to be received) by B in a ministerial capacity, as agent for A. B could be considered as mandatario senza rappresentanza for A, in the sale of the curtains to D and E, and A could claim the unpaid price directly from E under article 1705 c.c.29 In that case, if the contract between A and B had a certain date prior to the bailiff’s act of execution against B, the claim in question would not be considered as an asset available to C’s creditors (article 1707 c.c.).30 Alternatively, if those sales were not authorised, B may be entitled to collect the sums

26The matter is not disputed. See Bianca, La vendita e la permuta I 592, note 6. On the need to comply with the above-mentioned evidentiary requirement, see: Cass. 22 Feb. 1996, n. 1413, Fallimento, 1996, 759. The assignee must satisfy this requirement for every assignment, despite the fact that a master contract with a certain date exists, which obliges the assignor to assign all the claims that originate from a certain source to the assignee: cf. Cass. 14 Nov. 1996, n. 9997. Perlingieri, in Commentario del codice civile Scialoja-Branca 227 ff.

27See e.g. Trib. Bari, 1 Apr. 1998, Foro it., 2000, I, 1992, obs. Macario.

28Cass. 29 Jan. 1999, n. 785, Foro it., 2000, I, 1991, obs. Macario; Cass. 12 Oct. 1999,

n. 1132; Cass. 14 Nov. 1996, n. 9997; Giust. civ., 1997, I, 1879; Giur. it., 1997, I, 1, 1558; Fallimento, 1997, 787, obs. Badini Confalonieri. Cf. Macario, Riv. dir. priv. 2000, 437.

29See above, Italian report, case 6(a), (b).

30For commentary on article 1707 c.c. see above, Italian report, case 4.

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(d) B’s insolvency would not affect the analysis in relation to parts (b) and (c).

s c o t l a n d

(a)The money paid by D is simply part of B’s patrimony (estate) and is thus susceptible to execution by B’s creditors. Because D will never get the goods, he will have a right to get his money back. But this will be an ordinary claim and if B is insolvent D will lose money.

(b)The claim by B against E is also part of B’s patrimony (estate) and is thus susceptible to execution by B’s creditors. However, if E does not get the goods he can refuse to pay. His right to refuse to pay is effective not only against B but also against B’s creditors.

(c)Attempts have been made for the contract between A and B to provide that the proceeds of sub-sales shall be held in trust by B for A. Such attempts have not succeeded.35

(d)This would make no difference.

s o u t h a f r i c a

(a)The money paid by D into B’s bank account has become B’s, as it has been mixed with his own money. All the assets of the debtor (B), whether corporeal or incorporeal, are susceptible to execution by B’s creditors, including C. C can execute against B’s bank account as a whole. Since D will never receive the curtains, he will have a contractual claim against B for breach of contract. If he does not execute against B’s property himself, his claim will rank lower than that of C.

(b)Only B has a contractual right to claim payment from E. The bailiff (messenger of the court) can execute against all assets of B, whether corporeal or incorporeal, thus including contractual rights. E can however refuse to pay the price on the ground that B has not fulfilled his part of the contract. This would have the effect of avoiding B’s claim.

35Clark Taylor & Co. v Quality Site Development (Edinburgh) Ltd 1981 SC 111. See above, Scots report, case 5(c).

(c)The parties could agree that the proceeds of any sub-sales would be subject to a charge in favour of A. Such a clause is not very common in South African commercial practice.

(d)The legal position of the seller (A) and the unsecured creditors will be the same as above on B’s insolvency.

d e n m a r k

(a)According to Danish law, the monies paid to B’s bank account can be executed against by B’s creditors.

(b)A cannot preserve any right to the cloth after it has been manufactured into curtains. After the manufacturing he has only an unsecured claim against B. On the other hand, according to Danish law, B should settle with A when the cloth is used in the manufacturing process. Therefore, it is not possible for A to have a right which reaches B’s customers. In other words, the claim against E belongs to B and can be executed against by his creditor, C.

(c)A cannot get a better right in respect of the claims arising from the sub-sales through the use of a reservation of title clause. A might have some security for his claim if it has not been paid. B could assign the claims which arise from the sub-sale to A as payment of A’s claim against B or assign them as security for A’s claim. This approach will not fully protect A against a loss because there is a lack of security from the point at which the cloth is used for manufacturing to the point when the curtains are sold, and thus a claim has arisen. If there is a continuing relationship between the supplier and manufacturer, a credit consignment agreement may improve the position of the supplier. Under such an agreement B should settle with A when the cloth is used in the manufacturing. It might also be agreed, at the same time, that B could settle by assigning the claims against his customers to A as payment of A’s claim or as security for it. In order to protect A’s right against B’s creditors, the debitor cessus of each claim must be notified that the claim has been assigned to A.

In an arrangement like this it is important to note two facts. It is important that B settles with A when the cloth is used for manufacturing; if not, the court might rule that A has no right to the cloth remaining with B. It is also important that each settlement is of a