Dalhuisen on Transnational and Comparative Commercial, Financial and Trade Law Volume 4: Transnational Movable Property Law 9781509949540, 9781509949571, 9781509949564

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DALHUISEN ON TRANSNATIONAL AND COMPARATIVE COMMERCIAL, FINANCIAL AND TRADE LAW VOLUME 4 Volume 4 of this new edition deals with movable and intangible property law. The book addresses the transformation of the models of movable property in commercial and financial transactions between professionals in the international flow of goods, services, money, information, and technology. In this transnational legal order, the emphasis in the new law merchant or modern lex mercatoria of movable property turns to risk management, asset segregation, liquidity, and transactional and payment finality. Particular attention is given to the notion of assets and asset classes, the inclusion of monetary claims, the transformation of assets in production and distribution chains, and the type of user, income and enjoyment rights that can be established in them, when they become proprietary, what that means, the role of party autonomy in the creation and operation of these rights, and how they are handled between professional participants and upon a sale to consumers. The volume compares common law and civil law concepts - the one being geared to improving value, the other to consumption; it then identifies their relevance especially in modern finance, and concludes by indicating future directions. The complete set in this magisterial work is made up of 6 volumes. Used independently, each volume allows the reader to delve into a particular topic. Alternatively, all volumes can be read together for a comprehensive overview of transnational comparative commercial, financial and trade law.

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Dalhuisen on Transnational and Comparative Commercial, Financial and Trade Law Volume 4 Transnational Movable Property Law Eighth Edition

Jan H Dalhuisen Emeritus Professor of Law King’s College London Chair in Transnational Financial Law Catholic University Lisbon Visiting Professor UC Berkeley Corresponding Member Royal Netherlands Academy of Arts and Sciences Member New York Bar Former ICSID Arbitrator and FCIArb

HART PUBLISHING Bloomsbury Publishing Plc Kemp House, Chawley Park, Cumnor Hill, Oxford, OX2 9PH, UK 1385 Broadway, New York, NY 10018, USA 29 Earlsfort Terrace, Dublin 2, Ireland HART PUBLISHING, the Hart/Stag logo, BLOOMSBURY and the Diana logo are trademarks of Bloomsbury Publishing Plc First published in Great Britain 2022 Copyright © Jan H Dalhuisen, 2022 Jan H Dalhuisen has asserted his right under the Copyright, Designs and Patents Act 1988 to be identified as Author of this work. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage or retrieval system, without prior permission in writing from the publishers. While every care has been taken to ensure the accuracy of this work, no responsibility for loss or damage occasioned to any person acting or refraining from action as a result of any statement in it can be accepted by the authors, editors or publishers. All UK Government legislation and other public sector information used in the work is Crown Copyright ©. All House of Lords and House of Commons information used in the work is Parliamentary Copyright ©. This information is reused under the terms of the Open Government Licence v3.0 (http://www. nationalarchives.gov.uk/doc/open-government-licence/version/3) except where otherwise stated. All Eur-lex material used in the work is © European Union, http://eur-lex.europa.eu/, 1998–2022. A catalogue record for this book is available from the British Library. A catalogue record for this book is available from the Library of Congress. Library of Congress Control Number: 2022930608 ISBN: HB: 978-1-50994-954-0 ePDF: 978-1-50994-956-4 ePub: 978-1-50994-955-7 Typeset by Compuscript Ltd, Shannon To find out more about our authors and books visit www.hartpublishing.co.uk. Here you will find extracts, author information, details of forthcoming events and the option to sign up for our newsletters.

To my Teachers and my Students

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PREFACE This fourth Volume of the Eighth Edition of this series deals with the law of movable property including intangible claims. It is a subject that does not receive much comprehensive attention in comparative law and often suffers from serious academic neglect and poor teaching. Part of the problem stems from the lack of a proper distinction between professional and consumer dealings, the perspective often still being of the latter. Movable property is then principally a question of mine and thine and of consumption but in commerce and finance the perspective is much more likely to be that of improving asset values in production and distribution chains and consequently of risk management concerning the underlying assets, their liquidity and segregation, and of transactional and payment finality. A significant measure of party autonomy in the definition of asset classes (in which asset substitution becomes normal and intangible claims become ordinary assets) and in the creation of their proprietary rights is the sequence subject to a strong protection of the general public against such charges rather than a concern with the limitation of these proprietary rights at the point of their creation, and with transaction and information cost, which are then merely issues of ordinary due diligence investigation and consideration between professionals who compete for similar facilities. These issues are of special interest and importance in the international commercial and financial flows, where, in the methodology of this book, the traditional sources of law, still known in the Law of Nations, operate: fundamental and general principle, custom and practices, party autonomy and, where available, treaty law (or in the EU its Directives and Regulations). This avoids the fracturing of the legal regime concerning these flows which would result from irrationally applying national laws never written for them. This Volume shows how much work remains to be done and how much may need further consideration. In the meantime, blockchain and fintech pose new challenges to our understanding, perceptions, and requirements. Younger academics and practitioners who want to push things forward are invited to contribute towards any part of the text related to their interest in the next edition of this Volume by writing to me. Jan H Dalhuisen, Lisbon, February 2022 [email protected]

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CONTENTS Prefacevii Table of Cases xvii Table of Legislation and Related Documents xxiii Part I  Ownership, Possession and Limited, Future, Conditional or Temporary and Beneficial Proprietary Rights in Chattels and Intangible Assets 1.1. Introduction 1.1.1. The Notion of Property Law 1.1.2. The Difference between Contractual and Proprietary Rights 1.1.3. Proprietary Rights and the Role of Publicity. Prior Knowledge in the Transferee Distinguished 1.1.4. Proprietary Rights as Risk Management Tools. The Liquidity of Assets, the Interests Created, the Issue of Segregation, and the Finality of Transactions. The Asset Status of Contracts and their Transferability. When Can Obligations be Transferred? 1.1.5. Types of Assets. Claims 1.1.6. Types of Movable Assets. The Requirement of Economic Value and Commerciality. Notions of Identity, Specificity and Definiteness, and their Inherent Constraints. The Alternative of Adequate Description in the Contract 1.1.7. Assets as Classes Identified Through Mere Description and the Proprietary Status of Assets in Transformation or Replacement Assets. Classes of Assets or Assets in Bulk 1.1.8. Importance of the Law of Chattels and Intangibles in Civil and Common Law. Its Development alongside Land Law 1.1.9. The Traditional Physical and Anthropomorphic Approach to Property Rights. Modern Perceptions 1.1.10. The Need for New Financial Structures and their Effect on Modern Property Law 1.1.11. Comparative Law and Transnationalisation. Eurobonds, International Swap and Repo Markets Practices. The Law Covering Offshore Installations. EU Law and the DCFR 1.1.12. The Approach and Organisation of this Volume 1.2. The Types of Proprietary Rights in Civil Law 1.2.1. The Difference between Proprietary and Obligatory Rights in Civil Law

1 1 10 15

19 21

26 31 35 38 40 45 48 49 49

x  Contents 1.2.2. Nature and Structure of Proprietary Rights and the Manner of their Protection in Civil Law. The Numerus Clausus Notion. Ownership, Possession and Detention of Proprietary Rights 51 1.2.3. The Traditional Proprietary Rights in Civil Law and the Way They are Held. The Notion of Possession Revisited. Common Law Compared 56 1.2.4. The Way Proprietary Rights are Protected in Civil Law 61 1.2.5. The Acquisitive Prescription and its Importance in Civil Law. Difference with the Statute of Limitations and the Protection of Bona Fide Purchasers 65 1.2.6. Proprietary Defences in Bankruptcy. The Issue of Segregation 67 1.2.7. The Civil Law Relativity or Priority Principle in Respect of Proprietary Rights: The Difference from the Relativity of Obligatory Rights 70 1.3. The Types of Proprietary Rights in Common Law: The Practical Differences from Civil Law. Modern Functional Approaches 72 1.3.1. Legal and Equitable Interests in Chattels 72 1.3.2. Ownership and Possession of Chattels in Common Law 76 1.3.3. Equitable Proprietary Interests in Chattels 78 1.3.4. The Common Law System of Proprietary Defences: Tort Actions Based on Better Rather than Absolute Rights 80 1.3.5. Constructive Possession and Delivery in Common Law. The Absence of Acquisitive Prescription. Statutes of Limitation 83 1.3.6. The Situation in Bankruptcy 84 1.3.7. Practical Differences between the Common and Civil Law Approaches to Proprietary Rights in Chattels 86 1.3.8. Approximation of the Common and Civil Law Systems of Proprietary Law in Chattels. General Emphasis on User, Enjoyment and Income Rights. The Unifying Impact of Modern Financial Structures and the Requirements of Modern Risk Management. The Need for and Effect of Legal Transnationalisation 87 1.3.9. Virtues and Pitfalls of the Numerus Clausus Notion. Modern Functional Approaches92 1.3.10. Asset Liquidity and Risk Management or Transaction Costs and Standardisation in the Property Law Concerning Movable Assets in Professional Dealings? 98 1.3.11. The Effects of Globalisation and Transnationalisation on the Law of Movable Property. The Question of the Public Interest and its Representation at the Transnational Level 103 1.4. Transfer of Proprietary Rights in Chattels in Civil and Common Law 105 1.4.1. The Legal Requirements for the Transfer of Chattels 105 1.4.2. The Formalities of a Sale: Contract or Delivery (Physically or Constructively); Double Sales; the Real or Proprietary Agreement in Civil Law 108 1.4.3. The Relevance of Identification. Effect on the Transfer. Sales of Future Assets, Bulk Transfers, and the De Facto Transfer of Title 113 1.4.4. The Development of the Rules Concerning Delivery as a Formal Requirement of Title Transfer in Civil and Common Law 116 1.4.5. Legal Capacity and Disposition Right. Causes of Contractual Invalidity. Effect on the Title Transfer. Future, Conditional and Temporary Sales and Transfers 118

Contents  xi 1.4.6. The Transfer Agreement and its Failure: The Abstract and Causal System of Ownership Transfer. The Finality Issue 122 1.4.7. The Origin of the Abstract and Causal Systems of Title Transfer 128 1.4.8. Disposition Rights and their Failure: The Nemo Dat Rule and the Protection of Bona Fide Purchasers. Its Contribution to Finality 134 1.4.9. On the Origin of the Nemo Dat Rule and the Principle of Bona Fide Purchaser Protection 137 1.4.10. The Retention Right of the Seller in the Case of Default of the Buyer 142 1.5. Proprietary Rights in Intangible Assets in Civil and Common Law 146 1.5.1. Asset Status of Intangibles. Proprietary Rights and Protections in Intangible Assets. The Possibility, Importance and Method of their Transfer 146 1.5.2. Assignments of Claims, the Proprietary Aspects and the Meaning of Identification, Documentation, and Notification of the Debtor. The Situation in Multiple Assignments. Bulk Assignments and the Assignment of Future Claims. Civil Law Developments 154 1.5.3. The Development in Common Law. Legal and Equitable Assignments. Bulk Transfers of Claims and the Coverage of Future Receivables 161 1.5.4. Assignment of Rights and Delegation of Duties. The Issue of Separation of Monetary Claims and the Transferability of Entire Contracts. Extra Burdens and the Debtor’s Defences 165 1.5.5. The Status of Closely Related Rights and Duties and the Impact of Contractual Restrictions on the Assignment. Newer Needs and Developments. The Effects of Amendments of the Underlying Contract169 1.5.6. The Assignability of Future Claims. When is a Claim Future? The Effect on Assignability 174 1.5.7. Assignment, Novation, Amendment, Subrogation, Subcontracting, and Sub-participation 178 1.5.8. Different Types and Objectives of Assignments. The Role of Party Autonomy 181 1.5.9. The Better Right of the Assignee against the Debtor. The Notion of Abstraction and Independence. Comparison and Analogy with Negotiable Instruments 186 1.5.10. The Notion of Abstraction or Independence. The Liberating Effect and Question of Finality of Payment by the Debtor. The Debtor’s Protection against Competing Assignees and the Assignor 189 1.5.11. The Ranking between Assignees, the Nemo Dat Rule in Multiple Assignments and the Question of Transactional Finality 192 1.5.12. Special Assignment Issues: Warranties, Conditions and Default 196 1.5.13. Special Bankruptcy Aspects of Assignments 197 1.5.14. Contractual and Proprietary Aspects of Assignments. Mandatory Rules. Applicable Law and the Issue of Party Autonomy Revisited 200 1.5.15. Uniform Treaty Law Concerning Assignments 203 1.6. Trusts. Constructive and Resulting Trusts, Tracking and Tracing. Agency. The Civil Law Response 205 1.6.1. Basic Features of the Common Law of Trust 205 1.6.2. Definitional Issues, Fiduciary Duties, and Court Intervention 210 1.6.3. The Practical Significance of Trusts in Common Law Countries 213

xii  Contents 1.6.4. Constructive Trusts, Tracing and Tracking, Resulting Trusts, Statutory Trusts, and Charitable Trusts 215 1.6.5. Trust and Agency. Trust and Bailment 217 1.6.6. Related Civil Law Structures 218 1.6.7. Private International Treaty Law and Trust Law Principles 220 1.7. Secured Transactions and Conditional or Finance Sales. Floating Charges 223 1.7.1. The Importance of Conditional Sales in Finance and the Difference with Secured Transactions 223 1.7.2. What are Sale and Repurchase Agreements or Finance Sales? The Characterisation Issue. Property-based and Security-based Funding224 1.7.3. The Evolution of Conditional and Temporary Transfers in Civil and Common Law 228 1.7.4. When are Finance Sales Converted into Secured Transactions? The Recharacterisation Issue 230 1.7.5. The Operation of Finance Sales. Effect of the Conditionality of the Transfer. Proprietary Effect of Conditions. Duality of Ownership and of Possession in Civil Law. Openness of Proprietary Systems? 236 1.7.6. Examples of Finance Sales: Finance Leases, Repos and Factoring. Finance Sales as Executory Contracts, Cherry Picking, and Netting 238 1.7.7. The Outward Signs of Security Interests and Ownership-based Funding. Possession or Filing 241 1.7.8. Attachment and Perfection of Security Interests in Movable Property under the UCC in the US. Meaning and Weaknesses of the Filing System 246 1.7.9. Floating Charges in Common and Civil Law. Extended Reservations of Title. The Concepts of Bulk Transfers, Asset Substitution and Tracing and the Inclusion of Future Assets. The Facility to Sell Goods Free and Clear 249 1.7.10. Uniform Security Law and Principles of Security Laws 251 1.8. Private International Law Aspects of Chattels 251 1.8.1. When Conflicts Arise 251 1.8.2. The Application of the Lex Situs and the Concept of Transnationalisation256 1.8.3. The Notions of Equivalence and Adaptation; Temporary and Conditional Ownership, Finance Sales, Security Interests, and Retention Rights 262 1.8.4. Trusts: The 1985 Hague Convention on the Law Applicable to Trusts and their Recognition 265 1.8.5. The Details of the Trust Convention 268 1.8.6. Uniform Laws Concerning the Proprietary Aspects of Chattels 270 1.8.7. The Modern Lex Mercatoria Concerning Chattels. Earlier Approaches in the Law of Admiralty: The Maritime Lien 271 1.9. Private International Law Aspects of Assignments 272 1.9.1. Conflicts of Laws Issues. Special Problems with Bulk Assignments of Portfolios of Monetary Claims with Debtors in Different Countries. Unity of Portfolios of Debt? 272 1.9.2. When Is There a Conflict? Contract, Property and Enforcement Issues 276

Contents  xiii 1.9.3. Terminology, Characterisation Issues, and their Overlap 280 1.9.4. Mandatory Proprietary Laws Relating to Assignments. The Situs Issue 283 1.9.5. Current Approaches to Choice of Law Issues in International Assignments: Different Views of the Legal Situs of Debts 284 1.9.6. EU Regulation and Treaty Law Approaches to the Law Applicable to Assignments: The Choice of Law Provision of Article 14 of the EU Regulation. The EU 2018 Draft Regulation on the Law Applicable to Third Party Effects of Assignment of Claims and the Uniform UNCITRAL Convention on the Assignment of Receivables in International Trade 290 1.9.7. The Lex Mercatoria Concerning Bulk Assignments for Funding Purposes295 1.9.8. What to Do? The Technique to be Used 297 1.10. The Modern Law of Chattels and Intangibles 299 1.10.1. Traditional and Newer Approaches 299 1.10.2. The Modern Structure of Proprietary Rights as Promoted by International Commerce and Finance. Liquidity and Bankruptcy Resistancy. Transnationalisation 305 1.10.3. Paucity of Modern Property Theory 313 1.11. The European Draft Common Frame of Reference (DCFR) 322 1.11.1. Introduction 322 1.11.2. Chattels and their Transfer. The Issue of Physical Possession 326 1.11.3. Intangible Assets and their Assignment. The Problem of Asset Status 328 1.11.4. Security Interests. Treatment of Reservation of Title, Finance Sales, and Floating Charges 329 1.11.5. Trusts. The Question of Systemic Integration 331 1.11.6. Certainty, Finality, and Predictability 331 1.12. Uniform or Harmonised Statutory or Treaty Law. The Alternative of Transnationalisation and the Need for and Emergence of a Dynamic Movable Property Law 333 1.12.1. Consumers and Professionals 333 1.12.2. Different Sources of Law in the Professional Sphere 333 1.12.3. Dynamic Movable Property Law 334 Part II   Negotiable Documents of Title and Negotiable Instruments 2.1. The Role of Documents 2.1.1. Bills of Lading and Warehouse Receipts 2.1.2. The Concepts of Document of Title and Negotiability 2.1.3. The Origin and Nature of the Bill of Lading and its Operation in the Proprietary Aspects of the Transfer of Goods 2.1.4. Consequences of the different Attitudes to Documents of Title when the Underlying Goods are Transferred to Transferees Other than Through a Transfer of the Bill of Lading 2.1.5. The Transfer of Risk 2.1.6. The Named or Straight Bill of Lading and Sea Waybills 2.1.7. Private International Law Aspects of Bills of Lading 2.1.8. Lex Mercatoria and Uniform Treaty Law Concerning Bills of Lading. The Hague, Hague-Visby, Hamburg and Rotterdam Rules

337 337 340 343 347 348 349 350 352

xiv  Contents 2.2. Negotiable Instruments 354 2.2.1. Bills of Exchange 354 2.2.2. Acceptance and Discounting of Time Bills 357 2.2.3. The Persons Liable under a Bill of Exchange: Recourse 358 2.2.4. The Principle of Independence or Abstraction 359 2.2.5. The Holder in Due Course. Personal and Real Defences. Other Types of Holders 360 2.2.6. Cheques 362 2.2.7. Limited Modern Use of Bills of Exchange and Cheques 362 2.2.8. Bills of Exchange and Competing Assignments of the Underlying Claim363 2.2.9. Position of the Holder in Due Course of a Bill of Exchange Compared with the Bona Fide Holder of a Bill of Lading 364 2.2.10. Foreign Bills of Exchange: Private International Law Aspects 365 2.2.11. Uniform Treaty Law 367 2.2.12. The Lex Mercatoria Concerning Bills of Exchange 368 2.3. The Dematerialisation of Documents of Title and Negotiable Instruments; Electronic Transfers 369 2.3.1. The Traditional Use of Documents of Title and Negotiable Instruments. Their Inconveniences and Risks. Sea Waybills and Indemnities 369 2.3.2. Electronic Systems and their Importance in Replacing Transportation Documents. The CMI Rules and Bolero. Clearing and the Use of Central Counter Parties? 373 2.3.3. The Bill of Lading and the Potential of the Blockchain 376 2.3.4. The Situation with Regard to Bills of Exchange: Electronic Bank Transfers. The Facility of ‘@Global Trade’ 378 Part III  Investment Securities 3.1. The Different Types of Shares and Bonds 381 3.1.1. Traditional Distinctions. Negotiable Instruments and Transferable Securities. Dematerialisation 381 3.1.2. The Notions of Immobilisation, Book-entry Systems, Security Entitlements and Compartmentalisation. Securities Accounts and Bank Accounts Distinguished 384 3.1.3. Transfer Instructions and Finality. Tiered and Chained Systems of Transfer 390 3.1.4. Negotiability and Transferability of Investment Securities under Domestic and Transnational Law. Use of Securities Entitlements to Enhance Transferability and Liquidity 391 3.1.5. The Risk Factors in the Holding and Transfer of Investment Securities and Securities Entitlements. Bankruptcy Issues and Risk Reduction Techniques. The EU Settlement Finality Directive 394 3.1.6. Modern Clearing and Settlement Systems. Their Internationalisation 399 3.1.7. The Evolution Towards Security Entitlements: Depository Receipts and the Earlier Developments Towards Dematerialisation and Immobilisation401

Contents  xv 3.2. The Transnationalisation of Custodial and Settlement Systems and its Opportunities 404 3.2.1. The Role of the Euromarket for Bonds and the Effect on International Share Trading. The Dominant Role of International Practices and the Bankruptcy Law Implications 404 3.2.2. The Law Applicable to Transactions in Investment Securities of the Book-entry Type. The 2002 Hague Convention 410 3.2.3. The Lex Mercatoria Concerning Transnational Investment Securities Transactions416 3.2.4. Uniform Law: The EU Financial Collateral Directive. The UNIDROIT Project, and 2009 Geneva Convention 419 3.2.5. EU Activities in the Field of Clearing and Settlement. The Blockchain Potential422 Index425

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TABLE OF CASES Australia DKLR Holding Co (No 2) Ltd v Commissioner of Stamp Duty (1982) 149 CLR 431������������������ 78 Norman v Federal Commissioner of Taxation (1963) 109 CLR 9�������������������������������������������30, 162 Shepherd v Commission of Taxation [1966] ALR 969�������������������������������������������������������������������� 176 Belgium Commercial Court Brussels, 22 March 1988 [1989] RDCB 633��������������������������������������������������� 264 Cour de Cass, 17 October 1996, Sart-Tilman [1995–96] RW 1395����������������������������������������������� 401 Canada Rodaro v Royal Bank of Canada [2000] [QL] OJ 272��������������������������������������������������������������������� 172 European Union BGLBNP Parisbas SA v Teambank AG, Case C-548/18, ECLI:EU:C:2019:848��������������������������� 280 DCFR (Draft Common Frame of Reference), Art III-5:104������������������106, 149, 155, 326, 328, 330 Webb v Webb Case C-294/92 [1994] ECR I-1717��������������������������������������������������������������������������� 221 France Cour d’Appel Aix en Provence, 24 October 1980, Bull de Transports, no 186 (1980)���������������� 349 Cour de Cass 13 February 1834, s 1.205 (1834)��������������������������������������������������������������������������������������������������� 17 19 August 1849, D.1.273 (1849)��������������������������������������������������������������������������������������������������� 158 20 April 1858, D.1.154 (1858)��������������������������������������������������������������������������������������������������������� 51 9 May 1864, D.1.190 (1864)���������������������������������������������������������������������������������������������������������� 156 20 Mar 1872 [1872] D.1.140��������������������������������������������������������������������������������������������������������� 114 29 June 1881, D.1.33 (1882)���������������������������������������������������������������������������������������������������������� 167 6 July 1886 [1887] D.I.25��������������������������������������������������������������������������������������������������������������� 130 24 January 1899, D.1.535 (1900)��������������������������������������������������������������������������������������������51, 171 14 March 1900 [1900] D.1.497����������������������������������������������������������������������������������������������������� 114 28 November 1900 [1901] D.1.65������������������������������������������������������������������������������������������������ 114

xviii  Table of Cases 18 March 1903, D.1.126 (1905)����������������������������������������������������������������������������������������������51, 172 23 March 1903, D.1.337 (1903)����������������������������������������������������������������������������������������������51, 171 20 June 1938, D.1.26 (1939)���������������������������������������������������������������������������������������������������������� 156 12 June 1985, Bull civ III 95 (1985)��������������������������������������������������������������������������������������������� 156 15 March 1988, Bull civ IV, no 106���������������������������������������������������������������������������������������������� 263 11 June 1991, Bull des Transports et de la Logistique no 2443������������������������������������������������ 346 Court of Appeal Paris 31 January 1854, D.2.179 (1855)�������������������������������������������������������������������������������������������������� 178 27 November 1854, D.2.253 (1856)��������������������������������������������������������������������������������������������� 178 8 March 1904, D.2.65 (1905)�������������������������������������������������������������������������������������������������������� 166 Trib Gr Inst Paris, 8 March 1985, DS Inf Rap 346 (1985)��������������������������������������������������������������� 288 Tribunal de Commerce de Nanterre, 31 October 1990, Bull des Transports et de la Logistique, 136 (1991)������������������������������������������������������������������������������������������������������ 345 Germany BGH 25 October 1952, BGHZ 7������������������������������������������������������������������������������������������������������������ 175 BGH NJW 190�������������������������������������������������������������������������������������������������������������������������������� 219 22 February 1956, BGHZ 20��������������������������������������������������������������������������������������������������������� 238 9 June 1960, BGHZ 32������������������������������������������������������������������������������������������������������������������� 175 20 March 1963, BGHZ 39������������������������������������������������������������������������������������������������������������� 263 14 Oct 1963, BGHZ 40����������������������������������������������������������������������������������������������������������150, 173 1 July 1970, 54 BGHZ, 214������������������������������������������������������������������������������������������������������������ 125 9 July 1975, 64 BGHZ 395������������������������������������������������������������������������������������������������������������� 130 OLG Düsseldorf, 27 October 1977 [1978] NJW 703����������������������������������������������������������������������� 144 RGH 8 March 1881, RGHZ 4����������������������������������������������������������������������������������������������������������������� 157 RGZ 45, 80 (1900)�������������������������������������������������������������������������������������������������������������������������� 219 19 September 1905, RGHZ 61������������������������������������������������������������������������������������������������������ 191 RGZ 84, 214 (1914)������������������������������������������������������������������������������������������������������������������������ 219 23 September 1921, RGHZ 102���������������������������������������������������������������������������������������������������� 173 International Cases EctHr, App no 44302/02 15 November 2005�������������������������������������������������������������������������������������� 84 Netherlands HR

19 January 1898, W 5666�������������������������������������������������������������������������������������������������������������� 185 17 April 1964 [1965] NJ 23�����������������������������������������������������������������������������������������������������44, 285 12 January 1979 [1980] NJ 526����������������������������������������������������������������������������������������������������� 133 24 October 1980 [1981] NJ 265���������������������������������������������������������������������������������������������������� 177 25 March 1988 [1989] NJ 200������������������������������������������������������������������������������������������������������� 177

Table of Cases  xix 11 June 1993 [1993] NJ 776��������������������������������������������������������������������������������������������44, 282, 285 26 November 1993 [1993] RvdW 15.108������������������������������������������������������������������������������������ 348 18 Jan 1994 [1994] RvdW 61�������������������������������������������������������������������������������������������������������� 263 23 September 1994 [1996] NJ 461����������������������������������������������������������������������������������������������� 396 16 May 1997 [1997] RvdW 126����������������������������������������������������������������������������������������������44, 285 20 Sept 2002, NJ 182 (2002)���������������������������������������������������������������������������������������������������������� 159 17 January 2003, NJ 281 (2004)���������������������������������������������������������������������������������������������������� 173 13 June 2003, ECLI:HR:2003:AF3413����������������������������������������������������������������������������������������� 150 9 September 2011����������������������������������������������������������������������������������������������������������������������������� 58 21 March 2014, NJ 167 (2015)����������������������������������������������������������������������������������������������150, 173 3 June 2016, NJ 290 (2016)������������������������������������������������������������������������������������������������������������� 58 United Kingdom Aiolos, The [1983] 2 Lloyd’s Rep 25��������������������������������������������������������������������������������������������������� 163 Amory v Delamirie [1558–1774] All ER 121������������������������������������������������������������������������������������� 82 Aspden v Seddon (1876) 1 Ex D 496������������������������������������������������������������������������������������������������� 170 Atlantic Computer Systems Plc, Re [1990] BCC 859������������������������������������������������������������������������ 83 Balder London, The [1980] 2 Lloyd’s Rep 489���������������������������������������������������������������������������������� 182 Belvoir Finance Co Ltd v Stapleton [1970] 3 All ER 664���������������������������������������������������������������� 130 Brandao v Barnett (1846) 3 QBD 519������������������������������������������������������������������������������������������������ 145 Bristol Airport Plc v Powdrill [1990] Ch 774������������������������������������������������������������������������������������� 51 Bristol and West of England Bank v Midland Railway Company [1891] 2 QB 653�������������������� 347 Cammell v Sewell (1860) 5 H&N, 278����������������������������������������������������������������������������������������������� 257 Car and Universal Finance Co Ltd v Caldwell [1965] 1 QB 525���������������������������������������������������� 131 Carlos Federspiel & Co SA v Charles Twigg & Co Ltd [1957] 1 Lloyds Rep 240����������������110, 346 Compania de Neviera Nedelka SA v Tradex Internacional SA, The Tres Flores [1974] QB 264����������������������������������������������������������������������������������������������������� 152 Cooper v Chitty 1 Burr 20 KB (1756)�������������������������������������������������������������������������������������������������� 78 Crumlin Viaduct Works Co Ltd, Re [1879] II Ch 755�������������������������������������������������������������������� 115 Cundy v Lindsay (1878) 3 App Cas 459��������������������������������������������������������������������������������������130–31 De Mattos v Gibson [1858] ER 108���������������������������������������������������������������������������������������������������� 101 Dearle v Hall (1828) 3 Russ 1��������������������������������������������������������� 159–60, 162–63, 190, 192, 194–95 Dewar v Dewar [1975] 2 All ER 728�������������������������������������������������������������������������������������������������� 130 Don King Productions v Warren [1999] 2 All ER 218 (CA)���������������������������������������������������������� 172 Durham Bros v Robertson [1898] 1 QB 765�����������������������������������������������������������������������������163, 182 Enichem Anic Spa and Others v Ampelos Shipping Co Ltd (the Delfini) [1990] 1 Lloyd’s Rep 252���������������������������������������������������������������������������������������������������������������� 346 Evans v Marlett (1697) 1 Ld Raym 271��������������������������������������������������������������������������������������������� 343 Evans v Rival Granite Quarries Ltd [1910] 2 KB 979����������������������������������������������������������������30, 162 Fitzroy v Cave [1905] 2 KB 364��������������������������������������������������������������������������������������������������147, 162 Future Express, The [1993] 2 Lloyd’s Rep 542����������������������������������������������������������������������������346–47 Glegg v Bromley [1912] 3KB 364�������������������������������������������������������������������������������������������������161–62 Glenroy, The [1945] AC 124��������������������������������������������������������������������������������������������������������������� 346 Graham v Johnson (1869) LR 8 Eq 36����������������������������������������������������������������������������������������������� 166 Helbert Wagg & Co Ltd’s Claim, Re [1956] Ch 323������������������������������������������������������������������������� 289 Henderson v Comptoir d’Escompte de Paris (1873) LR 5PC 253������������������������������������������������� 345

xx  Table of Cases Hill v Tupper [1863] 2 Hurlst 7 C 121���������������������������������������������������������������������������������17, 101, 182 Hindley & Co v East Indian Produce Co [1973] 2 Lloyd’s Rep 515���������������������������������������������� 371 Holroyd v Marshall [1862] 10 HL Cas 191�������������������������������������������������������������������������������115, 176 Homburg Houtimport BV v Agrosin Private Ltd, The Starsin [2003] 1 Lloyd’s Rep 571���������������������������������������������������������������������������������������������������������������������������� 152 Hughes v Pump House Hotel Co Ltd [1902] 2 KB 190������������������������������������������������������������������� 176 Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896�������������������������������������������������������������������������������������������������������������������������� 147 Jade International Steel Stahl und Eisen GmbH & Co KG v Robert Nicholas (Steels) Ltd [1978] QB 917������������������������������������������������������������������������������������������������������������ 360 Jones Ltd v Waring & Gillow Ltd, Re [1926] AC 670���������������������������������������������������������������������� 360 Keppell v Bailey [1834] ER 1042������������������������������������������������������������������������������������������17, 101, 182 Kwok Chi Leung Karl v Commissioner of Estate Duty [1988] 1 WLR 1035������������������������������� 290 Lickbarrow and Another v Mason and Others [1794] 2 TR 63����������������������������������������������������� 343 Linden Gardens Trust Ltd v Lenesta Sludge Disposal Ltd and Ors; St Martin’ s Property Corporation Ltd and Anor v Sir Robert McAlpine &Sons Ltd [1993] 2 All ER 417����������������������������������������������������������������������������������������������������������������161, 172 Lumley v Gye (1853) 2 E&B 216���������������������������������������������������������������������������������������������������������� 25 Macmillan Inc v Bishopsgate Investment Trust Plc (No 3) [1995] 3 All ER 747������������������������� 413 National Provincial Bank Ltd v Ainsworth [1965] AC 1175������������������������������������������������������������ 27 Newson and another v Thornton and another (1805) 6 East 17���������������������������������������������������� 343 North Central Wagon and Finance Co v Graham [1950] 1 All ER 780������������������������������������77, 81 Ord v White 3 Beav 357(1884)����������������������������������������������������������������������������������������������������������� 167 Pacific Motor Auctions Pty Ltd v Motor Credits Ltd [1965] 2 All ER 105����������������������������������� 112 Pfeiffer GmbH v Arbuthnot Factors Ltd [1988] 1 WLR 150���������������������������������������������������������� 195 Pye v Graham [2003] 1 AC 419������������������������������������������������������������������������������������������������������������ 83 Quinn v Leathem [1901] AC 495��������������������������������������������������������������������������������������������������������� 25 Raffeisen Zentralbank Osterreich AG v Five Star General Trading LLC [2001] 1 All ER (Comm) 961�������������������������������������������������������������������������������������������������������������������� 287 Republica de Guatemala v Nunez [1927] 1 KB 669�������������������������������������������������������� 160, 162, 287 Rhodes v Allied Dunbar Pension Services Ltd [1987] 1 WLR 1703����������������������������� 160, 190, 194 Ryall v Rolle (1749) 26 ER 107����������������������������������������������������������������������������������������������������������� 244 St Martin’s Property Corporation Ltd and Anor v Sir Robert McAlpine & Sons Ltd [1993] 2 All ER 417������������������������������������������������������������������������������������������������161, 172 Sajan Singh v Sardara Ali [1960] 1 All ER 269��������������������������������������������������������������������������������� 130 Sale of Goods Act 1979, s 9����������������������������������������������������������������������������������������������������������������� 141 Scarfe v Morgan [1835–42] All ER 43����������������������������������������������������������������������������������������������� 130 Shamia v Yoory [1958] 1 QB 448������������������������������������������������������������������������������������������������������� 161 Sir James Laing & Sons Ltd v Barclay, Curle & Co Ltd [1908] AC 35������������������������������������������� 114 Stephens v Venables (1862) 30 Beav 625������������������������������������������������������������������������������������������� 166 Sze Hai Tong Bank Ltd v Rambler Cycle Co Ltd [1959] AC 576 (PC)������������������������������������������ 341 Taddy & Co v Sterious & Co [1904] 1 Ch 354. 138 34 NE 543 (1893)����������������������������������101, 182 Tailby v Official Receiver (1888) 13 AC 523������������������������������������������������������������������������������������� 176 Tancred v Delagoa Bay Co (1889) 23 QBD 239������������������������������������������������������������������������������� 163 TD Bailey Son and Co v Ross T Smyth (1940) 56 TLR 825����������������������������������������������������������� 346 Tito v Waddell [1977] Ch 106������������������������������������������������������������������������������������������������������������� 170 Tulk v Moxhay (1848) 2 Ph 774����������������������������������������������������������������������������������������������������51, 101

Table of Cases  xxi Twyne’s Case (1601) 76 ER 809���������������������������������������������������������������������������������������������������������� 246 United States of America and Republic of France v Dolfus Mieg & Cie SA and Bank of England [1952] 1 All ER 572������������������������������������������������������������������������������77, 81 Vallejo v Wheeler [1774] 1 Cowp 143����������������������������������������������������������������������������������������������� 152 Walker v Bradford Old Bank (1884) 12 QBD 511��������������������������������������������������������������������������� 162 Ward v Bignall [1967] 1 QB 534��������������������������������������������������������������������������������������������������������� 130 Westdeutsche Landesbank Girozentrale v Islington LBC [1992] 2 All ER 961��������������������������� 131 Winch v Keeley (1787) 99 ER 1284���������������������������������������������������������������������������������������������������� 161 Winkfield, The [1900–03] All ER 346�������������������������������������������������������������������������������������������������� 77 Winkworth v Christie, Manson and Woods Ltd [1980] Ch 496���������������������������������������������������� 257 Wm Brandt’s Sons & Co v Dunlop Rubber; [1905] AC 454����������������������������������������������������������� 163 Worcester Works Finance Ltd v Cooden Engineering Co Ltd [1971] 3 All ER 708�������������������� 112 United States Alfred Dunhill of London v Republic of Cuba [1919] AC 801������������������������������������������������������ 288 Banco Credito Agricola de Cartago 757 F2d 516 (1985)���������������������������������������������������������������� 288 Barbin v Moore 85 NH 362 (1932)���������������������������������������������������������������������������������������������������� 288 Barnouw v SS Ozark 304 F 2d 717 (5th Cir 1962)��������������������������������������������������������������������������� 271 Beatty v Guggenheim Exploration Co 225 NY 380, 386 (1919)���������������������������������������������������� 215 Benedict v Ratner 268 US 353 (1925)������������������������������������������������������������������������������������������������ 289 Bobbs-Merrill Co v D Straus 147 F 15 (2nd Circuit 1906), 210 US 339 (1908)��������������������������� 101 Brandon v Denton 302 F 2d 404, 410 (5th Cir 1962)���������������������������������������������������������������������� 271 Clayton v Le Roy [1911] 2 KB 1031�����������������������������������������������������������������������������������������������78, 82 Corn Exchange NB & T Co v Klauser 318 US 434 (1943)������������������������������������������������������164, 195 Daniel v Bank of Hayward 425 NW rd 416 (1988)�������������������������������������������������������������������������� 141 Department of Natural Resources v Benjamin 40 Colo App 520, 587 P 2d 1207 (1976)����������� 216 Dr Miles Medical Co v John D Park & Sons, 220 US 373 (1911)����������������������������������������������101–2 Frech v Lewis 218 Pa 141 (1907)�������������������������������������������������������������������������������������������������������� 132 Fugato v Carter County Bank 187 BR 221 (ED Tenn 1995)����������������������������������������������������������� 191 Garcia v Chase Manhattan Bank NA 735 F2d 645 (1984)�������������������������������������������������������������� 288 General Talking Pictures Corp v Western Electric, 304 US 175 (1937)���������������������������������������� 102 Gifford v Ford 5 Vt 532 (1833)����������������������������������������������������������������������������������������������������������� 132 Gorden v Hamm 74 Cal Rptr 2d 631 (1998)������������������������������������������������������������������������������������ 142 Harris v Balk 198 US 215 (1905)�������������������������������������������������������������������������������������������������������� 288 Hayward v Andrews 106 US 672 (1883)������������������������������������������������������������������������������������������� 163 Houtz v Daniels 211 Pac 1088 (1922)������������������������������������������������������������������������������������������������ 196 Johnson v Whiton 34 NE 543 (1893)�����������������������������������������������������������������������������������17, 101, 183 Kinetics Technology International Corp v Fourth National Bank of Tulsa 705 F 2d 396 (1983)������������������������������������������������������������������������������������������������������������������������������� 245 Lewis v Lawrence 30 Minn 244 (1883)���������������������������������������������������������������������������������������������� 289 Litwiller Machine and Manufacturing, Inc v NBD Alpena Bank 457 NW 2d 163(1990)���������� 245 McCarthy, Kenney & Reidy, PC v First National Bank of Boston 524 NE 2d 390 (Mass 1988)������������������������������������������������������������������������������������������������������������������������ 152 Mallinkrodt, Inc v Medipart, Inc 976 F2d 700/08 (1992)��������������������������������������������������������������� 101 Menendez v Saks 485 F2d 1355(1973)���������������������������������������������������������������������������������������������� 288

xxii  Table of Cases Moore Equipment Co v Halferty 980 SW 2d 578(1998)�����������������������������������������������������������81, 132 Moore v Robertson 17 NYS, 554 (1891)�������������������������������������������������������������������������������������������� 289 Mort, In the Matter of 208 F Supp 309 (1962)���������������������������������������������������������������������������������� 132 Perez v Chase Manhattan Bank 61 NY 2d 460 (1984)��������������������������������������������������������������������� 288 Pero’s Steak and Spaghetti House v Lee 90 SW 3d (Tenn 2002)����������������������������������������������������� 152 Poma’s Will, In re 192 NY Supp 2d 156 (1959)��������������������������������������������������������������������������������� 289 Salem Trust Co v Manufacturers’ Finance Co 264 US 182 (1924)����������������������������������������164, 195 Shaffer v Heitner 433 US 186 (1977)������������������������������������������������������������������������������������������������� 288 Sheinman and Salita Inc v Paraskevas 22 Misc 2d 436 (1959)������������������������������������������������������� 144 Tanbro Fabrics Corp v Deering Milliken Inc 39 NY 2d 632 and 19 UCC 385 (1976)���������������� 141 United States v General Electric Company, 272 US 476 (1926)����������������������������������������������������� 102 Vishipco Line v Chase Manhattan Bank NA 660 F2d 854 (1981)������������������������������������������������� 288 Wardell v Eden 2 Johns Cass 258 (1801)������������������������������������������������������������������������������������������� 163 Wells Fargo Asia Ltd v Citibank NA 852 F2d 657 (1990)��������������������������������������������������������������� 288 Werner v Graham 183 P 945, 947 (1919)����������������������������������������������������������������������������18, 101, 183

TABLE OF LEGISLATION AND RELATED DOCUMENTS Austria Civil Code s 308��������������������������������������������������������������������������������������������������������������������������������������������������� 57 s 367������������������������������������������������������������������������������������������������������������������������������������������������� 139 Belgium Bankruptcy Act������������������������������������������������������������������������������������������������������������������������������������� 126 Bill of Exchange Act of 1872�������������������������������������������������������������������������������������������������������357, 367 Civil Code, Art 1690���������������������������������������������������������������������������������������������������������������������������� 158 Royal Decree No 62 of 1967���������������������������������������������������������������������������������������������������������������� 400 Art 5������������������������������������������������������������������������������������������������������������������������������������������������� 401 Art 10����������������������������������������������������������������������������������������������������������������������������������������������� 413 Brazil Civil Code������������������������������������������������������������������������������������������������������������������������������������������������ 42 Canada Quebec, Civil Code, Art 1261������������������������������������������������������������������������������������������������������������� 220 European Union Bankruptcy Regulation 2002�������������������������������������������������������������������������������������������������������������� 255 Art 2(g)��������������������������������������������������������������������������������������������������������������������������������������289–90 Brussels Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters 1968��������������������������������������������������������� 221, 270–71, 352–53 Collateral Directive����������������������������������������������������������������16, 47, 178, 318, 335, 397, 410, 419, 422 Art 9�������������������������������������������������������������������������������������������������������������������������������������������414–15 Common European Sales Law (CESL)������������������������������������������������������������������������������� 322–23, 335

xxiv  Table of Legislation and Related Documents DCFR (Draft Common Frame of Reference)���������������������������������������� 17, 42, 45, 47–48, 56, 58, 60, 106, 115, 120–21, 127, 133, 203, 214, 223, 237, 248, 251, 309, 311, 313–14, 317, 320, 322–35, 419 Art I-1:102(2)���������������������������������������������������������������������������������������������������������������������������������� 333 Art I-1:102(2)(c)����������������������������������������������������������������������������������������������������������������������������� 325 Art I-1:102(3)(b)���������������������������������������������������������������������������������������������������������������������������� 333 Art I-1:102(3)(c)����������������������������������������������������������������������������������������������������������������������������� 332 Art I-1:103��������������������������������������������������������������������������������������������������������������������������������������� 326 Art II-1:102������������������������������������������������������������������������������������������������������������������������������������� 334 Art II-1:104������������������������������������������������������������������������������������������������������������������������������������� 334 Art II-2.101������������������������������������������������������������������������������������������������������������������������������������� 323 Art II-7:212������������������������������������������������������������������������������������������������������������������������������������� 332 Art II-7:303������������������������������������������������������������������������������������������������������������������������������������� 332 Art III-5:104(1)(a)�������������������������������������������������������������������������������������������������������������������������� 330 Art III-5:106������������������������������������������������������������������������������������������������������������������������������������ 328 Art III-5:108����������������������������������������������������������������������������������������������������������������������������328, 330 Art III-5:116������������������������������������������������������������������������������������������������������������������������������������ 329 Art III-5:118(2)������������������������������������������������������������������������������������������������������������������������������� 332 Art III-5:120(1)������������������������������������������������������������������������������������������������������������������������������� 194 Art III-5:121����������������������������������������������������������������������������������������������������������������������������329, 331 Art III-5:122������������������������������������������������������������������������������������������������������������������������������������ 329 Art III-5:203(3)������������������������������������������������������������������������������������������������������������������������������� 329 Art III-5:206������������������������������������������������������������������������������������������������������������������������������������ 329 Art III-5:302������������������������������������������������������������������������������������������������������������������������������������ 329 Art IVA-2:101�������������������������������������������������������������������������������������������������������������������������327, 332 Art IVA-3:101��������������������������������������������������������������������������������������������������������������������������������� 327 Art IX�����������������������������������������������������������������������������������������������������������������������������������������330–31 Art IX-1:101(1)(b)�������������������������������������������������������������������������������������������������������������������������� 329 Art IX-1:102(4)(c) and (d)������������������������������������������������������������������������������������������������������������ 330 Art IX-1:103����������������������������������������������������������������������������������������������������������������������������325, 330 Art IX-1:104������������������������������������������������������������������������������������������������������������������������������������ 329 Art IX-1.104(4)������������������������������������������������������������������������������������������������������������������������������� 325 Art IX-2:102������������������������������������������������������������������������������������������������������������������������������������ 330 Art IX-2:104������������������������������������������������������������������������������������������������������������������������������329–30 Art IX-2:105������������������������������������������������������������������������������������������������������������������������������������ 330 Art IX-2:108������������������������������������������������������������������������������������������������������������������������������������ 330 Art IX-2:301������������������������������������������������������������������������������������������������������������������������������������ 330 Art IX-2:306������������������������������������������������������������������������������������������������������������������������������������ 331 Art IX-2:307����������������������������������������������������������������������������������������������������������������������������325, 331 Art IX-3:102������������������������������������������������������������������������������������������������������������������������������������ 331 Art IX-5:204������������������������������������������������������������������������������������������������������������������������������������ 331 Art IX-6:102������������������������������������������������������������������������������������������������������������������������������������ 331 Art IX-7:103������������������������������������������������������������������������������������������������������������������������������������ 330 Art IX-7:213ff��������������������������������������������������������������������������������������������������������������������������������� 331 Art IX-1-101(2)(a)������������������������������������������������������������������������������������������������������������������������� 330 Art IX-1-102����������������������������������������������������������������������������������������������������������������������������������� 330 Art V-4:101������������������������������������������������������������������������������������������������������������������������������������� 326

Table of Legislation and Related Documents  xxv Art VII-2:101���������������������������������������������������������������������������������������������������������������������������������� 332 Art VII-5:101���������������������������������������������������������������������������������������������������������������������������������� 332 Art VIII-1:201��������������������������������������������������������������������������������������������������������������������������������� 326 Art VIII-1:202���������������������������������������������������������������������������������������������������������������������������56, 326 Art VIII-1:204��������������������������������������������������������������������������������������������������������������������������������� 326 Art VIII-1:205���������������������������������������������������������������������������������������������������������������������������58, 327 Art VIII-1:301��������������������������������������������������������������������������������������������������������������������������������� 328 Art VIII-2:101����������������������������������������������������������������������������������������������������������106, 326–28, 330 Art VIII-2:104��������������������������������������������������������������������������������������������������������������������������������� 327 Art VIII-2:105��������������������������������������������������������������������������������������������������������������������������������� 327 Art VIII-2:202��������������������������������������������������������������������������������������������������������������������������������� 332 Art VIII-2:203�������������������������������������������������������������������������������������������������������������������������325, 329 Art VIII-2:305��������������������������������������������������������������������������������������������������������������������������������� 327 Art VIII-2:307�������������������������������������������������������������������������������������������������������������������������325, 329 Art VIII-6:101��������������������������������������������������������������������������������������������������������������������������������� 326 Art VIII-6:102��������������������������������������������������������������������������������������������������������������������������������� 325 Art VIII-6:201��������������������������������������������������������������������������������������������������������������������������������� 327 Art VIII-6:202�����������������������������������������������������������������������������������������������������������������������������58–59 Directive 2002/87/EC on e-commerce, Art 3(4)������������������������������������������������������������������������������ 376 EBRD Model Law on Secured Financing������������������������������������������������������������������������������������������ 270 Financial Collateral Directive 2002/47/EC���������������������������������������� 16, 47, 178, 234, 248, 251, 318, 335, 397, 405, 410, 414–15, 418–19, 422 recitals 3, 5, 7 and 8������������������������������������������������������������������������������������������������������������������������ 419 recitals 5, 9 and 16�������������������������������������������������������������������������������������������������������������������������� 420 Art 2(2)�������������������������������������������������������������������������������������������������������������������������������������������� 420 Art 8(2)�������������������������������������������������������������������������������������������������������������������������������������������� 421 Art 8(3)�������������������������������������������������������������������������������������������������������������������������������������������� 420 Art 9������������������������������������������������������������������������������������������������������������������������������������������������� 421 Insolvency Regulation�������������������������������������������������������������������������������������������������������������������������� 407 Lugano Conventions on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters 1988�������������������������������������������������������������������������������221, 267 PECL (Principles of European Contract Law)������������������������������������������������203, 205, 298, 323, 328 Principles of European Trust Law�������������������������������������������������������������������������������211, 218, 222–23 Regulation on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters (Brussels I) Art 2�������������������������������������������������������������������������������������������������������������������������������������������221–22 Art 5(6)��������������������������������������������������������������������������������������������������������������������������������������221–22 Art 22����������������������������������������������������������������������������������������������������������������������������������������������� 221 Art 23(4)������������������������������������������������������������������������������������������������������������������������������������������ 221 Art 23(5)������������������������������������������������������������������������������������������������������������������������������������������ 255 Regulation on the Law Applicable to Contractual Obligations (Rome I)������������������������������������� 303 Preamble������������������������������������������������������������������������������������������������������������������������� 152, 280, 291 Art 3�������������������������������������������������������������������������������������������������������������������������������� 283, 285, 292 Art 4������������������������������������������������������������������������������������������������������������������������������������������������� 292 Art 4(1)�������������������������������������������������������������������������������������������������������������������������������������������� 292 Art 4(1)(h)��������������������������������������������������������������������������������������������������������������������������������������� 303 Art 6(4)(e)��������������������������������������������������������������������������������������������������������������������������������������� 303 Art 14���������������������������������������������������������������������������������������������������������������������������������� 44, 290–91

xxvi  Table of Legislation and Related Documents Art 14(1)����������������������������������������������������������������������������������������������������������������������������������292, 304 Art 14(2)��������������������������������������������������������������������������������������������������������������������������� 281–82, 304 Art 14(3)������������������������������������������������������������������������������������������������������������������������������������������ 280 Rome Convention������������������������������������������������������������������������������������280, 283–84, 286–87, 291–92 Art 12���������������������������������������������������������������������������������������������������������������������������������������290, 295 Art 12(1)�������������������������������������������������������������������������������������������������������������44, 282, 285–86, 304 Art 12(2)������������������������������������������������������������������������������������������������������ 44, 281–82, 285–86, 304 Settlement Finality Directive 98/26/EC��������������������������������������������� 251, 394, 397, 400, 410, 418–19 Art 9������������������������������������������������������������������������������������������������������������������������������������������������� 421 Art 9(2)��������������������������������������������������������������������������������������������������������������������������������������413–15 Statute of the European System of Central Banks���������������������������������������������������������������������������� 413 Treaty on the Functioning of the European Union (TFEU), Art 114����������������������������� 322–23, 420 France Banking Law of 24 January 1984�������������������������������������������������������������������������������������������������������� 158 Bankruptcy Act���������������������������������������������������������������������������������������������������������������������� 125–26, 235 Art 60����������������������������������������������������������������������������������������������������������������������������������������������� 144 Civil Code Art 208(2)���������������������������������������������������������������������������������������������������������������������������������������� 185 Art 543����������������������������������������������������������������������������������������������������������������������������������������������� 57 Art 544����������������������������������������������������������������������������������������������������������������������������������������������� 56 Art 711���������������������������������������������������������������������������������������������������������������������� 17, 109, 117, 344 Art 1129������������������������������������������������������������������������������������������������������������������������������������������� 106 Art 1130������������������������������������������������������������������������������������������������������������������������������������������� 113 Art 1130(1)�������������������������������������������������������������������������������������������������������������������������������������� 114 Art 1138�������������������������������������������������������������������������������������������������������������������������� 109, 117, 344 Art 1141������������������������������������������������������������������������������������������������������������������������������������������� 112 Art 1184������������������������������������������������������������������������������������������������������������������������������������������� 126 Art 1216-1��������������������������������������������������������������������������������������������������������������������������������������� 187 Art 1249������������������������������������������������������������������������������������������������������������������������������������������� 181 Art 1250������������������������������������������������������������������������������������������������������������������������������������������� 181 Art 1291������������������������������������������������������������������������������������������������������������������������������������������� 166 Art 1341������������������������������������������������������������������������������������������������������������������������������������������� 108 Art 1583�������������������������������������������������������������������������������������������������������������������������� 109, 117, 344 Art 1610������������������������������������������������������������������������������������������������������������������������������������������� 126 Art 1612�����������������������������������������������������������������������������������������������������������������������������������117, 143 Art 1613�����������������������������������������������������������������������������������������������������������������������������������117, 143 Art 1654������������������������������������������������������������������������������������������������������������������������������������������� 126 Art 1656������������������������������������������������������������������������������������������������������������������������������������������� 126 Art 1659������������������������������������������������������������������������������������������������������������������������������������������� 224 Art 1690������������������������������������������������������������������������������������������������������������118, 155–56, 181, 191 Art 2061��������������������������������������������������������������������������������������������������������������������������������������������� 90 Art 2072������������������������������������������������������������������������������������������������������������������������������������������� 243 Art 2073������������������������������������������������������������������������������������������������������������������������������������������� 158 Art 2074�����������������������������������������������������������������������������������������������������������������������������������156, 243 Art 2075������������������������������������������������������������������������������������������������������������������������������������������� 181

Table of Legislation and Related Documents  xxvii Art 2076������������������������������������������������������������������������������������������������������������������������������������������� 243 Art 2093��������������������������������������������������������������������������������������������������������������������������������������������� 67 Art 2102(4)�������������������������������������������������������������������������������������������������������������������������������������� 143 Art 2114������������������������������������������������������������������������������������������������������������������������������������������� 243 Art 2119������������������������������������������������������������������������������������������������������������������������������������������� 243 Art 2123��������������������������������������������������������������������������������������������������������������������������������������������� 68 Art 2279�������������������������������������������������������������������������������������������������������������������� 62, 112, 130, 136 Art 2282��������������������������������������������������������������������������������������������������������������������������������������������� 63 Art 2643������������������������������������������������������������������������������������������������������������������������������������������� 220 Code de commerce������������������������������������������������������������������������������������������������������������������������������� 367 Art L 14�������������������������������������������������������������������������������������������������������������������������������������������� 243 Art L 110-3������������������������������������������������������������������������������������������������������������������������������156, 243 Arts L 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158 Coûtume de Paris, Art 170������������������������������������������������������������������������������������������������������������������ 243 Coûtumes d’Orléans, Art 278������������������������������������������������������������������������������������������������������������� 117 Decree 81-862 of 9 September 1981�������������������������������������������������������������������������������������������������� 158 Law 81-1 of 2 January 1981����������������������������������������������������������������������������������������������������������������� 158 Loi Dailly��������������������������������������������������������������������������������������������������������������158, 178, 181, 191, 285 Ordonnance 2006-346�������������������������������������������������������������������������������������������������������������������90, 234 Ordonnance de Commerce 1673������������������������������������������������������������������������������������������������������� 243 Germany Allgemeine Deutsche Wechselordnung 1848����������������������������������������������������������������������������������� 367 Allgemeines Landrecht (Prussia)(1794)������������������������������������������������������������������������������������115, 139 Banking Act������������������������������������������������������������������������������������������������������������������������������������������� 386 Bankruptcy Act 1877 s 14��������������������������������������������������������������������������������������������������������������������������������������������������� 244 s 43��������������������������������������������������������������������������������������������������������������������������������������������������� 244 Bills of Exchange Act 1933������������������������������������������������������������������������������������������������������������360–61 Civil Code (BGB)������������������������������������������������������49, 57–58, 112, 123, 127, 187, 244, 325–26, 386 s 90����������������������������������������������������������������������������������������������������������������������������������������������������� 24 s 123������������������������������������������������������������������������������������������������������������������������������������������������� 125 s 137�����������������������������������������������������������������������������������������������������������������������������������������150, 172 s 159������������������������������������������������������������������������������������������������������������������������������������������������� 124 s 273�������������������������������������������������������������������������������������������������������������������������������������������143–44 s 320�������������������������������������������������������������������������������������������������������������������������������������������143–44 s 398�������������������������������������������������������������������������������������������������������������������������������������������24, 156 s 399���������������������������������������������������������������������������������������������������������������������������������� 150, 172–73 s 403������������������������������������������������������������������������������������������������������������������������������������������������� 191 s 404������������������������������������������������������������������������������������������������������������������������������������������������� 167

xxviii  Table of Legislation and Related Documents s 405�����������������������������������������������������������������������������������������������������������������������������������������173, 187 s 406������������������������������������������������������������������������������������������������������������������������������������������������� 166 s 407�����������������������������������������������������������������������������������������������������������������������������������������167, 191 s 409������������������������������������������������������������������������������������������������������������������������������������������������� 191 s 410������������������������������������������������������������������������������������������������������������������������������������������������� 191 s 546(2)�������������������������������������������������������������������������������������������������������������������������������������������� 386 s 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2100����������������������������������������������������������������������������������������������������������������������������������������������� 206 Code of Civil Procedure s 804��������������������������������������������������������������������������������������������������������������������������������������������������� 68 s 867��������������������������������������������������������������������������������������������������������������������������������������������������� 68 s 930��������������������������������������������������������������������������������������������������������������������������������������������������� 68 Commercial Code (HGB)������������������������������������������������������������������������������������������������������������������� 386 s 340b����������������������������������������������������������������������������������������������������������������������������������������������� 239 s 354a����������������������������������������������������������������������������������������������������������������������������������������������� 173 s 363II���������������������������������������������������������������������������������������������������������������������������������������������� 343 s 366������������������������������������������������������������������������������������������������������������������������������������������������� 135 s 369������������������������������������������������������������������������������������������������������������������������������������������������� 144 s 650������������������������������������������������������������������������������������������������������������������������������������������������� 343 Depotgesetz (DepG)��������������������������������������������������������������������������������������������������������������������386, 402 Insolvency Act 1999������������������������������������������������������������������������������������������������������������ 235, 241, 250 Negotiable Instruments Law��������������������������������������������������������������������������������������������������������������� 367 Saxon Mirror, Art 3.125������������������������������������������������������������������������������������������������������������������������� 37

Table of Legislation and Related Documents  xxix International Berne Convention on the Protection of Literary and Artistic Works������������������������������������������� 319 CMI Rules���������������������������������������������������������������������������������������������������������������������������������������������� 373 Convention on the International Recognition of Rights in Aircraft��������������������������������������������� 270 Geneva Convention 2009������������������������������������������������������������������������������������������������������������415, 419 Art 2������������������������������������������������������������������������������������������������������������������������������������������������� 422 Art 4������������������������������������������������������������������������������������������������������������������������������������������������� 422 Art 9(1)(a)��������������������������������������������������������������������������������������������������������������������������������������� 422 Art 9(2)(a)��������������������������������������������������������������������������������������������������������������������������������������� 422 Art 11����������������������������������������������������������������������������������������������������������������������������������������������� 422 Art 12(3)������������������������������������������������������������������������������������������������������������������������������������������ 422 Art 14����������������������������������������������������������������������������������������������������������������������������������������������� 422 Art 18����������������������������������������������������������������������������������������������������������������������������������������������� 422 Art 24����������������������������������������������������������������������������������������������������������������������������������������������� 422 Art 26����������������������������������������������������������������������������������������������������������������������������������������������� 422 Geneva Conventions 1930���������������������������������������������������������������������������������������������356–58, 367–68 Geneva Conventions 1932������������������������������������������������������������������������������������������������������������������ 368 Hague Convention on the Law Applicable to Certain Rights in Respect of Securities held with an Intermediary 2002��������������������������������������������������������������47, 415, 418 Art 4������������������������������������������������������������������������������������������������������������������������������������������������� 412 Art 4.1����������������������������������������������������������������������������������������������������������������������������������������44, 304 Hague Convention on the Law Applicable to Trusts and their Recognition 1985���������������������������������������������������������������������������������������������������������������44, 90, 210, 221, 265–71 Art 2�����������������������������������������������������������������������������������������������������������������������������������������221, 266 Art 3������������������������������������������������������������������������������������������������������������������������������������������������� 221 Art 4������������������������������������������������������������������������������������������������������������������������������������������������� 267 Art 5�������������������������������������������������������������������������������������������������������������������������������������������44, 266 Arts 5–10����������������������������������������������������������������������������������������������������������������������������������������� 268 Art 6�����������������������������������������������������������������������������������������������������������������������������������������222, 268 Arts 6–10����������������������������������������������������������������������������������������������������������������������������������������� 266 Art 7�������������������������������������������������������������������������������������������������������������������������������������������268–69 Art 8������������������������������������������������������������������������������������������������������������������������������������������������� 268 Art 11�����������������������������������������������������������������������������������������������������������������������������������������266–69 Art 11(d)������������������������������������������������������������������������������������������������������������������������������������������ 267 Art 12����������������������������������������������������������������������������������������������������������������������������������������������� 269 Art 13���������������������������������������������������������������������������������������������������������������������������������������266, 269 Art 15�������������������������������������������������������������������������������������������������������������������������������� 266, 268–69 Art 15(d) and (e)���������������������������������������������������������������������������������������������������������������������������� 269 Art 15(f)������������������������������������������������������������������������������������������������������������������������������������������ 267 Art 18������������������������������������������������������������������������������������������������������������������������������ 222, 266, 269 Art 19����������������������������������������������������������������������������������������������������������������������������������������������� 266 Art 22����������������������������������������������������������������������������������������������������������������������������������������������� 268 Hague Rules��������������������������������������������������������������������������������������������������������������������351–54, 370, 373 Hague-Visby Rules���������������������������������������������������������������������������������������������������������������� 351–54, 372 Hamburg Rules��������������������������������������������������������������������������������������������������������������352–54, 370, 373 Incoterms����������������������������������������������������������������������������������������������������������������������������������������������� 349

xxx  Table of Legislation and Related Documents International Convention on Maritime Liens and Mortgages������������������������������������������������������� 270 New York Convention�������������������������������������������������������������������������������������������������������������������34, 272 Rotterdam Rules������������������������������������������������������������������������������������������������������������352, 354, 376–77 Statute of the International Court of Justice, Art 38(1)������������������������������������������������������������������� 377 UNCITRAL Assignment of Receivables in International Trade Convention������������������������������������������������������������������������������������ 203, 239, 248, 251, 270, 284, 290 Arts 26–32��������������������������������������������������������������������������������������������������������������������������������������� 294 Art 28����������������������������������������������������������������������������������������������������������������������������������������������� 295 UNCITRAL Convention on International Bills of Exchange and International Promissory Notes 1988������������������������������������������������������������������������������������������ 368 UNCITRAL Model Laws��������������������������������������������������������������������������������������255, 374, 376–77, 407 UNIDROIT Cape Town Convention and Aircraft Protocol 2001������������������������������������������������� 262 UNIDROIT Convention on International Factoring 1988��������������������203, 239, 251, 270, 294, 296 Art 5(b)�������������������������������������������������������������������������������������������������������������������������������������������� 175 UNIDROIT Convention on International Interests in Mobile Equipment��������� 248, 251, 270, 318 UNIDROIT Ottawa Leasing Convention���������������������������������������������������������������������������������251, 270 UNIDROIT Principles of Contract Law����������������������������������������������������������203, 205, 223, 323, 328 Uniform Customs and Practice for Documentary Credits������������������������������������������������������������� 373 Vienna Convention on the International Sale of Goods (CISG)������������������������������������ 261–62, 422 Art 7���������������������������������������������������������������������������������������������������������������������������������� 294–95, 422 Art 71(2)������������������������������������������������������������������������������������������������������������������������������������������ 344 Vienna Convention on the Law of Treaties 1969, Art 53���������������������������������������������������������������� 377 Washington Convention������������������������������������������������������������������������������������������������������������������������ 99 Italy Civil Code Art 1376�����������������������������������������������������������������������������������������������������������������������������������109, 117 Art 1470������������������������������������������������������������������������������������������������������������������������������������������� 117 Art 1472������������������������������������������������������������������������������������������������������������������������������������������� 113 Luxembourg Grand-Ducal Decree of 1971�������������������������������������������������������������������������������������������������������������� 400 Grand-Ducal Decree of 7 June 1996�������������������������������������������������������������������������������������������������� 413 Grand-Ducal Decree of 19 July 1983 on fiduciary agreements entered into by credit institutions�������������������������������������������������������������������������������������������������������������� 401 Netherlands Bankruptcy Act�������������������������������������������������������������������������������������������������������������������� 114, 250, 320 Art 35(2)����������������������������������������������������������������������������������������������������������������������������������120, 175 Civil Code 1992������������������������������������������������������������� 32, 55, 123, 127, 132, 159, 207, 227, 315, 348 Art 3.1����������������������������������������������������������������������������������������������������������������������������������������24, 149 Art 3.6���������������������������������������������������������������������������������������������������������������������������������������������� 149

Table of Legislation and Related Documents  xxxi Art 3.7���������������������������������������������������������������������������������������������������������������������������������������������� 207 Art 3.11�������������������������������������������������������������������������������������������������������������������������������������������� 135 Art 3.17(1)(a)���������������������������������������������������������������������������������������������������������������������������������� 269 Art 3.26�������������������������������������������������������������������������������������������������������������������������������������������� 269 Art 3.36������������������������������������������������������������������������������������������������������������������������������������173, 187 Art 3.38(2)��������������������������������������������������������������������������������������������������������������������������������������� 229 Art 3.53�������������������������������������������������������������������������������������������������������������������������������������������� 123 Art 3.81���������������������������������������������������������������������������������������������������������������������������������������������� 57 Art 3.83(2)�������������������������������������������������������������������������������������������������������������������������������150, 173 Art 3.83(3)�������������������������������������������������������������������������������������������������������������������������������150, 172 Art 3.83(2)��������������������������������������������������������������������������������������������������������������������������������������� 173 Art 3.84(1)��������������������������������������������������������������������������������������������������������24, 109, 118, 123, 149 Art 3.84(2)�������������������������������������������������������������������������������������������������������������������������������177, 185 Art 3.84(3)�������������������������������������������������������������������������������������������������������������� 207, 222, 231, 270 Art 3.84(4)���������������������������������������������������������������������������������������������������������������������� 124, 229, 231 Art 3.85������������������������������������������������������������������������������������������������������������������������������������206, 229 Art 3.86(3)(b)��������������������������������������������������������������������������������������������������������������������������342, 361 Art 3.88��������������������������������������������������������������������������������������������������������������������������� 127, 133, 139 Art 3.90(2)��������������������������������������������������������������������������������������������������������������������������������������� 112 Art 3.94�������������������������������������������������������������������������������������������������������������������������������������������� 156 Art 3.94(3)��������������������������������������������������������������������������������������������������������������������������������������� 191 Art 3.97������������������������������������������������������������������������������������������������������������������� 114, 177, 185, 320 Art 3.99��������������������������������������������������������������������������������������������������������������������������������������66, 150 Art 3.107������������������������������������������������������������������������������������������������������������������������������������������ 150 Art 3.107ff��������������������������������������������������������������������������������������������������������������������������������������� 149 Art 3.115(3)������������������������������������������������������������������������������������������������������������������������������������� 237 Art 3.118�������������������������������������������������������������������������������������������������������������������������������������������� 66 Art 3.125��������������������������������������������������������������������������������������������������������������������������������������24, 62 Art 3.125(2)��������������������������������������������������������������������������������������������������������������������������������������� 64 Art 3.125(3)������������������������������������������������������������������������������������������������������������������������������������� 150 Art 3.236(2)������������������������������������������������������������������������������������������������������������������������������������� 159 Art 3.239����������������������������������������������������������������������������������������������������������������������������������177, 185 Art 3.246������������������������������������������������������������������������������������������������������������������������������������������ 185 Art 3.290������������������������������������������������������������������������������������������������������������������������������������������ 143 Art 3.290ff��������������������������������������������������������������������������������������������������������������������������������������� 144 Art 3.291������������������������������������������������������������������������������������������������������������������������������������������ 144 Art 3.292������������������������������������������������������������������������������������������������������������������������������������������ 145 Art 4.1066���������������������������������������������������������������������������������������������������������������������������������������� 206 Art 5.1ff�������������������������������������������������������������������������������������������������������������������������������������������� 149 Art 5.2���������������������������������������������������������������������������������������������������������������������������������������������� 123 Art 6.52��������������������������������������������������������������������������������������������������������������������������������������143–44 Art 6.52(2)��������������������������������������������������������������������������������������������������������������������������������������� 144 Art 6.57�������������������������������������������������������������������������������������������������������������������������������������������� 144 Art 6.127(2)������������������������������������������������������������������������������������������������������������������������������������� 166 Art 6.130������������������������������������������������������������������������������������������������������������������������������������������ 167 Art 6.145������������������������������������������������������������������������������������������������������������������������������������167–69 Art 6.146������������������������������������������������������������������������������������������������������������������������������������������ 169 Art 6.150������������������������������������������������������������������������������������������������������������������������������������������ 181

xxxii  Table of Legislation and Related Documents Art 6.159������������������������������������������������������������������������������������������������������������������������������������������ 180 Art 6.203������������������������������������������������������������������������������������������������������������������������������������������ 123 Art 6.265������������������������������������������������������������������������������������������������������������������������������������������ 123 Art 6.269������������������������������������������������������������������������������������������������������������������������������������������ 123 Art 8.413��������������������������������������������������������������������������������������������������������������������������� 341, 343–44 Art 8.417������������������������������������������������������������������������������������������������������������������������������������������ 343 Art 8.441������������������������������������������������������������������������������������������������������������������������������������������ 344 Art 8.460������������������������������������������������������������������������������������������������������������������������������������������ 344 Commercial Code 1838����������������������������������������������������������������������������������������������������������������������� 367 Switzerland Act on Private International Law, Art 145���������������������������������������������������������������������������������������� 285 Bankruptcy Act������������������������������������������������������������������������������������������������������������������������������������� 145 United Kingdom Bankruptcy Act 1986��������������������������������������������������������������������������������������������������������������������������� 246 Bills of Exchange Act 1882������������������������������������������������������������������������������������������������������������367–68 s 4������������������������������������������������������������������������������������������������������������������������������������������������������ 365 s 5������������������������������������������������������������������������������������������������������������������������������������������������������ 365 s 16��������������������������������������������������������������������������������������������������������������������������������������������������� 358 s 24��������������������������������������������������������������������������������������������������������������������������������������������������� 361 s 72(2)���������������������������������������������������������������������������������������������������������������������������������������������� 365 Bills of Lading Act 1855���������������������������������������������������������������������������������������������������������������339, 351 Carriage of Goods by Sea Act (COGSA) 1992���������������������������������������������������������������� 339, 351, 375 Factors Act 1889 s 2(1)������������������������������������������������������������������������������������������������������������������������������������������������ 141 s 8������������������������������������������������������������������������������������������������������������������������������������������������������ 112 Financial Services and Markets Act 2000������������������������������������������������������������������������������������������ 387 Insolvency Act 1986������������������������������������������������������������������������������������������������������������������������������� 84 s 283(1)���������������������������������������������������������������������������������������������������������������������������������������������� 85 s 436��������������������������������������������������������������������������������������������������������������������������������������������������� 85 Judicature Act 1873������������������������������������������������������������������������������������������������������������������������������ 163 Land Registration Act 2002������������������������������������������������������������������������������������������������������������������� 84 Law of Property Act 1925������������������������������������������������������������������������������������������������������60, 163, 195 Limitation Act 1980������������������������������������������������������������������������������������������������������������������������������� 83 s 4(5)�������������������������������������������������������������������������������������������������������������������������������������������������� 65 Recognition of Trusts Act 1987���������������������������������������������������������������������������������������������������������� 268 Sale of Goods Act 1979������������������������������������������������������������������������������������������� 60, 79, 131, 245, 299 s 2(1)������������������������������������������������������������������������������������������������������������������������������������������������ 116 s 5(2)������������������������������������������������������������������������������������������������������������������������������������������������ 113 s 5(3)������������������������������������������������������������������������������������������������������������������������������������������������ 113 s 16���������������������������������������������������������������������������������������������������������������������������������������������71, 345 s 17�������������������������������������������������������������������������������������������������������������������������� 109, 116, 159, 259 s 18���������������������������������������������������������������������������������������������������������������������������������� 109, 159, 259

Table of Legislation and Related Documents  xxxiii s 18(1)���������������������������������������������������������������������������������������������������������������������������������������������� 113 s 21�������������������������������������������������������������������������������������������������������������������������������������������134, 140 s 23��������������������������������������������������������������������������������������������������������������������������������������������������� 131 s 24�������������������������������������������������������������������������������������������������������������������������������������������112, 140 s 25���������������������������������������������������������������������������������������������������������������������������������������������140–41 s 28����������������������������������������������������������������������������������������������������������������������������������������������������� 77 s 29����������������������������������������������������������������������������������������������������������������������������������������������������� 77 s 29(4)���������������������������������������������������������������������������������������������������������������������������������������������� 111 s 41�������������������������������������������������������������������������������������������������������������������������������������������116, 143 s 47(2)���������������������������������������������������������������������������������������������������������������������������������������������� 345 s 48��������������������������������������������������������������������������������������������������������������������������������������������������� 144 Statute of Frauds 1677��������������������������������������������������������������������������������������������������������������������77, 108 Torts (Interference with Goods) Act 1977, s 8(1)������������������������������������������������������������������������������ 83 United States 49 USCS s 80105(a)(1)(A), and (b)���������������������������������������������������������������������������������������������������� 346 Bankruptcy Abuse Prevention and Consumer Protection Act 2005��������������������������������������������� 302 Bankruptcy Code�������������������������������������������������������������������������������������������85, 115, 132, 185, 228, 330 ch 15�����������������������������������������������������������������������������������������������������������������������������������������255, 407 s 101(25)������������������������������������������������������������������������������������������������������������������������������������������ 302 s 101(47)������������������������������������������������������������������������������������������������������������������������������������������ 302 s 101(53B)(A)��������������������������������������������������������������������������������������������������������������������������������� 302 s 362�����������������������������������������������������������������������������������������������������������������������������������������235, 302 s 365(e)�������������������������������������������������������������������������������������������������������������������������������������������� 131 s 365(n)���������������������������������������������������������������������������������������������������������������������������������������������� 25 s 522��������������������������������������������������������������������������������������������������������������������������������������������������� 85 s 541(a)���������������������������������������������������������������������������������������������������������������������������������������������� 85 s 541(b)(2)����������������������������������������������������������������������������������������������������������������������������������������� 85 s 544(a)(3)����������������������������������������������������������������������������������������������������������������������������������������� 85 s 546(c)�������������������������������������������������������������������������������������������������������������������������������������������� 132 s 555������������������������������������������������������������������������������������������������������������������������������������������������� 302 s 556������������������������������������������������������������������������������������������������������������������������������������������������� 302 s 559������������������������������������������������������������������������������������������������������������������������������������ 241, 302–3 s 560������������������������������������������������������������������������������������������������������������������������������������������������� 302 s 561������������������������������������������������������������������������������������������������������������������������������������������������� 302 s 562������������������������������������������������������������������������������������������������������������������������������������������������� 241 s 741(7)�������������������������������������������������������������������������������������������������������������������������������������������� 302 s 761(4)�������������������������������������������������������������������������������������������������������������������������������������������� 302 Carriage of Goods by Sea Act (COGSA) 1971���������������������������������������������������������������� 339, 351, 353 Consumer Protection Act 2005���������������������������������������������������������������������������������������������������������� 302 Harter Act 1893����������������������������������������������������������������������������������������������������������������������������346, 352 Pomerene Act����������������������������������������������������������������������������������������������������������������������� 346, 349, 370 Restatement (Second) of Contracts�������������������������������������������������������������������������� 132, 160, 164, 195 s 164������������������������������������������������������������������������������������������������������������������������������������������������� 132 s 342�������������������������������������������������������������������������������������������������������������������������������� 160, 164, 195 Securities Exchange Act 1934������������������������������������������������������������������������������������������������������������� 383

xxxiv  Table of Legislation and Related Documents Uniform Commercial Code (UCC)������������������������������������������������ 13, 17, 42, 49, 77, 89, 91, 94, 109, 117, 131–32, 141, 172, 177, 191–92, 214, 230, 233, 238, 245–47, 249, 300, 315, 318, 333, 345–46, 368, 415 Art 2����������������������������������������������������������������38, 56, 94, 116, 167, 245, 262, 301–2, 310, 312, 387 Art 2A���������������������������������������������������������������������42, 44, 228, 245–47, 301–2, 310, 312, 324, 387 Art 3�������������������������������������������������������������������������������������������������������������������������������������������367–68 Art 4�������������������������������������������������������������������������������������������������������������������������������� 301, 310, 417 Art 4A�����������������������������������������������������������������������������������������������������������42, 301–2, 310, 313, 324 Art 5�������������������������������������������������������������������������������������������������������������������������������� 301, 313, 417 Art 6������������������������������������������������������������������������������������������������������������������������������������������������� 114 Art 7�����������������������������������������������������������������������������������������������������������������������������������������301, 339 Art 8���������������������������������������������� 42, 44, 301–2, 313, 324, 383–84, 387–89, 398, 402–3, 417–18 Art 9������������������������������������������������������������������� 13, 30, 42, 56, 85, 93–94, 101, 115, 150, 162, 164, 167, 177, 183, 185, 195, 214, 216, 227–28, 230, 232–33, 239, 244–45, 247–49, 254, 263, 288–89, 296–97, 301–2, 308, 310–11, 313, 320, 324, 330 s 1-103���������������������������������������������������������������������������������������������������������������������������������������������� 116 s 1-201(5)����������������������������������������������������������������������������������������������������������������������������������������� 376 s 1-201(a)(35)��������������������������������������������������������������������������������������������������������������������������������� 230 s 1-201(a)(9)������������������������������������������������������������������������������������������������������������������������������������ 141 s 2-105���������������������������������������������������������������������������������������������������������������������������������������������� 302 s 2-201���������������������������������������������������������������������������������������������������������������������������������������������� 167 s 2-210�������������������������������������������������������������������10, 21–22, 150, 163–64, 167, 172, 187, 301, 312 s 2-210(2)�����������������������������������������������������������������������������������������������������������������������������7, 167, 172 s 2-210(3)����������������������������������������������������������������������������������������������������������������������������������������� 167 s 2-210(4)����������������������������������������������������������������������������������������������������������������������������������������� 172 s 2-401��������������������������������������������������������������������������������������������������������������������� 109, 146, 245, 346 s 2-401(2)��������������������������������������������������������������������������������������������������� 84, 111–12, 116, 125, 132 s 2-401(4)����������������������������������������������������������������������������������������������������������������������������������������� 131 s 2-403��������������������������������������������������������������������������������������������������������������������������������������116, 142 s 2-403(1)����������������������������������������������������������������������������������������������������������������������������������������� 142 s 2-403(1)(c)������������������������������������������������������������������������������������������������������������������������������������ 132 s 2-403(2)����������������������������������������������������������������������������������������������������������������������������������������� 141 s 2-501���������������������������������������������������������������������������������������������������������������������������������������������� 113 s 2-507(2)����������������������������������������������������������������������������������������������������������������������������������������� 132 s 2-702��������������������������������������������������������������������������������������������������������������������������������������110, 132 s 2-702(3)����������������������������������������������������������������������������������������������������������������������������������������� 132 ss 2A-301 and 307���������������������������������������������������������������������������������������������������������������������������� 44 s 2A-309������������������������������������������������������������������������������������������������������������������������������������������� 246 s 3-302���������������������������������������������������������������������������������������������������������������������������������������������� 360 s 3-305���������������������������������������������������������������������������������������������������������������������������������������������� 360 s 3-404���������������������������������������������������������������������������������������������������������������������������������������������� 361 s 3-415���������������������������������������������������������������������������������������������������������������������������������������������� 358 s 4A-108������������������������������������������������������������������������������������������������������������������������������������������� 313 s 5-102(9)(b)����������������������������������������������������������������������������������������������������������������������������������� 313 s 5-102(a)(9)������������������������������������������������������������������������������������������������������������������������������������ 417 s 6-104���������������������������������������������������������������������������������������������������������������������������������������������� 114

Table of Legislation and Related Documents  xxxv ss 7-307–7-308�������������������������������������������������������������������������������������������������������������������������������� 348 s 7-402���������������������������������������������������������������������������������������������������������������������������������������������� 344 s 7-501���������������������������������������������������������������������������������������������������������������������������������������������� 346 s 7-502���������������������������������������������������������������������������������������������������������������������������������������������� 372 s 7-502(1)����������������������������������������������������������������������������������������������������������������������������������������� 346 s 7-502(2)����������������������������������������������������������������������������������������������������������������������������������������� 346 s 7-503���������������������������������������������������������������������������������������������������������������������������������������������� 346 s 7-507(2������������������������������������������������������������������������������������������������������������������������������������������ 342 s 8-102���������������������������������������������������������������������������������������������������������������������������������������������� 384 s 8-102(a)(13))�������������������������������������������������������������������������������������������������������������������������������� 384 s 8-102(a)(15)��������������������������������������������������������������������������������������������������������������������������������� 383 s 8-102(a)(17)��������������������������������������������������������������������������������������������������������������������������������� 387 s 8-110���������������������������������������������������������������������������������������������������������������������������������������������� 417 s 8-110(b)���������������������������������������������������������������������������������������������������������������������������������������� 413 s 8-110(e)���������������������������������������������������������������������������������������������������������������������������44, 412, 415 s 8-110(e)(2)����������������������������������������������������������������������������������������������������������������������������304, 413 s 8-115���������������������������������������������������������������������������������������������������������������������������������������������� 390 s 8-301(a)(1)������������������������������������������������������������������������������������������������������������������������������������ 383 s 8-301(a)(3)������������������������������������������������������������������������������������������������������������������������������������ 383 s 8-313���������������������������������������������������������������������������������������������������������������������������������������������� 402 s 8-501(b) and (c)��������������������������������������������������������������������������������������������������������������������������� 388 ss 8-501ff������������������������������������������������������������������������������������������������������������������������� 383, 385, 388 s 8-503������������������������������������������������������������������������������������������������������������������������������������������������ 44 s 8-503(b)���������������������������������������������������������������������������������������������������������������������������������������� 388 s 8-505���������������������������������������������������������������������������������������������������������������������������������������������� 385 s 8-506���������������������������������������������������������������������������������������������������������������������������������������������� 385 s 8-507���������������������������������������������������������������������������������������������������������������������������������������������� 390 s 8-508����������������������������������������������������������������������������������������������������������������������������� 385, 387, 403 s 9-102���������������������������������������������������������������������������������������������������������������������������������������������� 247 s 9-102(a)(5–6)������������������������������������������������������������������������������������������������������������������������������� 185 s 9-104(1)����������������������������������������������������������������������������������������������������������������������������������������� 417 s 9-108���������������������������������������������������������������������������������������������������������������������������������������������� 297 s 9-109(a)(3)������������������������������������������������������������������������������������������������������������������������������184–85 s 9-109(a)(5)������������������������������������������������������������������������������������������������������������������������������������ 132 s 9-109(a)(5–6)������������������������������������������������������������������������������������������������������������������������������� 230 s 9-109(d)(13)�������������������������������������������������������������������������������������������������������������������������313, 417 s 9-109(d)(5)���������������������������������������������������������������������������������������������������������������������������164, 185 s 9-109(d)(7)���������������������������������������������������������������������������������������������������������������������������164, 185 s 9-201������������������������������������������������������������������������������������������������������������������������������� 142, 246–47 s 9-203��������������������������������������������������������������������������������������������������������������������������������������142, 247 s 9-203(1)(c)������������������������������������������������������������������������������������������������������������������������������������ 319 s 9-203(b)(2)�����������������������������������������������������������������������������������������������������������������������������245–46 s 9-203(b)(3)(C)����������������������������������������������������������������������������������������������������������������������������� 108 s 9-204�������������������������������������������������������������������������������������� 42, 115, 122, 177, 216, 247, 249, 302 s 9-204 (a)���������������������������������������������������������������������������������������������������������������������������������������� 164 s 9-301(1)�������������������������������������������������������������������������������������������������������������������������� 254, 288–89 s 9-302���������������������������������������������������������������������������������������������������������������������������������������������� 230 s 9-304���������������������������������������������������������������������������������������������������������������������������������������������� 417

xxxvi  Table of Legislation and Related Documents s 9-309(2)����������������������������������������������������������������������������������������������������������������������������������������� 195 s 9-315(a)(1)������������������������������������������������������������������������������������������������������������������� 142, 216, 241 s 9-317��������������������������������������������������������������������������������������������������������������������������������������247, 417 s 9-320����������������������������������������������������������������������������������������������������������������������������� 141, 250, 308 s 9-320(a)������������������������������������������������������������������������������������������������������������������136, 141–42, 311 s 9-322(a)����������������������������������������������������������������������������������������������������������������������������������������� 195 s 9-323��������������������������������������������������������������������������������������������������������������������������������������141, 247 s 9-329������������������������������������������������������������������������������������������������������������������������������������������������ 44 s 9-401���������������������������������������������������������������������������������������������������������������������������������������������� 241 s 9-401(b)�������������������������������������������������������������������������������������������������������������������������������������������� 7 s 9-403���������������������������������������������������������������������������������������������������������������������������������������������� 167 s 9-404������������������������������������������������������������������������������������������������������������������������������� 150, 166–67 s 9-405���������������������������������������������������������������������������������������������������������������������������������������������� 173 s 9-406��������������������������������������������������������������������������������������������������������������������������������44, 172, 177 s 9-406(a)������������������������������������������������������������������������������������������������������������������������ 164, 192, 195 s 9-406(d)��������������������������������������������������������������������������������������������������������������������� 7, 163–64, 167 s 9-406(f)����������������������������������������������������������������������������������������������������������������������������������������� 167 s 9-503���������������������������������������������������������������������������������������������������������������������������������������������� 241 s 9-601(a)����������������������������������������������������������������������������������������������������������������������������������������� 349 ss 9-601ff������������������������������������������������������������������������������������������������������������������������������������������ 236 s 9-607��������������������������������������������������������������������������������������������������������������������������������������185, 303 s 9-608��������������������������������������������������������������������������������������������������������������������������������������185, 303 s 9-609���������������������������������������������������������������������������������������������������������������������������������������������� 241 ss 9-615ff������������������������������������������������������������������������������������������������������������������������������������������ 241 Visual Artists Rights Act��������������������������������������������������������������������������������������������������������������������� 319

Part I Ownership, Possession and Limited, Future, Conditional or Temporary and Beneficial Proprietary Rights in Chattels and Intangible Assets 1.1. Introduction 1.1.1.  The Notion of Property Law Property law is best understood in terms of the various legal structures under which assets are held, used and protected, more specifically from the perspective of the user, income and enjoyment rights that may operate in these assets against, or must be respected by, third parties who were not involved in their creation or transfer, often considered the essential feature, which distinguishes these rights from mere contractual arrangements. What rights do we mean more precisely, and in respect of which assets can such rights be given or claimed, particularly when split-off and transferred by the original owner (who has them all in principle) as rights more limited than full ownership, like usufructs or life interests and security interests? When and how do they become proprietary affecting third parties, why, or when do they remain merely contractual and what does that mean? Can they be further split-up by transferees and then redistributed to others in a similar proprietary fashion, how and when? When are these splits and transfers final, and what does that mean? This requires first some idea of what assets are and how they may become the object of user, income and enjoyment rights in this sense. Land and chattels or physical movable assets are the most obvious examples but assets may also be monetary or could be claims, in fact all that has economic value may then be considered an asset, see further section 1.1.5 below, although, in some legal systems as we shall see, the asset status of intangible assets, even monetary claims like receivables, is sometimes still questioned. This suggests a physical aspect which legally confuses and raises also the question why rights of this nature might only attach to specific, identified and individualised existing assets for them to become proprietary. Or can proprietary rights, in a more modern environment, also attach to classes of assets, physical or intangible, now often commingled with services, information, technology and software, upon mere description of the asset or asset class in the relevant documentation, while within such a class legally there may then also be asset substitution, for example when these goods are in transformation as part of a production process or distribution chain whilst they are physically succeeded or replaced by others e.g when moving from commodities to final products, and, upon a sale, to receivables and, upon payment, to proceeds. This is relevant especially when user, income and enjoyment rights are given or split off as security for debt when the issue is whether upon transformation or a sale of the underlying assets

2  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights these security interests may shift into replacement assets in the production process, or, upon a sale, into receivables or proceeds, hopefully with preservation of the original rank. Rights in regard of assets in transformation or in future assets might thus be included and transferred prospectively and there may be assets and transfers in bulk or as a class in transformation. This is at the heart of floating charges as a form of asset-backed funding to obtain working capital for the manufacturing and distribution process as we shall see. The changing nature of the underlying assets presents in many legal systems a serious problem in respect of the continuing validity and effectiveness of these security interests or charges and the maintenance of their rank, see further Volume 5, section 2.2. In fact, it is in modern times this issue of identification, individualisation, and (physical) existence of the underlying assets that has become an important issue concerning property rights, their existence and creation or transfer and continuation, including the creation of security interests in them, at least in respect of movable assets, including claims, used or produced in the professional sphere. The nature of assets is therefore closely connected with the kind of proprietary legal framework we have or must move to and both may be in need of fundamental rethinking as the basic cornerstones of property rights. These rights and the way they are manifested and protected may then have to be reconsidered in their meaning and expanded in their operation, especially in international commerce and finance as we shall see all through. This might seem a merely technical issue or concern but proves to be essential and arises in particular in respect of the modern flows of goods, services, software, technology and other information, and of receivables, money or proceeds, and proves to present a major intellectual challenge in legal thinking as to how these flows can or should now be captured in any proprietary sense, not in the least also in their transformation, see the discussion in section 1.1.5 below, more urgent upon the globalisation of these flows in international production, and distribution chains. It raises the further question of the applicable law in the various stages and aspects of these chains. An example may help. Assume a car manufacturer buys iron plates in Sweden, produces car frames in Spain, adds tyres in France, electronic equipment from Germany, and software from the US before assembling the final product in Italy, subsequently distributed in 25 countries, sold whilst giving credit to buyers against a receivable, ultimately collected upon payment in banks in any of these countries. How is in this example, a reservation of title by the Swedish supplier of steel plates to be treated and maintained in the production, first in Spain into car bodies, then in France after the supply of tires potentially with a further reservation of title in them, and then in Germany after the addition of electronic equipment, again assuming a further reservation of title. How do they all figure in Italy after the completion of production and in the subsequent distribution of these cars in various countries, followed by a receivable upon the sale and ultimately by a payment into a bank in yet another country? Who has got what? If the local lex situs prevails at each moment of creation of such rights—which is the traditional proprietary principle—we get an amalgam of local rights in their proprietary aspects vying for recognition elsewhere, relevant especially in a bankruptcy of anyone in the chain wherever that may be. It raises issues of shifting rights in (future) replacement assets that are in transformation, with or without the preservation of rank or their loss altogether, complicated further by the possibility and impact of bulk transfers of these assets and rights therein in the manufacturing and distribution process, all potentially under some local laws. Does it provide for any sensible regime in respect of the whole operation with sufficient certainty and predictability? Can this still make sense in the international flows or must transnationalisation and transnational custom and practice or general principle or even party autonomy as an independent source of transnational law come to the rescue, which is the thesis of this book.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 3 If, as will be submitted shortly, the issues of liquidity and finality, and ultimately of risk management, are at the heart of the meaning and significance of modern proprietary rights in professional dealings in the international flows and the focus of transnationalisation of the proprietary laws therein, any formal or intrinsic requirement of the asset in terms of identification, individualisation, and existence is likely to prove a major hindrance to the further development of property law into a more dynamic force in international business as is also the formal limitation of the proprietary rights therein, in civil law terms the numerus clausus. The essence is here how the whole production and distribution process can be given as security for working capital, necessary to pay the workers and buy more commodities and semi-finished materials in the continuation of this process before payment of finished products is received. How can this be legally achieved if we still mean to cut this process up along domestic lines, further complicated by the lack of a consensus what assets are or whether there could be legal unity in the production and distribution process. If it cannot or not effectively and efficiently be achieved, the financing of this process may be more expensive as it is likely to be ineffectively or insufficiently secured. That would be the unavoidable consequence of nationalistic and traditional legal thinking in terms of assets and rights thereto which still prevail and assume that these flows must be broken up in individualised assets and along national lines assuming that all these domestic legal pieces together (derived from and identified under the traditional rules of private international law) can still produce an efficient legal system of operation and protection for the international flows. This discussion was started in Volume 1, section 1.1.6 and will now be resumed. Once we know what assets legally are, either in individualised form or in more modern perceptions of their flows as classes of present or future assets in movement and transformation, constantly transported between countries, commingled when necessary with services, technology, information or software, captured foremost in the contractual description that is likely to be at the origin of each proprietary right when conceded or transferred to others, we should obtain some better idea or clearer view of what legal structures we are speaking of in terms of their movement towards proprietary status, therefore of the types of user, enjoyment and income rights, including security interests or charges, that may be exerted in respect of these assets and legally claimed by the beneficiaries or interest holders as proprietary, and what that truly means and does for us. It was already said that the essence of rights being proprietary is that they are maintainable against everyone, therefore also against those not involved in their creation, transfer, or transformation. Indeed, it is the facility to enforce these rights, even if originally created or split-off by contract, against all the world that is traditionally considered the essence of proprietary rights, or in more modern approaches as we shall see, at least against professional classes of third parties. Without any form of privity, third parties must thus respect these interests, their creation and transfer, and leave them alone. But even then, it still remains to be determined which these rights are and what third party effect truly means or implies in this connection. It is particularly relevant in a bankruptcy when the proprietary right holders may be able to maintain their claims, if proprietary, against a bankrupt debtor and its bankruptcy trustee, thus potentially ignoring the bankruptcy and its liquidation, reorganisation and distribution process in respect of assets so encumbered. On the other hand, it is also important that these rights are extinguished at the level of the ordinary buyer to preserve their liquidity: nobody would dare to buy anything without it. It must then be determined when in truth they have reached the public to be so protected. That is the world of the bona fide purchaser. In first instance, the right of ownership as the most complete (in civil law terminology) user, enjoyment and income right to exploit and dispose of one’s asset springs to mind. It means that we can defend the ownership right in our car against all comers. If it is in the garage of our bankrupt friend, we just reclaim it and it is not part of our friend’s bankrupt estate. There are also

4  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights more limited and therefore less complete user, enjoyment or income rights that the owner may subsequently create in assets, which may also become proprietary and therefore maintainable against all others, such as life interests or usufructs, forms of leases (in real estate), rights of way or servitudes (notably in real estate), and especially security interests of which mortgages are prime examples in land, pledges in chattels, and in equity in common law countries, floating charges in classes of assets in transformation as already mentioned. These involve then more limited interests of other people in an owner’s assets and if becoming proprietary in civil law terminology are rights in other people’s property or iura in re aliena and must then be no less respected by all, therefore not only by the owner who granted or transferred these rights or his successor. It means that even if the owner sells the property, these rights in the asset remain intact, with the important side benefit that the erstwhile owner is discharged of any duties under such a proprietary right transferred to others. In our above example, if I have given my friend a loan, and he has given me his car as security, I now retrieve his car from his garage, not as owner but as a security interest holder and separate the car from the rest of his estate and sell it in a separate execution, thus retrieving my loan plus interest and cost out of the proceeds quite apart from the liquidation of the estate. The security interest was my proprietary right, which I may defend against everyone, even against the owner’s bankruptcy trustee or any new owner should my friend have sold the property in the meantime, which as owner he may be able to do but it would not interfere with my right or risk management arrangements. It being proprietary I can maintain against all the world including the new owner, as mine is older. The importance for the erstwhile owner is that s/he can still sell the property regardless of the charge s/he allowed to arise in it. That is liquidity.1 It discharges him/her at the same time from any duties under this proprietary right, for example, to look after the property pending the mortgage. Another example: there may be rights of way created for me over my neighbour’s land to provide ready access to my own property. If proprietary, these rights are easements or, in civil law, servitudes maintainable against everybody. That means that, even if the property of my neighbour is sold, my rights over his land are not affected. My former neighbour is discharged at the same time and the duty to give access passes to his successor in the property. Again, proprietary rights so passing to purchasers mean that the obligation passes with the underlying assets so that their liquidity remains ensured. My neighbour can sell the property regardless of the charge he created in it for me, without which he would face difficulties as he would still be liable to provide the right of way after having lost control. This can be demonstrated and would be the case if my right of way had remained merely contractual. Practically, that would require the underlying asset to remain in the control of the party having granted any contractual user or enjoyment right in the asset (here the right of way by my erstwhile neighbour to me) as without control of the asset, especially upon a sale of the property, performance of the contractual duties to let me pass could not remain assured. The new neighbour has no duty to me because he is not a party to the contract and it does not concern a proprietary right that passes with the property. The contractual duty to provide access to me cannot be unilaterally transferred by the former owner without my consent and acceptance by the new owner, who might not even know of my right and may in any event not be willing to continue it.

