Questionnaire regarding retention of title (ROT) and other forms of security interest:
ISLAMIC REPUBLIC of IRAN
Prepared by: Dr. Christian Ule, Frankfurt, and Jahanbahksh Nouraei, Tehran.
I. Preliminary questions:
1. When does title in property pass according to your national law? (E.g. upon conclusion of an agreement, handing over, etc.)
A- According to Article 362 of the Civil Code of Iran, the buyer, in a regularly conducted sale, then becomes the owner of the object sold as soon as the sale is affected.
On the stipulation of Article 363 of the Civil Code of Iran, if in a sale contract there is an option of cancellation or if a period of grace is fixed for the delivery of the object sold or for the payment of its price, this will not prevent transfer of ownership.
2. How is retention of title (hereinafter referred to as ROT) dealt with pursuant to your country’s private international law? What national law consequently governs the ROT?
Explanation: According to most national rules of private international law, questions of ROT will be decided in accordance with the law of the country where the item is actually located (Lex rei sitae, the law of the situation of the thing). It is extremely rare that parties are free to determine the law governing ROT in their contract.
A- The Civil Code of Iran is the national law which governs the ROT. However, in sale contracts with Iranian businesspersons, foreigners are allowed, with some reservations, to use the law of a foreign state as the applicable law of their contract.
According to Article 968 of the Iranian Civil Code:
"Obligations/liabilities arising out of contracts shall be subject to the laws of the place where the contract was concluded, except in cases where the transacting parties are both foreign nationals and have explicitly or by implication declared them to be subject to other laws."
Therefore, for instance, the German law respecting retention of title can be applied to a sale contract, if both parties conclude and sign it on the territory of the Federal Republic of Germany.
3. Does your national law accept - for a certain period of time - ROT agreed upon pursuant to a foreign legal system? Are there any special requirements if agreed upon in the framework of standard business conditions?
Explanation: In e.g. Switzerland valid ROT requires public registration; yet Swiss law recognises foreign unregistered ROT for a period of three months, thereby granting foreigners an additional period for registration.
A- If a contract of retention of title between an Iranian businessperson and a foreign national is signed in the country which its law has been chosen as the applicable law, the Iranian national law accepts the ROT agreed upon for an unlimited time.
II. Retention of Title
1. Admissibility
a) Does your national law allow simple ROT clauses („The goods remain our property unless paid for in full“)? What is the legal basis (e.g. codified law, precedence), please quote?
A- Iranian national law allows ROT clauses in the sale contract. The legal basis is Article 10 of the Civil Code which stipulates: “Private contracts shall be binding on those who have signed them, providing they are not contrary to the explicit provisions of a law.”
b) Are there any other, continued forms of ROT in your national law, according to which the original buyer assigns to the original seller all future claims for payment arising out of any resale to a third party?
Is this procedure allowed, possible, and/or common practice according to your national law? What is the precise definition?
A- Such practice is allowed under the provisions of Article 10 of the Civil Code, but it is not a common practice. However, for practicality of the retention, the third party must also accept the ROT. Otherwise, any agreement between the Original Buyer and the Original Seller shall not be binding on the third party.
c) Is it possible to further continue ROT to products created when processing the initial goods?
What provisions apply according to your national law with respect to combination, mixture, processing or resale of the goods to which title has been retained?
A- If the processing is made by the original buyer it would be possible in the framework of the said article 10. However, such a practice is not common in Iran.
d) Is it possible, allowed and/or common practice to provide for extended forms of ROT (Property in the goods does not pass to the buyer unless he has paid the purchase price in full as well as any other debts)?
A- Yes, it is possible.
e) Are there any other forms ROT may take?
A- No, other form is foreseen under the Iranian law.
2. What other formal requirements have to be fulfilled (if necessary please specify in what particular circumstances)? When is each of the requirements deemed to be fulfilled?
a) E.g. is it necessary to fix the ROT in writing or does ROT require registration or authentication by a notary public?
A- Sale contracts and retention of title agreements can be verbal and in written. However, it is advisable to draw up the ROT in writing.
