Beware of local property law in international sales

A judgement (Court of Appeal ‘s-Hertogenbosch 30 June 2015, ECLI:NL:GHSHE:2015:2435) of a Dutch Court of Appeal highlights the importance which formal requirements for the transfer of property in foreign law have for international sales contracts.

The case
A Dutch trading company bought heavy rolling machinery under the condition C&F Holland. One machine was shipped from Turkey to Belgium and another delivered to the Netherlands by truck. A different Turkish company, however, claimed and proved to be the rightful owner of the goods which had been stolen by or on behalf of the Turkish supplier who thus did lack both title and the authority to rightful dispose of the machinery.

District Court proceedings
Before the District Court the Dutch buyer relied on the fact that – as was accepted by the Court – it had acquired the goods in good faith and thus had become owner, notwithstanding the fact that the Turkish supplier had no right to transfer the ownership (as would have been the case under Belgian or Dutch law, although Dutch law gives the former owner of stolen property the right to recover his property from commercial parties, even though acting in good faith, within three years from the theft).

The District Court, however, ruled that the Dutch buyer could not rely on the fact that he had been acting in good faith because the Turkish law required a notarial deed for the sale and transfer of registered and unregistered transportation vehicles which under Turkish law included the rolling machinery in question. As there had been no transfer of ownership, the ownership had remained with the original owner at all times.

Dispute in appeal
Before the Court of Appeal the Dutch buyer tried to reverse his original claim that the property had been acquired in Turkey to the effect that the ownership of the machinery was transferred only on arrival in the Netherlands. The Court of Appeal rejected this reversed position as insufficiently motivated and subsequently rejected the Dutch buyer’s claim that the Turkish notarial deed was relevant for Turkish transport safety and taxation purposes only and therefore should be disregarded in international perspective and that the requirement for a notarial deed was customarily disregarded in the international sale and export of rolling machinery from Turkey to third countries on the ground that the requirements in Turkish law were explicit and without exemptions. The fact that the legal requirements were customary disregarded in international sales and exports was not sufficient to withhold from the rightful owner the right to recover his property.

Property and security issues
The judgement of the Court of Appeal stands in a long tradition of Dutch and international Courts which confirms that the existence of property rights (including security rights which in continental systems are seen as limited property rights) should be judged not by the rule of the contract but by the rule of the place where those rights were allegedly acquired. If goods then travel from one country to another, those rules must be respected, although the exercise of those property and security rights will be subject to the legislation of the country in which they are then physically present. It should be noted that while parties are generally free to agree on the law which will govern their agreement, there is no free choice of law when it comes to the actual transfer of property rights or the establishment of security rights which are governed by the laws of the place where those rights are acquired.

However virtual the world of international sales may seem to have become, it still is vital to pay close attention to the actual locations of the goods on which we want to acquire property or security rights and to heed locally required formalities.