1 However, the former owner is not discharged from the loan payments to me unless otherwise agreed. The loan itself is contractual and will not transfer to the new owner of the house (even if he knew of its existence and got the house at a discount because of the mortgage), although to avoid these issues, it is normal, as a practical matter, for the loan to be re-paid out of the proceeds of the sale and the mortgage cancelled at the moment of the transfer of the property, but that is for the moment a detail.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 5 Again, unless I agree (which will depend on the new owner’s willingness to afford similar access or on me being paid off by the seller), the property cannot be sold because the seller could no longer perform under the original contract and provide me with my right of way. Hence the resulting illiquidity in the underlying asset and that is in a market economy highly undesirable. The ultimate question then is how modern law reacts against this conundrum. In civil law, the main example of this problem is presented in the lease of apartments, which lease in most civil law countries is contractual, not proprietary as it is likely to be in common law. As we shall see, that has required a statutory exception to be made, for example, section 566 Civil Code (BGB) in Germany, under which any new owner must respect the lease contract and the old owner is discharged. This means that the rental agreement exceptionally acquires proprietary features. It has a long history and was earlier identified as an important inroad into the concept of privity of contract: see Volume 3, section 1.5.1. It is not a question of rental protection (as is often thought by students) but is motivated by the need for liquidity in the underlying asset which could otherwise not easily be sold by the owner. For similar reasons, as we shall see, in some civil law countries, a contractual right of way of a neighbour may now sometimes be deemed to transfer with the property at least if the transferee knew of this duty to provide access before he bought the property (and could discount it in the price). As will be shown, this gives an important clue as to how contractual user, enjoyment, and income rights in underlying assets may start working against third party transferees in the property and thus become proprietary. The essence is then the prior knowledge, not merely publicity, which cannot truly be equated with it as we shall see in section 1.1.3 below. Again, this is inspired by the need for liquidity of the underlying assets. Importantly, it is the reason why contractual user, income and enjoyment rights of all sorts tend towards proprietary status especially, it is submitted, when operating in the professional sphere, subsequently to be cut of at the level of ordinary buyers, notably consumers, as we have already seen for their protection. It is another aspect of liquidity. Although in this book the discussion of proprietary rights is primarily concerned with the creation, operation, transfer and protection of all rights in respect of (legally qualifying) assets (or classes thereof) in terms of user, enjoyment and income rights, proprietary rights proper are thus a more limited class of these rights and concern the potential third party effect and the liquidity/risk management, separation and finality issues concerning the underlying assets, whatever their nature. Traditionally they cover more specifically defined legal structures in terms of use, enjoyment and income such as ownership, usufructs, servitudes, and security interests. That is in civil law also referred to as the numerus clausus of proprietary rights. Other user, enjoyment and income rights then remain merely contractual, therefore maintainable only against the counterparty, usually the one who granted these rights. Again, they cannot be maintained against its successor in interest in the property unless acceding to the contract; that is privity. Given, however, a more dynamic notion of proprietary rights—as already proposed in Volume 1, section 1.1.6 for professionals among themselves—in which prior or sometimes even constructive knowledge of contractual user, enjoyment or income rights in the acquirer or transferee plays an important role, these user, enjoyment and income rights may thus acquire third party effect or proprietary status, at least in respect of some classes of third parties, notably those who can or should know of these prior rights, therefore professional insiders, especially other banks and main suppliers. Importantly, transforming these contractual rights into rights with (some) thirdparty effect, depending on prior knowledge in the third-party transferee, suggests or results at the same time in a form of party autonomy in the creation of proprietary rights. When, why and how this can happen, how therefore this notion of prior knowledge must be handled, is a key theme in this book, and the reason why the discussion is here not confined to the more traditional

6  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights narrow class of proprietary rights (or numerus clausus). Again, it is an issue of liquidity, but also of segregation and transaction and payment finality, and ultimately of risk management that becomes central to the discussion, rather than mere issues of mine and thine or even transaction or information costs (in the ‘law and economics’ approach) as we shall see, which rather suggests a consumer attitude. In Volume 3, the importance of contract as risk management tool between professionals was already identified. Here we see the proprietary component, operating particularly in the international marketplace. This is the world of professional dealings, of legal entities, and not of natural persons or consumers. All types of user, enjoyment, and income rights in respect of underlying assets are then in principle considered for their potential proprietary effect and for the nature and extent of that effect should it arise. All kind of proprietary rights with regard to underlying assets may then conceivably be created through party autonomy and could potentially become effective against (at least certain classes of) third parties (who are therefore not involved in the creation or transfer process) especially those who know or, in the case of professional insiders, should know about them before they themselves acquire a user, enjoyment or income interest in these assets. Notably in floating charges, the insiders, especially other banks and major suppliers, who should realise (because they avail themselves of these facilities) or do know that there are or might be such contractual rights before they acquire the property or a security interest or similar charge in them, may as a consequence have a search duty as part of their due diligence. Crucially, this duty does not then extend to the buyers in the ordinary course of business of commoditised products, therefore the ordinary public or consumers at large who buy these products free and clear. Their bona fides is assumed and there is for them no search duty. Even registration or filing of such charges does not affect them. Proprietary rights are here not cut off at the level of their creation, rather they are there promoted, but at the level of their operation. The ordinary flows are free from them, especially relevant for consumers in their purchases and the public at large need not worry. Again, nobody would dare to buy anything without it. It is what privity achieves in contract law. Proprietary rights are then also limited, here in the interest of the free flows in the marketplace and the ultimate liquidity of assets. There are therefore two prongs: first, the proprietary status of user, enjoyment and income rights is promoted to make these rights freely move with the asset so as not to inhibit their transfer, meaning that professionals with prior knowledge must respect them and have a search duty in principle, and, second, these rights are subsequently cut off at the level of the marketplace. In this book, this is considered a key insight in modern property rights concerning movable assets operating among professional insiders, which assets may be of a composite nature, including services, technology and information, and also cover monetary claims, possibly as replacement assets in the production and distribution process, which is then perceived as a unit in itself. These assets being part of it can be transferred in bulk and the rights therein are maintained in future replacement assets at the same time with maintenance of the original rank upon conversion into the next stage of their production or distribution, the coverage and extent being determined in the transfer or assignment documents. This being said, the search duty of professionals in respect of the legal status of individual assets may still be unworkable or impracticable especially in respect of classes of underlying assets, for example, whether there are transfer prohibitions or limitations of use in loan or receivable portfolios or for classes of chattels in production chains. Transaction costs may become prohibitive even for them. The law may therefore more directly cut off their effect even in respect of professionals, as indeed it has long done for chattels, and may increasingly also do so for intangible claims, see section 1.5.5 below. It is a more immediate protection of liquidity as a proprietary issue, leaving, however, the transferor or assignor still in default of his duties not to transfer.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 7 In practice, it may be hard to show damage and the law may discourage such claims against transferors as in the US Sections 2-210 (2), 9-401(b) and 9-406(d) UCC do in respect of contractual assignment restrictions and other defences of the debtor. Deleting notification and (individual) documentation requirements promote this important facility further in the case of bulk assignments. For professionals, the search duty is not reduced, however, in respect of prior transfers or assignments of the underlying assets and their bona fides can here not be readily assumed as in a market environment it is in respect of outsiders like the purchasing public. It follows that the proprietary system is here not or no longer set in concrete as is often still assumed to be the case in civil law, the reason for this civil law approach being that third-party effect can only be given in limited situations as a matter of public order or societal routine and standardisation with which there is then supposed to be sufficient familiarity, again the numerus clausus. Such an approach does not distinguish and the proprietary right operates against all third parties or none—that is the weakness in this way of thinking and underrates the liquidity, segregation, finality and risk management elements, which were submitted to be key in professional proprietary dealings. In the more traditional civil law view, even professionals who know of contractual user, enjoyment or income rights in the property are not then affected if they buy the underlying assets regardless—although it has already been shown that in respect of contractual rental agreements and rights of way in land, this approach is under pressure even in civil law. Indeed, especially among professionals, the proprietary system may be or may have to become more fluid, in which connection prior knowledge in a (professional) transferee of preexisting contractual user, enjoyment and income rights in the property then becomes a key issue. Again, this means and allows for a form of party autonomy in the creation of proprietary rights, particularly relevant in the professional sphere. Both the type of assets covered and the type of proprietary right created are then the subject of party autonomy to be watched by knowable insiders but the public goes free. For claims it means that bona fide collecting assignees may also retain their collections. Only insiders, like banks, benefiting from security interests in receivables, will have to respect prior rights. This may be coming to a head more particularly in the international flows of assets. It is submitted that expanded party autonomy in the creation of user, enjoyment and income rights in assets that may acquire third party or proprietary effect in this manner is a more particular and key feature of the transnationalisation process of proprietary rights that operate in these flows which foremost concern professionals. Thus, party autonomy in the creation of these rights, which may acquire third party effect, becomes an important facility among professional operators especially in international finance, their knowledge of such prior rights being assumed or deemed constructive amongst them, respect of these rights being demanded and enforced. Again, it does not affect the buyer of these assets in the ordinary course of business, therefore in respect of those commoditised in the ordinary flows. To repeat, it means that proprietary rights are here not cut off (and are rather increased) at the level of their creation but at the level of their operation. Thus, the proposition is that the international flows are free from them except in respect of the professional insiders; only they have a search duty. As such, their class needs definition. Although in principle these rights may still be considered contractual (or obligatory) and we should not get ahead of the present situation, even now they find particular expression in equity in common law countries which may give business in these countries a great advantage. In civil law, lawyers must be aware of these newer trends, which are likely to have a profound effect on their perceptions and understanding of the meaning and operation of proprietary rights in professional dealings transnationally. They are not then systematically limited and do no longer merely concern individualised assets. In this newer approach, the rights so created depend on their description in the contract and of the assets these rights concern. To repeat, the public at

8  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights large may ignore them when acquiring (income, user and enjoyment rights) in these assets, but not the insiders. It is suggested that this is in itself a public policy issue reflecting a market necessity in terms of liquidity, risk management, segregation, and finality. Yet the same public policy requires at the same time that the ordinary flows are free of these charges as far as the general public is concerned. To summarise, in the professional sphere, we are interested foremost in assets or more likely classes of them that may be in constant transformation and movement (increasingly also between countries) from commodity to finished product and receivable, ultimately to payment and proceeds in the supply and distribution chains, and acquire greater value in each phase and need protection and better use as collateral. That is increasing value and efficiency, legally supported by the demands of risk management, segregation, liquidity, and finality. The search for greater value in this manner and certainty of this nature is an essential component of professional dealings in the international flows and, it is submitted, puts proprietary rights in a special light. To resume a line of thinking already started in Volume 3: consumers buy a pint of milk to consume, and that is the end of the sale/purchase and of the asset. The professional buys a pint of milk to make something more out of it, cheese, yoghurt or whatever. That requires management. For contract, it was submitted that this has a profound effect on the model used; for the consumer, it dwells on intent and blame or fault in its formation and implementation; its meaning is determined and defined by the defences and excuses and by the common cry in civil law: ‘I did not mean it, I cannot help it, it is not my fault’, if, somehow, we do not want the pint any longer. Whether ownership passes or stays where it was, the asset will disappear promptly and proprietary rights become irrelevant beyond who can consume. Here, we have limited proprietary rights determined by publicly known standards, so that everyone knows or should know who can drink the milk. That is the world of the numerus clausus which remains in all dealings the civil law anthropomorphic approach as we have seen, and then fatally may also cover professional dealings in civil law’s unitary approach. Rather, it was submitted that in the professional sphere this should be different. Here contractually there are no quick defences against the duty to perform and the duty to take or to deliver is not quickly excused either, the contract is a road map and risk management tool and needs to be read and implemented as such. In principle, the law will not redistribute risk. Here the asset needs to meet the specific quality standards set out in the contract to improve its value and/or to obtain funding used as collateral to finance its further progression in the production and distribution chain in the way professionals want it. That is where the importance is for them. Once the asset comes to rest and is identified as an individual asset, it is entering the world of the consumer (for example, as a piece of cheese) and loses its value and legal meaning. There is no greater destruction of value than under the Christmas tree when all legal or proprietary meaning and protection lapses at the same time. In civil law we still treat all assets in this (individualised and physical) manner (Bestimmtheitsprinzip in German). Movable property law is here also consumer law as contract law is still perceived to be. In civil law that remains the standard model even in commercial and financial dealings. It is its essence and its weakness, it was submitted, applying a unitary approach to all relationships and assets and their use, a model meant mainly to deal with the aftermath of the Christmas tree bonanza where the children fight about the spoils and at most sentimental values survive, but it is wholly unsuitable for professional dealings. One could also say that the common law of property is interested in the asset before it reaches the consumer—that is its perspective—the civil law after doing so. These are two different worlds. Common law started here from the professional sphere as we have seen. Contract and movable property are historically commercial law issues. Thus, the contract was always primarily

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 9 a road map and risk management tool and had to be read literally rather like an instruction manual, where we also do not ask what the intent of the writer was to determine meaning. The essence is that there are in principle few defences (only in equity) and no excuses except a major default by the other party or otherwise if incorporated in the text itself as force majeure or hardship clauses. Some money must be put on the table as investment or there must be a beginning of performance in reliance before there is a cause of action. In equity, there further developed a supporting system of proprietary rights that can also deal with assets in transformation, often as a class or as cocktails including services, information and technology. There is then no need for individualisation and setting aside until much later when assets are fully formed and the finished products come to rest, usually as consumer products, indeed likely to lose their value and to become legally insignificant at the moment of consumption or unpacking. It follows that until such time, a strong form of party autonomy is recognised and accepted in the creation of proprietary rights amongst professional participants operative as part of their value creation process and underscores the risk management nature, the emphasis further being on segregation, liquidity, and on transactional and payment finality. It is a form of freedom which has difficulty in civil law as indeed contract freedom also has and is there a licensed concept as indeed property also is. It follows that especially floating charges, finance sales, and recognition of economic or beneficial property rights in trust structures with their segregation facility are easier in common law (equity). Again, this approach or model results from movable property having developed in common law first in commercial law, like the law of contract did, both much refined through equity. It is a different world that can better deal with different needs and a commercial perspective; it is also more suitable for international trade and finance and can more readily recognises the force and nature of the international flows. Notably it is not consumer law. It is no less important in this connection to appreciate—it is a separate point that may easily confuse, however—that in these international flows, contractual rights, even if still merely obligatory, have themselves also a proprietary aspect in that they are ordinary assets at the same time and may in law be considered property, at least if they have economic value, see again section 1.1.5 below. It folds into the notion what an asset legally is. They are no less to be respected by all and are in principle also transferable as such—easiest to understand for monetary claims or receivables, but it concerns in principle all existing contractual user, enjoyment and income rights in whatever asset which may be defended as such in tort. They may be transferred in ownership or even as usufruct or security interests as we have seen. Thus, even if remaining purely obligatory, they also have a property aspect, demonstrated by the possibility of assignment. The essence is that a merely contractual claim can be transferred or given as security or as a benefit either proprietarily or, if so desired, contractually when there is no effect on third parties.2 Transfer in bulk is here of special interest as the UCC in the US in Article 9 recognised from the beginning. Thus, all kind of user, enjoyment or income rights may be created in respect of underlying assets, which rights are themselves no less assets even if remaining merely contractual. We can freely create these and upon such a creation even assign them, meaning transfer them as

2 Thus, also the beneficiary of a contractual right of way may transfer it with his land as if it were property and will probably do so. This right of way after transfer by the beneficiary will still expire with the original contract under which it was given. Note that the neighbouring owner who granted the right is under an obligation and cannot transfer this duty without the beneficiaries’ consent—hence the liquidity problem as explained unless such a right starts to run with the land, meaning it becomes proprietary.

10  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights any other asset. If we mean the user, enjoyment or income rights in them to become proprietary, there may be further formalities, different conceivably for outright or security assignments or conditional transfers/finance sales. In this way, we may create or transfer a usufruct in our receivables or other contractual claims, as such to be respected by the whole world; we may also use these receivables or other rights as security for our debt. There might also be sub-usufructs in them and sub charges in rehypothecations. Increasingly we might even create rights in them that only affect certain classes of third parties (professionals in the know as we have seen) or we might want them to remain merely contractual.3 Even then they may in turn tend towards proprietary status. The essence is the dynamic nature of property law, at least in the professional sphere.

1.1.2.  The Difference between Contractual and Proprietary Rights The difference between user, income and enjoyment rights in underlying assets or asset classes being merely contractual or becoming proprietary emerges especially upon the transfer of commercial income streams. To repeat, the basic starting point is that if any rights earlier granted therein by the owner (meaning by the one who has all user, income and enjoyment rights in them, thus the most complete right) were proprietary, the successor/new owner or transferee of (the rights in) the underlying assets is bound by and takes subject to these rights, for example, an earlier usufruct or security interest in the same asset (s class). It is in the nature of these rights that they can be defended against any newcomer. If they were only contractual, the successor or new owner (assignee) of the assets may ignore them in principle, even if he knew of them, unless, in a more modern approach, this knowledge itself may open up the system of proprietary rights, as was already suggested in the previous section, and of which again in common law countries there are important examples in equity. Again, the importance of proprietary (income, user and enjoyment) rights is that they can be maintained against all the world (or at least against some classes of third parties which are those not party to the original transaction), therefore in principle against any intruders and go with the asset. Yet it remains to be determined what the consequences truly are. First, a proprietary interest implies an element of segregation although it does not fully define it, but it is of special importance and easiest to demonstrate in a bankruptcy. It was already noted in the previous section and means that if I have a usufruct in the underlying assets, I can ignore the owner and any successor even in their bankruptcies until my right expires. Similarly, it means that if my

3 This being said it should be appreciated that a contract itself is not an asset in this sense because it contains rights and obligations and is not transferable as such, only the rights under it are (unless they are highly personal). The former are assets, the latter liabilities. The essence is that assets, even if mere claims, can be transferred to third parties without consent of the counterparty in the contract, at least if monetary or not otherwise highly personal; obligations can only be transferred with consent of the counterparty unless closely connected like an arbitration obligation, it is a question of credit risk, see sections 1.1.4 and 1.5.5 below. That contracts are not only assets, means that they are not transferable as such, exactly because of the attendant obligations, which creates considerable problems especially in finance. The traditional hedge like options, futures and swaps are contracts and thus not transferable as such. To protect profits or limit losses thereunder, opposite transactions must be entered into. In professional dealings, this has led to the emergence of central counterparties (CCPs), which will be explained in greater detail in Vol 5, s 2.6. The American way around this in contracts for the sale of goods is to allow a transfer of the contract but the erstwhile obligor/transferor under it remains a guarantor for the obligations (s 2-210 UCC).

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 11 bicycle is in my bankrupt friend’s shed, it is not part of his estate and I can simply take it away upon his bankruptcy, relying on my right of ownership. It also means that if my friend gave me a security interest in his own bicycle or a similar charge to protect the return of any money I may have lent him, I may take the bicycle from him if the money is not returned in time (thus taking physical possession or ‘repossessing’ the bike unless there were more senior security interests belonging to others) and execute my security or my charge, meaning selling the bike in principle or, depending on the nature of my right, even appropriating it, quite separate from any bankruptcy of my friend. In the case of an execution sale, I only return to the bankrupt estate the overvalue for more junior security interest holders or ultimately the common creditors, even if in modern reorganisation statutes these (self-help) rights may now be curtailed or suspended for some time or even modified upon insolvency, at least in respect of assets within the jurisdiction. The same goes for monetary claims or receivables assigned to me even if only as security, although a security interest here normally means that I may collect and need not organise an execution sale. Upon a bankruptcy of the assignor whom I have lent money against this security, I may thus request payment from the debtors directly under these receivables or claims. I may already have negotiated a right to receive all interest payments and repayment of principal in respect of these claims anyway. In civil law, this right to pursue the interest in or rights to the asset is also called the droit de suite, a consequence of the proprietary interest operating against all the world including bankrupts, therefore regardless of who controls or administers the asset or is subsequent owner. To repeat, it also follows that if proprietary interest holders, like owners, subsequently sell or assign their interest, any limited proprietary right in or to the asset can be maintained against any successor who will be a junior proprietary interest holder, even if the new owner acquires the fuller ownership interest or title. So, if my friend sold his bicycle in which he gave me a security interest or gave another security interest to someone else, my security interest being older would still prevail against the new owner or later security interest holder (unless perhaps there was a bona fide purchaser who obtained control of the asset, which would not change the basic rule but provide a defence against it as we shall see). As my proprietary rights may be maintained against all the world, that thus means it can be maintained against all junior interest holders including, in a bankruptcy, all more junior secured creditors as well as the common creditors of the bankrupt, who only have a contractual or other obligatory right. Junior means here in essence any proprietary interest in the asset that was created later. In civil law, this is referred to as the preferential right or droit de préférence of those who may exert proprietary rights and suggests their ranking in the order of time. It means that I must respect all more senior proprietary interests in the same assets which also applies to monetary claims as underlying assets. Again, although much of their value may be lost because of failings of the debtor in his bankruptcy, I can still give the claim as security to others while all other existing security interests therein remain valid according to their rank. Although in this book the emphasis is rather on liquidity, transactional and payment finality, segregation, and ultimately risk management, these two rights—the droit de suite and droit de préférence—are traditionally believed to be the clearest benefits and consequences of rights being proprietary and to demonstrate best their nature and impact.4 Even though it is a typical

4 Sometimes, the right to exclude and the matter of governance are mentioned as the key aspects of proprietary rights, especially in modern law and economics, see eg, TW Merrill and HE Smith, Property. The Oxford Introductions to US Law (Oxford, 2010) 6, but these notions are not clear especially in respect of secured interests and seem to refer more to non-legal popular perceptions and moral perspectives.

12  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights civil law analysis, it is sometimes borrowed and used also in common law to demonstrate the point, although it should be realised that the distinction in this respect between proprietary and obligatory rights in common law is less sharp and never reached the same level of abstraction. For both systems, it may nevertheless be said that any user and enjoyment or income right that may be created in (other people’s) assets, and cannot be defined in terms of narrower proprietary structures,5 are in principle contractual or obligatory.6 Even though, as already noted, equity in common law countries started to provide greater flexibility, purely obligatory rights in or to other people’s assets of whatever nature (and they could themselves be obligatory rights) are not protected against all the world and do not give a special status in this connection.7 This means in essence that contractual rights or claims, even user, income and enjoyment rights in respect of underlying assets, are normally not respected in a bankruptcy of the owner of the asset. They are only enforceable against him as contractual counterparty and there is no droit de suite or droit de préférence. Even if I assign them to someone else, the assignee will not be in a better position. There are here no senior or junior rights, only competing interest holders or common creditors, even though this assignment is itself proprietary and could as such merely be a security interest. It means that the bank gets an interest in them but it does not improve the asset. These claims all have equal rank even if they were created earlier. Commonly that is the lowest rank in a bankruptcy. It follows that—however these rights may be expressed—there is no segregation or right to an asset, only a competing claim in a bankruptcy liquidation and distribution. Borrowing a bicycle may serve as a ready example. It does not give me any better standing against a bankruptcy trustee of the owner if he reclaims the bike for the bankrupt estate. I may have some right to damages if the use for a certain time was contractually transferred to me, but this is only a competing claim in the bankruptcy. On the other hand, creditors with a security interest in the bike rank higher and can hold on or claim the asset. If I was given a usufruct, I would also have been able to keep the bike until the end of the term (although it would still be subject to any older security interests). The fact that I might have possession as borrower of the asset does not give me a similar status. Possession, at least in civil law, is not itself a proprietary right, as we shall see, although in common law it is so in respect of chattels and may give some further protection as a matter of bailment but not in terms of a contractual user right. Again, we note here key differences between proprietary and contractual user, enjoyment, and income rights, in fact between proprietary and obligatory rights altogether, potentially differently expressed and organised in civil and common law. As mentioned, this distinction 5 We shall see later that although the appearances and details may be quite different, in the economic consequences the common and civil law of property achieves similar objectives and they are in that sense not as different as may at first appear. That is not surprising in economic systems that operate in similar ways, but it also shows that the law can go about these matters in very different ways and it is not without consequence in modern commerce and finance. As we shall see, in professional dealings this concerns especially equitable proprietary rights, like trusts, conditional and temporary rights or finance sales, and floating charges. 6 In civil law (as in common law), proprietary rights proper might still be filled out contractually in expansive ways, so that, eg, a proprietary right of way or servitude might be expanded by contract into a duty of the neighbour not to obstruct or to build on the land. How far contractual expansions of proprietary rights are possible (and may then be filed and remain proprietary when created in land) remains a matter of discussion, especially in civil law because of its overriding numerus clausus ethos. 7 But it should be realised all the same, as already discussed in the previous section, that even obligatory rights are not to be interfered with by others and have as such a proprietary aspect, although the result is usually an action in tort, not property law. Note that in common law, as we shall see, all proprietary rights are defended or reclaimed in tort whilst in civil law any resulting holdership of the relevant proprietary right of an owner in respect of the underlying asset is commonly also defended in tort against third party intruders as we shall see.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 13 remains fundamental in civil law (see further section 1.2.1 below), although the difference was only gradually understood and the types of user, enjoyment, and income rights that functioned as proprietary were only empirically identified in seventeenth-century legal scholarship in Germany as we shall also see. Roman law had played with these ideas, but (surprisingly) had not been able to provide full clarity in this regard. Neither did the common law manage to do so and even today its concept of proprietary and obligatory rights is hazier, with equity presenting some middle ground as already mentioned, especially (but not only) clear in trust structures, floating charges, and conditional or temporary ownership rights especially in finance sales. To repeat, the common feature is in equity a large degree of party autonomy in their creation and in the structuring of these rights and the segregation aspect. Thus, in common law countries, in equity—given less abstract (but also more practical) thinking in this regard—the distinction between proprietary and contractual rights in assets is not sharp, demonstrated especially in respect of all those who knew of contractual interest in the assets when they acquired the underlying property and they cannot then ignore them unless they were consumers. It was already said in the previous section that this may give us some clearer idea as to whether and when user, enjoyment or income rights that are normally created by contract may also become proprietary, therefore what the substantive criterion is for these rights acquiring third-party effect. This was identified as prior knowledge in the transferee and is the way liquidity in the underlying assets is promoted and risk management in them facilitated. It raises among other things the important question of party autonomy in the creation of proprietary rights, the question therefore in how far interested parties can influence this conversion towards a proprietary status outside the well-known and objectively defined class of such rights which can be used but not freely created (the numerus clausus of proprietary rights in many legal systems, especially in civil law). It was demonstrated that in a more modern world, contractual passage rights may provide an apt example even in civil law countries as they may become increasingly enforceable against all who knew of them before they acquired an interest in the property. In such cases, these contractual rights may acquire (some) proprietary effect. This facility may in civil law still be limited to rights of passage over one’s land, but prior knowledge of other people’s contractual or other obligatory rights in the acquirer of an asset may become a more extended concept, especially in professional dealings where there may be greater awareness and a search duty. It puts more generally the emphasis on knowledge (although in the case of rented property, by statute in civil law countries, the former owner is commonly discharged and the new owner bound even without knowing as was already noted). Again, this has long been the essence of equitable proprietary interests in common law countries, extolled for floating charges by statute in Article 9 of the Uniform Commercial Code (UCC) in the US, and it is seen in this book as a modern way forward also in civil law and an important aspect in the transnationalisation of the law of movable property in their international flows, therefore substantially in professional dealings. Thus, new and specially tailored security interests or conditional or finance sales might be created by the parties that may become operative against professional third parties who are insiders in business such as other banks and major suppliers upon mere description by the parties of the right and assets covered by them, but importantly they leave the (unaware) public unaffected. They can buy cars and any other consumer or commoditised goods without worrying about such charges in them, even if they suspect that there may be some or could have searched a register. The essence is, as already mentioned in the previous section, that they have no search duty and these charges are irrelevant for them. As we shall see, this may go further than the bona fide protection in the law of the acquisition of movable property in civil law, notably in that it does not require physical possession or similar control, and not even bona fides per se, it is assumed

14  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights (and then also extends to land and intangible assets). All who acquire in the normal course of their dealings may be protected. This more balanced approach may be economically beneficial because of the greater flexibility it provides and because it may in this way be more responsive to practical needs, especially in terms of modern risk management, and funding needs, note especially floating charges and finance sales, as we have already seen, but there is also an important liquidity aspect noted throughout and ultimately the issue of transactional and payment finality as will be discussed further below, and the issue of segregation, especially important in bankruptcies. It is submitted that this is a most important and fundamental insight and facility, in principle alien to the tradition of civil law, although, as we shall also see, the numerus clausus idea in civil law stands on shallower ground than often assumed and is expressed as such in few codifications, although it is certainly mostly implied but probably less understood. Hence again the idea in this Volume that we should first look at all user, enjoyment and income rights in respect of all assets or asset classes and only subsequently determine how they progress, or to what extent they have progressed, to proprietary status in the circumstances. These are not necessarily fixed notions and it can be demonstrated that there may be increasing flexibility, at least in professional dealings, particularly in international finance even in civil law countries. Indeed, it will be argued below that in transnational law concerning professional dealings, we are likely to see the development of a class of rights in between proprietary and contractual rights as earlier in equity in common law countries, where party autonomy becomes important in property law and feasible in the creation of proprietary rights. Thus, movable property law becomes itself another potent risk management tool and also a liquidity sustaining facility, for ordinary people the rights or charges in them cut off at the level of their operation—it was already mentioned. Thus, as ordinary citizens we can all buy what we like, free of these interests—they only affect the insiders—again, this is liquidity for us and a matter of transactional finality for all. It follows that even though the proprietary right moves with the assets (releasing the original transferor of his duties in this connection at the same time), only a small class of insiders not party to the transaction is affected and third-party buyers of commoditised assets may ignore these rights altogether. The ordinary commercial flows are free (so are the originators, who are released from their obligations in respect of these assets). This is public policy; again, nobody would dare to buy anything without it and it becomes another aspect of liquidity. So much the student should clearly understand. The question remains nevertheless which user, enjoyment and income rights qualified outright as proprietary and which ones remained in principle merely obligatory, even if we admit that prior knowledge in the transferee (which may be implied or constructive but only for insiders) has increasingly something to do with it and party autonomy is here in the ascendancy in the creation of rights which may at least be effective against some classes of insiders, not party to the transaction, thus supplementing the more traditional proprietary rights. So far, there appears to be no underlying scheme or grand idea why certain of these rights became fully proprietary and others not. It is hard to explain; it has already been said that it looks more like historical accident. It must have reflected pressing needs and general perceptions,8 not in essence much

8 See also nn 23, 43 and 51 below. It should be noted also that proprietary rights and contractual rights often go together. If, eg, I lend my car to A, at the end of the agreed period I may reclaim my car either on the basis of my ownership (or repossession) right or alternatively under the contract. This shows at the same time that the nature of proprietary rights as compared to that of the contractual right is foremost one of dimension. Once the person against whom I wish to maintain my proprietary right is identified, the action becomes also a personal one, just as in contract or tort, although in civil law the nature and conditions of the action are still likely to be different.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 15 different in common and civil law, even if they came out quite differently in the details which are very differently expressed, with the overhang at law of the feudal system in land and of equity in movable property in common law countries. It also had to do with established routines and standardisation, on which society depends to a great extent, but which are shifting all the time. To see property rights as being static, as the numerus clausus idea does (and now even by some in ‘law and economics’, see further the discussion in section 1.3.9 below) is not to understand this state of affairs and in particular hinders the need for risk management in a world in which risk is typically not standard. It is surprising in this connection that some in ‘law and economics’ have fallen for it mainly because of their guiding concepts of transaction and information costs, but they may be minor issues in this connection and obscure. It is submitted that liquidity and finality, segregation, and risk management are legally and practically much more important and the true key to this discussion. Finally, it may also be observed in this connection that where at least in civil law in contract law we have the good faith concept to move us forward, there is commonly no such open norm in the law of property. But we may still depend on more liberal interpretation techniques of which the good faith notion was considered an important carrier in contract in civil law. In movable property law, liberal interpretation is itself the more direct means to reintroduce the other sources of law besides statutes, where especially customary law may become important transnationally as expression of the needs in this regard of commerce and finance. This affects not only the type of proprietary rights and how they are created, operated and defended or move from the contractual to the proprietary realm, but, as we have seen, it may also impact on the type of asset which may be the object of these user, income and enjoyment rights. It was noted that this asset range may require a vast extension and move from individualised and specified existing assets, notably goods, into classes of assets, the notion of bulk, assets in full transformation or future assets in their flow, as well as to extended notions of intangible assets that include monetary claims, intellectual property rights, information and software, goodwill, and perhaps even services, at least to the extent associated with a particular business or incorporated therein or in its assets, see further section 1.1.5 below. There is then also the important issue of proprietary rights shifting into replacement assets or them being maintained with original status and rank after transformation along the production and distribution chain.

1.1.3.  Proprietary Rights and the Role of Publicity. Prior Knowledge in the Transferee Distinguished In more modern times, publicity has often been construed as the reason why some rights can be exerted against the whole world, thus becoming proprietary, and not others. Especially for chattels, physical possession is then considered a form of publicity also, that suggests ownership, but legal possession can be wholly constructive, at least in civil law as we shall see. In common law, it is bailment, well distinguished from ownership and says therefore little about it. That publicity is at the heart of proprietary rights is in its generality a doubtful proposition, even if, as already demonstrated in the previous section, in equity, prior actual knowledge of a (contractual) right of others may increasingly have third party consequences, at least in professional dealings, although still cut off by the protection of the ordinary commercial flows and the concept of transactional finality. In fact, it is presumed to exist in the professional class and not to exist in the public at large as we have seen. Rather, it may be the notion of standardisation or routine which publicity sustains but is not the cause of proprietary effect. It is one thing that those who actually know of a prior right in assets must respect it, but in the view that publicity

16  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights underpins all proprietary rights, knowledge is imputed and becomes merely constructive. The moral force of the argument that we must respect the interest of which we actually know before we acquire property thus collapses and is in respect of the few officially admitted proprietary rights replaced by a formalised concept of publicity that lacks intrinsic strength. The truth is further that, especially in respect of chattels and intangible assets, there is commonly no publicity at all to support proprietary rights in these assets, which undeniably exist, while the physical possession or holding of the asset can be misleading as to its ownership— there may be mere holdership or detention.9 Who is to say that the shirt I wear is mine? There is certainly an owner somewhere although others may have no way to spot him or her beyond what I tell them. This is now different for registered land holdings but it remains basically true for all chattels and intangible assets. It may be recalled in this connection that before the nineteenth century, there used not to be any publicity even in respect of land holdings, but property rights in land undoubtedly existed. In this connection, it should be noted further that even publishing contractual user, enjoyment or income rights, for example in newspapers, does not make them proprietary. Were it otherwise, these rights would become entitled to proprietary protection at the mere election of the publishing party, which would become especially relevant in a bankruptcy of any counterparty in whose assets it had some interest. This would be untenable. Where, on the other hand, it is accepted that prior knowledge of the interest is increasingly important in a modern system of protection, this does not suggest publicity itself as the source of proprietary rights, but rather (more negatively) only the protection of all bona fide purchasers who have no actual knowledge of prior interests which they otherwise would have to respect. Again, in more modern times this absence of relevant knowledge is imputed in all who buy commoditised products in the ordinary course of their dealings. It can only be reiterated that this was always a key idea in common law countries in respect of equitable proprietary rights and, it was posited, is also an important way forward in civil law and more readily so in the transnational law concerning professional dealings. Again, it is not an issue of publicity, certainly not in the sense of constructive knowledge, which, it was already said, is at most imputed amongst the insiders, like other banks or suppliers. Only they have a search duty and may have to do more, but the general public does not have it, even if in respect of certain chattels and charges in them, there may now be a register. These registers operate in this respect very differently from land registers. The latter create constructive knowledge in all, the former at best in the insiders. In fact, it merely facilitates their search. To repeat, there appears to be no clear underlying principle from which the traditional proprietary rights would appear to have emerged, at least in civil law, even if one admits that standardisation, routines and then also publicity might have something to do with it, but none would appear to be dispositive; there are in civil law at the formal level traditionally no other proprietary rights than the few conventional ones already mentioned, never mind publicity or other rationalisations. Although there is pressure on this system in the manner indicated, the 9 Only in respect of (some non-possessory) security interests in movable assets, may there be some exceptions in view of filing requirements, but it was already said that they do not normally impose search duties in respect of the ordinary flow of commoditised assets, which may be presumed to be free and clear of such interests, so that the value of this kind of publicity may well be questioned: see also s 1.7.7 below. They are therefore quite different from real estate security interests such as mortgages, which are also filed and cannot be ignored. For movable property, filing of an interest of this nature is generally only a facility that enables other lenders or suppliers extending credit better to know who is ahead of them. Indeed, there are usually no search duties for purchasers of the underlying assets, especially if they are commodities sold to the public at large. It is also noteworthy that at least within the EU, the Collateral Directive dispenses explicitly with all publicity requirements in respect of the use of investment securities as collateral as we shall see.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 17 numerus clausus of proprietary rights remains at least in theory strictly adhered to in civil law. As we shall see, it extends in civil law also to the forms in which these rights can be held and exerted: ownership, possession or detention.10 Publicity is no condition. More practically, property or ownership is foremost an instinctive concept in terms of ‘mine and thine’, easily understood by all, not least by children, but it is true that this basic concept, now believed to have even a human rights connotation, always created considerable difficulties in the way it was legally expressed and operated. In section 1.3.9 below, some of the more modern functional approaches closely connected with ‘law and economics’ in the US will be discussed in this connection, but it is doubtful whether they present any fundamental new insights either and may be misoriented. In section 1.3.10 some other theories will be discussed against the background of the approach of this book. In section 1.10, a summary of where we are or may be heading will be attempted. In section 1.11, finally, it will be considered what the Draft Common Frame of Reference (DCFR), in 2008/9 informally proposed as a model for an EU-wide codification, makes of modern property law in movable assets, including intangible claims. It will be shown that both in its emphasis on the objective existence, identification, and individualisation of the assets and in its adherence to the formal numerus clausus, it remains in older nineteenth-century civil law consumer perceptions and does not present a forward-moving picture for professionals. It remains anthropomorphic, meaning stuck in consumer law notions, and can notably not deal with modern finance and newer forms of asset-backed funding. It should, however, be realised that in common law there is no general intellectual concept or principle either, but in practice there developed in common law countries so-called equitable proprietary rights in certain areas, as we have seen, especially in trusts and trust-like structures, in the operation of conditional and temporary ownership rights, in floating charges as modern non-possessory security interests in chattels and intangible assets, and in assignments, again depending for their effectiveness on prior knowledge in the transferee rather than publicity. Party autonomy is at the centre, although equity proved also relevant for the modern set-off and netting rights as we shall also see, which create other important preferences in bankruptcy. Indeed, at least in floating charges, there resulted a more formalised notion of constructive knowledge in the sense that insiders such as banks and major suppliers were supposed to have it. It is less clear whether these interests can be expanded from there.11 However that may be, the essence is always that the ordinary commercial flows are free from such interests, whatever 10 This is accepted even in countries like France where the delivery requirement for the transfer of ownership of chattels and for the creation and transfer of the other more limited proprietary rights therein (except pledges) was deleted in the Civil Code of 1804 so that this transfer is achieved through the mere contract (‘par l’effet des obligations’: Art 711 CC). This could suggest that parties may have more freedom to create whatever proprietary right they like in chattels with full third-party effect. This was earlier indeed the attitude of the French Cour de Cassation, never overruled, but it is not truly the modern French approach. See for the original approach, Cour de Cass, 13 February 1834, s 1.205 (1834), but for the modern attitude, J Ghestin and B Desche, Traité des contrats, la vente (Paris, 1991) no 612, which makes clear that the transfer of ownership follows from the operation of the law and not of the contract. 11 As already mentioned in Vol 1, s 1.3.1, see also n 313 below and accompanying text, in Keppell v Bailey [1834] ER 1042, 1049, the Chancery Court famously held that ‘incidents of a novel kind cannot be devised and attached to property at the fancy and caprice of any owner’. In Hill v Tupper [1863] 2 Hurlst 7 C 121, it was further said that ‘A new species of incorporeal hereditament cannot be created at the will and pleasure of an individual owner of an estate and he must be content to take the sort of estate and the right to dispose of it as he finds the law settled by decisions, or controlled by act of parliament’. This suggests the increasing ossification of the law of equity also in this area, but it did not prevent the floating charge from developing in case law later: see Vol 5, s 1.5.2. Perhaps contractual arrangements rather than unilateral action make a difference here. See further the discussion in s 1.3.10 below. In the US, where there appears to be even greater flexibility and statutory law has helped especially in respect of floating charges (Art 9 UCC), there are nevertheless also limits, especially in testamentary grants and grants of servitudes, see Johnson v Whiton 34 NE 543 (1893)

18  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights publicity or lack thereof, it is irrelevant except for insiders. There is no investigation duty either except for them. Again, buyers in the ordinary course of business are thus protected,12 it is the issue of asset liquidity and transactional finality for them and a policy issue. These are essential elements in this different approach, also geared to better risk management, just like the modern professional contract is, see the discussion in Volume 3, and this attitude is then also extended into property. It will be discussed more fully below in section 1.3.1. At least in trusts, conditional ownership forms, and floating charges, there followed the possibility of specific performance and bankruptcy protection, underlining further the proprietary status of these equitable proprietary interests, a facility therefore to pursue these in origin contractual rights in the property against all third-party owners who knew of the interest before they acquired the property. This progression into bankruptcy protection becomes then a real test and makes these rights truly proprietary (creating bankruptcy resistance at the same time). That is segregation. Although there is not always full clarity in these aspects either, even in common law bankruptcy (see section 1.3.6 below), again, it may be assumed that at least in formal trusts, in conditional and temporary ownership forms or finance sales, and in floating charges, there is no doubt. The consequence is that on the one hand there results a proper duality of ownership and the beneficiaries are thus proprietarily protected against their rights being squandered by trustees or formal owners of the assets. On the other hand, all third parties who acquired interests in the underlying assets from these people, knowing full well of the arrangements, are not protected. Tracing of the beneficiaries’ interest in the proceeds or replacement assets became an essential sequel and further protection in equity against adverse action by trustees and similar intermediaries or formal owners and their successors as we shall see.13 It also means that in floating charges,

and Werner v Graham 183 P 945, 947 (1919). Indeed, there is a traditional resistance in the US to recognising equitable servitudes, at least in chattels, and they are in any event cut off by the bona fide purchaser protection principle: see for a rare discussion, Z Chaffee, ‘Equitable Servitudes on Chattels’ (1928) 41 Harvard Law Review 945 and ‘The Music Goes Round and Round: Equitable Servitudes and Chattels’ (1956) 69 Harvard Law Review 1250. See more recently in a modern context Molly Shaffer Van Houweling, ‘The New Servitudes’ (2008) 96 Geo LJ 885, dealing with the myriad restrictions on how electronic programs can be downloaded and used leading in the US to so-called click-wrap licences, which may still be considered merely contractual but concern also the so-called ‘free software’ and ‘free culture’ and tend towards affecting remote users and therefore start running with the burdened assets, automatically binding current possessors, at least that is the idea and hope of the original program suppliers. 12 As noted before in the text, this is a substantial broadening of the civil law notion that protects bona fide purchasers of chattels only, provided, moreover, that they obtain physical possession of the underlying asset at the same time, not an equity requirement either. In respect of assets traded in the ordinary course of business, in equity all purchasers may be protected even regardless of knowledge or physical possession. Bona fides is no longer necessary for adverse interests to be cut out. Protection against such adverse interests becomes then primarily a matter of finality and the protection of the ordinary course of business or liquidity of the underlying assets: see also s 1.4.6 below. 13 For the importance in finance, see also s 1.1.10 below. Thus, it may well be that, in a finance lease, the lessee, although only given a type of user right in the lease asset contractually, may now maintain it against all who knew it while acquiring the property from the lessor. This then also implies a segregation right against the lessor and all its successors in their bankruptcy. Similarly, in repo financing the repo seller may retain a proprietary retrieval right in the sold asset or even in its replacement if it concerns fungible assets. Again, this suggests that even when the assets are sold by the repo purchaser, the reclaiming right remains potentially alive in any replacement goods while a later bankruptcy may be ignored by the repo seller, although the proprietary remedies in this regard are in practice superseded by the full bilateral set-off and netting facility, see Vol 5, s 4.2.4. They remain relevant, however, especially in a reservation of title, which is another type of conditional sale, where the purchaser may be protected against a bankruptcy of the seller so that upon a proper tender of the purchase price, he still obtains the full ownership never mind the loss of the seller’s disposition right because of his intervening bankruptcy. These are important examples of new thinking in the area of proprietary rights and show the impact of the emergence of new financial products with specific needs and requirements in this respect: see in particular the discussion in Vol 5, Parts II and IV.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 19 which in England often operate behind trust structures, professional beneficiaries must watch out for each other but those who need not be aware of these interests, like the general public, may ignore them when acquiring commoditised asset from the producers. It may be clear from the foregoing that it is in particular the comparative study of equity in common law countries that may show us how the differences between proprietary and contractual user, enjoyment and income rights in assets may narrow. To repeat, the notion of knowledge of the third party of any of these rights when acquiring the underlying assets but no less also the possibility to freely describe by contract what they cover and what the interests to be created are, the shifting of these interests in replacement assets, and the requirements of the ordinary course of business, meaning the protection of the commercial and financial flows against these interests, may prove to be key elements in the further development, especially of modern financial law in respect of asset-based funding in civil law, but even more powerfully at the transnational level where party autonomy is likely to function here also as an autonomous source of law within the modern lex mercatoria. It will be argued in section 1.3.8 below that intellectually or in terms of academic analysis, we may find here an approximation between the common and civil law of property, at least for movable assets, and also a true model for a transnational approach in international transactions. It is an approach which, importantly, also looks to and supports the finality of such transactions, probably even more than national law does, which may not to the same extent be a product of market forces and protect purchasers in similar ways. It leaves the vital question of the public interest in terms of public policy and order that may more generally impact on these newer structures, already shown in the protection of the ordinary flows against them, and who will be the spokespersons for the public in this regard transnationally and formulate further rules whenever necessary. This was earlier identified as the true challenge to legal transnationalisation.

1.1.4.  Proprietary Rights as Risk Management Tools. The Liquidity of Assets, the Interests Created, the Issue of Segregation, and the Finality of Transactions. The Asset Status of Contracts and their Transferability. When Can Obligations be Transferred? In the foregoing, party autonomy in the creation of proprietary rights was identified as a major risk management tool in professional dealings. In this way it becomes possible better to use assets, or classes of them, in particular, to back up and obtain funding in all kind of ways and to achieve flexibly. This limits the exposure or credit risk of lenders and may make funding cheaper. So far, floating charges were presented as the most important financial instruments to manage risk. It will be shown later how temporary and conditional ownership rights may also be used, in so-called finance sales, especially in finance leases and repos. Of course, the traditional mortgage and the pledge also still do so, but they often did not have the flexibility that proper risk management requires. Again, it depends on a measure of party autonomy, also in the types of assets these instruments or facilities may cover, or classes of them, if necessary, in their transformation; it is then for parties to decide, depending on the type of risk they seek to protect. The trust, especially its constructive trust variant, may operate here in support especially as a most significant tool for the segregation of assets. In this book, proprietary rights are particularly considered from the risk management (and financing) perspective, hence in the latter case also the emphasis on party autonomy in this area subject to the protection of the ordinary commercial flows. It concerns the rights that can be so

20  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights created and financial structuring going (in equity) well beyond the (civil law) numerus clausus of proprietary rights, as we have seen. There is another aspect to modern proprietary rights, already highlighted also, and that is the key issue of protecting the liquidity of assets which are used in this risk management process, where all kind of user, income and enjoyment rights may be created by the parties. While knowledge of prior user, enjoyment and income rights may increasingly force the professional transferee to respect a-typical rights, this may at the same time discharge the transferor from the connected obligations. Both then go with the asset and it promotes and reinforces their liquidity. This was discussed in respect of the rental agreement in the context of privity of contract in Volume 3, section 1.5.1 and this discussion was resumed in the previous sections for contractual rights of way and for the survival of the rental agreement in a sale. It showed that liquidity of the underlying asset is served by any prior user, income and enjoyment rights in respect of an asset being transferred with the property, discharging the transferor who granted these rights at the same time. In this sense, there is a need for them to become proprietary and that is met by accepting that prior knowledge in the transferee may transfer the obligations together with the rights in the underlying assets. It was thus noted that the liquidity requirement is one important reason why user, income and enjoyment rights in assets all tend towards becoming proprietary at least amongst professionals. The need for liquidity and its promotion is also at the heart of the protection of third parties who buy these assets in the ordinary course of business here mostly consumers for personal use. That is finality which is thus closely related. This extends in this approach also to claims and their use as assets. Finality is therefore the sequence of liquidity, two essential features of assets and their risk management in this book. Segregation completes this picture and is another result. It may not solve all problems, especially when the rights do not concern particular assets and their operation, but constitute the asset itself. It was already said in section 1.1.1 that all rights may achieve asset status even though they are not physical and could be merely obligatory. In such cases, the issue is also their transferability or the creation of user, enjoyment and income rights therein. For example, they could concern a contractual income right rather than a proprietary usufruct or life interest. In the financial practice, the issue is especially relevant for futures and swaps. They are difficult to transfer because of the obligations attached to them. Again, the traditional rule is that rights can be transferred or assigned (except if they are highly personal or perhaps future) but obligations out of the same contract (unless very closely connected, see section 1.5.5 below) cannot. Thus, we cannot transfer whole contracts without consent of the counterparty; assets can be transferred, not liabilities—it is an issue already noted at the end of section 1.1.1—unless they cannot be separated, which for example in swaps and futures would hardly be the case. So, if we want to get out of a future or a swap contract altogether, when we want to realise a profit or limit a loss, we need either the counterparties’ consent, which may be costly to obtain and they have a veto, or we must engage in an opposite transaction, to neutralise our exposure in terms of a hedge. It means that the economic exposure or market risk in these assets in neutralised (but the counterparty risk doubled until settlement). As we shall see in Volume 5, section 2.6.6, the interposition of Central Counterparties (CCPs) may help in this regard. They close-out the opposite positions in bilateral netting, but it does not change the fact that these contracts are not liquid in principle; only the rights under them are, even then assuming they can be sufficiently separated out (and are not highly personal). The same applies to portfolios of receivables: the rights may transfer but the duties remain with the assignor. This remains an important impediment in securitisations. Transfer could be facilitated by expressing these monetary claims in promissory notes which are negotiable

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 21 instruments if expressed to bearer or order, see Part II below. This would still not extend to duties or connected obligation, however, although especially in Eurobonds, which are important examples of promissory notes, market practice allows a whole legal framework to be incorporated, see Volume 1, section 3.2.3, which transfers with the bond. This was never achieved in respect of futures and swaps, where, as we shall see, standardisation has become an important issue, but more in connection with clearing rather than affecting the mode of transfer itself (see Volume 5, section 2.6.5). The fact remains therefore that in respect of contractual positions there is no easy liquidity. That is different for proprietary rights and obligations which move with the underlying asset, although not otherwise either: we cannot separate a proprietary right of way (servitude) or the usufruct from the assets they concern. That is different for contractual rights that concede similar user, enjoyment and income benefits, unless, as we have seen, in a more modern perception the transferee of the underlying assets knew of them when they may move with the asset. A particular, statutory, way of facilitating the transfer of a contractual position and therefore their liquidity is provided in Section 2-210 of the UCC in the US, where a sales agreement becomes transferrable in principle but the obligor remains a guarantor of the obligations. So, if I am obliged to buy raw materials from a supplier, I can transfer the contract to any third party of my choice, who takes over the rights and obligations (notably to pay) under the contract, but I remain the guarantor of the obligations, notably of payment vis a vis the supplier. This is advanced thinking and an important departure in the area of contract liquidity. Again, one must distinguish between intangible rights themselves and how obligations or rights of others in them may move with any underlying asset, even if itself a contractual or other obligatory claim. Thus, there may be one question as to whether one can assign a portfolio of receivables, another whether, if they are assigned, any user, enjoyment and income rights created in such a portfolio, even if contractual in principle, move with them. If they are merely the latter, that would still be exceptional but may, as we have seen, increasingly depend on prior knowledge in the transferee. The transferor may then be discharged of any connected obligations or at most would become a guarantor. A usufruct as a proprietary right in such portfolio would still be different and would continue in the portfolio even if the transferee did not know of it and the former owner would be discharged as a matter of law. Disclosure would be a matter of due diligence between professionals.

1.1.5.  Types of Assets. Claims Traditionally chattels are considered tangible movable assets, such as cars, machinery, other equipment, clothes, foodstuffs, or utensils, in common law generally referred to as ‘goods’. This terminology will be used here. ‘Goods’ will not therefore cover all assets, as is the case in most civil law countries, notably, therefore, not land and intangibles. Intangibles are movable assets that have no appearance and cannot physically be held. It was already said that the most common example of an intangible asset is a claim, which, if it is monetary and results from a sale, is often called a ‘receivable’ or ‘account receivable’ or in the US sometimes simply an ‘account’. There are others: A bank has monetary claims on its borrowers for the return of principal and payment of interest. Depositors have monetary claims on their banks. There are of course many other types of claims, monetary or not, in contract, tort or unjust enrichment (restitution). In civil law terminology, they are all obligatory or personal, which means that they can be maintained only against the counterparty. It was already pointed out, that

22  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights there may also be proprietary claims, like a usufruct.14 As mentioned earlier, monetary claims and their asset status need some further attention and are a source of easy confusion. In civil law terminology, a monetary claim is a personal right against a counterparty that can only be enforced through a personal or in personam action. It was already said in sections 1.1.1 and 1.1.4 above that this is only the internal aspect. As it should be clearly understood that a monetary claim of this nature is at the same time also an asset, just like any other, with likely economic value, it can be the object of an ownership right if sufficiently specific or adequately described and can be defended against the whole world. It can therefore also be maintained against all intruders, in principle through the same proprietary or in rem actions (although in many countries the protection is here only in tort as we shall see). That is the external aspect. All personal or obligatory claims—not only monetary claims—therefore have a proprietary aspect also and may as such be owned, defended and transferred or given as security or in usufruct. That is assignment, which is a proprietary issue. To put it simply: someone always owns the contractual right (the same goes for tort and unjust enrichment claims). In this connection, one could argue nonetheless that it is hardly possible to steal a monetary or other claim, but one can induce someone else’s debtor to redirect the interest payments to oneself as well as the ultimate repayment of principal, amounting to a similar improper act of appropriation. It makes no difference that the claim arising from an underlying relationship may be affected when this relationship, for example a contract, changes, is transferred, is questioned or collapses; this also concerns claims arising out of it, but that is not different from any other asset that loses its value. The foregoing is a simple insight still giving trouble in many legal systems. In this connection, particularly in respect of monetary claims, it may be pointed out that in order to promote their alienability or liquidity, modern receivables are increasingly acquiring an independent status that separates them automatically from the legal relationship out of which they arise and they may in this way be obtaining a status that is not then so far removed from the old negotiable instruments, long since treated as chattels or being chattelised. It is an important prop for claiming full asset status. Section 2-210 UCC in the US supports this important development, as we have seen and which will be discussed later in section 1.5.4 below and also affects the status and (third-party) effect of any contractual assignment restrictions, see also section 1.5.5 below. Thus, the modern receivable increasingly approaches the nature of the promissory note. It may even be assumed that it is now more generally so treated unless there are specific impediments (for example, in the case of highly personal claims). This is a significant development and, it is submitted, another major modern insight, again motivated by the need for liquidity of assets in professional dealings, including claims particularly when monetary. But it was noted that there remain also impediments in respect of connected obligations and, as we shall see, also with the set-off and perhaps other defences against payment. Moreover, it was already noted also that the nature of this asset may still mean that any disposal, including the granting of more limited user, enjoyment and income rights in the asset,

14 Especially in most civil law countries, a claim may be proprietary (or real), like a revindication of property claim under an ownership right, which can therefore be maintained against the whole world and may be transferred as such. This should not confuse and involves a different concept. When invoked, even these proprietary claims are directed against specific persons or entities and thus become personal in that sense (like claims for reinstatement or damages for infringement) but they remain distinct and give more power: they are, as we have seen, also preferential and may be pursued against any later interest holder in the asset: see also the comment in n 4 above. They are considered a different category and they are not then claims in the more ordinary (obligatory) sense.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 23 is effected in a different way (through assignment) and may be subject to different formalities, perhaps notification to the debtor and some individualised documentation. Unless transnationalised, it depends on the applicable law of assignment, which may be hard to find in the absence of a clear situs, as we shall see, and remains so far underdeveloped in many legal systems, one reason being that until recently claims were not considered an important asset class, see also section 1.1.8 below. Even the protection of the proprietary rights in claims may be organised differently. It was already said that there are unlikely to be revindication rights or possessory actions as we have in civil law in respect of chattels. The normal defence may rather be in tort (which conforms to common law, where all defences of proprietary rights in respect of movable property are in tort). Nevertheless, at least in civil law terms, claims can be perfectly possessed, although not in a physical sense, but then the notion of possession in civil law, if properly analysed, is not physical and can be entirely constructive. As we shall see, it is rather directed towards a sufficient measure of legal control. The fact that in civil law there are normally no possessory actions in respect of intangible assets may therefore seem inconsistent, but no system is perfect and especially the proprietary regime in intangibles developed in a haphazard way, also in civil law, and may still not be complete. It has already been said that the ownership action is also lacking—defences are commonly in tort. Again, these issues will be more extensively discussed in section 1.5 below. More contentious is the idea that even a claim to services could be an asset in a legal sense (if they have economic value). It suggests that there are other intangible assets apart from monetary claims.15 Indeed we speak of ‘selling’ legal or financial services. We may also ‘sell’ football players, presumably for their services. It would mean that we might then also be able to give services as security for debt. Similarly, we might do so in respect of work in progress. So far, the law does not appear to go this way and waits until goods or financial claims arise from the rendering of these services. Only in that way may they be transferable and assignable or may be given as security, although, if we also allow future goods and claims to be so given (in security), it comes close to treating the underlying services as legal assets or even whole contractual positions. Their asset status may be easier to accept when services and goods are intermingled in the commercial flows. This supports increasingly a composite nature of commercial assets in which information and technology will also figure and suggests again that the contractual description becomes the key issue, not the intrinsic condition of the asset. It leaves open the question to what extent we can transfer a business in one go with all its constituent parts, including service agreements, electronic programs and software arrangements and the like, including therefore obligations. To repeat, not all assets are similarly treated in the details of their transfer and protection, even in civil law, although it altogether strove for a unitary proprietary regime for all types of assets, therefore for one unitary notion of ownership and of the other more limited proprietary rights that may coexist with it and are derived from it, regardless therefore of the nature of the underlying asset, and one unitary concept of how these rights were expressed and defended. The common law has no such ambition, particularly shown in the US in the UCC that rather deals with proprietary aspects per product or facility, potentially different therefore for sales, leases, investment securities, and security interests. However, although the modern approach is also to appreciate the proprietary aspect of claims (in fact of all rights) and thus to see them as assets like any other, whilst we may now also need a notion of composite assets, it may still be observed, for example, that even newly codified Dutch law presents here only some halfway



15 For

the asset status of goodwill, see s 1.1.6 below.

24  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights house even in respect of monetary claims and remains ambivalent.16 It was clearly influenced by German pandectist thinking and codified law, which since 1900 in sections 90 and 903ff BGB only deals with the idea of ownership in respect of physical assets. This was thought to be closer to the everyday use of the ownership concept and also reintroduced a more physical concept of possession.17 This was regressive thinking as possession, if properly understood, is not a physical concept in civil law at all. All is a matter of abstract rights and obligations or control over them and how they are expressed, enforced or protected. Again, nothing is ever physical in the law; it is ultimately all a matter of rights and obligations. In this vein, French law, following the teaching of Gaius, never made a fundamental distinction between physical and intangible assets; neither did earlier Dutch law in which ‘things’ could be tangible (corporeal) or intangible (incorporeal).18 That was also the view of Grotius,19 but in civil law, modern legal doctrine remains divided on the subject,20 it would seem unnecessarily so, and it is only bound to complicate for no obvious reason, with the unfortunate consequence that the reality of the composite nature of many modern assets becomes contentious whilst the need for the contractual description of such assets being sufficient also becomes problematic. In this connection, it should further be realised that physical possession is a dubious concept: no one is able to carry his/her possession in that sense physically with him/her all the time. In respect of land, it may be hardly possible. It must be admitted, however, that traditionally, intangibles also fit uneasily in the common law (although for different reasons as we shall see) and they tend to have their own proprietary regime in which contractual, tort, and restitution claims may be further distinguished while their transfer is then considered part of the law of contract, tort, or restitution respectively. It is indication that the notion of an asset as such never received a great deal of attention in common law and 16 Dutch law in its new Code of 1992 (not in the old one) is hesitant, avoids the use of the term ‘ownership’ in respect of intangibles, speaks rather of disposition rights (Art 3.84(1) CC), and restricts the limited proprietary rights, except for the usufruct and the security interests, to immovable and tangible movable assets only (Art 3.1 CC). Curiously, it does not define the most complete right that one can have in a claim at all. However, it is clear that the ownership concept is implicit in claims. They can as such be transferred (through assignment) whilst they are also (implicitly) made subject to possession (in the abstract civil law sense, as we shall see), acquisitive prescription (which depends on it), and even holdership notions. There is no proprietary or possessory action for intangibles, however, and the protection is commonly in tort (cf Art 3.125 CC). There is no bona fide purchaser protection either, in this case of the assignee who collects in good faith, unaware of better rights of others in the receivable or claim. In another 1992 innovation, notification was considered necessary for the validity of assignments; this was later found unpalatable in financing where a 2004 amendment led to its amendment, see Vol 5, s 1.2.1. 17 See H Dernburg, System des Römischen Rechts, 8th edn (1911) I, 319 (Sokolowski) and B Windscheid, Lehrbuch des Pandektenrechts, 9th edn (1906) I, 856 (Kipp). 18 See Gaius, Institutes 2, 12–14, repeated in the Justinian Institutes 2, 2.1–3, although intangible assets were not at that time commonly considered objects of proprietary rights because there was nothing like a traditio in respect of them, and therefore no technique of transferring them or creating acquisitive prescription in them: see also s 1.4.1 below. 19 See Grotius, Inleidinge tot de Hollandsche Rechts-geleerdheid (Introduction to Roman Dutch Law), II.1.9. Of interest in this connection are also two articles by Scottish scholars that appeared in South African legal journals and present opposite views, see KCG Reid, ‘Obligations and Property: Exploring the Border’ (1997) Acta Juridica 225, and GL Gretton, ‘Owning Rights and Things’ (1997) 8 Stellenbosch Law Review, Regstydskrif 176. 20 In German law, there is, on the other hand, a possibility of substituting the delivery requirement of physical asset transfers by an assignment of the retrieval claim in chattels leading to a transfer of ownership, which in Germany does not require notification to or cooperation of the holder: see s 398 BGB. Thus, physical assets under third parties may be transferred by assigning the reclaiming right (see ss 931 and 870 BGB (which is limited to the transfer of legal possession but also implies a transfer of the underlying contract with the third party)), but they may also be transferred through delivery of possession under s 930 BGB at the option of a seller without physical possession of the asset (the traditio longa manu).

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 25 in any event does not substantially figure therein as an intellectual concept.21 As we have seen, in equity practical considerations started to prevail. Investment securities held in a custodial system of securities entitlements may here also present newer concepts of ownership and its transfer where transfers proper no longer take place upon a purchase and sale but rather result in the creation or destruction of rights in security accounts held with brokers. It also forces us to think differently as to how these entitlements are protected in the case of a bankruptcy of the broker. At the request of an investor, they may in such cases be transferred immediately to another broker together with any back up there may be in the accounts of the bankrupt broker with sub-custodians or the main custodian. Intellectual or industrial property rights such as copyrights and patents or trademarks also fall into the category of intangible assets. They are not considered primarily contractual either, but rather proprietary, which means that they are protected and transferred like property rights, now often under special statutory laws. In bankruptcy, patent licences and copyrights, although still considered executory contracts, commonly have a special status which amount to protection, although trademark licences may still be considered mere contracts, see Section 365(n) US Bankruptcy Code. Important as they are, we shall not here be greatly concerned with them, although some further attention will be given to them while discussing the modern notion of assets more abstractly in section 1.10.2 below. It was already mentioned also that claims may sometimes be incorporated in documents and are then often treated as chattels. If expressed to order or in bearer form, they are then negotiable promissory notes, but it may also be so in respect of claims for the retrieval of goods when incorporated in documents of title, such as bills of lading or warehouse receipts, which, if issued to bearer or order, are then negotiable. Monetary claims or claims for payment may also be incorporated in documents, such as bills of exchange besides promissory notes. If issued to bearer or order they are also negotiable. All are then usually referred to as negotiable instruments. They are therefore documents of title concerning claims to money or other assets and are then treated more like chattels. Bank notes are promissory notes to bearer, issued by central banks, but they promise in times of paper currency or fiat money no more than the replacement with a new note. These documents and instruments will be discussed more extensively in Part II of this Volume. A key feature of all of them is that they are not only negotiable but that the claims contained in them (to underlying assets or payments) are also independent from the manner in which they have been acquired. It greatly enhances the value, liquidity or negotiability of these claims as it reduces the legal risk in them while the protection of bona fide purchasers enhances at the same time the finality of their transfer. To repeat, modern receivables are increasingly acquiring similar status; that is in any event the direction of the property law concerning them and a highly important modern development that will be further discussed in section 1.5 below. In the capital markets, promissory notes are called ‘bonds’ when representing loan principal. ‘Shares’, the other type of capital market instruments, represent participation entitlements in companies including rights to vote, to dividends, liquidation proceeds and information concerning the issuer and were traditionally also issued in negotiable (bearer or order) form and then 21 The discussion of what is an asset in this sense and how it can best be protected is for intangible claims not entirely alien to common law either: see the line of cases starting with Lumley v Gye (1853) 2 E&B 216. They show that the violation of a (contractual) right itself may lead to a tort action to protect the right as if it were an asset or piece of property: see further Lord Mcnaghten in Quinn v Leathem [1901] AC 495, 510 stating: ‘it is a violation of a legal right to interfere with contractual relations recognised by law if there be no sufficient justification for the interference’. See further also s 1.5.1 and n 219 below.

26  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights often also treated more like chattels. Bonds and shares (or equities or stocks) are together usually referred to as (investment) securities, to be distinguished from securities that result from secured transactions as ways to secure an indebtedness. As already mentioned, in modern times, investment securities have often abandoned their traditional negotiable form, are then dematerialised and held through book-entry systems organised by custodians. Clients have here securities accounts with their brokers/custodians much like balances in bank accounts. Although easier to handle, their proprietary structure has unavoidably become more uncertain: they will be discussed in Part III.

1.1.6.  Types of Movable Assets. The Requirement of Economic Value and Commerciality. Notions of Identity, Specificity and Definiteness, and their Inherent Constraints. The Alternative of Adequate Description in the Contract Chattels or goods and intangibles or claims were and are in common law together normally referred to as personal property or personalty and sometimes as movable property, the latter being the normal civil law expression. In common law, tangible movable assets (chattels or goods) are also called choses in possession, and intangibles choses in action.22 Both are distinguished from real property or immovable property or realty, which is land and the buildings on it. There may here be some cause for confusion since in common law (as in civil law) there is some movable property that is considered realty, such as chattels affixed to immovable property. There is (more typical for common law) also some immovable property that is treated as a chattel. These are the chattels real, which are estates in land (or types of ownership in land) for a limited number of years only, more properly called leaseholds or leases. In common law, the distinction between real and personal property in this sense is associated with the distinction between real and personal actions. The first exist in respect of land and the latter in respect of chattels and intangible assets, later superseded by tort actions. As has already been noted, this is fundamentally different in civil law where real actions are proprietary and personal actions are obligatory.23 In common law, ‘chattels real’ can only be defended

22 W Blackstone, Commentaries on the Laws of England 2 (1773) 384, 389. 23 The terms ‘realty’ and ‘personalty’ derived in common law from the Roman actiones in rem and in personam, but these terms were then not properly understood; see for the early common law development in this direction, the thirteenth-century English authors like Bracton, partly probably because the distinction between proprietary and obligatory rights was not fully clarified in Roman law, see Yale (edition), De Legibus et Consuetudinibus Regni Angliae (1922) 102 and Twiss (edition) (with English translation) (1879) ii, 133. In civil law, as we shall see in s 1.2.1 below, these Roman law actions were developed into the substantive law distinction between proprietary and obligatory rights or rights in re (or sometimes in rem) and rights ad rem or in personam only through the writings of Bartolus, Grotius and Vinnius: see R Feenstra, ‘Real Rights and their Classification in the 17th Century’ [1982] Juridical Review, republished in R Feenstra, Legal Scholarship and Doctrines of Private Law, 13th–18th Centuries (Aldershot, 1996), 106: see also his Ius in Re, Presentation, University of Ghent, 1978. In common law, on the other hand, these Roman law actions led to an emphasis on the type of asset to be defended: land was defended by actions in rem and as a consequence came to be called real property, and chattels were defended by personal actions and were then called personal property. The ‘personal action’ to retrieve chattels was subsequently superseded by the old tort actions and true proprietary actions only remain possible in land law (even though land in common law terms cannot be owned—it belongs to the sovereign, there are only

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 27 in ‘personal actions’ as the proprietary right in them (the seisin) is still considered to be with the owner or lessor. Leases (as distinguished from mere rental agreements) are therefore considered personal property even though estates in land. These are finer points, however, that should not blur the general picture. In both civil and common law, the traditional distinction is between land, movable tangible assets, and intangible assets. The difference is that civil law strives towards one unitary proprietary system for all types of assets as we have seen (even though still having some difficulties with claims), while in common law there is in essence a different proprietary system in respect of each of them, for chattels and intangible monetary contract claims mainly under commercial law, where in respect of these claims, a further difference may still be maintained between contract, tort and restitution claims as we have seen. In order for assets to be the object of proprietary rights in a private law sense, everywhere they must have a certain economic value and, at least in civil law since the nineteenth century, some specificity in the sense that they are at least identifiable.24 The first requirement is therefore some economic value. It means that things that have no value or only sentimental value can hardly be the object of ownership.25 The love one feels for someone, even if of the highest value to the lover, cannot legally be owned, although there may be some kind of love that can be sold. The air we breathe is for free, although when we catch it, it may be sold; it is the origin of the business of the balloon. It is often said that, in this sense, the most important things in life are for free and can as such not be owned or legally defended, although in another context one may still defend, for example, one’s honour or good name even if of no direct commercial value. It then concerns

private estates in land). This situation in respect of chattels highlights an essential point in the common law in that the plaintiff does not have an absolute right to reclaim the asset but must mention its value and be satisfied with the payment of this value at the discretion of the defendant unless the asset is absolutely unique. In common law, the distinction between real and personal actions is therefore within the law of property and not between this law and the law of obligations, as became the civil law approach. 24 In the previous section, some doubts were expressed in respect of the asset status of services. Goodwill may here be mentioned as a particular area of doubt also. It is the value that is commonly attributed to an enterprise beyond its immediate liquidation value and discounts a future income prospect that derives from the business as a whole. Even though the amount of goodwill can be economically established and is often mentioned separately in the accounts of an acquiring company, goodwill is commonly considered not to have a separate asset status and can as such legally not be transferred separately but only together with the business and that would be automatic (leaving aside for the moment that a business itself cannot be transferred as a whole in many civil law countries either, but, like a library, requires transfer of all its parts separately). The value of goodwill (which could even be negative) is therefore derivative. So is its status and it may therefore probably still be best not to see it as an asset in a legal sense. The true significance is in the question whether goodwill can be given as security as French law (nantissement de fonds de commerce) would seem to suggest, see Vol 5, s 1.3.1. It was a charge specially created by statute on an ongoing business, which, however, excluded inventory and accounts as being insufficiently specific, but could include equipment and other parts of a business, eg, equipment leases. Again, it would appear that goodwill is not here construed as an asset in its own right but is transferable only (especially as security) as part of a business. That seems mostly the position. Equity in common law countries has here the advantage that it allows for the transfer a business as a whole, including the goodwill, but even here goodwill appears not to have a separate asset status although in common law commentary it is often given the status of personal property. Yet following Lord Wilberforce in National Provincial Bank Ltd v Ainsworth [1965] AC 1175, 1247–48, property must be definable, identifiable, capable of assumption by third parties, and have some degree of permanence and stability, at least at law. The origin of movable property law in commercial law puts emphasis more generally on alienability or liquidity; goodwill as such is not alienable on its own, although in equity the distinctions may be more blurred. 25 The Germans use here the notion of Vermögen, the French of patrimoine. There is no good English legal term for it. It is therefore probably best simply to refer to assets in this connection.

28  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights highly personal rights. It follows all the same that, while claiming damages for loss of assets or their use, purely sentimental values are unlikely to be taken into account to any great degree. One may see here also the relationship between value and specificity or physical identification, for example, when capturing air to sell it in a balloon. It suggests indeed that only identified and individualised physical assets that have been captured or are set aside are capable of being assets in a legal sense. But the latter are in other contexts narrowing legal notions as we have already seen. They may limit bulk transfers and also the transferability of future assets. They became nineteenth-century civil law confines that did exist in a similar (restrictive) way also in the common law but not in equity. Roman law had also been different.26 The consequence was the limitation or elimination of non-possessory and especially floating charges in civil law. It is true that common law countries remained more pragmatic, but only in equity. It is being submitted throughout that monetary claim have economic value and are, in a market economy, assets in a legal sense, capable of proprietary protection. So may be other claims as we have seen. In modern times, there are other intangible rights that have acquired value because the law has given them legal status, mostly by statute, in particular the already-mentioned industrial and intellectual property rights. Yet intellectually, one could say that these assets, having value and being identifiable, were always objects of proprietary rights, even if intangible. Commerciality may then be assumed. That suggests legal protection and transferability. Statutory law may elaborate further, now also in respect of domain names, but, having value, identity and specificity, these assets do not strictly speaking depend for their recognition, operation and transfer on a statute alone, although it may make it easier (and clearer). On the other hand, the extent to which these assets should remain freely available to the public is an important and much debated economic (and social) issue.27

26 Roman law including the Justinian compilations, cf D 20.1.6, had been quite different and allowed proprietary rights, especially secured interests in classes of assets described in the contract. Possession was not necessary, see Antonius Negusantius de Fano, De Pignoris et Hypothecis (Lyon, 1549), and H Dernburg, Das Pfandrecht nach den Grundsaetzen des heutigen roemischen Rechts (1860). But in old French law, the security in movable assets became restricted to the possessory pledge of individual identified assets, see C Loyseau, Traicte du Deguerpissement (Paris, 1606), liv 3, cap.1 no 12 and Cinq livres du droit des offices, 325 (Paris, 1614), see also RJ Pothier, Traite de l’Hypotheque (1767) no 35, in Oeuvres de Pothier IX (Paris, 1861). Via the French Code Civil, this became the nineteenth-century norm in civil law codification countries, see VJM van Hoof, Generale Zekerheidsrechten in Historisch Perspectief [General security interests in a historical perspective] (Wolters Kluwer, 2015). Individualisation was subsequently extended to security in immovable assets, which could, however, remain non-possessory and usually was, although the French antichrese allowed also for a possessory security interest in immovables. 27 On the one hand, there is a need for protection to support ideas and innovation. On the other hand, there is a need for the free use of new technology, design and application to promote further experimentation and innovation. See for this tension, L Lessig, The Future of Ideas (New York, 2001). In modern US legal theory, inspired by the ‘law and economics’ school of thought, more profound theories on the nature of proprietary rights developed in this connection, see eg BM Frischmann and MA Lemley, ‘Spillovers’ (2007) 107 Columbia Law Review 257, based on some important earlier economic writings, see the classic contributions of RH Coase, ‘The Problem of Social Costs’ (1960) 3 Journal of Law & Economics 1, 2–6, and of H Demsetz, ‘Towards a Theory of Property Rights’ (1967) 57 American Economic Review 347. See for more general recent observations on the evolution of modern property law, TW Merrill, ‘Introduction: The Demsetz Thesis and the Evolution of Property Rights’ (2002) 31 Journal of Legal Studies 331; S Banner, ‘Transitions between Property Regimes’ (2002) 31 Journal of Legal Studies 359; S Levmore, ‘Two Stories about the Evolution of Property Rights’ (2002) 31 Journal of Legal Studies 421; HE Smith, ‘Property and Property Rules’ (2004) 79 New York University Law Review 1719; and BM Frischmann, ‘An Economic Theory of Infrastructure and Commons Management’ (2005) 89 Minnesota Law Review 917. Demsetz defended the simple proposition accepted in this book that all that can be identified as having economic value creates and is object of property rights as a fact and as an unavoidable social phenomenon,

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 29 What one owns and how one owns it, whether the property can be privately owned or only publicly or communally are thus important (legal) issues which do not distract, however, from the two essential features of legal ownership in terms of economic value and (at least some) identity/specificity of the underlying asset or the class, if only achieved in more modern approaches through contractual description. It is of course quite true that in this connection the extent of the property right and its modalities are also socially codetermined and are not an absolute given in themselves. Crucial as that insight is, it is not here the key element.28 To resume, adequate identification which is sufficiently specific is important and appeals to the notion of setting aside and segregation. They enable us to speak of owning a certain car and not cars generally or some car. However, although, as we shall see, we refer here normally to our ownership right in the car, this right only has meaning when it is exercised or asserted vis-à-vis others, and not in fact in the car itself, although it is exerted in respect of the car. This was for common law recognised as early as Bentham, later expanded by Hohfeld in the US.29 Especially for civil law, it has already been shown that the physical aspects are (in law) traditionally less important, possession even being an abstract concept, except laterally in the aspect of specificity but this was more particularly a nineteenth-century embellishment. It does not at first appear a great problem in respect of chattels, rather more so in respect of intangible claims, as we have also seen, although even they can be properly described and identified, often with reference to the debtor or possibly as replacement of an earlier identified asset in a production and distribution chain.

especially clear when these economic values increase as they tend to do in modern times in intellectual discoveries and their application. It means that others are not to benefit freely from increasing value, which itself can be seen as an externality that may be internalised in property concepts, meaning exclusion, disposition, and protection rights. This happens as a matter of efficient allocation if the benefits of internalisation of property rights exceeds the benefits of keeping them externalised (free as social benefits). There may be strong reasons for internalising, although there may also be considerable benefits in keeping the benefits of innovation externalised. Here a policy decision will ultimately be made. It may be repeated that in this book, which largely takes the perspective of the evolution of modern financial products, the argument (and therefore the notion of property) is substantially cast in terms of risk management, liquidity, segregation and finality, especially clear in asset-backed financing, resulting in a balance between preferred and common creditors but also clear in terms of the shifting of risk to different asset classes of investors through financial engineering, which may throw yet another light on what is or should be proprietary. 28 It is a well-known fact that under modern law, no proprietary right is ever absolute and that social policies impact on all of them or, as the German Constitution (Basic Law) expresses it: ‘ownership creates social duties’ (s 14(2)). These duties are of a political nature and vary from time to time and from place to place. They will not be discussed here at this juncture as they are not essential to the basic concepts here explained, although the impact of societal values in the creation and operation of proprietary rights, certainly also at the transnational level, is far from being denied. In common law, the more philosophical aspects of this discussion received scant attention for a long time, but see more recently C Rotherham, Proprietary Remedies in Context (Oxford, 2002), JW Harris, Property and Justice (Oxford, 1996), earlier (with a strong civil law background) AM Honoré, ‘Ownership’ in AG Guest (ed), Oxford Essays in Jurisprudence (Oxford, 1961) 161, and further J Waldron, The Right to Private Property (Oxford, 1987). 29 See Wesley N Hohfeld, Fundamental Legal Conceptions as Applied in Judicial Reasoning (New Haven, CT, 1919 based on two earlier articles in the Yale Law Journal of 1913 and 1917), who remains significant, particularly in his demonstration that property is about rights and obligations and is nothing physical in law. See more recently in England JE Penner, ‘The “Bundle of Rights” Picture of Property’ (1996) 43 UCLA Law Review 711, and The Idea of Property in Law (Oxford, 1997); RB Grantham and CEF Rickett, ‘Property Rights as a Legally Significant Event’ (2003) CLJ 717, and L Murphy and T Nagel, The Myth of Ownership: Taxes and Justice (Oxford, 2002). See ss 3.1.9 and 3.1.10 below for some further discussion of the modern literature in the US beyond these references. Some of this will be familiar ground for civilian lawyers, who are more used to theoretical thought in their intellectual approach to property rights.