The ROT does not require registration or authentication by a notary public. However, if the ROT is drawn up at a notary public office, its enforcement in case of the buyer’s breach of confidence shall be easier.
b) Are there any special (formal) requirements with regard to standard business forms? If so, please specify.
A- There are no special formal requirements and no standard business forms with respect to the ROT.
c) Does your national law provide for any other formal requirements?
Explanation: In some countries formal requirements apply with respect to the date when the ROT was agreed upon. This proves that the ROT had been agreed prior to the time when other creditor’s claims arose (so-called certain date).
A- The ROT contract or the sale contract containing the ROT clause must have been dated and signed by the parties. It would be more effective if two male witnesses sign as well.
3. Model clauses / registration forms / legal texts:
If possible, kindly attach to your answer possible wordings (original/copies) of common ROT clauses/agreements, and forms that may be required for registration. We would very much appreciate it if you could kindly add any German translations that are available, but also English and French versions are highly welcome. Providing us with relevant legal texts (acts etc.) would also be of great assistance.
A- A ROT clause can be worded as follows:
“The parties, on the basis of Article 10 of the Civil Code of Iran, agreed that the ownership of the goods will be transferred to the buyer only after full payment of the whole amount of the price of the goods. Until the full payment of the price of the goods, the seller shall be still considered the owner, and the buyer shall be considered a trustee with respect to the goods.”
4. Effect: What degree of security does ROT offer?
a) What legal effect(s) does ROT produce between the parties to the contract?
Under the ROT provisions, the buyer must stick to the statutory obligations of a trustee, and in case of unauthorized use or resale of the goods, he shall be held responsible civilly and will be subjected to prosecution for commission of the crime of breach of trust (Article 674 of the Islamic Penal Code).
The buyer / trustee must preserve the goods in the way that the seller laid down; and if there was no specific stipulation for the manner in which the goods is to be preserved, the buyer must keep it in the way which is usual for the goods; otherwise he shall be held liable.
The buyer / trustee shall have no liability in respect of the destruction or the depreciation of the goods held by him, unless in case of negligence or excessive use (Articles 612 and 614 of the Civil Code of Iran).
b) What effect does it have towards third parties?
Particularly towards the
i) Subsequent buyer acting in good faith
ii) Other creditors
iii) Government / treasury
c) What effect does ROT have in the case of execution?
d) What effect does ROT have in the case of bankruptcy?
A- In bankruptcy proceedings, the goods held in trust by the bankrupt businessperson shall be set aside and not included as part of the estate of the bankrupt.
As for the creditors secured by pledges, according to Article 517 of the Commercial Code of Iran, the receiver can authorize the payment of such creditors out of the first moneys received. If such privilege is contested, the matter shall be referred to the court for settlement.
III. Allied forms of security interest
Does your national law provide for any allied forms of security /security interest?
A- Other forms of security are envisaged in Iranian law. Conditional sale, pledge/mortgage, and lien are allowed by virtue of Articles 458 to 463 and 771 to 794 of the Civil Code and Article 33 of the Registration Law.
IV. Jurisdiction
Is there any relevant jurisdiction which you find worth mentioning?
A- With respect to the court jurisdiction, as per the stipulation of Article 13 of the Iranian Civil Procedure Code, in commercial suits the plaintiff may refer to the court where the contract was concluded or the obligations must be fulfilled there.
Therefore, in case of the courts of Germany, where a ROT-included contract with the Iranian party may be signed, they will have jurisdiction to handle the contract in the event of litigation.
The Iranian courts in principle honor the arrangement made freely between the contracting parties to take their case to the court of a foreign country. However, they reserve the right for themselves to intervene when they realize that they also have jurisdiction to decide about the case.
This right is foreseen in Article 971 of the Civil Code which states:
"With respect to the jurisdiction of the courts and regulations relating to rules of the trial proceedings, the lawsuits shall be subject to the law of the place, where they are filed. Lodging the same lawsuit in a foreign court shall not deprive the Iranian court of its jurisdiction."
So, despite agreeing on the clause that any difference which may arise between them will be handled by a German court, both contracting parties, shall also have the right to refer to Iranian courts as plaintiff, if they wish to do so.
February 28, 2002
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