30  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights Indeed, it has already been submitted that it is not the physicality or the intrinsic nature of the asset but rather the reasonable description possibility that is the key in a modern rights-based system of proprietary rights, no longer constrained by physical notions or inherent qualities of the asset. Since the nineteenth century, civil law has had a problem in this connection in that its intrinsic specificity requirements curtailed bulk transfers in respect of both categories of assets (chattels and intangible claims). There is, especially in civil law, then also a problem with future chattels or intangibles and the (prospective) ownership in them and its transfer.30 This notably affects the proprietary status of assets in transformation and the shifting of the proprietary rights into the transformed products in a manufacturing and distribution process. Another observation to make in this connection is that in all assets, upon proper analysis, the issue is not normally the specificity or identification per se, but rather the disposition possibility and right in them for which sufficient identification would appear to be a precondition. The preoccupation with the disposition right in a typical physical sense is, however, also a nineteenthcentury concern as we shall see in section 1.4.1 below and is then a problem again often associated with the transfer or disposition of future assets, assets in transformation, or assets in bulk. Even

30 As we shall see in s 1.5.3 below, this may be less of an issue in Germany and in equity in common law jurisdictions. In this connection (in German terminology), tangible assets may be absolutely future, meaning that they are not at present existing, like next year’s crop or future claims for payment, or they may be relatively future in the sense that they do exist but are not yet owned or otherwise possessed or used by the party who wants to dispose of or otherwise transact in respect of them. In German legal thinking, it is easier to dispose of the relatively future assets, as we shall see in s 1.4.5 below in connection with the disposition right. Although this distinction is not uncommon, it may well be asked whether it should truly be material in respect of ownership and transfer of future assets. The distinction is not greatly favoured in this book. The common law does not clearly distinguish in this manner either, although both notions are known. It is especially important for claims, but the issue more generally arises in respect of after-acquired property, future receivables, a future judgment debt, payments expected but not yet received, shares in companies not yet in existence, an inheritance even from a living person, and expectancies dependent on a person exercising a power of appointment, a benefice to which someone may be appointed, the proceeds of an indemnity or insurance policy, moneys arising from contracts not yet entered into or from loans which have yet to be made. They can be transferred in equity but only under a contract to assign. Such an assignment becomes effective only upon the claim coming into existence and being acquired by the assignor. But future payments under an existing contract such as rental income may be assigned, so may be receivables under existing contracts even if contingent upon performance of certain obligations by the assignor whilst the contract might still be prematurely terminated for breach. What is existing or future in this connection is not always easy to determine. All moneys outstanding to the credit of an assignor with a certain bank as well as proceeds from existing letters of credit are assignable, but the assignment of future dividends may be more difficult as a company is under no obligation to pay any, see also AG Guest, Guest on the Law of Assignment (London, 2012) 6ff, see further also the discussion in s 1.5.6 below. As already mentioned, the issue is particularly important in floating charges when future (replacement) inventory and receivables are included, and in securitisations or in receivable financing when respectively whole portfolios of loans, including the interest payable thereon and the prospective repayment of principal, and whole portfolios of receivables may be transferred, the latter out of existing business but not necessarily yet out of all existing contracts, see also the discussion in Vol 5, ss 2.2, 2.3 and 2.5, and the High Court of Australia in Norman v Federal Commissioner of Taxation (1963) 109 CLR 9, and for the nature of the floating charge in England, Vol 5, s 1.5.2. There remains in England—not in the US under Art 9 UCC—the issue as to what the floating charge is before an event of default or crystallisation occurs. This may also have to do with the future nature of the assets covered. It may then be assumed that there can be no (equitable) interest before crystallisation, manifested also by the fact that the company may still dispose of the assets and cash the receivables free of the charge until default. It would be merely an agreement to grant a charge in the future. In Evans v Rival Granite Quarries Ltd [1910] 2 KB 979, 999, an immediate proprietary equitable interest was accepted, however, subject to a licence to dispose of the property free and clear of the charge in the ordinary course of business. It expands the notion of what is a transferable future asset in this context. A (resulting) trust is here often assumed, see R Goode, Commercial Law, 4th edn (London, 2010) 724; see also Guest at 234ff.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 31 so, there is normally no problem on the contractual side: future assets can always be disposed of by contract regardless of their present or future state, as long as they can be reasonably described (so that the contract has a proper object). However, for a true transfer, therefore third-party effect of the transaction—it is mostly still assumed that they must be sufficiently set aside or identified while a transferor must have sufficient rights in them to transfer title or other interests. This still allows for considerable variation in the details as we shall see, but the modern trend must be that physicality is de-emphasised and that an adequate contractual description is sufficient and for the rest a proper degree of control for proprietary rights in these assets to be created, to operate, and to transfer. This control is commonly assumed when there are sufficient disposition rights in the asset. It leaves the question what is ‘sufficient’ in this connection.

1.1.7.  Assets as Classes Identified Through Mere Description and the Proprietary Status of Assets in Transformation or Replacement Assets. Classes of Assets or Assets in Bulk The issue and objective requirement of identification of the asset in order for it to become the object of a proprietary (user, enjoyment or income) right are traditionally clearer in legal systems that still require delivery of the asset for title transfer, such as Germany and the Netherlands in the case of chattels, although even in these countries this delivery need not be strictly physical, and can be constructive. However, they also emerge in systems that do not require delivery for ownership transfer of physical movables assets, such as those of France, Italy and England, where at law the transfer of future assets cannot merely be constructive (non-physical) either. Again, it is a concern with physical realities that sits uneasily with a modern more abstract right- and obligations-based system of property law including disposition powers or notions of control that could conceivably also be prospective and then concern expectancies. As we shall see, these were anthropomorphic, physical remnants in modern legal thinking that are atavistic, although there might here also be a more practical public order concern under which proprietary rights are not to reach too far into the future. Transfers of future assets may limit the prospective recovery rights of other creditors of the transferor too drastically. There may be transparency concerns as well. These are important policy issues but should not enter the discussion of the structure of the proprietary rights themselves. At the practical level, a valid transfer of future assets would require some kind of advance transfer facility or a constructive delivery concept which raises immediately the question whether an intervening bankruptcy of the seller might interfere with the validity of the transfer, thus whether the future asset could still be considered retroactively transferred when the asset emerges in the debtor’s possession after its bankruptcy. We shall see that in security transfers, especially in modern non-possessory floating charges to back up and secure some indebtedness (where legally accepted, which, as already noted, is not yet the case in many civil law countries), even now the notion of specificity and identification is relaxed so that future assets may be validly included, especially if they are assets in transformation in the production process or replacement assets and creditors so secured will claim their original rank in a bankruptcy. As such, these assets are then deemed to be sufficiently existing in a legal sense, identified, and included even if not yet in being, for example as finished products, at the time of an intervening bankruptcy. It means that the lien or charge is allowed validly (and automatically) to shift into these replacements whenever they appear or whatever they are, even after the bankruptcy of the debtor and retain the original rank. That was in common law countries an early achievement in equity

32  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights in its tracing and shifting facility, by no means generally followed in civil law countries, as we have seen, where this type of facility (except in Germany in respect of replacement assets) is often thought to need statutory intervention (as now in France, see Volume 5, section 1.3.1), exactly because remaining physical notions of identification and disposition rights may not allow this development under existing general principles of the civil law proprietary system while there may also be public order constraints already mentioned. As noted also, closely related is here the possibility of a transfer of assets in bulk, such as libraries, inventories, portfolios of receivables, and the like. It also applies to businesses if transferred separately from the company that owns them (in which case a share transfer would be sufficient). In these cases, also, the true question is whether these assets can be transferred, or better whether they are sufficiently specific to have (in a civil law sense) any owner, possessor or user rights in them transferred in bulk, and how. Must there still be individual delivery? Related contracts might have difficulty also because of the obligations inherent in them and which are commonly not transferable without consent of the creditor/counterparty. An alternative is to attach at least lists with all individual items, still a clumsy way of proceeding. In the case of (existing) assets in bulk, the more precise question is whether they can be legally transferred (into ownership or a security interest) in one legal act, for example (as in Germany) with reference to a certain (enclosed) place. The real issue is whether ownership in bulk can exist at all. If so, there must be some way of transferring it as such. Again, this issue acquires special importance in floating charges where whole classes of present and future (replacement) assets may be included. But where it comes to assignments of receivables or other monetary claims in bulk, it is also an issue in securitisations and in receivable financing. For their present status, these problems will be discussed in greater detail in sections 1.4.3 and 1.5.3 below. Suffice it to say for the moment that domestic laws may take different attitudes in the definition of chattels and intangibles and in the meaning they attach to the specificity and identification requirement, therefore to physical elements, to allow proprietary interests in them to create, operate, and be transferred, especially when the assets are not physical, or are future, or exist in bulk. The divide is here not necessarily between common and civil law, although common law again tends to be more practical and has in equity the better facilities, while even within one legal system the requirements may be different for ownership and more limited proprietary rights such as security interests. They may also be different depending on the type of underlying asset, different, for example, for chattels and claims, as in Germany, see section 1.5.3. They may not even always be clear.31 31 Thus, in the most recent codified system, which in Europe is the Dutch one under its Civil Code of 1992, receivables must be identifiable in order to be transferred, but even here the exact requirements are sometimes unclear and are in any event not statutorily defined. In respect of claims, identification is foremost done with respect to an identified debtor, but this leaves a problem with respect to the proprietary status of future claims, see SCJJ Kortmann and NED Faber, ‘Bepaaldheidsvereiste by cessie en verpanding’ [Specificity requirement for assignments and security transfers of claims] (1998) Weekblad voor Privaatrecht, Notariaat en Registratie 6324, and ‘Een streng bepaaldheidsvereiste: geldend recht of “Wishful Thinking”’ [a strict specificity requirement: positive law or ‘wishful thinking’] (1999) Weekblad voor Privaatrecht, Notariaat en Registratie 6374. In this view, a sufficiently described claim on a certain debtor (even if only future) may be the object of ownership and may be transferred as such (through an assignment), but for secured interests to vest in it, the contract (or other legal relationship) out of which the claim arises must also be in existence. This may be more restrictive, see further Vol 5, s 1.2.1. The main point to make here is that there is doubt, which the new codification only increased through a lack of proper analysis. French law has similar requirements for both the transfer and creation of security interests in receivables, as we shall see, but German and English law are more relaxed, especially important when in floating charges replacement goods are deemed included with a rank as of the original date of the security, see Vol 5, ss 1.3, 1.4, 1.5 and 1.6.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 33 Particularly in respect of the transfer or assignment of future movable assets or bulk transfers or assignments, great differences may thus continue to exist. There may also be differences between goods and claims in one country. Some laws may be much more flexible than others and allow the transfer or assignment of a multitude of assets in one transaction with reference to a certain place or one transferor, or in the case of a multitude of receivables with reference to one assignor, and include any replacement assets. Others may remain more conservative or may still not have properly considered the issues.32 It is doubtful whether a more favourable law can be chosen by the parties in these proprietary issues since they have a third party or public policy aspect. In section 1.1.1 above, it was already suggested that particularly in respect of the international flows of goods, which are now immense, larger than the GDP of the largest countries, this issue of individualisation of underlying assets may need in particular reconsideration. The use of the word ‘flows’ itself suggests here that assets are considered in their movement and transformation rather than their final individualised resting state, which for most goods means consumption or their being thrown away after a short period of use. This ‘resting state’ was traditionally the starting point in civil law and may well remain the approach of national property or consumer law. It was often said in civil law doctrine in this connection that the law of obligations was the law of movement and the law of property was the law of resting. However, at least internationally, it is the flows that count, and movement or liquidity is the essence of these flows which constitutes their increasing value and also suggest professional dealings. It means that legally in transnationalisation, proprietary rights respond to a very different environment, the legal result being very different also. Or to put it differently, the value is in these flows as flows and signifies adding more on a large scale, now normally in international supply and distribution chains. It was already said also that when these assets come to rest and are individualised as finished products, they soon lose their value. There is no greater value destruction than buying new cars or in unpacking presents under the Christmas tree. All is second hand thereafter and there is little value left. It is submitted that legally that affects their asset status which in this book was connected to economic value. For the assets in the flows as flows and their legal treatment, we must borrow more fundamentally the concept of classes of goods in transformation and movement, of which domestically the floating charge to the extent it could be incorporated in the relevant legal systems was the precursor in the area of asset-backed funding. Equity was the legal vehicle in common law countries, which at law could not make this shift and deal with these newer needs either. Again, reasonable description in the contract becomes the key in terms of identification, but also in terms of proprietary rights that are created. There is no objective criterion left for what constitutes an asset, except economic value in the marketplace, and replacement assets either as goods, receivables, proceeds/cash balances may be included in the same title, which will be

32 In the case of assignments, new Dutch law introduced a notification requirement for their validity. In practice, this ruled out any bulk assignment, but an exception was made for the creation of a security interest in receivables for which there was a registration requirement instead, although the collection right and the collections did not even then accrue to the security assignee before the notification. Through a 2004 amendment, assignments without notification are now generally valid if registered in a similar way as security assignments of claims, see Vol 5, s 1.2.1. In the meantime, in countries like Belgium and in financing arrangements between professionals in countries like France, the requirement of notification for the validity of assignments was also deleted, exactly to make bulk assignments possible, see also Vol 5, ss 1.3.6 and 2.2.4. English and German law were always more flexible, also in this area, as we shall see.

34  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights good against all who know of these arrangements or as professionals should know of them when acquiring them and thus have (putative) knowledge. It also allows for an asset’s composite nature; many are now an amalgam of goods, services, information and technology. It has already been said repeatedly that properly considered these flows are free of any proprietary rights when acquired for value by outsiders, notably buyers in the ordinary course of business or consumers, usually of commoditised products. These then are key concepts of property law in the modern lex mercatoria, which allows a large degree of party autonomy to structure and define these rights in an open system that can be maintained, however, only against certain classes of third parties, notably the professional insiders. The in rem right is then more limited but has not disappeared. The practical issue and essence of modern property law thus becomes how these rights are to be legally structured, created, operated, transferred, and protected as compared to what we now have in civil and common law. Again, in a market economy, liquidity, transactional and payment finality, and separation especially in bankruptcy, and ultimately risk management become the focus of this type of property law which is meant to facilitate them. For the originators this liquidity manifest itself in agreed user, income and enjoyment rights moving with the asset upon a transfer or sale, for the public in it they can acquire these assets free of any charges. The public interest thus refines this newer approach, notably in the protection of the ordinary flows for consumers, when as far as these transnationalised flows are concerned, public order and public policy requirements may themselves be transnationalised, an issue further considered in section 1.3.10 below. To the extent these flows come demonstrably onshore in individual countries, local policies and values will remain relevant but only for conduct and effect in respect of these assets and the rights therein or thereto in the countries concerned, issues earlier discussed in Volume 1, section 2.2.6. Bankruptcy and the protection of other creditors may then also be one of them. It will be argued later that the ever more virtual nature of many of these flows may make them increasingly difficult to locate, so that relevant local policies become also more difficult to identify. In this respect, we should also understand and it is repeated that in law all is about rights and obligations and there is nothing physical at all, nothing, in particular, territorial about them either, the effect of which may be shown also when risk in these flows is moved elsewhere through derivatives. Thus, domestic policies and their effectiveness weaken upon globalisation with the creation of international supply and distribution networks. Hence the importance of the articulation of the public interest in international transactions at the transnational level. That may also become relevant for bankruptcy. Those are the transnational minimum standards. It was submitted all along that it is a key issue that arises in the daily practice of the law in commercial and financial structuring and in the pursuit of the rights so created and is truly the greater challenge in the transnationalisation process of commercial and financial law. It comes to the fore in particular in dispute resolution, in the ordinary courts more particularly in bankruptcy cases, now still local—it is then an enforcement and sovereignty issue—when rights in or to foreign financial products must be fitted in, their rank established, and the rights of buyers in the ordinary course of business in the transnational flows determined. Local courts may be ill-equipped for this, but, in particular in insolvency, have to deal with these issues. In international arbitration, it goes to the powers of international arbitrators, the law they find as applicable and their reasoning as we shall see, their awards impacting also on the domestic scene in terms of recognition and enforcement under the New York Convention potentially even in bankruptcy.33 33 See for this discussion Vol 2, ss 2.3.3 and 2.4.3. An arbitral award may thus reinforce these foreign proprietary rights and facilitate their domestic recognition even in a bankruptcy, but ultimately it will depend on the local bankruptcy courts.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 35

1.1.8.  Importance of the Law of Chattels and Intangibles in Civil and Common Law. Its Development alongside Land Law As mentioned before, we are concerned here mainly with the proprietary law of chattels and intangibles or movable assets, in common law terms with personal property, including documents of title, negotiable instruments, and investment securities, and not therefore with immovables which are land and buildings. The issue is in particular the promotion of risk management, liquidity, segregation, and transactional and payment finality in the international flow of goods, services, money, information and technology. Introducing here a measure of party autonomy in the creation of proprietary rights means a dynamic movable property law. It is true that at least in common law, the emphasis in so far as proprietary rights is concerned has traditionally been on the law of real estate or land law and its development. That is also reflected in legal education. As long as real estate was the traditional store of value, this was understandable and it is true that well into the twentieth century the total value of chattels was modest. In a cash society, receivables were not major assets either. Deposits in banks and loans were small except for businesses which also remained relatively small. Documents of title and negotiable instruments (except for bank notes) were mostly commercial law specialties, while investment securities were few in number and not widely held. However, with the enormous increase of wealth in private hands and with the development of the business sphere, consumer society, and credit in which large corporations as well as individuals became active, the total value of tangible movable assets and intangible claims, especially receivables, corporate and consumer loans and deposits, and of investment securities, increased manyfold, especially after World War II. It now probably matches land values, even if real estate remains often the largest asset of an individual. For businesses, on the other hand, real estate does not normally function as core business, and these assets are now often leased, unless it concerns real estate companies. Consequently, the importance of the law of property concerning chattels and intangibles has undergone a sea shift, including the law of modern financial instruments or legal structures based on these movable assets. Investment securities, for example, are now most important investment instruments, widely held. In modern countries, in business one need think further only of the non-possessory security interests such as floating charges in manufacturing equipment, inventory, and receivables, purchase money protection through reservation of title of goods and hire-purchase, and of modern financing structures such as finance leases, repurchase agreements and factoring, which all take chattels or receivables (and the income, user and enjoyment rights in or to them) as their base. This is more particularly the subject of Volume 5. It was suggested that legally these assets must now be captured in their flows as classes of ever transforming assets, especially at the transnational level. All the same, the law of personal property still remains little studied in common law countries and is largely nineteenth-century in its thinking in civil law, also substantially neglected, a situation that requires urgent correction. In fact, it is undeniable that in a modern business environment, land law is of relatively little interest, probably even less in international commerce and finance. From an international business law perspective, conflicts of laws do not habitually arise in connection with it either, as immovable assets are unlikely to have a great impact outside their own country unless it concerns the business of real estate development cross border. Succession apart, only where they are the subject of sales agreements under a foreign law or when they are used as security for foreign loans may issues arise, mainly concerning the manner, formalities and moment of transfer of ownership or perfection of the security interests.

36  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights The lex situs (and not the lex contractus) is generally deemed controlling in these proprietary aspects of land and cannot (in the common view) be varied by the parties, exactly because of the effect on third parties. It is what it is and that is usually the end of it for real estate. From a comparative law perspective, the feudal nature of real property in common law makes land law so different from the modern civil law in this area that comparing is hardly instructive either, but even between countries with fairly similar land law systems, like those within the common or civil law, comparative analysis is not greatly valuable beyond the general structure of property law. For chattels and intangibles that may now be quite different. Although often still considered to be covered by the lex situs also, there may be more flexibility in the applicable law for assets that habitually move between countries, traditionally trucks, aircraft and ships, but now whole manufacturing streams, while for intangibles the situs is in any event much more difficult to establish. Indeed, the whole notion of situs could be challenged when we abandon a physical concept of movable property law. At least there may not be a fixed one, and if there is one it will not be for long. More importantly, these assets are likely to be at the core of businesses and are then likely to play a role also in international financings. Their status internationally is therefore more important to determine and comparative research into their legal status and nature more necessary. These issues will be dealt with at length in sections 1.8 and 1.9 below, for chattels and intangible claims respectively. It has already been said that we have to concern ourselves here in particular with the international flows as flows forcing the pace of the transnationalisation of the law concerning them in international manufacturing and distribution chains. For these reasons, the law of real property is in this book referred to only where it is used as a model for the development of the law of property concerning chattels and intangibles. In common law, the trust concept was, for example, borrowed from land law and then also applied to chattels and intangible assets. So are future or conditional and temporary ownership interests, which, as we shall see, commonly appear as equitable interests in chattels. It may be repeated that the law of chattels and also of intangibles was in common law long neglected and mainly developed as part of the commercial law only, more particularly in connection with sales of goods and the transfer of ownership or the creation of security interests in them. In common law countries, this commercial law is in itself, however, no longer a different type of law, as we have seen in Volume 1, section 1.1.3. Yet it has probably retained a more separate status than in civil law. It also covers a broader field, including title and possessory (bailment) notions and related proprietary structures. As noted, that is uncommon in civil law. The law of tangible assets remains in common law, however, determined by notions mainly of physical possession (seisin) as we shall see. For intangibles and their transfer, the development is (therefore) largely in equity, even if in modern times especially in the US the distinctions in this respect have become ever more blurred. Although land law was at one time also feudal on the European Continent, the law of chattels and intangibles was not affected. Like the situation in modern common law, their legal regime was, however, also much determined by physical possession (saisine or gewere) as we shall see. However, the feudal features of land law and the notion of saisine or gewere for chattels were abandoned early and modern civil law now largely maintains a unitary system of property law, which covers all types of assets along the Roman law model of proprietary rights and their protection as further developed on the Continent of Europe after the reception of Roman law from the twelfth century onwards, later with some additional rules per type of asset, especially intangibles as we have seen also. It became the system of the modern civil law codifications. New elements for land were the modern land registration facilities of the nineteenth and twentieth century, which made for a number of important changes in the area of transfer of ownership and the creation of other rights, especially (non-possessory) mortgages in immovables.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 37 For personal property, on the other hand, there followed increasing nineteenth-century emphasis on identification and specificity impeding transfers in bulk and especially transfers of future assets as we have also seen, including future cash flows. For chattels (only), there developed the protection of bona fide purchasers, while the modern law of assignments was largely a new addition for intangibles, but, as we have seen already in section 1.1.5 above, it remained substantially underdeveloped. In common law, the situation is still quite different. It has already been said that there are different proprietary regimes for each type of assets, different therefore for land, chattels and intangibles, while intangible claims may be further divided for this purpose into contractual, tort, and restitution claims. As just mentioned, the basic land law notions still derive in common law from the feudal system with its particular estates in land, although in England, the feudal system itself had already been abolished in 1660, earlier therefore than in most other parts of Europe except in land. In England, the feudal concepts continued in land law as a historical accident and land law is as a consequence still based in England on the notion that the Crown is owner of all land so that at the theoretical level, there is still no private ownership in land. That is now merely a fiction; there is only a residual effect when there are no heirs. In such cases, the Crown takes the land by so-called escheat rather than as ultimate heir and successor. Yet in a technical sense, private ownership in land still does not officially exist in England, only a system of tenancies or estates in land. That is so also in countries that took its lead, even the US where states are the only owners of land. As mentioned, much earlier the notion of seisin or physical possession had allowed private rights in land to develop based on its occupation and use or tenancy. Subsequently, these rights acquired a measure of independence and ultimately became as good as ownership rights that could be transferred and inherited. Thus private interests in land acquired a kind of entitlement status, but the ensuing system of tenure or various estates in land (such as the fee simple, the life interest, the estate for years or leasehold, the mortgage, and the easement) and the conditional or future interests, such as the reversionary interest and remainder (either vested or contingent depending on the conditions attached and the vesting of the interests thereunder) prevented a more conceptual ownership concept from developing and led to an incidental approach even with respect to the various interests that can now be created in land. Again, technically, outright private property of land does not exist in common law countries. This system was as such not suitable or necessary for chattels and intangible assets. Here the notion of seisin or physical possession also became the starting point but allowed a proper ownership notion to develop in chattels, although ownership remained in many respects the weaker right as we shall see.34 In fact, the notion of seisin retarded the development of the ownership notion in chattels also. Although the term seisin is now no longer used in the context of chattels, it played a substantial role in the development of the notion of bailment or physical possession which in common law remains at the heart of the proprietary protection of chattels rather than

34 The notion of seisin or physical possession in a common law sense was thus decisive for the further development of land law into forms of private ownership entitlements (tenure or estates) and for the notion of the proprietary right of possession or bailment in chattels. It was itself Germanic or Saxon in origin (gewere); the notion found its expression in Art 3.125 of the so-called Saxon Mirror (Sachsenspiegel), a collection of Saxon laws by Eike von Repgau dating from the thirteenth century. The concept was older and apparently came to England via the Low Countries in the sixth and seventh centuries, when the earlier Roman law completely disappeared; see also FW Maitland, ‘The Seisin of Chattels’ (1885) 1 LQR 324, and ‘The Mystery of the Seisin’ (1886) 2 LQR 481. It also prevailed in France (saisine), even for chattels, at least until the later reintroduction of Roman ideas through the reception of Roman law.

38  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights the ownership concept itself. It is supplemented in equity by conditional and temporary ownership rights as well as trust structures all borrowed from land law as we have seen, and by floating charges and notions of tracing. For intangibles, there were no such basic concepts at all and the common law concerning these assets remained as a consequence even more underdeveloped and subsequently mainly evolved in equity. In England, the feudal land law concepts were updated by statute in 1925 when all future interests in land also became equitable and therefore subject to the protection of the bona fide purchaser of the legal interests, just as they are for chattels. The old law still applies under State law in the US (except in Louisiana). It is of some amusement that ancient European feudal concepts of land law, not even existing any longer in England, may still be and are sometimes litigated in the US, where there are technically only estates in land. Statutory rules concerning the sale of chattels or goods, including the transfer of ownership in them in a statutory manner, started to appear in England through the Sale of Goods Act 1893 (updated in 1979). In the US, similarly, some aspects of the proprietary law concerning chattels derive from statute, especially in the sale of goods, now through Article 2 UCC, accepted (with some minor modifications) in all states of the US.

1.1.9.  The Traditional Physical and Anthropomorphic Approach to Property Rights. Modern Perceptions Whatever the progress in the modern law of property may have been, it has already been demonstrated several times that everywhere this law retained important physical and anthropomorphic features, depending therefore on features human beings can see and physically handle. It was confirmed in the nineteenth-century developments in the codification ethos on the European Continent and remains the situation today at many a national level. This is not now a good perspective as we see over and again (cf especially section 1.2.3 below) and has retarded the development of a more modern property law especially in professional dealings, although it may still not be unnatural in the consumer sphere.35 It was submitted in this connection that modern law is about rights and obligations only, not primarily about anything physical or personal. It means that in property law, the nature of the assets in respect of which these rights and obligations arise are not of prime importance, although they sometimes still affect the type of rights or obligations that emerge. So, we commonly have no proprietary leases or servitudes in other than real estate. Although physical possession is normally at the heart of these older perceptions, it should be realised that even then it can never be a continuous requirement as nobody can travel about with all its belongings to retain the property rights where still considered depending on it. Physicality and individualisation of the asset is a primitive concept in property law. Similarly, in the law of contract, we have already seen in the previous Volume that the will or state of mind of contracting parties is also not or no longer directly relevant for the rights and obligations that emerge, at

35 It was supported by the law of property’s origin in an agricultural society where land was all and as far as chattels were concerned, the interest went to cattle, a few beasts of burden, and some tools. Money was largely absent in such a society and much interchange was in the form of barter. Such a society thinks in a physical manner and sees all property in relationship to owners (even if tribal). Thus, the emphasis is on what is mine, not primarily on how I exert my rights in respect of the property vis-à-vis others. It easily leads to an absolute notion of ownership. Again, in such an environment, there is little room for monetary or other claims as economic valuables or of property as a more abstract concept such as ownership of future assets or entitlements.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 39 least not in professional dealings. In modern contract theory, it is all a matter of reliance and risk acceptance as discussed in Volume 3, section 1.1.5. Anthropomorphic notions are thus hardly helpful, neither in contract nor modern property law, and certainly not in international business, but these concepts remain nevertheless very strong in most people’s minds, legal scholars being no exception. Although it was observed in this connection that the notion of intent was never to the same extent dominant in the common law of contract as it was in civil law, it was also shown that the physical anthropomorphic flavour of property law is still particularly clear in common law countries, notably at law in bailments, for our purposes thus particularly in the law of chattels, where physical possession or bailment remains the dominant title. Our continuing difficulties with bulk transfers, assignments of claims, and the transfer of future assets or classes of assets that may be subject to transformation, and with an adequate description being sufficient in terms of assets and structure, are a particular reminder of this more parochial state of affairs, which was only assuaged in equity in common law countries and could not been avoided in modern civil law either, which did not have the same facility to correct or adjust. Although in civil law the notion of possession is not truly physical, as we shall see and was already mentioned, and possession is, upon proper analysis, not itself a proprietary right but rather demonstrates a way these rights are expressed and protected, in civil law the consequences of a more physical approach are nevertheless still particularly apparent in: (a) a strict specificity and identification requirement for assets in order to be capable of being owned and transferred, which impedes notably bulk transfer (as for libraries and businesses) or bulk assignment (for example, of receivable portfolios) and transfer of future assets or those in transformation; (b) the requirement of sufficient disposition rights in assets, which is then (often) related to (a form of) personal capacity believed incapable of irrevocable transfer in respect of assets that are only obtained in the future; (c) the concept of delivery as mainly a physical act (meaning the transfer of physical possession as a formal requirement for transfer of ownership), again with the ensuing difficulties in the transfer of future assets but also intangibles or assets in bulk. Even though civil law allowed legal or constructive notions of possession and delivery to develop, they remain in this connection a constant source of confusion and debate; (d) more in general the problems connected with the proprietary status of all intangible assets; (e) the types of proprietary rights that are commonly accepted and the problems especially with beneficial, conditional and temporary ownership rights, and floating or non-possessory charges, the latter especially in movables; and (f) the unqualified use of the concept of the lex situs to determine the applicable law in proprietary matters, at least in respect of tangible asset with a limbo as to the location of non-tangible assets and the laws applying to them. Again, this is the result of anthropomorphic thinking, here manifested also in the civil law of property. Where there may be more ground for the consideration of the physical aspect is: (a) in the prima facie protection of physical possession as a matter of social peace in terms of respect for the status quo, which protection can only be temporary, however, until better rights are established and is then merely in tort, and (b) in the protection of the bona fide purchaser or perhaps even the purchaser in the ordinary course of business, although it may be considered that control or even forms of constructive possession may be just as good as long as it is clear that the bona fide purchaser or purchaser in the ordinary course of business has adequate disposition rights.

40  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights In common law countries, in equity in terms of future and temporary interests and beneficial ownership rights, the law of property, including the law relating to chattels and intangible assets, became on the other hand increasingly less physical or anthropomorphic as we have seen. As a consequence, it became more flexible as reflected in the equitable proprietary rights, which are based on a proper description of the asset (class) rather than on its physicality and allow for a degree of party autonomy, also in the rights so created, resulting in more dynamic concepts of property. Protection of bona fides and now more in particular of the transferee in the ordinary course of business against such charges is here also not limited to physical possessors.36 It is probably best to say that the equitable proprietary right simply does not reach that far. The law of assignments was then also able to develop better (in equity). Transfers of future assets and the automatic shift of title to the transferee as soon as the assets emerged in the (constructive) possession of the transferor (regardless of his bankruptcy) became possible as well. The automatic shooting-through of title in assets bought by an agent acting in its own name to the principal upon disclosure of the agency is another facet of a less physical and anthropomorphic approach to property in modern common law systems (in equity). As ‘equity’ was a facility that crucially passed it by (unlike the praetorian law in Roman times), civil law is especially deficient in these areas. Yet in other areas, such as in the notions of seisin and strong protection of physical possession at law (even at the expense of the development of a proper notion of ownership in chattels), and in the absence of the protection of bona fide purchasers as a general concept at law (unlike in equity), the common law of property remains at law at least as atavistic as civil law, only balanced by its advance in equity. This is again connected with anthropomorphic notions that are therefore still pretty universal although differently expressed in different legal systems. Modern companies as major (unphysical) legal actors and dealings among professionals as legal entities, especially in modern financial transactions and products, underline the need for and possibility of a more practical (that means here a more abstract and responsive) legal approach, even if clothed in a more intellectual (but also more radical) model that is not physical any longer but presents a framework of pure rights (and obligations), meant to help and support, and which finds in this manner ways to do so. We may revert here to the discussion in section 1.1.7 above and the identification therein of the international flows suggesting a newer approach to assets and asset classes, presenting a particular challenge for a more modern property law system in civil law. This will be explored further, in sections 1.3.8, 1.3.10 and 1.10 below, first as a way of approximation between common and civil law and subsequently at the level of transnationalisation of the law applicable to movable assets operating in the international flows.

1.1.10.  The Need for New Financial Structures and their Effect on Modern Property Law The requirements of modern finance, especially in asset-backed and future commercial/cash flow-backed financing, are now making further demands on the system of property rights concerning movable assets, especially in civil law (see also Volume 1, section 3.2.2) when these

36 It has already been noted several times that in equity in common law jurisdictions, this protection is indeed not necessarily based on physical possession (see further ss 1.2.2 and 1.4.8–1.4.9 below), but follows rather from the very structure of the equitable rights, which are only protected if the successor of the legal interest had prior knowledge of them when acquiring the property.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 41 assets operate internationally, that is move between borders. Ultimately, they may be articulated more particularly in the modern transnational law for international business. Even now, structures long developed in common law through equity can no longer be dispensed with on the European Continent, although this may still remain a particular challenge, especially after Brexit when London financial business is attracted to the Continent. It is the thesis of this book that there is a need in professional dealings of a financial nature at the international level, in particular as a matter of better risk management, liquidity, segregation (in bankruptcy), and transactional and payment finality. Legal transnationalisation in the international flows was submitted to be an important challenge and answer. The dealings in these flows then become the centre of modern commercial and financial law or the new lex mercatoria, which is perceived here as an expression of a new transnational legal order, therefore separate from the traditional domestic laws in this regard. This process of transnationalisation was substantially the subject of the discussion in Volume 1. This new transnational law functions as a particularly potent conduit for these newer insights into proprietary rights and structures and their functioning, which chiefly derive from practical need, expressed increasingly in transnational custom and practices, supported by general principles in the international marketplace, of which the Eurobond and its market was the early precursor and the swap market the more recent manifestation. As such, it is submitted, their status is to be respected also in domestic laws, ultimately even in domestic bankruptcies as a matter of the application of the modern lex mercatoria and its hierarchy of norms in international professional dealings, including a strong measure of party autonomy also in proprietary matters, unless still eclipsed by domestic public policy or public order considerations (of which the protection of the ordinary commercial flows against these interest is itself an important aspect but bankruptcy laws may also be), which in countries that wish to enjoy the benefits of globalisation must lead to a trade-off and a narrowing concept of the national public order in particular as a bar to the recognition and operation of practices considered internationally appropriate and necessary. See for international finance arbitrations further the discussion in Volume 2, section 2.3.3. Domestic considerations of anti-competitive behaviour, market abuse, fraud, tax evasion, and corruption would then remain other bars but such practices would at the same time most likely also be condemned in the transnational legal order itself, therefore as part of its own public order requirements or transnational minimum standards in the international marketplace. Thus, property law becomes dynamic and an important risk management tool in the professional sphere and moves to the heart of financial structuring, especially in asset-backed financing of all kinds in these international flows, including those involving future cashflows, all upon an adequate description of the underlying asset or asset stream in the contract and of the type of user, income and enjoyment rights therein. As we have seen, at the transnational level, it suggests a large degree of party autonomy and requires an open system of proprietary rights subject to a strong protection of the ordinary flows of goods, services and money, therefore of bona fide purchasers and payees and of transactional and payment finality in the ordinary course of business, especially in respect of commoditised products sold as consumer products. Again, segregation and asset liquidity are promoted at the same time. This was earlier perceived as being the essence of the modern financial legal structuring practice, particularly in relation to asset-backed funding, as further discussed in respect of several modern financial instruments in Volume 5. Again, it is inspired substantially by the law of equity in common law countries. Such a dynamic law of movable property is, it was submitted, at the heart of new developments and of the transnationalisation of private law in the professional sphere, in which a new balance is being found between party autonomy, the rights of various classes of creditors, and the protection of

42  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights the commercial flows in the creation and operation of these structures: see for a summary also Volume 1, section 1.1.6. Because of these more recent demands, pressures and trends everywhere, the modern law of property may start lacking simplicity in its intellectual base. This discussion began in section 1.1.5 above in connection with legal asset status. This may be the consequence of abandoning the basic notions of physicality to the extent not already redressed by equity in common law countries, but it is particularly intriguing in the civil law, which was always more intellectual and unitary. At this juncture, it may no longer be capable of retaining a comprehensive approach, at least not in finance among professionals, ultimately not even domestically or it should be in greater party autonomy. It has already been noted in this connection that, while on the one hand, assets tend to be composites or packages, whilst asset classes are less confined and increasingly depend on the contractual description (monetary claims in particular increasingly needing inclusion), it is, on the other hand, their use and the particular (financial) facility in which they operate that may start making an important legal difference. It means more in particular that, in professional dealings, property law is becoming (financial) product specific in the manner as determined by the parties. To maintain the semblance of a unitary approach per country may even now create considerable problems, particularly in civil law countries as shown by the 1992 Dutch Civil Code, which is particularly weak in its approach to security interests (notably in intangible claims and in respect of floating charges). Newer interests such as conditional and temporary ownership rights resulting in finance in so-called finance sales (including finance leases and repos), bulk transfers, assignments especially for security purposes, and substitution possibilities involving future assets and agency notions then remain also underdeveloped. The notion of segregation backed up by constructive trusts is also missing. The same is true in the new Civil Code of Brazil of 2002. It is surprising how little the drafters of either Code were aware of more modern needs and trends in this respect, particularly in finance, and the drafters of the DCFR in Europe knew no better. It shows the severe decline in civil law academic thinking in recent generations, which has also to do with basic unfamiliarity with, and therefore lack of confidence in, commerce and finance and more generally with the marketplace, especially as it operates at the transnational level. This is related to the uncertainty as to how the public interest can be expressed at that level. In the US, on the other hand, the UCC never aspired to a unitary approach and maintains quite different proprietary frameworks for sales, equipment leases, payments, investment securities and secured transactions, as we shall see, and can live with this. Again, it is in the common law tradition, which in equity is more pragmatic and, in any event, less concerned with system and generalities, even in legislation. In this situation, in the US under the UCC the practical response has been simply to ignore property law as a general structure and to reach for ad hoc solutions. This is clear from Article 2A on equipment leases, Article 4A on payment transfers, Article 8 on investment security entitlements, and Article 9 on secured transactions as further discussed in Volume 3.37 It is particularly clear in section 9-204 UCC where future cash flows are accepted as security for present and future debt through a simple description of these flows. It may mean that also in respect of intangible assets, including investment securities, information or data, and technology, different approaches may be favoured in this regard, ultimately, again,

37 cf also JH Sommer, ‘A Law of Financial Accounts: Modern Payment and Securities Transfer Law’ (1998) 53 The Business Lawyer 1181.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 43 of special relevance in the case of bankruptcy and the protection of these rights when given by a bankrupt originator or when controlled by a bankrupt estate. Are these rights purely contractual or something more? It would seem that modern property law as we know it in respect of chattels and intangible assets is, on the one hand, up against the haphazard way in which, especially in common law countries, it was put together, more latterly also in ‘equity’, and, on the other hand, against the narrow physical and anthropomorphic notions of ownership remaining in civil law and no less ‘at law’ in common law, although there at least it is free of all-pervading system thinking. It appears difficult to cut through these different approaches by devising a coherent new intellectual framework or model.38 In fact, one may hardly hope that in its details modern property law can retain intellectual clarity and rigour for the moment, although clearly it can be more properly understood and better explained. Some lines can be discovered; at least this is very much the purpose of the present discussion, which is inspired by the equity approach but may move well beyond it. Because of a lack of newer thinking over the last 50 years, the general or formal law of property has not progressed a great deal in either common or civil law, although the former was always ahead in the context of the promotion of business. There hangs a veil of intellectual impotence and practical foreboding over proprietary law in both the common and civil law, especially in respect of movable property, even if more so in civil law. This may be a contributory reason why property law is now often ignored at the academic level and few students show any mastery in the subject, but it is an aberration. Even if there are ups and downs in the modern international financial industry, this industry is now so crucial for all, that it is bound to expand further and will continue to need and find new ways which the law will have to support, proprietarily especially in ever newer forms of asset-backed funding, unless public order is vitally offended. It has already been said that it has become a question of proper risk management, transactional and payment finality, segregation and asset liquidity, notions that are legally handicapped, especially in civil law, for no clear reasons except systemic considerations still largely based on atavistic physical notions of property of medieval origin and an improper understanding of party autonomy and its reach in the law of property concerning movable assets including claims. Greater flexibility and imagination in the further development of proprietary rights will be necessary; this is pursued in section 1.10 below and for international finance especially in Volume 5, in which connection it was posited already that the common law approach in equity, with its larger scope for party autonomy in this area leading to a de facto open system of proprietary rights subject to a strong protection of the bona fide purchaser and the ordinary course of business or the commercial and financial flows, is likely to show greater promise and a better way forward. This was discussed and summarised earlier in Volume 1, section 1.1.7 as being at the heart of a dynamic modern lex mercatoria in property law, modern contract theory serving a similar purpose in modern transnational contract law, see also Volume 3, section 1.1.5. Thus, a more normative approach would appear necessary also in property law in order to facilitate its further development in response to modern needs especially in international commerce and finance.39 Dynamism arises in this connection from the nature of the financial 38 Reference is also made here to the literature cited in ss 1.1.5 above and 1.3.9 and 1.3.10 below, which has shown little tangible result in either the common or civil law of property. 39 Putting emphasis on the nature of the particular proprietary right as intangible right and on how it is exercised makes it easier to deal with any redistributive character of property law and to understand the rebalancing of proprietary interests in modern case law. It perhaps also makes it easier to understand how ethical, social, and efficiency considerations enter into the development of modern property law, illustrating no less than in the law of obligations its in essence dynamic nature, although in property law these dynamics are not necessarily the same as in the law of obligations.

44  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights instruments and structures themselves and from their further evolution. Here again, the particular nature of the proprietary right as right must be put at the centre of the investigation rather than physical notions of the holding of underlying assets and the types of these assets themselves, which to a large extent are immaterial and have become a distraction.40 As just mentioned, particular illustrations of this trend may also be found in the US in the creation of investment security entitlements in Article 8 UCC (see section 8-503 and the Official Comment) and equipment lease interests of lessor and lessee in Article 2A UCC (see sections 2A-301 and 307). It was said in Volume 1, section 1.1.2 that in not responding properly, civil law is marginalising itself in international finance because it leaves too much legal risk on the table. To repeat, one essential feature in terms of risk management is the growing impact of party autonomy on property law and its indirect redistributive effect. Alternatively, it may also concern the right to choose the law applicable to the proprietary aspects of their transactions. In recent times, this latter possibility has become unexpectedly apparent in private international law where the transfer regime of assignments and the operation of book-entry entitlements system for modern investment securities holdings is now often left to a choice of a domestic law by the parties. See also the interpretation of Article 14 of the 2008 EU Regulation on the Law Applicable to Contractual Obligations and implementing case law (see also section 1.9.3 below)41 and Article 4.1 of the 2002 Hague Convention on the Law Applicable to Certain Rights in Respect of Securities held with an Intermediary (see also section 8-110(e) UCC, and section 3.2.2 below). In a similar vein, Article 5 of the 1985 Hague Convention on the Law Applicable to Trusts allows the settlor to determine the law applicable to the trust regardless of the situs of the trust assets: see section 1.6.6 below. The result is some flexibility, although still limited to what is on offer under the domestic laws so chosen unless the choice of law by the parties may also be the lex mercatoria, or the latter may be deemed to apply in appropriate cases when parties have not made any choice at all. Upon a proper analysis, it could even be argued that a choice of a domestic law in international business transactions can only be made within the context of the hierarchy of norms of the modern lex mercatoria, very much the view of this book—see Volume 1, section 1.4.13, such local laws then only serving a residual function in international business.

40 That is not to say that the type of asset fully loses its importance, even physicality may still have some impact, see the discussion in s 1.1.9 above. The nature of underlying assets remains important, eg, in floating charges in respect of equipment, inventory, and receivables. It also remains important to the extent assets are meant to trade (or are commoditised) when purchaser protection may be normal, even in respect of known charges in the asset or to the extent they are meant to serve as collateral, as receivables now normally do, which again would allow assignees to ignore charges or transfer restrictions in them. It was noted at n 16 above, that some proprietary rights such as easements and leases (where proprietary) are usually reserved for real estate. Although income rights in movable assets may be separated as usufructs, user rights in them cannot be so separated or split out in servitudes, at least not in civil law. There are trends here that have found a more modern expression in the UCC in the US (cf ss 9-329 and 9-406). On the other hand, the distinction between types of assets should be much less important for the protection of bona fide purchasers, which, in a modern approach, should be protected regardless of the type of asset, be they chattels or claims (and not only in equity). The same applies when this protection is extended to all transferees or assignees in the ordinary course of business, especially in commodity types of products and facilities. 41 Thus, in Dutch case law, even in proprietary aspects of assignments, sometimes the law of the underlying claim and in other cases the law of the assignment have been upheld as applicable (following Art 12(1) and (2) of the 1980 Rome Convention on the Law Applicable to Contractual Obligations), now Art 14 of the 2008 EU Regulation on the same subject, rather than on the law of the debtor or that of the assignor. This allows for party autonomy and a contractual choice of law in proprietary matters. There are in the Netherlands three Supreme Court cases in this connection, the last two of which have elicited considerable international interest: see HR 17 April 1964 [1965] NJ 23; HR, 11 June 1993 [1993] NJ 776; and HR, 16 May 1997 [1997] RvdW 126, see further s 1.9.3 below.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 45 Even domestically, the use of temporary and conditional ownership rights unavoidably leads to new forms of proprietary rights, the content of which is then more fundamentally determined by the parties as a function of how they formulate the condition or the time element, also in modern civil law, even if in this respect it remains particularly embryonic: see section 1.7 below. We may see it better in the reservation of title as sales price protection device everywhere. Trust structures or constructive trusts also play an ever-larger role, as do in floating charges the notion of tracing and shifting liens in replacement goods allowing for the use of future cash flows to support debt upon the mere description of these flows. Party autonomy moves forward and the duality of ownership, split ownership rights, and rights in bulk or in future assets are all around us, upon a proper analysis also in civil law even if the development remains timid and is often still not sufficiently identified and put in context. Again, from the more academic and especially comparative law perspective, we are concerned here with the breakthrough of equitable proprietary rights into the civil law environment and the key protection of the commercial and financial flows against these ‘hidden’ interests as will be discussed more extensively below. It means that they are cut off at the level of their operation not at the level of their creation. It was submitted and will be further demonstrated in section 1.4 below that this development also culminates in a better and stronger notion of transactional and payment finality at the transnational level, therefore in the international marketplace.

1.1.11.  Comparative Law and Transnationalisation. Eurobonds, International Swap and Repo Markets Practices. The Law Covering Offshore Installations. EU Law and the DCFR It has already been said that immovable property is mostly not of great interest in comparative law or in international business. Even in the area of updating movable property law, comparative law analysis is also not dispositive, even if the common law approach to equitable proprietary rights was shown to be of considerable help and interest (see further also section 1.3.7 below). This updating was identified earlier as a question of legally capturing especially the needs of a dynamic forward-moving process of financial innovation especially at the international level. If one leaves sharia financing to one side for the moment, social and cultural differences are not of great importance here, although they may still play a role in the way proprietary rights of whatever type are exercised, especially in respect of weaker parties, but this hardly figures in professional dealings and financings. It was also pointed out that even then local bankruptcy laws and courts may still present quite different views when it comes to enforcement wherever it proves to be needed, often inspired in this regard by the concern for weaker creditors. A more dynamic approach to proprietary rights, which even in civil law ultimately forces open its traditionally closed system (or numerus clausus), moved by actual (or for professional insiders constructive) knowledge of prior interests before assets are acquired and subject to a better bona fide purchaser protection and ultimately the protection of the purchaser in the ordinary course of business or of the commercial and financial flows more generally, especially relevant for consumers, has on its face the disadvantage of greater instability. However, it must be asked whether the stability the old regime suggested, in its credibility seriously affected by the fracturing of the legal regime in international transactions under the lex situs principle, is not dysfunctional and therefore the greater problem. International commercial and cash flows must then be broken up and they cannot be transferred and used as security as such. It was submitted that only legal transnationalisation holds out the promise of better risk management, greater asset liquidity, and stronger transactional and payment finality.

46  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights To repeat, any danger to transactional and payment finality or certainty in that sense is in this approach countered in particular by stronger bona fide purchaser protection or protection of the ordinary course of business. Another more sophisticated form of stability is thus created and has domestically long worked in common law countries. It was posited that this insight allows in fact for a quite simple extension of the traditional types of proprietary rights introducing a form of party autonomy as an effective risk management tool as is even now the underlying idea in equity. It would suggest that although a modern proprietary system may become more product specific and the result of market forces and party autonomy, it is not without some underlying coherent ideas in terms of: (a) what is legally an asset or asset class, based on economic value, for all practical purposes further defined by the parties, thus depending on mere description, there being no other intrinsic notion of what an asset needs to be in terms of physical existence and individualisation in order to be the object of a proprietary right; (b) the inclusion of intangibles, notably monetary claims; their increasing separation from the legal relationship out of which they arise as if they were promissory notes; (c) the expanded reach and protection of contractual user, enjoyment and income rights in respect of the underlying assets against (certain classes of) third parties based on prior knowledge in those who acquire an interest in the underlying assets; (d) the resulting increasing role of party autonomy promoting better risk management through the creation of more diverse rights that originate in contract but may acquire proprietary protection in this manner against certain classes of third parties (notably professional insiders); (e) the shifting of these interests into replacement assets allowing for substitution of individual items potentially covering therefore an entire supply and distribution process with the original priority pro rata surviving into substitutions and proceeds; (f) the protection of the ordinary course of business or the commercial and financial flows against any such interests, especially in respect of consumers; (g) the consequential enhancement of the risk management facilities in relation to these assets, segregation, asset liquidity and transactional and payment finality; and (h) the reinforcement of the correction facilities under notions of public order, increasingly itself of a transnational nature in the form of transnational minimum standards, to guard in particular against market and other abuse. It has already been repeatedly suggested that in a responsive legal environment stability in a modern sense, therefore in a dynamic legal environment, whether in contract or movable property, must at least in professional dealings come principally from the participants themselves, from their discipline, and the way they commonly handle risk and structure their transactions. It must therefore come foremost from the structures they create, helped or propelled by modern technology, and from the manner in which they use them and want the ordinary course of business to proceed and be protected. That is for them customary law. It is subject to proper financial regulation or other public order requirements, if necessary, in respect of these products and their use and distribution, assuming that regulators have here the proper insights. In this area, there is no normativity beyond it. Private law ultimately is there to serve the interests of the participants unless there are clear public policy or public order reasons of a domestic or transnational nature why it should be otherwise and that may be less obvious in professional dealings. It was submitted that this support for industry practices and legitimate needs is in proprietary matters the prime focus of modern commercial and financial law, especially in an international context, therefore in the modern transnational law merchant or lex mercatoria.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 47 In Volume 1, section 3.2.2, it was shown that these modern international financial developments and insights indeed lead to the development of transnational proprietary rights in the modern lex mercatoria, supported in particular by progressing transnational custom and industry practice. It could be spotted in the development of the modern Eurobond and the trading, clearing and settlement practices in this market and the manner in which it is now held (as security entitlement in a dematerialised manner). Transnationalisation may also be seen in set-off and netting facilities under international swap and repo master agreements notwithstanding their references to local laws, especially the laws of England or New York, as a matter of selection by the parties, which choice is hardly decisive as the protection resulting from netting at the expense of common creditors is not at the free disposition of parties wishing to benefit. Thus, the transnational lex mercatoria takes over, especially in the largest markets, as the objective mandatory law corrected where appropriate by public policy considerations at that level. This theme will be further explored in section 1.10.2 below. Yet it is not unlikely that at the transnational level these proprietary rights will initially have a physical nature also, easier so to be identified, in which context notions of physical possession or control may even be reinforced and may be the easier starting point. Ownership of drilling rigs on the high sea, and similar installations offshore, like wind farms, may serve as examples. Even though the normal rules for real estate may not work as there is no real estate jurisdiction on the high seas, not even in the respect of the continental shelf, it is still conceivable that all individual parts coming from shore retain their original (movable) property regime, but it creates obvious difficulty as to the legal status of whole operation and the type of security interests that might be available. Transnationalisation is the answer and was already noted in the development and operation of the Eurobond as a transnational negotiable instrument. Further sophistication may require a more intellectual elaboration, however, for example, in more sophisticated security interests or finance sales (such as leases and repos) in which these assets and whatever they produce are used, which could conceivably also come from treaty law.42 This has the great disadvantage, however, of territorial confinement to Contracting States and of bureaucratic compromise and rigidity for the future. Thus, true refinement continues to depend on financial structuring and academic thought and writing showing the future trends and better ways of legally progressing at the transnational level. What is needed is a development that suggests indeed flexibility in proprietary matters, again not unlike the one in equity in common law that came quite naturally out of daily practice and needs. In our example, it may indeed allow for non- possessory security interests or finance leases in offshore rigs and wind parks or repos in Eurobonds or similar assets to emerge, maintainable against all who know of them, can easily find out, or have been warned, especially other banks, financiers or suppliers. It may then also allow for future interests and trust-like structures, rights in future assets, including the minerals and electricity produced, that shift into replacements, tracing notions etc. in the production. In the EU, in the financial sphere, some of this is supported by the Collateral Directive (see section 3.2.4 below) even if the implementation in domestic civil laws and their systems has created problems for obvious reasons. Again, in section 1.10 we will probe these newer insights and directions further. The DCFR in terms of its quality must be judged in particular on its approach to these issues. It will be 42 Thus treaty law is in essence only relevant in respect of onshore operations short of some universal approach. For investment securities, the 2002 Hague Convention on the Law Applicable to Certain Rights in respect of Securities held with an Intermediary may spring to mind but it is only a conflict of laws Convention. The 2009 UNIDROIT Geneva Convention has a substantive law regime in this area, see s 3.2.4 below, but may be too intellectually complex and has so far not met with much acceptance.

48  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights discussed in section 1.11 and will be found to be seriously wanting, but it is first necessary to engage in a more profound comparative study in both civil and common law to see where we are and where in international transactions the traditional private international law pointing to the applicability of the domestic law of the situs has left us or is failing us also.

1.1.12.  The Approach and Organisation of this Volume In the following, we shall start with a description of the civil law of movable property as, ever since Roman times, it presents the more intellectual and, in that sense, the more conceptual and sophisticated legal approach. The manner in which this Volume will proceed is by describing the model of proprietary interests on which property law is in essence based in all civil law countries, although as such nowhere fully implemented. This has the advantage of presenting a framework that is not dependent on that of any particular civil law country and allows the law of the different countries to be contrasted and critiqued. This is useful in order to come to grips with the considerable differences that exist even between the major civil law countries in the details of their proprietary laws. It also allows a readier contrast with the common law approach, which was always more practical but also more dispersed. It should be repeated that the civil law of property is in principle unitary and means to cover all types of assets under one proprietary regime, which is upon a proper analysis not truly physical but rights based notwithstanding many incidents to the contrary—which were discussed in section 1.1.9 above. It concentrates on abstract or purely legal notions of ownership, possession, and holdership of the various recognised proprietary rights (largely ownership, usufructs, security interests, and servitudes), therefore mostly regardless of the type of underlying assets (either immovable or movable property including claims, except for these servitudes, which commonly only operate in land) which are the objects of these rights. However, especially in respect of intangible claims, as we have already seen, German and now also new Dutch law started to deviate and again became more physical, thus excluding them from the general proprietary regime. So does the DCFR as we shall see in section 1.11 below. This may be considered seriously regressive. The common law system is, on the other hand, more down to earth, at least for movable property. It is for chattels still largely built around the physical holding, as we have seen, therefore around physical possession (bailment or seisin) of the asset but is incidental in the elaboration of the details. Traditionally, intangibles fit uneasily in common law also, exactly because they are not physical. They therefore tend to have their own proprietary regime in which contractual, tort and restitution claims may be further distinguished while their transfer is then considered part, respectively, of the law of contract, tort or restitution. This may look strange to civil lawyers. For land, there is a different common law proprietary regime altogether that remains in most common law countries feudal in origin, in essence also based, however, on physical possession or tenure (seisin) leading to the various estates in land as we have seen. Again, it will not be extensively discussed here, see also section 1.1.8 above. As a consequence, there is no unitary proprietary system in common law at all and the rules tend to be different depending on the type of asset. Whatever there is in common law, it is supplemented by an alternative system of proprietary rights in equity in the manner already indicated. Here, the common law shows the greater sophistication, in which it became largely product or facility based. It thus allows for quite different attitudes depending on different uses rather than merely the different nature of assets, either in a commercial or a financial setting.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 49 This is clear, for example, for trusts and conditional ownership rights in finance sales, although the latter are often believed to operate behind a trust as floating charges may also do. This product or facility approach is also borne out in the different Articles of the UCC in the US as we have already seen in sections 1.1.5 and 1.1.10 and as will be discussed in greater detail below. In moving forward, it also leads to special requirements for information and data as well as technology protection. The blockchain or similar technology may introduce a whole new spectre of facilities, conceivably of interest in the area of intangible movable assets registration and investment securities. Again, the ultimate test is often the status of these rights or facilities in bankruptcy. The first Part of this Volume will deal mainly with these issues in both civil and common law. The law concerning these movable assets, including receivables, will subsequently be dealt with in the context of private international law and then finally in the context of the developing transnational law or the modern lex mercatoria. The second Part will deal with the more traditional negotiable instruments and documents of title, and the third Part with the modern security entitlement structures concerning investment securities. Volume 5 will deal more extensively with various assets when used in the context of financing or funding and will be largely product or facility oriented. Volume 6 will deal with their regulation.

1.2.  The Types of Proprietary Rights in Civil Law 1.2.1.  The Difference between Proprietary and Obligatory Rights in Civil Law In proprietary matters, civil law in essence follows Roman law, although the conceptual framework deduced from it is more recent. The present framework was mainly developed in the ius commune, that is the Roman law as it further evolved after its reception in most of Western Europe from the twelfth century AD onwards, and, in the proprietary system, especially by the natural law school of Grotius and Pufendorf in the seventeenth and eighteenth centuries with a final chapter in the German Pandectist school (if for the moment one sidesteps its continuing relevance in South Africa and to a lesser extent in Scotland). This occurred after an initial period in which, on the European Continent, property law often accepted feudal notions for land (as in England) and notions of seisin or gewere (physical holding) for persons in possession of chattels. The continental law in land and chattels was then much closer to what is still the English proprietary system for these assets, for chattels especially to the notion of bailment. It follows that on the European Continent, this approach was gradually abandoned in favour of the reception of Roman law, eventually even for land, whilst further elaboration of the Roman law ideas followed by the German Pandectists in the nineteenth century when an un-united Germany still depended for a large part on received Roman law. By then, codification had already begun elsewhere in Europe, mostly along the lines of the French model of 1804. The German Civil Code (BGB), which followed in 1900, only on its surface changed the approach somewhat, in property law especially in the perception of the concept of possession, illogically returning to a more physical approach, as we shall see, which also affected the property law concerning intangible assets, especially monetary claims. There developed then also a more fundamental understanding of the difference between proprietary and obligatory rights, also called rights in rem and rights in personam, to which

50  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights reference has already been made in sections 1.1.2 and 1.1.6 above.43 This terminology also affected the common law much earlier as we have seen, but not in its fundamental meaning. The basic idea is here that the proprietary or absolute (in re(m)) rights can, in principle, be maintained against all. Their opposites are in civil law the personal or relative rights (ad rem or in personam) such as the rights derived from contract to receive an asset or payment or some other performance or damage claims which may also derive from the commission of tort or unjust enrichment. They can only be enforced against the counterparty, grantor, transferor or debtor (that is their internal aspect), although, as we have also already seen in sections 1.1.1 and 1.1.5 above, in terms of them being an asset of the creditor and therefore an object of value, these rights may equally be defended against all the world and transferred in a manner to be respected by all. As such they are proprietary, at least for legal purposes. That is their external aspect. The difference between in re(m) or proprietary rights and ad rem or personal rights remains fundamental in civil law and has already been demonstrated above in the right of way. In civil law, this can be granted as a proprietary right by way of a servitude in the manner the objective law allows, but it can also be granted by contract as a purely contractual right in the manner the parties wish. In the first case, the beneficiary can maintain his/her right of way as a proprietary right against the whole world, therefore also against all succeeding owners of the land, even if they did not know of the servitude. In mode modern times, they could have checked the register, but it was always their problem. It is freely transferable with the land that it serves (but not separate from it) or can be given as security or in usufruct with its land by the beneficiary. On the other hand, if the right of way is merely contractual or personal, succeeding owners may in principle ignore it. In that case, the beneficiary only has recourse—that is, a damage action—against the original party who granted the right on the basis of his inability to protect the enjoyment if the right is not honoured by succeeding buyers of the land. It has a value, however, and can as such be transferred (assigned as a contractual right), perhaps even without the land it serves. However, even now, in more modern civil law as we have also seen, one may note on occasion some important, albeit incidental, approximation and it may be repeated that the beneficiary who has only a contractual right of way can maintain it increasingly against succeeding owners of the land if they knew of the existence of his/her right at the time of their purchase. This was earlier identified as a key development which tracks equity in common law countries. This may be all the more so if such a right, even though only contractual, could be registered in land registers and as such acquire publicity. In the latter case, one may note the element of publicity (therefore not only actual but also constructive knowledge) sustaining rights against third parties, which, as we have seen in section 1.1.3 above, at the theoretical and practical level never used to be sufficient in itself to distinguish between proprietary and personal rights in civil law but may help to open up the system of proprietary rights to some extent in certain circumstances as here in respect of contractual rights of way when published.

43 The distinction is often traced to the Roman law distinction between real and personal actions (actiones in rem and in personam), but it is doubtful that this is correct as the situations giving rise to the actiones in rem are hardly the same as those that give rise to proprietary actions in modern civil law: see also Feenstra, n 23 above and G Pugliese, ‘Diritti Reali’ in Enciclopedia del Diritto (Milan, 1964) XIV, 755ff. The distinction was only articulated in the later ius commune, in the work of Hahn in Germany in the seventeenth century (see n 51 below), particularly following the natural law school of Grotius and adopted in the German nineteenth-century Pandectist thinking. Grotius in De Iure Belli ac Pacis, II, 3,19, 2 clearly started to distinguish dominium and creditum. In his Inleidinge (Introduction to Roman Dutch Law) II, 1, 58 he used in the margin the terms ius in rem and ius in personam as the fundamental distinction and also incorporated among the real or proprietary rights the limited proprietary rights or iura in re aliena.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 51 In common law countries, this is all easier.44 More importantly, in the law of equity, as noted, knowledge of beneficial rights in designated assets under specific legal structures, such as trusts, future interests and floating charges, when acquiring such assets subject to such charges or interests obliges the purchaser to respect such rights more broadly. There thus arises a middle category between proprietary and obligatory rights, as we have seen.45 We shall come across other instances below where, due to practical considerations, the civil law proprietary system allows other proprietary rights to appear. This has happened particularly in the area of security interests where new non-possessory securities were created in Germany in the nineteenth century through contract and case law, see for greater detail Volume 5, section 1.4. As noted before, it is also true in the area of conditional sales and proprietary rights used in financing (finance sales or reservation of title, repos, and finance leasing), where there still arise, however, at the theoretical level considerable problems in civil law and it often remains unclear how the duality in ownership, which thus follows, needs to be handled: see section 1.7.5 below. Where holdership is protected in a proprietary (possessory) manner, as it is in Germany, the underlying contractual claims (as in the case of custody, rental, etc) may also acquire a proprietary aspect for the holder, even if the latter merely holds pursuant to a contractual right (as in the case of a rental) rather than pursuant to a proprietary right (as in the case of a usufruct or pledge).

1.2.2.  Nature and Structure of Proprietary Rights and the Manner of their Protection in Civil Law. The Numerus Clausus Notion. Ownership, Possession and Detention of Proprietary Rights In civil law, for all tangible assets, ordinary speech identifies the ownership right with the object of the right itself, therefore with the asset. Hence there are rights in things or (in civil law) iura in re, although, in a rights-based approach, this is strictly speaking an improper legal terminology. From a legal point of view, rights have a meaning only against other natural or legal persons, even if they are asserted in respect of certain assets as object of user, enjoyment or

44 In common law, because of its less conceptual approach, it may largely depend on the type of situation whether there are so-called covenants that run with the land (such as licences to pass), see in England, Tulk v Moxhay (1848) 2 Ph 774 and its aftermath, and those that run with goods (such as leases in aircraft), see Bristol Airport Plc v Powdrill [1990] Ch 774, and also S Gleeson, Personal Property Law (London, 1997) 21. It is clear that such covenants, when known to a buyer, cannot be ignored, certainly if characterised as equitable interests. In the case of land, they may still prevail even if unknown to a buyer, which is usually the case if they are part of a development or zoning plan and are meant, eg, to maintain the residential nature of a development, when there may be deemed to be constructive notice. They are especially enforced as such in the US. In chattels, covenants that restrict their resale are generally rejected for asset liquidity reasons, but they have long been upheld in France, see Cour de Cass, 20 April 1858, D.1.154 (1858). It requires that the original seller, buyer or a third party has a justified interest and that the restriction is limited in time, see Cour de Cass 24 January 1899, D.1.535 (1900); 23 March 1903, D.1.337 (1903); and 18 March 1903, D.1.126 (1905). The defendant need not have had knowledge of the original covenant before acquiring the asset, but in the case of chattels bona fides means that a subsequent transferee is considered full owner and need not return the asset. 45 Even now there are in civil law certain so-called qualitative obligations that may run with an asset and can be enforced against any subsequent owner and that is so regardless of the latter’s knowledge or any publication. They are especially rights of neighbours and tenants in real estate. In France, they are also referred to as rights propter rem. These may also concern an expanding class of rights that may be maintained against any owner of land or buildings and may again include rights of way, even if not expressed as a servitude but generally known or accepted; see more particularly Vol 3, s 1.5.1 on privity of contract.

52  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights income right. Nevertheless, we normally speak of owning a piece of land or a car and not of having an ownership right in land or in a car, although it is legally more precise. This is clearer when we speak of life estates or, in civil law, usufructs or other more limited proprietary rights in tangible assets. Thus, we say that we have a usufruct or a security interest in a car, the real reason being probably that these are rights in the property of others (iura in re aliena). All the same, as we have seen, proprietary rights are often still thought to be rights in things as opposed to obligatory rights which in that view then operate between natural and/or legal persons, thus rights against persons even though these obligatory rights could also be rights to (acquire) a thing (iura ad rem). Hence also the confusion in that view that we own a car but not a claim. It has already been said that the key is not that proprietary rights represent rights in things (iura in re), whether or not tangible, but that they can be maintained against all the world (or in equity in common law countries at least against certain classes of third parties, not party to the creation or transfer of these rights). They therefore imply rights that must be respected other than by the person from whom the relevant assets were obtained and were privy to the creation or transfer, therefore even without there being any special legal relationship with such parties in question (until someone violates the proprietary right). Again, to speak of rights in an asset is in this connection legally meaningless and confusing. We only have rights against others in respect of underlying assets as object of these rights. Ordinary speech is here better left to one side. To repeat, all rights are intangible, whether or not they are proprietary; only the objects of rights may be tangible or intangible. We should not confuse the two. All related legal concepts are equally intangible, a question of legal ordering. Importantly, that applies also to the notion of possession which, at least in civil law terms, means the will to hold the asset for one self and is not physical per se either and often wholly constructive. It was already said that land can barely be possessed in a physical manner. Holdership or detention is another form of constructive possession, when a holder holds an asset for someone else subject to an own (normally contractual) user right. In fact, most physical movable assets must be left alone for long periods, nobody can carry all of them around all the time. Control is therefore the better term and is connected with the disposition right in the underlying asset. In fact, in civil law when properly understood, possession is, as we shall see, simply the appearance of ownership and the exercise of its indices whatever they may be, often a claim to proprietary user, income and enjoyment rights or ownership in the underlying asset, which combines them and includes the usufruct and security interests. As such, control is merely a resultant or derivative notion, its meaning wholly depending on the situation and on what disposition right the legal possessor has and wants to exercise; a holder has very little but still has control and may even be able to create subholderships. In civil law countries control is probably the modern meaning of corpus, a term commonly used in this connection but not a clear legal notion, see further the next section. Although for intangibles, such as receivables, the connection of the ownership right with the object and the issue of possession was always less obvious, this should not disturb as it should now be clear that any physical connection is, at least in civil law if properly considered, legally largely irrelevant, although the intangible nature of the underlying asset seems to make the protection of the rights in or to them still more complicated in the minds of many as the indices or obvious manifestations of ownership or possession may be less clear in these assets. It is in truth wholly irrelevant if one accepts that these concepts and indices were never merely physical. Again, it is all about rights and obligations and the whole framework of their manifestation and protection is abstract. This has already been traced above in German and Dutch law,46 and its discussion will be resumed in the next section.

46 See

text at nn 16 and 17 above.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 53 To repeat, in civil law, ownership (as the expression of the relevant proprietary right to an asset which includes all others until split out), possession (as the expression of the will or intent to hold the relevant proprietary right for oneself as if the owner), or even holdership/detention (as the expression of the will or intent to hold the right for another, subject to own user, enjoyment or income rights to the asset), can in truth all exist without a physical element, although as was acknowledged in section 1.1.9 above, there remain strong remnants of a more physical approach, certainly also in civil law, but the protections or defences given in connection with each of these notions do not truly depend on it: see more particularly sections 1.2.4 and 1.2.5 below. This confirms that the model or system is in essence abstract and not about physicalities except in the prima facie protection of the status quo as an issue of social peace and in civil law for chattels (only) in the protection of bona fide purchasers in physical possession, as we have also seen in section 1.1.9 above, but even in the latter case probably subject to erosion in favour of more abstract notions of legal control. These abstract concepts of ownership, possession and holdership manifest how a proprietary right is being held and provide in civil law at the same time the main bases for proprietary protection in respect of each type of proprietary right in respect of an asset (such as ownership, usufruct, or security interest), therefore rather than the physical element itself. This is in general terms still different in common law as we shall see. Again, the civil law approach is here fundamentally more intellectual and conceptual. However, even if the (physical) holding of an asset has no legal meaning per se, it still needs to be legally characterised first in terms of the relevant underlying proprietary right, such as ownership, usufruct, servitudes, security interests etc, and subsequently in terms of ownership, possession or holdership (detention) of the type of proprietary right in question. It is another fundamental aspect of civil law that both these proprietary rights and the way in which they can be legally expressed and protected are limited. That is the idea of the numerus clausus or the closed system of proprietary rights in civil law. All the same, it has already been said that more modern (non-possessory in a physical sense) security interests crept in, especially in Germany, but the civil law of property still largely ignores in this connection floating charges and also conditional or temporary property rights as alternative asset-backed funding devices and their (way of) protection. They could, did, and are even now opening up the whole system, also in civil law, particularly in terms of finance sales and reservation of title in respect of movable property, although it remains as yet little understood. These finance sales may be expected increasingly to operate against professional insiders, now also in civil law, subject always to the protection of the ordinary commercial and financial flows in respect of outsiders, usually consumers, who may thus still acquire the assets free and clear of such interests (if bona fide or buying them in the ordinary course of business, at least for chattels, even if it may remain more problematic for intangibles) as we have already seen. This was earlier identified as the modern direction and trend also in international finance, although in civil law much behind and slow. It may in practice mean a substantial opening up the numerus clausus, as already noted. The essence remains nevertheless to appreciate that in the traditional civil law view there is only a limited concept of what an asset is and there are still only certain defined proprietary rights and equally only certain limited forms of expression and protection of these rights. In this matrix, we have, as we have seen, the ownership right as the most absolute right to an (identified underlying) asset whether tangible or intangible (meaning the bundle of all user, income and enjoyment rights in the underlying asset) but also the ownership expression of it (or the assertion of the proprietary right itself), as we have also for other proprietary rights, such as usufructs, servitudes and security interests. Alternatively, in civil law, these proprietary rights may be expressed through possession (defined here as the will to hold the right for oneself as

54  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights if one were the owner, behaving as such, and asserting the disposition rights, assuming legal control, and resulting in the appearance of ownership), or holdership (defined here as the will to hold for another, subject to an own user right, which is usually merely contractual), giving rise to different protections or actions in each case. It should be obvious by now that we should not be particularly thrown off by the fact that the underlying assets may be intangible, in transformation, or future, or part of a class of assets (appearing in bulk), even though that is still the view of many. It may bear repeating that in this system the holdership of a proprietary right itself may be the consequence of the granting of a mere contractual user, enjoyment or income right under an existing proprietary right concerning the underlying assets, for example under a usufruct of an intangible share portfolio. Thus, the owner of a usufruct may by contract transfer his income right thereunder to another. As a consequence, the beneficiary becomes the holder of the usufruct for that purpose. It gives the beneficiary a contractual action against the grantor (unless there is a sub-usufruct which would be a proprietary right). The key is that there results proprietary protection of the holder against any other, even if in many civil law countries that proprietary protection would have to be invoked by the legal possessor rather than by the holder (although not in Germany, as we shall see), who may, however, still protect his right against third parties in tort. This is to repeat that our language and terminology are here often imperfect and inadequate, and ordinary speech may confuse, especially when we speak in this connection of the ownership right itself and of ownership in terms of manifestation and legal protection of that ownership of any proprietary right. In this sense, one can be the owner of an ownership right as long as it is understood that we use two different notions here: one being the proprietary right itself and the other being its expression, protection and enforcement. Again, it is easier and more revealing when we speak of the ownership of a usufruct or a security interest. Instead of the proprietary right itself, we may here also refer to ‘title’. So, we own title, possess it, meaning holding title (being the proprietary right in question) for ourself, or hold it for another usually as the consequence of the transfer of a contractual user, income and enjoyment right in the underlying asset, for example lending our bicycle to a friend. In civil law as we shall see, the legal transfer is often through or completed by delivery of (legal) possession of the proprietary right (with regard to underlying assets), clearest in respect of the right of ownership, which in this system, it is submitted, is again not physical per se but means only the demonstration of the end of the will to hold the right for oneself. This may be shown by the physical handing over of the asset but there are other ways and the delivery of possession or control in this legal sense may also be purely constructive (non-physical) when a declaration may suffice, notably when assets are and remain under third parties (the traditio longa manu) or under the seller (constitutum possessorium). In some countries, such as France and Italy, the mere sales agreement is itself sufficient expression of the will no longer to hold the right to an asset for oneself, as we have already seen, and then transfers the property coterminously with the conclusion of the sales agreement, but still it was already shown that the title transfer remains a separate legal act, sometimes expressed as a transfer constituto possessorio, meaning, as we shall see, that the asset remains under the transferor for the time being. It should be realised that even holdership is in this system strictly speaking non-physical and there may be sub-holders. Again, properly considered, legally, all is expressed as a question of rights (and obligations) and not in physical terms. This is law, not physics, and that is the key. In civil law, to repeat, it is therefore correct to view ownership of an asset in terms of ownership of a right, in fact of the fullest of all user, enjoyment and income rights in respect of an underlying asset. Again, it is not at all impossible in this approach to view ownership

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 55 in property as a bundle of intangible proprietary rights that may be subdivided in the limited proprietary rights such as usufructs, certain types of long leases or security interests, under which certain income, user or enjoyment rights may be split off by the owner in favour of others who thereby acquire more limited proprietary rights in other people’s assets (iura in re aliena) and may defend these more limited proprietary rights against all the world as owner, possessor or holder of that (sub-)right. As we have seen, even contractual user, enjoyment, and income rights may be split off and given to a holder, whose position must be respected by any third party/transferees who knew of them when acquiring title. That was the idea that all contractual user, enjoyment and income rights gravitate towards proprietary status as a matter of liquidity and finality, see section 1.1.4 above. But in traditional civil law, the composition of this bundle of proprietary rights remains preordained and parties may (in principle) not split off proprietary rights at random. That is the numerus clausus. Nor can they manifest these rights in any other way than the three manners indicated except by making them merely contractual. Again, in a proper analysis, all rights and the way they are legally held are intangible, including the right of ownership itself, even in tangible assets, although this does not rule out the fact that the nature of these underlying assets and objects of these rights in terms of land, chattels, or intangibles may still impact on the details of these rights, their protection and transfer especially when proprietary, but it is of lesser importance. Thus, in civil law, the transfer of the intangible ownership rights in chattels is not normally through assignment as it is in the case of intangible assets.47 There may also still be delivery requirements, as we have seen, but they are not necessarily physical either and could be wholly constructive, even for chattels, as noted. For intangible assets, delivery may be completed with the assignment itself, although it is not uncommon to find that there is a further formal requirement, namely notification of the debtor. That was the traditional French approach, now alleviated for financial transactions (as we shall see later). It is sometimes seen as equal to the delivery requirement for chattels, especially in the Dutch Civil Code of 1992. It then suggests a form of publicity, which, however, mere notification to a debtor hardly is in practice. In any event, it has already been said in section 1.1.3 above that publicity itself does not create proprietary rights although it may sustain them. In the new Dutch Civil Code, the poorly considered introduction of this requirement of notification created havoc and was promptly relaxed although not deleted, see Volume 5, section 1.2.1. As to other differences, bona fide purchasers of (proprietary rights) in chattels are (mostly) considered the full owners—that is the important question of finality—but a similar rule does not (as yet) exist in civil law countries for intangible assets even if commoditised (and also not for land where land registers correctly created a different situation). Proprietary rights in intangible assets therefore still seem to have some important different features, but, except for the protection of bona fide purchasers or assignees, they are less fundamental than they may appear at first: where, for example, under applicable law no special act of delivery is required for the transfer of title in chattels or notification of the assignment of a claim to the debtor as a condition of its validity, there is no difference as the transfer of ownership in either type of asset results objectively by law from the conclusion of the transfer agreement, not from the contract itself. This is now often so characterised in Belgian law.48 47 See for Germany, however, also n 20 above. 48 As we shall see in s 1.3 below, it is less easy to summarise the common law in this respect. Physical possession still plays a key role in the protection of the holder of chattels, much easier to defend than ownership, while both are traditionally the only proprietary rights in chattels under common law, expanded, however, by equitable proprietary rights, especially in the form of trust benefits, conditional and temporary rights, and floating charges.

56  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights

1.2.3.  The Traditional Proprietary Rights in Civil Law and the Way They are Held. The Notion of Possession Revisited. Common Law Compared It has already been mentioned that in civil law, in terms of proprietary rights, there is first the right of ownership as the most complete right, best expressed by Article 544 of the French CC and now also in Article VIII-1:202 DCFR. This weak definition means to say that the owner has all user, income and enjoyment rights of which in some preordained ways he can dispose in a proprietary manner or otherwise contractually. It followed that derived from ownership there are a number of limited proprietary rights such as usufructs, in some countries, certain forms of long leases, easements or servitudes such as rights of way—the latter two being normally only in real estate— and security interests, such as mortgages in land and pledges or more modern nonpossessory security interests in chattels and intangibles. All others are in principle contractual. These derivative proprietary rights which operate in the assets of others (the iura in re aliena) automatically reintegrate into the ownership right upon the end of their term, which ownership right thus becomes full again while the (then) owner reacquires his full rights without any additional (re)transfer requirements.49 In this framework, the younger (proprietary) interest holders naturally take subject to the older (who can defend against the whole world including any juniors but not seniors). The independence of these rights and their transferability in principle also means that they may themselves be encumbered by security interests or made subject to usufructs so that it is conceivable to create layers of different proprietary rights in one asset. We may thus have a usufruct in a usufruct. It even applies when the underlying asset is itself merely a contractual user, income and enjoyment right because they are no less assets and we can have a usufruct or security interest in these rights. In this way, it is possible to have an ownership right, a usufruct and a security interest in the usufruct, all concerning the same underlying asset at the same time but for different interest holders.50 Yet delivery of possession (in this sense) is no longer a requirement for the transfer of ownership of chattels in England and they transfer through the mere sales agreement (unless otherwise agreed). Intangible assets are transferred through assignment without notification or other formalities (at least in equity). In the US under Art 2 UCC, delivery of possession is still necessary for the transfer of title in chattels (unless the parties agree otherwise). For assignments generally there are still considerable differences between the various states of the US in the formalities, as we shall see in s 1.5.3 below, but for the assignment of receivables there is now a special uniform regime under Art 9 UCC. But perhaps the more distinguishing feature is the de facto open system of proprietary rights in equity in common law countries in respect of all classes of assets, whether land, chattels or intangible claims, subject always to strict bona fide purchaser protection or the protection of the commercial flows in commoditised assets. 49 This is also referred to as the elasticity of the civil law ownership concept. It has as such no clear equivalent in common law. It does not mean, however, that these more limited proprietary rights during their period of existence have an inferior or dependent character. Again, they operate independently besides the ownership right in that sense and vis-à-vis each other, much as they do in common law, and are defended separately until the end of their term. As such, they must be respected by all, including the owner, even if the older interest holder, because he granted them. In German law, it is probably more precise to say that the key is here not the contract but rather the disposition (or Verfügung) by the owner in which no other person needs to be involved and which follows from the operation of the law. A disposition itself is not normally sufficient, however, to bring about these proprietary rights, their transfer or split. Except in countries such as France and Italy, as we have already seen, for the transfer of title in chattels (but not even there in respect of pledges), forms of delivery of the right in the asset are required, even though this delivery (of possession in the civil law abstract sense) may only be constructive: see s 1.4.2 below. 50 It should be noted, however, that civil law on the whole does not favour rights in rights and the sequences of rights that thus follow, but a usufruct of a conditional ownership right would appear possible, also of a security interest if the underlying claim it ensures becomes subject to a usufruct.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 57 In this system, which was, as we have seen, first empirically identified in the ius commune,51 it remains, however, a debated issue how far possession (the will to hold the proprietary right in an asset for oneself) or even mere holdership or detention (the will to hold the proprietary right in an asset for another subject to one’s own user rights) in respect of these assets could also be considered a proprietary right.52 Unlike the approach of the old Austrian and former Dutch Civil Codes in the case of possession,53 it is better not to consider them so in civil law (it is different in common law) but indeed only to see them as ways in which proprietary rights (all of them) manifest themselves and are protected, rather than the proprietary rights themselves, and that may now be considered the better view. As already noted in section 1.2.2 above, it may then be necessary to talk of ownership as one of the three possible expressions (therefore ownership, possession and holdership) of each proprietary right, signalling the most obvious manner in which a proprietary right is held, manifested and protected. The ownership notion used in this way is not then a proprietary right either, even when used in respect of the proprietary ownership right itself for which, as earlier suggested, the term ‘title’ may then better be used. In civil law, legal possession is then this ownership notion’s appearance or shadow (the intention to hold an asset for oneself as owner and to exercise the indices of ownership, therefor the necessary measure of control). Ownership and legal possession of a proprietary right thus usually go together and are normally not distinct, but give rise to two different options of defending the underlying proprietary right of which they are the expression or manifestation, either therefore through ownership (revindication) or possessory actions as we shall see. The essence is that the three ways in which proprietary rights are manifested and protected are themselves not rights capable of transfer. They result from the way the underlying proprietary rights are distributed. It means that if an underlying ownership right is transferred, the previous owner surrenders the manifestation of his ownership and cannot maintain possession as the appearance of it either. It follows that the owner (of a proprietary right) in civil law terms will normally also be the possessor (of that right) as he means to hold that right for himself as if he were the owner (which he normally is), but it should be immediately realised that while in civil law there can only be one such owner of a right, there can be more possessors. Even if possession cannot be voluntarily transferred as a right, it can be taken. The most obvious situation is that of the thief who is not an owner but, upon physically taking the asset for himself, wishes to become the legal owner (of the ownership right, although technically it is also possible to steal a usufruct or servitude). S/he becomes possessor but only besides the true owner of the ownership right, who remains possessor also. Even if the (involuntary) loss of control in the owner technically weakens the latter’s possession, it does not do so in a legal sense and s/he will also keep his/her possessory 51 The identification of the limited number of proprietary rights maintainable against all was first achieved by Heinrich Hahn at the University of Helmstedt in Germany in 1639 on the basis of an empirical analysis which allowed them to be distinguished from obligatory or personal rights that could only be maintained against a counterparty; see also Feenstra, n 23 above. 52 See s 308 of the Austrian CC of 1811 and Art 584 of the old Dutch CC of 1838; cf also the more general Art 543 of the French CC of 1804, which does not give a list, whilst Art 3.81 of the new Dutch CC of 1992 refers only to the proprietary rights allowed by statute and does not enumerate them. In the German BGB. there is no list either, or even a reference to the closed system of the proprietary rights. It was considered implicit. 53 Another important aspect of the proprietary nature of these limited rights is that, like ownership, they can be transferred (often, however, only together with the asset as in the case of a servitude and, in the case of a pledge or mortgage, only with the indebtedness they insure) without the consent of anybody else, including notably the owner (of the ownership right) or any physical holder of the asset (even though the latter may have to be notified to protect the new situation). This confirms their independent proprietary status and distinguishes them further from contractual rights.

58  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights remedies and defeat the thief because he has the older right. Again, it is a prime manifestation of possession in civil law not needing to be physical at all. If there can be only one owner and more possessors, amongst the latter, the older has the better right to defend. Holdership, on the other hand, presents a split. The holder does not mean to hold for himself but rather for someone else (the owner or any possessor). One cannot be legal possessor and holder at the same time because one cannot hold at the same time for oneself and another. Again, there can be various holders of an asset through subholderships, so that detention strictly speaking need not be physical either. Again, holdership cannot be transferred as a right as such but is the consequence of the legal situation regarding the underlying asset, but, like possession, it can be appropriated. One may ask what happens if property is not transferred but its use is taken and not objected to pending, for example, an agreed later transfer. Does possession or holdership result? The solution may be in the assumption of conditional or temporary ownership rights characterised by a resolving holdership and suspended possession.54 It is true that German law at the theoretical level now presents a somewhat different picture, which at first glance may confuse. Although in earlier drafts of the BGB the above system was maintained, in the end, following criticism from von Jhering55 and contrary to the Roman law tradition, section 854(1) BGB was redrafted and still seems to base possession on the physical holding of the asset in the nature of the old gewere or seisin notion. The DCFR follows this approach uncritically.56 Possession is here cast in terms of control 54 There is such an example in the Netherlands, Muller qq v Hoogheemraadschap van Schiedam en de Krimpenerwaard, HR 9 September 2011, see also B Hoops and EJ Marais, ‘Het verjaringsbos weer door de bomen van bezitsverkrijging zien’ (2017) WPNR 7141, explaining its meaning in the context of acquisitive prescription for which possession, not holdership is necessary, see s 1.2.5 below. See for a better understanding of the operation of conditional ownership/possession/holdership in the Netherlands, Rabobank v Reuser, HR June 3 2016, NJ 290 (2016), see also Vol 5, s 1.2.2, and AAJ Smelt, ‘Het voorwaardelijke eigendomsrecht’ [The Conditional Right of Ownership] (2017) WPNR 7149. 55 Der Besitzwille (Jena, 1889) 212. See for a resonance in the Netherlands, n 71 below. It may be of interest in this connection to point out that von Jhering, in his support for the notion of legal possession (quite apart from physical holdership) with its own actions, sought foremost better to protect the ownership right, which, on the basis of physical possession or corpus (and its disturbance), may indeed be more easily defended, not only in civil law. But this is not the full story. Much non-physical possession also needs protection. In typical nineteenth-century fashion, the protection of possession had earlier been tied (in Germany by von Savigny) to the mere will to possess (Besitzwille or animus possedendi, see also text at n 68 below) and thus became a matter of protection of the will and an issue of mere intent. Von Jhering proved here more pragmatic but also less conceptual and reintroduced in the process an unclear anthropomorphic idea of property law. This will theory went against the earlier notion of von Savigny, who thought that the requirements of public order and peace were the basic reason why physical possession was protected, see Das Rechts des Besitzes (1804) 31, regardless of the fact that in contract he had pushed will theories, see Vol 3, n 27. It is an important issue and relies on the prima facie state of affairs connected with a purely physical idea of possession, see also s 1.1.9 above, but did notably not explain the intricate Roman system of possessory protection and the use of a legal notion of (constructive) possession in this regard, which had the purpose of a dispositive protection of proprietary rights more generally, not of the prima facie need for respect of the status quo. It is to be noted, however, that when possession is defined as the will or intent to possess for oneself, this is not necessarily always a concession to nineteenth-century will theories. It may in truth be a more objective concept of control, see also the previous section. It should also be considered that when modern German law and the DCFR refer to control instead, this may appear a more objective wording, but is in fact not different because this control is still perceived to depend on the state of mind of the possessor, all the more confusing when the terms ‘direct’ and ‘indirect’ are also used in this context. 56 It speaks in Art 8-1:205 of possession as being directly or indirectly physical. Especially the latter concept is confusing as indirect physical possession in this sense is not physical at all. The prime importance of physical possession is in terms of social peace (see s 1.1.9 above) in the sense that the physical possessor is primarily protected until someone pretends a better right. The DCFR uses the term ‘mere possession’ here, which is truly the factual physical possession (Art VIII-6:202) and even allows a form of self-help on the basis of physical

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 59 (corpus),57 still seen, however, as something physical, not simply the result of the disposition right. Again, this was a backwards step and does not clarify. Yet the concept of legal or constructive possession was not abandoned: see section 872 BGB.58 It has already been said that this German system became curious because it tries to steer some middle course between old Saxon and Roman law, the one being based on physical realities, the other being rights based.59 The advantage is that it gives the mere holder possessory rights and thereby proprietary protection, but systematic confusion unavoidably results. For example, the transfer of title becomes in this manner systematically more complicated as delivery of possession seems to suggest a physical act. As noted before, this is problematic where the buyer already has the asset in his physical possession when the second sentence of section 929 indeed deletes the requirement of delivery altogether (the traditio brevi manu), or where the asset remains with the seller when only a proprietary retrieval right is created in the buyer (the constitutum possessorium of section 930), or where the asset is in the hands of a third party when an assignment of the retrieval right is necessary (the traditio longa manu of section 931 BGB). In common law, on the other hand, we have, as we shall see, ownership and physical possession or bailment as the only proprietary rights in chattels at law, which operate as two distinct interests or titles at least in chattels and are each protected in their own manner. This protection is always in tort and there are no typical proprietary or possessory actions. Bailment is often distinguished from possession in this sense as it tends to denote a voluntary transfer of possession for a more limited period of time, but its characteristics are otherwise the same. appearances, although even then confusion enters when the self-help is also given to protect against a detentor, see Art VIII-6:202(3). 57 The Roman corpus requirement was not meant to be purely literal and thus physical at least not in the later perceptions. To begin with, it never meant that the possessor must hold the asset physically all the time or that in respect of land each bit of soil must be possessed in a physical manner, but even in the Corpus Iuris, where the concept of possession was a legal and not a physical one, there continued a measure of confusion about the physicality of the concept, a confusion increased because the Corpus Iuris was a compilation of views of different authors and not one system. Thus in D.41.2.1.3, Ofilius and Nerva still maintain that possession is factual and not legal. This is reminiscent of the common law of bailment and the old Germanic gewere—hence the beginning of the confusion. But in Gaius 4.153 the position was clarified, and this was followed by the Justinian Institutes 4.15.5. The possibility to exercise legal control (or the relevant indicia of ownership connected with the disposition right) was probably always the key, see also the previous section, and this provided, especially in the Ius Commune as we shall see, for an easier protection facility as it was often simpler to show this control (which in the case of several possessors depended on the older one, relevant especially when a thief intervenes, meaning that possession and control in a legal sense was not lost) than the ownership right itself, which was likely to be more abstract and relied on acquisitive prescription as we shall see. Another aspect of the protection of possession was the fact, also already mentioned, see s 1.1.9 above, that for reasons of public peace prima facie physical ownership was protected. Strictly speaking neither the legal concepts of possession nor holdership directly reflected this concern. 58 This is the Eigenbesitzer (the one who holds for himself), the other is legal holder or Fremdbesitzer (who holds for another). If the Eigenbesitzer or Fremdbesitzer has the property physically, he is the unmittelbare (immediate or direct) Besitzer (see s 854), otherwise the mittelbare (constructive, intermediate or indirect) Besitzer (see s 868). The Fremdbesitzer is normally unmittelbar (with physical possession) but even he can be mittelbar if there is a contractual subletting involved. In Germany, the relationship between the immediate or constructive possessors and holders or between holders is called the Besitzmittlungverhältnis and may derive from proprietary as well as contractual dispositions, as respectively in the case of usufructs and rental agreements. 59 Ambivalence about the nature of possession and the difference between it and holdership is widespread: see J Gordley, Foundations of Private Law: Property, Tort, Contract, Unjust Enrichment (Oxford, 2006) 64. Here the owner is thought to be free to do with the property as he pleases because (normally) he paid for it. The possessor is then ‘protected only so that the property will be used and is cared for by someone’. In this way, ownership and possession are not primarily cast in terms of protection but rather in terms of use (by the owner) and preservation (by the possessor). In civil law terms, this kind of possession reminds more of holdership (it is not the manifestation of ownership), albeit that the holder usually benefits from a contractual user right and has the position of holder only during an agreed period.

60  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights In equity, on the other hand, the types of proprietary interest that may be created, at least in chattels and intangible assets, are in principle limitless. It may well be that the main structures themselves such as trusts (as well as resulting trusts, constructive trusts, and tracing notions), conditional and temporary ownership rights, and floating charges are now conventional and may not easily be augmented,60 but through them virtually any form of interest can be created. This may be seen in particular in the rights of trust beneficiaries and future (temporary or conditional) interest holders. As shown throughout, rather than limiting the number of proprietary rights, equity instead limits their effect and does not uphold these rights against bona fide third parties who acquire a legal interest (ownership or bailment) in these assets for value. So, in common law, the proprietary system is in principle open and proprietary rights can be created freely by contract (in equity), but the corollary is better protection for bona fide purchasers, even in respect of assets other than chattels. As we have seen this may even go as far as the protection of the ordinary course of business in respect of commoditised products and of finality in that context, in the latter case regardless therefore of any bona fides relevant especially for commoditised assets. It is always presumed. It has already been said also that this is an important and understandable trade-off, which does not operate at law, therefore not against ownership and possession in respect of chattels, except where so provided by statute as in the Sale of Goods Act 1979 in the UK (see for this nemo dat rule more particularly section 1.4.9 below).61 Although the notion of ownership is universal and in civil society now often considered a human right, it should be noted and must be accepted that at least at the more theoretical level, common and civil law still present considerable differences in the manner proprietary rights is handled and expressed. Even where the terms are the same, such as ownership and possession, the student must understand that their meaning is quite distinct: common law has a much weaker notion of ownership in chattels, allows (unlike civil law) multiple ownership rights in them as we shall see, and sees possession, which in common law is the physical holding, as a concept from which a stronger prima facie protection is derived (in bailment) and which hardly allows of multiple possessors of the same asset (as civil law is used to doing). It follows that possession in this sense is a proprietary right by itself. In fact, it may be fair to say that apart from the equitable interests, the main difference between both systems is in the concept of possession. If within the EU a more uniform framework for the law of chattels and intangibles were ever considered, a fundamental choice must be made here: is it to be the more abstract Roman approach or, for chattels, the more physical old Germanic approach, which is also still that of the common law although notably not in equity. A middle course hardly seems possible as the faint-hearted German approach demonstrated earlier, even though the DCFR clearly opts for this system without questioning it. It is hardly conceivable that it could ever have been introduced in England or after Brexit in other common law EU Members. It has already been said before that the above model of proprietary rights and their operation in civil law is nowhere fully implemented, see for example the German variations, but it is posited that it presents a powerful model for comparison and critique, also in assessing the value of the DCFR in this area. It was also acknowledged that the role and meaning of physical possession

60 As already mentioned in s 1.1.2 above, these are the three areas where equitable proprietary rights most commonly manifest themselves. It was also noted there that they may not be capable of being freely extended, see in particular n 11 above, but together these three structures may cover virtually every contractual configuration. 61 It may be noted in this respect that all conditional and temporary interests and trusts in land became equitable in England under the Law of Property Act 1925 and thereby subject to bona fide purchaser protection.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 61 reappears at the transnational level, at least in the initial phase of transnationalisation of the law in this area,62 but it was also submitted that it was likely to be soon eclipsed by more abstract rights-based notions.

1.2.4.  The Way Proprietary Rights are Protected in Civil Law As we have seen in the previous section, the assertion of the various proprietary rights is in civil law foremost a matter of invoking their ownership. The shadow of it is possession: the will or disposition to hold the proprietary right in an asset for oneself as if one were the owner. Normally it means that in civil law ownership and possession of a proprietary right go together. This is not so in the case of theft. One can also hold a right of another for oneself in a bona fide manner, for example pursuant to a void sales agreement, which is at the heart of acquisitive prescription, see for this concept section 1.2.5 below. Then there is the holdership by third parties: the will to hold the proprietary right for someone else subject to one’s own (contractual) user, income or enjoyment right. In the case of the proprietary ownership right, owning that right thus means the assertion of the right itself, as it would in the case of a usufruct or pledge. In this connection one normally finds in civil law a special proprietary action for the assertion of the ownership right. That is the revindicatio of Roman law and is tied to acquisitive prescription during the prescribed period providing the proof of ownership of the relevant right. As for the iura in re aliena, which are the other more limited proprietary rights, they are normally proven by deriving unbroken from the full ownership right, during the required period, also as a matter of acquisitive prescription. However, as to chattels, in civil law the proprietary rights in them may also be proven as bona fide purchaser. Indeed, the proprietary claims may then also derive immediately from bona fide possession of these rights as well as from their acquisitive prescription, sometimes also expressed in such cases as an acquisitive prescription of zero years, as we shall see. It was already said that possession in this context means the assertion of control (or corpus in that sense) of the relevant proprietary right in respect of the relevant asset63 with the intent to hold it as owner (the animus domini)64 or, perhaps better, asserting the underlying proprietary right in the asset as if one were the owner of that right, making it a demonstration of the disposition right. In the case of the usufruct, servitude, or security interest, possession means therefore asserting these rights and using the assets thereunder as if one were the rightful beneficiary, therefore the owner of these more limited proprietary rights in an expressional sense. More generally, reference is in this connection also made to the animus possedendi, which may therefore exist in respect of each proprietary right. In a perfect system, there would follow a special possessory action irrespective of the underlying proprietary right. In Roman law, that was the actio Publiciana.65 62 See also s 1.1.11 above, where the examples of assets on the high seas and the Eurobond were used and the need for supplementary equitable rights was also noted. 63 See n 57 above. 64 It is the combination of corpus and animus in this sense that held the key, see D.41.2.1.3 (Paulus). See also n 55 above for the view of von Jhering with his emphasis on corpus. 65 Thus, the possessory action was in Roman law the actio Publiciana, whilst the owner himself had the revindicatio, the strongest proprietary action of all, but not easy to bring because ownership had to be proven, often difficult where the prescriptive acquisition possibilities were still limited: see n 74 below. The actio Publiciana was not a general possessory action, however, but was given to any possessor whose acquisitive prescription period was still running as if it had been completed. In other situations, interdicts were used to protect possession and were more in the nature of tort actions. In later times, it became the possessor as

62  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights As discussed before, ownership and possession in this abstract civil law sense can also exist in relation to the proprietary rights in intangibles or claims (even user, income and enjoyment rights in the same underlying assets exercised by a holder of the original proprietary right with respect to the underlying asset), which rights are themselves assets of the holder, therefore the object of further proprietary rights, even though there may not exist revindication and possessory actions in respect of them in most civil law countries, particularly in Germany and the Netherlands, where these rights are then only protected against third parties in tort. But one could also say that the owner of these contractual rights is truly the holder of the original proprietary right of grantors in respect of the underlying assets, which again he may defend in tort (or in Germany whilst borrowing the possessory action from the possessor). Naturally, possession is here never physical either, as legally it never needs to be in civil law, as we have seen. It is all to repeat that, in a proprietary sense, obligatory rights are assets and therefore have a proprietary aspect (and protection) at the same time, clear especially in respect of monetary claims. Although proprietary protection is in that sense not an asset itself, it can be transferred with the right. Asset status arises legally when claims are formulated, also in respect of damages claimed for infringement or in claims for repossession. It was already noted in this connection that such claims are always (in civil law terms) in personam,66 therefore against a specific defendant, although they do not thereby become merely obligatory. If proprietary in origin, they even give a reclaiming right against a bankrupt debtor, allowing the claimant to operate (in principle) quite separate from the bankruptcy or claim priority against all others under a security interest in these claims. In civil law, at least in the case of tangible property, proprietary rights can always be transferred to others temporarily. They become the holders or detentors, as we have seen, subject to the user, enjoyment or income rights that were given and they will normally be handed the asset (mostly physically, although there may also be sub-holders) to enjoy it, but it depends on the arrangement which is likely contractual. It is then so only according to a special relationship with the legal possessor, who does not thereby lose his legal possession. This is the situation particularly in the case of a warehouse or custody arrangement or a borrowing or hire-purchase agreement with the owner. The holder now holds the ownership right for the owner/possessor until the end of the contract and has income, user or enjoyment rights thereunder as the contract defines. Where there is a usufruct, the beneficiary has the asset as owner/possessor of the usufruct and has the user, enjoyment and income rights as granted thereunder, but is holder at the same time for the owner/possessor in respect of the latter’s ownership right. In a similar manner, the holder

pretended owner who would ‘borrow’ the revindication action, now backed up by a better developed system of acquisitive prescription to support the ownership claim, but it was more limited in time and always subject to the better possessory rights of others, that is, older possessors of the same asset, or the owner. This is still the approach of the new Dutch law (Art 3.125 CC, cf also Art 2279 CC in France. In Germany, there is greater emphasis on the proprietary action or revindicatio: see ss 985ff BGB. The advantage is that it awards permanent protection as opposed to the temporary protection of the possessory action based on an involuntary loss of possession only. The possessory action nevertheless allows the recovery of the asset, even out of the bankruptcy of the defendant, and if necessary, also from holders who refuse to return the goods or from any others in physical possession without a better (usually the older) right to it. When ownership and possession in this sense are not in the same hands (the normal example being the situation of theft, or when goods are lost and found by someone else, or when the underlying arrangement under which ownership is obtained proves to be void), the owner, who, strictly speaking, never lost his legal possession, is faced with a competing possessor but revindicates the asset from the pretended owner or invokes the possessory action, as possession is always subject to the better right of the lawful owner and older (rightful) possessor. 66 See also what was said on this subject in n 14 above.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 63 or detentor may hold the usufruct of an owner/possessor of that right and receive the benefits in the way the contract specifies. To that effect, the usufruct is transferred to him as holder and he can also create a sub-holder. At the end of the contractual terms these rights will automatically be reversed. Thus, the holder holds the relevant proprietary right (here the usufruct) to the asset subject to his own income, user, or enjoyment right as defined by the contract, which may as a valuable asset in its own right still be transferable to others. This is likely to be done through assignment, transferring at the same time the underlying proprietary right of usufruct for this limited purpose, which would lift the transferee to the level of subholder of this right (until it or the usufruct expires). Holdership could also exist in respect of intangible underlying assets, as in the case of a collection agent to whom receivables are transferred for collection purposes only. The key is always that these holdership arrangements and any surrender of assets thereunder do in civil law not disturb the legal possession of the asset under the relevant proprietary right, which would merely become constructive (or in German mittelbar), although the holders acquire a status of their own vis-à-vis third parties, which they may be able to defend. It was already said that they do not normally do so through their own type of proprietary action, but only in tort (or in contract against the grantors), yet in countries such as Germany in the case of chattels they may defend in a possessory manner, subject always to the better rights of the owner and legal possessor. In this sense holders borrow the possessory action at least in respect of chattels. There are those in other civil law countries who have argued for giving holders or detentors similar protections subject to the better rights of other holders, of sub-holderships, and of legal possessors and owners.67 This may make sense. Holdership can only be truly undermined if the holder subsequently manifests the desire to hold as owner (or as beneficiary of a limited proprietary right) for himself, thereby manifesting the animus possedendi and becoming possessor. The result is two legal possessors, of which the older has the stronger right.68 Again, in this system there can only be one real owner, but there could be more than one possessor and also more than

67 In the Netherlands, especially HCF Schoordijk, ‘Enige opmerkingen over de bescherming van bezitters en houders [Some observations on the protection of possessors and holders] 1984’ in Assembled Works (Deventer, 1991) 447, invoking in support the English rather than the German approach. Similar views had been expressed earlier by JC Naber, ‘Het onredelijke der bezitsbescherming’ [The unreasonableness of the protection of possession] (1902) III Tijdschrift voor Privaatrecht, Notariaat en Fiscaalrecht 161. The only protection he proposed was that of the better right, much as in the English tradition: see later also JC van Oven, De bezitsbescherming en hare functies [The protection of possession and its functions] (Amsterdam, 1905) 199ff. Modern French law in Art 2282 CC as amended in 1977 appears to give holders similar strong rights. Yet the French Civil Code, having abandoned the requirement of delivery for title transfer in respect of chattels, is less concerned with the notion of possession and therefore also detention and their protection. It abandoned the actio Publiciana as a special possessory action. This lack of interest is also reflected in French legal treatises on the subject. It may be of some interest in this connection to consider the position of Grotius. In s II.3.4 of his Inleidinge tot de Hollandsche Rechtsgeleerdheid [Introduction to Roman Dutch Law] of 1631, he characterises ownership as the right to be re-established in physical possession (regardless of whether the present possessor was bona fide and acquired the property for value). The key emphasis is here on user rights. Their protection was considered a basic natural right, although in De Iure Belli ac Pacis II.2 and 3, Grotius emphasised the common nature of property but denied that individual ownership itself had a basis in natural law. It was only a matter of positive law (ius gentium), which meant that states could intrude on ownership rights through legislation (in more modern times, eg, to protect bona fide purchasers, etc). 68 It could be argued, however, that the first possessor having only constructive possession thus loses it and therefore also his position as a possessor. He only retains the possessory actions. From that point of view, the situation is not different from theft, which is what usually happens when a holder steps up to possession.

64  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights one holder of the same right to an asset if one also keeps the possibility of sub-holding in mind, an example where even holdership can become purely non-physical or constructive (or mittelbar) in respect of physical assets. For proper proprietary protection, in civil law it is thus necessary always to appreciate the nature and status of the different proprietary actions, which derive from the particular manifestation of the underlying proprietary right. It means first that they are not founded in the law of obligations (contract or tort), but in the law of property itself and should be clearly distinguished, although, again, at the practical level in most civil law countries the holder/detentor (except in Germany for chattels) and the owner of a claim normally defend in tort. Proprietary actions can be used by the owner (the revindicatio), by the mere possessor, owner or non-owner, whatever his pretence (the Actio Publiciana) and, in Germany, also by the holder against anyone improperly in physical possession of the goods, wherever they may be or however they may have been acquired by the latter. This does not affect any older limited proprietary right or the bona fide purchaser of chattels in physical possession, who is in civil law now mostly protected unless acquired from a thief (or the latter’s successor). It also does not affect any beneficiary of acquisitive prescription as we shall see in the next section. To repeat, for each, the ownership, possession, or holdership action, there are in principle different requirements, although this may not be fully expressed in all national laws. For the full right (ownership of it) to be so defended, its absolute nature must be established. This is done through reliance on acquisitive prescription in which the notion of bona fide legal possession plays a crucial role: see again the next section. The legal possessor, on the other hand, only asserts his better right, cf Article 3.125(2) Dutch CC. So does the holder if given proprietary protection. It means that in civil law, it is often easier to defend as possessor than as owner, which is one reason for the importance of the concept of possession in civil law. It is also of interest to see how ownership, possession and holdership in this sense are acquired and surrendered. The transfer of ownership results from the proper transfer of the underlying proprietary right, which includes surrender of legal possession by the previous owner, as a requirement of the transfer of title through delivery of (legal) possession of the asset, or, as in the case of chattels, in countries such as France and Italy, upon the mere conclusion of the sales agreement (unless delayed thereby)—see more particularly section 1.4.2 below. In civil law, the transfer of ownership may also result from bona fide acquisition in the case of chattels if the only defect is a lack of disposition rights or from acquisitive prescription for all types of assets and defects, which mostly also requires the transfer of legal possession meaning sufficient legal control. Transfer of legal possession of the relevant proprietary right to the asset will go with it. Separated from ownership, possession may also be created spontaneously and autonomously through physical appropriation of the right, as in the case of theft, when an additional possessor starts operating. One could say that in such a case legal possession itself is not properly transferred. It is in any event the junior interest. It may also result from invalid transfer agreements when ownership proper is not passed. Interestingly, in Germany, as already mentioned, legal possession of chattels not in the physical possession of the owner may also pass-through assignment of the retrieval right (section 870 BGB). It might suggest that in Germany possession itself is in truth some transferable proprietary right. Transfer of holdership, on the other hand, results from contracts meaning to establish it, such as rental agreements or other types of contractual user, income and enjoyment rights. The consequence of this civil law system is, as we have seen, that the legal possessor, even though physically surrendering the asset, does not necessarily lose his possessory status but may legally retain the benefits, actions and defences accorded the possessor. As we have seen, the legal holder is in most civil law countries not protected in a similar manner, has mostly only a tort

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 65 action, and in the meantime depends on the owner or legal possessor of the underlying proprietary right if the asset has reached third parties, if the legal holder cannot reach them in tort. Again, it is important to appreciate that the holder, while losing the asset involuntarily, thereby does not lose his status as legal holder or its connected protections either. The benefits of legal possession in this sense, even if the possessor does not physically hold the asset, are: (a) the possessory protections which the possessor in the legal sense can raise against any junior physical possessor of the asset including a holder/detentor (after the end of the contract creating the holdership), against the thief who stole the asset from him, or against the thief ’s holder, and against any finder; while (b) any acquisitive prescription running in favour of the legal possessor is not interrupted either. Again, in Germany, similar protection exists for the holder in respect of sub-holders, thieves or finders and their holders in the case of chattels. There is no acquisitive prescription for the holder or Fremdbesitzer, unless he changes his position to legal possessor or Eigenbesitzer. This is the same as in other civil law countries.

1.2.5.  The Acquisitive Prescription and its Importance in Civil Law. Difference with the Statute of Limitations and the Protection of Bona Fide Purchasers In civil law, the acquisitive prescription is of prime strategic importance as it allows any owner to prove his/her relevant proprietary right in an absolute, exclusive, or ownership manner, which is the basis of his/her protection as owner of that right and as such the pivot of the entire system. As we have seen, this protection is at least in respect of physical assets afforded through the revindicatio and, to mark the owner of a proprietary interest out as the sole title holder, it relies on this acquisitive prescription, which applies no less to all other proprietary rights. In that sense, ownership of each proprietary right is exclusive and there can only be one owner of such a proprietary right although it is subject to other older proprietary rights in the same assets or, like in the case of a usufruct, there might be a sub-usufruct in the same assets, as we have seen). Acquisitive prescription results from bona fide legal possession, which in this context acquires a central place but may as such still be entirely constructive. The acquisitive prescription function, connected with legal possession of this sort, derives in civil law from the notion that in the end the law will follow the appearance of the right. This applies to all proprietary rights provided there was no mala fides. Acquisitive prescription in this sense should be clearly distinguished from the operation of the statute of limitations. This does not require bona fides but still a desire to hold the (relevant right in the underlying) asset for oneself while there must also be some manifestation. Thus, even the retrieval action against a thief will eventually be time barred (traditionally after 30 years, although under modern law often sooner). That might still not make the thief technically the owner/possessor as a statute of limitations strictly speaking does not transfer property, although that result is often accepted under more modern law, at least as long as the thief openly demonstrated his claim to the property. In other words, in order eventually to become the owner under a statute of limitations, the thief must in this view openly deny the right of the original owner and manifest his desire to hold for himself and demonstrate control. To keep the asset hidden in the attic might not be enough.69 69 The English Limitation Act 1980, s 4(5) now excludes all claims to ownership of claimants who acquired property in a criminal manner: see further n 105 below.

66  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights We have seen in the previous section that ownership, usufructs, easements or servitudes, and security interests may also be defended on the basis of the mere legal possession of these rights (on showing the better claim in this regard), or on the basis of their ownership, proven in turn with reference to the required time of bona fide legal possession, that is through acquisitive prescription.70 That shows the connection between both ways of protections. In fact, acquisitive prescription was at the origin of the abstract Roman notion of possession. Wherever there is a reference to possession in a civil law sense, it may indeed be assumed that there is also a possibility of acquisitive prescription if this legal possession (the intent to hold the relevant proprietary right in the underlying asset for one self) was bona fide for some time, which bona fides itself may be presumed. Where, on the other hand, there is a problem with this possession in respect of intangible assets, as there is in Germany, the acquisitive prescription possibility may itself become subject to doubt too, but note that in civil law the concept of acquisitive prescription applies in principle to all asset classes and not only to chattels. In principle, under civil law, acquisitive prescription thus arises in favour of any legal possessor, therefore in favour of anyone (a) who wants to hold the proprietary right to the asset for himself, (b) has control of the asset, even if only through a holder or detentor, or did not surrender it voluntarily in the case of theft or loss, (c) is bona fide, which is usually presumed,71 and (d) has together with his bona fide predecessors fulfilled the required number of years (if there was a thief in the chain, it may be considered broken). In the case of tangible movable assets or chattels, the acquisitive prescription is now immediate in France, unless the property was obtained from a thief when it is likely to be three years of bona fide possession, 30 years for intangibles and immovables, 10 years under the new Dutch CC, Article 3.99. In Germany it is 10 years for chattels under section 937(1) BGB; there is no similar rule for intangible assets. It assumes that the assets have existed that long. It is one of the reasons that in countries like Germany and the Netherlands, for chattels, the bona fide purchaser protection is seen not as a matter of acquisitive prescription, not even of nil years, but rather as another way in which property is instantly acquired, further limited, however, to the situation of a lack of disposition rights,72 assuming further that there is sufficient control of the asset. Note further that in countries like Germany, invalidity of the contract itself does not inhibit the transfer per se, either, which is seen as a separate legal act (dingliche Einigung) as we shall see below in section 1.4.7. This is the so-called abstract system of title transfer. In France, on the other hand, the bona fide purchaser protection may even be immediate if there was no valid contract, assuming the buyer was not aware of this and not himself causing the invalidity, for example in the case of lack of capacity to contract in the transferor or in the case of illegality.73 The acquisitive prescription of nil years then covers all defects (although it may still be postponed for three years in the case the property was unknowingly acquired from a thief).

70 It was said in the previous section that the more limited proprietary rights or iura in re aliena are normally proven on the basis that they derive unbroken from the ownership right itself proven on the basis of acquisitive prescription, but in respect of chattels they may also derive from a bona fide purchaser. Indeed, for chattels, the limited proprietary rights themselves may be established not only through acquisitive prescription, but also through bona fide acquisition, which then may be clearly distinguished. 71 Still there are some important differences. In countries like Germany (s 937(2) BGB) following canon law and the teachings of Bartolus based thereon, the bona fides of the buyer must subsist during the entire prescription period. This was not the Roman law (C.7.31.1) and is not required in France (Art 2269 CC) nor in Dutch law (Art 3.118 CC), where bona fides is relevant only at the moment of acquisition. 72 For acquisition from a thief, there may still be a number of years for the real owner/possessor to show up. 73 Normally (except in the case of under-age children), there would be constructive notice of such incapacity, but only, it appears, if so advertised in the country of the buyer.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 67 Indeed, for acquisitive prescription, the transferee does not need to have himself acquired the asset pursuant to a valid cause (usually pursuant to a contract of sale or exchange) or from a person with proper capacity and disposition rights, as long as s/he is not aware of any such defects in his/her purchase. Formalities need not be observed earlier in the chain either, so defects in delivery are also covered. Again, there is clearly no need for physical possession of the acquirer earlier in the chain in this system either. The acquisitive prescription for the required number of years thus covers all defects in the acquisition of the relevant proprietary right to assets including any invalidity of the underlying contract where required for the transfer, and any lack of capacity to transact in the transferor, any lack of disposition rights in him, and any deficiencies in the formalities. That is the general rule. Only theft breaks it and the period starts anew. As we shall see, the more immediate protection of bona fide acquisition of chattels in this manner came separately, in order to protect the ordinary flow of goods and derived from the practices in the commercial centres of Italy, the Netherlands, and Northern Germany and only later became a more general rule, first in France in the seventeenth century: see section 1.4.8 below. It spread from there through most of the civil law, to be distinguished from acquisitive prescription, which was mostly not instantaneous, but on the other hand not limited to the acquisition of chattels and did not require sufficient possession nor a valid contract (in the chain) as we have seen,74 as long as it was bona fide, which was mostly assumed but interrupted by theft. It may be of interest to note here that acquisitive prescription in this sense is not a common law facility, which limits itself to statutes of limitation and sometimes to bona fide purchaser protection, notably in the sale of goods but only by statutory disposition; see further section 1.3.5 below.

1.2.6.  Proprietary Defences in Bankruptcy. The Issue of Segregation In bankruptcy, proprietary rights and their protection acquire a special meaning as they may give the beneficiary the right to ignore the bankruptcy and claim his interest directly from the bankruptcy trustee outside the distribution process, primarily as owner or security interest holder, or even as a beneficiary of a usufruct during its term. This is segregation, but the situation may become more varied in more modern bankruptcy law. In bankruptcy, the general rule in civil law is that the debtor is liable with its entire estate for all his/her debts (see Article 2093 French Cc: ‘les biens du débiteur sont le gage commun de ses créanciers’), but this implies in principle respect for all existing proprietary or priority rights of others in the debtor’s estate’s assets. In fact, contrary to what is often argued, bankruptcy is about ranking, not about equality, not in civil

74 Under later Roman law, it appears that the acquisitive prescription (usucapio) foremost protected the bona fide buyer who had technically acquired the asset in the wrong manner, that is, without the proper formalities under the various methods of transfer designated under Roman law. It was otherwise difficult to invoke. The main problem for a wider use was in the res furtivae (Inst 2.6.2), which could not be obtained through acquisitive prescription. They were goods that were once stolen or embezzled or even goods that were earlier in the ownership chain transferred without a valid contract (Inst 4.1.6). They could never be retained, therefore, even by a bona fide possessor who himself had obtained the asset under a valid contract, see also D41.3.33 (last sentence). These were at the same time impediments to the possessory action, the actio Publiciana: see D.6.2.7.16–17. In most cases, the acquisitive prescription did not therefore protect against lack of disposition rights or capacity for which in modern times it is effective and primarily meant. So, it could rarely be invoked against the real owner (see also D.6.2.16–17), but it could still be of use against other possessors. D.6.1.24 notes that the normal and easiest way for the owner or possessor to retrieve the property was through the use of the possessory interdicts, which allowed recovery on the basis of an action in tort but would be effective only against the depossessor and

68  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights law either. This is often still advocated but has probably always been a misconception, see more particularly Volume 5, section 1.1.1. An important distinction needs to be made here. Proprietary rights commonly allow the creditor to claim his/her proprietary right in whatever asset against all the world including in principle the bankrupt estate quite separate from the bankruptcy through a procedure which is called ‘repossession’ and which may even allow self-help as long as it is peaceful. Otherwise, some form of judicial support, even a judgment, might be necessary. That is different for personal or obligatory claims. In that case, a creditor will normally proceed to judgment and upon such judgment (if not voluntarily complied with) to attachment of the goods of the debtor, if necessary to a general attachment through bankruptcy proceedings against an insolvent debtor. In principle, the creditor will then share equally with all other creditors in the collections (if not himself also a secured creditor or lien holder) and will, as an obligatory claim holder, not have a preference in respect of the proceeds of the attached assets nor a right to separately recover, unless there are also set-off rights as we shall see. It is true that in some countries, prior judgment creditors may benefit from judicial or judgment liens supporting their otherwise unsecured monetary judgment claims (especially in the US under State law). This then leads to proprietary interests of competing creditors and repossession rights in the order of time in respect of the assets to which these judgment liens attach, normally real estate of the debtor, still subject, however, to older proprietary interests, so that judgment liens have a low rank. They remain exceptional. In most civil law countries, there are no judicial liens giving priority status except the judgment lien in real estate under French law, the hypothèque judiciaire of Article 2123 of the French CC. Among the main civil law countries, only in Germany do mere attachments yield priority giving rise to attachment liens in the attached assets (see sections 804, 867 and 930 of the German Civil Procedure Code of 1877). This is an old germanic rule which also prevailed in the Netherlands until the time of the codification when the French sharing approach was adopted. This attachment lien is also accepted in many states of the US. It gives the attaching creditor a preference in the proceeds of the attached assets, always subject to senior proprietary interests. Again, this attachment lien does not extend to the creditor who opens bankruptcy proceedings. The essence is that competing creditors in a bankrupt estate will normally have to respect all third-party proprietary rights (and liens) in the bankrupt’s assets including earlier conventional or statutory security interests. Full ownership rights of third parties in assets held by the bankrupt debtor are the clearest example of their exceptional status in bankruptcy. It comes down to the retrieval of my bicycle in the shed of my friend who has gone bankrupt. In that case, the asset will be repossessed by me as rightful owner (through the revindicatio), although theories of apparent ownership of the debtor may still detract from my rights, especially if I voluntarily surrendered possession to my friend/the bankrupt debtor and his common creditors relied on the appearance of his ownership of my property while extending credit to him. However, this notion of

not against his/her successors in interest. The owner also had the actio furti, which was more in the nature of a tort action, later also available to holders who were disseised but liable to return the goods to the owner (Inst 4.1.13). However, it only led to payment of damages. Acquisitive prescription, where allowed, was substantive, therefore another way of acquiring full ownership as it now again is in Germany and the Netherlands. Only later did its function become largely procedural in that invoking the prescription became the traditional way of proving and asserting ownership, which would entitle the owner to the revindicatio. As such it still remains important in civil law as we have seen when an absolute rather than a better right has to be proven in ownership claims.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 69 apparent ownership, which may give mere creditors better rights, is being substantially weakened in modern law, see especially Volume 5, section 1.1.10. To what extent third parties may indeed claim better rights and repossess, especially if their proprietary rights are less than full ownership rights, as, for example, under a non-possessory reservation of title or other appropriation rights upon default or under a floating charge or finance sale, is an important theme throughout this book. It is rightly a matter of great practical but also intellectual interest. Especially in a bankruptcy of a mere holder of the assets, the result will depend on each country’s laws (normally the lex situs of the asset), but also on the special provisions of the applicable bankruptcy laws, which may change the normal rules, especially if a reorganisation in bankruptcy is considered. Repossession is an important protection and expression of a proprietary right. It suggests that the bankrupt has no proprietary rights in the assets and that his holdership of a proprietary right is not strong enough in this regard. I f the third party has only a security interest in the assets, he will have to wait under applicable law until a default before he can repossess. That could be a bankruptcy. Even then he might find that there are older security interest holders who take priority. The reason for and nature of the proprietary interest might be different. The owner may earlier have given the bankrupt a particular limited proprietary right, such as a usufruct. The bankruptcy trustee may continue to collect the income or also be able to sell such a usufruct, subject to the ultimate right of the owner to retrieve the assets at the end of the term. Alternatively, the bankrupt may have been given a user right by the owner making him/her a holder for the owner, for example, I lent my bicycle to my friend for him to use. This right may still have value for the estate. The estate as holder may then continue to use it until the end of the term, often subject, however, to rights of repudiation (of contracts) by the bankruptcy trustee, important when the estate must pay for the use, which may no longer be valuable. If there is demonstrable damage for the owner by ending the agreement, s/he may claim it as competing creditor. If the trustee wants to continue s/he may have to give assurances of payment. As we have already seen, common law distinguishes here less clearly. Not only does it not have a limitation of equitable proprietary rights, the definition and impact of proprietary rights are also less clear. This may make a difference notably in the bankruptcy of a holder (bailee) of the asset who is not the owner or when the asset is alienated by a bailee to third parties and the owner wants to retrieve it. In common law, the owner has in principle only a personal (often contractual) retrieval right against the bankrupt physical possessor or bailee. The owner’s position is thus weak, also in a bankruptcy of the bailee, unless he may construe a right to immediate repossession. It may derive from the contract itself, which might reserve this facility explicitly should an event of default or a bankruptcy intervene.75 Under civil law, in such cases, the owner will in principle use his/her proprietary action (revindicatio) to retrieve the asset subject to any proprietary or even contractual user right of the bankrupt’s estate in the manner just mentioned. If the bankrupt has a limited proprietary right in it, like a usufruct, this will be respected and valued and could be the subject of an execution sale in which the usufruct is sold for its remaining period and value. If there were personal rights of the bankrupt in the property, such as contractual user rights, the rules concerning continuation or repudiation of executory contracts would apply as in the case of all other contractual relationships of a bankrupt. As we have seen, this may give rise to a damage claim by the owner for lost revenue even upon a return of the asset, which are, however, only competing non-secured

75 See for this right to immediate repossession s 1.3.2 below. There might also be some tracing rights suggesting an unjust enrichment or restitution remedy.

70  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights claims. In the meantime, the bankruptcy trustee can hold on to its holdership if that is beneficial to the estate. It should, however, also be considered that in common law in respect of chattels, there is never an absolute right to recover the asset, not even upon an immediate repossession, as we shall see; the defendant may always pay damages instead, discretion in England now being vested in this regard in the courts. That does not necessarily make the owner/bailor a competing creditor, however. Yet, even where chattels are sold conditionally or where the title transfer is delayed as in a retention of title, their physical retrieval from a defaulting buyer in possession is problematic, also in the latter’s bankruptcy. Perhaps the interest of the seller in the sold but unpaid asset may still be characterised here as a constructive trust and may as such give a stronger recovery right.76

1.2.7.  The Civil Law Relativity or Priority Principle in Respect of Proprietary Rights: The Difference from the Relativity of Obligatory Rights A final observation may be appropriate and helpful on the civil law notion of proprietary or absolute rights. It was explained earlier that civil law maintains a limited number of proprietary rights in which ownership operates as the fullest right and the others (such as usufructs, some long leases, servitudes and security interests) operate as limited proprietary rights in respect of the assets of others (iura in re aliena). Although these rights in relation to the fullest right (ownership) may be more limited, they are not inferior to it during the period of their existence and no less absolute. There is no relativity here at all, but even the proprietary rights, however absolute in nature, in that they can be maintained against all the world,77 are relative vis-à-vis each other. This follows precisely from their absolute nature itself, in the sense that the older right prevails over the younger and is therefore the better right. There is therefore a ranking implicit among the various proprietary rights according to time or seniority, but not as between the various types on the basis of relative importance as the bigger or smaller right. Thus, an older usufruct will prevail over a later ownership right in the asset. It will naturally also prevail over the former owner who granted it, assuming the grant itself was not defective (when bona fides of the grantee in actual possession may still be a protection in the case of chattels in respect of a defective disposition right, while acquisitive prescription will ultimately extinguish any defects). In this connection, the maxim prior tempore potior iure (‘first in time first in right’) is also used, very clearly in the case of senior and junior mortgages in real estate, but the concept applies more generally and this relativity or priority manifests itself also where several possessors of the same proprietary right surface (or holders where possessory protection also attaches to holdership). Proprietary or tort actions against thieves or finders will cut through this system.78

76 See s 1.3.6 below. 77 See for the modern social orientations and impact in the exercise of proprietary rights, n 28 above. Important as they are, they are not here further considered. 78 In civil law, the older possessory right may still be defeated in favour of a younger possessor with physical possession if it could be proven that the older possessor was not the true owner or rightful beneficiary of the proprietary right, as in the case of a thief who lost physical possession. This is another instance in which physical

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 71 There is another consequence: first the owner of a proprietary right, who did not voluntarily cede it, can normally pursue this right in the underlying asset wherever it is against whomever else pretends to be the owner of that right or of any other proprietary right concerning the same assets, or however the latter acquired it. In that sense, the right follows the asset and its owner. The terms droit de suite and droit de préférence were used in this connection above in section 1.1.2 to explain the traditional consequences of property rights. It is sometimes also said79 that, where no delivery is required for ownership transfer in chattels, as in France upon a sale, there is a form of relativity (at least in chattels) of the ownership itself, as, upon a double sale, the bona fide purchaser who acquires physical possession, even if he was the later buyer, acquires full title. Physical delivery is then often still important to establish the ownership vis-à-vis third parties. It suggests one ownership type between the original parties and a different one vis-à-vis others, so that there results a duality or relativity of the ownership concept. This view is now mostly abandoned as in truth it concerns here only a special case of bona fide purchaser protection. There is no duality or relativity as the bona fide purchaser has obtained all rights to the asset and the rightful (first) owner has lost all upon physical delivery, while before this moment the first buyer had everything and the second buyer nothing. We shall revert to this in the context of the discussion of double sales in section 1.4.2 below. In a similar vein, however, the heading of section 16 of the UK Sale of Goods Act 1979 still refers to the ‘Transfer of property between seller and buyer’. This is meaningless as between two parties such rights are always personal or obligatory. Proprietary status only arises in respect of third parties not part of the original transaction, often primarily the creditors of sellers and buyers, in the question to whose estate the sold asset legally belongs. Although the relativity of proprietary rights—in the sense of better rights rather than absolute rights to prevail—is more a common law concept than a civil law one, as we shall see, it is thus not unknown to civil law either, especially in the ranking of security interests. In that sense, it is basic to all property law. It should be clearly distinguished, however, from the other type of relativity more commonly referred to in civil law in the context of the distinction between proprietary and personal rights. In that context, the proprietary rights are absolute as they work against all the world and the personal rights are relative as they work only against the debtor or counterparty. In common law countries, in equity, it is weakened in so far that the equitable proprietary rights only operate against certain classes of third parties as we have seen. It does not distract from the principle although one could see here another type of relativity.

possession may still matter in civil law. It means that the younger possessor, who can claim this so-called ius tertii, may be able to hang on to the asset, except that in the case of involuntary surrender by the thief, he still has an action against his own thief. Only if the younger possessor was not a tortfeasor in this sense and all the more so if he was bona fide (with a valid contract), would he be fully protected as such. In Germany, on the other hand, the older possessor prevails and a reference to the ius tertii is not permitted. Only in the revindicatio may the defendant prove that the plaintiff is not the true owner. It is a normal consequence of the German emphasis on the revindication rather than on possessory actions. In a similar vein, a retentor or beneficiary of a possessory lien, for example a repairer of a watch, see also s 1.4.10 below, may retain the asset until payment as if he had a proprietary right and protect this even against older possessors. Also, in the law of secured transactions there may be deviations from the principle that the older right prevails. Sometimes it is the younger, more specific, interest that prevails over the older, more general, as we shall see below in the context of floating charges. Thus, a younger purchase money security interest or reservation of title in favour of a more recent supplier of an asset may defeat an older charge over a whole business. 79 See eg, still U Drobnig, ‘Transfer of Property’ in A Hartkamp et al (eds), Towards a European Civil Code (Nijmegen, 1994) 353.

72  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights

1.3.  The Types of Proprietary Rights in Common Law: The Practical Differences from Civil Law. Modern Functional Approaches 1.3.1.  Legal and Equitable Interests in Chattels We must now contrast the common law of personal property, first of chattels, with the civil law approach and then decide what differences there are in practice and evaluate any approximation which there is, or may be, between the two systems and what we may need or expect in the transnationalisation of property law in the international flows of goods, services, money, information and technology. Here, what are called equitable proprietary interests in common law countries were earlier identified as holding some middle ground and it was already said that they may be significant especially in any transnationalisation of proprietary notions within the modern lex mercatoria: see for this also Volume 1, sections 1.1.6 and 3.2.2 and section 1.1.10 above, and further section 1.10 below. For the rest, for movable property, especially chattels, the main difference was found to be in the notion of possession. In section 1.1.8 above it was observed that, in common law, the law of personal property is little studied. The focus has always been on land as it was considered to have the greater economic value, even though in the modern industrial and consumer society this may no longer be so. The fact that personal property tends to have a shorter lifespan, usually loses its value promptly, at least in the area of consumer goods, and turns over quickly is another reason why traditionally in common law it has not inspired much comprehensive legal thought. In terms of the sale of goods, the subject was relegated to an incident of commercial law. In any event, common law, being traditionally practitioners’ law, is interested in solutions rather than in concepts and has never looked much for a coherent system of legal rules for chattels and intangibles as is shown throughout. It is not on the whole interested in the more theoretical aspects of this law either. As, however, in modern times the value and importance of chattels in terms of industrial equipment and stocks of commercial receivables, even of consumer holdings in investment securities, is very considerable as already noted in section 1.1.8 above, the law of chattels and intangibles has become much more relevant, if only from the point of view of their financing and the security that they can provide in this connection. As a consequence, the law in this area can no longer be ignored, underdeveloped as it may have been. In common law, the law of ownership in chattels or goods is usually considered in the context of the transfer of title, and therefore mostly in sales which has the transfer of title as its major objective. As mentioned, as such it is traditionally considered part of the commercial law and within it principally an issue of the law of contract (and not of property which transfers on its conclusion, at least in England if not postponed). It is not the complete picture as the protection of the owner is part of the law of torts. Possession itself is in common law a different issue altogether, and if voluntarily separated from ownership, it is for chattels covered by the law of bailment, which was developed not within the law of sales but rather in connection with lending and letting arrangements or custodial functions, often still under commercial law, however, and is as such older than the sales contract. It follows, that, in common law, there was for chattels and intangibles never a comprehensive system of proprietary rights and their protection. As was also observed before, in all of this there is not even a unitary approach to proprietary issues and common law differentiates according to the nature of the asset. There are as a consequence very substantial differences between the proprietary aspects of real estate (where formally ownership does not exist in a feudal system of land holdings), chattels, and intangibles and within chattels between different products or

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 73 structures such as sales, leases and securities, and within intangibles even between contractual, tort, and unjust enrichment claims. It is thus clear that common law never developed or even aspired to a unitary system of proprietary rights in the manner in which civil law did under the influence of Roman law and the ius commune. In fact, it did not even develop a clear conceptual distinction between proprietary and obligatory rights as we have also seen. Although modern common law writers use the distinction between rights in re, which are proprietary, and rights ad re or in personam, which are considered obligatory as a useful tool to express concepts which in one form or another must also exist in common law,80 one should be careful not to assume from this usage of civil law terminology that common law has developed in a similar manner and now clearly distinguishes between proprietary and obligatory rights. It is not to say, of course, that proprietary rights and obligatory rights do not exist in separation in common law but they are not commonly considered in their fundamental difference. Common law was and is protection oriented and still looks primarily at the available remedies and remains less interested in substantive rights, abstract rules and concepts, or a property system or model and its functioning. It was already said that it remains largely indifferent to it. In this connection, the maxims ubi remedium, ibi ius and ‘remedies precede rights’ are still commonly used and hold true in common law as in fact they also did in Roman law but not in the civil law of the codifications. That is why courses in contract law still tend to start with remedies rather than formation and the performance. As we have seen,81 Roman law had an effect on early common law but very different from that on civil law. The distinction between the old Roman in rem and in personam actions on which the civil law developments were subsequently built led in common law at first to a split between the types of assets that could be the object of proprietary rights (the distinction between realty and personalty) rather than to a distinction between proprietary and obligatory rights, as was the later civil law development, of which it can now be safely said that the right comes before the remedy. In such an approach, the distinction between proprietary rights and obligatory rights can develop and even become fundamental. That did not happen in common law.82 What was on the other hand a more typical common law feature was, as we have seen, the emergence of equity as additional support in the area of remedies where the common law itself proved inadequate. In the law of property, equity became of importance first in the area of land law when certain uses that were not within the traditional common law system of estates, such as custody arrangements in the case of absentee landlords, needed consideration and definition. As custodians to whom the estates were transferred were in possession and therefore in a very strong position at law (as a matter of seisin), the true owners needed better protection. They were then made beneficiaries with some proprietary protection which offered less than full proprietary status. Yet it protected at least against intermediaries who did not want to return the property and especially against their alienation of the land to persons who were familiar with the arrangements. After the Statute of Uses of 1535, which sought to outlaw abuses of this facility especially when used to circumvent restrictions on the alienation of land by will or contract or to defraud creditors, ways were nevertheless found to strengthen them under the new name of ‘trusts’. 80 See eg, Goode, n 30, 28. 81 See n 23 above. 82 See also G Samuel, ‘Property Notions in the Law of Obligations’ (1994) CLJ 524, 527, noting that the distinction is also not always so clear in civil law, and that hence civil lawyers should not feel superior in having developed the distinctions in this respect more clearly.

74  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights Both the trust and other rights such as future interests developed first in land law but were later introduced into the law of chattels also. They were then considered equitable even if they did not operate behind a trust (although they often do). Ultimately, as was shown above, floating charges provided another area where equity law became of great facilitating importance in the area of property law.83 Equity in this sense, although originally based on the King’s conscience (through his Chancellor in the Court of Chancery, in England, now the Chancery Division of the High Court) offered only incidental protection, however. Case law nevertheless subsequently allowed the development of a set of rules in certain areas, as indeed for assets in trusts and for future interests in chattels, assignments of proprietary rights in intangibles, client protection in agency, and equitable liens. Only in the law of trusts, bankruptcy, and companies is there a fuller and more comprehensive equity system, made possible and now mostly supported by statute. As explained in Volume 1, section 1.3.1, equity itself was never a system and it does also not mean a general influx of good faith and reasonableness notions into common law. In fact, unlike modern civil law of the northern European variety, common law is on the whole averse to such a generalised approach and remains principally remedial.84 As for the true differences between common and civil law concerning chattels and intangibles, the first and perhaps most obvious difference is that common law distinguishes between ownership and possession (or bailment) as the only proprietary interests at law in chattels and uses these concepts in quite a different manner. Ownership and possession operate here side by side and are both indivisible (for chattels, not for land). That is to say, first, that the one cannot be expressed in the other, but more importantly that both proprietary rights in chattels are full. This means that, at law, there are no limited proprietary rights in chattels. Thus, a life interest in a piece of jewellery cannot exist at law and is full ownership (at best subject to a remainder in equity). Equally, possession cannot be conditional, even though again, there may be (some) protection in equity. Unlike in civil law, possession of chattels in the above sense is in common law a proprietary right governed by the law of bailment (which is often seen, however, as one particular form of possession, that of a temporary and voluntary nature only). Based on the physical notions of possession, it is often stronger than the ownership right itself, at least when the owner has voluntarily parted with physical possession. It has just been said that there are no limited proprietary rights in chattels at law. Nevertheless, there can be a pledge, but it should be understood that this requires the transfer of the physical possession which creates a bailment, therefore a new title, not a limited one. It follows that the pledge is defended as a bailment, not as a (limited) proprietary right or security interest as it is in civil law.

83 Although it is argued in this book that the protection of equitable interests in this manner is owed to the knowledge of the (succeeding) owners in the assets, manifested in the protection of the bona fide purchaser of the legal interest, it is all the same true that this is not really the accepted underlying general principle and the law of equity is here more static and limits itself to specific situations, see more particularly n 11 and accompanying text above. 84 Nevertheless, in the protection of equitable interests in chattels and intangibles, generally bona fide purchasers of assets held in trust or subject to hidden adverse equitable interests (such as equitable charges or conditional or temporary ownership rights) are protected. It was already mentioned that civil law traditionally protects bona fide purchasers but of chattels only (as statutes now do also in common law in the context of the sale of goods at law), see ss 1.5.8–1.5.9 below, but otherwise in civil law the good faith notion remains largely confined to the law of contract. It has already been observed that where bona fide purchaser protection is exceptional at law, in equitable proprietary rights it is the essence as only successors in interest that know of prior contractual user enjoyment and income rights must respect them, although only professional participants have a search duty.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 75 To repeat, this type of possession in the common law sense is based on the simple physical holding of the assets (the old seisin) once surrendered by the owner and is not therefore a derivative or limited proprietary right. Again, security interests are here proprietary because they are possessory, and are bailments, not separate proprietary rights. It follows that technically speaking there is no place at law for non-possessory security interests or charges which depended for their evolution on equity (hence the equitable floating charge). The non-possessory chattel mortgage still exists at law, however, and is here an exception but is then perceived as a conditional sale (at law) of specific existing property and is for private persons much confined by statute and depends for them on a form of publicity, see section 1.7.7 below and Volume 5, section 1.5.2. Only equity developed interests in chattels of the type that could in civil law terminology be more properly considered examples of limited proprietary rights. Indeed, in a trust, the economic interests are allowed to be legally separated from the ownership of the asset, but equitable rights need not operate behind a trust only. It was already said that in equity, different interests in time may operate side by side in chattels, such as equitable interests for years or life interests. They may be joined by conditional interests and the resulting reversionary interest or remainders. They are in principle unlimited in number and their content depends on the parties creating them, although it can be said that they primarily concern user, enjoyment or income rights, therefore economic interests in these assets. It is true, as mentioned before, that in the professional sphere, in movable property, equity concentrates here largely on three structures: (a) trust and trust-like structures including constructive and resulting trusts, tracing and tracking, (b) conditional and temporary ownership rights, and (c) floating charges. Whether or not this still implies limitation, it should be realised that these structures are highly flexible and can be filled in contractually in such a manner that virtually any right or structure may result. It shows, and was already demonstrated repeatedly, the importance of party autonomy in proprietary rights under which economic interests in this manner may be freely split off in equity. Although it leads to protection for the beneficiary only in tort, this is in fact in common law no different for ownership and possession of chattels as we shall see—another fundamental difference from civil law. On a proper analysis, these equitable interests should be seen as no less proprietary in nature, even though (in the manner of equitable relief) still cast more in terms of protection than in terms of substantive rights. It is true that they can be defended only against certain types or classes of third parties, not party to their creation or transfer, notably against successors in the legal interests who had knowledge of the equitable ones at the time of the acquisition of the asset (or did not acquire the assets for value). As we have seen, these beneficial interests may therefore not be defended against all the world, but only against certain successors in interest (and the trustees themselves), who were not party to the original deal. IN respect of them, there is here clearly third-party effect and only bona fide purchasers or purchasers in the ordinary business of commoditised products (for value) are protected against them. The result is in civil law terms a largely open system of proprietary rights in equity. Even proprietary rights similar to those in land were in equity explicitly allowed to operate also in chattels, like the future interests and even servitudes, see also section 1.3.10 below. On the other hand, in intangible assets, like monetary claims, in common law countries, the ownership notion hardly ever developed at all and the transfer of these rights (through assignment) was traditionally severely restricted at law: see section 1.5.2 below. Here again equity developed its own facilitating rules of ownership and transfer, quite different from those in chattels and real estate. Here bona fide collectors of monetary claims under the different interests or charges that may be created in them are protected and may retain their collections as we shall see.

76  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights The concept of trusts and future interests in chattels will be discussed more extensively in section 1.6 below and floating charges in Volume 5, section 1.5.2. At this stage, we are first concerned with the main outline of the legal regime concerning movable property at law.

1.3.2.  Ownership and Possession of Chattels in Common Law It was pointed out in the previous section that while common law operates with the notions of ownership and possession, legally they have a meaning which is quite distinct from those of their civil law equivalents. Ownership is a weak concept in common law, even for chattels, while, as noted, technically it never developed for private parties in land under the feudal system of land holdings (which only knows tenure or estates)85 and had (at law) no meaning for intangible assets either. For chattels, the common law emphasis is on possession in a physical sense (bailment), therefore quite different from civil law, where this notion is based on the will or intent to hold the relevant proprietary right in an asset for oneself as owner (the animus domini or possedendi). As we have seen, it assumes some form of control of the underlying asset (the corpus) but not necessarily physical holding and is not itself a proprietary right but only a way in which such rights are expressed and defended. In common law, on the other hand, possession is not the mere manifestation of an underlying proprietary right but is itself considered a proprietary right. It is in principle physical (seisin) and it results from the physical (and voluntary) handing over of an asset by the owner, which particularly happens in the case of custody, hire-purchase, lending, or a pledge. This is where the concept of possession in this sense was first applied and the law of bailment originated. They are indeed the most common forms of bailment or possession in this sense, although there are forms of custody that are not considered bailment, for example when representatives, employees, or servants handle the owner’s goods. In those cases, exceptionally a form of constructive possession (for the owner) emerges even in common law.86 As we shall see in section 1.3.5 below, there are some other instances of constructive possession in common law, but they are all exceptional. Thus, bailment results from a voluntary split between ownership and possession on the part of the owner and normally has a contractual arrangement at its origin. However, it remains clear that bailment itself does not derive from contract but rather from the physical handing over of possession and confers a distinct status. In this connection, it may be repeated that bailment existed long before a system of (underlying) contracts (of custody, hire, etc) properly evolved in common law and bailment may as a consequence exist without any valid contract, for example, in the case of a custody agreement without consideration. Bailment may be usefully and perhaps better compared to a delivery of assets in trust: see also section 1.6.5 below. From this analogy, there may derive some special (fiduciary) duties of the bailee in equity which are more clearly formulated in common law countries than those of a holder vis-à-vis the owner/possessor in civil law. Nevertheless, in all cases where possession in this sense is transferred under a contract, the contractual rights so created for the beneficiary acquire in civil law terminology proprietary effect and protection under bailment, which in

85 At least for chattels, the common and civil law notions of ownership could have developed along similar Roman law lines. For common law, this was attempted early on by Bracton, De Legibus et Consuetudinibus Regni Angliae (see n 23) above. Their original similarity derived, however, rather from the Germanic concepts of gewere or seisin, later abandoned in civil law under Roman law influences, as we have seen in s 1.2.3 above. 86 In civil law, there would be no possession in this case at all as the possession would be imputed to the principal.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 77 common law terms suggests an opening up of the proprietary system, even at law, although technically ownership and possession in this sense cannot be curtailed by contract and is what it is. The contractual position of the owner and the strong position of the possessor in such cases mean in common law that the owner often has not much more than a contractual retrieval right except when the arrangement comes to an end or is legally interrupted. In those cases, there may be a right to immediate repossession (or a kind of property right in replevin),87 which leads to another form of constructive possession in common law, but is probably better characterised as a mere retrieval right. Normally, the bailee has the better defence position and will also act against third parties, even if s/he is not liable to the bailor for the loss of or damage to the asset within his/her duties of care.88 It is true, however, that the position of the owner in modern common law is here gradually reinforced. Whatever the (limited and exceptional) concept of constructive possession may mean in England in this context, there is then also a concept of ‘constructive delivery’ in cases in which possession must be delivered, see further section 1.3.5 below. That is no longer important for the sale of goods in England, which is now the subject of statutory law that no longer insists on delivery, but it remains necessary for gifts and bailments, including the creation of a pledge. Delivery of constructive possession is relevant in those cases when the goods effectively remain with another bailee. In such a situation, this bailee must consent to the title transfer as a matter of ‘attornment’, acknowledged in sections 28 and 29 of the Sale of Goods Act 1979. Again, this must be characterised as an exceptional situation and constructive delivery continues to have only limited importance in common law, very unlike civil law.89 In the previous section it was already mentioned that possession is not a right that derives in common law from ownership. In chattels, these concepts operate side by side, both as title or proprietary rights at law. To repeat, possession here derives its status as title solely from being physical. As just mentioned, it has no contractual basis even if a contract is now normally at the origin of the bailment. As such it is not truly comparable to holdership or detention in civil law either. When in common law it is said in this connection that both ownership and possession are indivisible, it means that they cannot be cut down by contract. It is in this connection confirmed that both owner and possessor have original title, therefore the one has the ownership title and

87 Against the bailee, the owner traditionally could defend only on the basis of his personal contract right (of rental, hire, custody or borrowing). He had no direct action against third parties either, even against any thief of his goods under a bailee except through the latter unless he had an immediate right to repossession: United States of America and Republic of France v Dolfus Mieg & Cie SA and Bank of England [1952] 1 All ER 572, 584. In that case he could also recover damages or repairs in respect of his goods. Even then, this was in the nature of a tort action, true revindication rights in England existing merely in connection with real estate, while traditionally the defendant always had the option to pay damages instead of returning the asset. Naturally any recovery of damages from a third party by a bailee in excess of his own interest in the asset was kept in constructive trust for the bailor. The right of immediate repossession is now also presumed to exist if the bailee defaults under his contract with the bailor: see North Central Wagon and Finance Company v Graham [1950] 1 All ER 780. See also Vol 5, n 278 for the situation in conditional sales before the UCC. 88 See Sir Richard Henn Collins in The Winkfield [1900–03] All ER 346 in 1902, confirming much older law: ‘As between the bailee and a stranger, possession gives title—and that is not a limited interest, but absolute and complete ownership’. 89 The idea of constructive delivery was also supported under the Statute of Frauds of 1677, which guarded against undocumented non-possessory interests in tangible assets. Under it, possession could replace the requirement of a document, again relevant mainly in respect of goods with custodians and bailees, when constructive delivery (subject to attornment) was sufficient: see for the Statute of Frauds also Vol 5, s 1.5.2.

78  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights the other the possessory title, which is legally often as good if not better, although other authors use the term ‘title’ only in connection with ownership.90 All the same, ownership is in this context considered to be indefeasible. That means that it cannot be destroyed by the separation of possession. In that sense, it is the stronger right, but not the easier to defend. Possession, on the other hand, cannot survive its own transfer but moves on, leaving the erstwhile possessor with no proprietary right at all, although in the case of an involuntary dispossession he may still have a strong retrieval right as being the older (erstwhile) possessor. It could be seen as yet another instance of constructive possession, but again it is probably better to consider it a mere retrieval right (in tort) which may also exist against third parties unaware of the original dispossession and who obtained the assets lawfully.91 Even if defended on the basis of a better possessory right, it bears repeating that under common law, in chattels, the defendant always had the option to pay the reasonable value instead, a discretion in England now vested in the courts.

1.3.3.  Equitable Proprietary Interests in Chattels In view of all that has already been said on equitable title, it is possible to be brief. As we have seen, in the common law of personal property, limited proprietary rights can only be (mostly contractually) created in equity. Even then, it may be better not to consider them as truly split off from the ownership right itself, which only operates at law and is as such considered indivisible as noted before. Normally the more limited rights in chattels operate in equity quite independently from the legal interests of ownership and possession, although they may overlap, for example when a trust beneficiary also obtains the physical possession of the asset to enjoy the benefit fully. Rather, it is sometimes said that they are impressed upon the property rather than created in it as proprietary right.92 Other examples are future interests such as (sometimes) those of a buyer under a promise to sell or those under temporary or conditional title transfers, and those of the original mortgagor under a chattel mortgage (the equity of redemption).93 These equitable interests are interests freely created by the parties (or unilaterally by a settlor in trust or derive from the operation of the law as in the equity of redemption)94 and are protected

90 The common law terminology is not stable in this connection. Goode (n 30) 45, gives both the owner and possessor title. S Gleeson, Personal Property Law (London, 1997) 25, on the other hand, refers to title only in connection with ownership. Another difference in terminology concerns ‘possession’. Some, like Professor Goode, use it interchangeably with bailment. Others, like Gleeson, distinguish between the two. 91 See Clayton v Le Roy [1911] 2 KB 1031, and earlier Lord Mansfield in Cooper v Chitty 1 Burr 20 KB (1756). 92 There have always been objections to the use of the term ‘equitable proprietary rights’, first because they do not operate against all the world but only against certain classes of legal or natural persons. F Maitland was in that category, see his Equity, Also the Forms of Action at Common Law: Two Courses of Lectures (1909), chs 9–11. Another reason is that this terminology suggests a carve-out from the title at law; hence the newer idea that the equitable interest is printed or impressed on the property rather than carved out, see DKLR Holding Co (No 2) Ltd v Commissioner of Stamp Duty (1982) 149 CLR 431. Much of this is semantics. It has already been said that these equitable rights cover a middle ground between the law of obligations and the law of property and it is therefore admitted that they are not wholly proprietary in the traditional sense, but because of the notion of segregation they undoubtedly introduce, they are even less purely obligatory. The significant third-party effects of these rights, even if affecting only certain classes of third parties, would appear to justify the reference to them being proprietary, although their extent still depends on the circumstances (and the contract). 93 See also S Worthington, Proprietary Interests in Commercial Transactions (Oxford, 1996). 94 Earlier it was explained that there may be only some more specific types as these equitable proprietary rights mainly surface in the area of trusts (including constructive and resulting trusts and tracing), conditional and

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 79 in equity, making them as good as proprietary rights except that they are extinguished by a transfer of title by the legal owner or possessor to a bona fide purchaser for value (or in modern times even to buyers in the ordinary course of business of commoditised products regardless of their bona fides). They can therefore only be maintained in respect of some classes of third parties, especially those who knew of the arrangement before they acquired the property or acquired the underlying asset for free as we have seen. It has already been said also that this is a trade-off and allows the common law system to accept an unlimited number of equitable proprietary rights. No delivery of possession is necessary for this protection of the bona fide purchaser.95 Even if (physical) possession remains with the beneficiary, the bona fide purchaser has good ownership title, although a bailment could have warned him, thus potentially affecting his bona fides. For Continental lawyers, it will be of further interest that this bona fide purchaser protection against equitable interests also applies to land and intangible assets. Whilst it is exceptional in civil law, it is a general principle of equitable protection, all the more interesting as at law it has remained exceptional and is then mainly derived from statute (the Sale of Goods Act), as in the already mentioned case of the sale of goods: see further section 1.4.8 below. It was said before that this protection of bona fide purchasers with respect to equitable interests is not an exception but follows from the very structure of these equitable rights, which can only be maintained against those interest holders who knew of them before they acquired the property (or acquired it for free). It could still be said, however, that, strictly speaking, the protection of equitable interests in this manner is not proprietary, but rather based on the bad faith of the buyer of the legal interest and on the beneficiary’s (tort) action to protect. But at law proprietary interests are also protected in tort. In any event, the result is similar to a proprietary action as it may also be brought against any successor of such interest holders if themselves aware of the equitable interest. For the operation of these equitable rights and of equitable charges in England, see more in particular Volume 5, section 1.5.2. Where it is believed that the equitable interest is in truth nothing more than the imprinting of an economic interest on the asset, which interest became protected in this manner, it may find an equivalent in civil law, for example in situations where an asset has been sold and has been paid for but has not yet been delivered in a system where delivery is required for title transfer. It might be possible to assume in such cases that in the intervening bankruptcy of the seller, the buyer is protected in a proprietary manner and may then be equivalent to the protection of an equitable interest in common law. We could also see here the notion of unjust enrichment turned into a constructive trust operating in civil law. In civil law terms, the protection would then be proprietary rather than in tort, but the practical difference is not great, as even in common law these (tort) actions can be maintained against a bankrupt (wrongful) title holder and are as such (in a civil law sense) more proprietary than personal in nature as already noted. We have also seen above, starting in section 1.1.2, that in modern civil law, a party knowing of a contractual right of way may have to respect its continuing existence when this party buys the land over which the right of way was given, even, therefore, in the absence of a servitude. Again, this is similar to equitable protection of such a right (in common law terms) and makes

temporary ownership rights, and in floating charges. It is unclear whether new ones may be created all the time, see n 11 above, although in England the floating charge was created more recently in case law, see Vol 5, s 1.5.2. In any event, through trusts or conditional ownership rights, one can create virtually any legal structure in respect of the underlying assets. 95 Thus, under equitable proprietary rights, possession need not be transferred at all. If it is, it may at the same time impose a bailment. The example given before was when a beneficiary obtains the use and enjoyment of certain physical assets put in trust. This may give the beneficiaries additional protection.

80  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights it proprietary even in civil law countries, at least in respect of all who know of the right. As yet this is far from being a concept capable of generalisation in civil law, but would result in a close approximation of equitable proprietary rights notably in that they may affect certain third parties but not all. It was submitted that in the common law system, the result of these equitable rights, although often still cast in terms of protection rather than substantive right, is an ownership type and division that primarily functions between the parties to the original transaction and the insiders in their trades. Nevertheless, this has led some to conclude that these rights remain closer to a contractual arrangement, although they may be defended in tort against certain classes of third party/successors of the legal interest holder. It has already been pointed out above in section 1.1.2 that that is in the nature of all proprietary rights and it seems clearer to accept this, although it being equity, the consequence will be largely left to the equity judges in terms of restoration of the prior situation or damages. It substantially depends on the facts. The prior situation may be restored more readily if there is demonstrable fraud or collusion in respect of land. Also, as between creditors of the trustee and the beneficiary, the proprietary characterisation is important and probably more apt, especially in bankruptcy, as the creditors’ recovery right in the assets in the case of the bankruptcy of either party (or both) cannot be varied by bankruptcy trustees repudiating the underlying arrangements as if they were only executory in a contractual sense This is bankruptcy resistance, in civil law indeed considered a key proprietary issue. Again, as far as these equitable interests go, it may therefore be best and clearest to consider the relationship between both parties (the legal and equitable owners), and therefore also between their creditors, as operating in a proprietary manner.

1.3.4.  The Common Law System of Proprietary Defences: Tort Actions Based on Better Rather than Absolute Rights Another general feature of the common law, already briefly mentioned, is that the emphasis is traditionally on the types of protection of one’s rights rather than on the nature of these rights themselves (whether at law or in equity, although probably even more so in the latter). It tends to be the opposite in civil law (but not in Roman law) and also applies to ownership and its protection, which in common law in the case of chattels is still weak as we have seen. To repeat, in proprietary matters, the common law emphasis is on the protection of physical possession rather than on ownership, the origin of which is in the ancient notion of seisin, in French saisine, or in German gewere. These notions, which also obtained in continental Europe before the reception of Roman law, were derived from the older germanic or saxon laws and suggest a lower level of legal development in a system that is based on physical realities rather than on rights. In real estate, the notion of seisin eventually allowed the development of private interests in land in England in terms of tenure or estates as we have seen and became almost as strong as ownership rights, which in the feudal system remained, strictly speaking, vested in the Crown. In the common law of personal property, where the ownership notion could develop independently, it did so, but in a weak manner, as we have seen, because of the overriding importance of physical possession or seisin and its protection at the expense of a more abstract ownership concept. This possessory protection is traditionally obtained through the old tort actions in trespass, detinue, conversion, trover, or replevin. Although these actions are tort actions, they are quite

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 81 different from the modern tort of negligence or the civil law tort action, which is purely personal, therefore directed only against the tortfeasor. Although in common law the negligence action may also serve to protect an affected possessor, the special feature of the old possessory torts is that (in civil law terms) they have a proprietary effect, as they allow the asset to be pursued in the hands of anyone with a lesser right to it (especially in detinue). In England much of this protection has now become statutory. Even so, and as previously noted, under common law, there never was an absolute right to retrieve personal property, not even at law. As such there are no revindicatory actions. Even under the old tort action of trespass against goods, the defendant always had the option to return the monetary value of the asset instead. In England, since 1854, the courts have acquired discretion in this area under statutory law. This discretion naturally weakens the position of the dispossessed plaintiff and of any owner (if different) in the bankruptcy of the wrongful possessor. Even in land law, ownership or revindicatory actions do not truly exist as there is technically still no ownership, but there are here full legal reclaiming rights, which for all practical purposes may be equated with a revindication, but they are even then technically still possession or seisin-connected. Although it is a generic term, the concept of bailment does not necessarily operate in a completely identical fashion in the various situations in which it arises. Nevertheless, in all instances it leaves the owner or bailor in a weak position. Thus, in the bankruptcy of the bailee, the bailor cannot simply rely on his/her ownership right and retrieve the asset (subject to any payments for shortened use, as would most likely be the civil law approach). The bailment must be unwound first. Moreover, in the case of an involuntary dispossession of the bailee, it is in essence the latter who has the right and possibility to retrieve the asset from the thief, very different therefore from the situation in civil law where (except under modern German law) the owner (and legal possessor in a civil law sense) is the more likely party to pursue the asset and protect the dispossessed holder, who has a personal retrieval action against the tortfeasor only and none against the latter’s successor in interest. As noted, only at the end of the bailment when the bailor obtains a right to immediate repossession,96 which s/he may also acquire during the bailment when its essential terms are violated by the bailee, may the bailor have the possibility of defending his/her rights against third parties directly. Here the underlying contract may exceptionally cut the bailment short, which otherwise operates independently from the contract from which it resulted. It follows that, even when the bailee goes bankrupt, the owner/bailor may not have a true retrieval right against him/her or his/her transferees. Constructive trust notions might help but the proprietary rights are not clear cut. It is true, of course, that in civil law the bankruptcy trustee of a holder of the asset may also elect to continue the agreement, for example in the case of the rental of equipment until the end of the agreed period while offering security for payment of the rentals. The difference is that at the end of the rental, the question of the proprietary protection of the owner will arise as a separate issue in common law, which is unlikely to be the case in civil law. Similar problems may arise where a bankrupt agent has client assets in his/her possession (which problem may be further aggravated for any lack of segregation). 96 See North Central Wagon and Finance Co v Graham [1950] 1 All ER 780, and United States of America and Republic of France v Dolfus Mieg & Cie and Bank of England [1952] 1 All ER 572, 584. See for the right to immediate repossession upon the voidness of the transfer in a sale contract induced by fraud in the US, Moore Equipment Co v Halferty 980 SW 2d 578 (1998). There was no protection of bona fide purchasers in that case, now often corrected by statutory intervention.

82  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights Again, for chattels, the emphasis in common law is in first instance on physical possession, more so than in civil law, which looks rather at ownership or otherwise at possession in the more theoretical civil law sense of legal control. While in civil law ownership is the fullest right, in a common law context, for chattels, the ownership notion is often seen as no more than what remains, taking into account the position of the physical possessor or even the equitable interest holders.97 There is therefore no absolute or fullest right and ownership itself is easily undermined through bailments and in equity. In civil law, physical possession by third parties may also lead to strong rights but this requires bona fides as to the existence of the true owner. That is the difference. Again, in civil law, there is only one owner of the relevant underlying property right while there may be many possessors of these rights where the better right prevails. In common law, there may be many owners of chattels who rank according to the strength of their ownership rights but there is likely to be only one possessor. To repeat, this does not mean that in common law possession based on physical holding is a better right than ownership—the possessor takes subject to this right—but technically speaking s/he has the more effective protection.98 The weak feature is that once the physical holding of the asset is lost, it is at an end, although, if involuntary, still with a retrieval right based on a better right but always subject to the possibility that the plaintiff will only be awarded damages. Although possession of this sort needs to have some animus, even in common law in the case of bailees, thieves or finders, for its protection it need not be the will to hold for oneself as if one were the owner, therefore it need not be the animus domini or possedendi in a civil law sense. Again, it is in principle purely physical and factual. Consequently, the following picture emerges. In common law, if O as owner has allowed P to take physical possession, both are considered to have a title in the property. O’s title is ownership. It is indefeasible, which means that it can survive someone else taking physical possession; P’s title is possession or bailment.99 It is subordinate to that of O, whose right during the time of the bailment is protected only in contract, however, and is even weaker against anyone else, including someone who takes possession against P’s will. This latter person is then the possessor but has lesser or younger rights than P, while both must accept that O has the best right, even if s/he cannot reclaim the asset from P or any other possessor except on contractual grounds. Being indefeasible, O’s right acquires, in civil law terms, some absolute features, but without possession (if voluntarily surrendered) it is difficult to defend against third parties including the bailee or a thief from him. In this system, the thief (T) from P is possessor (but not a bailee, bailment being limited to a voluntary transfer of possession) and protected against anybody else except his victim, P, who continues to have a reclaiming right.100 That is also the position of the happy finder (F) of an asset of which it is clear and admitted that s/he is not the owner. Any third party who takes the asset from T or F involuntarily and wants to retain the assets on the simple basis that T or F are not the owner and he has the physical possessory right may be thwarted, however, by T or F’s better

97 See Goode (n 30) 34ff and AP Bell, Modern Law of Personal Property in England and Ireland (London, 1989) ch 4. 98 See for the concept of possession in common law also DR Harris, ‘The Concept of Possession in English Law’ in A Guest (ed), Oxford Essays in Jurisprudence (Oxford, 1961) 69, and further Bell (n 97) ch 3. 99 See also n 87 above, although the proprietary protection of the bailor was subsequently enhanced at least when he has a right to immediate repossession: see n 91 above and accompanying text. 100 Since as early as 1722, see Amory v Delamirie [1558–1774] All ER 121. The action is in tort (trespass). See also Clayton v Le Roy [1911] 2 KB 1031.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 83 (older) possessory rights. Only under modern statutory law in England101 may possessors following T or F invoke P or O’s better right (ius tertii) by way of defence against them and may prevail in this manner if P or O intervenes and supports them. In civil law, it would be possible and indeed normal for any defendant to invoke the owner’s right as a defence against anyone else claiming such ownership.102 Even in a conflict between two possessors, possessor and holder, or between holder and sub-holder, the ownership concept could thus intervene. The traditional common law approach is not interested in any such absolute rights but rather in relative rights, although through statutory adjustment, as already mentioned, in common law there is now some approximation.103

1.3.5.  Constructive Possession and Delivery in Common Law. The Absence of Acquisitive Prescription. Statutes of Limitation We have already seen that in common law, the instances of constructive possession are exceptional and in fact only an expedient, used when, as in the case of the owner at the end of a bailment, a void may exist as to the reclaiming rights against third parties leading to a right of immediate repossession: see section 1.3.2 above. In this vein, it can also be argued that the bailee who loses his possession involuntarily retains it in a constructive sense, giving him/her an action for recovery against a thief. It has already been said that, in such cases, it may be better not to use the term ‘constructive possession’ as it concerns here only the ability to sue for the recovery of possession. It is a retrieval right. There are some other cases. Thus, under UK insolvency law, the lessee remains the possessor vis-à-vis the lessor even if the assets have been transferred to a sub-lessee, at least for purposes of any stay of proceedings, which thus also affects a head lessee without actual possession.104 There is further a limited notion of possession without physical holdership where representatives, employees or servants manage assets, as already mentioned. It is indeed clear that common law never developed a more abstract notion of possession. It remains physical, that is its essence. Common law is in this connection not concerned with acquisitive prescription either or with the procedural or evidential function of possession, which contributed much to the development of the civil law approach and its abstract concept of possession: see section 1.2.5 above. There are statutes of limitations in common law and actions become barred as anywhere else (tort actions mostly in six years and others often after 30 years), but that is different from the concept of acquisitive prescription by a bona fide acquirer.105 In civil law, it

101 Under modern English law, bailees may invoke the rights of the true owner as a defence: see s 8(1) of the Torts (Interference with Goods) Act 1977 (the ius tertii of civil law: see n 78 above). 102 See s 1.2.7 above. 103 On the other hand, modern civil law is not always insensitive to the relativity concept either, so much part of common law as we have already seen in s 1.2.7 above. 104 Re Atlantic Computer Systems Plc [1990] BCC 859. 105 See for the problem of the absence of acquisitive prescription and the question who may consider himself owner in common law jurisdictions after the statute of limitation has run (and the action of ejectment is no longer available), Pye v Graham [2003] 1 AC 419 (House of Lords). Although the English Limitation Act 1980 s 4(5) excludes all claims to ownership of claimants who acquired property in a criminal manner, since the English Real Property Limitation Act 1833, now replaced by the Limitation Act 1980, at least in land law the right of the original interest holder is otherwise at an end. There is a need for adverse possession, however, excluding in this way persons who hold the real estate pursuant to a contractual arrangement or hide their possession. The question in this case was what adverse possession requires. There must be an ‘intention to possess’, which is, however, considered a factual matter. It means a form of control that need not always be physical but usually will

84  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights is first a way in which ownership is acquired but beyond that also a procedural tool to prove full ownership and defend with the ownership action (revindicatio). Although originally in England delivery of possession was necessary for the transfer of title in chattels, that approach is now abandoned (see section 1.4.2 below) although it is still the rule in the US, subject to the parties’ right to agree otherwise. Delivery is also relevant for gifts or bailment, and always means physical possession (see section 2-401(2) UCC) while the concept of constructive possession or constructive delivery was not developed in this context either. See also section 1.3.2 above, where the concept of attornment was discussed, used when assets are left with another bailee when his consent is needed to complete the delivery. Common law clearly has had less need to distinguish between legal possession and physical holdership or between constructive and actual possession. Whether one holds for oneself or for someone else does not make any fundamental difference as far as protection goes. Neither is it necessary for the holder ever to rely on the owner for his defence, which is the traditional civil law approach. As mentioned earlier, only in modern German law did we see a similar move towards possessory protection for the holder going back to the older Germanic or Saxon notion of seisin or gewere. Nevertheless, this does not fundamentally affect the role of possession within the general Roman law structure of German ownership law: see section 1.2.1 above.

1.3.6.  The Situation in Bankruptcy The relative position of the owner and equitable interest holders vis-à-vis a bankrupt bailee or possessor is a less regular topic of discussion in bankruptcy treatises in common law countries, even in the context of the definition of the bankrupt’s estate, see further the discussion in section 1.3.4 above. Is the possession of the non-owner, being a proprietary right, part of his bankrupt estate and what are the retrieval possibilities of the owner? As for the latter, in so far as possession goes, it seems clear that even a seller under a reservation of title who surrendered possession has a weak position in the bankruptcy of his defaulting debtor and his retrieval right cannot be presumed to continue even though he is not paid.106 As for bailment being part of a bankrupt estate, section 436 of the UK Insolvency Act 1986, while defining the bankrupt’s property, does not mention the possessory interests. Neither are

be. Again, it shows English law’s natural instinct for a physical aspect. In this case it became clear that exercising grazing rights may be sufficient even without any warning to the (absentee) owner. Even so, the adverse possession must be open and clearly exercised (squatters, eg, are normally in that situation, although in England the Land Registration Act 2002 imposes much stricter conditions on squatters in terms of their adverse possession). The European Court of Human Rights in Strasbourg in its decision of 15 November 2005 (App no 44302/02), found, however, that this system of adverse possession may lead to a form of expropriation rendering the UK government liable for compensation. Adverse possession was thought in this case not to have been in the general interest and disproportionate. It seems a strange decision. Statutes of limitations (or acquisitive prescription) are not normally so interpreted and the virtual extinction of title in that context has not so far been contentious. 106 G Lightman and G Moss, The Law of Administrators and Receivers of Companies (London, 1986) 140, observe that even upon a reservation of title, once the seller has parted with possession, he normally has no satisfactory statutory remedy if the buyer becomes insolvent and defaults. Goode (n 30) 423 suggests that exceptionally in the case of the sale of goods upon rescission of the contract for reasons of default, the title re-vests in the seller, although not retrospectively, but the effect in bankruptcy of the buyer in possession remains unclear. As in the case of a failed sales agreement because of mistake or fraud, the buyer in possession might be considered the constructive trustee for the seller, and as such the seller may acquire a proprietary retrieval right as beneficiary under such a trust and this may also be effective in bankruptcy. At least this could be a respectable US view. Yet, when there are no clear security interests or charges proper, the retrieval possibility upon bankruptcy

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 85 equitable interests considered, but both must somehow impliedly be covered and at least in formal trusts, conditional and temporary ownership, and floating charges, one must assume a duality of ownership under which the rights of the beneficiaries are respected,107 including in a bankruptcy of the legal owner or bailee.108 Thus, it may have to be considered how not only ownership, but also equitable interests impact on a bailment in a bankruptcy of the bailee. Although in equity there may still not be full freedom in the creation of beneficial proprietary interests to be defended against all who knew of them, therefore even in their bankruptcies,109 nevertheless where they operate, their status in the bankruptcy of a counterparty must be clarified. It is only to demonstrate that, as common law itself does not present a clear-cut system of proprietary and obligatory rights, in bankruptcy the situation is likely to be less transparent than in civil law, until in civil law contractual user, enjoyment and income rights also become more widely protected, at least against successors in the title who knew of them when acquiring it. In common law, this is a consequence of the openness of the proprietary system in equity. Even in a bailment itself, therefore at law, there are hints of an open proprietary system (in a civil law sense). When possession is surrendered pursuant to an underlying contract of custody, hire, etc, these underlying contractual rights acquire proprietary (possessory) protection (here strictly speaking without the balancing effect of bona fide purchaser protection, however) and may create conflicts with other (equitable) proprietary rights. It may be considered, however, that in bankruptcies common law is generally more generous in the proprietary protection of rights of beneficiaries, either through the equitable ownership notions or through bailment, but it may create challenges as between various interest holders. At the same time, it limits the rights of the owner and the latter’s creditors in the bankruptcy of these beneficiaries or bailees, although the way in which this is done may remain on the whole less clear.

of the physical possessor may be in doubt. In any event, in the US, under Art 9 UCC, reservations of title are now treated as security interests and no longer result in a retrieval right (which under earlier law was conceded), only in a disposition and set-off of the proceeds against the debt (sales price). 107 It is of interest that this problem is not a regular topic in treatises on bankruptcy in the UK: see, eg, the leading book by IF Fletcher, The Law of Insolvency (London, 1996) 187ff, 206 and 217. Section 283(1) of the UK Insolvency Act 1986 vests all property belonging to the bankrupt in the bankruptcy trustee, but s 436 defining the bankrupt’s property does not mention possession. It does not mean that mere possession of a bankrupt bailee has no relevance in his bankruptcy and is not included in the estate. The estate certainly also includes, at least in principle, the equitable interests or beneficial ownership rights of the bankrupt debtor even though eg, on the basis of the provisions of the trust deed the benefits (before they are paid out) might not belong to the estate. Short of real remedies, which, in the case of chattels, are limited to situations where there are charges or security interests in the property, there is only a personal right to the return of the property (sometimes also referred to as a resale). Also, the unpaid seller has no revindication right but must prove his better right in the circumstances which may not result in retrieval in a bankruptcy. The law in Scotland may well be different because of its Roman law origin and revindication rights in chattels. In the US, s 541(a) of the Bankruptcy Code includes in the estate all legal and equitable interests of the debtor and s 522 defines what is exempt. It covers possession as a legal interest but subject to the better rights of others. Whether such better rights may always be asserted against the bankruptcy trustee of a bailee may well remain doubtful. 108 In the US, the position of the trustee in bankruptcy is reinforced under s 544(a)(3) as he is given the status of lien creditor and bona fide purchaser of the bankrupt’s assets, but at least property held under expired leases is not part of the estate: see s 541(b)(2) of the Bankruptcy Code. See for special reclaiming rights in bankruptcy in the US also Vol 3 s 2.1.10, and n 191 below. 109 See n 11 above.

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1.3.7.  Practical Differences between the Common and Civil Law Approaches to Proprietary Rights in Chattels What are the practical differences that result from the different attitudes of civil and common law in the area of proprietary rights in personal property? How serious are they? Functionally there is no great difference. The real issue is always the entitlement to the user, enjoyment and income rights in the underlying assets. In either system, they can be created freely but their legal manifestation and protection are distinct when arising under contract or operating as proprietary rights, which rights are in principle limited to certain situations. In the latter case, their defence may be expected to be more complete and also manifests itself in the position of succeeding owners and in the bankruptcy of counterparties. That is (a) the right to pursue (or the droit de suite), these rights against ant transferee, earlier identified as a matter of liquidity as it discharges the transferor of his obligations at the same time, and (b) right of preference (or droit de preference), earlier identified as an issue of risk management in the underlying asset. These are proprietary notions or consequences both known in civil and common law, although more fundamental in the former. If operating as proprietary rights, so protected user, enjoyment and income rights are limited in number in civil law, exactly because of the benefits. That is different in common law, at least in its equity variant, which, instead of limiting the proprietary rights at the level of their creation, cuts off their effect at the level of the bona fide purchaser, therefore at the level of their operation, but there are other differences between the civil and common law in the approach to proprietary rights. Altogether these may be summarised as follows: (a) the continuing emphasis on physical possession in common law. It led to tenure or the estates in land, and to the notion of bailment at the expense of ownership rights in chattels, while at law proprietary rights in intangible assets could hardly develop at all; (b) the open nature of the proprietary system in equity. It made possible the proprietary protection of the equitable interests that may virtually be freely created subject to the protection of bona fide transferees and of the ordinary commercial and financial flows; (c) the defence of proprietary rights in common law through tort actions (rather than proprietary actions). It is based on the relative strength of the proprietary, possessory, or equitable rights rather than on absolute rights; (d) the lack of specific performance in common law. Notably in the law of personal property, the plaintiff does not have an automatic right to retrieve the asset but may have to be content with its economic value; (e) there are different approaches to the transfer of proprietary rights and bona fide purchaser protection—see more particularly section 1.4 below. They also affect assignments: see section 1.5 below; and finally (f) the open nature of the system of proprietary rights may also affect the situation in bankruptcy as it is likely to cut into the rights of common creditors. It was shown that the most immediate practical difference is in the relatively weak position of the owner in the common law of chattels when s/he loses his/her possession voluntarily. It leaves him/her with limited powers to recover the asset, the bailee being henceforth in the driver’s seat. The main consequences may be seen in: (a) situations where the bailee has transferred the property to someone else without the owner’s consent and (b) in a bankruptcy of the bailee. Then there are the equitable interests raising also the matter of (c) the status of beneficiaries of equitable interests in assets in the possession of a bailee especially in his bankruptcy. The issue always is: who has got what in such circumstances, especially also in an intervening bankruptcy.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 87 The effect of voluntary dispossession is clear but may be remedied if the owner obtains an immediate right to repossession upon a breach of contract. Even so, it may be difficult to maintain against sub-bailees. It was also shown that the position in bankruptcy is not straightforward either, which equally applies to the question whether bailments belong to the bankrupt estate of the bailee and what the consequences are for any equitable or other interests in the underlying assets. The fact that at a theoretical level the common law practises an open proprietary system in equity continues to raise legal issues exactly because the consequences were never thought through in a systematic fashion. Civil law is clearer but introduction into civil law of equitable rights leading to an opening of the proprietary system will undoubtedly create similar problems to overcome in civil law bankruptcies. Nevertheless, it was argued that in the professional sphere with greater need for newer risk management tools and more emphasis on liquidity of assets, segregation and transactional and payment finality, this is the way forward.

1.3.8.  Approximation of the Common and Civil Law Systems of Proprietary Law in Chattels. General Emphasis on User, Enjoyment and Income Rights. The Unifying Impact of Modern Financial Structures and the Requirements of Modern Risk Management. The Need for and Effect of Legal Transnationalisation In the previous section five major differences were identified between the common law and civil law of property concerning chattels, and it may be of interest to see whether, at least at the theoretical level, there is some approximation. Foremost it may be said that civil law is slowly opening up its proprietary system by: (a) recognising conditional and temporary ownership rights; (b) (perhaps) giving (as in Germany) possessory protection also to mere holders/detentors of chattels, thereby reinforcing their position under a contract pursuant to which they acquired the use of an asset; (c) more generously protecting economic interests (the example given was the protection of the buyer who paid but had not yet received the asset in a system that requires delivery for title transfer); (d) allowing third-party effect of rights of way to the extent they are known or published, notably contractual rights of way, and allowing also more broadly so-called qualitative obligations (see section 1.2.1 above); and (e) adding to or varying (as we shall see in section 1.7.4 below) the preferential rights of secured and similar creditors in certain cases, leading ultimately also in civil law to some forms of shifting interests and floating charges, even into future assets, at least to the extent they are replacement assets and can as such be identified. Under (a) and (e), reservations of title were developed as sales price protections, often at first in case law, which subsequently resulted in the development in Germany of the proprietary expectancy or dingliche Anwartschaft. Also, especially in Germany, there developed the Sicherungsübereignung, equally through case law, first as a kind of conditional transfer of assets to raise funding without transferring possession, although subsequently developed more as a priority right in proceeds, at least in a bankruptcy of the counterparty, as we shall see in greater detail in Volume 5, section 1.4.2. It could (in Germany) even be broadened and take the form of a floating charge.

88  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights Under (b), it became possible to protect economic interests in terms of user, enjoyment and income rights for the holder in a proprietary manner when assets are transferred thereunder. Under the German approach, possessory protection extends in such cases to the holder as well. Under (c) and (d), the best protection results for any user, enjoyment or income right under the principle that third parties must respect what they know in terms of these rights in underlying assets before they acquire them. It was suggested that this indeed is the underlying rule of equity in common law countries where these rights may thus be protected against all except bona fide purchasers or, better, purchasers in the ordinary course of business in respect of commodities. Covenants running with the land may also be protected, now sometimes even in civil law, again, especially when they can be or are known by succeeding owners.110 Differences deriving from the stronger protection of physical possession in common law are here becoming less relevant. It is true that also in civil law mere physical possession sometimes gives protection, but primarily in the sense that the law everywhere respects the physical status quo and the prima facie possessory situation. That was identified in section 1.1.9 above as an issue of social peace but it is never more than a starting point and not dispositive.111 Other areas where physical possession may still matter in civil law were also pointed out and especially concern the protection of bona fide purchasers who commonly need physical possession in civil law, but otherwise in civil law possession normally is a legal or constructive concept, in common law only exceptionally so, except again in equity. To that extent there is convergence. An important similarity of sorts is in this connection that for proprietary rights to vest, especially in civil law, they must be properly identified, which in the case of chattels may mean properly set aside in a physical manner. It is an issue of specificity in more modern law often closely connected with the disposition right, as we have seen in section 1.1.4 above. Indeed, in common law, specificity and identification are equally important issues, at least at law, but again they are much less material (or physical) for equitable interests to arise and be protected. That allows for future interests and their transfer and also for ready transfers in bulk as we have seen. Also in this area, the civil law in its nineteenth-century shape has stayed behind and is now struggling. It is true, however, that in civil law the physical holding of an asset mostly means nothing in itself and needs to be characterised in law in order to determine its significance, first in terms of the proprietary or contractual right on the basis of which the asset was obtained or is operated, while subsequently its significance must more particularly be determined in terms of its defence, which, if the right is proprietary, touches on its further characterisation in terms of ownership, possession and holdership of that right as explained above. It may, however, rightfully be asked in how far this triptych of ownership, possession and holdership of proprietary rights in assets remains relevant in the operation and defence of more modern economic interests when maintained against third parties that know of them in an equity sense, which also touches on the issue of specific performance. For these issues see in particular Volume 5, section 2.1. If the protection of economic interests that were known to subsequent owners of the underlying assets is a major way forward as suggested in this book, certainly also at the transnational level, it would appear that, since their defence is likely to be in tort, this civil law triptych and the specific performance that it implies may lose much of its relevance. In fact, it could also be said

110 See n 45 above and accompanying text. 111 Holders are therefore assumed to be possessors and possessors are deemed owners and may themselves prima facie defend as such (even if, in some countries, only in tort).

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 89 that the same applies already now to the defence of intangible assets in civil law, notably monetary claims. It would increasingly concern all modern asset-backed financial instruments or products that become bankruptcy resistant in ways that will be further discussed in Volume 5, Part II. At the same time, dispensing with this triptych in favour of a protection in tort would be another major approximation between the common and civil law of property at the theoretical level. Finally, and as a more general observation, the concept of ownership is known to all legal systems. It may even be considered a human right. As such it is hardly conceivable that ownership in movable assets is in practice very different wherever these assets go (traditionally important for ships, aeroplanes and cars or lorries). Yet it was already said that the manner of the protection of such ownership against third parties claiming older rights or even younger more limited proprietary or contractual rights combined with (physical) possession (and also the manner of the transfer of ownership, as we shall see below in section 1.4) was always legally problematic and may still differ considerably. Again, the key often seems to be the different role physical possession plays at the legal level. The more it is de-emphasised, the more approximation there can be. It means that to make progress, it should be repeated that we must think here in legal, not in physical terms, thus in terms of a rights-based not a physical regime. We should also not continue to confuse model and physical realities in what often still is an anthropomorphic approach to movable property: see the earlier discussion in section 1.1.9 above. If one thus shifts the emphasis from physical possession to user, income and enjoyment rights in pools of underlying assets, one may see a move and need in the direction of stronger proprietary status of these economic interests everywhere. In sections 1.1.3 and 1.1.4, this was already explained as a matter of better risk management and greater liquidity. It allows for better protection of these rights in assets, subject of course to the better rights of others who are unaware of these interests (and are therefore bona fide) and the need to protect the ordinary course of business as a matter of the uninterrupted continuation of the commercial and financial flows and to achieve finality. While shifting the emphasis in this manner, it was submitted that a more modern system of proprietary rights can develop, at least among professionals. Again, it admits of a large degree of party autonomy in the creation of proprietary rights in respect of all kinds of user, enjoyment and income rights, at least in professional dealings, but also puts the emphasis on the notion of the bona fide purchaser or the protection of the ordinary course of business as cut-off points for third-party effect. For this approximation there is every room in the transnationalisation of property law in respect of movable assets operating in the professional sphere, that means in the international flows. There are many variations possible here in terms of more subjective or objective or even constructive knowledge such as we have in publication systems that assume a search duty as in the case of land, but often not in the case of filing systems of security interests in movable assets, at least not under the UCC in the US where the buyers in the ordinary course of business, who may well know of the interest, are still protected and have no search duty. This is all closer to the common law (in equity) than to the present-day civil law system, especially in the development of equitable proprietary rights where the physical element has abated. Again, one may think more in particular of trust-like structures, conditional and temporary ownership forms, and of floating charges but also of transfers of goods or assignments of intangibles in bulk or of transfers or assignment of future assets. There is in common law definitely greater and, it would appear, useful flexibility in the creation of proprietary rights, if only in equity, which may then also allow more readily for specific performance in common law countries where it is more difficult to obtain at law. For civil law, modern contractual rights of passage and retrieval rights when assets remain unpaid have already been mentioned.

90  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights The introduction in civil law of proprietary protection for both parties in a conditional transfer, as in the reservation of title, will be discussed more fully in section 1.7.3 below112 as another important example of approximation, notably in connection with finance leasing, repo financing and factoring, opening up the proprietary system of civil law, potentially even leading to trust-like structures. It confirms a shift, even in civil law, to a greater contractualisation of the proprietary notions and of the interests that may be so created in more professional dealings.113 The commercial and financial practice requires it. What is missing so far is an adequate intellectual framework and proper understanding in civil law that the sequel must be a better protection of bona fide purchasers or the ordinary course of business all round. A more modern civil law would then also have to develop a more adequate protection method in terms of fiduciary duties of primary interest holders such as legal owners/ possessors in the manner of trustees in common law and of court intervention adequately to protect the beneficiaries. The concept that split ownership rights of this nature and the strict enforcement of fiduciary duties may require or even depend on extra court protection and an interventionist judicial approach is so far also less well understood in civil law.114 On the other hand, the lack of conceptual clarity in common law as to the meaning of ownership and the overriding impact of the physical aspect of possession in the case of chattels often still give the common law an uncertain bias. Together with the lack of a clear division between proprietary and obligatory rights, it results, as we have seen, in the position of the owner or even equitable interest holders without physical possession being complex and frequently insufficiently clear in the bankruptcy of the physical possessor or in situations in which the latter is dispossessed by third parties. Also, the law of segregation or constructive trust, tracking or tracing of client assets, although all notions well known in principle in common law countries, may in practice not always be as clear in result as one might think. Typical for equity, much may depend on the circumstances and whether assets are still physically retrievable or on the extent they are. Thus, here again, much is left to the exact facts of the case. It is the ultimate demonstration that, legally, the property concept in connection with chattels and intangible assets is still not fully stabilised in common law and remains incidental and remedial in equity. This is certainly also the case in respect of

112 See for arguments in favour of a more open system, JH Dalhuisen, ‘European Private Law: Moving from a Closed to an Open System of Proprietary Rights’ (2001) 5 Edinburgh Law Review 1. See for proposals for a more fundamental modernisation of Dutch property law (concerning chattels and intangible assets), JH Dalhuisen, ‘Zekerheid in roerende zaken en rechten’ [Security in Chattels and Intangible Assets] in Preadvies Vereeninging’ Handelsrecht (Kluwer, 2003). See further also S van Erp, ‘A Numerus Clausus of Property Rights as a Constitutive Element of a Future European Property Law’ (2003) Electronic Journal of Comparative Law 1 and in Belgium V Sagaert, ‘Het Goederenrecht als Open Systeem van Verbintenissen? Poging tot een Nieuwe Kwalificatie van Vermogensrechten’ (2005) Tijdschrift voor Privaatrecht 983. 113 See for German legal writing on this development in connection with trust-like structures, W Wiegand, ‘Die Entwicklung des Sachenrechts im Verhältnis zum Schuldrecht’ (1990) 190 Archiv fuer die Civilistische Praxis, 112, 131ff and his reference to the ‘Obligatorisierung der dinglichen Rechte’ or the ‘contractualisation of proprietary rights’. See also MJ Waal, ‘The Uniformity of Ownership, Numerus Clausus and the Reception of Trusts in South Africa’ (2000) Electronic Journal of Comparative Law, 1. 114 See H Coing, Die Treuhand kraft privaten Rechtsgeschäfts (Munich, 1973), and s 1.6.5 below. The existence of separate funds with a purpose as Sondervermögen or Treugut was known in germanic law and they are still alive particularly in Germany and Switzerland. In France, in recent years there emerged proposals to introduce a fiducia concept in this connection by statute (Art 2061 CC), which ultimately resulted in statutory law in 2007, see more particularly Vol 5, s 1.3.7. Floating charges were introduced in France by Ordonnance 2006-346 of 23 March 2006, see Vol 5, s 1.3.1. In the meantime, the concept of the trust has also gained some favour in countries like Italy and the Netherlands that recognise foreign trusts pursuant to the 1985 Hague Convention on the Law Applicable to Trusts and their Recognition. They may even include assets in the recognising country: see further s 1.6.6 below.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 91 intangible assets and their transfer, even if one must accept that intellectual concepts, models or systems can never fully cover all day-to-day realities, not in civil law either. We lack the necessary insight and the concepts we have are mere abstract approximations that depend for their usefulness on constant verification and testing, even if embodied in the positive law. In section 1.1.10 above, reference was made to the new needs and developments which derive especially from the dynamic requirements of modern financial law. In section 1.1.11 above, the role of transnationalisation and of the new commercial law or international law merchant or lex mercatoria was mentioned in this connection. International finance accelerates within that law the above-signalled trends. The modern lex mercatoria serves here as a conduit while newer financial dealings have created the dynamic environment in which this acceleration takes place and in which it becomes indispensable. It introduces at the transnational level more broadly an open, albeit fractured, system of proprietary rights in which for each financial structure these rights are likely to be separately determined. In this connection, the different proprietary approaches under the different Articles of the UCC in the US have already been highlighted. This approach is not therefore asset specific but rather product specific. The operations in the Eurobond market and the swap markets, and the progress of finance sales in the repo and lease markets we mentioned in this connection as well as the increasing need and progress of the floating charge in international commercial flows. Indeed, risk and risk management are now substantially at the forefront of these newer proprietary concepts, particularly relevant in the context of professional financial dealings. They are supplemented by the need for asset liquidity as we have seen in section 1.1.4 above and the requirements of segregation and transactional and payment finality. It is not therefore surprising that they receive increasingly attention in that context. Approximation between civil and common law is most relevant and urgent in these areas, but may still be wanting. Transnational law or the modern law merchant or lex mercatoria and its acceptance and recognition of general principles and custom or industry practices is likely to further them as an expression of the autonomous and spontaneous law-creating force of the international economic and financial legal order itself. A dynamic concept of movable property is the result in the transnationalisation process in the professional sphere besides an equally dynamic and important concept of modern contract law, discussed already in Volume 3. See also the discussion on both and summary in Volume 1, section 1.1.6. In this newer professional environment, trusts, beneficial ownerships, conditional and temporary transfers, bulk transfers, and assignments even of future rights, floating charges including replacement assets, security entitlements and the way they can be used for financing, payments through credit transfers, finance leases, repos, and forms of factoring and securitisations, should be accepted foremost as international structures that operate under their own transnational law operating in the professional sphere or the modern lex mercatoria and that leaves domestic laws well behind, although there may remain bankruptcy law problems, especially fitting in these rights in domestic bankruptcy regimes, bankruptcy remaining by its enforcement nature principle a domestic competency. It is for academia to articulate this trend, draw lines, and formulate the applicable rules on the basis of internationally established or developing principles and practices, accepting for the time being that this may not be done on the basis of a unitary, intellectually coherent system of proprietary rights in the traditional civil law manner. Nor may it in truth be necessary. The prime question is what works and meets best the requirements of international commerce and finance for all concerned and conforms to enlightened domestic and international public order requirements or restrictions to the extent relevant in this area, although it is necessary and helpful for legal academia to find structure and explain better what is happening.

92  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights Again, ultimately this will come down to the recognition and acceptance of these newer transnational proprietary structures in domestic bankruptcies as internationally accepted practice or custom. That is the true test of their significance and full demonstration of their proprietary nature: see also Volume 1, section 1.1.6, Volume 1, section 2.3.3 and Volume 5, section 1.1.13.

1.3.9.  Virtues and Pitfalls of the Numerus Clausus Notion. Modern Functional Approaches It has already been said in section 1.1.10 above that in modern academic writing, the proprietary concepts and laws have been neglected, both in civil and common law except in the area of intellectual and technical property rights. However, in the more modern functional approaches in the US, especially in ‘law and economics’, there has been an interest in the civil law concept of the numerus clausus of proprietary rights. Some renewed civil law interest115 in this concept is also apparent but is largely pragmatic and focuses on its constraints and artificiality. It was shown above those new proprietary rights developed all the time, first in the law of secured transactions, for example, non-possessory securities and floating charges, and now also in the law concerning finance sales as security alternatives in asset-backed financing, sometimes backed up by new legislation, at other times it is case law or merely commercial practice. It was also said that in civil law, the limitation of the recognition of proprietary rights was always largely historical, based on the observation that some user, enjoyment or income rights had obtained third-party or proprietary effect. No doubt this was supported by necessity, although it did not go so far as easily to recognise new ones on the basis of newer needs. A material reason why some of these rights became proprietary and not others proved otherwise hard to give. Notably publicity or notice was not one of them as noted in section 1.1.2 above. In civil law, pressure is now particularly coming from the financial practice in respect of movable property to rethink at least some of this approach and was noted in the previous section. User, enjoyment and income rights (or economic interests) may well require more generally additional protection than contract law can give and may—it was posited—increasingly be maintained against third parties who acquire the underlying assets and know of the prior arrangements concerning them, also in civil law. The key is that contractual constraints limit the liquidity of assets; once it is out of control of the party who must perform, it will lead to default, so it cannot be sold. If, on the other hand, the obligation is proprietary, or may be so qualified, it goes with the asset, the seller is freed whilst it is then likely to be cut of at the level of the bona fide transferee. This was explained above first as a liquidity requirement and subsequently as risk management necessity where party autonomy also comes in in the creation of these rights. This suggests a propensity towards beneficial ownership notions and trust-like structures everywhere, at least in movable property in the professional sphere and therefore an open system of proprietary rights, cut off not in number (therefore at their creation) but at the level of the bona fide purchaser or the ordinary course of business as we have seen (therefore at their operation). Especially in the US, the concept of limitation of proprietary rights has nevertheless caught the attention of academics but in a different manner and has a lot to do with ‘law and

115 See nn 112 and 113 above.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 93 economics’ fascination with transaction and information cost or standardisation.116 Here it is believed that the limitation to some pre-packaged alternatives is efficient and should as such be promoted from this perspective. This has become a popular theme, but it was always unclear how this could square with better risk management, as risk is hardly standardised, and with the need to promote asset liquidity in both its aspects. It may be a typical consumer law perspective, as in civil law its numerus clausus of proprietary rights always was, connected with its anthropomorphic history and the older limitations on the rights of bona fide purchasers. The first observation to make is that this discussion is often based on a poor understanding of the common law itself, because in these discussions it is assumed that it has a closed system of proprietary rights as well. Thus, limitation is here understood to be the fundamental common law approach also, even though this notion and analysis was more in particular a product of eighteenth-century ius commune thinking on the European Continent and has in civil law much to do with the theoretical distinction between proprietary and contractual rights, which never became fully clear in common law, as we have seen. More important is that the operation of equitable proprietary rights and the openness they achieved in the proprietary system in common law jurisdictions are not then clearly spotted and studied in this discussion and their origin and significance (and limitations), especially in terms of risk management between professional parties and liquidity promotion, may not be properly understood. It confirms a widespread criticism of the US functional approaches to the effect that they have often little appreciation for how the positive law works and what it achieves or fails to achieve. The limitation of proprietary rights to a small standardised number is here assumed. It then also ignores that even in the law of bailment in respect of chattels, therefore at law, user and enjoyment rights could always be freely created and be protected against third parties as long as the underlying assets were handed over, like in repos. These may all be examples of a contractualisation of proprietary rights, to which the common law, aided by equity, with its lack of clear lines was always more prone, which contractualisation, it is submitted, is there to the common law’s benefit as a risk management tool in professional dealings and a liquiditypromoting facility at the same time. Even though much of this is now hidden behind trusts and in the US also behind Article 9 UCC in funding operations, this does not change the basic picture and remains particularly relevant in the characterisation of repos, finance leases (outside Article 9 UCC), and forms of recourse factoring: see Volume 5, section 2.3.2. It is certainly wrong to conclude that in common law countries the proprietary system is now in practice closed. This has already been shown in the further development of floating charges in many common law countries and conditional or finance sales also. In any event, it was pointed out before that the trust and the operation of conditional ownership rights allow for almost any kind of proprietary facility in common law,

116 TM Merrill and HE Smith, ‘Optimal Standardization in the Law of Property: The Numerus Clausus Principle’ (2000) 110 Yale Law Journal 1. See also H Hansmann and R Kraakman, ‘Property, Contract, and Verification: The Numerus Clausus Problem and The Divisibility of Rights’ (2002) 31 Journal of Legal Studies 373. See for common law writers on the subject of the numerus clausus earlier B Rudden, ‘Economic Theory v Property Law: The Numerus Clausus Problem’ in Oxford Essays in Jurisprudence, 3rd Series (Oxford, 1987) 239. See also A Fusaro, ‘The Numerus Clausus of Property Rights’ in E Cooke (ed), Modern Studies in Property Law, Vol 1 Property 2000 (Oxford, 2001) 307 and W Singer, ‘Democratic Estates: Property Law in a Free and Democratic Society’ (2008/2009) 94 Cornell Law Review 1009. See earlier for the idea of contractualisation of proprietary rights in common law, JH Langbein, ‘The Contractarian Basis of the Law of Trusts’ (1995) 105 Yale Law Journal 624. See for civil law, n 112 above. See further

94  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights albeit (quite understandably and necessarily) subject to the protection of the ordinary course of business or the commercial and financial flows and public policy when relevant. Thus, except in the case of a supplementary bailment in the beneficiaries, most third parties would not be affected, which is a reason why one can say that such property rights can become in practice more and more contractualised. This gives the common law great flexibility and is the true significance of the positive law in this area in common law countries and probably an important reason why in international finance common law centres like London, New York, Hong Kong and Singapore are all preferred as venues, although their laws do not necessarily reach all assets out of the jurisdiction, but within them all modern financial products are equitable in this sense. As mentioned, one of the arguments used in this connection in US academia in support of a closed system of proprietary rights centres on the benefits of limitation and standardisation, which are assumed to reduce information cost, here presented first in the form of the so-called optimal standardisation theory.117 It sees standardisation as supporting routine trading while emphasis is put on the communication function being facilitated by a set of pre-existing structures and rules or labels—thus the opposite of what was submitted above, that markets require greater flexibility in the operation of proprietary rights as a matter of risk management and asset liquidity. This theory comes down to the question and importance of information costs limitation, which is then presented as justification for the numerus clausus over alternative views which are more legally normative, such as those based on network effective notice or publication/knowledge theories which are more likely to open up the system. Note that nothing much is said here about the quality of the labelling and of the information or communication itself. History is supposed to have been efficient. The main point is that information processing costs are thought to be automatically reduced in a mandatory fashion in this manner. As such the effect of proprietary rights is seen as an externality or risk constrained by the numerus clausus. Yet, the advantages of choice, risk management, including bankruptcy protection, and asset liquidity are then similarly constrained, which could easily exceed the benefits of standardisation. This is not denied and so-called frustration costs are here admitted. In principle, in this approach, new proprietary rights may thus still be created if the frustration costs start to exceed the information costs of novelty in this area. Yet, it is not clear where the optimum standardisation point is. This being the case, the formulation of new proprietary rights is then believed to be best left to a legislator, but where is it supposed to get its ideas from and how would this work in the international marketplace or in the international flows? In fact, it would seem that there is nothing against creating new proprietary rights if that leads to superior labelling, assuming there is sufficient communication, which would appear to follow n 29 above for more modern property theories, also in the US. Even earlier the idea had already been expressed those proprietary interests in goods are, at least under the UCC, specifically limited in order to promote the free flow of goods, see JF Dolan, ‘The UCC Framework: Conveyancing Principles and Property Interests’ (1979) 59 Boston University Law Review 828. The conveyance is here considered limited to produce only the allowed proprietary rights identified as title, the special property interest of Art 2 UCC, the security interest, and the lien in terms of a retention right. This view suggests that the statutory law of Art 9 UCC changed the law of equity fundamentally so that these rights are cut off at the level of their creation and no longer at the level of the bona fide purchaser or purchasers in the ordinary course of business of commoditised products, therefore at the level of their operation, but this was always the older equity idea. It notably ignores the idea of liquidity, which proprietary rights seek to promote, see further the discussion in s 1.1.1 above. 117 See Merrill and Smith (n 116) and also Rudden (n 116) 253.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 95 if there is enough use of any new proprietary right reducing the communication cost at the same time. It may be reasonable to assume sooner to arise between professionals who can handle due diligence and would indicate that a new proprietary right can establish itself through custom and practice, although only over time. This is not surprising in the terms of this book but it also suggests that the system is not closed at all and that little hangs by the principle.118 An approach that moves on from the optimal standardisation theory as support for the numerus clausus notion is the verification theory.119 The idea that the numerus clausus limits externalities is accepted, but not the optimum standardisation approach, which is not considered typical for proprietary rights. Nor are communication and information cost considered problematic. This theory insists rather that parties having rights in the same assets must be enabled to understand their relative position better. This is identified as a ‘co-ordination problem’, yet another law and economics favourite, which assumes some notice of the situation and understanding of the relevant structures. In this view, parties must always be able to obtain an appreciation of their mutual rights, entitlements and duties, particularly before enforcement. So, this co-ordination problem ultimately would appear to be narrowed down to an awareness of enforcement consequences, therefore to preferences or priorities especially in an insolvency. The argument then is that to simplify the system, a numerus clausus of proprietary rights may help. In this view, new proprietary rights are only justified if their marginal benefit exceeds the marginal verification costs (cost of giving notice and understanding the structure), although logically these costs can only be established in retrospect and depend on the very use of the new right (or new financial product) which, if widespread, would itself reduce these costs. It confirms, however, that new proprietary rights can still establish themselves over time, also therefore that the system is not closed. The verification theory appears to assume a regulation of proprietary rights per type and a degree of notice in which connection publication or manifestation (which may be through physical possession) are clearly important, although apparently not by themselves creative of new proprietary rights. It assumes that some filing or communication facility exists (which could also cover contractual user and enjoyment rights and would not seem to have a connection 118 In the meantime, it may well be asked why a similar approach should not be favoured also for contractual rights. They can also weigh heavily on an asset as, eg, assignment restrictions for receivables or contractual rights of way on liquidity of the underlying property over which these rights are given. Here the notion of modularity or standardisation could also step in, which assumes that many legal structures (proprietary as well as contractual) can be usefully pre-packaged, thus also in contract, and therefore be anticipated. The advantages of contractual boilerplate are often stressed in this connection, see H Smith, ‘Modularity in Contract: The Role of Boilerplate’, Law and Economics Workshop UC Berkeley January 2006, but their elective character is obvious and there is nothing mandatory about them nor can they normally be assumed to exist except perhaps in standard documentation around one central organiser/company. This approach suggests further that such legal structures operate and can be seen in isolation, even within one transaction, and that such transactions from a legal point of view can be split up into independent standard ‘building blocks’ that can be used in all types of agreements and may increasingly be expected to do so, again reducing information costs. It is a formalistic approach that would not appear to correspond with modern needs and structuring trends except where standard agreements are used as an organisation tool by enterprises, eg, in service contracts for consumers. But it concerns then the entire contract and it does not commonly affect professionals in their dealmaking activities. As far as standardisation or modularity goes, as an example, dispute resolution and applicable law clauses spring first to mind. The choice of law clause is often considered, but whether such a choice of a domestic law makes sense in international transactions and is effective or efficient depends on many factors and is the far more important question, also since its effect is not a given but depends entirely on the law so chosen, which could be anyone’s. In some areas, like property, such a contractual choice of law clause is mostly ineffective and in the traditional conflict of laws approach usually overruled by the mandatory lex situs. 119 See Hansmann and Kraakman (n 116).

96  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights with proprietary rights per se or a numerus clausus of them) and indeed enough business understanding of what this means. This may all have some significance, likely between various security interest holders in enforcement, especially in a bankruptcy, and may also promote some broader co-ordination between transacting parties. Clearly contractual organisation also becomes important and contract law can then be seen as solving at least some co-ordination and enforcement problems as well, but the numerus clausus notion appears to work here mainly as an admission of the insufficiency of publication, coordination, and communication systems. Yet in truth, the protection does not and can hardly come from this limitation of proprietary rights (in terms of publication or similar kind of advertising or signalling), at least not in respect of chattels, but comes foremost from the bona fide purchasers’ protection, for whom all of this is irrelevant, or better still from the protection of the ordinary course of business and the commercial and financial flows, which may then ignore all these interests. This was earlier identified as another liquidity and transactional and payment finality promoting facility. Again, professionals should know the risk and also the general principles of ranking amongst themselves. That is why in equity these charges only affect them and there is no reason why they should not be free in principle to arrange these matters among themselves in any way they want; it is their choice and they may then also create new proprietary rights but only operating in that circle, that is to say only against a limited class of third parties being themselves in open competition for recovery rights. It follows that a numerus clausus of these proprietary charges among professionals would hardly appear to be necessary and efficient. The essence is rather the distinction between professionals amongst themselves as insiders and outsiders who would not need to worry about anything of this when acquiring the assets, notably consumers buying commoditised products in the ordinary course of business, even if they might know of proprietary charges created in them by professional insiders like banks and main suppliers. This is in principle a simple approach. To put it another way, regardless of the type of proprietary right, the verification cost is to be put on the user or organiser who must advise third parties of any adverse interests which even then would stick only in respect of the professional insiders. Among these professional insiders, this then becomes a matter of their investigation duty and due diligence and they should be aware of the dangers. In fact, they are aware as they compete with each other for these rights (for example, floating charges or conditional or temporary ownership rights in leases and repos), therefore in terms of risk management. Beyond this inner circle of competing banks and main suppliers, all are protected against such schemes. Especially in respect of chattels, the numerus clausus notion does not appear to make any difference to them and neither, therefore, does the regulation, standardisation or limitation of proprietary rights. For professionals it limits liquidity in the sense that the user, income and enjoyment rights created by them in the underlying assets do not move with these assets. Still more support for the numerus clausus principle comes from the anticommons theory.120 Anticommons are considered to arise when multiple owners of proprietary rights are endowed with a sufficient right to exclude others from, or hinder them in the use of a scarce resource while no one can overcome the hurdles to gain an effective right of use or enjoyment of the asset for themselves. The asset may thus be wasted through fragmentation in a ‘tragedy of the anticommons’. It is the mirror image of property held in common, which may become

120 M Heller, ‘The Tragedy of the Anticommons: Property in the Transition from Marx to Markets’ (1998) 111 Harvard Law Review 621.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 97 overused and depleted, giving rise to a ‘tragedy of the commons’, which could suggest forms of regulation.121 A numerus clausus of proprietary rights is then seen as a matter of simplification and limitation of the anticommons. In this vein, ranking of these rights is considered an important efficiency tool while contractual user, income and enjoyment rights would only concern certain clearly identified counterparties and may thus be ignored by others. It is in so far of interest that it recognises that in a modern proprietary system, the bona fide possessors or buyers in the ordinary course of business are likely ultimately to take all (although that would still leave the situation open in respect of intangible assets). It may also be considered of help that professional transacting parties as between themselves are able in their contract to limit the exercise of restrictions in respect of the use and transfer of the underlying assets and may thus allocate the assets’ use and enjoyment regardless of their respective proprietary rights and their fragmentation. Yet, this theory still seems to be somewhat remote from modern developments, which require and practise greater openness of the system and have also learnt to deal with competing rights (indeed especially through contractual devices, notions of ranking, and bona fide purchaser protection) in order to prevent the paralysis that is feared and of which in real life there may truly not be much sign except perhaps in the protection of intellectual and industrial property rights at the expense of further experimentation and innovation by others.122 Although in theory one can see that a limitation of proprietary rights may help in this connection, it is even now ever more diluted under modern commercial and financial pressures, which itself suggests that participants can live with and are not much bothered by the anticommons risks. It may be concluded that these newer theories first would not appear to appreciate clearly how the present system works, especially in common law countries from which a more open system hails (in equity), and, second, do not provide a clear new insight into the reasons why some rights are proprietary and others remain contractual and why a limitation is needed and sustainable and how it can readily be applied and explained (let alone how such proprietary rights operate in the different legal systems and why there are these differences). Again, it should always be remembered that at least in professional dealings, movable property and its use is foremost a risk management and liquidity promotion tool and as such an extension of contract which allocates the risks between the parties including those in the assets they use: see the discussion in section 1.3.8 above. In that context, standardisation may run its course and is not always the paramount consideration, again, the reason being that risk is hardly standardised in modern markets. Limiting transaction and information costs may then be secondary. Greater refinement and tailor-made arrangements are here often necessary and more important, which again poses the issue of party autonomy in the creation and operation of proprietary rights

121 The traditional theory, first formulated by Garrett Hardin, ‘The Tragedy of the Commons’ (1968) 162 Science no 3859, 1243, thus holds regulation to be necessary, because, without it, pollution and depletion of resources would naturally occur as individuals do not recognise the effects on others or are not interested. This was, however, contested by the 2009 Nobel prize-winning economist Elinor Ostrom who noted that people manage common resources reasonably well without regulation (which proved in any event often misdirected). Rules would develop over time, users being involved in this process and in the monitoring, provided entitlements were clear, individuals had a discernible interest in the benefits of maintaining the resources, maintenance duties were proportional to benefits, and adequate dispute resolution methods were available. It may be seen that this insight is closely related to the emergence of custom and practices, which may indeed favour different property rights besides purely private or public ownership. 122 See also the discussion in n 27 above.

98  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights where standardisation would hardly appear to be always efficient. Indeed, it calls for a more dynamic concept of proprietary rights between professionals. The key is that the insiders know and follow each other and that the public can ignore it all.

1.3.10.  Asset Liquidity and Risk Management or Transaction Costs and Standardisation in the Property Law Concerning Movable Assets in Professional Dealings? In the foregoing party autonomy in the creation and operation of proprietary rights was considered a key issue in professional dealings, a matter of risk management closely connected with liquidity, transactional and payment finality, and asset segregation in bankruptcies. It means in this connection in particular that in the commercial flows there is no limitation in the number of pre-set proprietary rights that work in rem, that means against third parties (the numerus clausus). Rather, professional parties will be able to create proprietary rights at will but, again, these rights commonly work only against certain classes of third parties, notably the insiders who structure these deals themselves, know about them or use them, and have a search duty. They were earlier identified as notably banks and main suppliers who have the means and expertise to engage in that kind of structuring and engage in due diligence in the international flows. In intellectual property, they might be other manufacturers or publishers. How they do this is ultimately a matter of competition and efficiency or optimal use of resources between them and as such in principle a positive development subject only to public policy or public order requirements operating at the transnational level as we have seen (for example competition law), the protection of consumers who buy finished products and the liquidity of commoditised assets in that sense and the finality of their transactions in them being an important aspect of public policy in the international flows itself.123 Market and public interest thus coincide. It means that when such assets reach the public, the interests created therein are bound to lapse (when acquired for some value). The keys are therefore to determine first who are part of the professional class or members of the public and what kind of investigation duties may (still) be expected from them. Transaction and information costs may still be of interest but they are not, it is submitted, at the heart of proprietary rights and are only part of the ordinary due diligence costs of professional insiders. Again, asset liquidity, risk management, finality and segregation are the much greater issues. It should not be overlooked that liquidity has here two aspects. It is not only the question of protection of the public and the commercial flows in that sense against unknown charges therefore an issue for transferees. There is also the position of the originator or transferor who when conceding user, income, and enjoyment rights in the underlying assets benefits from greater liquidity in them when these charges move with the asset upon alienation, for him/her the real importance of proprietary rights. If they were or remained purely obligatory, the loss of the assets

123 It was already noted that the law has always favoured the liquidity in respect of tangible movable assets, see s 1.1.4 above, even if this is more of a struggle in respect of intangible assets, notably monetary claims, see s 1.5.1 below. From the market perspective, the essence is that it allows user, income and enjoyment rights in underlying assets or asset classes to move with the property, if that is what parties want and need, and these rights then work as such against all successors in interest. That is liquidity for them, mere contractual limitations would be a hindrance. For the successors in interest, liquidity, on the other hand, means that they can acquire the property free and clear which bears a close connection to finality. They are basically the consumers; it means that only professionals are affected and have a search duty.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 99 would create a risk of default. Again, it should be understood that the numerus clausus is here a handicap to liquidity promotion and risk management and greater flexibility is necessary. To repeat, the proprietary rights are here not cut off at the level of their creation but at the level of their operation and it is supported by public policy at the level of the bona fide purchaser, in a capitalist society the promotion of liquidity itself is a policy issue. It was shown that this is promoted domestically in common law countries in equity and is perceived in this book as a more comprehensive and fundamental shift in the operation of proprietary rights at the transnational level. Again, it means that upon a sale, the original owners are discharged from any duties resulting from the rights they have given to others in respect of the underlying assets, whilst the public may ignore these rights altogether when acquiring them out of the commercial flows. Thus, the buyer in the ordinary course of business of commoditised products, wherever located, buys them free and clear; even bona fides has no longer much to do with it as long as they buy these products in the ordinary course of their activity, in essence for private use and it is assumed they do and there is no search duty, the issue being transactional finality in these flows for them at the same time and it is of the greatest importance. The same applies to intellectual property rights, although their proprietary status and operation may still be affected by statutory law as indeed is also the case under Article 9 UCC (Section 9-320(a)). The principle is nevertheless that the ordinary public buys commoditised assets unencumbered and need not worry about any of this. Even now, local laws may express this when these assets come to rest domestically with consumers or other end-users, at least for chattels, but the principle is more fundamental. In the process, we then have commercial flows that allow for property rights that are not asset specific and may depend on mere description of classes and type of rights moving with the property but again enforced only against certain classes of third-party participants in the marketplace, and we have specific concepts of the public interest, which affect and promote risk management facilities of this nature. It is thus at first the contractual description or party autonomy that takes over in the assets covered and their modality and in the rights that may be affixed to them. Intrinsic qualities become secondary. Subsequently the public can ignore all such rights of others. Again, risk management, liquidity, transactional or payment finality and asset segregation move to the centre of operation of property rights. These four elements make for a dynamic movable property law among professionals,124 which is, it was submitted, the direction of property law, after globalisation more in particular also in the international marketplace.125

124 It is sometimes suggested that the corporate form of holding and controlling assets shows new departures in property law, but it is simply a form of jointly held property that is separated from its ‘economic’ owners until liquidation, as such not much different from the marital community of property, some forms of partnership, and the bankrupt estate, all closely connected with the concept of legal personality and property put together and committed for a certain purpose and certain time, see also Vol 5, s 1.1.9. cf, however, also O Hart and J Moore, ‘Property Rights and the Nature of the Firm’ (1990) 48 Journal of Politic al Economy 1119, and earlier more pronounced AA Berle and GC Means, The Modern Corporation and Private Property (New York, 1967, revised from 1932). Perhaps the focus should not be here merely upon the corporate nature of the holdings, but on the fact that they stand for professional dealings, now indeed often in the international marketplace, from which, it was submitted, modern property law in that sphere derives its more particular features. 125 Foreign investment and its protection under modern BITs are often seen as another form of property that may be transnationalised, but it may be better to use the notion of governmental licence. Cross-border protection is then an issue of international administrative law that is increasingly developed through ICSID (under the Washington Convention) and otherwise, is better distinguished from the transnational property scene as here described, see Vol 2, s 3.1.4, analogy being avoided.

100  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights To summarise the modern literature on the subject, it has already been noted that there is not a great deal of new light, certainly not beyond what has already been discussed in the previous section.126 The discourse remains mostly traditional and moves from the moral justification of property127 to the economic question of control over scarce resources, especially in the exercise of proprietary rights, their optimum allocation, the externalisation (or not) of the costs of using them, the role of transaction, information and verification costs in this connection, and of regulation especially of the environmental effects of the exploitation of property rights. That is Coase, who attempted to demonstrate in this connection the futility of traditional notions of nuisance, harm, causality, and liability. Although risk management, liquidity, finality and segregation are considered the more important issues in this book, this research is still important as to how the traditional property rights are expressed in a newer environment where the pressure on resources increases. Demsetz built on this and shows how private property is here better than communal property or state ownership while internalising cost-benefit on the one hand and a social calculus on the other. Private discourse between competing interests gives the better result in this view. All that has value is the object of private property rights, implying also that all that is losing that value becomes irrelevant from a private proprietary perspective,128 and important insight in the context of the above discussion. Others emphasise more in particular the room to be respected by the modern state for private ordering in civil society, sometimes connected to the stability-enforcing nature of capitalism129 versus the alternative idea that since civil society lives and operates (in that view) by virtue of the state, the latter can take all or at least can set out in a mandatory fashion the limits of proprietary rights and define or redefine them at will. The social function of property is then no more than an incident that could easily allow for forms of expropriation. Some sociologists have also noted the effect on social mobility.130 It was observed before that where most people would probably spot a fundamental psychological concept of mine and thine in the legal notion of property, and some see here also a human right, there does not automatically appear to follow an inherent preconceived structure that finds easy recognition in morality, sociology, and law alike.131 There would appear not to be much of a pre-set context.132 Common ground is that from a legal point of view all the world (or in equity at least important classes of competitors who can know about these rights before acquiring the assets) must recognise proprietary rights, which basically means respect them and not interfere with them whilst they transfer with the property. For security interests, in particular, it means that their rank must be respected by other creditors and the owner, whomever owns the property, especially relevant in bankruptcies. It has already been noted several times that in these aspects, the fundamental structure of property in both civil and common law (including equity) has changed little over time although differently expressed in either system of laws. This has long been well understood and hardly anything dramatic

126 See A Lehavi, Construction of Property (Cambridge, 2013) particularly in chs 1 and 2. 127 J Waldron, The Right to Private Property (Oxford, 1989); J Rawls, A Theory of Justice (Cambridge, MA, 1999). 128 Especially R Coase, ‘The Problem of Social Cost’ (1960) 3 Journal of Law and Economics and H Demsetz, ‘Towards a Theory of Property Rights’ (1967) 57 American Economic Review; see n 27 above. 129 See H De Soto, The Mystery of Capital (New York, 2000); M Cohen, ‘Property and Sovereignty’ (1927) 13 Cornell Law Quarterly 8, who rather saw this as a state-endorsed system. 130 BG Carruthers and Laura Ariovich, ‘The Sociology of Property Rights’ (2005) 30 Annual Review of Sociology 23. 131 JL Rierce et al, ‘The State of Ownership: Integrating and Extending a Century of Research’ (2003) 7 Review of General Psychology 84–107. 132 Even for Grotius, see Vol 1, s 1.2.7.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 101 emerged from newer writings,133 but globalisation may change form and substance. This was the element of foreboding that was noted before (in section 1.1.9 above) as hanging over the law of property, including its structure, and is, it is submitted, what is happening as a result of transnationalisation in the professional sphere. These issues will be revisited and summarised in section 1.10 below. Undoubtedly, the blockchain and crypto currencies or their successors will bring further change. Where the present limits are remains to be seen. That remains in fact also true for the equity approach in common law countries and is an issue of long standing. In Keppell v Bailey,134 the Chancery Court famously held that ‘incidents of a novel kind cannot be devised and attached to property at the fancy and caprice of any owner’. In Hill v Tupper,135 it was said that ‘A new species of incorporeal hereditament cannot be created at the will and pleasure of an individual owner of an estate and he must be content to take the sort of estate and the right to dispose of it as he finds the law settled by decisions, or controlled by act of parliament’. This suggests the increasing ossification of the law of equity also in this area, but in Tulk v Moxhay,136 the equitable servitude was clearly established (first in land) and the principle firmly expressed that it was enforceable but only against successors who acquired the property with notice. Thus, it did not prevent these rights or charges from developing further, not only for servitudes but later also for floating charges in movable property, see for the latter Volume 5, section 1.5.2. Perhaps contractual arrangements rather than unilateral action make a difference here. Again, the true issue is then a question of the investigation duties of transferees and the differences in this regard between professionals and consumers. But public policy is a bar, from early on notably in price maintenance schemes,137 and of course in all arrangements in restraint of trade. In the US, where there may be even greater flexibility and statutory law has helped especially in respect of floating charges (Article 9 UCC), there are nevertheless still limits, especially in testamentary grants and grants of servitudes, see Johnson v Whiton138 and Werner v Graham.139 Indeed, there is a more traditional resistance, even in the US to recognising equitable servitudes, at least in chattels, hence also them being cut off by the bona fide purchaser protection principle140 or public policy.141 More recently the issue has arisen in a more modern setting dealing with the myriad restrictions on how electronic programs can be downloaded and used leading to so-called click-wrap licences, which may still be considered merely contractual but concern also so-called ‘free software’ and ‘free culture’ and may aim towards affecting remote users and therefore may attempt to start running with the burdened assets (including programs), automatically binding

133 But a political process of evolution and change in the design of property law has been spotted by G Libecap, Contracting for Property Rights (Cambridge, 1989) and Itai Sined, The Political Institution of Private Property (Cambridge, 1997). 134 [1834] ER 1042, 1049. 135 [1863] 2 Hurlst 7 C 121. 136 [1848] 41 ER, 1144, followed for movable property in De Mattos v Gibson [1858] ER 108. 137 Taddy & Co v Sterious & Co [1904] 1 Ch 354. 138 34 NE 543 (1893). 139 183 P 945, 947 (1919). 140 Cf for such servitudes attaching, Mallinkrodt, Inc v Medipart, Inc, 976 F2d 700/08 (1992). See for a rare discussion, Z Chafee, ‘Equitable Servitudes on Chattels’ (1928) 41 Harvard Law Review 945 and ‘The Music Goes Round and Round: Equitable Servitudes and Chattels’ (1956) 69 Harvard Law Review 1250. 141 Notably when in restraint of trade or promoting price maintenance schemes, see US S Ct in Dr Miles Medical Co v John D Park & Sons, 220 US 373 (1911). See for copy rights so used, see Bobbs-Merrill Co v D Straus, 147 F 15 (2nd Circuit 1906), aff ’d 210 US 339 (1908).

102  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights current possessors, whether advertised in the information or not.142 It is then a business issue but the general public tends to be protected once these products reach them, they are free and clear—it is a more fundamental issue.143 Short of this, there may still be other public policy issues: retail price maintenance and competition issues were already mentioned. There may also be special duties for the organiser when there are standard terms. There may be some intrinsic limitations concerning reach and coverage, like the lack of salient features (or what normal people or professionals may expect).144 There may be further limitations derived from the concept of possession. Statutes (and case law) may also disturb, it was already mentioned, but again in business these limitations are secondary and for retail probably largely beside the point. It should be noted in this regard also that any (re)sale of restricted assets is normally valid regardless of any such impediments and the remedy would at best be damages against the transferor. On the other hand, it may be recalled that in the anthropomorphic approach of civil law, servitudes in movable assets were not considered and usually excluded from the roster of proprietary rights altogether (numerus clausus), erroneously, it was submitted, for professional dealings. They concern user rights. It may be recalled in this connection that usufructs, on the other hand, remain commonly available as proprietary income rights in movable assets. To repeat and conclude, at least in the professional sphere, the prime elements are always better risk management, hence also the advance of party autonomy in the creation of proprietary rights in that sphere as here described, greater liquidity, transactional or payment finality and asset segregation. The professional modern contract thus deals not only with the normal incidents in a commercial relationship allocating the risks in so far as foreseeable between the parties, but at the same time in a similar manner with the assets that are used or produced in this connection, the user, income and enjoyment rights therein, and with the risks concerning them, not only in asset-backed funding when it concerns the recovery rights. Where in Hohfeld’s world,145 in a system of rights, there was approximation between contract and property, here one sees another approximation: in the professional sphere both are risk management instruments and go together and financial structuring in particular becomes market driven in an open system of proprietary rights. This is hardly obvious in the work of Merrill and Smith and Hansmann and Kraakman, who argue for a numerus clausus as a matter of standardisation reducing in this manner transaction, information, or verification costs as we have seen. That may have some meaning for consumers, although their protection is not this limitation, but rather their bona fides when acquiring the property. Again, it is assumed not to be subject to any search duty so that it morphs into the protection of all that is acquired in the normal course of their activity whilst liquidity and finality are here favoured for them and is the more important protection. Somewhat curiously for ‘law and economics’ adepts, the authors expect here much from government and mistrust market forces

142 Molly Shaffer Van Houweling, ‘The New Servitudes’ (2008) 96 Geo LJ 885. 143 See DR Miles Medical Co v John D Park & Son, n 141, 404 referred to the need for freedom of traffic, thus liquidity, as public policy. Chafee, n 140 (‘Music’) above, referred to ‘the policy in favor of mobility’. See for patented products, US Supreme Court in United States v General Electric Company, 272 US 476 (1926), correctly excluding professionals as licensees. See further General Talking Pictures Corp v Western Electric, 304 US 175 (1937) referring to a parented devise having passed into the hands of ‘purchaser in the ordinary channels of trade and full consideration paid therefore’. That is the equitable principle. Note that as to works of art, this rule would not apply as they are not commoditised and purchased in the ordinary course of trade. 144 See R Korobkin, ‘Bounded Rationality’ (2003) 70 U Ch LR 1203, 1229. 145 See n 29 above.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 103 even in professional dealings, but how could government know and make the proper choices about what is proprietary or not in a transnationalising world? Which government? Treaty law? Who has the wherewithal for its content? Again, it is consumer law thinking which remains by its very nature more national and regulatory. It is unsuitable in professional activity where the protection of bona fides is also weaker and investigation duties exist. Finally, and on a more general note, it may be observed that rights against third parties or the public at large are fundamentally limited in contract by privity but even in property by bona fide purchaser protection as alternative to the protection derived from the numerus clausus.146 It means that their history or origin becomes irrelevant. Other examples may be found in the notion of abstraction or independence in negotiable instruments and letters of credit. The German abstract system of title transfer may offer a further important illustration. Prescription or statutes of limitation and laws against perpetuities may be other indications. Here again, liquidity, transactional and payment finality and risk management/party autonomy issues come together in the marketplace, for professionals now especially at the international level. To repeat: proprietary user, income and enjoyment rights promote liquidity of the underlying assets from the perspective of the transferor and are as such preferable to contractual restrictions which do not transfer with the asset. They are promoted in professional dealings. Cutting off these rights at the level of the transferee also promotes liquidity from the latter’s perspective, relevant especially for consumers. When properly understood, both find support in the positive law and public policy. The numerus clausus is thus sidelined for all.

1.3.11.  The Effects of Globalisation and Transnationalisation on the Law of Movable Property. The Question of the Public Interest and its Representation at the Transnational Level This may be the place finally to revisit the subject of globalisation and its effect on property law more broadly, especially in professional dealings, in particular for movable property including claims or receivables in international production and distribution chains, and briefly to consider also modern recent philosophical, sociological and economics writings on the subject beyond the ones already mentioned in the previous section. The starting point in this book is that, when we think about property in a globalised context, we must first think not in terms of individualised assets, or their mine or thine, but rather in terms of their flows and transformation, the attendant user, income and enjoyment rights in them, and questions of risk management, liquidity, transactional or payment finality and segregation in bankruptcies. We must not then think in terms of physicality, but rather in terms of rights and obligations which are all intangible; nothing is physical in the law, some may operate only between the parties, others against all or at least some classes of the public like professionals not involved in the creation or transfer of these rights. This discussion was begun in sections 1.1.2 and 1.1.7 above. Thus, we should not or no longer think of identification, specification and setting aside per se, but rather in terms of classes of assets that are in constant movement and transformation or value

146 M Gergen, ‘Privity’, in AS Gold et al (eds), Oxford Handbook on New Private Law (Oxford, 2021).

104  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights adding transnationally, and are defined by their description in the underlying documentation. It is easiest to visualise this in the production process when classes of assets (including services, information and technology) may transform from commodities into manufactured goods and from there into receivables upon a sale and in proceeds upon payment, ultimately resulting in cash balances that are no more than claims against banks. In these flows, properly considered, these movements and transformations do not affect the title and especially not any security interests or similar rights like finance sales that might be given in these assets to insiders (banks and main suppliers) along the way, nor their ranking or status as finance sales amongst such professionals, except that proceeds may have to be shared by those who came later to contribute to the greater value of the asset, although then likely to be lower in rank for their pro rata share. Again, individualisation comes here only at the end of a chain when an asset comes to rest in the hands of the end user, often for a short while until it is consumed or thrown away. Except for capital goods or pieces of art, very little is resold in that world and there is little residual value in the area of chattels. We know that when we unpack a present, it immediately becomes second hand and is not a store of value any longer (only land and durable goods like equipment or objects of art like paintings and jewels are—which are unlikely to be commoditised). It means that, in a modern society, property rights substantially lose their meaning once the assets come to rest and are therefore of particular interest only between professionals in their flows and transformation, the essence being that value is added. It was submitted that at least in respect of commoditised assets, they have their true value only in these flows as flows and are hardly interesting outside them. Consumers may of course still have other assets which are not so commoditised, notably dwelling houses or claims, the latter usually only a matter of collection. They may also have bank accounts and investments, usually in custodial form; both are now also treated quite differently from the traditional proprietary and transfer points of view, see Volume 5, Parts III and IV. It was submitted all through that in international trade and finance, it is these flows that count ever more fundamentally and should be legally treated as such. They are enormous. By 2020, they were approaching a value of US$ equivalent of 20 trillion per annum for goods, another five trillion for services, larger than the GDP of the largest countries or even conglomerates of countries like the EU. The essence is the size and force of these flows, therefore their momentum, which in this book is seen to be at the heart of the creation of a new legal order: the commercial and financial legal order competing with statist legal orders, in which the modern property concepts are founded and whose law is the modern lex mercatoria. It is a product of the globalisation of the marketplace itself resulting in a bottom-up process of law formation between professionals, based on custom and practices, supplemented by fundamental and general principle, and party autonomy that itself is also founded in this order and may extend into property as we have seen, all corrected to the extent necessary by public order or public policy considerations of which liquidity and the protection of public against such charges are major ones. This process of law formation and correction was described in Volume 1. The Eurobond market, now more than 50 years old, is the largest capital market in the world with an issuing volume of more than US$ equivalent of five trillion by 2020 and an outstanding total of more than US$ equivalent nearing 30 trillion and should also be considered. The proprietary status of the Eurobond and its trading and transfer used to be the prime example of transnationalisation of the legal regime, imposed by the flows in the capital markets, but the commercial flows do so, it is submitted, in an ever more compelling way also in respect of other asset classes. It could be added that the international swap market is valued in the region of US$ equivalent 600 trillion of swaps after netting probably still in the US$12–18 trillion equivalent bracket. These flows are immense and increasingly difficult to capture in a territorial sense (and then further broken up in terms of contract, property and enforcement). It follows that

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 105 governments can hardly decree the proprietary structures of and in these flows even if they had a clear insight into the tipping points where, in terms of the theories discussed in the previous sections, the extra information costs of novelty meet the frustration costs of more flexibility, or marginal benefit exceeds marginal verification costs. It is indeed in this void that the international marketplace itself creates the basic (proprietary) structures, which are dictated rather by the need for liquidity, risk management, transactional and payment finality and separation as we have seen. It was submitted that this need not be greatly problematic in professional dealings as the Eurobond market and swap markets have shown, rather they strengthen them. For the public, there is the protection of the bona fide purchaser for value. Yet an important concern may still be the representation and formulation of the public interest, more broadly, first to keep the international markets clean—it may be a reference to public order issues or to societal values which also in the transnational commercial and financial legal order exist and cannot be ignored and go to international minimum standards. Another issue is the ranking of the insiders and the contributions they may have to make especially in reorganisation proceedings of a debtor under applicable bankruptcy law. It was argued all along that the public policy aspect raises the question of who are the spokespersons for it in the transnational order or in these transnational flows. To the extent international transactions still come demonstrably onshore in terms of conduct and effect, sovereign states will have a dominant say, but only in their territories and there is an obvious problem with the international flows now often being intangible or virtual, therefore difficult to locate, while the risks concerning them may be moved elsewhere through derivatives. This pleads also for transnational minimum standards. Bankruptcy laws which remain local create here special problems. It was further submitted that formulating and applying international standards is the true challenge in the legal transnationalisation process. In the international markets, the true force is thus on the one hand an advanced form of party autonomy in the creation of proprietary rights and the acceptance of a reasonable description of how professional parties cut up these flows and the rights amongst them, which in principle they may be able to do at that level in any way they want and for whatever purpose they like. That is privatisation. On the other hand, we have public policy, part of which is the protection of the public against these newer charges and interests whilst supporting greater liquidity and finality at the same time. Here the interest of the market and the public coincide. The rest is promoting the integrity in the international marketplace: one may think of competition policy, market abuse, insider dealing, money laundering, tax evasion, and corruption, also the environment and public health. Since ultimately this concerns the credibility of these markets, here again, these minimum standards are also in the interest of these markets themselves. In international business transactions, it is often a matter of structuring largely connected with asset-backed funding and not primarily a matter of transaction, information, verification and optimal standardisation costs.

1.4.  Transfer of Proprietary Rights in Chattels in Civil and Common Law 1.4.1.  The Legal Requirements for the Transfer of Chattels Ever since the Roman jurist Gaius (Institutes 2.20), it has been said that for a valid voluntary transfer of chattels, there needs to be (a) a disposition right in the transferor (normally an ownership right in the underlying asset although it could be another right), (b) a valid cause (normally

106  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights a sales contract, gift, or exchange), and (c) an act of transfer (delivery or transfer of possession or a contract saying so). In this connection, one may also refer to power, intent, and formalities. Also, in common law one may note these essentials even if less clearly expressed. In respect of both the contract and the act of transfer, there is the further requirement of legal capacity. Another requirement is often stated to be sufficient identification of the asset to be transferred.147 It will have to be considered in this connection in particular to what extent the asset must physically exist in order for it to be legally transferable. This has already been discussed in section 1.1.5 above. In civil law, the requirements of identification and existence became closely associated with or even integrated in the disposition right itself, but it may follow from the foregoing that it may be clearer and better to keep them apart. The accent so far has been on the transfer of the ownership right in chattels, but another important issue is what transfers of this nature are meant to achieve, therefore what proprietary right is meant to be created or transferred. In chattels, some form of transfer may also be necessary to create a usufructs or security interests. In civil law, this goes back to the numerus clausus of proprietary rights and their creation and raises the further issue whether for different proprietary rights there are different requirements in terms of disposition rights, contractual requirements, and especially transfer or formalities besides legal capacity and asset identification. If, as proposed in this book, we must look first at the creation and operation or transfer of all user, income and enjoyment rights in the underlying assets and subsequently decide when, why, and how they become proprietary, therefore affecting any subsequent transferee of an asset if these rights are pre-existing, and accept that they all have a tendency to become proprietary, if only to promote the liquidity of the underlying assets, see the discussion in section 1.1.3 above, this suggests that proprietary rights may arise more spontaneously without further formalities, although there may still be a need for disposition rights in the transferor, signalling sufficient control which is then normally assumed, while the question of bona fide protection against such rights for subsequent transferees (or any transferees in the ordinary course of business even regardless of bona fides) would also arise. This was earlier identified as the issue liquidity and of transactional finality and was considered a key issue transnationally. Civil law strives on the whole for a unitary approach, as we have seen, but there are obvious differences in the creation or transfer requirements and formalities of proprietary rights especially in the creation of security interests as compared to (notably) conditional and temporary ownership rights: see particularly section 1.7 below and it was noted before that a unitary approach may not be fully sustainable in modern financial products or facilities. Civil law prefers not to distinguish according to the underlying type of asset, but in respect of land there are in any event different publication requirements (and also more proprietary rights such as easements or servitudes and in some countries also certain types of leases). In respect of intangible assets, especially for the assignment of monetary claims, there may be further differences and refinements (or lapses), also already mentioned and as we shall see in more detail in section 1.5 below. Hence the idea that the above transfer requirements apply primarily to chattels and to the proprietary rights created or transferred in them. Similar issues, however, also arise in the assignment of intangible assets, especially receivables, very clear even in the DCFR (see Articles VIII-2:101 and III-5:104), therefore even when claims (as in the DCFR) are not considered assets proper. 147 Goode (n 30) 54. It is deemed implicit also in laws that do not require delivery for the transfer of title, like the laws of England and France: see also Ghestin and Desche (n 10) No 544; see also Art 1129 CC. Note that in Goode the civil law requirements in this respect are transposed into the common law. It leaves open the question what sufficient identification is, notably whether future assets or assets in bulk or as a class can be transferred, see ss 1.1.5 above and 1.4.3 below.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 107 As for chattels, it is efficient first to explain the formalities, especially the requirement of delivery in some countries. Thereafter we will turn to the requirement of identification and existence, then to capacity, then to the contract, and finally to the disposition right. As already mentioned, the last normally derives from ownership and it should then be clearly distinguished from capacity. Capacity goes to the heart of both the validity of the contract and of the delivery (if considered a juridical or legal act as is likely to be the case, at least in countries requiring it as a condition for the transfer of ownership). The disposition right is a different requirement, as we have seen, and derives in principle from an unbroken chain of transfers, bona fide acquisition or acquisitive prescription (in civil law), in which identification and existence of the asset may also play a role. Although capacity and the disposition right must thus be clearly distinguished, and may lead to different issues of finality when they fail, as we shall also see, they may sometimes be closely related in the sense that lack of capacity earlier in the chain of transfers may affect the ownership and therefore the disposition rights of a later seller. The discussion of these issues will particularly take the perspective of failure of any of these requirements for a valid transfer and address its effect on the transferee (usually a buyer) especially if in (physical) possession of the asset, more particularly relevant if a chattel. May s/he keep it, or must he/she return it and, in the latter case, is the return of title automatic or does it require a separate act of retransfer? If so, it is unlikely to lead to the retrieval of the asset in the case of the intervening bankruptcy of the buyer. This is indeed the issue of finality where the importance of bona fide purchasers or acquisitive prescription comes in. In civil law, the bona fide purchaser of chattels is mostly protected against the defects earlier in the chain, therefore against a lack of disposition right (see section 1.4 below) but not normally against invalidity of its own purchase agreement for whatever reason (lack of capacity, lack of intent in civil law or consideration in common law), or of the delivery of possession pursuant thereto (wherever required), or other formalities. Only acquisitive prescription (which in the case of chattels could, however, be immediate) may achieve this (see the discussion above in section 1.2.5), which covers all defects. If the purchaser was not bona fide as to the causes of the failure of its own purchase contract, statutes of limitation could still help also, but they are procedural devices that do not traditionally transfer ownership (although they may do in common law excepting criminal behaviour and now also in many civil law countries by special statutory provision) but are unlikely to be immediate. Lack of formalities do not have a similar cure, like failure to deliver in countries requiring delivery which than also affects any bona fide purchaser protection against lack of a disposition right and the abstract system of title transfer against an invalid contract as the transaction is not completed. As just mentioned, we shall be concerned here mainly with sales of goods of physical movable assets (chattels). The transfer of intangible assets through assignment will be dealt with in section 1.5. The transfer of immovables will be largely ignored. It was already said that the legal regime concerning them is not a primary concern in this book and not of great importance in international business (unless real estate is that business). Transfer of ownership is on the other hand the prime objective of all sales agreements, although it can also be achieved through exchange or barter. Succession is another way of acquiring property, as are acquisitive prescription in civil law and bona fide purchases (if the problem is only a lack of disposition rights), or increasingly even those in the ordinary course of business for commoditised products as we have also seen. Whether title has effectively passed is for the applicable law to decide. In international cases, under traditional private international law, this will normally be the lex situs of the asset (assuming the situs can be established and has some permanency). It was argued that transnationalisation of the international flows and rights established and enforced therein overcome these limitations. Hence the modern law merchant or lex mercatoria.

108  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights In connection with the ownership transfer, the word ‘title’ is often used, but it should be realised from the outset that it may be used in different ways. In civil law, title is in this connection mostly considered the underlying sales contract while in common law it is the ownership that is being transferred. Here we shall use the English terminology so that ‘title’ refers to the proprietary right that is transferred.148 In the present context, transfer of title means therefore transfer of ownership. It should be recalled in this connection that in civil law terminology, strictly speaking the transfer of ownership is the transfer of the ownership of the underlying proprietary right (in the asset and never strictly speaking the asset itself): see section 1.2.1 above. It could also be a usufruct or security interest as we have seen. Delivery should then be perceived as the transfer of possession (therefore transfer of the will to hold for oneself) of the underlying proprietary right and the surrender of the disposition right therein. Again, possession is here in essence perceived as entirely abstract or constructive (as the underlying right and the delivery also are) in the nature of the intent to exercise the proprietary right, signifying control, which is surrendered in this manner upon a sale, see further section 1.2.2 above. In the following, this terminology will be respected but not belaboured so as to avoid a pedantic vocabulary. To also retain some simplicity, the discussion will largely be limited to the transfer of full ownership of chattels. In terms of the matrix of proprietary rights and their manifestation in civil law set out in section 1.2.2 above, this means mainly the transfer of the ownership manifestation of the ownership right and not of usufructs and security interests concerning these assets. The transfer of the possession or holdership of these proprietary rights will also not be the main focus—it is mainly a change in the intent to possess or to hold (see also the observation at the end of section 1.4.4 below), but there may be other formalities. Again, intent (contract), capacity, and disposition rights are here always perceived as purely legal notions. So are proprietary rights and possession or holdership. Any remaining anthropomorphic approach to property is here abandoned (or considered exceptional as in the case of the protection of the bona fide purchaser only if in physical possession of the chattel wherever required), all the more proper, it was posited, in professional dealings in the international commercial flows, in which commonly legal rather than natural persons are involved and control might be the better expression of possession which is not then perceived as something merely physical.

1.4.2.  The Formalities of a Sale: Contract or Delivery (Physically or Constructively); Double Sales; the Real or Proprietary Agreement in Civil Law The formalities of the transfer of ownership in chattels may concern the sales agreement itself and any additional requirements. The sales agreement concerning chattels is, however, normally informal and needs no writing (except in common law in situations where a deed is required when there is no consideration, an unlikely event in a sale of chattels).149 Any formalities that we need to be concerned about in this connection relate therefore to any specific requirements of the transfer of title. They mainly concern the requirement of delivery of the asset to complete the ownership transfer. There are at least four possibilities. 148 Title may sometimes also mean the document giving rise to enforcement action, not here immediately relevant. 149 See for the Statute of Frauds requirements and its remnants in common law, and for the requirements of Art 1341 CC in France, more particularly Vol 3, s 1.2.8. See for the remnants in the creation of security interests in the US, s 9-203(b)(3)(C) (9-203(1)(a) old) UCC.3.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 109 The main distinction is here between the law of countries that require delivery for the transfer of title in chattels and those that do not. Germany (section 929, first sentence, BGB), Switzerland, Austria, the Nordic countries, the Netherlands (Article 3.84(1) CC), and Spain are in the first category and all require an act of delivery for the passing of title in chattels. The law in these countries uses in this connection the notion of delivery of possession, which is more theoretical and allows this possession and its transfer to be constructive. Delivery is here indeed a legal and not a physical act. This largely follows Roman law, which, however, in sales also required payment, as we shall see shortly.150 England (sections 17 and 18 of the Sale of Goods Act 1979), France (Articles 711, 1138 and 1583 CC),151 Belgium, Luxembourg, Italy (Article 1376 CC), and Poland are in the second category and do not require a formal act of delivery to complete the transfer. The civil law countries in this category follow here the teachings of Grotius and Pufendorf from the natural law school, who started to deviate from the Roman law model in this regard and found the transfer of ownership upon the mere conclusion of the sales contract more natural. Of course, delivery will normally be the object of the sale, but it then becomes a matter of performance and is then likely to be physical, not then a legal act as such. Common law required delivery for title transfer in chattels well into the nineteenth century and case law in England only started to change towards the end of it. This was eventually reflected in the first Sale of Goods Act of 1893, but parties may still decide otherwise. Thus, the idea of delivery for title transfer in chattels is not as alien to common law as it would now often appear. In fact, in the US, there is still a preference for the old delivery rule. The UCC confirms this and states that the moment of transfer of title in chattels upon a sale is still delivery except if parties agree otherwise (section 2-401).152 Again, such a delivery is then thought of as a physical act, which conforms to the common law notion of possession as physical (and only exceptionally constructive, see section 1.3.5 above). It should be noted that the English and US approach unite in leaving the issue to the parties, therefore to party autonomy: under English law they can still agree to delivery as a transfer requirement, under US law they can agree to delete it. If they do not say anything in their contract, the statutory regime as default rule will differ. It follows that the situation in England and France, although very similar on its face, is still not exactly the same. As just mentioned, in common law, parties are entirely free in the manner and timing of the transfer. Only if they do not make a choice in their contract does statutory law as default rule decide for them with a different result in England and the US. Contractual freedom is here the basis. That is not so in France where there is, strictly speaking, no possibility for the parties to decide the modalities of the ownership transfer. The Code Civil (Articles 1138 and 1583 (old)) determined that title passes at the time the contract of sale is concluded (provided the assets sold are sufficiently specific, which raises the question of the transfer of title in future or generic goods, to be discussed later). Parties may, however, by common agreement postpone this moment to a later date by including a time limit or a condition. They could even choose 150 Inst 2.1.41. See also R Feenstra, Reclame en Revindicatie [Reclaiming Rights and Revindication] (Dissertation, Amsterdam, 1949) 11ff, and more recently R Zimmermann, The Law of Obligations (Deventer, 1992) 273. The question whether credit was extended and whether this could be done indirectly by not insisting on payment became a much-discussed point in medieval law, most authors requiring an express credit agreement. 151 According to Art 711 CC property transfers ‘par l’effet des obligations’ and according to Art 1583 ‘dès qu’on a convenu de la chose et du prix’. 152 The UCC states expressly in its Comment, however, that it does not want to focus on the title transfer and seems to consider it secondary in a sale of goods. It is true that in practice, the passing of risk is often a more important issue and this can also be determined by the parties in the contract. Nevertheless, the question of title and especially the finality of the transfer cannot be ignored. It acquires special importance in the case of the bankruptcy of the seller who has not yet delivered or of a buyer in possession who has not yet paid.

110  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights the moment of delivery or of the payment of the price, as is common in a reservation of title. This is a statutory exception, however, and there is in principle a mandatory regime of title transfer in all civil law countries, whether they require delivery for title transfer or not. In the French tradition the contractual and proprietary effect is coterminous but no more and still needs to be distinguished. As a consequence of this statutory legal regime, one normally finds little said on title transfer in sales agreements under civil law. In common law, on the other hand, title transfer normally figures as an important part of a sales agreement and will be elaborated by the parties. Again, the common law is here in essence directory. The consequence is therefore that in the approach that transfers title at the moment of the conclusion of the contract (in principle) there are still two different attitudes that should be clearly distinguished: the French and English.153 The latter is freer.154 It also affects the types of proprietary interests that can be created, which, although in common law restricted at law to only ownership and possession, is de facto open in equity as we have seen, but then subject to a strong bona fide purchaser protection, see section 1.3.1 above. How equitable interests (in terms of user, income, and enjoyment rights) are created is here in principle also entirely left to contract although trust deeds form a different category of instrument in this regard as we shall see in section 1.6 below and do not need consideration for example. They are usually unilateral declarations of the settlor. The result is that there are at least three approaches: the German, French and English ones. The fourth type is the old Roman law, which for title transfer in chattels through a sale required not only delivery but also payment for the validity of the transfer. It still survives in South Africa. It is not as curious as it may seem and is intuitive in most people, while legally this result is obtained elsewhere through a reservation of title, which postpones title transfer until payment. In this sense, the Roman law system included a reservation of title in all sales agreements, which parties could, however, agree to disregard. In the US, until the advent of the UCC, cash sales were often also thought to be completed only upon payment. The UCC now gives a brief reclamation right instead, which is proprietary and also obtains in a buyer’s bankruptcy (section 2-702). Although a distinction must thus be made between countries that require delivery for title transfer in chattels and those that do not, in both systems there are exceptions and further variations. As we shall see in France, for example, a sale of unspecified assets cannot proceed and the transfer must wait until the assets are properly set aside. That is also the English rule. In both countries, there is also a stronger right for the buyer who obtained possession when there is a double sale. On the other hand, where normally delivery is necessary, as in Germany and the Netherlands, there are traditionally three situations where it is not required and they all come

153 Drobnig (n 79) 345 does not make this distinction and sees as a consequence only two systems operating, one transferring title by virtue of the sales contract, the other upon delivery; so also, M Waelbroeck, Le transfert de la propriété dans la vente d’objets mobiliers corporels en droit comparé (Dissertation, Brussels, 1961). It is posited that this does not sufficiently reflect the different attitudes towards the creation of in rem rights in countries like France and in the common law. 154 In the common law approach, parties may thus fundamentally opt for the moment, place, and other modalities of title transfer and the nature of the proprietary right created, which choice may, however, sometimes be deemed implied, as in the FOB term in England, when full title is assumed to pass at the ship’s rail: see Carlos Federspiel & Co SA v Charles Twigg & Co Ltd [1957] 1 Lloyds Rep 240. Similarly, in the case of a reservation of title, it is deemed to be postponed until payment. Only in the absence of such an explicit or implicit determination by the parties, is there, at least in England, the objective law rule which now fixes (full) title transfer in the case of a sale of chattels at the time of the conclusion of the contract. Thus, the sole intention of the parties prevails (assuming it can be established) as regards the time, method, nature and extent of the title transfer.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 111 from Roman law. Delivery here becomes truly constructive. Thus, if ownership is meant to be transferred but the erstwhile owner reserves for himself some contractual user rights in the asset, for example a rental, and therefore converts himself in civil law terms from an owner/possessor into a holder, it is not necessary for him first to hand over the asset to the buyer in order for it subsequently to be given back. The result is that in such cases the ownership transfers upon the mere agreement of the parties. This is the transfer constituto possessorio (section 930 BGB). It is sometimes said in countries that follow the French system, which does not require delivery, that under this system all transfers are by statute constituto possessorio so that the French system is also based on the notion of delivery (see also section 1.4.4 below), although it may not be immediately clear what is gained by this insight. Another situation where, in countries that require delivery, it can be done by mere agreement is when the asset is already with the buyer who thus converts himself from holder into possessor/owner. That is the traditio brevi manu (which in Germany does not require any delivery of constructive possession as a further legal act as, in the German concept of possession, the buyer already has it: see section 1.2.4 above and section 929 second sentence BGB). Finally, there is the so-called traditio longa manu under which an asset that is under the control of a third party, for example in a warehouse, is transferred (section 931 BGB). It may be seen as a variation of the constitutum possessorium, as the third party is here only the holder for the seller, while title transfers by him becoming the holder for the buyer (which in the constitutum possessorium applies to the seller himself). This change is achieved by the mere agreement of which the warehouse will be told. It is conceivable that such information is itself a constructive element of the transfer which is delayed until such time. It is often said that in these three cases the transfer is by mere agreement even in countries that normally require delivery, but it may also be said—and this is probably the better view—that there is constructive delivery of possession. Of course, these situations may also arise in systems that do not require delivery, but they do not then solicit special attention because title will have passed upon the conclusion of the agreement unless delayed by agreement.155 In systems that require delivery for title transfer, the delivery itself should be considered a legal act. That is in civil law indeed largely the attitude.156 In such an approach, delivery may be a two-step structure. It implies the conclusion of a further legal agreement followed by the factual delivery of the asset or the actual handing over. Again, there may here be some re-emphasis of physicality (unless the asset is already with the buyer or remains with the seller or under a third party), which is more particularly German and may also be noted in its attitude to holdership,

155 There is, however, a special aspect in common law: when the asset is with a third party bailee, it cannot be transferred without notice to him (earlier it required his approval). This is the so-called attornment still found in s 29(4) of the UK Sale of Goods Act 1979: see also s 1.3.2 above. In common law, constructive delivery may also arise in those few instances where delivery matters, as in the case of making a gift or creating bailment, see s 1.3.5 above. Yet in other cases where delivery is necessary, it is mostly meant to be a physical requirement, as for example in the case of the requirement for delivery that still obtains in the sale of goods in the US: see s 2-401(2) UCC (again, unless parties agree otherwise). 156 Although title transfer was in England originally also achieved through the physical act of delivery and the receiver had to have some intention to receive the asset, it was done without the Roman law distinction of possession and holdership and the protections behind it, even though the Roman law traditio requirement with animus possedendi was at one time seen as compatible with this system. See in the thirteenth century, H Bracton and G Woodbine (eds), De Legibus et Consuetudinibus Regni Angliae, f 38 b (Newhaven, CA, 1922) ii, and Twiss (ed) (with English translation 1878), i, 305. This line of thought was not pursued and the voluntary physical handing over of the asset remained the key to the system and resulted in either the transfer of full title or the creation of a bailment: see W Blackstone, Commentaries on the Law of England (1756), 452.

112  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights as we have seen. It means nevertheless that there is foremost a need for acceptance of delivery in a legal sense and for legal capacity of both parties. As we shall see in section 1.4.6 below, in Germany this additional agreement is deemed implicit in all delivery and is referred to as proprietary agreement or the dingliche Einigung, earlier called the dinglicher Vertrag by von Savigny, who first formulated the concept.157 It is important, however, not to apply the precise requirements of contract law to this type of agreement but rather the general rules concerning bilateral juridical acts, which may be found in the general part of the German BGB. As already noted, where delivery is not required to complete the transfer, it is merely a matter of contract implementation and mostly considered merely a physical act (that must be performed). It shows that physicality is not irrelevant. Indeed, for the buyer it is ultimately likely to be of extreme importance, although the legal and physical aspects should not be confused, as they often still are. As already mentioned, delivery is sometimes also legally material in countries that do not normally require it for title transfer in chattels. The traditional situation concerns the situation of a double sale. Thus Article 1141(old) of the French CC (limited to chattels) stated clearly that if an asset is sold twice, the second buyer prevails if the asset is delivered to him provided, he was bona fide, therefore without knowledge of the first sale. Given the requirement of bona fides, this may suggest a need for physical delivery. It is in fact a lex specialis to the more general protection of the bona fide purchasers under Article 2279 CC and the delivery requirement, which is therefore physical, may be better explained in the context of this bona fide purchaser protection than as a condition for the title transfer itself. In England, section 8 of the Factors Act (meant to cover the situation in which a seller of goods appoints a representative or factor to handle the sale) and section 24 of the Sale of Goods Act 1979 also give the second buyer the stronger title upon physical delivery158 but again only if s/he was without notice of the first sale, which here means actual knowledge.159 In the system where delivery is required for an ownership transfer, the seller remains, on the other hand, the owner upon the first sale as long as delivery does not follow. When s/he effects a delivery under the second sale, the second buyer becomes the owner even if s/he was not bona fide and knew of the first sale. That is the difference between the English and French systems, on the one hand, and the German (section 929(1) BGB) and Dutch (Article 3.90(2) CC) systems, on the other, which require delivery for title transfer. It was already Roman law, which did not know of the bona fide purchaser exception (C.3.32.15 pr). Ownership of the second buyer follows here simply from the fact that the seller retains the disposition right in the asset upon the first sale without delivery and can still legally deliver. Naturally, the aggrieved first buyer has an action for damages against the seller for breach of contract, but this will not give him/her the asset. However, in modern law, the first buyer may

157 3 System des heutigen römischen Rechts (Berlin, 1840), para 140, p 313 and 2 Obligationenrecht (Berlin, 1853) 256ff. One may well ask whether in a system such as that of the UCC, where in the absence of a contractual provision to the contrary title also only passes upon delivery (s 2-401(2)), it is not then also a juridical act, although s 2-401(2) still insists on physical delivery. The importance is in the need for acceptance and capacity of the parties. The (independent) status of the juridical act of delivery itself may become a particular issue if the underlying contract fails, as we shall see (s 1.4.6 below) and goes to the question of the causal or abstract system of title transfer. It is not an issue commonly discussed in common law, however. The insistence on physical delivery shows that the act of delivery as a legal act is not an immediate common law concern and its meaning is not normally further considered. 158 See Pacific Motor Auctions Pty Ltd v Motor Credits Ltd [1965] 2 All ER 105 and Worcester Works Finance Ltd v Cooden Engineering Co Ltd [1971] 3 All ER 708. 159 Worcester Works Finance Ltd (n 158) (per Lord Denning).

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 113 have a tort action against the second buyer if the latter took advantage to push the original buyer out of the deal. In countries like France, there may even be specific performance in such cases so that the first buyer can still collect the asset—especially important when scarce equipment is involved. Where, as in the three cases mentioned above (the delivery constitutum possessorium, longa and brevi manu), systems requiring delivery are satisfied with constructive delivery, any subsequent purchaser who acquires the goods physically is also likely to be protected, but this purchaser will only be able to claim this protection if s/he was bona fide, therefore only on the basis of the normal bona fide purchaser’s protection in the case of chattels.

1.4.3.  The Relevance of Identification. Effect on the Transfer. Sales of Future Assets, Bulk Transfers, and the De Facto Transfer of Title As we have seen, traditionally, title cannot transfer if the goods sold are not yet sufficiently identified or set aside to the contract—even in England and France, countries that do not require delivery for title transfers in chattels. There may, in such cases, still be a problem with the title transfer in unidentified goods. In countries that require delivery, this act itself suggests it, but such a delivery may still be merely constructive and not physical, as we have seen. The result is that, in either system, the moment of transfer may sometimes be less certain when goods are not yet sufficiently identified or set aside. In those instances, the asset transfers as soon as it is clear that it is sufficiently identified or has been sufficiently set aside, either by the owner or his representative or warehouse. What is sufficient identification is then an issue that needs to be further determined and may be differently interpreted. It was already noted in section 1.1.6 above that this problem arises more particularly when future assets are sold, those that do not yet exist: see section 18(1) of the Sale of Goods Act 1979 in the UK.160 They may also physically exist, but not yet in the ownership of the seller, although eventually they may enter its ownership, as under a call option upon the exercise of which title might shoot through to the buyer of the goods if sufficiently identified. In German terminology, these goods are relatively future.161 When goods do not yet exist, this shooting through can only happen when they emerge. These are until such time absolutely future. Both conditions can go together, but not all absolutely future goods are also relatively future, for example when future goods, such as next year’s harvest, automatically accrue to a seller. In many legal systems the difference between absolute and relative future goods is immaterial. Thus, in the UK, there is in both cases only an agreement to sell to which the Sale of Goods Act 1979 does not apply (section 5(3)). It means that title cannot pass under it until there is an appropriation to the contract. In truth, there is no problem with the sale itself, but the transfer of title cannot follow before the goods emerge in the ownership of the seller, even therefore in a country that do not require delivery for title transfer. Once the goods so emerge, transfer is then immediate to the buyer in systems that do not require delivery. In systems that do require it, it is constructive.162 160 This sale is to be distinguished from purely contingent sales contracts under which a seller may be discharged if he cannot deliver: see s 5(2) of the Sale of Goods Act 1979. 161 See also n 30 above. 162 See also s 2-501 UCC in the US and Art 1472 of the Italian CC and for France in similar vein, Ghestin and Desche (n 10) no 550, again stressing the need for some form of individualisation upon the coming into being of the asset and the similarity with the situation concerning unspecific goods. This being said, French law always allowed the transfer of future tangible assets, also as security—see Art 1130 (old) CC—but it is much more restrictive of a transfer of future claims: see s 1.5.4 below. For chattels, these authors assume that title passes automatically as soon as the goods emerge and are identified to the contract, although

114  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights The remaining question is whether such a transfer is retroactive or is ineffective against a seller who has gone bankrupt before the asset emerged.163 Even where no delivery is necessary, whether in a system that normally requires it for title transfer or not, a transfer in bulk may also be problematic and normally requires some special form of identification, in Germany with respect to the container or place in which the goods are held, assuming further that they are as such sufficiently separate. Until they are so identified, no title will transfer into them either. Thus, where certain assets in a multitude are sold or as a class, a sufficient setting aside or identification is mostly still deemed necessary before ownership can transfer. Weighing and measuring may also help, although the mere surrendering of control may even be sufficient as it was in Roman law (D.41.1.9.5/6). There may be further problems, however, when future or unspecific goods are included while a bulk transfer commonly does not provide a vehicle to circumvent the specificity requirement entirely (but they may be recast and widened). It may still present an important hurdle, even in countries that do not normally require delivery for title transfer.164 It means that circumstances are likely to decide when a transfer is complete in these situations, but notions of ‘generality of goods’ or definitions of what ‘bulks’ are may help and facilitate their transfers while they may also include a concept of substitution or tracing and automatic inclusion of replacement goods, which are likely to be (absolutely) future. However, new Dutch law notoriously failed to define these concepts after an earlier attempt was made. It is particularly relevant when floating charges are created as security interests in inventory or in whole portfolios of trade receivables, which, without a concept of replacement, would also require new transfers to the lenders (even if sufficiently identified in the contract from the start) each time such a replacement took place and would then also endanger the rank of the security in these replacements which, coming later, would (normally) be lower. It may also be an issue when businesses or parts thereof are transferred unless they are incorporated when shares are transferred. Under applicable law, it may be easier in respect of relatively future goods and the situation may be different again for receivables: see also sections 1.4.5 and 1.5.4 below. An intervening bankruptcy may still upset the arrangement, as modern Dutch law shows (Article 35 Dutch Bankruptcy Act, amended in 1992).165 Again, where delivery is required, the problem of there is older French case law to the contrary still requiring delivery in that case, see Cour de Cass, 28 November 1900 [1901] D.1.65. Completion of construction may also be an element in France when a structure is sold in advance: see Art 1130(1) (old) CC and Cour de Cass 20 Mar 1872 [1872] D.1.140 and 14 March 1900 [1900] D.1.497 with the problem of determining when it takes place. In any event, there is here still a physical element to perfecting the title, no different from countries requiring delivery, cf also Art 3.97 of the Dutch CC: although delivery itself is, strictly speaking, not necessary, it would be indicative of the emergence of the asset as a prelude to the title transfer. 163 It may be a severe handicap for those who order these goods and are faced with a bankruptcy of the construction company: see Sir James Laing & Sons Ltd v Barclay, Curle & Co Ltd [1908] AC 35. 164 In the US, Article 6 UCC provides a special regime concerning bulk transfers but does not go into these issues. Its main aim was to avoid fraud by a debtor who sells his estate for too little or for any price and thereafter absconds and it may as such be seen as part of the law against fraudulent or preferential transfers. It provides therefore mainly a creditors’ protection measure. It renders ineffective against creditors of the transferor any such transfer without a list of creditors and sufficient identification of the assets, see s 6-104 UCC. In many states it has been repealed. 165 The system in respect of security transfers may be less restrictive: the specificity requirement and shift in replacement (future) assets may be more liberal, at least in a modern civil law country like Germany, but this remains exceptional: see for the German technique of creating floating charges, Vol 5, s 1.4.1. See for newer French law in this connection, Ordinance no 2006-346 of 23 March 2006 and Vol 5, s 1.3.1.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 115 what can be transferred surfaces more acutely. Where there is constructive delivery in civil law as, for example, in a delivery constituto possessorio of assets that are meant to remain with the seller or in a traditio longa manu of assets in the custody of third parties, as a minimum some physical setting aside may still be necessary for the transfer of title. That would seem to exclude the sale and delivery of future goods in those cases, but, as will be discussed shortly in section 1.4.5 below, it is technically conceivable to assume a delivery under an anticipated constitutum possessorium of (future) goods that therefore remain under the seller. Thus, a more physical and anthropomorphic concept of delivery might be abandoned and the transfer of ownership in such future goods is then considered in a predominantly normative manner, always assuming that the goods are sufficiently described and are identifiable upon their emergence in the ownership of the seller. It thus becomes possible to operate with a reasonable description to effect the transfer, see also the discussion in section 1.1.7 above. That may present a great leap forward in many legal systems and many have not yet taken that step. It is the direction nevertheless that needs to be taken in order to make, for example, modern floating charges fully effective.166 In relation to future goods and their possible transfer, it is possible to elaborate on the above in terms of the (future) disposition right of the seller and distinguish in that connection also between the sale and delivery of future assets, on the one hand, and the conditional and temporary sale of present (and future) assets, on the other. In that case, it may still be necessary to make a further distinction between physical and intangible assets, especially between chattels and claims. This will be further discussed in connection with the disposition right in section 1.4.5 below. Finally, although the applicable national property law will normally pronounce on the issue of resulting ownership rights, tying it, in the case of a sale of chattels, either to the conclusion of the contract or to delivery, some ownership change is also bound to arise de facto or through the operation of the law—for example where commodities are converted into semi-finished products or goods are commingled so that title perforce transfers to others with physical possession or it

On the European continent, it ought to be borne in mind that Roman law, at least in secured transactions (hypothec), had never been so restrictive: see clearly D.20.1.1pr. Non-possessory security in future assets (immovable or movable) was allowed and was perfectly effective, even without publicity, although of course it put the risk of earlier securities operating in the same assets on the later secured creditor. This only changed in the era of codification in continental Europe. The specificity requirement was then used to outlaw any inclusion of future assets and also non-possessory security; it can be traced at least to the Prussian Code of 1794 (Art I.2, para 136), which only retained non possessory mortgages for (existing) real estate subject to a form of registration, see for the Roman law further also n 26 above. It could not last and, in the later industrial age, at first through forms of conditional sales, the situation was redressed for chattels, at least in so far as the element of possession was concerned, but the use of future assets remains problematic in civil law even now. In such an atmosphere, floating charges in particular have difficulty in developing: see also Vol 5, s 1.1.4, Germany being here somewhat of an exception, but there would appear to be regression in the DCFR, see s 1.11.4 below. Notions of reputed ownership are closely related: see Vol 5, s 1.1.10. The common law did not suffer similarly. It retained the non-possessory chattel mortgage, since Holroyd v Marshall [1862] 10 HL Cas 191, in equity also extendable into future assets, but more importantly was also able to use the concept of the equitable charge to introduce the floating charge covering whole classes of future assets and including a shift of the charge into replacement goods: see further Vol 5, s 1.5.2. A reasonable description of the charge and the assets covered becomes here the criterion. See, for the US s 9-204 UCC, and Vol 5, s 1.6.2. Theories of reputed ownership in the transferor or assignor, which could still affect such transfers, have been abolished since 1986 by the UK Bankruptcy Act and were there already abandoned in earlier case law for corporate bankruptcy: see Re Crumlin Viaduct Works Co Ltd [1879] II Ch 755. They were always less popular in the US: see further Vol 5, s 1.1.10. 166 See the liberal US statutory approach in s 9 UCC, n 165 above.

116  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights may have to be shared so that a co-ownership structure or forms of beneficial ownership emerge as a result of physically handing over the goods, whatever the more formal title transfer regime may be. Another example may be client accounts of brokers who trade investment securities for their clients and may retain such accounts in their own name. The applicable law may recognise this state of affairs and elaborate on it as a separate way of acquiring ownership. Accession is of course another way of acquiring ownership, based on factual considerations. It has already been said in section 1.1.3 above that user, income and enjoyment rights in assets tend towards becoming proprietary, if only to promote their liquidity. This also has a spontaneous proprietary element and may derive from the mere contractual declaration or obvious intent, where party autonomy is accepted in these matters or even from public policy, subject always to the protection of the ordinary course of business and the commercial flows against such charges.

1.4.4.  The Development of the Rules Concerning Delivery as a Formal Requirement of Title Transfer in Civil and Common Law Above, it was said that in England originally title in goods passed upon a sale only through their physical transfer. It had to do with the concept of seisin, which, unlike on the Continent, was in England never superseded by the Roman law notion of possession and delivery as legal concepts which could under that law both be purely constructive. In England, there had, however, long been an exception if the transfer was by deed. Eventually a further exception was created if there was a sales contract, as now reflected in section 17 of the Sale of Goods Act 1979, superseding the earlier (but virtually identical) text of 1893 in this respect. Strictly speaking, it was already noted that in England, (physical) possession no longer plays a role in the context of title transfer in goods: see also section 2(1) of the Sale of Goods Act 1979 (except in instances discussed in the previous section), which Act also applies in Scotland. If the seller remains in possession, in this system, s/he becomes a retentor (see section 41 of the Sale of Goods Act 1979) or a kind of bailee of the buyer, who, in line with what has been said about bailment before, would, as bailor, only have a contractual right to delivery against the seller as bailee. Upon payment, this personal right can convert into a proprietary right (enforceable, however, only in tort under the general rules of proprietary protection) if the seller/bailee defaults (when an immediate right to repossession results), then also valid in the latter’s bankruptcy, provided always of course that there was no agreement for title to pass later. A remedial constructive trust in favour of the buyer who has paid is also conceivable: see on this alternative section 1.4.3 above. As we have seen, in the US, the subject of the sale of goods is now covered by Article 2 of the UCC. It allows title to pass at the moment set by the parties in the sale contract but presumes that it only passes upon physical delivery if parties have not agreed otherwise: see section 2-401(2). Article 2 UCC de-emphasises the aspect of title transfer, however, and it does not concentrate on the proprietary aspects, which may therefore remain a source of disparity under State law. In fact, the older common law is in this aspect still controlling except where especially superseded: see section 1-103 UCC. Article 2 is particularly relevant in this connection for the protection of bona fide purchasers from buyers who do not have good title: see section 2-403.167

167 It abolished in this connection the consequences of the distinction between credit and cash sales for bona fide purchasers, as mentioned in s 1.4.2. In credit sales there is a voidable title upon the buyer’s default. In cash sales, title is often not considered transferred at all until payment, resulting in a kind of implied reservation of title if

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 117 In France, the concept of seisin or saisine had earlier also led to a system based on the protection of physical possession at the expense of the owner who had voluntarily parted with it, just as under English and early German law: see sections 1.1.5 and 1.16 above.168 In this system the transfer of physical possession was also necessary for a transfer of ownership. Eventually, the Roman law approach prevailed for movables,169 with the resulting distinction between the positions of the owner, possessor, and holder. It confirmed the requirement of delivery of (legal) possession (in this sense) for title transfer. However, as far as the transfer of title in movables was concerned, it became the practice in France early on to include in the sales agreement a clause (clause de desaisine) under which possession in a legal sense was immediately transferred to the new owner while the seller remained the holder for the time being subject to immediate demand by the buyer.170 It was an instance therefore of a traditio or delivery of possession (in the Roman law sense) without a physical transfer (solo animo), or a transfer constituto possessorio. The result was a retention right for the seller at least until payment.171 The standardisation of the clause de desaisine established the practice of title transfer at the moment of the conclusion of the sales agreement, at least for movables. As we have seen, the natural law school, starting with Grotius in the early seventeenth century, independently concluded that the transfer of property at the time of the conclusion of the sales contract was more natural and closer to the will of the parties who should have the right to decide these issues.172 In France, this view was followed in the late seventeenth century by Domat,173 who believed that the clause de desaisine was always implied. From there the principle entered the French Civil Code of 1804 (see Articles 711, 1138 and 1583) although it was not without opposition,174 while Article 1138 (old) still used the old concepts declaring that the delivery of the good is achieved through the mere agreement of the parties. In fact, it may be seen as implying a delivery constituto possessorio in all cases, a fiction finally abandoned in the Italian Civil Code of 1942 (Articles 1376 and 1470). It could still imply a separate legal act, however, although simultaneous with the conclusion of the contract, a view still found in the Belgian literature. This approach does not extend to the creation of other possession has been transferred (or a retention right, if it has not been). The common law in the US was and is confused about the moment of title transfer, which in cash sales seems to be only upon payment, as under the old Roman law, which attitude also received some early support in England: see Blackstone (n 156) 247 (who also wanted delivery): see also Williston, 3 The Law Covering Sales of Goods (New York 1948), s 342. The UCC does not change the law but protects bona fide third parties against the consequences of this confusion. 168 This development dates from the thirteenth century when an owner, even without physical possession, was increasingly given standing to defend his rights in rem under the influence of Roman law concepts which became prevalent with regard to chattels under local customary laws. The rights of the physical holders were thereupon considered inferior to, and derived from, the owner. In this system, the holder no longer had an independent possessory action against third parties who interfered with his holdership and could at best defend in tort motivated by his own inability to fulfil his obligation to return the assets on the due date to the owner. This owner was, on the other hand, denied the action against the wrongdoer under Roman law as long as he could recover from the holder: see Justinian Inst 4.1.17(19). 169 See also J Brissaud, A History of French Private Law (Boston, MA, 1912), 300. 170 See Art 278 Coûtumes d’ Orléans, in C-A Bourdot de Richebourg (ed), Nouveau coutumier general (Paris, 1724) III.2. 171 Cf for modern law Arts 1612 and 1613 CC, now often explained as a consequence of the exceptio non adimpleti contractus, which, although not as such expressed in the Code, is often held to be a general legal principle under French law: see also Ghestin and Desche (n 10) no 695. 172 See De Iure ac Pacis Lib II, Cap VI, ss 2ff. 173 Les lois civils dans leur ordre naturel, Livre I, Titre 2, No 8 (Paris, 1777). 174 Among others from Pothier, Oeuvres completes (Paris, 1821) Vol 3, s 1, and Oeuvres de Pothier, Vol IX 299, Traité du droit de propriété (Paris, 1823) No 245.

118  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights proprietary rights in tangibles, such as a pledge, where delivery remains necessary. It also does not extend to the assignment of receivables, which still requires notice (Article 1690 Cc; see for the 1981 amendment for finance transactions, Volume 5, section 1.3.5), or to immovable property. Yet unlike in England, it is not limited to sales and any other agreement transferring full title in chattels, such as an exchange or barter, also effects an immediate passing of title. For movables, in France, legal possession is thus by law transferred with the title at the time of the conclusion of the sales agreement (assuming no further conditions are added and the title transfer is not postponed). In this connection, the traditional concept of delivery (largely as a transfer of physical possession) has lost its legal importance, but, as in England, it retains its significance in the proper performance of the agreement; physical delivery will always be one of the main objectives of a sale. It is not then a legal act, however, merely a matter of performance. Dutch law, even in its new Code of 1992, remains for tangible movables close to the Roman law concepts of ownership, possession and holdership, also in its manner of title transfer through (constructive) delivery: see Article 3.84(1) of the new CC. The same may be said for German law in its Civil Code (BGB of 1900): see section 929, first sentence, for the requirement of delivery for title transfer, although in other respects probably farther removed from Roman law, especially in its attitude to holdership— see section 1.2.3 above. It is in both countries the remnant of a more physical and anthropomorphic notion of property law. At least from a civil law perspective, a final observation may be in order. It should be remembered that the delivery requirement in countries that maintain it for chattels is normally only in respect of the transfer of the ownership right and then refers to the transfer of its possession, not in a physical sense, but as the intent to hold the relevant right for oneself, and then more specifically to the transfer of this intent to control the asset. It may be accompanied by physical delivery of the asset if the sales agreement so requires, as it is likely to do either immediately or later as a matter of contract compliance but, again, not then as a legal act. For the transfer of the other proprietary rights in chattels, therefore the usufruct or security interests, delivery may not be a formal requirement, especially for non-possessory security interests, although it was commonly necessary for the more traditional pledge. It should be understood, however, that the creation of a security interest, even if non-possessory, still means in civil law the transfer of possession in the above sense (as the intent to hold the security interest for one self), although not the physical delivery of the asset, which, under the terms of the security interest, may stay with the debtor, who in respect of this asset will then result as the holder of the security interest for the creditor.

1.4.5.  Legal Capacity and Disposition Right. Causes of Contractual Invalidity. Effect on the Title Transfer. Future, Conditional and Temporary Sales and Transfers In section 1.4.1, it was already observed that in sales, the issue of legal capacity arises in two ways. Everywhere it is required for the validity of a sales agreement (as for any other), but it may also arise at the level of delivery in countries where it is a prerequisite for the transfer of title, in other words where this delivery itself implies a further legal or juridical act (the German dingliche Einigung). Capacity in this sense does not exist in minors or in wards of court. Absence of it makes the sales contract absolutely void even though it may still be cured if the guardians accept it or the courts so decide, which they may do when there is a clear benefit. In legal entities, capacity may be sooner assumed, it is a matter of apparent authority as we have seen. It follows that, in countries requiring delivery for the title transfer, lack of legal capacity appears to invalidate the delivery as a legal act also, except if ratified later.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 119 In this connection, the issue arises whether lack of legal capacity in the sales contract, therefore invalidity of the sales agreement (for this or other reasons like lack of intent), itself undermines the delivery as a legal act if already made, even if in the meantime the incapacity was lifted, an issue which will be discussed in more detail below in section 1.4.6. The Germans distinguish here between the abstract and causal systems of title transfer. In the first approach, which is the German one, delivery is considered a separate legal act, which is independent of or abstracted from the underlying sales agreement in so far as its effect on the transfer of title is concerned. As far as the delivery goes, it follows that once it is properly done, German law ignores any defects attached to the original sales agreement. In this approach, the invalidity of the underlying agreement may give rise to a damage action but it cannot itself affect the transfer once completed. There is no revindication possibility of the asset on that basis. To undo the transfer, an unjust enrichment action may be brought aiming at the (ex nunc) return of the asset. This is never automatic in an abstract system, except perhaps in the case of fraud, again damages may be more likely. In the causal system, on the other hand, the invalidity of the underlying sales agreement entails the automatic invalidity of the title transfer (ex tunc, therefore retroactively), even if at the time of the delivery there was sufficient capacity. It gives the seller a revindication right or in rem remedy. If in the meantime the buyer went bankrupt, it would allow the seller to reclaim the asset as owner. This would not be so in the abstract system. As already mentioned, not only lack of legal capacity may invalidate the underlying sales agreement and pose the question of the continued validity of the transfer once made. The contract may be invalid for other reasons, for example illegality, fraud, misrepresentation, error or mistake. Most importantly, it might also be avoided for reasons of default. Especially in that case, the question of the abstract versus the causal system is important. In a pure causal system, the seller of a bankrupt buyer who does not pay and is therefore in default would be able to reclaim from the estate the sold property, also if the bankruptcy itself were the event of default that avoided the underlying sales agreement. That is the consequence of retroactivity and used indeed to be the system in the Netherlands in case law under its old Code. It meant that in practice, a condition of payment or a reservation of title was implied in each sales agreement. As we shall see in the next sections, that extreme position has now been abandoned unless the contract still provides otherwise, which is especially the case if there is a reservation of title. It has already been said that legal capacity issues should always be clearly distinguished from the disposition right. That is the right to be able to transfer ownership of an asset or any other proprietary right in it (or perhaps all user, enjoyment and income rights). It is therefore not a general requirement for legal acts but arises only in connection with the transfer of ownership (or other more limited proprietary rights in the asset or indeed all user, income and enjoyment rights therein which have the potential of becoming proprietary). In principle, only the owner of rights or anyone authorised by him/her can make such a transfer. Neither the possessor non-owner in a civil law sense (for example, a thief) nor the holder in civil law (who usually merely enjoys a temporary user right in the asset) has sufficient disposition rights to transfer ownership or any other proprietary (or even contractual) right in the asset, nor does a bailee in common law. They can at best transfer their own more limited right, but never more than they have. Naturally, by contract they may sell or otherwise dispose of all they want, but without proper disposition rights they cannot properly transfer in a proprietary sense, even in countries that do not require delivery for the transfer of title proper. In countries that require delivery, they cannot deliver, in those that do not, they can simply not transfer title. It confirms that the transfer needs therefore always to be distinguished from the contract, even if the moment of transfer is at the time it was concluded. As we have seen, in most civil law countries and under statutory law also in some common law countries, the exception is the transfer to the bona fide purchaser in the case of chattels. Even if s/he acquires from someone without sufficient disposition rights, s/he may become full owner

120  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights of the relevant right if s/he did not know and the transfer agreement was valid: see in more detail section 1.4.8 below. The notion of the bona fide purchaser thus normally goes to the lack of disposition rights in the predecessor. Except in France, as we shall see in the next section, it does not go to the lack of capacity of the immediate predecessor or to the lack or invalidity of an agreement with him for other reasons. It should be repeated, however, that lack of capacity or of an invalid agreement for other reasons earlier in the chain of transfers would result in the lack of a disposition right in the seller, which would then not, in the case of chattels, affect the bona fide buyer. As noted, the issue of sufficient disposition rights arises in a more specific manner in connection with the sale of future assets. Can they be sold and transferred, assuming that they can be sufficiently identified in the contract? Must they at least exist and, if so, must they also have entered the ownership of the seller or can the seller transfer a mere expectancy and what would then be the legal nature of such a transfer? Here we may also have to consider the difference with conditional or temporary sales and deliveries (in countries requiring delivery for the transfer of title even if only conditionally or temporarily). Assuming the asset can be sufficiently described in the contract, it is mostly accepted that a future asset of the seller can be transferred immediately at least if it exists although not yet in the ownership of the seller (either through physical or constructive delivery). It may also be seen as the transfer of an existing claim to delivery, and would then suggest the legal form of an assignment. To repeat, it is in German terms a question of relatively future assets. In the case of chattels, existence in this sense is then a physical requirement; as for an intangible claim, it sufficiently exists in this sense if at least the relationship out of which the future claim arises has been created when it is also considered identifiable. In legal systems like that of Germany, which require delivery for the transfer of chattels (but not of intangibles, as we shall see in section 1.5 below), the disposition right may then be deemed sufficiently present and for chattels the transfer is completed through a so-called anticipated constitutum possessorium, therefore constructively (in anticipation of the seller acquiring the asset). In Germany, for intangibles proper, the delivery is complete with the assignment and no anticipated delivery in this sense is necessary as in Germany no delivery is required for the transfer of intangible assets. As just mentioned, for being relatively future, the relationship out of which the claims are likely to arise or another sufficient Rechtsgrund (legal basis) must then exist. In fact, it appears that mere description is here sufficient to transfer even absolutely future claims (see further section 1.5.5 below), at least if they are replacement assets. The DCFR requiring assets to exist for their transfer appears to undo this: see section 1.11 below. At least in Germany, as part of a floating charge or an extended reservation of title, absolutely future chattels may still be covered if they are replacement assets: see further section 1.7.8 below. Some tracing facility would therefore be deemed to be implied. In both cases (relatively or absolutely future chattels or intangibles, the latter if they are replacement assets), an intervening bankruptcy of the seller would not therefore affect the transfer. As soon as the asset emerges in the property of the seller or assignor, title shoots through to the buyer or assignee. Nothing further is required from the seller or assignor in terms of transfer (delivery) and the transfer is complete. Section 91 of the German Bankruptcy Act 1999 gives expression to this approach.175 It could be argued that even so the distinction between absolutely and relatively future goods is artificial and

175 In the Netherlands, there is a similar provision in the Bankruptcy Act, Art 35(2), which, however, applies not only to absolutely future assets, but also when goods do already exist but have not yet entered into the ownership of the seller and are therefore only relatively future at the moment of his bankruptcy. For the situation in common law countries, see n 30 above.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 121 unhelpful. It is not followed everywhere, particularly in common law countries. The view of this book is that all future assets should be transferable if they can be sufficiently described and that a modern legal system requires that facility. It is an entirely different matter whether anyone wants to give any value for them. That is determined by market forces and must be left to the participants/transferees, certainly if they are professionals. As just mentioned, both in Germany and the Netherlands (but more so in the latter country) this is relevant in particular for floating charges (see also section 1.7.9 below), which may thus risk to be cut down in bankruptcy for assets that emerge only after the bankruptcy of the transferor. It may also be relevant in the extended reservation of title, which is a reservation of title that shifts into replacement goods. Even this facility appears under pressure in the DCFR: see section 1.11 below. In these cases of future assets, even if replacement assets, the disposition right has sometimes been qualified as conditional, leading at most to a conditional sale and transfer as such still vulnerable in a bankruptcy of the seller, although there seems nothing against a seller binding his disposition right in advance, the expression of which is in civil law in the case of chattels the already mentioned anticipated delivery constituto possessorio (thus constructively, title shooting through when the asset is obtained by the seller). In the case of receivables, in countries where notification to debtors is required for the validity of an assignment, such as legal assignments in England and non-financial assignments in France and the Netherlands (unlike assignments in Germany and equitable assignments in common law), it would require an anticipated notification to the debtors, who must therefore be known, which is a serious limitation, although it could conceivably also be done retroactively (now suggested in the Netherlands). The situation of conditionality of the transfer relating to the future nature of assets and the disposition right therein should be distinguished from a situation where existing assets owned by a seller or assignor are transferred conditionally or temporarily, on which there is no such constraint. In the first case, the conditionality is objective, in the nature of the future asset and the disposition right over it, cannot be helped, and may (in the opinion of some or under the applicable bankruptcy laws) restrict the transfer possibility as we have seen. In the case of existing assets, the conditionality is subjective or foremost contractual and not related to the state of the asset. It still raises the question of the nature of the resulting interests, especially in civil law with its closed system of proprietary rights, but is a different issue. However, also future assets can be conditionally or temporarily transferred, which would again raise the question of the effectiveness of such a transfer upon an intervening bankruptcy of the seller. A potent example is the finance sale or sale of future assets for financing purposes—see more particularly section 1.7 below—when, for example to achieve financing through the factoring of receivables, future receivables are conditionally or temporarily included in the transfer (depending, for example, on their ultimately being collected, which is a matter of credit risk). It may be argued, however, that in such cases the situation may be different altogether as these assets were never meant to come fully into the ownership of the bankrupt seller (or assignor of receivables) in the first place and the ownership part, that was always meant for the financier, accrues to him/her directly. At most, the bankrupt or bankruptcy trustee act here as (undisclosed) agent for the financier in the title transfer while it will depend on the agreed condition who ultimately acquires full ownership in the asset. Thus, if the receivables are collectable, the financier will have them, if not they may be automatically returned to the bankrupt for any residual value (probably collectable only upon litigation), and the financier will recover from other receivables as there is likely to be an excess of receivables in the assignment. If the financier has fully recovered his/her money, any remaining excess receivables will then also automatically

122  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights revert to the bankrupt estate. Similarly, if the sale of a future asset to a financier was conditional upon him/her releasing full ownership to the debtor upon the latter tendering the repurchase price in a timely manner, it would be the bankrupt estate that would become the full owner upon such a tender. Should such a payment not occur, it would be the financier who would ultimately have full ownership rights. The conclusion is that in such cases the present or future nature of the asset might not be relevant. Note that these problems do not arise in the US, at least not in the context of a floating charge, which, according to section 9-204 UCC (both in the old and revised 1999 text), allows the inclusion of absolutely and relatively future assets. It makes no distinction in this regard. In England, the situation is different, the idea being that only upon acquisition does the charge become effective, regardless of whether the goods were absolutely or relatively future at the time of the sale. Note in this connection also that in England the floating charge has a low rank, which derives only from the date of its crystallisation, normally the date of default of the debtor. That is not now so in the US where the date of filing of the security interest or charge is normally conclusive. In any event, in the case of the sale of future assets in England, the idea is that title shoots through to the buyer upon their acquisition by the seller, see further Volume 5, sections 1.5 and 1.6.

1.4.6.  The Transfer Agreement and its Failure: The Abstract and Causal System of Ownership Transfer. The Finality Issue In section 1.4.1 above, it was pointed out that, in civil law, the transfer of ownership needs an underlying reason or cause, which is normally found in a contract, particularly in a sales contract, but it could also be an exchange or even a gift if resulting from a contractual obligation. Here we shall concentrate on the sales contract. In civil law, it is often argued that in the change of ownership or in the creation of other proprietary rights, the contract is the motivator and the vehicle that transforms. The transfer of title or of a limited proprietary right follows and establishes a new equilibrium or balance to produce a continuous effect while the contract itself comes to an end through performance. Thus, it may be said that obligatory rights mean change and proprietary rights mean a new status quo meant to endure. This makes sense although it was also demonstrated before that in the international flow of goods, services, technology, information and money, property becomes a dynamic concept and movement of assets and their transformation into others the dominant feature. The abstract theory of title transfer, which was already mentioned in the previous section and which obtains especially in Germany, supports this older truth but in terms of transactional and payment finality and asset liquidity also supports this newer world. It de-emphasises the legal consequences of an invalid contract and therefore of an insufficient cause for the title transfer once delivery has taken place. As such it may also be seen as protection of the new status quo,176 and support for the liquidity of assets. As we have seen, there is in this approach no automatic return and revindication right when the underlying contract is invalid for whatever reason assuming the delivery is complete. At most there is an action for unjust enrichment meant to retrieve the asset, which can hardly be initiated after a buyer’s bankruptcy. The opposite result may be reached in the causal approach, as we have already seen also.

176 Bona fide purchaser protection notions and the notion of reliance also contribute. So does de-emphasising in this context notions of intent, defences and excuses and making them more objective, especially in the professional sphere. See for the notion of finality also Vol 5, ss 2.6.1 and 2.7.2.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 123 Everywhere, the underlying cause of the transfer, therefore normally a sales contract, should be valid for title (or the relevant proprietary right) to pass definitely, although the consequences of it not being or remaining valid may differ after the transfer took place. This brings us back to the lack of capacity, but at least in civil law there must also be a valid consensus or in common law at least a valid exchange of offer and acceptance and some valid bargain in view of the consideration requirement. It is clear in this connection that mistake or misrepresentation, force or undue influence, or fraud may undermine the contract as much as a lack of capacity may do. Illegality may be yet another reason for failure of the underlying agreement. Lack of an object may be another, and in older civil law codifications also a lack of a sufficient or licit cause, a requirement sometimes equated with consideration in common law, although technically speaking not requiring any quid pro quo and in modern times going foremost into the rationality of the arrangement: see Volume 3, section 1.2.6. It is not necessary to elaborate on these contractual complications as this was done in Volume 3. The only aspect that is significant here is that a contract may fail and we l have to consider what the immediate legal consequences are if title under it has already been transferred. What is the effect on the rights in the asset? Was the transfer once completed legally final? Again, it is the issue of finality. Although the many reasons for a contract’s failure need thus not be considered any further, one special reason for the failure of the underlying sales agreement was identified as the default of payment and should here be considered separately. In such cases, the underlying contract may be rescinded and comes to an end in that manner. If so, under older civil law, the contract was then often considered avoided from its beginning (ex tunc) and was thought never to have existed. At least in causal systems like that of the Netherlands, the consequence was that title would automatically and retroactively revert. That would be so even in the bankruptcy of the defaulting buyer. The rescission of the sales agreement, or rather default, becomes here a resolving condition of the title transfer and is often referred to as the lex commissoria (tacita), a concept already existing in Roman law, see D.41.4.2.3 (but not so named). This seems in principle still the French and Spanish approach (with modern limitations in France as we shall see), was also the approach in the Netherlands until its new Code, but has long been abandoned in Germany and does not figure in the BGB or in this manner in the new Dutch Civil Code. In this newer German and Dutch approach, the parties must still undo any acts of performance rendered so far and the defaulting party in particular must cooperate in the return of the asset. Yet this requires a retransfer of the asset and there is no longer an automatic return, at least in the case of a default followed by rescission of the sales agreement. It is also said that the effect of the termination of the contract is here now only ex nunc. In Germany, it is a consequence of its abstract system. In the Netherlands, which has a causal system, it is in the case of default so by special statutory provision in its new Civil Code, which retains for the rest its causal approach.177 Thus, where under modern law the rescission in the case of default only works from the moment it is invoked (ex nunc), its effect on the title transfer itself is less strong. That is indeed the German and new Dutch system, which therefore only gives a personal retrieval right that has no proprietary effect and will therefore not be good in the bankruptcy of the buyer. Parties

177 This state of affairs in the Netherlands is deduced from the rescission now being ex nunc and there no longer being any retroactive title effect upon default (unless the parties agreed otherwise). See Arts 6.265 and 269 CC. It confines the operation of the full causal systems to situations in which the underlying agreement is invalid for lack of capacity, lack of consensus or illegality: see Arts 3.53, 6.203, 3.84(1) and 5.2 CC, which in such cases of voidness of the sale agreement allow the title still to revert ab initio or retroactively.

124  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights may, however, still achieve the proprietary effect if they insert a special clause to the effect in their contract, even if such a clause would not create retroactivity either so that accrued rights and liabilities remain in place and may need to be unscrambled separately. This is the lex commissoria expressa of Article 3.84(4) of the Dutch CC. In Germany such a condition would also be possible but not be retroactive either (see section 159 BGB). Thus, lack of retroactivity does not necessarily exclude all proprietary effect, even though that conclusion is often drawn, but it still makes a difference in the bankruptcy of the transferee and for the reclamation/repossession right in such cases. Another perspective on the abstract or causal system of title transfer is that of the delivery itself, particularly in countries that require it for title transfer. Indeed, in civil law countries a distinction is often drawn here between countries where delivery itself (even if only constructive) is a requirement for the transfer, therefore a legal act, and those in which it is not. It is often concluded in this context that, where no such delivery is required for title transfer, the automatic retransfer would follow more readily upon the rescission of the underlying sales agreement. This would be all the truer, of course, if in the case of a default, the rescission itself were also considered ex tunc. However, as we shall see, the question of the impact of a failed sale agreement and the survival of the transfer arises no less in countries that do not require delivery for title transfer, such as England and France, but it may explain why the issue of automatic return (or not) is not discussed there in the same way. Nevertheless, also in these countries, it is still necessary to determine the effect of the invalidity or rescission of the sale agreement on the transfer and a clear distinction should still be made in these countries between the contract and the transfer of title, which are merely coterminous. One could even maintain the delivery perspective if a delivery constituto possessorio (therefore a constructive delivery) were always implied in countries that do not openly require delivery for title transfer. It is an analysis sometimes still advocated in France and Belgium, as we have seen in section 1.4.4 above, and might here acquire some special meaning.178 It suggests an implied additional legal act of transfer, which indeed highlights the difference between the sale agreement and the transfer of title, even in countries like France. Normally, however, in these countries one uses the concept of voidable or void title rather than the concept of transfer or real agreement, and then determines when voidness may lead to an automatic return of title. Clearly, German law is considered the prime example of an abstract system, which in that country is largely tied to the delivery requirement or real agreement itself. As noted, in legal systems of this type, the title does not automatically return upon a void or rescinded sales agreement, especially important in a bankruptcy of the buyer, although there may be some limited exceptions, especially in the case of fraud as already mentioned and also in the case of a reservation of title. In Germany, the independence of the delivery as a legal act and separate type of contract (the real agreement or dingliche Einigung or dinglicher Vertrag)179 leads by itself to the conclusion that the failure of the underlying sale agreement will not automatically affect the delivery. The history in this approach is not relevant. That would only be different if it could be argued that this Einigung was void at the same time, which, as just mentioned, is often

178 See also s 1.4.2 above. 179 See also n 157 above.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 125 considered the case in a situation of fraud. This is then thought to undo the dingliche Einigung also (section 123 BGB). Under German law, in the case of a reservation of title, it must be included in the dingliche Einigung to be effective, although it will normally be considered part of the latter if it was in the sales agreement until proven otherwise.180 In fact, in Germany it is possible to introduce the reservation of title as late as at the dingliche Einigung stage, assuming it can be established that that was what the parties intended at that moment. If the dingliche Einigung is so affected, the transfer is conditional and the reservation of title will be effective also in the bankruptcy of the buyer in Germany who has failed to pay, regardless therefore of the wording of the underlying sales agreement that had omitted it. It should be noted that in countries such as the Netherlands, Switzerland and Austria, which all have the requirement of delivery as a separate legal act (even if not all going as far as assuming the need for an Einigung in the German manner), the causal approach can only exist while assuming that the legal act of delivery is invalidated at the same time as the underlying sale agreement. It confirms that the delivery requirement need not lead to an abstract system per se and the characterisation of delivery as a separate legal act can coexist with a causal system. In countries like England and the US, there is largely an abstract approach even though not so analysed. It is fairly clear from case law and statutory instruments, as will be discussed in the next section. Thus, once title has passed, the asset is unlikely to be returned if the underlying contract is void except for fraud, and certainly not if it is rescinded merely for reasons of default. The reason that this is so in common law is not the requirement of a delivery as a legal act, also not in the US where delivery is mostly still required for title transfer in chattels (see section 2-401(2) UCC); at law it is probably rather the physical possession of the buyer and its bankruptcy trustee and in equity the discretionary implementation of the rescission remedy. As important, there is for personal property in any event no revindication remedy proper in common law as we have seen. The fact that even in a disturbed bailment the courts have discretion in ordering the return of the asset or damages also suggests a more abstract approach. More generally, the absence of a general rule protecting bona fide purchasers of chattels in common law may lead to a more abstract approach to preserve the status quo. The exception again is in the case of fraud. Thus, if a buyer fraudulently obtains an asset from the seller, it is likely to be returned. It borders on theft when the real owner is always protected in a proprietary sense. In an abstract system this is an exception, in a causal system the rule. As noted before, in France, Belgium and Luxembourg, no delivery is required for title transfer either. The return of title therefore in principle seems automatic in the case of an invalidation of the sale agreement. As we have seen, in the case of a default and rescission of a sale agreement, the lex commissoria tacita is indeed normally implied in these countries, also in a bankruptcy of the buyer. It suggests a causal system, but also here it does not automatically follow and, at least in France, there are significant corrections to any implied causal approach. Thus, for effect in bankruptcy, the return of the asset to the rightful owner must have been requested before the bankruptcy of the wrongful owner occurred.181 More generally, there is a difficulty in France

180 See for reservation of title in Germany, BGH, 1 July 1970, 54 BGHZ, 214, 218 (1970). 181 If the goods are already with the buyer, they can only be returned upon his bankruptcy if the seller has already started the revindication proceedings: see Art 117 French Bankruptcy Act 1985; see also G Ripert and R Roblot (eds), Droit Commercial 2, 16th edn (Paris, 2000) no 3158. A distinction is now made (since the Bankruptcy Act 1985) between a situation in which the sale was already rescinded before the bankruptcy and in which rescission was petitioned or intended but not yet granted. In that case, revindication is still possible but only if

126  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights with conditions maturing upon bankruptcy. The common creditors of the bankrupt may also be protected against any automatic retrieval right under the theory of the solvabilité apparente or apparent ownership: for this notion see in particular Volume 5, section 1.1.10. This exception to any causal approach in France has to do with the position of the creditors of the buyer in its bankruptcy. If it can be established that they relied on the outward signs of creditworthiness of the debtor/buyer caused or inflated by the seller putting the buyer in possession of unpaid assets, they may be protected and prevail over the retrieval rights of the seller. The asset will in that case remain part of the bankrupt estate. This theory of the solvabilité apparente even prevented a reservation of title being fully effective in bankruptcy in France until 1980 and in Belgium until 1998. In the meantime, the bankruptcy Acts of both countries have been expressly amended to overcome this problem—see Volume 5, section 1.3.4—but it still demonstrates that France does not have a full causal system. In fact, on the basis of French case law, the buyer may hold on to the asset regardless of the invalidity of the underlying sales agreement provided the buyer is bona fide and the cause of the voidness of the agreement does not lie with him/her.182 S/he is not therefore protected in the case of his/her own default, but s/he may be bona fide as to other causes, as in the case of mistake or lack of capacity of the other party, therefore in respect of causes arising on the side of the seller. Naturally, the concept of the protection of bona fide purchasers of chattels is known to most civil law countries, but it was already said that normally it only cures a lack of disposition rights in the seller, not the absence of a valid sales agreement between seller and buyer: see further the discussion in section 1.4.8 below. Only in France and in countries following its lead might it also cover the case of a failed sales agreement for reasons concerning the seller and as regards which the buyer is bona fide, meaning that he was not in the plot. Again, in most other countries, the bona fide purchaser protection does not bear on the validity of the sales agreement, only on the power of transfer or disposition right. The lack of a valid sales agreement between seller and buyer is, however, relevant for others because it takes away the subsequent disposition rights of the buyer. The bona fide purchaser protection normally only means to cure that. In the causal system, the successor in interest of such a buyer is thus protected but not the buyer, which would require an abstract system of title transfer. Here the French system is different and again not strictly speaking causal. The abstract system, which protects the transfer even if the underlying sales contract fails, is the more common and one would expect it to operate in trading nations. It sustains the ordinary flow of goods and promotes finality, especially important for commoditised products. It is an important feature of any transnational property law. The concept of finality is a key notion in this book, see Volume 1, section 1.1.8 and the abstract system of title transfer is a main pillar of it in the case of a failed contract, as is the protection of the bona fide purchaser against a lack of disposition rights, now increasingly extended to all buyers in the ordinary course of business as we have seen. Reliance is another, as we have seen also, and so is a more formal approach to capacity and intent. Again, this was earlier identified as an issue of the protection of the ordinary flow of goods on which society wholly depends and is a key public policy requirement.

the rescission was for reasons other than default of payment of the purchase price. This is because of Art 47 of the French Bankruptcy Act, which after bankruptcy generally suspends all actions for the rescission of contracts based on lack of payment of a sum of money. See in France for the lex commissoria tacita, Arts 1184 (old), 1610 and 1654 Cc and for the lex commissoria expressa Art 1656 Cc. 182 Cour de Cass (civ), 6 July 1886 [1887] D.I.25.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 127 Roman law had not progressed this far and it is not even central to the DCFR. In fact, the Justinian compilation was contradictory in the matter of the abstract system, but the ius commune largely adhered to it, as we shall see in the next section. It may be more logical in a legal environment in which bona fide purchasers of chattels were not yet protected against a lack of disposition rights in the seller as was the situation under Roman and medieval law. The abstract system limits this possibility by eliminating the impact on the disposition right of earlier failures of contracts in the chain. Conversely, one could say that the causal system can only properly operate when bona fide purchasers are at least safe against a failure of disposition rights. It is therefore less suitable for transactions in real estate and in intangible assets where there is commonly no bona fide purchaser protection in civil law. In the case of chattels, only in Spain might we see a causal approach without the full protection of bona fide purchasers against a lack of disposition rights, although Spanish authors, like the French, do not appear to analyse the situation in this way. Only smaller countries like the Netherlands, Switzerland and Austria knowingly adhere to a causal system (even if for real estate and intangibles the bona fide purchaser principle does not normally operate),183 although in all these countries there have also been other views. That may be expected in countries requiring delivery for the title transfer as a separate legal act which may technically make any defect in the underlying agreement irrelevant for the title transfer itself. In practice, there was never a consistent choice in favour of either approach. As already mentioned, the more extreme application of the causal system was abandoned in the Netherlands through the curtailment of the lex commissoria tacita. In other countries, the causal system may not apply when the rescission of the agreement is invoked after the bankruptcy as the debtor is not supposed to be able to effect a re-transfer under those circumstances and in such countries the return of title is not then deemed automatic. There are signs of this in France. Moreover, French law still adheres in bankruptcy, when it truly matters, to the notion of the solvabilité apparente protecting unsuspecting creditors of the bankrupt, as we have seen, while the buyer is protected if in good faith as to the causes of the invalid contract. It all undermines the causal approach. On the other hand, the abstract system often yields to a causal result in the case of fraud or of a reservation of title, as we have seen also, even in Germany, while the situation in England for reservation of title is still not fully clear.184 As noted, in Germany we have the fullest abstract system. For chattels, this is combined with the protection of the bona fide purchaser against a failure of the disposition right. Finality is here further buttressed although the connection between the two appears not to have been fully considered when the BGB was enacted. It did not go so far as to move finality to the centre but it was in line with the later ius commune, and therefore pre-codification law, under which the abstract approach prevailed, while as from the seventeenth century in France and earlier in the trading cities of Northern Italy and the Netherlands the notion of the protection of bona fide purchasers of chattels also started to develop for situations where there had been a valid contract but not a sufficient disposition right as we shall see in section 1.4.9 below.

183 For real estate and receivables, where normally the protection of the bona fide purchaser is not operative, it is now especially introduced into the new Dutch Civil Code to allow the acquisition even though there was an invalid transfer earlier in the chain of transfers, an important and unique innovation (see Art 3.88 CC), which became necessary in a causal system where not even the entries in the land register may always be relied upon as being correct, eg, because of prescription. 184 See s 1.3.6 above and for England also n 200 below.

128  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights Modern notions of finality in payment and security transfer systems have thrown new light on the issue of abstraction or independence and favours them: see also Volume 5, sections 2.6.1 and 2.7.2. There can be little doubt that for modern financial products, the German abstract system is the more realistic. It favours the unhindered flows in a commoditised environment and reflects practical needs,185 whilst narrowing also the situations in which a lack of disposition rights becomes relevant because of an earlier invalid agreement in the chain, and therefore the need for bona fide purchaser protection. It is of particular interest for real estate and intangible assets where there is no bona fide purchaser protection at all.

1.4.7.  The Origin of the Abstract and Causal Systems of Title Transfer The problem of the continuing validity of the title transfer regardless of the invalidity of the underlying sales contract and the opportunity of protecting the ordinary flow of goods it offered was identified early, especially in the ius commune. As mentioned in the previous section, it is now often cast in terms of the abstract versus causal system of title transfer. In South Africa, where the ius commune still obtains, the issue has been of special interest, also because of the common law influence on the law.186 Both the ius commune and the South African system that follows it are abstract, the later Justinian Roman law itself having been unclear on the subject. There is a famous contradiction between D.41.1.36 and D.2.1.18. The reason for the confusion might have been in the different forms of transfers of property under classical Roman law, some of which, like the mancipatio, were clearly formal and therefore likely to have been abstract. Others may not have been.187 From the Corpus Iuris it is not clear in which forms of property transfers the two contradicting Digests may have had their origin. It must have followed here also its adopted practice of retaining old texts but adapting them to new or solely surviving structures, which could be different in nature. At the root of the ius commune discussion concerning the causal or abstract approach is the passage in the Institutes of Gaius (2.20), already mentioned in section 1.4.1, requiring for the transfer of title (a) delivery, pursuant to (b) a valid title and assuming (c) proper disposition rights of the owner. In connection with the requirement under (b), D.41.1.31 pr speaks of an iusta causa. The question was what this meant, whether it was a continuing requirement, and what its failure or absence meant for any completed transfer of title in goods, especially if based on delivery. It became clear in the ius commune that an imaginary or putative contract was sufficient. That was at least the view of the Glossa Ordinaria,188 but a simulated contract was not good enough as

185 Also in the Netherlands, the need for an abstract system is now more widely recognised, eg, in the transfer of investment securities: see notably W Snijders, ‘Ongeregeldheden in het Vermogensrecht’ (2005) 6608 Weekblad voor Privaatrecht, Notariaat en Registratie 96. It probably applies to all assets that are market traded or commoditised: see for emission rights MH Koster, ‘Handel in emissie rechten: het causale stelsel uitgesloten’ (2005) 6617 Weekblad voor Privaatrecht, Notariaat en Registratie 301. The nature of the asset and the way it is traded seem to suggest it. 186 See JE Scholtens, ‘Justa Causa Traditionis and Contracts Induced by Fraud’ (1957) 74 South African Law Journal 280ff. 187 But cf R Zimmermann, The Law of Obligations (Deventer, 1992) 271, who accepts without reservation the causal system for the Roman traditio in classical Roman times. 188 See in particular the well-known reference in the Glossa Ordinaria of Accursius, Iusta Causa Ad D.41.1.3.1 pr. The sales agreement could be an indication of a putative or imaginary title or even proof but not conclusively so. The argument used was that since the delivery pursuant to a failed sales agreement was considered a form of undue

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 129 in that case there was no transfer at all. The same was more generally true when the parties were not ad idem. This was particularly the case when the contract was induced by fraud, although even that was sometimes contested, but no longer since the seventeenth-century Roman-Dutch School.189 In practice, when the asset was handed over, it was normally assumed that there had been sufficient power to transfer it, as it was unlikely that there had been no reason at all for doing so.190 The result was that the completion or abstract system of title transfer was considered a substitute for the sales contract as iusta causa traditionis. In modern times, in civil law, Germany remains the most perfect example of the abstract system as we have seen.191 In this country, the approach of the Glossa Ordinaria, which, as a form of unjust enrichment, gave only a personal retrieval action to the seller when a failure of the sale agreement became apparent after delivery, remained the prevailing one during the nineteenth century before the introduction of the new German Codes in 1900 and was then retained. In the meantime, this abstract approach was underpinned by von Savigny’s concept of the ‘real’ or in rem agreement for delivery as a subsequent legal and not merely a physical act (dinglicher Vertrag),192 in a legal system that continued to require delivery, even if it may only be constructive, as a prerequisite for title transfer, as is still the case under the present German Civil Code. This view was supported by his pupil Windscheid who had much influence on the drafting of the new German Codes.193 It thus entered into the BGB (section 929), which as a consequence does not view the prior (sales) agreement as the immediate cause of the transfer but rather the will of the parties (dingliche Einigung) that ownership should transfer at the time of the delivery (of tangible assets) and completion of the transaction. Yet even in this approach, incapacity, illegality or fraud may invalidate the intent both in the underlying sales agreement and in the real agreement (or delivery as a legal act). Mistake, however, is much less likely to do so. In this system, only the dingliche Einigung or the real agreement is causing the in rem or proprietary effect of the transfer. As we have seen, it does not, strictly speaking, require the physical transfer and can be constructive (Übergabesurrogat). The physical delivery in this approach is no more than a factual event or condition of the sales agreement but not itself a further legal act. In legal terms, it is insignificant except in the context of enforcement of the sales agreement if it requires the physical transfer. In fact, the terms of the dingliche Einigung itself may be different from the original sales agreement and the delivery may therefore be made subject to extra (proprietary) conditions at the time the legal possession is transferred. As we have seen, of these conditions, the reservation of title is the most important. Only if it is part of the real agreement may it lead to an automatic return of the full title in the bankruptcy of the defaulting buyer.194 It may be difficult to prove but there is,

performance, the action for the recovery of undue payments (the condictio indebiti of D.12.6.1.1) was applicable to retrieve the value. This was, however, only a personal action and not an in rem remedy like the rei vindicatio. As property, it remains with the buyer. 189 See J Voet, Commentarius ad Pandectas, 4.3.3 and for further sources and comments, Scholtens, n 186 above, at 284ff. 190 See Vinnius, Commentarius ad Inst 2.1.40.10. 191 See also Drobnig (n 79) 353. 192 See n 157 above and accompanying text. 193 See B Windscheid and T Kipp, Lehrbuch des Pandektenrechts 1 (Frankfurt am Main, 1900) paras 171(5) and 172(16a). 194 See n 157 above and accompanying text.

130  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights as also noted, some presumption under German law that the real agreement (dingliche Einigung) is in the same terms as the underlying sale agreement and a reservation may be deemed implied if it is a term of the underlying sale agreement, although it may still be inserted at the time of the dingliche Einigung itself, even if contrary to the original sale agreement.195 It was already mentioned that the situation in France is less clear. Under older French law, the approach of the Glossa Ordinaria, limiting the retrieval possibility to a personal action only (in modern terminology resulting in the abstract approach), was normally followed.196 In modern French legal writing, the subject appears of lesser interest, apparently since delivery is no longer required for title transfer in chattels under the Code Civil. In the previous section it was said, however, that that cannot in itself be decisive and French case law does indeed not suggest the automatic return if the acquirer was bona fide as to the causes of the contract failure and had physical possession. This is largely an expression of the bona fide purchaser protection rule in France (Article 2279 CC), extended then also to operate between two parties to a sale confronted with the invalidity of their contract.197 To repeat, as the bona fide protection operates here not only in respect of third parties, but also for a party under an invalid agreement, this may be an indication of a more abstract approach to title transfer in France. It is also clear that in the bankruptcy of a defaulting buyer, the lex commissoria or automatic title return—which would otherwise normally follow in France where the mere sale agreement transfers title and its demise therefore annuls the transfer—is not fully effective and rescission of the sale agreement thereunder does not automatically produce a return of title if the claim does not pre-date the bankruptcy.198 Also if the asset is already in the possession of the bankrupt, it may have to stay there in view of the theory of reputed ownership or solvabilité apparente: see section 1.4.6 above. As we have also seen, in English law the lack of the delivery requirement has not led to a causal system of title transfer. The situation is not discussed in these terms in English legal literature.199 However, case law seems to bear it out,200 also (very clearly) for assignments of

195 See BGH, 9 July 1975, 64 BGHZ 395 (1975). 196 See R Pothier, Traité du droit de propriété (Paris, 1823) no 228. 197 The classical case is Cour de Cass (civ), 6 July 1886 [1887] D.I.25. 198 See n 181 above. 199 Except in the context of Roman law discussions, see for the UK, F Schulz, Classical Roman Law (Oxford, 1951), 350 and F de Zulueta, The Roman Law of Sale (Oxford, 1945), 56. 200 See for older English case law, Lord Cairns in Cundy v Lindsay (1878) 3 App Cas 459 at 464, opting for an abstract approach, although the House of Lords in this case of fraud accepted the return of title as there had never been any intention to contract with the person who had lied about his identity. The leading modern case (of the Privy Council) is Sajan Singh v Sardara Ali [1960] 1 All ER 269, in which Lord Denning, with reference to Scarfe v Morgan [1835–42] All ER 43, held that the lack of a government permit to acquire a transport vehicle did not prevent the transfer of title between parties, who clearly meant that title should pass, no matter the illegality and consequent invalidity of the underlying sale agreement. It had transferred the property, even though under Malayan sales law the title had not passed at the moment the contract was concluded, as would have been the case if the contract had been valid. The situation became less clear after Belvoir Finance Co Ltd v Stapleton [1970] 3 All ER 664, where in a similar case of invalidity of the sale contract, Lord Denning accepted the permanence of the transfer of title ‘even where the transferee has not taken possession of the property, so long as title to it has passed’. Implementation, performance or physical transfer of the asset seemed not to be required. See more recently also Dewar v Dewar [1975] 2 All ER 728, in which a gift, accepted as a loan, once given, was still considered a gift, no matter the clear disagreement on the underlying cause. It is true that most of these cases seem to be more concerned with the transfer of title itself than with its undoing whilst the last case involves a gift situation or loan substitution. In RV Ward v Bignall [1967] 1 QB 534 it was said that, upon both termination and rescission of a sales agreement, title automatically revests in the

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 131 intangible claims.201 There may be reasons to think that under the Sales of Goods Act 1979, title reverts at least ex nunc in the case of irregularities in a sales agreement or its performance, but physical possession by a buyer would give him strong rights to the asset regardless of the fate of the underlying sale agreement, while in the case of rescission, there is no automatic right to a return of the property in equity (specific performance). This has clear consequences in bankruptcy and may weaken the seller’s proprietary position fatally. Only in the case of fraud would, under English law, the title appears to revert automatically and retroactively, at least if the fraud went to the heart of the title transfer.202 In most other cases of invalidity of the sales agreement, the question therefore remains whether the seller can prove a better right to the asset against the bankruptcy trustee of the buyer in possession and retrieve the asset, which seems doubtful under English law. Lack of specific performance and the strong position of the physical holder appear to make the English system in practice abstract. The exception, confirmed in section 2-401(4) UCC in the US, is the situation in which the buyer rejected or otherwise refused to receive or retain the goods upon a tender of delivery, whether or not justified or where there is a justified revocation of the acceptance. The UCC states that in such cases the re-vesting occurs by the operation of the law and is not a sale or resale. The exceptional nature of this remedy giving the seller retrieval rights confirms at the same time that normally they may not exist, certainly in a bankruptcy when the bankrupt is in possession. Clearly, US law does not suggest the return of title either in the case of the failure of the underlying sale agreement and specifically disallows the effect of rescission clauses with title return in bankruptcy.203 It can be seen as another confirmation of the basic approach, which, in

seller. The seller, even if not in possession, may as a consequence make a valid sale to a new buyer, but whether the latter can reclaim the asset from the first buyer, particularly in the latter’s bankruptcy, must be in doubt. This may also affect a reservation of title. R Goode, Commercial Law, 3rd edn (London, 2004) 391ff makes a distinction between rescission and termination and reserves the first term for situations of voidable title in cases of misrepresentation, fraud and duress, and the last for major breaches and notes that title re-vests in the seller in both cases, although in the case of termination not retrospectively so that in that case accrued rights and liabilities are not affected. This re-vesting is seen as exceptional and typical for the sale of goods only. However, it remains unclear what physical possession of the buyer means, especially in his bankruptcy. In that case there may be no real, ie, proprietary, remedy, but only a personal retrieval action for the owner except where there is a charge, lien or other type of security or equitable interest in the asset. The problem is that English law does not systematically analyse the contractual remedies (see Vol 3, s 1.4 above) from the retrieval or proprietary perspective. Whether the situation in a sale under the Sale of Goods Act 1979 could be fundamentally different from other situations in which a title transfer is invalid seems doubtful but again it is hard to say in the absence of a comprehensive approach to the subject. Restitution remedies seem to be of no help. In common law, restitution actions are perceived as in essence personal: see Westdeutsche Landesbank Girozentrale v Islington LBC [1992] 2 All ER 961. It had always been so in the ius commune and also in Germany. No constructive trust or other proprietary right was therefore allowed in the original moneys the Council of Islington had paid under a swap, a remedy which under common law is in itself not at all unusual in respect of cash payments (in this case complicated by the fact that the moneys had been commingled, however, although that does not need to prevent tracing). 201 See n 265 below and also s 1.5.9 below. 202 See Car and Universal Finance Co Ltd v Caldwell [1965] 1 QB 525 and Cundy v Lindsay cited in n 200 above. Third parties who were bona fide purchasers of the asset while the original sale agreement was not yet voided are in any event protected by the special provision of s 23 of the Sale of Goods Act 1979, provided there was at least an intention between the original contracting parties to transfer title. It is an instance of bona fide purchaser protection under common law, which remains exceptional under common law, and which itself suggests a greater need for an abstract approach to title transfer. 203 Confirmed in s 365(e) of its Bankruptcy Code.

132  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights German terms, is the abstract one.204 In common law countries there may also be a remnant of the reputed ownership notion and in any event a suspicion of hidden non-possessory proprietary interests. As in England, the situation is also less clear in the US when there is invalidity, illegality or fraud voiding the contract rather than a rescission upon mere default or for other reasons. In the US, early case law suggested a return of title in these cases,205 but State law then developed in the sense that in a credit sale invalidity, illegality, fraud or default led to a voidable title only and no automatic return if the voidness was invoked. In cash sales, title was not even considered to pass before payment, but was thereafter probably considered absolute. As already pointed out in the previous section, it is clear that in practice most systems are hybrids with generally a clear inclination to an abstract system at least in respect of commoditised assets. German law is abstract but not when there is invalidity, illegality or fraud when going to the heart of the dingliche Einigung. Indeed, most systems are in such cases causal although in the case of invalidity it could still be argued that no one should hide behind his or her own incapacity or invalidating behaviour (such as misrepresentation or fraud) as a defence, certainly in the professional sphere when the other party is innocent. In the case of illegality, it may depend on the policy objective behind it, which may not always require the undoing of the transaction. French law is seemingly causal but does not always bear this out. Dutch law is said to be causal but now with considerable restrictions, at least in default situations.206

204 See also G Gilmore, Security Interests in Personal Property (Boston, MA, 1965) 63. It is indeed established case law in the US that default in a credit sale does not automatically retransfer title: see Frech v Lewis 218 Pa 141 (1907). There is only voidable title. A voidable title also results if a sale fails in the US for reasons of invalidity, illegality or fraud: see s 164 of the Restatement (Second) of Contracts (1997), but not if the sale contract is induced by the fraud of a third party who presents himself as an agent for a non-existing principal: see Moore Equipment Co v Halferty 980 SW 2d 578 (1998). In that case there is no contract at all and no voidable title either, but rather a void title. In a cash sale, title transfer was traditionally considered postponed until payment and no title had therefore passed either. As it implied some kind of reservation of title, it could still give the seller repossession rights. Under present law, that would be a security interest, however, which implies the immediate transfer of title to the buyer: see s 9-109(a)(5) (9-102(2) old) UCC. The UCC largely abolished the distinction between credit and cash sales and title passes when parties want it or otherwise upon delivery: see s 2-401(2) UCC. Good faith purchasers from a defaulting credit or cash buyer are now in both cases protected against what is considered voidable title provided there is (voluntary) physical delivery to them: s 2-403(1)(c) UCC. It is an instance in which the UCC does not necessarily correct or clarify the former law, but neutralises its effect on outsiders, here by assuming voidable title in both cases. In fact, between the parties, there are still remnants of a special regime for cash sales in s 2-507(2) UCC, which now assumes all sales to be cash sales unless otherwise agreed. It still makes delivery a condition for payment (not of title transfer if parties want it to be otherwise) and payment itself a condition of the buyer’s right to dispose of the goods, but according to the Official Comment, a reclaiming right result only if the buyer does not pay when requested. This right is in the nature of a lien and protected in a bankruptcy of the buyer: see In the Matter of Mort, 208 F Supp 309 (1962), but still subject to the right of bona fide purchasers and the bankruptcy trustees’ lien under the Bankruptcy Code (if the request for payment is made after bankruptcy). Another instance of a reclaiming right results in the US under s 2-702 UCC for 10 days after delivery of goods in a credit sale whilst the buyer was insolvent, a right since 1978 also recognised in bankruptcy, see s 546(c) of the US Bankruptcy Code. Again, it is incidental and exceptional and does not denote any causality of the transfer. It is also subject to the right of bona fide purchasers: see s 2-702(3) UCC, which refers to s 403 UCC. 205 Gifford v Ford 5 Vt 532 (1833). 206 While legal doctrine in the Netherlands often accepts the concept of the ‘real’ agreement: see HCF Schoordijk, Vermogensrecht in het algemeen naar Boek 3 van het nieuwe BW [The General Part of the Law of Property and Obligations according to Book 3 of the New Dutch Civil Code] (Deventer, 1986) 254ff, it does not lead to an abstract system, as the law negates its effects by generally rendering it void together with the underlying sale

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 133 In terms of transactional and payment finality, the subject remains also of vital importance between seller and buyer in the bankruptcy of the latter and more especially for the transfer of immovables and especially intangible property, where the bona fide protection is not normally available to bona fide purchasers of these assets, except for intangibles embodied in negotiable instruments or in the case of a special statutory provision like the new Article 3.88 of the Dutch CC for real estate transfers having failed earlier in a chain.207 What the abstract system does, is eliminate the relevance of such failures and their effect on the disposition right of the seller. It follows that bona fide purchaser protection against a lack of disposition rights in a seller is then less crucial for the latter’s protection. Nevertheless, the causal system seems more natural and is in modern comparative legal writing sometimes preferred.208 The DCFR also favours it with restrictions (see section 1.11 below) but it is not the system that prevails most. The hesitancy concerning the causal system, although seemingly more normal, is understandable as it creates more uncertainty in the title. In truth the issue is always one of finality and its promotion, which the abstract system does do better. The causal system may be especially objectionable if the avoidance or rescission derives from later acts of the parties, notably from the default of the buyer in possession. The need for an abstract system is also clear in the transfer of ownership of highly speculative assets meant to trade, like securities and commodities, when a whole subsequent pattern of (hedging) transactions may be organised and the underlying values may have changed completely. A personal action for damages may then be more appropriate than the return of title, even if the asset is still with the buyer, at least if the buyer has taken further action with regard to the asset or the protection of its value. Another obvious situation where respect for the status quo may be preferred may present itself when a sales contract is declared void for policy reasons in the country of the seller (for example for breaking its foreign exchange restrictions), but the asset is already transferred in another country (or is real estate located elsewhere), when the lex situs may still validate the transfer (even if it maintains a causal approach), in order not to disrupt its own proprietary system too much.209 The principle of abstraction is itself well established and also apparent in many other areas of the law. It is inherent in agency and the concept of its independence under which the principal may become the owner of assets bought by the agent regardless of underlying restrictions on the agent’s activity in the agency agreement. Negotiating a bill of lading or other documents of title and acceptance of a bill of exchange are also believed abstract. The principle of abstraction operates in a not dissimilar way in the issue of bank guarantees and letters of credit. In bills of exchange the acceptance is independent of the drawer–drawee as well as drawer–payee relationships, while the commitments under a bank guarantee or letter of credit are commonly separated from both the underlying sales contract and the instruction by the buyer to the bank. It may well be that notification of an assignment to the debtor, and his subsequent payment, are equally abstract: see section 1.5.10 below. The principle of abstraction may also be seen operating in the context contract. It has been argued in the Netherlands, however, that there are situations where the sale agreement itself is valid, but the later real agreement not, another way of proving its own separate character, cf ibid, especially in cases where governments intervene to prevent delivery without declaring the contract itself illegal or in situations in which an impending bankrupt is forced to deliver pursuant to a sale agreement without wanting to do so or in any other case in which excessive pressure is exerted to achieve performance of an existing agreement. 207 See n 183 above. 208 See Drobnig (n 79) 359: see also F Ferrari, ‘Vom Abstraktionsprinzip und Konsensualprinzip zum Traditionsprinzip’ (1993) Zeitschrift für Europäisches Privatrecht 52. 209 See in the Netherlands HR 12 January 1979 [1980] NJ 526.

134  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights of finality of payments and of investment securities transfers. It seems that it appears everywhere where the ordinary course of business needs protection against the consequences of complications which have their origin in underlying relationships or their failure, if not in legal sophistry.

1.4.8.  Disposition Rights and their Failure: The Nemo Dat Rule and the Protection of Bona Fide Purchasers. Its Contribution to Finality It was explained above that the disposition rights of the seller do not concern the latter’s capacity but his/her ability to transfer rights in the assets s/he tries to sell or means to dispose of in other ways, for example, by transferring a security interest. It is a typical proprietary issue. As far as the contractual side of a sale is concerned, it is possible to sell anything, even assets which do not (yet) belong to the seller or may as yet not even exist, but it is a basic assumption in many legal systems that title cannot be legally transferred in them if the seller is not the owner or, if it concerns the transfer of another property right, at least has sufficient disposition rights to transfer (or create) that right. Lack of disposition rights exist obviously in a thief but it more legitimately occurs if the seller has the asset in apparent ownership but there was a defect in an earlier transfer so that someone else is the true owner in civil law terms or has the better ownership right in common law terms. Unlike capacity, the ability to dispose of an asset may be considered a more factual than legal issue, but this is misleading and has led particularly in civil law to difficulties in the transfer of future assets and in bulk assignments as we have seen. It should also not be associated with the delivery requirement or possibility, which in civil law may in any event be entirely constructive or abstract, as we have seen also. It is true that in Germany it also plays a role at the level of the dingliche Einigung or real agreement, therefore at the level of the transfer itself, but again in an abstract or legal sense, not necessarily physically or factually. For the present discussion, the key is that failure of the disposition right, whatever its cause, leads in principle to an invalid transfer, also if (legal) delivery took place in systems that require it. That is so even in an abstract system where even the Einigung may still fail for that reason. Lack of disposition rights impacts no less on the title in countries that do not require delivery for title transfers. Section 21 of the UK Sale of Goods Act 1979 clearly says so. It embodies the nemo dat (quod non habet) rule of Roman law (D.50.17.54). Nobody can in principle give more than he or she has in legal terms, which is as such an obvious statement. Where the real owner consented, there is no problem. The seller is then his/her representative in this aspect, although there may still be a question whether the consent should have been expressed to the seller or also to the buyer, which is not the case, for example, in an undisclosed agency. The law has not halted here but has over time developed the concept of the bona fide purchaser, at least in respect of chattels upon a defective sale. It may also have relented in redefining the concept of disposition right in respect of future assets and their transfer: see section 1.4.5 above. Bona fide purchaser protection is one way of protecting the ordinary flow of goods or business, which is not served by uncertainty as to ownership and even less by assets moving (physically) backwards and forwards between the parties. This is finality and, as we have seen, the bona fide purchaser protection is one way of achieving and supporting it besides an abstract system of title transfer, reliance notions, and more objective notions of intent and its failure, see Volume 1, section 1.1.8. The acquisitive prescription in civil law and statutes of limitation had a similar objective: see sections 1.2.5 and 1.3.5 above. The instant protection of the bona fide purchaser took that concept one step further, at least in situations where the only defect was a lack of disposition rights in the seller because of earlier events concerning the chattels sold.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 135 Rather than the protection of the ordinary course of business and therefore the commercial flows as a public policy imperative, which is likely to be the more modern justification, the more traditional justification given for the protection of the bona fide purchaser was that the original owner voluntarily parted with the goods and put them with a bailee or holder (in a civil law sense) who subsequently sold them. If anyone, the seller is here considered to be at fault, which is, in the anthropomorphic civil law view a key issue also in default situations especially in contract as we have seen in Volume 3 when discussing force majeure. The question is then simply who is protected: either the old owner or the new one? In modern law, even in common law, which is in principle stricter and will allow only statutory exceptions to the nemo dat rule (except in equity), the balance shifts here increasingly towards the protection of the new owner who was unaware of the problem when acquiring the property. In the more traditional approach, a sale by an unauthorised person to whom the original owner voluntarily handed the goods is then considered the latter’s risk. This is also called the entrusting principle, which may also be seen as a variation on the agency principle, but again the true and more modern perception is the protection of the ordinary flow of business and therefore the finality of commercial and financial transactions or flows which are not or no longer to be undermined by sophisticated legal reasoning. When this is the objective, bona fides might not or no longer be the material issue, as we shall see. Although in the interest of finality modern law may go well beyond the protection of the bona fide purchaser, at least the latter, in respect of chattels, is now normally protected provided he obtained the physical possession of the goods for value. It was pointed out before, however, that this physical aspect may be a remnant of older anthropomorphic physical thinking and the requirement is in any event less clear under the statutory exceptions in common law, but also in German law in the case of a sale of goods under a holder (longa manu) or custodian when the real issue appears to be whether the seller lost sufficient control rather than whether the buyer obtained physical possession: section 934 BGB. In these cases, technically only the retrieval right on the basis of the relationship with the holder (the Besitzmittlungsverhältnis, see also section 1.2.4 above) is assigned under section 870 BGB (although if there are no disposition rights proper in the seller, this relationship is hardly likely to exist).210 Commonly, the bona fide buyer must also have paid good value, although this value need not be commensurate while the requirement is altogether absent in the German system. The other requirement is of course that the bona fide purchaser must be unaware of the disposition impediment of the seller. There are here different approaches, however. In some countries, the criterion is less subjective than in others, the new Dutch law being here on one side of the scale (objective: see Article 3.11 CC, even implying an investigation duty) and the German BGB on the other (subjective: see section 932(2) BGB). Dutch law refers in this connection specifically to the disposition rights, German law only to the ownership question, although in section 366 HGB (Commercial Code) broadened to the disposition rights to protect commercial dealings. The concept of the bona fide purchaser where it prevails is usually not confined to the transfer of a full ownership interest. Here one may see in civil law a connection with the acquisitive 210 The question is especially relevant in Germany in a reservation of title, when the conditional buyer sells the asset constituto possessorio to someone else (eg, his bank for security purposes) who on-sells through a tradition longa manu to a bona fide purchaser. Upon default of the first buyer under a reservation of title and in physical possession is the first seller or the last buyer protected? In the absence of physical possession of the latter, it should be the former, but that does not seem to be the solution of s 934 BGB. Another aspect of the present German system is that while a traditio constituto possessorio of a non-owner to a bona fide purchaser fails under s 933 BGB, it would succeed if the non-owner were to put the asset with a custodian or agent and subsequently deliver it longa manu.

136  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights prescription based on bona fide legal possession as the manifestation of any proprietary right. French law looks at the protection of the bona fide purchaser still very much from this perspective and assumes an immediate acquisitive prescription or a prescription period of zero years. It cures not only the lack of disposition rights in the seller but any defect in the sale of chattels on the part of the seller as long as the buyer/possessor was not aware of any defect in the transfer when s/he concluded the transaction: see also section 1.4.6 above. It could even have dispensed with the physical element of possession, which for acquisitive prescription was never necessary in Roman and civil law, but this is not the approach of Article 2279 Cc. It puts emphasis on the possession réelle rather than on the transfer itself. It is the modern meaning of the maxim ‘en fait de meubles possession vaut titre’. Earlier French law had allowed the transaction to stand on the basis of the mere physical possession of the buyer. This was expressed in the maxim ‘meubles n’ont pas de suite’ (or ‘mobilia non habent sequelam’). It still finds a resonance in the English bailment as the English buyer in possession has a strong position, even if the underlying contract is invalid, as we have seen in section 1.3.2 above, and probably no less when there were no disposition rights in the seller. It may be a reason why the bona fide purchaser protection under common law still does not need to operate as a general principle for chattels. Importantly and as an indication of newer thinking, in common law, the applicable statutes will even now sometimes allow all transfers in the ordinary course of business to stand, that is even without bona fides on the part of the buyer. This is so in particular where the law guards against security interests and does not want them to obstruct the ordinary flow of goods. An important example of this may be found in the US under section 9-320(a) UCC. Again, it is a question of protection of the business or commercial flows, therefore indeed of finality. It was posited throughout that this is truly the way forward in respect of all commoditised products, especially consumer goods, but also receivables, and even now may be the basic rule. Another way of approaching the issue is to assume bona fides, which is now commonly the approach. Indeed, the key is that the protection of bona fide purchasers directly protects finality against a lack of disposition rights, now increasingly broadened to the protection of all transactions in commoditised chattels acquired in the ordinary course of business, even without bona fides in the transferee, who will realise that probably all he buys is in one way or another encumbered by the shop to its professional financiers. It is then also an issue of liquidity and segregation. It may be clear from the discussion in sections 1.4.6 and 1.4.7 above, that the abstract system provides also protection for a purchaser in this connection as the lack of a valid contract in the ownership chain is no longer relevant after delivery and therefore does not affect the disposition right thereafter. The abstract approach is in fact an older and often less subtle way of achieving finality as it limits the instances in which subsequently a lack of disposition rights in the seller could occur. There is no bona fides requirement. The key is to understand that it fundamentally reduces the need for bona fide purchaser protection in respect of lack of disposition rights, which is thus less likely to occur. The abstract system even protects the buyer against an invalid contract between him and the seller, in Germany subject to an unjust enrichment action only, as we have seen. In France, the extension of the bona fide protection to instances of a defective agreement leads to a result similar to that of the abstract system, but only if the buyer does not have knowledge of the invalidity of his contract nor gave rise to it. Fraud in the chain and lack of disposition right in the seller if a thief or mere holder, are still relevant, however, except perhaps in sales conducted on open markets or at auctions. In most civil law countries, the need for protection against a lack of disposition rights has now largely been achieved more directly by the bona fide purchaser protection in respect of

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 137 chattels, not therefore for real estate (which has to do with constructive knowledge where land registers exist, as we have seen) and intangible assets acquisition (if not embodied in negotiable instruments). Again, where the bona fide purchaser protection is still not commonly available, as in the case of intangible assets (except for bona fide collection in the law of equity in common law countries as we shall see), the abstract system, where obtaining, retains its full importance in limiting the instances in which a lack of disposition rights may occur.

1.4.9.  On the Origin of the Nemo Dat Rule and the Principle of Bona Fide Purchaser Protection In section 1.2.3 above it was noted that under the old Germanic principles of property law, no clear distinction was made between ownership and possession. Under the prevailing notion of gewere, or elsewhere seisin or saisine, physical possession appeared the basic right, at least for chattels. It is still so in the common law when possession in a physical sense is voluntarily surrendered by the owner, leaving him only in the position of a bailor with not much more than a personal action against the bailee for retrieval of the asset at the end of the bailment while in the meantime the latter as bailee has all actions against third parties and is in charge of the property. In England, even in modern law, the bailor may retrieve the asset from the bailee only if under a contract requiring it or if he has a right to immediate repossession in his relationship with the latter as we have seen. In this system, the bailor even runs the risk of losing his reclaiming rights, particularly in the bankruptcy of another physical holder of the asset. In the case of involuntary loss of his asset, on the other hand, the basic action of the owner although in principle still personal, in tort, could reach third parties and is thus stronger, almost proprietary. Under the old Germanic law, there was a similar strong position for all physical possessors and the protection of all who acquired actual possession even regardless of their bona fides. One finds this expressed in the Germanic maxim ‘Hand muss Hand wahren’. It is clear that in such a system the protection of bona fide purchasers is less urgent, at least if they are in the physical possession of the asset. In France, this same approach led originally to the old French maxim: ‘meubles n’ont pas de suite’, in medieval Latin expressed as ‘mobilia non habent sequelam’ noted in the previous section. This is the saisine. Again, it left any rightful owner with only a personal action against a holder of his/her assets if s/he voluntarily surrendered them. As regards the protection of title acquired from this holder and presumed owner, it was only later made dependent on notions of good faith of the acquirer. Except in France, probably as the consequence of its old tradition based on the saisine, the position of the acquirer was often refined in the sense that for protection there also had to be a valid contract besides the physical acquisition from someone who had sufficient power over the asset effectively to deliver it but no sufficient legal disposition right.211 In this approach, acquisition from a thief (therefore upon involuntary

211 Another idea altogether was the option of the owner to retrieve the assets from the outsider upon payment of certain damages, usually the price the third party had paid or a part thereof, thus sharing the burden of any unauthorised sale. This idea also had a basis in old Germanic law and is often referred to as the Lösungsrecht: see R Feenstra, ‘Revendication de Meubles et “Lösungsrecht” des Tiers Acquéreurs’ in R Feenstra et al (eds), Collatio Iuris Romani, Etudes dediées à Hans Ankum à l’occasion de son 65e anniversaire (Amsterdam, 1995) 87. It has no equivalent in modern law.

138  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights surrender) would also lead to full ownership (or lack of a retrieval action) but only after a number of years, again provided the purchaser was bona fide and obtained physical possession, except (in many countries) when the acquisition took place on a public market or at auction, when it was immediate. As in England, this often did not even require bona fides (as long as there was no bad faith). There was no investigation duty. Here we see an early example of the protection of the ordinary course of business taking over. Roman law had not pursued the idea of the protection of the bona fide purchaser of movables and adhered strictly to the requirement of D.50.17.54, which formulated the so-called ‘nemo plus (iuris ad alium transferre potest, quam ipse haberet)’ maxim of which the nemo dat (quod non habet) maxim is a simplified version. It meant that nobody could transfer more than he had and the receiver could therefore not receive more and have better rights than his predecessor. Notions of the protection of the ordinary course of business did not play a role either. There was only one exception .in Justinian law (C.7.37.2/3): in the case of execution sales by the tax authorities, the buyer was exceptionally protected (regardless apparently of bona fides). The concept of bona fide acquisition was itself, however, known in Roman law, but it remained limited to acquisitive prescription, which was exceptional, as we have seen.212 One of the keys to understanding the Roman system is that the mere holder (as distinguished from the legal possessor) who sold the asset for whatever reason was considered a thief and acquisition from him could therefore never result in ownership since it rendered the asset a res furtiva.213 In such a system, the protection of the bona fide purchaser cannot develop. This was not a problem in the old Germanic law except in respect of the true thief, but it remained a serious complication in the further development of Roman law in Western Europe, which, as we have seen, gradually overtook the germanic law of chattels from the thirteenth century onwards. In fact, Spanish and Portuguese law remain to this day closer to the Roman notions in this regard notwithstanding the general protection of the bona fide purchaser of movables with possession (and for value) developed under modern civil law in most leading civil law countries. Spain and Portugal balance this by having very short acquisitive prescription periods. The essence remains that during this period the original owner may retrieve its assets by offering the new owner the latter’s purchase price. Although the physical holder may have misappropriated the assets, in the ius commune this was gradually no longer considered theft in the Roman law sense, probably because the owner had for whatever reason voluntarily parted with the assets. The protection of physical possession under older germanic law was here probably a facilitating argument. Acquisitive prescription of an asset sold by a holder thus became possible, provided there was good faith in the transferee and a valid contract with the seller/holder. Some city laws in Italy, Northern Germany and the Netherlands had in the meantime adopted similar approaches in the interest of continuing trade, often without great clarity on the aspect of bona fide acquisition.214 Again, one sees here

212 Nevertheless, the idea of bona fide acquisition was in later Roman law extended to beneficiaries of usufructs and to pledgees, but only in the sense that, if bona fide, they were given a tort action to defend against infringement by third parties and always in a non-exclusive way, as the true owner/legal possessor retained these actions also: see respectively D.9.2.11.10 and D.9.2.17. The pledgee could also transfer ownership in an execution sale, but this facility was considered based on the implied assent of the pledgor: see Inst 2.8.1 and D.41.1.46. 213 See for this concept and its consequences, n 74 above. 214 See also the later notes of Grotius on the laws of Amsterdam and Antwerp in his Inleidinge tot de Hollandsche Rechts-geleerdheid [Introduction to Roman-Dutch Law] in the Lund manuscript, F Dovring, HFWD Fischer and EM Meijers (eds), 2nd edn (Leiden, 1965) 50–55. In the original text, II.3.5, Grotius had still adhered, however, to the general rule that protected the owner against bona fide possessors even if they acquired the chattels for value. This later, largely commercial, development was subsequently also noted in commercial circles in Northern Germany by Mevius, Commentarii in Ius Lubecense Libri Quinque (Frankfurt, 1700).

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 139 a difference in the reasoning: it is the ordinary course of business that needs protection. This is public policy and the entrusting principle or bona fides in the acquirer become less relevant, or to put it another way, bona fide purchaser protection is a narrower concept of protection. As we have seen, in France the original, maxim ‘meubles n’ont pas de suite par hypothèque s’ils sont mis hors du pouvoir du débiteur sans fraude’, which suggested that all physical possession represented ownership in line with the concept of saisine, was eventually modified by the requirement of bona fide possession under the maxim ‘en fait de meubles possession vaut titre’; but also in France, the requirements of trade and of the ordinary course of business contributed to this development,215 where the Roman law of acquisitive prescription, which also required bona fides, seems to have become the more ready model. Although the newer maxim was originally only an evidence rule (fonction probatoire), it was gradually seen as an acquisition rule or way ownership could be obtained (fonction acquisitive).216 Again, unlike under Roman law, no iusta causa was required for this type of acquisition in France. As a consequence, bona fide acquisition with physical possession from a mere holder then gave rise to the protection and to the passing of title in chattels, even if there was no valid sales agreement: see section 1.4.6 above. This is probably still a vestige of the old ‘meubles n’ont pas de suite’ or saisine approach and also suggests some features of the abstract system of title transfer, as we have seen, although the protection did not extend to the acquisition from the thief, which situation was clearly distinguished.217 In the German sphere, the Prussian Codes of 1794 followed the Roman law system rather than old Germanic law in this area. The Austrian Civil Code (section 367) of 1811 clearly introduced the notion of the protection of the bona fide purchaser of chattels from a nonowner who had voluntarily been put in possession by the original owner. The protection was then cast in terms of a defence against the original owner. In the German Civil Code of 1900 (section 932 BGB), the protection is cast neither in these terms, nor as an acquisitive prescription as in France, but rather in terms of independent separate way of acquiring possession and ownership. It still requires as a consequence a valid cause, but not necessarily a valid sales agreement, and concentrates here on the dingliche Einigung as a sufficient causa traditionis in the German abstract approach to title transfer as noted previously. As already mentioned in the previous section, it may not insist on some value or even physical possession either and allows constructive possession for the operation of the bona fide purchaser protection but only in the case of the traditio longa manu.218

215 In the eighteenth century, the ‘sureté du commerce’ was invoked as an argument for the extension of the protection in this manner by F Bourjon, Le droit commun de la France et la coûtume de Paris, réduits en principes 6, Title 8, ch 3, s 4(18). 216 Again this development was in particular reflected in the writings of Bourjon in the eighteenth century, Le droit commun de la France et la coûtume de Paris, réduits en principes 3 (Paris, 1770) Title 2, ch 5 and Title 22, ch 5, who fully deduced this acquisition principle from the prescription (reduced to zero years) and hence implied the bona fides requirement: see WJ Zwalve, Hoofdstukken uit de Geschiedenis van het Europees Privaatrecht (Groningen, 1993) 95 and JA Ankum, Actio Pauliana (Zwolle, 1962) 273. From there the principle reached the French Code Civile of 1804, thus in the chapter concerning prescription (Art 2279). 217 The French approach insists on bona fides at the time of acquisition and requires physical possession (here even in the context of acquisitive prescription) so that a mere acquisition pursuant to the conclusion of a sales agreement (the normal French rule) is not sufficient. It excepts acquisition from a thief. 218 Dutch law largely follows this German example, although its emphasis in terms of the causa traditionis is on the validity of the sale agreement itself in the causal tradition, rather than on the validity of the delivery as a legal act. It is less elaborate in discussing the various types of delivery in the context of bona fide purchaser protection, but excludes the acquisition constituto possessorio from the protection while it requires the acquirer to disclose his predecessor in order to benefit: see Art 3.88 new Dutch CC.

140  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights In England, the law of chattels, although still largely based on the germanic principle of seisin, did not develop a protection for the acquirer with physical possession buying movables from a non-owner. It is somewhat surprising that the common law as the law of a trading nation like England in its basic approach is here closer to Roman law than most civil law countries now are. All the same, the old principle of protection of the possessor/bailee upon the voluntary surrender of the asset to the latter by the true owner makes the bailee virtually the title holder (as possessor) against the whole world. Even the true owner has then only a weak personal claim against him, as we have seen, while the defendant holder always had the choice either to return the asset or pay damages, a discretion which in England may now be exercised by the defendant at the discretion of the courts. The result is that the owner’s position is enfeebled towards the holder, and even more so towards acquirers from the latter (except if the transfer to them creates a right to immediate repossession in the owner vis-à-vis the bailee), even regardless of their good faith or bona fides. It was already said that the English developments must be seen against this background, which may explain why bona fide purchaser protection might not have been so necessary and even now remains exceptional, at least at law. The nemo dat rule is in England expressed in section 21 of the Sale of Goods Act 1979, which Act formulates, however, a number of important statutory exceptions, which take it (for the sale of goods only) close to the dominant civil law position. The oldest exception was the purchase in markets overt (section 22 old), which were certain marketplaces and shops in the City of London. Meant to protect the ordinary course of business, it required a weak form of bona fides of the buyer, no more than the absence of bad faith. It was an exception never introduced in the US and, because of its antiquated formulation, is now also abolished in the UK (since 1995). It should be taken into account in this connection that the system of title transfer may be considered abstract in common law (see section 1.4.6 above) and therefore already underpins the notion of finality from this perspective. The modern concept of the protection of the ordinary course of business is important and reinforces it, particularly expressed in secured transactions in the US, as we have seen. Then there is the more general protection under the English Sale of Goods Act 1979 of all persons in possession buying from sellers who were voluntarily entrusted with the goods by the original owner (section 25). This is therefore the entrusting principle, which approximates the broader protection for bona fide purchasers under civil law, under which the notion of voluntary loss of the physical possession of the asset often also plays a major role. Another important exception in England is the one caused by estoppel when the owner of the goods through conduct is precluded from denying the seller’s authority to sell. It leads in the same direction (section 21). Section 24 of the Sale of Goods Act 1979 further protects dispositions by a seller who has not yet delivered the assets to his buyer and concerns the question of the protection of the bona fide buyer in a second sale, for which English law, unlike legal systems in which title has not yet passed because of the lack of delivery, logically requires bona fides, as French law does in a similar situation. Then there is the protection of the bona fide buyer who bought and obtained possession before the seller’s contract with his predecessor was voided for fraud or similar reasons: section 23.219 That is the voidable title situation where an exception developed early as it also did in the case of agents who sold property of their principal beyond their authority, later followed by the entrusting principle.

219 This avoids any problems of retroactivity of the rescission or invalidation of the contract in the manner of the abstract system of title transfer, although it may also obtain in the case of fraud as long as the buyer is bona fide as to the causes of the invalidity, very much like the situation in France.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 141 Thus Section 25 protects the bona fide buyer from someone who himself bought the goods and received possession but not title (which normally follows the conclusion of a sale contract subject to any agreement to the contrary).220 Section 9 in conjunction with section 2(1) of the English Factors Act 1889 similarly allows the commercial agent who handles assets of his principal with the latter’s consent to make any kind of disposition in the ordinary course of his business, while any bona fide purchaser of the agent in possession is protected under these circumstances. Except where there is a second sale, there may not be the same insistence on actual possession of the acquirer under these statutory exceptions, as civil law often requires, notwithstanding the common law’s normal insistence on seisin for proprietary protection. In the US, the principle of bona fide purchaser protection also remains exceptional. However, as in England, it is by statute accepted in the sale of goods. It may be enhanced when they are traded in the ordinary course of business when there may be no bona fides requirement. This applies particularly to security interests in those goods as we have seen. Thus, security interests of third parties in goods that are normally sold in the ordinary course of business are ineffective against subsequent buyers even regardless of their good faith or more properly regardless of the filing of the security interest if the assets are sold in the ordinary course of business of the seller. In this connection section 2-403(2) UCC elaborates on the entrusting notion in sales but only to a merchant who deals in goods of that kind, probably without physical delivery. It leads to a bona fides requirement. Section 9-320(a) UCC elaborates on the protection against non-possessory security interests in chattels sold in the ordinary course of business, which protection is notably not conditional on any entrusting notion221 and therefore not on bona fides either.222 Special protections apply to bona fide purchasers in the case of failed sales agreements because of default.223 In the US, the concept of the protection of bona fide purchasers is normally tied to the concept of the purchase being for value. This is usually added in the statutory texts. Again, it is less clear whether there has to be actual possession by the third-party purchaser of the assets in order to be protected. Section 2-403(2) UCC does not require it in the case of a purchase in the ordinary course of business, while for the protection against secured interests under section 9-320 the possession of the bona fide purchaser is not relevant at all.224 Only the seller with a voidable

220 It produces a so-called agreement to sell rather than a sales agreement, only the latter of which immediately transfers ownership. The reservation of title is the prime example. 221 See for the classic study on the subject, G Gilmore, ‘The Commercial Doctrine of Good Faith Purchase’ (1954) 63 Yale Law Journal 1057 showing that the requirement of good faith itself became less and less demanding. In the US, it may mean no more than an absence of mala fides while for a purchase in the ordinary course of business from a merchant dealing in the goods the bona fides may no longer be relevant altogether and is presumed, at least after the goods have been entrusted to the other party. See for the problem of voidable title and the protection of s 2-403(1) UCC, n 204 above. 222 Note, however, the definition of a buyer in the ordinary course of business under s 1-201(a)(9) UCC, which itself requires that the buyer is in good faith and without knowledge that the sale to him was in violation of the ownership rights or security interests of a third party in the asset. He must also buy in the ordinary course of business from someone in the business of selling goods of that kind. The good faith requirement is here not meant to undermine the concept of protection in the ordinary course of business under Art 9, however. In fact, it is confirmed in the Official Comment on s 9-323 that the third-party buyer takes free even if he knows that there is a prior interest. He takes subject to it only if he knows that the sale was in violation of the underlying agreement between the seller and the original buyer or in violation of a security agreement, which term was not waived by words or conduct of the seller or secured party. See also JJ White and RS Summers, Uniform Commercial Code, 4th edn (St Paul, MN, 1995) 881. 223 See n 204 above. 224 See also Tanbro Fabrics Corp v Deering Milliken Inc 39 NY 2d 632 and 19 UCC 385 (1976). See for the situation under s 9-320(a) (9-307(1) old) UCC, very explicitly Daniel v Bank of Hayward 425 NW 2d 416 (1988). It may raise

142  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights title must be in possession in order to be able to make a valid sale to a bona fide purchaser (which could also involve a security transfer) under section 2-403(1). The concept of protection of third-party purchasers being still exceptional in common law, it must be restrictively interpreted: see for the general (nemo dat) rule in respect of sales of goods, section 2-403(2) UCC, first sentence, and in respect of security interests in personal property in the US, sections 9-201 and 9-315(a)(1) UCC. In this connection section 9-320(a) UCC adds that the exception in respect of buyers in the ordinary course of business is only in respect of security interests created in the sold asset by the seller (and not by any of his predecessors in the title). Finally, in common law, there is the overriding trust law principle under which the trustee is able to transfer full title free of the beneficiary’s interest to anyone who is unaware of the transfer in breach of trust, provided this is done for adequate consideration. It may not require physical possession. As we have seen before, this general principle of protection in equity against unknown equitable proprietary interests is of utmost importance in an open system of proprietary rights (as the common law is in equity) and then also applies outside the law of sales and to other than movable assets. It should not be confused with the much more limited concept, here discussed, of the protection of bona fide purchasers at law against other than equitable proprietary interests in the property, which protection in common law countries is usually only statutory. As noted before, this protection of bona fide purchasers in equity is not exceptional but a natural consequence of the rule that all who do not know of the equitable proprietary interest while acquiring the property for value are protected.

1.4.10.  The Retention Right of the Seller in the Case of Default of the Buyer In legal systems that normally transfer title in goods at the time of the conclusion of the sale agreement, as is now the rule in England and also in France and in many legal systems derived from French law, the seller is naturally extra vulnerable as he loses title even before physical delivery, let alone payment. It is normal therefore to construe both under English and French law a legal lien or retention right in the sold assets for the protection of the seller who has not yet physically delivered the goods and therefore remains in possession, although he has lost title. This is particularly relevant in respect of payment and was an issue already briefly discussed in the law of sales: see Volume 3, section 2.1.10 above. questions about any continuing interest of a debtor remaining in possession of the assets which could conceivably be sufficient for the continuation of the security interest under s 9-203 (new and old) UCC. Section 9-203 (new and old), which does not require ownership of the debtor in order for him to give (and maintain) a security interest of a third party in his asset, is here not helpful and could still give a foreclosing secured creditor some protection if unaware of an earlier sale (without a delivery of possession) in the ordinary course of business. The civil law requirement of physical possession of the buyer in order for him to be protected presents a clearer picture but obviously also gives less protection. However, also in the US, only physical possession would give the buyer in the ordinary course of business full protection. In a situation where there was first an unauthorised sale plus delivery to a buyer who subsequently resold the goods in the ordinary course of his business to a bona fide purchaser after having given a security interest in the asset to a third party, the bona fide purchaser would defend against the original owner on the basis of the entrusting notion under s 2-403 UCC and against the security holder on the basis of a sale in the ordinary course of business (assuming the requirements for it were met) under s 9-320(a) (9-307(1) old) UCC: see also White and Summers (n 222) 33–16, and Gorden v Hamm 74 Cal Rptr 2d 631 (1998).

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 143 It means that, in cash sales, the seller cannot be forced to deliver the goods before he is certain that he will receive payment. In legal systems that do not require delivery of possession for the transfer of title, it is another instance in which physical possession retains an important meaning. The lack of it weakens the new owner’s position considerably. In systems that require delivery for title transfer in chattels, such as the German and Dutch systems, the seller remains in any event the owner before delivery so that there is only a need for a retention right if there has been constructive delivery with the seller retaining the asset, as in a delivery constituto possessorio: see section 1.4.2 above. Section 41 of the Sale of Goods Act 1979 in the UK indeed states that the unpaid seller in possession is entitled to retain it (the seller’s lien) until payment, even in the case of insolvency of the buyer, unless there are credit terms that have not expired before delivery. In France this legal retention right (droit de rétention) results under Articles 1612 and 1613 CC and is reinforced by the legal reclaiming right of Article 2102(4) CC during a short period after the sale when possession has been transferred but the buyer is in default of payment. It re-establishes the retention right and is therefore itself not in the nature of re-transferring title. Beyond this, it follows that in civil law, a lien or retention right does not automatically result from the mere possession of the asset by any creditor but foremost depends on statute or the operation of the law, see sections 273, 986 and 1000 BGB and Article 3.290 of the Dutch CC. It provides as such a strictly limited remedy and generally guards against proprietary action or self-help. However, it may also be agreed in the contract and does not then automatically follow the rules of the statutory liens. Rather, the contractual retention right may under applicable law then equate to a possessory charge subject to the rules concerning the creation of such security interests. That is at least the position in the US. A retention right of this nature always assumes that the owner or holder (or bailee) ceded the asset voluntarily to the retentor or left it voluntarily with him, as in the case of a sale without transfer of physical possession. Appropriation of an asset will normally not give rise to a retention right. Even where statutory or contractual retention rights are operative, parties may of course still be able to rely on other remedies, of which the exceptio non adimpleti contractus is the most common. In common law, it follows from the conditionality resulting under all key contractual clauses leading to defences to performance: see Volume 3, section 1.4.2. It may generally be used in all situations where mutual contracts remain executory and allows a non-defaulting party to suspend its own performance pending compliance by the other party. In a sale, it allows the seller to defend himself against the contractual delivery right of the buyer pending the latter’s full performance. Important for this discussion, it may then also allow a seller in possession to retain the asset until payment. In that case, it may imply yet another kind of retention situation (besides the statutory and contractual ones). Reference to that kind of retention right is in Germany made in sections 273 and 320 BGB. In modern legal thinking, at least in civil law, the exceptio non adimpleti contractus and the statutory retention right may both be considered examples of suspension or postponement rights—see for example Article 6.52 of the Dutch Civil Code225—although the consequences may be very different. The retention right, even if resulting under the exceptio non adimpleti contractus, may have some proprietary and preferential aspects and has often become much more than a simple defence. It is likely to provide a first step in the return of title, especially in systems in

225 In France, the retention right is now often also explained as a consequence of the exceptio non adimpleti contractus, which, although not as such expressed in the Code, is held to be a general principle under French law: see also J Ghestin and B Desche, Traité des obligations I: Vente (Paris, 1990) no 695.

144  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights which title transfers upon the mere conclusion of the sale agreement, as in France and England. Modern law may allow the retentor subsequently to dispose of the property in an execution sale in which he may satisfy his claim by priority out of the sale proceeds, but at least in civil law s/he is unlikely to be able to appropriate title in the asset under it.226 Section 48 of the Sale of Goods Act 1979 in the UK, on the other hand, gives the seller a right to sell the asset to someone else, which is a facility quite separate from the retention right. For a retention right to operate, it is normally thought that there must be reciprocity of the obligations: see section 273 BGB. The obligations must therefore exist between the same parties. There must further be some direct connection between the handling of the asset and the (resulting) claim, although it need not necessarily arise from the same contract but must come out of the same legal or economic relationship. At least that is so in Germany where the retention right may now also be used for prior claims relating to the retained asset.227 This principle of connexity is clearly expressed in Article 6.52 of the new Dutch CC, which covers all postponement actions, including the retention right, applicable unless connexity is explicitly not required: see Article 6.57 and Articles 3.290 ff Dutch CC. The connexity may be more widely or more narrowly interpreted depending on the facts and on reasonableness in a contractual sense. The general course of dealing between the parties may here also be relevant: see also Article 6.52(2) Dutch CC. In Germany, in the case of a retention right under a mutual claim, a greater degree of connexity seems necessary: section 320 BGB. Another fairly general requirement of a retention right is that the claim of the retentor must be mature (except in commercial matters in Germany: see section 369 HGB when the principle of connexity is also relaxed) and for an amount of money, although the final determination of the total sum may have to await judgment. It means that non-monetary claims, such as those for specific performance, may not be backed up by a retention right in the asset. It is increasingly accepted that the true owner need not be the contract party of the retentor who may therefore even prevail over an owner or over the beneficiary of an older proprietary right, cf Article 3.291 of the Dutch CC. A related question is whether the retention right may be transferred with the debt it secures and is therefore an accessory right. This is often contested, certainly in Germany and the Netherlands (where the retention right remains clearly distinguished from a security interest), but believed possible in France (where as a consequence it acquires distinct features of a security interest).228 In common law, there is the possibility of a more general retention right, that is a retention right in a whole class of assets (for which in England the term ‘lien’ is usually reserved, unlike 226 Apart from these retention rights for the unpaid seller still in physical possession, in most legal systems there are also retention rights for other types of creditors with actual possession (or possibly with possession through an employee, broker or custodian, but not through other holders or bailees, mere legal or constructive possession not being sufficient) of certain goods (if movable and being of some economic value) in some other precisely defined circumstances. The most common example is the retention right of the repairer in respect of the repair costs of the asset he holds. The carrier may also have certain retention rights in the goods he carries in respect of the freight price or loss averages. In the Netherlands, the security broker (‘commissionaire’) has now also been given a retention right on the securities he holds for his clients. They are all incidental and specific and there is especially in civil law no general retention right for any physical possessor of goods in respect of any claim he may have against their owner. Special liens of this nature are sometimes also available in common law but equally only in certain situations, such as for a private carrier, a warehouse, a bailee, a trustee, a lawyer, an arbitrator and any general or special agent; see in the US, Sheinman and Salita Inc v Paraskevas 22 Misc 2d 436 (1959). 227 See OLG Düsseldorf, 27 October 1977 [1978] Neue Juristiche Wochenschrift (NWJ) 703. 228 See F Derrida, Encyclopédie Dalloz (Paris, 1987) Rétention No 30. In a French bankruptcy of the debtor, the bankruptcy trustee may demand the handing over of the asset but he must then cede a preference in the proceeds of an execution sale of the asset to the erstwhile retentor: see Art 60 of the French Bankruptcy Act 1985.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 145 in the US where this term primarily covers security interests, whether consensual, statutory or judicial). It considerably loosens the requirement of connexity. However, these general retention rights operate only for certain providers of services, particularly bankers and brokers.229 They may then cover all outstanding debt between them and operate as security interests. The essence of such a general lien is that whatever asset is surrendered to the rightful owner or client, the remainder of his assets with bank or broker will serve for the rest of the owner’s debt to the retentor. Any additions to the assets will serve as further security at the same time, while unsatisfied earlier obligations and future obligations are also covered. Although the instances of a general lien are limited in common law, commercial usage appears to add to them and have a greater impact in this area than under civil law, which looks more towards statutory authorisation, even if broadened under the exceptio non adimpleti contractus. If by contract certain present and future goods are designated for the purposes of a retention right, there is no question of illicit retention. Thus, in countries where no general liens or general retention rights exist, banks may through their general conditions of business claim a retention right covering all they have received or may receive on behalf of their client in order to protect any credit or other types of client indebtedness from being extended in the present, past or future. Even in civil law countries this may amount to a general retention right and the question then arises whether this contractual enhancement of the retention right does not exceed its normal use while creating or attempting to create a more general security interest at the same time. As already mentioned above, retention rights, if contractually created in individual assets, might be considered possessory pledges and may thus become subject to their rules. If they are in future assets of the debtor, they may be considered floating charges, which may be subject to further formalities in terms of documentation and registration or publication at the risk of the retention right so extended becoming a voidable preference. There may also be problems with the identification requirement, especially under new Dutch law. In either case, the ranking may be affected in the process of characterisation and these retention rights or liens may not then have the highest priority. The resulting protection may even lack the nature of a charge in the asset altogether and become limited to a preference in the execution proceeds only, as appears to be the case in a French bankruptcy. The related question is always whether the retentor may appropriate or execute the property he holds under statutory or consensual liens or only has a right to retain the asset, of which the nuisance value is then the most important aspect. This used to be the situation in most countries under statutory retention rights, but is now abandoned in the Dutch Civil Code of 1992 in favour of an execution right with the highest priority, assuming the conditions of a pledge or charge are inapplicable (Article 3.292 CC). Prior judicial authorisation following attachment of the goods (under the retentor himself) is required. Thus, even the statutory retention right acquires here some features of a security interest and a right in rem. This is in civil law indeed the more modern tendency; see also Article 37 of the Swiss Bankruptcy Act, for statutory retention rights or liens not so far followed in common law. However, there may be a contractual or implied power of sale for the creditor/retentor, which would not be an execution proper but would lead all the same to a preference for the selling retentor or lien. There remains in this connection the further question whether upon a default under a sales agreement, the statutory retentors in countries like England and France, where title passes upon the conclusion of the sales agreement, may appropriate the asset if not automatically returned to them upon a rescission of the sale agreement. It appears that where such a rescission is subject to 229 See in England Brandao v Barnett (1846) 3 QBD 519.

146  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights judicial approval as in France (except if waived in the agreement itself), title cannot revert earlier on the basis of the statutory retention right of the seller alone. In contractual retention rights, whether of an individual or general nature, parties will often introduce special provisions covering default situations, which may authorise appropriation or sales and recovery out of the proceeds. As already mentioned, the main question is here whether the retention right must be characterised as a pledge or charge, as a consequence subject to the rules of either. Modern statutory retention rights are also moving in that direction. In conclusion, it may be said that the modern retention right is of a hybrid nature. It has clear proprietary aspects, where it may lead to appropriation of title in sales when ownership has already been transferred but not yet the physical possession and there is a default in payment, or where it begins to function as a security interest in the assets concerned. Where they are contractually created, they may even be seen as security substitutes or as ways to avoid the formalities normally attached to the former, and may as such be curtailed or converted. A particular instance of this is the retention of a bill of lading in the US: see section 2-401 UCC, an attitude sometimes also favoured by English law. Statutory retention rights may acquire similar features. On the other hand, retention is clearly a matter of the law of obligations in terms of the determination of the reciprocal nature of the obligations and of the connexity between asset and claim, in which reasonableness and commercial reality will also play a role. It may also give no more than a contractual defence or exception.

1.5.  Proprietary Rights in Intangible Assets in Civil and Common Law 1.5.1.  Asset Status of Intangibles. Proprietary Rights and Protections in Intangible Assets. The Possibility, Importance and Method of their Transfer In sections 1.1.1 and 1.1.5 above, the proprietary aspects of claims were mentioned and it was argued that claims, even though intangible, are ordinary assets like any other and should as such be proprietarily protected against third parties, who must respect the owner’s (creditor) rights in them. It follows that they may also serve as a basis for recovery of the creditor’s own creditors, are in principle transferable or assignable, and can be given as security, or be the subject of finance sales. The first issue that arises in the transfer of intangible assets in connection with the assignments of contractual claims, especially if monetary, concerns therefore the asset status of debt. Even though intangible and commonly having their origin in the law of obligations, it was submitted all along that claims are ordinary assets. As such they are indeed transferable/assignable and proprietarily protected against third parties, who must respect the owner (creditor)’s and its successor (assignee)’s rights in them.230

230 It may be noted that all rights are intangible, including all proprietary rights. There is nothing tangible in the law. As such, one could envisage one system of transfers, all through assignment. That would not be an illogical development, but it remains a fact that the nature of the underlying asset still has an effect on the way the proprietary (and other) rights in it are created, transferred, and protected and manifest themselves, and it would be incorrect to apply the common rules of assignment to all transfers of rights without differentiation.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 147 Assets are thus not only real estate and chattels but also intangibles like claims. Although, as we shall see, this may remain contested, especially by those who associate asset status with physical presence, in truth in law everything of economic value may be an asset in a legal sense.231 In civil law countries, this was to some extent recognised from early on as it strove for one ownership concept in respect of all assets,232 although there could still be important differences especially in the proprietary rights that can be created in intangible assets and in the manner of their transfer or creation (through assignment) and protection. Civil law countries do not show here one single picture, although there are common features in their attitude to all property rights. In particular, most have a similar approach to what is an asset, commonly with an emphasis on individualisation so that the asset that can be identified, exists, and set aside. This narrow perspective often still has a physical origin as we have seen, for movable assets basically limited to what can be held in one’s hand, but it is a paradigm at the origin of problems with the proprietary status of all assets and of intangibles in particular. It also

231 It may be repeated that in modern US legal theory, inspired by the ‘law and economics’ school, more profound theories on the nature of proprietary rights developed especially in connection with intellectual property rights, see BM Frischmann and MA Lemley, ‘Spillovers’ (2007) 107 Columbia Law Review 257, based on some important earlier economic writings like the classic contributions of RH Coase, ‘The Problem of Social Costs’ (1960) 3 Journal of Law & Economics 1, 2–6 and of H Demsetz, ‘Towards a Theory of Property Rights’ (1967) 57 American Economic Review 347. See for more general recent observations on the evolution of modern property law, TW Merrill, ‘Introduction: The Demsetz Thesis and the Evolution of Property Rights’, (2002) 31 Journal of Legal Studies 331; S Banner, ‘Transitions between Property Regimes’ (2002) 31 Journal of Legal Studies 359; S Levmore, ‘Two Stories about the Evolution of Property Rights’ (2002) 31 Journal of Legal Studies 421; HE Smith, ‘Property and Property Rules’ (2004) 79 New York University Law Review 1719; and BM Frischmann, ‘An Economic Theory of Infrastructure and Commons Management’ (2005) 89 Minnesota Law Review 917. Demsetz defended the simple proposition, accepted here, that all that can be identified as having economic value creates and is object of property rights as fact and as an unavoidable social and economic phenomenon, as such to be protected, especially clear when these economic values increase as they tend to do in modern times in intellectual discoveries and their application, although it is also an issue in supply, production and distribution chains. It means that others are not to benefit freely, especially not from increasing value, which itself can be seen as an externality that may be internalised in property rights, meaning exclusion, disposition, and protection rights. In this view, this happens as a matter of efficient allocation if the benefits of internalisation as property rights exceed the benefits of keeping them externalised (free as social benefits). There may be strong reasons for internalising, although there may also be considerable advantages in keeping the benefits of innovation externalised, eg, in intellectual property rights. Here a policy decision will ultimately be made. Technological advances, software, information, goodwill, claims, expectancies, and services are thus potentially objects of property rights often closely associated with hardware (chattels) in one package that may evolve and be sold or given as security for debt. Modern systems will accept here a reasonable description and allow a degree of party autonomy, as equity has long done in common law countries subject to the ordinary flows of commoditised assets and the public being protected against such charges. They leave it to the financial counterparties to decide whether they want to give credit on the basis of it and redistribute risk accordingly. If one takes largely the perspective of the evolution of modern financial products, the argument (and therefore the notion of property) is, it is submitted, substantially cast in terms of liquidity, risk management, and transactional or payment finality, especially clear in asset-backed financing, resulting in a balance between preferred and common creditors and in the shifting and distribution of risk amongst different classes of professional investors through financial engineering, which may throw yet another light on what is or should be proprietary and how the relevant income, user and enjoyment rights are to be handled, either in an obligatory or proprietary manner (or something in between). It is further submitted that liquidity requires that they all tend towards proprietary protection and then move with the asset or asset class. 232 Even in England, where similar problems presented themselves with intangible assets in common law, see s 1.5.3 below, intangible assets are not always considered purely personal (contractual, tort or restitution) rights. In Fitzroy v Cave [1905] 2 KB 364, 372, it was said that the courts of equity admitted that the assignee of a debt had title and the debt was considered a piece of property, an asset capable of being dealt with like any other; for English law see also Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 89 holding that ‘a chose in action is property’, and Guest (n 30) 4.

148  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights affects the possibility of their legal existence or their being owned and transferable as a class like for chattels one’s library or one’s inventory or, for claims, a receivable portfolio, and their transfer in bulk as one legal act (which cannot then be done, only each item within it), and the possibility of ownership of future assets like future collections and payments as replacement assets in production and distribution chains and to give them in advance as security for debt or working capital. There are important issues here in all civil law countries, although for claims probably less so in Germany where the denial of the asset nature of them, rather perversely, may have created here more space and flexibility. At least for physical assets, civil law countries commonly maintain a numerus clausus of proprietary rights, as we have seen. They cannot then be freely created and these countries also have a similar approach as to how these rights are manifested and can be defended, either by invoking the proprietary right itself or its possession or holdership. Ever since Roman law, they also have a similar approach to the creation and transfer of these rights with emphasis, as we have also seen in section 1.4.1 above, on (a) power (disposition right, usually ownership), (b) cause (usually a contract, for example, of sale, assignment, or pledge), and (c) formalities (often delivery of possession for sales or pledges, notification of the debtor in the case of assignment of monetary claims, or registration in the case of land). They then also commonly consider the legal consequences of failure of any of these requirements after the transfer has taken place, as we have also seen, in the case of chattels notably through the protection of bona fide purchasers against a lack of disposition rights and an abstract or causal system of title transfer in the case of failure of the contract. Reliance or a less formal approach to capacity and intent in this connection may be others. On the other hand, in this approach and perhaps somewhat strangely, the lack of formality like delivery of possession (or control) for chattels or notification of the debtor in the case of an assignment or registration in the case of land, usually meant that there was never a sufficient transfer to protect, at least not in a proprietary sense, although in common law there could still be equitable proprietary rights. In civil law, only acquisitive prescription could then help out. Again, it was much the subject of the previous sections. As for the admitted proprietary right, to start with real estate, it may be repeated that beyond ownership, which denotes in civil law the fullest right encompassing all user, enjoyment and income rights in respect of the underlying asset(s), there are commonly the usufruct, the security interests, servitudes, and (sometimes) some long-term leases. In civil law, it means a split off of some user, income and enjoyment rights in a proprietary sense, as far as the numerus clausus permits it, therefore to be recognised in principle by all the world. These are the iura in re aliena. For the creation and transfer of these rights and also of the right of ownership itself, for lands, there are likely to be special publication requirements also for these rights now that most countries maintain a land register. For chattels, most of these limited proprietary rights are also available. Although income rights in movable assets may be split off in a usufruct, user rights commonly cannot be so split off as servitudes in movable property, neither can there be longer leases as enjoyment rights. However, conditional and temporary ownership rights have pushed here against the numerus clausus for some time and are increasingly recognised also in respect of chattels, like in reservations of title, non-possessory asset-backed funding, or in finance sales, like repos and finance leases, even if they may remain problematic.233

233 JH Dalhuisen, ‘European Private Law: Moving from a Closed to an Open System of Proprietary Rights’ (2001) 5(3) Edinburgh LR 1, and s 1.3.8 above.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 149 For intangible assets like claims, the proprietary rights that may be created in them besides full ownership are also limited and in civil law commonly restricted to the usufruct and security interests, but increasingly also extended to finance sales like in recourse receivable financing or factoring. These intangible claims commonly transfer through assignment. Disposition rights in the claims, an assignment agreement, and some form or formalities of transfer may be needed. Possible formalities are here (a) a need for a writing and (b) notification to the debtor, both confirming at the same time individualisation and existence. For the creation of more limited rights in them there may be special assignment types and further formalities, as we shall see in section 1.5.8 below, more in particular when security interests are created. In particular in the US, filing may be required for perfection and to determine rank amongst professional insiders at least in the case of bulk assignments presumed to serve as asset-backed financing. A single assignment is excluded from the coverage of Article 9 UCC (so are collection agreements); they are rarely of significance and the emphasis is no longer on them. There remains, however, confusion between outright sales and security transfers of monetary claims, a (recharacterisation) problem that has resurfaced in particular in securitisations as we shall see and is an underlying issue in all of Article 9 UUC in the US that has also been problematic in finance leases and repos financing. Modern systems like the Dutch of 1992—erroneously it is submitted—further complicate and no longer speak here of ownership of claims; alternatively, it also does not refer to the most complete right in them, commonly standing for ownership, either, but refers instead only to the disposition right (Article 3.84(1) CC, cf also Article 3.6 CC). It appears to take a retrograde step (Article 3.1 CC) by formally restricting the concept of ownership to tangible assets only, see Articles 5.1ff CC in conjunction with Articles 3.107ff CC. This emphasis on physicality is new in Dutch property law and appears to have derived from the German example, although notably it does not put assignments in the law of obligations as the Germans still do; it figures in the General Part of the Law of Obligations (Book II). In French law, assignments also remained part of the law of obligations under the Code Civil of 1804. It remains also the approach of the Draft Common Frame of Reference (Article III-5:104 DCFR), which in this respect follows German law uncritically, although the conditions and formalities of the transfer are declared substantially the same for all movable assets, also the limitations inherent in the notion of specificity, where the DCFR may even be considered regressive for monetary claims in German terms;234 it in particular affects the possibility of the transfer of classes of assets and future claims, including monetary ones. Individualisation of existing claims remains here the standard approach. Beyond this, it is often mere semantics, however, because there is no doubt that the new Dutch Civil Code, as indeed the German BGB, treats claims as assets, even though only implicitly. Again, the notion of physicality is a legal deception, there is nothing physical in the law, which is about rights and obligations. It was an unhelpful development which has become more than clear in the Netherlands. As just mentioned, Dutch law talks here of the disposition right rather than the right of ownership but allows in this connection expressly for (legal) possession, which 234 The discussion concerning assignments is here often cast in terms of ways to become a creditor (subrogation being yet another), but that is quite different from the way the original obligations were created. The confusion is compounded by the idea that there are proprietary rights maintainable between contract parties and others that are maintainable against third parties, see eg AJ Berends, ‘Cessie, subrogatie, hoofdelijke aansprakelijkheid, verrekening en financiele overeenkomsten in Rome I’ [2009] 6824 Weekblad voor Privaatrecht, Notariaat en Registratie 1038, 1039, a misunderstanding also common in Germany, see U Drobnig, ‘Transfer of Property’ in A Hartkamp et al (eds), Towards a European Civil Code (Nijmegen, 1994) 353. There are no proprietary rights as such between contract parties: all is obligatory but the claim is an asset in respect of third parties. Proprietary effect is by definition third-party effect, no more, no less.

150  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights is in civil law normally the shadow of ownership, even for acquisitive prescription which is based on it (Article 3.99 CC), probably less clear in Germany. Presumably, there is then also holdership, for example, in collection agreements to achieve their segregation from the collection agent, although it remains a problem, not helped by the absence of constructive trust notions or clarifying statutory law.235 It remains unclear whether there are proprietary, possessory, or holdership actions, cf. also Article 3.107 CC, as the notion of possession would suggest. In fact, intangible claims and the rights thereto are defended in tort against third parties that infringe them (cf also Article 3.125(3) CC). It brings this aspect of civil law in line with common law in which all proprietary protection in personal property can only be achieved through tort actions.236 In the earlier law, which was said many times not to have been changed, holdership of claims was recognised in the collection agreement, allowing the assignee to claim the proceeds from a bankrupt collecting agent, now less clear. Only contractual user, income and enjoyment rights in claims are then defended in tort. The asset status of claims, however expressed, underlines that they are in principle transferable and may also serve as a basis for recovery of a creditor (assignor or assignee)’s own creditors, if necessary, through garnishment. This is not truly in doubt and they can also be given as security for debt, or increasingly be the subject of finance sales237 through assignments in their various forms, which denote the creation or transfer of proprietary rights in intangible assets, notably claims, of which, again, monetary claims are then the most obvious, most important, and most ready example, one may think in particular of portfolios of receivables and bank loans, in which connection their existence in bulk becomes a further defining feature, although this development has so far only matured in the US, in Article 9 UCC. Because of the dual nature of these assets in terms of the internal (obligatory) and external (proprietary and enforcement) aspects, it took, however, considerable time for the law to create any legal framework for the transfer of these rights without the consent of the debtor and to devise a means of proprietary protection, both in common and in civil law, whilst the further step to their recognition and transfer in bulk was only decisively taken in equity in common law countries. It became truly urgent only in a highly leveraged credit society, which is recent.

235 See in the Netherlands for the limited scope of client accounts, which need to be statutory or analogous, HR June 13 2003, ECLI:HR:2003:AF3413. The collection agreement (cessie ter incasso) based on holdership and allowing a form of segregation was unhelpfully eliminated in the new Code although it might still subsist. 236 In the Netherlands it remains debated whether the possessory action is still possible, cf also JWA Biemans, ‘Vorderingen in of uit het goederenrecht? Een voortgezet debat’ (2007) NTBR 36. There remain other differences with the law of chattels, as notably in the exceptions to the nemo dat rule for bona fide purchasers (assignees), in civil law often not deemed applicable in the case of intangibles, although this may be different in common law (equity): see text at n 258 and s 1.5.3 below. Also, the contractual prohibition of an assignment tends to be valid in the case of claims and then has third-party or proprietary effect in principle, undoing any assignment to the contrary (see s 399 BGB and BGH 14 Oct 1963, BGHZ 40, 156 in Germany and Art 3.82(3) in the Netherlands) while it has ordinarily no such in rem or third-party effect in the case of chattels: see s 137 BGB, Art 3.83(3) Dutch CC. There is, however, a more recent trend towards restricting the effect of contractual limitations on the assignment in the Netherlands, HR March 21 2014, NJ 167 (2015), also in Germany at least in professional dealings, see s 1.5.5 below, also for the situation in England. Statutory law in the US has long been reluctant to give these contractual assignment prohibitions third-party effect: see ss 2-210 and 9-404ff UCC. 237 See for this development in common law, SA Riesenfeld, Creditors’ Remedies and Debtors’ Protection, 3rd edn (St Paul, MN, 1979) 215. For a rare overview of the laws of assignment in Europe, the US, and Japan, see W Hadding and UH Schneider (eds), Die Forderungsabtretung, insbesondere zur Kreditsicherung in ausländischen Rechtsordnungen (Berlin, 1999).

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 151 Even so, Roman law already showed the early problems with the asset status of debt and needed for the transfer a form of novation, meaning the consent of the debtor.238 More modern law was also hindered by the unphysical nature of the asset, although, importantly, it started to allow the transfer without consent of the debtor, even without notification of the latter, as later Roman law also started to do, or any other formality.239 Present German law, as we shall see, may also allow for the assignment of claims in bulk (Globalzession or Abtretung), even if absolutely future, at least as long as they figure as replacement assets in production and distribution chains, although, again, mostly considered possible, it would appear, because claims are still not considered assets proper and not proprietary, leaving also more room for a party choice of the applicable law even in third party aspects where, at least in civil law orthodoxy, party autonomy may still be seriously questioned. For a better understanding, it is important that the internal (obligatory) relationship between creditor and debtor is not confused with the external (proprietary) one, that is the relationship between the creditor and all the world, in practice especially (different) assignees and the creditors of both assignors and assignees. Although the internal relationship is commonly arising from and covered by the law of contract (or tort or unjust enrichment, as the case may be) and is therefore obligatory in principle or (in civil law terms) in personam, the external one is a matter of the law of property and is proprietary or (in civil law terms) in rem. Significantly and often confusing as we shall see, there is a mixture in the position of the debtor, who is a third party to the assignment, and therefore also in matters of the ownership of the claim, especially clear when it comes to the collection rights and power of assignees, whom the debtor cannot ignore once he has been made aware of the assignment(s). On the other hand, s/he may continue to raise his/her contractual defences against payment and use excuses, for example, extra burdens, against a collecting assignee and relies then on the internal relationship which continues although with a different counterparty (assignee) but in respect of the assigned claim only and not the rest of the contract. The situation may be further complicated by confusion between the tripartite nature of the assignment and its third party/proprietary effects. Again, what hovers over all of this is the asset status of claims, notably in Germany and in countries following its lead. The result appears to be that especially in international assignments when the applicable law is determined in respect of each of the (three) parties, there is no proper distinction between contractual, proprietary and enforcement aspects. It will be the subject of sections 1.9.2/3 below. The distinction between the transfer requirements in terms of disposition right, contractual cause and formalities, and the significance and meaning of lack thereof is then also easily lost and even the example of physical assets ignored. Although the debtor is unavoidably caught up in the external or proprietary relationship in terms of the payment duty and discharge which emanate from the succeeding owner of the claim, it should indeed be remembered that there is no full replacement of the original contract party 238 Under Roman law, for intangible assets like claims, the problem originally arose also because there was no possibility of a traditio or of a physical transfer of possession: see Gaius 2.38. As a consequence, intangibles were not believed capable of transfer and of acquisitive prescription and they were not then commonly considered the objects of property rights either: see also D.41.1.43.1 (Gaius), even though in Inst 2, 12–14 Gaius clearly refers to intangibles as incorporeal assets, while in Roman law possession was even then not merely physical, see Gaius 4.153. Nevertheless, any assignment was at first considered a contractual matter only, when there was the further issue of the personal nature of each relationship, which was not considered changeable, even on the active side, by an act of the creditor alone: see Inst 3.13. 239 See n 244 below for the later developments. The assignment in bulk was then probably also less of a problem, even of future claims and eventually whole inheritances could be so transferred (C8.53.33 pr).

152  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights who remains the beneficiary of other rights and also liable for the duties—it is in principle only so for the assigned claims arising under such a contract (unless there are closely related rights and duties whilst in the case of a security assignment, there may be more assignees of the same claim(s) with a ranking according to time in respect of even more limited proprietary rights in the relevant assets. As we shall see in section 1.5.4 below, it is normally still not possible to assign the whole contract because of the duties, the transfer of which requires in principle consent of the debtor (creditor under the duties) whilst the contract continues for the rest undisturbed between the original counterparties. It poses the question in particular how monetary claims can be separated out and what this process of separation entails for the debtor(s) especially in terms of closely connected rights and especially duties. The proposition will be that, in professional dealings, monetary claims stand increasingly alone, especially important when their appearance and assignment is in bulk, facilitated in the transnational practice, it is submitted, as a matter of abstraction and by the approximation to promissory notes which were also product of the transnational law merchant, see more in particular the discussion in section 1.5.9 below. As we shall see also, party autonomy in the determination of the classes of assets and the rights created therein further sustains the development towards the unity of these portfolios and their transfer internationally, notably regardless therefore of the location of the debtors. Here again, the issue is more properly liquidity and risk management, now of claims, in particular monetary claims, which, as compared to chattels, raises the particular issue of separation from the rest of the agreement or other legal relationship out of which they arise. It is a key issue in this book that in professional dealings, especially those between suppliers, banks, and the organisers of (international) production and distribution chains, the proprietary issues might be less of a simple mine or thine assessment, as it may be in the consumer sphere, but rather concern liquidity, segregation, risk management and distribution and transactional and payment finality240 in respect of underlying classes of assets in constant transformation and 240 Transactional and payment finality should be well distinguished from legal certainty and is a proprietary issue. Only in terms of the narrower issue of the finality of their transactions, especially in respect of title transfers and payments, is there an overriding need for certainty which the law merchant was always prone to provide, viz the law of negotiable instruments and bills of lading. For the rest, we look for predictability, certainty can hardly be assured. It was argued in Vol 1, s 1.1.7, that certainty may be of such a low quality that it destroys everything. Certainty in terms of finality has traditionally been stressed in English case law ever since Lord Mansfield, especially in mercantile transactions; see Vallejo v Wheeler [1774] 1 Cowp 143, 153 (KB); see more recently Homburg Houtimport BV v Agrosin Private Ltd, The Starsin [2003] 1 Lloyd’s Rep 571, 577 (Lord Bingham of Cornhill) and Compania de Neviera Nedelka SA v Tradex Internacional SA, The Tres Flores [1974] QB 264, 278 (Roskill LJ). For the US, see McCarthy, Kenney & Reidy, PC v First National Bank of Boston 524 NE 2d 390 (Mass 1988). Again, it should be noted that at issue here are often negotiable instruments and letters of credit, all related to payments, or bills of lading, therefore a narrower strand of commercial law where finality is indeed of special importance and a proprietary issue. See also Pero’s Steak and Spaghetti House v Lee 90 SW 3d (Tenn 2002) and should not be confused with certainty. In this context, emphasis on finality is not incompatible with the transnationalisation of commercial and financial law; see also JH Sommer, ‘A Law of Financial Accounts: Modern Payment and Securities Transfer Law’ (1998) 53 Business Law 1181. It is submitted that the concept of finality may be enhanced by it because the international marketplace itself demands it. It would also seem misconceived to ask in this context for clearer rules of conflicts of laws and be satisfied even with arbitrary rules and therefore an arbitrary choice of some domestic law, whatever its quality and responsiveness, see again the discussion in s 1.9.5 below. That is a step back and contrary to the basic tenets, history, and true needs of international commerce and finance. These rules are nationalistic academic fabrications. The more recent and new references in this connection to ‘certainty’ in the Preamble (6 and 16) of the EU Regulation (EC) No 593/2008 on the Law Applicable to Contractual Obligations (Rome I) are also misconceived, it is submitted, and disappointing, but typical of traditional conflicts of laws thinking.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 153 moving all the time until they come to rest, mainly as consumer products and are sold as such either for cash or on credit, when in the latter case claims or receivables become an important further part of this process, and need to be handled, especially clear upon the sale of finished products, whilst asset-backed working capital must be obtained well in advance from third parties to provide funding pending manufacturing, distribution, and payment. On the other hand, payments must be final once made to the appropriate payee, who may be a bank as assignee under a security assignment. Again, this is a different perspective, better understood in common law (especially in equity), where contract and movable property law historically emerged from commerce, not like in civil law from nineteenth-century anthropomorphic perceptions from dealings between natural persons which we now associate with consumer law and where giving credit was exceptional. It may be repeated in this connection also that the common law is especially sensitive to value creation in the production and distribution chain, civil law more in the consumer aspect, where, upon unpacking or consumption, the value of the asset disappears and therefore, it is submitted, also its legal relevance. It was already said that there is no greater destruction of value than upon unpacking under the Christmas tree when all is virtually reduced to legal irrelevance. In respect of movable assets, including payment claims, common law is interested in what happened before, civil law in what happened after. That results, it was argued, in a different legal response or emphasis in terms of property rights and their operation, which in professional dealings are more fluent in the common law, in equity subject to a cut off at the level of bona fide purchasers or collectors in the ordinary course of business rather than at the level of their creation, as we have seen, which suggests at the same time room for party autonomy rather than a numerus clausus of proprietary rights. Again, that is equity and these are the equitable proprietary rights. They are, it is submitted, no less important in respect of intangible claims. In common law, segregation, liquidity and risk management and the flexibility this requires are here the key, therefore also in intangible property, stimulating the separation of monetary claims from the relationship out of which they arise and their appearance and transfer in bulk, even if future. Again, for a better understanding, it may be useful to keep in mind that common law comes from one direction, civil law from another. These are two different worlds, the important result being that at least in equity common law countries were able to abandon the notion of physicality, could deal better with classes of assets including future receivables, and allowed proprietary security interests to shift into replacement assets with the retention of their original rank. That is the floating charge, but it also facilitated securitisations, receivable financing or factoring, finance sales, like repos and leases, and (constructive) trust structures as important ways of assets segregation and their use in financing. Issues of power, cause and formalities, identified above as key concepts in the creation and transfer of proprietary rights may then manifest themselves in all assets and their transfer for whatever purpose, although potentially still in different ways as the needs may be different and concern then also the nature of the user, income and enjoyment rights created in them. The distinction is not only in the type of assets, here monetary claims, but more properly in professional as distinguished from consumer dealings in them which also affects chattels, especially in floating charges and finance sales. Civil law has here much catch up to do. As for the liquidity issue, it may further be observed that from a business point of view at least in professional dealings, all obligatory user, income and enjoyment rights tend towards proprietary expression and move with the assets so as not to inhibit their transfer but may subsequently be extinguished at the level of the bona fide purchaser or collector under

154  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights monetary claims,241 although at other times the assignor must accept that he retains exposure especially in related obligations but also in the duty to release the debtor upon payment. All must be weighed in the decision to assign and the consideration s/he is demanding. It was already said that approximation of monetary claims to promissory notes may help, so may party autonomy in the creation and transfer of rights in these assets, expressed and achieved by allowing their operation against all those who knew (or as professionals should have known) of their existence before they acquired an interest in them. Professionals may have an investigation duty, but the public at large is protected, especially when paying a new creditor. Furthermore, competing interest holders may be cut off by the one who obtains the asset in good faith, meaning in respect of monetary claims all those who manage so to collect. Again, this is equity in common law countries and relevant particularly in asset-backed funding operations in professional dealings, at the heart of the development of the floating charge and finance sales, where receivables play a major role and their liquidity is a main issue. It is also relevant in receivable financing and securitisations, also funding operations. The question is ultimately how these issues are dealt with in the international flows, how the modern law of assignments responds, and in what way it finds expression at the transnational level. Perhaps the issues may be summarised as follows: (a) the asset status of intangible assets, notably monetary claims, (b) the separation of the internal contractual and external proprietary status as a matter of abstraction and the affinity of monetary claims with promissory notes, (c) their transferability without consent of the debtor (and the latter’s cooperation duties in this connection) and the creation as a matter of party autonomy of proprietary user, income and enjoyment rights in them or in classes of them including future replacement assets, subject to a cut off not at the level of their origination in terms of a numerus clausus but at the level of their operation as a matter of abstraction of the title transfer and/or protection of the bona fide collector, (d) the notion of ownership, possession and holdership in them if these user, income and enjoyment rights are intended and expressed in a proprietary fashion, (e) the gravitation of these rights towards proprietary expression and the moving of them with the ownership of the underlying assets upon assignment as a matter of liquidity promotion, (f) their proprietary protection, or, if remaining merely contractual (which may require creditor consent for any transfer), their protection in tort.

1.5.2.  Assignments of Claims, the Proprietary Aspects and the Meaning of Identification, Documentation, and Notification of the Debtor. The Situation in Multiple Assignments. Bulk Assignments and the Assignment of Future Claims. Civil Law Developments As for the transfer of claims, this is indeed done everywhere in a special manner, commonly through assignment, although the specifics may still vary, also between civil law countries. As already mentioned in section 1.4.1, ever since Roman law, for a valid voluntary proprietary creation or transfer of all asset types there needed to be power in the transferor (or a disposition right, usually sufficient ownership of the asset), a valid cause supported by sufficient capacity/intent of assignor and assignee (mostly a transfer agreement), and formalities (mostly an act of transfer, for tangible assets normally an actual or constructive delivery of possession).242 It is in principle 241 See s 1.1.1 above. 242 Gaius, Inst. 2.20.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 155 not different for intangible assets and therefore for the modern assignment, confirmed in the DCFR, Article III-5:104, and should not be particularly complicated; even a formal act of transfer if still required should not be problematic per se. It could be purely constructive as the delivery for chattels now often is in civil law wherever still required for the transfer of ownership.243 As there is more generally nothing tangible in the law which only concerns rights and obligations—all intangible—it was already noted that at least under modern Dutch law, claims can be possessed and this possession can be transferred which may be seen as a form of delivery. Rather than the transfer of possession, the transfer of intangible assets may require some other special act, however, notably notice to the debtor, which is then sometimes believed to be some delivery substitute. That may basically still be the French approach in Article 1690 Cc, still following in this respect closely the reception of Roman law244 in the ius commune,245 243 See s 1.2.2 above. 244 In Roman law, because of the view that all contractual relationships were highly personal, creditor substitution could at first only be achieved through a novation, which meant through a new agreement requiring the debtor’s consent: see Inst Gaius 2, 38 and 39. There was the additional problem of the impossibility of the tradition which was perceived to be physical in principle. Commercially, the result was too restrictive and a kind of transfer possibility without consent was created by the creditor giving others a licence or power to collect with the attendant rights to sue the debtor. This was the procuratio in rem suam, or the power for a third party to act and collect for its own benefit, for which it would have paid the creditor. It did not mean creditor substitution, however. First the debtor could still pay the original creditor. Moreover, the mandate by its very nature could always be terminated by the creditor and lapsed in any event upon the death of one of the parties (unless a lawsuit concerning the collection had become pending between the procurator and the debtor), although this could result in an action for recuperation of the consideration paid: see for these complications C.4.10.1, which gave a so-called actio utilis to ease the situation and allowed the procurator to continue his collection if the creditor had died in the meantime; see for the procedural details also M Kaser, Römisches Privatrecht, 14th edn (Munich, 1986) 246. The actio utilis subsequently became the vehicle to achieve a situation which became broadly similar to the modern assignment. This development was underpinned by the facility existing since the Emperor Antoninus Pius in the middle of the second century to assign deceased’s estates in their entirety: see D.2.14.16pr and further C.4.10.2 and C.6.37.18. That was an example of an assignment in bulk and there was no strict individualisation in Roman law. Eventually the actio utilis became available to all purchasers of claims even before a procuratio was given, C.8.41.3, and ultimately also to the heirs of a deceased assignee (see C.8.53.33 pr), but it never meant that the original creditor was fully substituted and he could still collect while the debtor could always make a liberating payment to him. The assignee could stop this under later law, however, by giving notice (denuntiatio), see C.8.41.3, and could in any event exert recovery rights against the collecting original creditor. Recognition by the debtor, payment, or the start of a lawsuit by the assignee would also suffice and signify sufficient knowledge on the part of the debtor. It was accepted that the debtor could make a liberating payment to the assignee even earlier. His right became exclusive, however, only after any of these actions. Until such time, the assignor could still demand payment as well. 245 The ius commune also used the actio utilis of C.8.41.3 (see n 244 above) as the basis for further development, see also WJ Zwalve, Hoofdstukken uit de Geschiedenis van het Europese Privaatrecht, Inleiding en Zakenrecht (Groningen, 1993) 280, but increasingly required notification as a precondition for the validity of the assignment, which, however, became questioned in Germany in the nineteenth-century Pandectist thinking, see n 249 below. In this view, notice was only a matter of convenience allowing the debtor to pay to the assignee directly, but was not a constitutive requirement for the transfer of the claim, and assignees with earlier rights would in this view have an action for recovery against the collecting assignee with lesser rights, even if bona fide. This followed the influential approach of the late seventeenth-century Dutch writer Voet, Commentarius ad Pandectas, 18.4.15ff, who invoked the customary law of his time. When in countries like France notification became a requirement of a valid assignment, some authors rather suggested a return to the older Roman law in which the notice or recognition had not fulfilled a similar role (although the starting of the law suit had) while believing that the mere assignment should be sufficient to transfer the claim to the estate of the assignee. A similar (on the surface) theory to that of Voet, leading to the full effect of the assignment as at the moment of the conclusion of the assignment agreement, was proposed by the seventeenth- and eighteenth-century natural law school: see C Wolff, Institutiones Juris Naturae et Gentium (Halle, 1734), para 338, which school had also argued that in the case of chattels the mere agreement should transfer the asset, an approach for movables accepted in France, see n 248 below. There was, however, a difference with the approach of Voet, who had still wanted a

156  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights even though in France delivery was abandoned as a formal requirement for the sale of chattels in its Code civil. This notification is formal and does not mean any need for subsequent approval by the debtor, but it suggests individualisation and existence of the claim with reference to a debtor who can be identified, meaning the impossibility of a transfer of classes of claims in one legal act and inclusion of future claims. Unwisely, the Dutch reintroduced the requirement of individual notification in their new Code of 1992 (in the same year the Belgians did away with it), indeed upon the idea that the formal requirement of delivery for chattels had to be followed by some formal requirement for assignments,246 which was then found in notification, both considered forms of publicity although notification hardly is.247 The only similarity with the delivery of chattels is here indeed an additional formal requirement or legal act. The problem, is that notification can hardly be constructive. Again, the true problem is in the facility of assignments in bulk including future receivables as replacement assets, which is the backbone of the use in modern funding operations. Elsewhere, the proprietary transfer may be deemed implicit in the assignment agreement itself and does not require any formalities, which makes it easier and the assignment may then cover more. This is the German approach, even though German law, unlike that of France,248 still maintains a formal requirement for the transfer of chattels in terms of delivery of possession. In Germany, Section 398 BGB, following in this respect later nineteenth-century German case law, unlike France, abandoned the ius commune approach in this respect adopting Pandektist thinking which dispensed with the notification requirement (and the ius commune‘s alternatives proprietary transfer in the sense of traditio so that the mere assignment agreement (or pactum de cedendo) was not sufficient but needed to be completed by a further transfer agreement (the pactum cessionis), even though they could and would normally be embodied in one legal act. 246 Thus, the main reason for the Dutch switch to notification was dogmatic. It was considered incongruous that there was a requirement for delivery for the transfer of chattels in Art 3.94 CC but that claims were transferred by mere (written) agreement (although it probably implied a traditio at the same time in the German manner). As in France, notification is in this view considered a form of publicity, as delivery is considered to be for chattels, and the manifestation of the proprietary right (rather than an expression of the real agreement) which is assumed to depend on it, but notification of an assignment to the debtor is not publicity in respect of anybody else. The curious issue in France was always that no such formality was required for the transfer of chattels, where, as we have seen, the delivery requirement was abandoned in the Code civil. 247 It is even doubtful whether publicity is at the heart of proprietary rights at all as is often assumed in civil law, it only makes it easier to recognise and enforce them, see s 1.1.3 above. At least in chattels, most of these rights are normally hidden. The only practical advantage of the notification requirement is, as we shall see, that it simplifies the situation if there has been a double assignment. 248 French law remains especially close to the Roman system of assignments, see C.8.41.3 as subsequently elaborated in the ius commune, see n 245 above, requiring notification for the effect of the assignment on third parties, especially on the debtor, or the latter’s recognition, see Art 1690 CC, as repeatedly confirmed by the Cour de Cassation in decisions of 20 June 1938, D.1.26 (1939) and 12 June 1985, Bull civ III 95 (1985) notwithstanding serious criticism. It did so under the influence of one of the leading French commentators at the time: see R Pothier, Nouveau coutumier général (Paris, 1724) III, 1, and follows here a course different from the one for chattels where Pothier’s teachings requiring delivery of possession had been less successful and were abandoned in favour of the natural law school approach, see Grotius De Iure Belli ac Pacis Lib II, Cap VI, ss 2ff followed in France by Domat, Les lois civils dans leur ordre naturel, Livre I, Titre 2, No 8 (Paris, 1777), allowing title in chattels to pass through the mere sales agreement. The notification of Art 1690 CC was always of a formal nature and needs to be given by an official judicial officer. In the case of a transfer for security purposes only, a public deed remains also necessary except in the commercial sphere where a charge of this nature may be proven by any means: see Art 2074 CC as compared to L 110-3 and L 521-1 (Arts 91 and 109 old) Code de Commerce. Like in later Roman law and in the ius commune, see n 245 above, this system allowed, however, payment to the assignee even before notification in the context of the possibility of recognising the assignment (acknowledgement), which in the case of immediate payment did not need to be similarly formal, see Cour de Cass, 9 May 1864, D.1.190 (1864), but otherwise still requires an acte authentique.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 157 of recognition or the start of a lawsuit by the assignee for recovery from the debtor).249 Yet German law still insists on a real transfer or traditio (or Einigung) as in the case of real estate and chattels, which is, however, believed implicit in the assignment agreement unless clearly intended to be otherwise.250 It also dispenses with documentation requirements and is more flexible in the identification need, both bearing on the assignment possibility of classes of claims and future claims as already noted, see further section 1.5.6 below. It is nevertheless less common in Germany to distinguish between the agreement to assign, which is the sale of the claim, and the assignment itself, which is considered to complete the proprietary transfer. It has the already mentioned effect that a degree of party autonomy in the proprietary aspects is often still assumed, also allowing for a contractual choice of law, and underpins at the same time the transfer in bulk including future claims, although it may not go as far as to determine the kind of proprietary rights that may be created in them. Elsewhere in civil law countries, this may not be followed but there are often no longer special transfer formalities for an outright assignment except the notification requirement in those of the French tradition,; it may still be different for a security assignment, where there may remain special identification and documentation requirements which have proven particularly troublesome under the new Dutch civil code when a bulk assignment is the objective, more in particular in securitisations. It should be considered in this connection that a constitutive requirement of notification, wherever still obtaining, although no longer meaning a request for approval, may have a significant substantive or material effect, the consequence being that the assignee giving notice first and whom the debtor paid obtains an advantage even if his assignment was later. Until such time (or in France alternatively the recognition or the start of a lawsuit by the assignee), the claim still belongs to the assignor whose creditors could still garnish the claim for payment to them. In a bankruptcy of the assignor, the assignment is then also operative only as at the date of the notification, not of the assignment. In this system, upon a double assignment the first notifying assignee would thus ultimately prevail while the asset becomes part of this assignee’s estate as at the moment of the notification. Until such notification, the debtor could still validly pay the former creditor/assignor; only upon proper notice by an assignee, could he safely pay the latter. The debtor’s knowledge of an earlier assignment is then irrelevant as it would not have led to the desired transfer, although new Dutch law, which now generally requires the notification for the validity of the assignment, may well have left some doubt in this aspect, see Article 6.34 CC. On the other hand, in countries that do not have a notification requirement, the debtor would at best be discharged if he paid a second assignee in good faith, which raises the issue of his investigation duty, see further the discussion in section 1.10 below. There is the additional problem in civil law, that bona fide transferee protection is normally only extended to purchasers of chattels. 249 Until the decision of the RGH, 8 March 1881, RGHZ 4, 111 (1881), the older ius commune (see n 245 above) continued to be applied in this area in Germany during much of the nineteenth century: see B Windscheid and T Kipp, Lehrbuch des Pandektenrechts 2 (Frankfurt am Main, 1900) no 331. As noted, the more modern German approach still requires a special act of transfer or Einigung (which in the case of intangibles would signify at the same time the transfer of legal possession) to complete the assignment and it suggests indeed the transfer of a proprietary right in the claim. It confirms the proprietary aspect of the assignment and is in Germany normally considered coterminous and implicit in the assignment agreement, although in an abstract system of title transfer, such as the German one, both the contractual and proprietary aspects should still be distinguished. This fits in with the approach of Voet, see n 245 above, which is at the root of the modern German system. Here the notification was not or no longer equated with giving notice as a matter of publicity, nor was it seen as a delivery substitute. The result is that there are in Germany formalities for the transfer of physical assets but none for the transfer of claims. The situation in France is rather the opposite, see n 248 above. 250 Ultimately it followed Voet, see n 245 above.

158  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights Where, like in France and the Netherlands, there is still a need for a document, it was already mentioned that notice and the requirement of a document reinforce together the requirements of specificity and identification or individualisation, again an anthropomorphic concept, but an important issue nevertheless with another significant substantive or material consequence in that it further handicaps especially bulk assignments including the assignment of future claims.251 These requirements may also go to the disposition right of an assignor and then curtail it as a further impediment of their transfer. Again, it is different in Germany where there is not only no notification need but also no documentation requirement, which reinforces in German law greater flexibility, to repeat, probably as a consequence of the fact that claims are not truly considered assets but only obligatory rights which in that view then also simplifies their transfer and can be less formal, a systematic irregularity but advantage of sorts. Thus, under applicable law, assignments may or may not require notification to the debtor in order to be perfected, or even documentation and further individualisation, but they now never require the debtor’s consent unless (a) the right is highly personal, (b) serious extra burdens result, or (c) different arrangements are agreed. It may demonstrate by itself the proprietary nature of the right in the claim and then also its transferability or liquidity in that sense, especially important if claims are for money like receivables or concern bank loans. Again, it becomes relevant notably in receivable financing, floating charges, and securitisations when the possibility of their transfer in bulk with the possible inclusion of future replacement assets may be of prime importance. The absence of a need for debtor consent also supports the creation of limited proprietary rights in these assets, especially security interests or conditional/finance sales, obviously further facilitated when there are no other formalities in terms of notice and documentation and a measure of party autonomy can also be condoned. That is equity in common law countries, as we have seen, with its limitation of the proprietary effects on participants in the ordinary course of business or the public more generally.252 To facilitate especially bulk transfers or assignments of receivables and bank loans, these formal requirements (of identification and individual notice and documentation) have now been pushed back in France since the amendments introduced in 1981 by the Loi Dailly, but only in the context of financial dealings.253 Again, in Germany, it follows more generally from

251 What is a future claim is itself problematic, see s 1.5.6 below. 252 See for how much freedom there is in common law, in equity, in this respect, s 1.5.8 below. 253 See Law 81-1 of 2 January 1981 modified by the Banking Law of 24 January 1984 (Arts 61ff) and supplemented by Decree 81-862 of 9 September 1981, now codified in Arts L 313-23–L 313-35 CMF. It provides for an alternative way of assignment for professionals to facilitate modern financing structures involving portfolios of receivables: see also G Ripert and R Roblot (eds), Droit Commercial 2, 16th edn (Paris, 2000), nos 2428ff. It still requires an official deed (bordereau) to incorporate the receivables, which may then be transferred to a credit institution providing advances on the basis of it. The necessity of notification to the debtors as a constitutive requirement of the transfer is abandoned for these types of assignment. Nevertheless, the requirement of the bordereau remains restrictive and any further receivables need a new document, which would appear not to allow the inclusion of future receivables in the transfer so that it is still not possible to assign whole cash flows derived from certain types of activity in this manner. Belgium has more radically and generally abandoned the notification requirement for assignments in Art 1690 of its own civil code in 1994. A further French amendment of 1984 allowed the bordereau transfer technique also to be used by way of guarantee and without any determination and payment of a price. It may lead to a security in the guise of a fiduciary transfer, which had been favoured in France since the Cour de Cassation allowed it on 19 August 1849, D.1.273 (1849). It also made collection possible to reduce any advances given, which were in this manner amortised. This collection possibility had remained uncertain where receivables were merely pledged under Art 2073 CC. The fiduciary transfer still required individual notification of each creditor for its validity, however, which may now be avoided by using the bordereau transfer technique if the transfer is to banks.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 159 its approach as these requirements never existed in modern times to the same extent. In the Netherlands, proposals to lift the notification requirement for outright assignments (although limited to financial assignments, especially meant to cover securitisations) suggested the route of (private) registration instead, borrowed from security assignments, and led to an amendment in 2004 allowing for this alternative in finance.254 The result is two types of assignments, the existing one requiring notification (of which the security assignment proper is a special type) being considered public, the new one being private, the difference being that in the new one title passes immediately (provided there is proper documentation/registration).255 In respect of the documentation requirement, also inherited from French law for all assignments, although it did not need to be notarial or otherwise formalised, it remains in force under new Dutch law, further emphasising the identification and individualisation aspects. Together with the introduced of notification as a constitutive requirement of the assignment in the new Dutch Civil Code of 1992, it eliminated bulk assignments: each claim had to exist and had to be individually transferred subject to notification and documentation, although the Supreme Court eased the latter requirement. and clarified the situation to some extent,256 all manifestations of how it should not be done. It should be noted, however, that for the assignment of intangibles, notification was even in England sometimes seen as a substitute for delivery as originally required for the transfer of chattels,257 see the well-known case of Dearle v Hall of 1828.258 Although English case law never went as far as to require it for the validity of the assignment itself, at least in equitable assignments, as we shall see in the next section, it gave it crucial importance by preferring any assignment followed by notification if the debtor was in good faith while paying, even though not strictly speaking the assignee whilst giving notice. Naturally where notification to the debtor is not a constitutive requirement for the validity of the assignment, it is still a practical requirement to make the debtor pay the new creditor or assignee. That is not then a requirement for the assignment itself or legal act in that sense but a question of implementation of the assignment or performance, much as delivery is in systems that do not require it for title transfers in chattels. Without it, the debtor may still pay the former creditor/assignor and make a liberating payment in so doing. On the other hand, upon proper

254 It was rightly criticised as regressive. Although for a security transfer proper notification was not necessary—there is in that case the alternative of registration, which is not public, however, the only advantage being that it certifies the date of the assignment—it still created problems for bulk security transfers as the identification and documentation requirement continued to apply in respect of each transferred claim, see n 256 below. 255 To make things more complicated, it took the form of the public security assignment even though it was no security assignment proper. Registration then replaces the notification requirement, only meant to protect the debtors as a matter of implementation of the assignment and the claims are transferred regardless. It leaves the question what the situation is if without being notified the debtor still pays the assignor knowing of the assignment and to whom the money so paid belongs, see for a discussion WHM Reehuis, Levering van Vorderingen op Naam, http://irs.ub.rug.nl/ppn/280521464. 256 It was only made practicable by more recent case law especially for the creation of security interests in portfolios of receivables, helped for the private assignments after 2004 allowing for registration, but each claim is still individually transferred regardless and still needs documentation. Art 3 236(2) CC proved more in particular troublesome. The Supreme Court now allows claims to be described in a general fashion (‘all claims’), see HR Sept 20 2002, NJ 182 (2002), if necessary to be determined retroactively from the records of the debtor/pledgor; it may still raise issues of priority in respect of future claims but the financial practice has learnt to live with it, see more in particular Vol 5, s. 1.2.1. 257 In England for chattels the requirement of delivery for title transfer upon a sale was abandoned during the nineteenth century: see ss 17 and 18 of the Sale of Goods Act 1979 and s. 1.4.4 above. 258 Dearle v Hall (1828) 3 Russ 1.

160  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights notice, s/he must pay the assignee at least if not aware of earlier assignments, which raises the important and troublesome issue of his investigation duties, see section 1.5.10 below. That is property law. On the other hand, s/he may also still have the defences under the original contract, for example, in the case of non-conform delivery, although s/he may also incur a balancing cooperation duty as we shall see in section 1.5.9 below. The only other question that then remains is whether an assignee, aware or not aware of an earlier assignment, must surrender his collections to earlier assignees, see section 1.5.11 below. In equity that would seem to be the case only if there was no bona fides, which for professional assignees might still imply a more stringent search duty. It is relevant in this connection and was already mentioned that protection of bona fide assignees is normally not part of civil law, which generally protects only bona fide purchasers of chattels (on the basis of the outward manifestation of ownership of the transferor, again as a matter of physicality), but it may be different in common law (in equity) and there are also States in the US, notably New York, that accept that bona fide collectors may retain their collections,259 see also section 342 of the Restatement (Second) of Contracts (1981). English case law at least protects the bona fide debtor who pays in good faith to a second assignee who gives notice first as we have seen. That assignment is thereby perfected—see again Dearle v Hall—but it did not strictly mean that under English law the collecting assignee could also retain the earnings, even if he himself was unaware of the earlier assignment, although in modern case law that is now accepted,260 although, again, it still leaves the question of the search duty of a professional assignee. Indeed, good faith would appear to go here to the issue of sufficient disposition rights of the assignor and to the question of prior knowledge of the professional assignee in equity concerning earlier assignees and their search duty at the time they acquire an interest in the property, especially other banks and main suppliers. Only real or constructive knowledge of defects in the disposition rights would then make earlier charges effective against them, even if organised by others. Furthermore, in England, failure of the assignment agreement itself does not affect the transfer once perfected, at least not upon collection, meaning that the proprietary effect of the assignment is not dependent upon the existence of a prior valid contract to assign either, unless the assignee was in the plot, which in civil law terms suggests the abstract system of title transfer as further protection of the assignment once implemented.261 A related issue is in this connection that the assignment of claims, especially receivables, when transferred separately from the legal relationship out of which they arise, may still entail the automatic transfer of closely related rights and especially duties arising out of that relationship and what that means for the debtor and assignor. It is closely connected to the issue of segregation and the approximation of monetary claims to promissory notes, probably another asset status issue, see the discussion in sections 1.5.4 and 1.5.9 below. Another obvious assignment issue is what happens to an assignee if the assignor and debtor amend the underlying contract affecting assigned (future) claims thereunder. These issues will be discussed more extensively, particularly in sections 1.5.9–1.5.11 below. For the moment the conclusion is that the requirement of a sufficient disposition right and a contract is maintained for assignments in both civil and common law, but that the failure of either may be cured. Formalities in terms of notification of the debtor and documentation, both as issues of validity where still existing, may on the other hand be a more serious bar to the effectiveness of assignments, especially those in bulk covering also further receivables as

259 See also n 269 below. 260 Rhodes v Allied Dunbar Pension Services Ltd [1987] 1 WLR 1703. 261 Republica de Guatemala v Nunez [1927] 1 KB 669, 697, see also text at n 265 below.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 161 replacement assets and their ranking. We have seen that in finance there is at least some statutory correction in countries like France and the Netherlands. Notably in equity there may be a different attitude to these formalities in common law countries altogether and more fundamentally then also to the issues of the individualisation and identification, the shift of equitable proprietary rights into replacement assets, and the question and extent of party autonomy which may dispense with these requirements. It may perhaps be said that in civil law countries German law comes here closer to a more modern approach suitable also in finance. What is still lacking is, however, the underpinning of bulk assignments through the approximation of and analogy with promissory notes and the concept of abstraction of the assignment and the notice of payment to the debtor, even in Germany that otherwise is well attuned to an abstract system of title transfer as we have seen.

1.5.3.  The Development in Common Law. Legal and Equitable Assignments. Bulk Transfers of Claims and the Coverage of Future Receivables Before going into greater detail, the common law of assignment justifies a closer look. At law, the common law system struggled with the concept of assignment longer than the continental legal systems, even if the latter proved by no means enlightened either and, especially in France and countries following its lead, remained restrictive, stuck in formalities as we have seen. Like under Roman law, claims in common law were at first hardly transferable as they were considered too personal in nature and could therefore be transferred only with the debtor’s consent through a kind of novation. Later on, some power of collection could be given to a third party (probably borrowed from the Roman procuratio in rem suam which became the common law assignatio from which the term assignment is derived), but if disputes arose in respect of the assigned claim, the original creditor would still have to be involved.262 The claim also had to be identifiable and exist whilst this type of arrangement originally required documentation as well. It was already noted that there was never truly a unitary approach in England so that the assignment of contractual claims was considered a contractual matter, of tort claims a tort matter, and of restitution claims a restitution matter, and there could be differences in treatment, especially of tort claims being the more personal.263 There was also the more fundamental issue 262 The creditor would give a written power of attorney to a third party to collect and an instruction or assignatio to the debtor to pay to the third party so appointed. Yet there remained a problem with these powers of collection, which were in principle revocable, and also with the facility to conduct lawsuits of someone else’s for one’s own benefit. It was considered against the law of maintenance, which prohibited the intervention in law suits merely for one’s own benefit without any other concern: see WS Holdsworth, History of English Law 7 (London, 1927) 534. Most importantly, the creditor/assignor was not released from the contract and would have to join any lawsuit by the assignee against the debtor who in any event could still pay him, although in the assignor’s bankruptcy the debt was eventually believed to belong to the assignee: see Winch v Keeley (1787) 99 ER 1284. It also became possible for the debtor to agree to pay a third party at the request of his creditor. This is called acknowledgement, dispenses with any novation or assignment requirements, and remains common: see Shamia v Yoory [1958] 1 QB 448. 263 As far as tort claims are concerned, under common law, traditionally their transfer was impeded by the impossibility to assign a right of action. Under modern law, the proceeds of such an action may, however, be assigned, see Glegg v Bromley [1912] 3 KB 474, and probably now also the action itself. At least actions for other types of damage are now assignable: see Linden Gardens Trust Ltd v Lenesta Sludge Disposal Ltd and Ors; St Martin’s Property Corporation Ltd and Anor v Sir Robert McAlpine & Sons Ltd [1993] 2 All ER 417.

162  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights whether these intangible obligatory rights were assets as such protected as property against third-party interference, which, as we have seen, at least in equity became accepted,264 while it was subsequently also held that this proprietary effect of the assignment was not dependent upon the existence of a prior valid contract to assign, at the same time a clear expression of the abstract system of title transfer in common law, also already noted.265 It remained, however, a difficult concept. Physicality remained the basic idea in property law, whilst for chattels, the concept of ownership was even overtaken by that of physical possession or bailment altogether, which had, however, no equivalent in the case of intangibles. As far as property is concerned, in common law the type of proprietary protection as between tangible and intangible assets remains largely undiscussed. The line between the assignment as a purely contractual matter and a transfer of title in claims remains also blurred, not helped by the general lack of a clear distinction between in rem and in personam rights in movable property. There is no doubt, on the other hand, that claims are in principle transferable without the debtor’s consent. Again, equity in particular became willing to accept that claims were ordinary assets and was therefore better able to do away with the traditional constraints which became particularly important in professional dealings, therefore in the production and distribution chains between their organisers or manufacturers, suppliers and their banks. As mentioned before, liquidity, segregation, risk management and transactional and payment finality become here the overriding concerns as they do for all assets amongst professionals. Equitable assignment thus became the more normal way to transfer claims, but was at first possible only if the assigned claims were themselves equitable (like restitution, corporate, or tax claims).266 Although (in England) under the statute of 1925 (section 136), the legal assignment 264 In Fitzroy v Cave [1905] 2 KB 364, 372, it was said in this connection that at least the courts of equity admitted that the assignee of a debt had title and the debt was considered a piece of property, an asset capable of being dealt with like any other, see n 232 above. 265 Nunez (n 261). 266 For equitable claims (as in tax, agency, partnership, company, trust, insolvency and specific performance matters), equity did accept the ownership notion from an early date and rejected the restrictions on transferability as confirmed in Fitzroy v Cave (see nn 232 and 264 above). It did not then require a document and notification as conditions for the validity of the assignment either: see also Dearle v Hall (n 258), although the first notifying assignee had the better right as only his assignment was deemed completed and his title perfected. There had to be adequate consideration: see Glegg v Bromley [1912] 3KB 364, 372, but any lack of it only affected the assignment between assignor and assignee and was not considered to affect the payment duty of the debtor to the assignee upon notification: see Walker v Bradford Old Bank (1884) 12 QBD 511. Again, this is like an abstract system of transfer for assignments: see also text at n 261 above, and further Republica de Guatemala v Nunez, n 261 above, where it was held that the validity of the assignment did not depend on the existence of a prior valid contract to assign, as far as the debtor was concerned. For the equitable assignment and notion of future claims and what may be future in this connection, there is no full clarity, see s 1.5.6 below. The issue is particularly important in floating charges when future inventory and receivables are included, and in securitisations or in receivable financing when respectively whole portfolios of loans, including the interest payable thereon and the prospective repayment of principal, and whole portfolios of receivables may be transferred, the latter out of existing business but not necessarily yet out of all existing contracts, see also the High Court of Australia in Norman v Federal Commissioner of Taxation (1963) 109 CLR 9. There remains in England—not in the US under Art 9 UCC—also the issue as to what the floating charge is before an event of default or crystallisation occurs. This may also have to do with the future nature of the assets covered. It could be assumed that there can be no (equitable) interest before crystallisation, manifested also by the fact that the company may still dispose of the assets and cash the receivables free of the charge until default. It would be merely an agreement to grant a charge in the future. In Evans v Rival Granite Quarries Ltd [1910] 2 KB 979, 999 an immediate proprietary equitable interest was accepted, however, subject to a licence to dispose of the property free and clear of the charge in the ordinary course of business. It expands the notion of what is a transferable future asset in this context. A (resulting) trust is here often assumed, see Goode (n 30) 724; see also Guest, n 30 at 234ff.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 163 was expanded, it still requires notification and a writing and is in practice limited to the transfer of large individual claims, an advantage being, however, that it does not require consideration. Yet the equitable assignment continued to be used because of its inherent merit and flexibility especially after the merger of law and equity when it became also available for claims at law.267 Since no notification or documentation is required either, it allows also bulk assignments including future receivables as replacement assets, further reinforced by a degree of party autonomy as we have seen even though it might not be unlimited.268 There remains a difference, however, in that technically upon an equitable assignment, the assignor retains legal title, must still be cited in litigation, and has at least in a security assignment at law the right to regain the receivables accompanied by the equity of redemption. How real this still is in practice is another matter. In the US, the legal assignment seems to be entirely abandoned, but the law among the various States remains still divided,269 especially in the meaning of notification.270 Some States adhere

267 This was the consequence of the Judicature Act 1873, which merged law and equity, although even then not fully. Section 25(6) of the 1873 Act (now superseded by the similar s 136 of the Law of Property Act 1925) instituted a statutory assignment facility requiring a document and notification for the assignment to be valid. This statutory assignment does not require consideration and gives the assignee power to discharge the debtor without the consent of the assignor. It requires a full transfer, therefore, not an assignment by way of charge or a conditional assignment, although it does not exclude the assignment of a mortgage: see Tancred v Delagoa Bay Co (1889) 23 QBD 239, as mortgages are not considered charges or limited interests: the whole interest of the mortgagee (or conditional buyer) is considered transferred in that case subject to a redemption right. Nevertheless, the statutory assignment remained cumbersome and the equitable assignment technique (still requiring consideration) therefore survived on the basis of the argument that the statute had not meant to destroy equitable assignments and that in the case of a conflict between law and equity, the latter prevailed: see Wm Brandt’s Sons & Co v Dunlop Rubber [1905] AC 454. The equitable assignment now covers claims at law as well, but still in a different way as the assignor must still be involved in lawsuits of the assignee against the debtor: see Durham Bros v Robertson [1898] 1 QB 765 and more recently The Aiolos [1983] 2 Lloyd’s Rep 25, 33. The reason is that technically legal title cannot be transferred in equity. Thus, the assignor of a legal claim must be made party to the equitable assignee’s lawsuit against the debtor. Only the assignee of an equitable claim may therefore sue in his own name as equity allows the passing of the full equitable claim. This technicality is probably of little importance in the US today. The assignor must also become involved in equitable claims if he retains an interest in the contract, eg, when the assignment is only partial or limited, as for security purposes only, or is conditional: see Durham Bros v Robertson, cited above, which is logical as the assignor is not meant to be released. 268 See n 313 below. 269 In the US the law of assignment developed on the basis of the equitable assignment and did not inherit the old common law impediments: see W Cook, ‘The Alienability of Choses in Action’ (1916) 29 Harvard Law Review 818. However, even in the US the subject remained riddled with controversy, primarily centring on the question whether the assignor’s right had been fully extinguished or whether the assignee had only an irrevocable power of attorney to collect, albeit in his own name and not affected by his death or bankruptcy. The difference between law and equity played a role here too; equity in the US would accept that the assignee had a claim in his own right and did not need to rely on the power of attorney notion, but the courts at law never permitted the assignee to sue in his own name: see the NY case of Wardell v Eden, 2 Johns Cass 258 (1801), also stating, however, that an assignor had no more power over the judgment than a stranger. Only the name of the assignor had to be used, for which his consent was not required. Suing exclusively in the assignee’s name was only made possible by statute and most States now have these enacted, superseded or amended by the UCC for sales contract claims and security assignments: see ss 2-210 and 9-406(d), while in the US the courts sitting in equity have largely renounced the legal jurisdiction once exercised in assignment cases: see Hayward v Andrews 106 US 672 (1883). The consequence is, nevertheless, that where there is no assignment statute operative, the assignee can still only sue in the name of the assignor although for his own benefit. However, in the other aspects of assignments, the equity approach usually prevails, including its ownership concept of claims and the absence of a need for notification in order for the assignment to be valid. 270 Some states follow the English approach of Dearle v Hall, see n 258 above, giving the first notifying (perfecting) assignee the right; others give the first assignee the title regardless of notification, although in New York any later

164  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights here to the English equitable approach, protecting the assignee first giving notice unaware of prior interests; others give the first assignee the best right regardless of notification, while in New York traditionally the first assignee has the better right but any collecting bona fide later assignee may retain the collections. All are agreed, however, that notification is ordinarily not a request for consent nor a requirement for the validity of the assignment itself. The Restatement (Second) of Contracts in section 342 gives the bona fide collecting assignee the better right but does not go into any search duties of a professional assignee. More important are the special assignment provisions of section 2-210 UCC for the assignment of sales receivables and of section 9-406(d) UCC for assignments of all claims that may be transferred as security under Article 9 UCC. For assignments of portfolios of monetary claims (which are presumed to be made for funding purposes, unless there is a collection agreement (Section 9-109(d)(5), and therefore covered by Article 9 UCC),271 the UCC has a special regime altogether, which requires filing in respect of present and future claims (Section 9-204 (a)) if it concerns substantial portfolios of receivables and not a single account (Section 9-109(d)(7)) or a collection agreement. It determines the ranking and the status and interest dispositively in respect of professional assignees (again unless merely collectors or a single claim). For them, bona fides is then irrelevant and they have a search duty. In this approach, bulk assignments no longer present special problems, neither do assignments of future claims, all depending for their effect on a reasonable description of the rights transferred and of the asset class concerned in the assignment agreement. It is entirely left to banks to decide whether they want to give credit against that kind of interest. It follows that every bulk assignment of receivables is now treated similarly under State law and normally requires a disposition right in the assignor (Section 9-203(b)), a contract with the assignee (Section 9-203(a)) which attaches the security, and the filing (of a finance statement) for perfection of the security interest and the determination of the right or rank in time (Section 9-310(a)). Section 9-406(a) UCC authorises the debtor to pay the assignor until notice. Thereafter, s/he must pay the assignee. The suggestion is that the debtor pays the first one giving notice; there is no search duty. As to the ranking between assignees, the filing of the finance statement determines the rank, see further sections 1.5.7 and 1.5.8 below. It was already noted that probably the most important feature of equitable assignments is the measure of party autonomy they allow, not merely in a party choice of the applicable law, but both in this way or more directly in the assets covered and type of interests that may be created and their proprietary protection, although in the US now encapsulated in Article 9 UCC. It gave the equitable assignment great flexibility and importance, especially in floating charges, receivable financing and securitisations, even though it may still be asked in how far this freedom truly goes in common law countries (beyond statutory law in the US), see further section 1.5.8 below. assignee who collects in good faith may retain the proceeds: see also Salem Trust Co v Manufacturers’ Finance Co 264 US 182 (1924) and Corn Exchange NB&T Co v Klauder 318 US 434 (1943) and further Corbin on Contracts, 4 (St Paul 1951) s 902. Notification is, however, nowhere any longer an absolute requirement for the validity of the assignment itself and demonstrates the demise of the legal assignment in the US. 271 The lack of distinction between a sale and security transfer of receivables has long been identified as a serious logical flaw in Article 9, going to the disposition right in the claims. Once a sale has taken place, even for funding purposes, it would appear that logically no further assignments can follow, see Th E Plank, ‘Assignment of Receivables’ (2007) 68 Ohio State Law Journal 231, but that would not appear to follow if there is no full assignment as there may not be in conditional or temporary assignments. The presumption behind the UCC was always that all dispositions of monetary claims are there for funding purposes and are re-characterised as security interests. Individual assignments and collection agreements are then excepted and operate outside Article 9.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 165

1.5.4.  Assignment of Rights and Delegation of Duties. The Issue of Separation of Monetary Claims and the Transferability of Entire Contracts. Extra Burdens and the Debtor’s Defences As regards the transfer of intangible assets, the fundamental rule is that only the asset or active side of a contractual arrangement may be freely assigned to third parties, therefore without the consent of the debtor and to that effect claims may then be separated from the relationship out of which they arise, in particular the payment rights, provided in principle that (a) the claims are not highly personal, (b) no material extra burdens are created for the debtor and s/he is not substantially deprived of defences under the contract out of which the claims arose, and (c) the contract is not fundamentally changed by its assignment; it usually only concerns a partial replacement of the counterparty, limited to the claimant of the particular assigned claim or claims. This severability and the separation and transfer possibility involving creditor substitution for claims under a contract do not normally apply to a transfer or delegation of contractual (or other) duties, thus not to debtor substitution, or to the liability or passive side of the contract. Notably, it also means that whole contracts cannot normally be transferred as such because they commonly also cover obligations. The reason is obvious and a matter of credit risk: except in the case of personal services, it is often immaterial for a debtor whether he or she performs to an assignor or assignee, especially clear in the case of a payment provided there is a proper release (which is the transfer to the assignee of the relevant connected duty without a discharge of the assignor), but it is normally very relevant to a creditor who the person is who must perform and pay to him/her. Thus, for the creditor there is in the case of payment a credit risk to be considered or a quality risk in the case of other duties owed him/her, which means that debtors cannot normally substitute themselves for others without the consent of the creditor. It would be an excessive burden and fundamental change of risk under the relevant contract. Nevertheless, the issues and protections raised under (b) and (c) above are increasingly eroded especially when claims must be used as security for funding, especially in respect of receivables which may make any credit given to the debtor possible. Even as far as rights go, it was already mentioned that for personal services, creditor substitution may remain difficult as a personal service provider, like a servant, cannot normally be asked to provide his/her service to anyone whom the employer might identify except where that was part of the service contract. In French (Latin) legal terminology, the contract is intuitu personae, which is an implied condition in many service contracts. This personal aspect applies then to debtor and creditor or to the active and passive side of the contract alike. Other claims are highly personal and may remain unassignable altogether, like those for alimony or child support. Life insurance policies, wages and pension payments may equally not be assignable because of their very nature. Social security benefits may also be in that category, as are more generally claims that are created with the person of the debtor in mind. Other claims may be considered inherently unassignable for other reasons: future claims may still be the classic example, see section 1.5.6 below, or there may be situations in which there are contractual assignment limitations, see section 1.5.5 below. The modern trend is, however, to facilitate and promote the splitting-off and the assignability of the asset side, at least of monetary claims like receivables—it is a matter of asset liquidity, again, often necessary, especially when meant to fund the credit given to the debtor allowing the receivable to serve as security—and one may assume that monetary claims are now ordinarily severable and assignable everywhere, although it is obvious that even for monetary claims it

166  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights may still be asked how far this segregation goes, therefore in how far the original contract terms still impinge on it, notably assignment restrictions, quality shortcomings, and set-off rights as defences against payment. There is also the issue of extra burdens and an important aspect of the status of the debtor becomes here whether, when extra burdens result for him/her, s/he may be able to ignore the assignment even upon notification, and refuse to pay the assignee. As far as extra burdens are concerned, one could think of a situation in which different places or countries of payment result upon an assignment of a monetary claim or higher payment costs. It means that in such cases an effective assignment might still need consent or at least the debtor’s cooperation. Again, there may also be the defences against the claim, which are in so far different from the extra burdens that they are likely to derive from the nature of the claim or from the relationship with the assignor, also the set-off rights.272 It was already noted that the debtor cannot be considered merely a third party to the assignment but may retake in such cases his/her position under the contract out of which the claim arises. There may also be an extra risk to a full release of the debtor upon payment to the assignee, see section 1.5.10 below, and the automatic transfer of closely related duties, when the question arises whether and to what extent the assignor is discharged, see also the discussion in the next section. As far as the defences go, they may indeed concern quality issues in a sale and the effect on the amount payable which then becomes an issue of set-off. Thus, the impeding factors of an effective assignment are commonly (a) the issues of segregation and assignability, (b) any resulting material extra burdens or risks for the debtor or the status of the defences the debtor may still have against an assignee, and (c) any (remaining) liability of the assignor in respect of duties automatically transferred with the claims. This is quite apart from issues of power, cause, and formalities already identified in the previous sections which affect all asset transfers. The just mentioned impeding factors are more special to assignments of claims and emphasise it contractual rather than proprietary aspects. There is no doubt that the transfer of intangible claims, even if merely monetary, remains intrinsically more complicated for these reasons and is often more controversial in the details than the transfer of chattels. It is the internal relationship and nature of the asset that affects and may impede the proprietary transfer or make it unattractive to an assignor or ineffective, especially in asset-backed funding, which was identified as the likely true objective of assignments in bulk. It is a fact that the assignment of claims affects a third party to the assignment of each of them, who is passive or in a sense a victim: the debtor to the extent that his/her performance must be redirected towards the assignee. There is for him/her an unselected new counterparty even though only in the relevant claim. It raises nevertheless the just mentioned complications, where 272 The retention of the set-off facility upon an assignment against the assignee is commonly accepted: see for Germany, s 406 BGB, which allows the set-off in respect of all claims which the debtor acquires against the assignor even after the assignment but before the debtor becomes aware of it. That is also the system of s 9-404 UCC in the US for security assignments. In the Netherlands under its new system requiring notification for the validity of the transfer, all counterclaims until the notification can naturally be offset, as was earlier the case under the ius commune: see C.8.41.3. In England, the set-off right is at least good for claims arising out of the same contract whether they arise before or after the debtor has notice of the assignment: see Graham v Johnson (1869) LR 8 Eq 36. Other claims may be set off only if they arose before notice was given: see Stephens v Venables (1862) 30 Beav 625. A problem is that for a set-off normally both claims need to be mature: see eg, Art 1291 French Cc and Art 6.127(2) Dutch CC. If the claim of either assignor or debtor was not mature before the assignment but matured thereafter, there is a question whether the debtor may still invoke the set-off against the assignee. It may not be possible, but if the debtor waives his credit in anticipation of an assignment in order to render his claim against the assignor off-settable, he would appear to have that facility: see for France, Court of Appeal Paris, 8 March 1904, D.2.65 (1905), and for Germany s 406 BGB.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 167 the reality is that to the extent s/he wants credit, s/he needs to cooperate. The question then is in what way and in how far. Section 2-210 UCC273 is here of great importance. It deals with the extra burdens and requires them to be accepted if not material. It does not distinguish between extra burdens and the pressure on defences. It further ignores contractual assignment restrictions as we shall see in the next section. Importantly, Section 2-210 also deals with the delegation of duties which under this section (in the context of the sale of goods only) does not need the consent of the counterparty either except where there is a substantial interest in the performance by the original promisor. The trade-off is that the debtor/transferor is not released without the consent of the creditor and remains a guarantor although the transferor may insist that the transferee (the new debtor) performs first (unless otherwise agreed). It is an important departure, likely to be followed transnationally, as it allows each party in principle to transfer its entire position at least under a sales agreement, therefore the whole contract, and is as such a significant pointer to a new trend. To return to the defences in particular, it was already mentioned that in sales, the most important defence against payment is often non-conform delivery.274 It assumes that at least as long as the quality of the delivered goods is not the agreed standard, there is a right for the debtor not to pay or at least to set off repair costs or damages. Under applicable law in most countries, such defences against the assignor usually remain effective against the assignee unless the contract out of which the assigned claims arise in its assignment clause prevents the debtor raising any such defences against assignees,275 which is not common although not unlikely when security transfers were contemplated from the beginning. As a consequence, the internal relationship normally continues to have a strong effect and, in the case of valid (and material) defences, they can be maintained against the assignee whilst the assignor is unlikely to be automatically released upon an assignment without the debtor’s consent. The latter might be able to waive or amend, but may also retain them against both the assignee and assignor. It means that the duties of the assignor in this regard are not normally transferred with the right of payment and s/he is not discharged. 273 Section 2-210 UCC provides for a special regime for assignments of sales receivables (although Article 2 does not generally deal with the sale and transfer of claims but only of goods: see s 2-201 UCC). Except when the assignment materially changes the duties or materially increases the burdens or risks of the other party (the debtor), where section 2-210 does not distinguish between extra burdens of the assignment and the weight of the defences under the existing contract out of which the claims arose), the assignment of claims from sales agreements is allowed and even promoted. The method of assignment of monetary claims is not covered by s 2-210 UCC but has its own regime under Article 9 UCC which assumes that bulk assignments of monetary claims are made for funding purposes and considered security transfers (unless for collection alone) as we have seen. There are differences in approach between s 2-210(2) and (3) and s 9-406(d) and (f) UCC, which go beyond the fact that in Article 2 the transfer of sales contracts’ rights and duties is considered generally, while Article 9 UCC concerns the (security) assignment of monetary claims. Section 9-406 seems even less disposed to accept assignment restrictions on receivables when assigned for security purposes. The reason is that the debtor has the benefit of funding which itself must be funded. Thus, in the US the splitting out of a receivable and its separation from the context out of which it arose seem less problematic under the UCC than under earlier common law, even if the assignment is only partial or limited for security or other purposes or merely conditional: see also Gilmore (n 204) 1077ff. 274 It includes the benefits of the exceptio non adimpleti contractus. This is established in France through case law, see Cour de Cass, 29 June 1881, D.1.33 (1882) and in Germany through ss 404 and 407 BGB, again allowing all defences accruing to the debtor until he becomes aware of the assignment; see also s 9-404 UCC in the US for security assignments. See for England Ord v White, 3 Beav 357 (1884). See for the Netherlands, Art 6.130 and Art 6.145 CC, under which all defences accruing until the notification can be maintained. 275 In the US, s 9-403 UCC especially upholds these contractual waivers for security transfers of claims.

168  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights Still, if there is an extra burden or other detriment as a result of the assignment, or if there is a defence against payment altogether or perhaps against the assignment itself, the question remains whether they are in truth sufficiently material to be taken into account as impediments to the assignment when it must also be asked what the consequences are: do they allow the debtor to ignore the assignment, even upon notification of the assignor, is the assignment invalid and must s/he still pay the latter? It means that in such cases an effective assignment would still need his/her consent or at least cooperation. Again, there may also be the contractual specific defences against the claim. The more modern approach is that a debtor is bound to cooperate if the burden on him is not substantial and it will be argued below in section 1.5.9 that even defences may need curtailment in a modern setting when the debtor, to make giving the credit possible, needs financing that must be funded and that especially receivables should be considered much more like promissory notes under which such extra burdens and defences do not commonly obtain either. It is submitted to be the direction in transnationalisation of the applicable assignment laws. It is a question of liquidity and it is increasingly the underlying idea in all assignments of monetary claims, which is indeed often needed to obtain the funding that made an extension of credit by way of receivables possible in the first place. If the assignment is burdensome for the debtor, the question thus is how burdensome and what must s/he accept? What about the defences in these circumstances? What are the cooperation duties and is there something like a de minimis rule? If so, it is probably an expanding concept and the real question then becomes what the effect on the assignment is taking the foregoing into account. (a) Is the assignment undone or invalid because of extra burdens or risks, or may it be merely ignored by the debtor even upon notification? Whom can s/he safely pay in that situation? (b) Are there extra duties for the assignee to minimise the effects, and (c) can at least the defences be limited in respect of the assignee without necessarily discharging the assignor? It is clear that it depends on the state of the applicable law when it can also be asked whether a debtor, who must reasonably cooperate, is held to more cooperation when the assignee is a bank supporting his/her credit rather than a hedge fund/capital venture organisation or professional debt collector which might be in another position in this regard and may not provide the funding on which the receivable was based.276 276 Cf in the Netherlands also the issue before the Supreme Court in a prejudicial opinion requested by the Court in Amsterdam concerning a transfer of loan agreements between a bank and its clients to a non-bank under Article 36 of the Dutch General Banking Conditions which implies consent given in advance in the case of a transfer of (part of) the banking business. The issue was here presented in terms of transferability of the loans and the cooperation duties of the debtors rather than in terms of the continuing obligations of the transferor bank or transferee. Transfers of claims from bank loans to a non-bank were not considered impeded by the nature of these loans. The duties of care of the assignor bank were not diminished, however, and are not transferred to the nonbank; the defences of debtors are not impaired either (Art 6.145 CC). Whether the transferee/assignee institution has some further duties of its own was not decided in this case but may under Dutch law be determined by notions of good faith, in particular when debtors are consumers, see further D Busch and LP Buitelaar, ‘Overdracht van oninbare vorderingen na Promotoria’ [Transfer of Non-performing Loans after Promotoria], WPNR 7340, 695 (2021). The issue is usually one of extra burdens (eg, imposing sharper conditions especially if the loan agreement so allows or under renegotiation rights and duties under law). What is reasonable and makes sense in the circumstances given relationship thinking? In common law countries, there may be fiduciary duties in situations of dependency. It may be considered in this connection also that on 16 December 16 2020 proposed to facilitate the transfer of non-performing loans, Com (2020) 822 final, and submitted an action plan. One aspect is that the position of debtors vis a vis the lender cannot be (further) impaired as a consequence of the transfer/assignment to a non-bank or bad bank. For securitisation, the EU had proposed a similar approach to non-performing exposures on 24 July 2020 in its Capital Market Recovery Package, but so far it does not resolve the issue what extra burdens debtors must accept. Is the issue of their (depending) default itself relevant? Is the situation of a transfer of non-performing loans different from a situation of a security transfer of a loan portfolio to ensure its funding or to remove loan assets in a securitisation? What about cooperation duties?

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 169 But again, within reason, the debtor must increasingly accept the inconvenience of assignments of rights others have against him, especially in the case of monetary claims as the ordinary flow of business and extending credit requires it and his/her participation in these flows assumes flexibility which may result in more stringent cooperation duties. It means that only if unreasonable burdens or risks result may the modern debtor be able to ignore the assignment or depend on the continuing obligations and liability of the assignor.277 Professional debtors might have the accept more. The UCC requires these burdens to be material as we have seen. Also, the notification will have to be handled and must be considered in this connection. In some countries, it became a prerequisite or formal requirement for a valid assignment as we have seen above in section 1.5.2. But in all cases notification is necessary if it is the intention of the assignor and assignee that henceforth the debtor pays the assignee. Obviously, that must normally be the objective, although especially in security assignments, the assignor may not want debtors to know that he needs financing and the assignee may in that case be willing to let the assignor collect the receivables, the proceeds of which will then be held by the assignor for the assignee under a collection agreement. It raises issues of what a proper notification is and any search duties of the debtor as to its appropriateness and legality and whether he has here perhaps extra duties or may accept the first notice if regular on its face, see the discussion in section 1.5.10 below.278 The more modern tendency, best expressed in the UCC, is to favour at least the separation of the receivable or other monetary claims from their context (contract or other) and make them freely assignable, whilst inherent limitations derived from the in personam nature of each claim or the internal or obligatory relationship are deemphasised and reasonable extra burdens deriving from the assignment itself must be accepted. The alternative for the creditor is to have the debtor sign a promissory note; but it is cumbersome in an increasingly paperless society. The modern development is then to make receivables ever more operating like promissory notes to promote their liquidity and use in funding operations. The essence is that the assignee may obtain a stronger position than the assignor had when it comes to payment, see further section 1.5.9 below, but the debtor may also gain some advantages in terms of a liberating payment, see section 1.5.10 below.

1.5.5.  The Status of Closely Related Rights and Duties and the Impact of Contractual Restrictions on the Assignment. Newer Needs and Developments. The Effects of Amendments of the Underlying Contract There arises in assignments the question whether and to what extent ancillary or accessory rights and closely related duties automatically transfer with the assigned claim and what that means in terms of effect. Again, the basic question is in how far a claim can be separated from its context and separately assigned, which raises in particular the issue of the connected rights and obligations,

277 Unlike the UCC in the US, Dutch law has not relented, see Art 6. 145 CC except for promissory notes, Art 6.146, which shows that it remains reluctant to treat monetary claims similarly and is not aware of the challenge for purely monetary claims. 278 As already mentioned, it also raises important issues in civil law as to the title or beneficial rights in any collections if alternatively, the assignor continues to collect in his own name. Naturally, this is relevant especially if the collecting assignor goes bankrupt, see text at n 235 above.

170  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights especially the latter. As we have seen, a receivable normally may be severed from the underlying (often sales) agreement out of which it arises. So may claims for damages. Even so, this segregation may not be absolute. In the previous section, the question of the extra burdens and of the defences against assignee’s requests for payment deriving from the underlying relationship and the cooperation duties were already mentioned. Accessory rights and closely connected duties may further affect the picture. Stepping back once more, the most obvious example of an intangible asset that may be assigned is a contractual right. In sales, this means especially the right of the buyer to receive the goods and of the seller to receive the payment (resulting in a receivable). We have seen that in modern law, these rights can be transferred through assignment, receivables being the most common and likely assets to be so transferred because of their liquidity and easier separation possibility, although the debtor will still be concerned about his defines and extra risks and burdens and a full release upon payment to the assignee. The transfer of rights to delivery, on the other hand, must often be balanced by concern about the connected payment obligation. Will the transferee/assignee pay? There may be other connected duties in terms of timely conform delivery or transportation and insurance arrangements. In bilateral contracts more generally, as in sales and exchanges, rights are thus often balanced by contractual obligations or duties, resulting in an interwoven contractual relationship in which these rights and benefits may not stand sufficiently alone to be assigned separately or the duties to be ignored. It then concerns a package and this affects more fundamentally the issue and extent of segregation and therefore the scope and impact of an assignment, again especially relevant for monetary claims and in sales for receivables, assuming whole contractual positions cannot (yet) be transferred, see the discussion in section 1.5.4 above. In fact, a sufficiently close relationship of this nature between the transferred right and supporting rights and especially duties may suggest an automatic transfer of closely related rights and duties together with the assigned right, if inextricably connected, again the notion of the package, perhaps easier to understand for closely connected rights like supporting security interests,279 which in any event as rights may be transferable separately at the same time as and together with the assignment of the claim itself, but the automatic transfer makes it simpler. Closely connected duties on the other hand present much greater problems. They often represent a precondition for the enjoyment of the right itself, like a duty to make an advance payment before a right may be enjoyed,280 but may also concern the duty to release the debtor upon payment (to the assignee) and then raises the question in how far the assignor is discharged at 279 Closely connected rights (such as security interests) may transfer more easily as an integral part of the claim. See for the accessory nature of the security interests more particularly, Vol 5, n 28. The issue of accessory right and its meaning has received attention in civil law scholarship in Germany, Switzerland, the Netherlands, Belgium and France, but is less of a feature of common law scholarship, see for Germany W Mincke, Die Akzessorietaet des Pfandrechts (Berlin, 1987), E Eberhard, Die Forderungsgebundenheit der Sicherungsrechte (Berlin 1993), C Schmidt, Die sogenante Akzessorietaet der Burgschaft (Berlin, 2001), and S Heinemeyer, Der Grundsatz der Akzessorietaet bei Kreditsicherungsrechte (Berlin, 2017); for Switzerland C Schoebi, Die Akzessorietaet der Nebenrechte von Forderungen (Zurich, 1990); for the Netherlands TE Booms, Aanvulling van Subjective Rechten (Nijmegen, 2019); for Belgium, K Swinnen, Accessoriteit in het vermogensrecht (Brussels, 2014): for France M Cottet, Essai critique sur la theorie de accessoire en droit prive (Paris, 2013). 280 Thus, the rights to mineral extraction subject to payments of royalties have been found assignable without consent while imposing the payment duty in respect of royalties on the assignee: see the English line of cases on the subject starting with Aspden v Seddon (1876) 1 Ex D 496, see further also Tito v Waddell [1977] Ch 106, 302. But it raises the issue whether the assignor is fully discharged in the process and it is likely that the debtor retains residual recourse against the original creditor unless explicitly released. In supplies, there may be the duty to deliver in a certain place or of insurance and issues of time and place of payment.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 171 the same time. Another may be the duty to arbitrate in the case of a dispute between debtor and assignee. In the case of an assignment of a right to the delivery of goods, again, there may be timely and conform delivery requirements, insurance and transportation duties and very likely also the duty to pay on the appointed day.281 Increasingly, the assignee might have to accept the automatic transfer of the resulting preconditions and the intrinsic or connected duties in this regard – it again suggests a transfer of entire contractual positions, but it may not be good enough for the original counterparty or seller (the debtor in the delivery duty) who may have reason to distrust an assignee he did not choose or approve. It could still impede the assignment as far as the debtor is concerned who might then be able to ignore it or still hold the assignor responsible for any default of the assignee under these related duties, even if they transfer automatically with the claim. In other words, the connectedness and transfer of the duty does not mean an automatic discharge of the assignor and a forced acceptance by the debtor. Thus, whilst extra burdens or defences may still be practical impediments to the assignment of receivables even though no longer favoured for monetary claims, so may be related duties when automatically transferred with the right as a debtor with a justified interest might still object and be protected, which may at the same time impact on the effectiveness of the assignment and any release of the assignor, one way out being that both the assignor and the assignee become liable for performance of these duties. That may also concern the duty fully to release the debtor upon payment to the assignee. Again, delivery rights, which are in principle assignable, may be subject to duties in terms of delivery or transportation, insurance and payment, as the case may be when the assignor may retain liability. That may still mean a substantial impediment to the liquidity of such claims and their assignment and deter both assignors and assignees. It was earlier submitted that all income, user and enjoyment rights tend towards proprietary status282 so that they move with the underlying assets to promote their liquidity, but they may become less attractive to a buyer knowing of related duties, who may need an extra discount. Contractual assignment restrictions are commonly meant to avoid any argument about extra burdens, defences ad connected duties upon an assignment, but their validity and effect present increasingly further issues which again may be overcome by transnationalisation of the rules applicable to international bulk assignments, especially of monetary claims. It may be useful to underline in this connection that contractual restrictions on the transfer of chattels are normally considered not to have in rem or third-party effect and cannot be opposed to buyers who did not know of them; even if they did it might still be an issue since asset liquidity may be considered a matter of public order at least for physical assets,283 and there is in any event no investigation duty; in ordinary buyers the good faith is assumed. Different treatment in this regard in the 281 It may be noted in this connection that the Eurobond practice expanded the realm of connected duties considerably and commonly incorporates a whole legal framework in the bond that is meant to transfer with it, but, importantly, it is limited to what is provided in the note itself and written on it. The law made applicable by the parties, usually that of England or New York, does not support this—it is against the notion of negotiable instruments, which are supposed to express in the simplest way the asset side of a monetary claim—but international market practice accepts it, an example of a situation where the choice of the applicable law is irrelevant in the proprietary status as its effects are not at the free disposition of the parties. Rather, it signifies transnationalisation of the objectively applicable law and it should then be considered whether, in the international marketplace under its practices, such a transnationalisation is also happening for international bulk assignments, especially of monetary claims, see further the discussion in ss 1.9.7/8 below. 282 See s 1.1.4 above. 283 In France, however, covenants that restrict their resale have long been upheld in principle, see Cour de Cass, 20 April 1858, D.1.154 (1858) where there is accordingly a need for bona fides in the transferee to retrieve the situation. But it still requires that the original seller, buyer or a third party has a justified interest and the restriction must be limited in time, see Cour de Cass 24 January 1899, D.1.535 (1900); 23 March 1903, D.1.337 (1903); and

172  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights case of intangible claims, which remains common, may still be considered the consequence of them not being considered assets proper. It may also be connected with civil law not according bona fide purchaser protection to transferees of intangible claims, which may be considered a related issue. In modern law, there may now be a legitimate question how far these assignment restriction clauses remain truly enforceable and against whom: see again sections 2-210 and 9-406 UCC in the US.284 To repeat, it is a question of liquidity, especially of monetary claims and their use in funding to make the credit to the debtor possible. In the latter UCC Section, the policy is indeed that any credit extended needs financing that may require the resulting receivable to be given as security, which therefore should not be unreasonably objected to by the debtor as beneficiary of the credit. An assignment prohibition in the contract may not then amount to much and may in any event not impede the assignment. In other words, there is no longer third-party effect, important especially in a later bankruptcy of the assignor. To the extent bona fides is required, an investigation duty of the assignee in the underlying contracts is increasingly eliminated by statutory intervention. S/he only needs to worry about more senior assignees of the same portfolio. That is the modern trend and the older approach is under pressure everywhere especially in financial dealings. Even if still enforceable in principle, again the precise consequence of a contractual assignment prohibition would still have to be ascertained. It may merely be a damages action for the debtor against the assignor for breach, which may not amount to much. The courts in the US have been particularly impatient with the proprietary effect of contractual assignment restrictions.285 However, German law in section 399 BGB and Dutch law, even in

18 March 1903, D.1.126 (1905). The defendant need not have had knowledge of the original covenant before acquiring the asset, but in the case of chattels bona fides means that a subsequent transferee is considered full owner and need not return the asset. In this respect s 137 BGB in Germany and Art 3.83(3) of the new Dutch CC are also clear. 284 To repeat, in the US under s 2-210(2) UCC, all rights under a sales contract are assignable except where the assignment materially changes the duty of the other party or increases materially the burden or risk imposed on him. Section 2-210(4) UCC further presumes that a non-assignability clause only concerns the delegation of duties and not the assignment of rights except where the circumstances indicate otherwise. In any event, a right to damages for breach of the whole sales contract or a right arising out of the assignor’s due performance of his entire obligation under a sale of goods agreement is always assignable despite agreement otherwise (s 2-210(2) UCC old). Section 9-406 (d) UCC is even more liberal when receivables are assigned for security purposes, cf also n 273 above. In England, an assignment prohibition in respect of the ‘contract’ as a whole is still upheld and considered to affect the obligations as well as the rights, not only in respect of future performance under it, but also in respect of payments and accrued rights of action thereunder, Linden Gardens Trust Ltd v Lenesta Sludge Disposal Ltd and Ors; St Martin’s Property Corporation Ltd and Anor v Sir Robert McAlpine & Sons Ltd [1993] 2 All ER 417 (1993). In fact, it was held that liquidity was not the issue and that there was no need for a market in choses in action. This may be considered a remarkable and wholly out-of-date finding. The Court of Appeal (per Kerr J) had allowed a split and ignored the prohibition in respect of payments and rights of action. That seems to be greatly more sensible and more reflective of modern needs and perceptions. The English Business Contract Terms (Assignment of Receivables) Regulation 2017 now also take a different view. See for more recent case law also Don King Productions v Warren [1999] 2 All ER 218 (CA) under which it was held that at least in an equitable assignment there could still be a declaration of trust in favour of the assignee regardless of the assignment prohibition. It begs the question whether the assignee has a search duty. In Canada the position is taken that the assignment is not invalid in the case of an assignment restriction but the assignee can still not directly claim from the account debtor: see Rodaro v Royal Bank of Canada [2000] [QL] OJ 272. 285 Although the debtor may thus often ignore the assignment in the case of a contractual prohibition in the underlying contract out of which the claim arises, there may be a complication if the debtor benefitting from a contractual assignment prohibition pays the assignee, which would seem to validate the assignment and perfect the transfer of the claim from assignor to assignee. Any further assignment by the assignee (or assignor) may then also free of the assignment restriction if the debtor has no demonstrable further interest in the limitation.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 173 its new Article 3.83(2) CC, still supported the older attitude286 and contractual limitations on the assignment in these countries commonly still have in rem or third party effect and assignees cannot even invoke their bona fides in order for the assignment to be valid thus not even in situations in which the assignee could not have been aware of the restriction.287 Again, one sees generally pressure for change increasingly reflected in more up to date statutory law, also in these countries. Another question is whether the debtor and assignor may still change the underlying agreement after an assignment of a claim arising out of it so as potentially to deprive the assignee of a benefit. In the case of a security assignment in the US, section 9-405 UCC makes such modifications effective if made in good faith and in accordance with reasonable commercial standards. The assignee will receive any benefit; if harmed s/he may still have recourse against the assignor under the assignment agreement. This is a radical approach, particularly relevant in the case

Would it make a difference whether the transfer limitation is an outright prohibition of an assignment or requires the debtor’s consent only? The power to transfer is in the latter case not curtailed and upon an unauthorised assignment there may be recourse only against the assignor but not against a bona fide assignee. A further question is whether under such clauses the consent can be given conditionally and whether such a condition has automatic returning effect if breached. The unauthorised assignment, where in principle valid, may still void the underlying contract for fundamental breach. If the claim arises out of that contract, it may then be asked whether the assignment is still meaningful. These issues remained little discussed, but see earlier GC Grismore, ‘Effect of a Restriction on Assignment in a Contract’, (1933) 31 Michigan Law Review 299. 286 Confirmed in the Netherlands by HR, 17 January 2003, NJ 281 (2004), although somewhat weakened in HR March 21 2014, NJ 167 (2015). Under Dutch law, the contractual assignment restriction does not go to the issue of the disposition right of the assignor as it may be for chattels, but is simply considered a condition of the claim itself and therefore contractual but parties could still indicate that they meant the restriction to be proprietary which they commonly started to do. Draft legislation now aims at making restrictions to the pledging of receivables ineffective in financial transactions (amendment Art 3:83 (2) CC). 287 Unless misled because the restriction was, for example, not contained in the documentation on which the assignee relied: see Art 3.36 CC and for Germany s 405 BGB. In 1998, German law started to relent and now denies proprietary effect to assignment restriction clauses between merchants excepting consumer debtors and bank loans, see s 354a HGB. The general rule remains nevertheless that the restriction is effective and may be either inherent in the nature of the claim or be negotiated (s 399 BGB); there may be a difference in treatment. An example of the former is a claim of a company against its unpaid-up shareholders. In that case, it was the abstract nature of a transfer of title in German which did not allow the debtor to go behind the assignment and he may upon notification no longer be allowed to pay the assignor: see RGH, 23 September 1921, RGHZ 102, 385. The third-party impact of the implied restriction is thus lost upon assignment. As it was never meant to protect the debtor in the first place, it could in any event hardly be invoked by him. In the case of a contractual restriction (to which he was a party), the debtor could traditionally ignore the assignment as the restriction is believed a debtor’s right, not inherent in the claim but rather an integral part of it: see BGH, 14 October 1963, BGHZ 40, 156 (1963). It is even said that in such cases the assignment was ineffective per se so that the assignee has nothing at all but one might also still argue that the breach only gives the debtor a defence, which he may be able to maintain against the assignee. As a consequence, this limitation is then likely to work against third parties, therefore in rem but only when invoked. It is nevertheless exceptional that a mere contractual term can have such an effect against third parties. Even if contractual assignment restrictions may be opposed in principle to unsuspecting assignees, it is not immediately clear to whose estate the claim belongs upon a forbidden assignment if the assignor goes bankrupt in the meantime: can his trustee invoke the invalidity of the assignment vis-à-vis the assignee or can only the debtor do so? Would the situation be different if the limitation or prohibition of the transfer were inherent in the claim and would the abstract or causal system of title transfer have any relevance in this respect in the relationship between assignor and assignee as suggested by the first case cited above?

174  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights of partial assignments, as in security assignments, therefore in situations when the contract at least partially continues between the original parties and only certain rights, the receivables, are normally cut out and assigned for special purposes only, while the assignor must continue to perform the rest of the agreement. It may not have any wider application outside the area of security transfers, although again it is indicative of more modern thinking in this area.288

1.5.6.  The Assignability of Future Claims. When is a Claim Future? The Effect on Assignability The issue of inherent or statutory lack of assignability arises in particular in respect of future claims where English (in equity) and German law seem to be more liberal and French and even new Dutch law more restrictive. Future claims are here defined as those not yet existing, rather than claims that do already exist but have a later maturity date. That is relevant especially in the case of an assignment of bank loans, which may include future principal and interest payments under them and their inclusion should not then be a problem. These claims exist, although payable in the future. A receivable, on the other hand, is a future claim in respect of payment for goods not yet sold when the debtor (the future buyer) is also unlikely to be known. The question of transferability is one of policy, arising in particular when receivables are replacement assets upon a sale of goods under an extended reservation of title or in a floating charge. At least the origin is known in such cases, although not yet the debtor. Common barriers remain identification, documentation, and notification or registration requirements, wherever obtaining. They are obviously more difficult to meet if the debtor is in the future and not yet identified. However, in terms of identification, it might still be in the origin of the claim rather than in the existence of the debtor. In practice, it raises more in particular the possibility of bulk assignments but also goes into the ranking in the case of security assignments. Can there be a ranking before the individual debtor is known or can be identified? Is the crucial date in such cases the one of the assignment or of the emergence of the debtor or any other moment? Roman law had been liberal (in those limited instances where an assignment was possible)—probably ever since a whole (future) inheritance could be assigned, although there remained much controversy on this point in the ius commune, see section 1.5.2 above. Eventually, the discussion became connected with the need to give notice to the debtor, which was increasingly accepted as a constitutive requirement of an assignment,289 288 It was nevertheless held sheer madness by Professor Gilmore, n 204 above, at 1085, but at least for any benefit a comparison may be usefully made with the position of a third-party beneficiary under a contract upon notice of the benefit, which benefit cannot then normally be withdrawn and even less so if it has been accepted, assuming that in common law jurisdictions there was some consideration. Indeed, a notified benefit is normally not thought to allow for any change by the original parties without consent of the beneficiary. This may be all the more reasonable because the debtor is aware of the beneficiary (assignee)’s interest. On the other hand, the beneficiary has no absolute veto over any amendments in the underlying agreement and reasonable cooperation must be expected as long as there is no clear detriment. More difficult may be the situation when duties are also imposed either together or without a benefit. A similar situation may arise when in an assignment there is some assignee involvement or acquiescence, which may be explained as acceptance of the amendment: see also the discussion in s 1.5.7 below. If he now must also accept changes dictated by reasonable commercial standards even if detrimental, it would suggest that a lender receiving a collection facility as a third-party beneficiary may be in a better position than a lender receiving a security assignment of the same receivables. It is in fact entirely possible to organise a transfer of a partial benefit under a contract in this manner and avoid any restrictions or limitations inherent in assignments. 289 See n 245 above.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 175 unavoidably creating further problems for the assignability of future claims when the debtor might not yet be known. Another issue was whether each assignment still needed individual documentation, again a problem if the debtor is not yet known, and then an issue also for bulk assignments, more so if also covering future claims. German law, in abandoning the requirement of notification and documentation in the nineteenth century,290 freed itself from these constraints as we have seen; the only modern German requirement in this connection is that the claim be identifiable at the time of the real agreement291 or dingliche Einigung, which agreement in the case of intangibles is implied and means transfer of legal possession at the same time, therefore at the time of the assignment agreement. It still leaves, however, the question what ‘identifiable’ means. It concerns the Bestimmtheitsprinzip and the question whether replacement assets may be included and how much can be left to a reasonable description in the assignment agreement. It was already mentioned that the most normal situation in which this type of assignment of future claims arises is under an extended reservation of title and in a floating charge292 when the issue of a bulk assignment (Globalzession) is most likely also to arise. In an (extended) reservation of title, it means that all receivables connected with a resale of goods in which title is reserved by the supplier are assigned to the latter at the time the reservation of title is made regardless of who the ultimate debtors will be and of the exact amount of the claims against them. German law proves indifferent to these two uncertainties in such situations293 and the reference to the goods sold under a reservation of title and to all claims deriving therefrom upon a resale are considered sufficient identification of the goods and claims in Germany. The rank dates from the day of the transfer. There is in such cases adequate legal reason or Rechtsgrund for the transfer or assignment which are immediately complete,294 although for goods (therefore replacement physical assets) technically still subject to an anticipated transfer constituto possessorio or a constructive delivery. As we have seen above in section 1.5.2, there is no such formal requirement for assignments in Germany which further facilitates the bulk assignment including future claims as replacement assets. In a floating charge German style,295 it means that all future goods and receivables may automatically be included in the charge. Beyond the identification with reference to origin, also in Germany, claims must still be sufficiently identified with respect to the relationship out of which they are to arise. A more specific later assignment of them to a bank, even at the time of their actual emergence, does not, in that case, take precedence. That would at least appear to be the result under section 91 of the 1999 German Insolvency Act.296 290 See n 249 above. 291 See also BGH, 9 June 1960, BGHZ 32, 367 (1960). 292 See Vol 5, ss 1.5.4 and 2.2.4 293 See BGH, 25 October 1952, BGHZ 7, 365 (1952). 294 See K Larenz, Schuldrecht, Allgemeiner Teil, 14th edn (Munich, 1987), para 34 III. 295 The floating charge has no base in statutory or case law in Germany and must be gathered together on the basis of contractual clauses. In Germany, the situation compares closely to the extended reservation of title or verlängerter and erweiterter Eigentumsvorbehalt situation. There are in this connection the so-called Raumsicherungsvertrag, which allows for bulk transfers of assets within a certain space, the Verarbeitungsklausel, which allows their conversion into other products in which the charge is then contractually extended, and the Vorausabtretungsklausel, which allows for an anticipated assignment of all future claims from sales of the assets. Although s 91 of the German Bankruptcy Act of 1999 may interfere with the transfer of future or replacement assets in this connection, it would appear (at least in the case of receivables) to apply only to assets that remain absolutely future at the time of the intervening bankruptcy of the transferee/debtor and cannot be otherwise identified, see Vol 5, s 1.4.1. 296 See in the Netherlands Article 35(2) of its Bankruptcy Act, cf also Art 5(b) of the UNIDROIT Factoring Convention 1988, which also assumes the existence of the receivables before the transfer can be effective, but it is explicitly stated that there is no need for any new act of transfer. It may still depend, however, on the

176  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights The English approach under equitable assignments, which do not require notification as a constitutive requirement nor a document, is not dissimilar,297 yet there is no full clarity. The issue is believed more generally to arise in respect of after-acquired property, future receivables, a future judgment debt, payments expected but not yet received, shares in companies not yet in existence, an inheritance even from a living person, and expectancies dependent on a person exercising a power of appointment, a benefice to which someone may be appointed, the proceeds of an indemnity or insurance policy, moneys arising from contracts not yet entered into or from loans which he yet to be made. They can be transferred in equity but in principle only under a contract to assign. The basic idea is here also that such an assignment becomes effective only upon the claim coming into existence and being acquired by the assignor. But when that is so, may still be in doubt and the date may be different from the original assignment agreement. Future payments under an existing contract such as rental income may be assigned, however, so may be receivables under existing contracts even if contingent upon performance of certain obligations by the assignor whilst the contract might still be prematurely terminated for breach. All moneys outstanding to the credit of an assignor with a certain bank as well as proceeds from existing letters of credit are also assignable, but the assignment of future dividends may be more difficult as a company is under no obligation to pay any.298 English law also allows the assignment of all book debts due and owing or becoming due and owing during the continuation of a financing agreement. Yet, when future book debts are assigned, the subject matter of the assignment is technically considered capable of being identified only as and when the book debts come into existence, whether the description is restricted to a particular business or not. As in Germany, the later emergence of the claim does not suspend the assignment agreement in respect of it and the assignment is perfectly valid and effective as at the assignment date, but the proprietary right of the assignee (and any priority that comes with it in the case of a fixed charge) is in principle only established as at the day the claim materialises. If the contingency upon which a payment depends is essentially in the control of the assignee (for example his own performance) there is no problem with the assignment.299 Importantly, if there is no control, it is still possible to assign a right to future income from a sufficiently specific source.300 It suggests that receivables as replacement assets can be effectively assigned as of the date of the assignment agreement. But if there is not even such an identifiable source, the claim becomes wholly future and there is then only a contract to assign, which, if consideration is given, is perfectly valid in equity but, again, the transfer under it only takes place as of the moment the claim arises or control is established.301 This may therefore still present problems, especially in an intervening bankruptcy of the assignor. However, equity, which regards as done what ought to be done, may in such cases still

applicable lex fori concursus what the effect is in the case of an intervening bankruptcy of the assignor. Even outside bankruptcy the question of ranking of the security interest may arise. 297 Cf the interesting case of Tailby v Official Receiver (1888) 13 AC 523 where the House of Lords followed Holroyd v Marshall (1862) 10 HL Cas 191 in which it had dealt with similar questions on the transfer of future chattels. 298 See also Guest (n 30) 6ff. 299 Hughes v Pump House Hotel Co Ltd [1902] 2 KB 190. 300 See Shepherd v Commission of Taxation [1966] ALR 969. 301 The issue of crystallisation under a floating charge cut through this in terms of priority, see n 266 above, but does not affect the charge itself.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 177 come to the rescue and imply such a transfer (as an equitable assignment) without further steps. It is then considered automatic and an intervening bankruptcy of the assignor may therefore have no impeding effect on the transfer and rank of any charge.302 It might be remembered in this connection that the bankruptcy jurisdiction itself is equitable. As mentioned before, the situation in the US is not the same everywhere, and in some States the policy of the courts appears more restrictive than in others, probably on the view that no one should commit too far out and mortgage the future or defeat the reasonable expectations for recovery of future creditors. However, the UCC under its Article 9, adopted in all States, accepts for security assignments any description of the collateral, whether or not it is specific, as long as it reasonably identifies what it describes: section 9-108 UCC. It was already mentioned that the ethos of the Code (section 9-204 UCC) is that for security transfers all future assets (after acquired property except consumer goods and tort claims) can be given for all future debt subject to a form of publication (in the case of claims if they account for a substantial part of the assignor’s portfolio of claims) through the filing of a finance statement and one may therefore assume a liberal interpretation of any requirement of ‘existence’ of the claims. As regards notification, which is not a constitutive requirement under the UCC, it must reasonably identify the rights assigned in order for the debtor to make a liberating payment pursuant to it, section 9-406 UCC, again without saying what this identification requires. The same applies to any security filings. As already pointed out before also, in the US, all transfers of receivables and similar claims are now covered by Article 9 UCC, whether or not a secured transaction is intended unless the assignment was for collection purposes only or clearly an incidental act. To repeat, all bulk assignments of portfolios of debt are here assumed to be for security purposes to support funding, whether in the form of a sale or a security. On the other hand, French and Dutch law seem more restrictive and require on the whole that the legal relationship out of which the claim arises must exist in order to make it assignable, although Dutch law under its new Code appears to leave some more room if the assignment is an outright transfer of title (Article 3.97 CC) but not in the case of an assignment for the purposes of security only (Article 3.239 CC).303 It was already shown that the situation under its new Code is seriously fraught and has required multiple interventions by the Supreme Court to make it work

302 Cf Chitty on Contracts 30th edn (London, 2008), paras 20-028/20-032. The assignee’s interest is therefore more than a mere matter of contract, even before the claim comes into existence. 303 Under pre-1992 law, this was a general requirement for all assignments, HR, 24 October 1980 [1981] NJ 265 and 25 March 1988 [1989] NJ 200. For outright transfers of claims (but not for security transfers), Arts 3.84(2) and 3.97 CC now suggest greater flexibility by merely requiring that they are identifiable. At least the debtor must be known, a requirement reinforced by the need for notification to make the assignment valid. In this system it is conceivable that all claims against a particular debtor, whether they are present or future, may be assignable, which assignment would under the general rules of assignments relate back to the date of the notification and not to the date of the emergence of the claim. This possibility could be limited, however, to all claims arising out of certain activities or derived from certain identified sources or any balance in a current account with a particular bank. The requirement that the legal relationship out of which the claims arise is already in existence need not then be fulfilled. It concerns a potential debtor only, which in cases where the contract out of which the claims arise is not yet in existence, seems not then to impede the notification possibility itself. The regime may be stricter for security transfers, which also impedes the notification requirement. In that case, exceptionally, registration of the contract is possible as an alternative to notification but may still present identification problems. As already mentioned, the Dutch new Code was amended in 2004 allowing alternatively a system of (ordinary) assignment without notification but still requiring registration, from which the priority then derives.

178  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights in a fashion. Since the extended reservation of title was eliminated and floating charges are barely possible, the transfer of future claims may still be less relevant.304 In France, the restriction on the assignment of absolutely future claims has existed ever since the financial troubles of the writer Dumas and his attempt to assign his future copyright of unwritten books and plays to prevent his bankruptcy. These rights fell into his bankrupt estate regardless of the assignment for want of a debtor, which meant for want of a contract out of which any benefit could have arisen.305 Conversely, it meant that a theatre agreeing to assign future income even out of plays that did not yet exist or publishers agreeing to assign revenue out of books that had not yet been written could in this way facilitate the transfer of future income. It was not considered material in this connection that the benefit might not materialise.306 In France, where notification is traditionally required for the assignment to be valid (except under modern law in financing schemes with banks),307 this approach stands to reason and is then very much connected with the debtor being known. The introduction of the floating charge in France in 2005 and of the fiducie in 2007 followed by the fiduciesûreté in 2009 lifted the restrictions on the transfer of future receivables in the context of these newer facilities. The implementation of the EU Collateral Directive did the same in the area in which it is operative. Earlier, the French law of securitisation (titrisation) of 1988 (as amended)308 had taken a similar approach but still requires a document identifying the transferred claims, usually bank loans but it could describe a class of claims. It may be seen that ultimately the question of the assignability of future claims from a practical point of view mainly concerns the question into whose estate they fall if the assignor goes bankrupt before payment, first as between him and the assignee, but then also as between various assignees, which raises also the issue of priority. Thus, a reservation of title by a seller extended into the receivables may compete with a subsequent factoring of the receivables to a bank, even if the receivables emerged later. It raises the question of retroactivity (or not) of their inclusion in the reservation of title. German law may here go further than English law. There is also the impact of the notification in countries that still require it for the validity of the assignment, which is then likely to depend on the debtor being known at the time of the assignment. It was already noted that countries with such notification requirements, such as France and the Netherlands, here have a further impediment to the assignment of absolutely future claims unless special statutory arrangements exist, which are now increasingly created in finance as we have seen. Documentation requirements in France and the Netherlands are further impediments as also mentioned. They should be abandoned and there is no room for them in the transnationalisation of the applicable law.

1.5.7.  Assignment, Novation, Amendment, Subrogation, Subcontracting, and Sub-participation The use of the ownership concept to achieve a transfer of the active side of an agreement or the rights under it implies a creditor substitution under the original in personam relationship without 304 See ss 1.2.1 and 1.2.2 above. 305 See Court of Appeal Paris, 31 January 1854, D.2.179 (1855). 306 See also Court of Appeal Paris, 27 November 1854, D.2.253 (1856). 307 See for the Loi Dailly and its aftermath n 253 above. There is still the requirement of a document identifying the claims which remains a check on the inclusion of future ones. 308 See Vol 5, s 1.3.6.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 179 the debtor’s consent. The result is that to that extent the contractual relationship continues in force with another party or, to put it differently, that the debtor’s contractual obligation is directed towards a new creditor without any other change in the contract, while the former creditor or assignor normally remains the beneficiary of all other claims under the contract and liable for any duties thereunder, as guarantor likely even for those that are so closely related to the assigned rights that they transfer with them, although the assignor might still be able to insist in such cases that the assignee perform first. In that case the assignor becomes merely a surety in respect of the performance of these obligations as we have seen. If the claim is secured by the debtor (on the latter’s or somebody else’s assets), this arrangement is likely to remain undisturbed and the benefit of the security will in that case accrue to the new creditor/assignee, at least if there was a full assignment and not merely a security or conditional one. Creditor substitution nevertheless means a fundamental change in the underlying legal relationship in terms of the counterparty (although not in terms of the applicable contractual, tort, or unjust enrichment rules), but can all the same be achieved without involvement of the debtor, in the example of a sales receivable, therefore, without consent of the buyer/payor of the price or debtor under the claim. Again, it is the consequence of rights being treated as ordinary assets. As no consent is required, this substitution is not normally perceived as an amendment of the contract either. To repeat, it all assumes that there are no material extra burdens resulting for the debtor or inroads in major defences and the contract is not otherwise fundamentally changed by the assignment. There being no formal change in the underlying relationship (except for creditor substitution in the identified claim), the extra burdens and complications could only be the result of the assignment itself. It follows that in debtor substitution and in those cases where creditor substitution may be more difficult, the way of transferring the position of the assignor involves a degree of consent or acquiescence of the debtor in the underlying agreement for the assignment to be effective, because (a) the debtor retains an interest in the person of his creditor (especially likely in the case of him supplying personal services); (b) there result in practice material extra burdens, or loss of material defences for the debtor as a consequence of the assignment; or (c) the whole contract is being transferred. The effect of this consent or acquiescence in such cases is itself troublesome. Does it mean a tripartite agreement introducing a new party and releasing the old one? That could be novation. A novation is a more circumstantial transaction as it terminates the earlier agreement in whole or in part and puts a new agreement with the new party (either as debtor or sometimes as creditor) in its place. The old contract and its supporting or accessory secured interests would lapse or be split up, as well as all defences thereunder (if not settled on that occasion) and any security interests supporting either party’s obligations must be renegotiated if they are meant to continue in favour of the new creditor although the original ranking will still be lost. Novation may be unattractive in these circumstances and has therefore become uncommon in civil law. New Dutch law no longer specifically deals with it at all (but see Articles 1449ff old CC, which may retain residual importance). This novation may mean no more than a (partial) substitution of one of the parties with a release of the substituted one, but it may also vary substantive terms of the agreement at the same time. As an alternative, it is conceivable that the debtor’s consent, for example to perform a personal service for another party, leads to no more than an amendment of the old contract allowing substitution of the old creditor. Its supporting arrangements may then remain in place, even though the old agreement may be changed at the same time to allow for the new situation, for example as regards the place where the service or payment will be performed (now at the place of the new creditor or assignee). Thus, it seems that creditor or even debtor substitution

180  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights with consent need not always be novation but can lead to simple amendment of the contract between the original parties, allowing a new party into some of the agreement309 or to which this party as assignee becomes a third-party beneficiary for the rights and third-party debtor for the connected obligations upon his acceptance. Even then, the question could still arise whether the consent by way of amendment affects the defences of the debtor. It will often be a matter of interpretation on the basis of the circumstances—taking into account any implicit changes in the rights or duties of the parties and any explicit or (more likely) implicit waivers—whether consent of the counterparty leads to: (a) a mere creditor or debtor substitution in some parts of the contract; (b) a more fundamental change and amendment of the underlying contract (and what that means in terms of defences and supporting rights) especially in the case of some more explicit consent of the counterparty; (c) an attempt at creating a third party beneficiary or debtor structure, or (d) a novation (when the old defences and supporting rights are lost and the ranking of any supporting security interest also). Another question in this connection may be whether the debtor’s consent to creditor substitution may be achieved through mere recognition or acknowledgement, and, if so, how this affects the defences and supporting rights or connected duties. It may, at least in some legal systems, substitute for a notification to the debtor, while this alternative for notification may also result from recognition in France310 or possibly from mere payment or performance of any other duty of the debtor, the benefit of which was transferred by his obligee/creditor. It could as such imply consent to mere creditor substitution but also give rise to an interpretation of the assignment in terms of amendment or novation. The survival of supporting securities and especially their rank in the case of a mere substitution without consent or even upon consent in the case of a mere amendment of the contract or upon recognition or acknowledgement may be a great advantage for the assignee while costs will be saved. The continuation of the debtor’s defences against the assignee may be an acceptable price to pay, as it is often in the assignee’s interest that a novation is avoided while the risks will be discounted in the price paid for the receivables. For the assignor, however, there may remain a particular question whether, short of such a novation, he is fully discharged from any connected duties, as this is often unlikely to be explicit. Such a release would not necessarily be an indication of an amendment of the agreement or of a novation either, but may in common law still lead to the requirement that adequate consideration is paid in order to be effective and could then still mean an amendment or novation involving the debtor. It may be the reason why, in these situations, novations are more frequent in common law, at least in the English practice, as they clarify the status of all parties so that the former creditor’s release cannot be in doubt. In terms of consideration, the termination of the old agreement may be sufficient if the released creditor gives up some rights. It also removes any need for the assignor to be any further involved in lawsuits brought by the assignee against the debtor, in common law a particular remnant of the old controversies concerning assignments at law or in equity as noted in section 1.5.3 above. Even in civil law, novation often remains the only way out where a party wants to transfer his duties at the same time, therefore the whole contract, or even when some duties are closely related to assigned rights and automatically transfer with them, but do not lead to a full release. As far as creditor substitution is concerned, it may also be achieved through subrogation. Subrogation commonly takes place in situations where someone has actually paid somebody 309 This may be distinguished from or a situation where one party transfers its contractual position to a third party with consent of the counterparty, when all ancillary rights may remain intact, cf Art 6.159 Dutch CC. 310 See for the ius commune n 245 above, for French law n 248 above, and for the common law approach in England n 261 above.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 181 else’s debt. The former creditor is thereby satisfied while the payor steps into his position so far as the debtor is concerned. The subrogated party retains the benefits of any securities but remains subject to the defences of the debtor. Subrogation is a limited concept, however, and not all payors may automatically demand or have a right to subrogation. Statutorily, it often follows when a third party is forced to pay the debt, either because he conceded a security interest in his assets to support someone else’s debt or he conceded a guarantee or accepted an insurance contract. Contractually, it may arise when the debtor and a third party agree that the latter pay the debt to the creditor and he does so, followed by creditor’s substitution. In new Dutch law, this type of subrogation is made subject to the requirement that the original creditor at the moment of payment is made aware of this agreement (see Article 6.150 of the new Dutch CC). In France, contractual subrogation traditionally has a broader application. Under Articles 1249 and 1250 Cc, it does not require notice to the creditor if payment to him by a third party (who will be subrogated to the creditor’s rights) is arranged by the debtor. Neither does it require notice to the debtor if payment by a third party is arranged by his creditor (as an assignment and also a pledge in receivables would require in France: see Articles 1690 and 2075 Cc). The third-party payor will be subrogated to the rights of the original creditor. This kind of subrogation was before the Loi Dailly of 1981, which did away with the notice requirement in professional financings,311 a useful substitute for assignments in France. It often still is and avoids the formalities and notification requirement of assignments. By contract, the transferor and transferee of the claim may thus agree that, upon payment of the nominal values of the outstanding debts by the transferee to the transferor, the former is subrogated to all the transferor’s rights against his former debtor regardless therefore of the latter’s consent or notification. The debtor’s defences remain intact. So do the security interests supporting the debt. Subcontracting may constitute another form of debtor substitution, which normally cannot by itself result in full substitution as the original debtor/contract party is unlikely to be discharged, but it may not require full novation so that the original contract continues with a new contractor. It is then better seen as an amendment, which may involve at the same time minor contractual adjustments, for example, to allow the new party to operate from his place of business. Often it will be clear from the start that a main contractor requires help in its performance of the agreement and the creditor’s consent to the debtor substitution will then be implied if not already expressed in the agreement itself. Particular in finance, one may see another form of sub-participation if a bulk assignment is not feasible, for example, to achieve a securitisation of a loan portfolio or if there are substantial complications in the underlying structure (for example, a layering of risk situation). It may thus be that a bank wants to transfer financial instruments to another finance party and that a subparticipation is simpler. The result, however, will only be a contractual arrangement transferring an economic benefit in an underlying asset class, a price will be paid, the benefits will be transferred when they are collected, but there is no proprietary transfer and therefore no protection of the sub-participant in a bankruptcy of the original party.

1.5.8.  Different Types and Objectives of Assignments. The Role of Party Autonomy The question of the proprietary status of intangible assets will surface not only in determining whether and how intangible assets can be transferred, but also in how the ownership of intangible 311 See n 253 above and accompanying text.

182  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights assets may be split up and more limited proprietary rights may be given in the claims to others (as in iura in re aliena for chattels), often with different transfer formalities, for example when creating security interests. More generally, the possibilities are similar to those in chattels and entail312 (a) assigning a claim outright or absolutely; (b) making a conditional assignment, as may happen in receivable financings or factoring agreements concerning receivables; (c) assigning by way of security; (d) assigning a usufruct; or (e) assigning the residual rights in the case of overvalue or reverters and remainders of the assignor when previously less than a full transfer of ownership was made suggesting the possibility of multiple assignments. They all raise issues of ranking and entitlement to collections. The terminology as it developed is somewhat different from the situation in respect of chattels where it was already mentioned that we tend to think in terms of power (disposition rights), transfer agreement, and formalities (if any, such as delivery or documentation). For assignments, these elements are equally valid but in civil law reference is often made instead to formation, assignability and validity, characterisations then considered more relevant and handled differently especially in private international law where any further distinction between contractual, proprietary and enforcement issues tend to get lost, see section 1.9.3 below. It is confusing whilst this terminology is in any event unstable. Key issues as severability and the inclusion of future claims are then often seen as assignability issues, but could also be formation or validity issues. On the other hand, the very different forms of assignment and their purpose may then not be specifically considered or covered, neither are assignments in bulk. It would seem that the field is not properly mapped out in this manner. There is in this connection also the complication of the inherent limitations in civil law countries of the ways in which ownership rights may be split or be made conditional or temporary. This is the issue of the numerus clausus of proprietary rights. Does it apply or is there more room for party autonomy? As the assignment is in common law largely a matter of equity, it was already noted that it is right to think there mainly in terms of equitable proprietary rights, which may be more freely created, cut off in principle only by the rights of bona fide purchasers or even all purchasers in the ordinary course of business, therefore at the level of their operation rather than their creation. That concept applies in equity also to the acquisition of intangible assets by an assignee, who, when collecting in good faith, is then able to retain the proceeds, see the discussion in sections 1.5.2 and 1.5.3 above and 1.5.11 below, even if it may still be an issue what bona fides entails here in professional dealings and what kind of search duty there may be. As was shown, it allows at the same time for party autonomy in the creation of proprietary rights, enforceable, however, only against those who knew of them, or as professional insiders, like banks and main suppliers, should have known of them before they acquired an interest in the relevant assets.313 For the rest, the protection of the

312 See for English law Durham Bros v Robertson [1898] 1 QB 765 and more recently The Balder London [1980] 2 Lloyd’s Rep 489. 313 See, however, n 11 above for the risk of an unbridled creation of equitable proprietary rights and Keppell v Bailey [1834] ER 1042, 1049, in which the Chancery Court famously held that ‘incidents of a novel kind cannot be devised and attached to property at the fancy and caprice of any owner’. In Hill v Tupper [1863] 2 Hurlst 7 C 121, it was further said that ‘A new species of incorporeal hereditament cannot be created at the will and pleasure of an individual owner of an estate and he must be content to take the sort of estate and the right to dispose of it as he finds the law settled by decisions, or controlled by act of parliament’. In Taddy & Co v Sterious & Co, [1904] 1 Ch 354, retail price maintenance restrictions were not accepted, there probably arose here a public policy element rather than a private law protection issue against unknown interests, which in equity are in any event cut down at the level of the bona fide purchaser for value which may be assumed to exist in the public at large and there is no search duty, which, it was submitted, only applies to professionals and is for them a matter of risk distribution amongst them.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 183 ordinary commercial and financial flows against such charges is here the paramount policy issue and is foremost a matter of liquidity as we have seen, more in particular relevant for chattels but also important for a collecting assignee in the ordinary course of his collections especially from consumers or other end buyers. Where assignments concern monetary claims and create junior interests or charges, all in the end concerns the question of who may exercise the collection right and may keep the proceeds, so that the order as between the various interests so created needs to be particularly considered. Thus, it is clear that there is not only the possibility of the assignment itself to be considered, but also the different objectives of assignments in terms of the rights being transferred thereby and their relationship especially in terms of rank and entitlement to the proceeds. These are typical proprietary issues which, on the one hand, debtors cannot ignore and, on the other hand, are relevant especially for assignees inter sese. Particularly for bulk assignments, it is useful to distinguish from the outset between the various types of assignment in this connection. To repeat, it may be of special interest in receivable financing or factoring although also relevant in floating charges and securitisations.314 The outright assignment of a portfolio of receivables against a certain price is not uncommon in this connection. It leaves the assignee with the collection risk in exchange for which the assignor will normally give a discount on the nominal value and a further one for an interest charge when not all claims are mature. The assignor may give yet another discount for the collection cost and risks. Under such a scheme, all collections are for the assignee who will have the autonomous right to pursue the debtors in the way he deems fit. Depending on the arrangement, when party autonomy comes in, it may also be that the portfolio is transferred only so as to allow the assignee to take the necessary collection action. In this arrangement, the collections are returned to the assignor who retains the credit risk of the portfolio and pays the assignee for his activities as collector. The assignor may still determine what action the collector should take against defaulting debtors and is likely to bear the cost of such action. It is a mere collection agreement with a temporary transfer of the proprietary interest for collection purposes only and is also common. Although the assignee may technically become the owner of the claims, he acts here in fact as a collection agent. The collection transfer could then

Although there was increasing ossification of the law of equity also in this area, it did not prevent the floating charge from developing in case law later, see Vol 5, s 1.5.2. Perhaps contractual arrangements rather than unilateral action make a difference. In the US, where there appears to be even greater flexibility, statutory law has helped especially in respect of floating charges (Art 9 UCC), it was already mentioned several times. There are nevertheless also limits, especially in testamentary grants and grants of servitudes in chattels, see Johnson v Whiton 34 NE 543 (1893) and Werner v Graham 183 P 945, 947 (1919). It was already noted that in civil law there are commonly no servitudes in chattels at all and user rights in them cannot so be split off (although income right can be in usufructs). Indeed there is a traditional resistance also in the US to recognition of equitable servitudes or user rights and any use restrictions on assets, at least in chattels, besides being cut off in equity by the bona fide purchaser protection principle where only the professional investors have a search duty: see for a rare discussion, Z Chafee, ‘Equitable Servitudes on Chattels’ (1928) 41 Harvard Law Review 945 and ‘The Music Goes Round and Round: Equitable Servitudes and Chattels’ (1956) 69 Harvard Law Review 1250. For proprietary restrictions of use of movable assets, see more recently and in a more modern context, M Shaffer Van Houweling, ‘The New Servitudes’ (2008) 96 George Town Law Journal, 885, dealing with the myriad restrictions on how electronic programs can be downloaded and used leading in the US to so-called click-wrap licences, which may still be considered merely contractual but concerns also the so-called ‘free software’ and ‘free culture’ and they tend towards affecting remote users and therefore start running with the burdened assets, automatically binding current possessors. 314 See also text at n 235 above.

184  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights more properly be seen as a temporary or conditional transfer. In common law countries there may be a constructive trust for the benefit of the creditor. It is a question of characterisation and definition of the assignor’s rights, especially in a bankruptcy of the collecting agent. It was already mentioned in section 1.5.1 above that the danger in civil law is that the collections will be considered part of the estate of the agent collecting in his own name unless another characterisation can be given, which may be in the uncertain construction of the conditional (or limited) transfer. It is relevant particularly in a bankruptcy of the agent and it was suggested earlier that notions of holdership of the claims may also help out in civil law,315 but it is not a common view. It means that the agent is mere holder of the collections which continue to belong to the owner of the claims. The outright transfer and the collection agency are two extremes. The portfolio may also be transferred for security purposes to support a loan. Upon default there may be a disposition when any excess will normally be returned to the original assignor. More likely is that the creditor will simply be allowed to collect while returning any overvalue. In English law, this is referred to as a collateral assignment. Importantly, in common law countries, in equity, the portfolio may also be transferred conditionally, meaning that any receivables remaining after a certain amount is collected will automatically retransfer to the assignor, as may be any extra collections. Indeed, the exact terms may be left to party autonomy and a bank may alternatively take the full credit risk while retaining any overvalue. It is possible that there is some revolving credit since funding is provided as and when receivables are collected. There need not be a repayment schedule but repayments may follow during the period of the facility (say five years) when the total value of inventory, receivables, and proceeds declines while greater advances may be made when this total value increases. Many variables are possible in the funding and in the asset support given in this connection especially in common law countries. The essence is the use of receivables in one structure or another suggesting equitable proprietary rights that can be maintained against all who knew about them before they acquired an interest in the property, where the professional insider might have special search duties. As receivables are likely to be more liquid than inventory, they are often preferred in schemes like these as back-up for funding either in a secured transaction or conditional sale. These are two different structures, however, in which the cash flow the receivables produce is differently treated. In a secured transaction, any excess receivables or collections over the loan provided are for the debtor; in a conditional sale that remains to be seen and is likely to be weighed against the credit risk the funding party assumes in the receivable portfolio. Here again, the equitable variety provides flexibility through a measure of party autonomy in the operation of proprietary rights. A reasonable description of the underlying claims and of the interests so created will suffice but bona fide third parties will be protected, to repeat especially all assignees who collect in good faith under these schemes assuming in the case of professional assignees that they have met their search duty. It was already mentioned that in the US, Article 9 UCC allows the agreement to determine the assets covered upon a reasonable description. All sales of receivables operate in principle under it, as we have seen, and are therefore treated in the nature of a security interest (see section 9-109(a)(3)) and any conditional transfer is then converted into a security agreement also, see further also section 1.5.11 below. That assumes a limit to party autonomy. It is the unitary functional approach in line with Article 9’s antiquated suspicion of sales being used 315 See text at 236 above.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 185 for financing purposes: see section 9-102(a) (5–6) UCC. The exception is the sale of receivables for collection purposes or assignments of an individual claim as noted: see section 9-109(d)(5) and (7) UCC. All the same, Article 9 still allows some distinctions between (finance) sales of receivables and a security assignment depending on the agreement. Especially an execution sale is not obligatory in the first case and the seller (debtor) is entitled to any overvalue if the agreement so provides (see sections 9-607 and 9-608 UCC). The arrangement may also be such that those receivables which the debtors prove unwilling or unable to pay are automatically returned to the assignor. There may also be an arrangement where the assignee approves every receivable before assignment. Again, it leaves the assignor substantially with the credit risk in the portfolio and allows the assignee to collect other receivables (if available) without the time and expense connected with legal action. In the US, this is often called recourse financing. It is less likely to leave the assignee with any overvalue in the portfolio, but there may be some special reward for his collection activities and naturally for the funding. This is the area of receivable financing and factoring.316 Especially where the arrangement puts the credit risk in the portfolio on the assignee, it is normal that the assignee has certain (if not all) rights in any overvalue as compensation for this risk beside his normal reward. Article 9 UCC allows this for receivables—not for chattels, which may create problems for them in finance sales. This is the re-characterisation issue, in the US cured or its negative effects at least reduced in modern amendments to the Federal Bankruptcy Code to facilitate the operation of a number of financial products.317 Civil law remains here more confined, although it was noted that notably in Germany, assignment remaining an issue of obligatory rather than property law, there may be more flexibility,318 and even elsewhere there may also the possibility of a finance sale. The greatest material difference between the conditional sale and the security transfer of a portfolio of receivables is here that (a) the former may leave the assignee with (part of) the overvalue depending on the nature and terms of the arrangement while in the case of a security arrangement, the entitlement to the collections ends once the debt it secures (plus interest) is paid off. Another important difference is that (b) in some countries like the Netherlands under its old law and still in France it was not believed possible for the assignee to collect receivables under a secured transaction at all and the creditor could merely hold the portfolio subject to an execution sale upon default or at best a set-off right at that time.319 This restriction never applied in cases of a conditional transfer of the portfolio. There further exist (c) more obvious differences in documentation and other formalities, including sometimes publication, like filing in the US at least for perfection or (in the Netherlands) registration requirements (at least if under a security transfer no notification to the individual debtors is being given). Another difference might be (d) in the assignability of the claims itself: it was already noted that new Dutch law requires for a (conditional) sale that the claims are identifiable although for future claims it may now be sufficient to refer to all claims on a certain debtor (Article 3.84(2)), yet for an assignment by way of security it is necessary that the relationship out of which the claim arises is already in existence (see Articles 3.97 and 3.239 CC).

316 See text at n 315 above. 317 See also S Vasser, ‘Derivatives in Bankruptcy’ (2005) 60 The Business Lawyer 1507. 318 See s 1.5.2 above. 319 See for former Dutch law Art 1200 CC and HR, 19 January 1898, W 5666, and for France Art 2078(2) Cc. See for new Dutch law explicitly allowing the collection under secured transactions Art 3.246 CC.

186  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights A further difference may be (e) in the right to invoke any security interests supporting the receivable itself, therefore in the accessory right: in a sale this benefit is likely to be automatically transferred to the assignee, but in a security transfer of the portfolio it is possible that these accessory protections remain with the assignor, who alone may institute alternative recovery proceedings against other assets of the debtor if the latter defaults. Finally, (f) in the case of chattels, the difference between conditional sales and security interests may be more fundamentally characterised as a difference in risk management strategy. This may play a lesser role in the case of intangibles where, at least if the assignment concerns monetary claims, all converts into collection rights (assuming that is also the case under applicable law when a mere security interest is transferred in the receivable) and there may therefore be less reason to dwell on the difference. Related obligations do not transfer with the asset unless closely connected, again one could think of the duty to arbitrate if the claims become contested. On the whole, the conditional sale allows for greater flexibility and parties’ input and clearly pushes in civil law against the numerus clausus. Again, these sales may, for example, distribute the overvalue in the assigned portfolio quite differently in exchange for other benefits such as the allocation of the credit risk to the assignee in whole or in part. The reward structure is as a consequence likely to be different from that under a secured loan agreement where the prevailing interest rates will be used allowing for size, maturity and credit risk. The fee structure in a conditional sale is also likely to be quite different and subject to other competitive pressures (it is a different market). Again, that is equity in common law countries, civil law countries struggle with what are perfectly sensible structures where one could hardly plead public policy against them, at least when used in professional dealings, and it is not credible that the preservation or protection of the ‘system’ is used as such. However, if a portfolio of receivables is conditionally transferred for a price and there is a specific interest rate structure agreed until repurchase as reward rather than some other fee, a secured loan structure is likely to be more suitable and any excess collections over and above the received sum and the interest must then be returned to the entity requiring the funding. This is the important issue of re-characterisation. In other words, if there is a formal interest rate structure under which interest is the reward, it was submitted all along that a loan structure must be assumed in which case any supporting assets, in this case receivables, must be considered to have been transferred as supporting security. There is no conditional or finance sale.

1.5.9.  The Better Right of the Assignee against the Debtor. The Notion of Abstraction and Independence. Comparison and Analogy with Negotiable Instruments From the discussion so far, the question arises whether and when under modern law the assignee may claim a better position vis-à-vis the debtor than the assignor had. Related questions are what the position of the debtor is upon an assignment, especially his cooperation duties, acceptance of extra burdens and loss of defences, and how the various assignees relate to each other. These issues will be revisited and amplified in the next three sections. The first is one of ignoring, in so far as the assignee is concerned, some of the rights and defences of the debtor against the assignor. It is clear that under present law the assignee is likely to receive increasingly better treatment, first against undisclosed and undiscoverable flaws in the assigned position, such as any undisclosed incompleteness in the documentation concerning an assigned claim if due to the debtor’s oversight or to his lack of cooperation in

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 187 not amending the contractual text properly when alterations were agreed. A similar provision already existed in the German BGB of 1900 (section 405 BGB) and was also introduced in new Dutch law (Article 3.36 CC). But there are other situations in which the (bona fide) assignee is in a better position vis-à-vis the debtor than the assignor. As yet this may not go so far as to allow the assignee more generally to ignore assignment restrictions in the original contract and especially set-off rights or other defences of which the assignee was not or could not have been aware at the time of the assignment (and the lifting of any search duty in this respect), but it depends increasingly on the situation, see sections 1.5.4 and 1.5.5 above. It is in truth an aspect of liquidity especially in respect of monetary claims. As we have seen, in the case of a transfer restriction, modern law, especially in the US, is likely to reduce the debtor’s right to a personal claim against the assignor for breach of contract only, rather than affecting the validity and effectiveness of the assignment itself. Also, in the US, clauses in the underlying agreement not allowing the debtor to raise defences against an assignee are common and favoured, at least in the context of creating security interests in receivables in the professional sphere and may even be deemed implied. It is especially relevant in bulk assignments for funding purposes as we have seen, where the debtor may have to make concessions in return for the credit, he received which must itself be funded. It prevents an expensive review of all contracts out of which claims may arise. However, as noted also, even in the US, set-off rights of debtors under the agreement between them and the assignor are likely still to be upheld against the assignee. Thus, assignability may still suffer. Debtor extra burdens and defences may also still be accepted against the effectiveness of the assignment, but it may increasingly depend on how heavy or material and important they are, again especially relevant in bulk assignments of receivables, and a reasonable cooperation duty of the debtor may be implied. It was suggested that in modern law, there may here also be a de minimis rule, see section 1.5.4 above. In section 1.5.5 above, it was also noted that where an assignment aims at transferring the active or asset side of an in personam legal relationship (primarily a contractual relationship and then more particularly a contractual monetary claim, normally the payment claim or receivable), any automatic delegation of duties that are closely connected to the assigned rights may create special risks for the assignee but also for the debtor. Allowing a delegation of closely connected duties without the debtor’s consent is now a feature of the modern US approach as legislated for in respect of rights and (all) duties arising under sales agreements in section 2-210 UCC. However, as noted, the trade-off is likely to be that it does not relieve the assignor (which raises the issue whether the assignor remains a primary obligor or has only a secondary obligation in the nature of a surety) so that it does not detrimentally affect a debtor having a substantial interest in the performance of its original promisor. There remains therefore the crucial question in how far the assignor is liberated and the assignee engaged. Modern law may weaken the effect of connected duties in as far as an assignee is concerned whilst still holding the assignor responsible, cf also the new Article 1216-1 of the French Cc since 2016. Another issue in this respect is the impact on the assignee of any later changes in the underlying contract made by the assignor and the debtor, which may also reduce the assignee’s rights. As we have also seen in section 1.5.5 above, in this aspect, modern law in the US may distract from the assignee’s expectations and allow these amendments to affect him and his assigned claims if the amendments are made in the ordinary course of business, especially where the claims were assigned for security purposes only, but the question remains whether that should more generally become the rule in all bulk assignments. Again, the essence is that because of modern economic and especially financial requirements, which for funding need increased assignment facilities without too many impediments

188  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights or strings attached, the extra burdens or risks resulting for the debtor may no longer give the latter a sufficient excuse not to pay the assignee. They are in any event unlikely to void the assignment and the debtor will increasingly have to sort matters out with the assignor while respecting the assignment itself. In other words, the tendency is for the internal relationship to have less and less effect on the external relationship, which is in line with intangible monetary claims being considered ordinary assets and liquid. There is here an increasing element of abstraction or independence under which the assignee especially in respect of monetary claims may not only ignore the underlying relationships out of which the claim arises but more generally also unknown circumstances concerning an assigned claim. The history of these claims is then ignored. Again, this is a move in the direction of a promissory note and a matter of severability and liquidity which is here identified as the underlying current and policy direction in respect of all assignments that aim at funding, therefore especially security assignments or finance sales of monetary claims in bulk. As a consequence, payment obligations are increasingly allowed to be lifted out of existing contracts and assigned separately, at least if they are transferred in bulk for funding purposes. Naturally, the debtor may retain damage actions against the assignor in the internal relationship but neither the assignment itself nor the duty of the debtor to pay the full amount of the assigned claims to the assignee would be affected. It could even apply to assignees aware of the debtor’s original protections if the receivable arises out of normal commercial or financial transactions. That is the proprietary aspect. In the commercial and professional sphere, it may increasingly be seen as a common risk of the debtor participating in business and requesting credit therein and becomes an ordinary benefit for the professional assignor and a protection for the professional assignee or funding entity. Part of this is also that the assignor retains obligations if the assignment covers closely related duties which may enable the assignor to find more readily the financing and financiers required. Again, this appears to be the modern trend and stands to reason. It is policy and of great significance. It would end with the full commoditisation of receivables altogether. In this connection it may indeed be considered that if the debtor had issued a promissory note, the abstraction and unimpeded transferability of the claim would have followed. The modern trend is thus that a negotiable instrument is no longer necessary to achieve a similar transfer facility for receivables, at least not if assigned in bulk for financing purposes. A similar policy may support the assignment of portfolios of bank loans in securitisations. It may be repeated in this connection that the abstraction or independence principle is rougher than the notion of bona fides in that it does not depend for the protection of the assignee on what he knows or should find out in terms of the rights and duties of the debtor under his contract with the assignor.320 Again, the internal relationship loses its force which is reduced to the bare minimum. There follows a different balance or equilibrium.

320 Negotiable instruments such as bills of exchange and promissory notes are normally treated as incorporating a claim and considered fully to separate it from the underlying legal relationship out of which it arises. That is the abstraction and independence principle. The other aspect of the treatment of a claim like a chattel in this manner is its negotiability. These issues are connected but should be distinguished. The transfer is not through assignment but through the handing over of the document if to bearer or through endorsement and handing over if to order, even in legal systems such as the French and English that otherwise no longer require delivery for a transfer of title in chattels. In legal systems that protect bona fide purchasers of chattels, as most civil law countries now do, the further consequence of this chattelisation is that bona fide purchasers for value of this type of paper are protected against the claims of any senior transferees or other third parties notably creditors of the transferors and do not have a

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 189 But there is another aspect of this chattelisation or reification of monetary claims also. The assignee might need to worry less about an assignor’s title to the underlying claims altogether, perhaps more important for succeeding assignees. In this aspect, their bona fides remains an important issue. This is another proprietary issue, which will be discussed further in section 1.5.11 below. It concerns finality and the invalidity of earlier assignment agreements in a chain of assignments or any effect of an older assignment of the same receivable portfolio on the disposition right in any subsequent assignment. The essence is that in bulk assignments of monetary claims for funding purposes including securitisations, the assignee/fund provider need not worry or worry less about the individual claims and their characteristics. The end result is indeed that monetary claims become more like negotiable instruments (promissory notes),321 with the special advantage (and difference) of becoming transferable in bulk, and it implies that professional assignees are increasingly protected in similar ways, therefore as holders in due course of claims that are free of the underlying defences. Only the set-off rights would be retained by the debtor but may no longer encompass counterclaims in respect of poor quality of goods delivered under a sales agreement: see the discussion in section 1.5.4 above. Again, this would then have to be sorted out with the assignor as would have been the case if there had not been an assignment.

1.5.10.  The Notion of Abstraction or Independence. The Liberating Effect and Question of Finality of Payment by the Debtor. The Debtor’s Protection against Competing Assignees and the Assignor In the previous section any better rights of the assignee against the debtor were discussed as compared to the rights of the assignor, and the notion of abstraction or independence of monetary claims like receivables and bank loans in that connection. On the other hand, upon an assignment, properly notified (even in systems where it is no constitutive requirement for the validity of the assignment itself), the debtor may also have some special protections and may be able to pay a notifying assignee without any need to go behind the notice and look into the validity of the assignment and to watch out for assignees with better rights, which might even include an unsatisfied assignor or one alleging an invalid assignment. That is what the transfer of property and respect for the new order implies. Good faith could still play a role in this protection, but even this requirement may be weakened and it is likely that any notification that is on its face properly made by tie assignee/new owner protects a debtor and there is no search duty. That is also in accordance with the passive nature of the debtor’s position and absence of a need for his consent. search duty and are then more properly called holders in due course. In common law, this resulted under the law merchant. It may be increasingly relevant also for the transfer of claims, see s 1.5.11 below. It should be noted that bona fides goes here to any lack of disposition rights in the seller of these negotiable instruments. It is not required against defences of the debtor against payment of the underlying claim, as the debtor who issues a promissory note is considered to have surrendered them against any subsequent buyer of the paper collecting under it on the appointed date. 321 It is, on the other hand, also conceivable that at least in the consumer sphere consumer protections may disallow certain assignments or impose some new restrictions. For example, in mortgage banking, upon the assignment of floating rate mortgages, these mortgages could become subject to the interest rate structure of the assignee. It could be considered an unacceptable variation of the original contract, not achievable through an assignment without the debtor’s consent, so that the interest rate structure of the assignor remains applicable. It is to underscore the fact that in professional dealings a different attitude may prevail.

190  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights It is another aspect of abstraction or independence, here affecting the meaning of notification by the new owner and need for a release of the debtor upon payment. All resolves into the single question who has as far as the relevant debtor is concerned the collection right and whom he or she should pay (assuming the assignment concerns monetary claims). Potential claimants or new owners are various assignees as full (putative) owners of the intangible asset, conditional owners, security holders or beneficiaries under a usufruct, their garnishing creditors or trustees in bankruptcy, or even the assignor for any reversions or residual rights remaining in him/her. Their status and ranking amongst themselves is another matter of property law and will be discussed in the next session. Here the question is whether they should concern the debtor/payee? One further aspect is the effect of a lack of disposition rights in the assignor, an invalid assignment, or lack of formalities discovered after payment has been made. This may be more in particular an issue for assignees, see the next section, but may also enter into any search duties of the debtor whilst paying. It is clear that an assignee may potentially also be faced with the proprietary pretences of many, even of the assignor invoking an invalid assignment, and with the question how far s/he may ignore these, first by giving notice and requesting the debtor to pay and subsequently retaining any collections so received. As we have seen, English law in equity has traditionally resolved this issue by considering only the assignment completed or perfected upon notification to and payment by a bona fide debtor.322 This may introduce considerable uncertainty for him, resulting in non-payment pending clarification, which Dutch law would appear to allow, Article 6.37 CC. All the same, whom the debtor should pay may present a dilemma and could depend in first instance on his knowledge whilst it could still leave open the question of the ultimate entitlement to the collection proceeds.323 The applicable law should resolve these issues and reduce the uncertainties by limiting any duty of the debtor to investigate; hence here also the concept of abstraction, now of the notice to him. In theory there are various possibilities. It is clear that as long as there is no notification, the debtor must still pay the assignor and will be released or liberated when doing so. Upon notification of an assignment, he may probably expect a release in the way directed even if he knows of another assignment, although, again, his bona fides might then be an issue especially if notification is not a validity issue. In such cases, the first notifying assignee might not be the rightful assignee, although, again, an investigation duty could hardly be imposed and the debtor should be able safely to pay and obtain a release, at least if there is the appearance of ownership in the assignee. If in the meantime he received several notifications, he should still be protected if he paid the first one if its claim was valid on its face and s/he would not have any investigation duty into any better right, but his good faith could still be questioned if he had subjective knowledge of an earlier assignment or of the possible invalidity of the present one and made a payment. Clarity is here needed. If on the other hand notification is a prerequisite for the validity of the assignment, and an assignee tries to collect, the debtor should know that the first notification transfers the claim and he must therefore pay the first notifying assignee. If before s/he makes payment, s/he receives several notifications claiming assignments by the original creditor/assignor, s/he still has a duty

322 This is the famous rule in Dearle v Hall, see n 258 above. It could be criticised on the grounds that it undermines the equity assignment approach, which in principle does not rely on notification. 323 In England, it was settled that the bona fide collecting assignee can keep it, see Rhodes v Allied Dunbar Pension Service Ltd, n 260 above. It would seem to be in line with the bona fide purchaser protection that more generally obtains in the case of equitable proprietary rights.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 191 to pay the first notifying assignee and the latter’s bona fides would appear irrelevant if s/he pays another thinking that the latter had a better right (for example, because this assignment contract was earlier) and s/he will not be protected, although it leaves open the question of knowledge of a possibly invalid assignment. One might especially wonder what happens if an assignor alleges breach of the assignment or an invalid assignment and still requests payment before any assignee does or even thereafter, which may also be an issue where notification is not a matter of validity. Such a payment request could, however, hardly have the status of a notification upon an assignment and, it is submitted, should not be similarly treated. Problems may then derive from: (a) the form of notice; (b) the person who can validly give it; (c) the order of notices when there have been competing assignments or, to complicate matters further, when an assignee has re-assigned the claim to a succeeding assignee; and (d) the knowledge of the debtor in paying upon notice or choosing between competing or further assignees with or without notice,324 or (e) claims of an unsatisfied assignor. It is clear that any emphasis on the bona fides of the debtor while paying an assignee may put him in particular in a difficult position if faced with several notices in a system where notification is no constitutive requirement for the validity of the assignment. This should be avoided, as it raises the question how much of an investigation into better rights he must conduct and what his bona fides requires. It may be assumed and is for the debtor a question of payment finality and its liberating effect for him. German case law is firm in that the debtor has no investigation duty and is only not discharged if he has actual knowledge that the assignment had not taken place. It does not seem necessary for him to go into any suspicion of more assignments or into the validity of the transfer.325 It thus appears that the first assignee who produces the assignment document to the debtor normally prevails although other assignees (or even the assignor) may have better rights. What if they present them before payment? The debtor must pay the assignee if ordered to do so by the assignor and also if an assignee officially notifies him of the assignment (see sections 409 and 410 BGB). He needs then not worry about the various competing rights, and must pay the first notifying assignee if the notification is proper on its face. Other assignees

324 The form of the notification itself may vary a great deal—see for the notification requirement more generally, s 1.5.2. above. In France, where it is a constitutive element of the validity of the assignment, it still requires under Art 1690 Cc notice by a judicial official (huissier) or through a notarial document, which greatly impeded assignments but had the advantage of raising the notification to an official level and assuring its status. It resulted in an implicit check on its being properly given. Since the Loi Dailly of 1981, notification is no longer required as a constitutive element in bulk transfers supporting financing in the professional sphere, as we have seen, but in practice it is naturally still necessary to make the debtor pay the assignee but may then be informal. It raises, however, the question who the debtor can validly pay. In the Netherlands, where notification became a requirement under its new Code, notice may be given by the assignor or assignee in any form. A document is required for the assignment itself but need not figure in the notification to the debtor. The latter may require, however, that the assignor provide him with an extract of the document which appears to put the ultimate burden of the notification being properly given upon the debtor (Art 3.94(3) CC). A 2004 amendment replaced the notification requirements with a registration requirement as an alternative in finance. It is similar to the one applying to assignments for security purposes, see text at n 254 above. In Germany, where notification is not a constitutive requirement and the assignment itself does not require a document (although the assignee may request one: s 403 BGB), the emphasis is on the knowledge of the debtor, however acquired, see s 407 BGB, and notification as such does not figure in this connection. In the US, in States where notice is required for a valid assignment (beyond those covered by the UCC), it may apparently be oral also: see Fugato v Carter County Bank 187 B.R. 221 (ED Tenn 1995). Knowledge by the debtor was considered sufficient: see further s 1.5.3 above in fine. 325 RGH, 19 September 1905, RGHZ 61, 245.

192  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights should recover either from the assignor or from the collecting assignee knowing of their better rights. In the US, section 9-406(a) UCC authorises the debtor to pay the assignor until notice. Thereafter s/he must pay the assignee. If requested by the debtor, the assignee must furnish reasonable proof of his/her rights and unless s/he has done so the debtor may still pay the assignor. The suggestion is here also that the debtor pays the first notifying assignee. There is no investigation duty and the various assignees will have to establish among themselves who will ultimately be entitled to the collection. In England, the situation under Dearle v Hall has already been discussed, with its emphasis on the bona fides of the debtor while paying. It leaves the sorting out of the better right in the first instance to the unsuspecting debtor who is a total outsider as far as the assignments are concerned. This may leave him with a heavy burden, which could allow him/her to ignore the entire assignment or not pay anyone. Strictly speaking, it does not say anything about the right of the collecting assignee in the collections. As noted earlier, some states in the US allow the assignee, if also bona fide, to retain them (superseded by the UCC for assignments covered by it). That is now also the English case law approach.326 A simple system may require the assignor and assignee jointly to give the debtor notice or the assignee alone if authorised to do so on the assignor’s behalf while producing the authorisation document or the assignment document itself. An approach like the US one (under the UCC) that requires the debtor always to pay the first notifying assignee if this notice is regular on its face regardless of a debtor’s knowledge of other assignments and their ranking leads to even greater simplification and is in line with the notion of abstraction or independence of the notification and the proprietary nature of the assignment. It implies a full release of the debtor at the same time and meets the duty of both assignor and assignee in this regard. In this way, the debtor faces no extra burdens connected with his payment duty and the notification becomes an abstract payment instruction. Again, it would not be unlike paying a holder or endorsee of a negotiable instrument like a promissory note. For assignees, it would become a pure race situation, as in fact it already largely is where competition must be feared unless there is a clear system of ranking as there is likely to be in security assignments. The abstract nature of the first notification, which instructs and protects the debtor in this manner, would mirror the abstract nature of the assignment, which may give the assignee better rights against the debtor as discussed in the previous section. Both types of abstraction (of the first notification and of the assignment itself) provide greater clarity and may greatly facilitate the assignment practice and especially bulk transfers of monetary claims and their liquidity. Again, it means that monetary claims are increasingly treated as negotiable instruments, where, upon payment, the payee simply retained the document as proof. This was identified in section 1.5.9 as the modern trend.

1.5.11.  The Ranking between Assignees, the Nemo Dat Rule in Multiple Assignments and the Question of Transactional Finality In the previous sections we have seen that, in the absence of a clear proprietary concept of claims, it took the law some time to formulate a workable approach to the proprietary protections. 326 See s 1.5.3 above and further s 1.5.11 below.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 193 This also concerns the protection of the assignee against third parties, notably other assignees (and their creditors) claiming better rights which possibility also needs to be considered. It is an issue to be distinguished from the assignee’s better rights against the debtor (compared to those of the assignor) under an assigned receivable discussed in section 1.5.9, and the liberating payment rights of the debtor upon an assignment, which were discussed in section 1.5.10. All may raise issues of good faith protection but in quite different ways as we have seen. In the case of the better right of the assignee against the debtor it is a matter of comparison with the position of the assignor, or more properly a question of the rights the debtor may still enforce against an assignee who is unaware of them, raising the question of a search duty at least for the professional assignee. The protection of the debtor making a liberating payment to an assignee may equally depend on his good faith, although that may ultimately not be satisfactory either because it may suggest some investigation duty. The abstraction principle gives better results in either case and raises the analogy of the promissory note as we have also seen. The protection among various assignees is of a different order and more traditional nature, and raises also the question whether an assignee, having given notice to the debtor and having collected the money, may retain the proceeds if collected in good faith, thus unaware of the potentially better rights of any other assignee (or any residual right of the assignor). This is an aspect of the nemo dat rule and of bona fide purchaser protection, related to the ability (in principle) or not of the assignor to transfer his/her claim more than once and is then a typical problem of double or subsequent assignments. The issue may also arise when there was a faulty assignment in a chain of them or when the present assignment agreement is invalid. Again, it is the issue of sufficient disposition rights in the underlying claims and validity of the assignment itself, particularly the former more properly raising the issue of bona fides, here in the transferee or assignee.327 Although conceivably fraudulent, it should be realised that a second assignment of the same claim by the assignor does not need to be sinister in any way: it was already noted that the assignor may assign his/her claims first in a security transfer or in usufruct for some time and thereupon the remainder or excess value to another assignee so that a ranking results. He may also make a conditional sale and a further assignment of the reversion. Normally, this situation will be disclosed but in a bulk assignment of claims any remainders and reversions of this nature are likely to be included, or, to put it another way, the claims are implicitly assigned subject to any pre-existing limited or better rights therein, when the question arises to what extent these rights still can be enforced against debtors, as we have seen, and who is entitled to any collections. As any better rights of others may not have been apparent to a notifying assignee, the question then arises how far he is protected upon giving notice and collecting, assuming he gave good value for the assignment. What kind of investigation duty is incumbent on him? It was already noted that the law in most civil law countries does not allow bona fide purchaser

327 Disposition rights in the transferor and a valid transfer agreement are the normal requirements for a proper transfer of assets. Above in n 320, it was already noted that acquisition of promissory notes in due course remedies any lack of disposition right in them, and there is no need to go into the history of the original claims and disposition rights therein, only in that of the negotiable instrument itself. A similar attitude is here proposed in respect of the underlying claims in a bulk assignment acquired by a bona fide assignee. The collecting assignee also needs a valid transfer agreement, much as in the case of the sale of chattels. If there is no valid contract, the protection of the collecting assignee may still result, however, from the abstract system, here in respect of title transfer (in the German manner) when bona fides is strictly speaking not relevant (unless the assignee was in the plot). See for indications of an abstract system in this respect in England text at n 261, see also n 265 above. In a causal system the collecting assignee is then unprotected, as is still the Dutch system. His bona fides would not be sufficient to protect against an invalid assignment agreement, only against the lack of a disposition right (which, however, may result for an invalid assignment agreement earlier in the chain).

194  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights protection to operate here, as its justification is normally based on the predecessor of the pretending owner having left him/her voluntarily with indices or the appearance of ownership, typical in the case of chattels left with a bailee or holder who subsequently sells them. It is then a matter of physicality and of the entrusting principle. At least under civil law, the voluntary parting with the goods in these circumstances then disallows the real owner from invoking his own better rights against the bona fide purchasers for value with a valid contract from the holder. The unauthorised sale is here considered the risk of the original owner. Obviously in the case of intangibles, the appearance or indices of ownership of any unauthorised assignor are more difficult to maintain as justification because of the lack of a physical manifestation of control on which the assignee might have relied and which may be imputed to an assignor or his predecessor. Given the entrusting principle, the exception to the nemo dat rule resulting in the protection of the bona fide assignees is therefore often considered not applicable in the case of intangibles.328 Nevertheless, in civil law there is often still a possibility of acquisitive prescription if someone other than the rightful owner starts collecting in good faith. It may suggest that there could also be room for a bona fide purchaser exception to the nemo dat rule, but only after a certain time. Common law, which is on the whole less generous with bona fide purchaser protection and inroads in the nemo dat rule even in the case of chattels (and needed statutory intervention in the case of the sale of goods as we have seen), allows it in equity under its general rule protecting such purchasers against earlier equitable proprietary rights; as noted, it is fundamental to it. It was submitted that another and more modern justification for the protection of bona fide transferees may simply be the protection of the orderly flow of business (rather than the entrusting principle) as a public policy requirement, again it is the liquidity issue. The requirement of bona fides may then even be dropped and all transfers in the ordinary course of business, therefore to the general public, may be protected against charges of all kinds, at least in respect of the acquisition of commoditised assets, notably chattels, by the general public especially consumers. It is a matter of transactional finality and if that is truly the concern, as suggested here, it would put the position of the bona fide collecting assignee also in a different light, even in civil law and may then also cover transfer or disposition problems and cure severability issues in the case of claims. It may still be asked, however, whether professional assignees still have an investigation duty. It may also be repeated in this connection that in the case of promissory notes, its chattelisation or reification means the protection of the holder in due course of the segregated monetary claim and that would again become the analogy. Whether there is an exception in common law in the case of a double or further assignment of intangibles seemed to remain unresolved in England until quite recently. As mentioned before, the case of Dearle v Hall gave the first notifying assignee the right to collect and the debtor could pay him safely if unaware of better rights, but it did not say who had the ultimate right to the collection. In equitable assignments, it is now indeed the assignee who so collects providing he is bona fide, therefore unaware of earlier interests. That type of collection is then equated with perfection,329 although it may still raise the issue of investigation duties. It was already suggested that especially professional insiders like banks and main suppliers, might have to take more care. 328 Interestingly, the Draft Common Frame of Reference (DCFR) in Art III-5:120(1) protects the bona fide first notifying assignee. It is an important exception to the nemo dat rule now also accepted for intangibles but the DCFR forgets to state that this should be so only upon collection. 329 See for example Dearle v Hall, nn 258 and 326 above plus accompanying text. See for the bona fides requirement allowing the collecting younger assignee to retain his collections, which was only implicit in Dearle v Hall, Rhodes v Allied Dunbar Pension Services Ltd, nn 260 and 323 above. There is no clear investigation duty

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 195 The law in the various States of the US remained divided, as we have seen in section 1.5.3 above. The majority rule still appears to be that the first assignee is the rightful owner of the claim upon assignment, and this regardless of notification to the debtor, although at least in New York a second assignee who manages to collect in good faith may retain the proceeds.330 That is also the approach of the Restatement (Second) of Contracts (section 342). For security assignments, section 9-406(a) UCC fails to provide a fundamental rule, although section 9-322(a) UCC maintains for all filed security interests the priority of the first finance statement. Filings thus prevent junior assignees from retaining their collections. It would suggest that they are always considered insiders with a search duty (specially to discover other financiers). Under the UCC, there is another aspect, already mentioned in section 1.5.8 above, in that all assignments of claims (only accounts in the sense of Article 9 which excludes notably tort claims and bank deposits, or collection assignments and assignments of a single claim) are covered by it, therefore also ordinary (outright) sales of accounts. This implies in principle a filing facility also in respect of such outright sales and priority for earlier assignees as per the date of filing of the finance statement concerning these sales or assignments (automatic perfection follows only for assignments of less than a substantial part of a debtor’s receivables portfolio (section 9-309(2) UCC). It is a somewhat curious departure in Article 9, perhaps more understandable in the case of chattel paper, which was specially created as a collateral category to promote financing. It was already said that the implication is that all sales of accounts are for financing purposes. The filing then takes the place of notice to the debtor as a perfection method in respect of third parties or other assignees. The conclusion is that the issue of the proper ranking as a proprietary matter is not always determined by the seniority of the assignment itself. There may conceivably be other factors: (a) notice to the debtor, at least in countries that see it as a requirement for the validity of the assignment; (b) bona fides of the paying debtor, at least in countries that see it as relevant in this connection; (c) bona fides of the assignee, at least in countries that allow protection against the nemo dat rule in the case of assignments of claims;

and acquiring knowledge of the earlier assignment after the second assignment (but before notice is given thereunder) is irrelevant for the entitlement to the collection, but if there is a registered charge, there may be constructive or implied notice, although this is not automatically so in England and in particular does not apply to any restrictive assignment covenants in a floating charge as they need no filing. If the earlier assignment was a legal assignment, it would have required notice to be valid, and there would not appear a problem with a second legal assignee, but what if the earlier assignment had already been notified (without collection) unknown to a later legal assignee who notifies and collects? In that case, the priority of a bona fide legal assignee could follow from the general principle that earlier interests of which the later legal purchaser is unaware and are equitable as to him may be ignored. Strictly speaking Dearle v Hall was not an expression of that principle as it concerned two equitable assignments. English courts appear to prefer the rule in Dearle v Hall, upholding the right of the first collecting assignee in all cases: see Pfeiffer GmbH v Arbuthnot Factors Ltd [1988] 1 WLR 150 in which it was held that for priority purposes the legal assignment may be considered equitable. In this connection reference was made to s 136(1) of the Law of Property Act 1925 making legal assignees ‘subject to equities having priority over the right of the assignee’; but cf also F Oditah, Legal Aspects of Receivable Financing (London, 1991) 155ff challenging (with regret) this interpretation. 330 See Salem Trust Co v Manufacturer’s Finance Co 264 US 182 (1924) and Corn Exchange NB&T Co v Klauser 318 US 434 (1943), see n 270 above and accompanying text. It leaves the issue of proper investigation and a search duty amongst professional assignees.

196  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights (d) filing, at least in countries that provide a filing facility in this connection; and (e) the type of rights transferred, which may lead to a different regime for security transfers distinct from outright transfers or conditional transfers in finance sales. Clearly, the subject is of great importance in receivable financing upon assignment of ­portfolios of monetary claims and bona fide collections thereunder, especially in asset-backed funding when the question truly arises who is the owner of the collection right under the circumstances and therefore entitled to the proceeds upon payment by the debtors. The issue is also important for the creditors of the various assignees who may seek to recover from these claims through garnishment. They are likely to prevail over creditors of an assignor if good value is paid for the assignment. They may also increasingly prevail over all competitors if they manage to collect first in good faith. Whether this is so regardless of notice in countries that require it for the validity of the assignment must, however, remain doubtful.331

1.5.12.  Special Assignment Issues: Warranties, Conditions and Default While discussing warranties and conditions in this context, it should be noted that the terminology is normally different from that used in connection with contractual excuses. As regards warranties in the context of assignments, they concern principally assurances of the existence and ownership of the claim or receivable by the assignor. There may be problems with either especially when the claim is future or conditional. It may more properly be seen as a question of the impact on or reinforcement of the disposition right in an assignor. Future claims under existing contracts may be considered existing as at least the debtor is known, see also the discussion in section 1.5.6 above, and any implicit or explicit warranty of existence would then appear unnecessary. Otherwise, it may be useful to look for further assurances, for example, when an existing claim is future because of conditions attached to it except if, like in England, the fulfilment is in the control of the assignor. Whether claims arising out of a certain source, for example the sale of assets in which title is reserved by the assignor, or from a particular line of business, or against a certain debtor are present or future remains a question of definition under the applicable law closely related to the question of assignability as we have also seen in section 1.5.6 above. Here again, a warranty may help. It must also be noted that even existing unconditional claims may not properly or no longer belong to the assignor, for example if obtained through a chain of assignments, one of which might have been defective. It raises the question of the effectiveness of the nemo dat rule for bona fide purchasers of claims and their collections may belong to other assignees with better rights, see the previous section. Of course, any warranty of ownership in such situations will not protect the title but will give the assignee a personal action against the assignor for breach. A warranty may not put him in a much better position than the action for breach already did, but especially in bulk assignments, it may be important as the breach of a warranty in this regard could give the assignee under the relevant receivable financing or factoring agreement the right to collect other receivables until the total number of permitted collections is reached. A breach of a warranty may also lead to a rescission of the assignment or trigger other protections such as a guarantee of a third party. In the case of a rescission on grounds other

331 In the US, there is an older Idaho case (from a State that required notification for validity) which rejected the claims to the collection made by creditors of the assignor before notification: Houtz v Daniels 211 Pac 1088 (1922).

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 197 than lack of ownership of the assignor (when nothing will have passed to the assignee), the receivable may even return to the assignor. More likely to trigger a return is any condition or warranty of solvency or payment by the debtor and is common in recourse financing, see section 1.5.8 above. It will not affect the whole bulk assignment but only the individual claims involving defaulting debtors. Default under the assignment agreement itself could also operate as a condition, and in particular a (fundamental) breach by the assignee under a financing (bulk) assignment could give rise to the claim(s) reverting to the assignor, at least if that were the intention of the parties. It would be automatic in a causal system of title transfer; in an abstract system it would have to be established that parties did mean to annul the transfer under a resolutive condition.332 This may be considered more likely. In this connection, any automatic return upon a default of the collecting assignee caused by its bankruptcy and its effect on the debtor having been given earlier notice of the assignment should also be considered, as well as his/her right or duty still to pay the assignee, the status of his/her bona fides, if relevant in this connection upon publication of the opening of the bankruptcy, and the possibility for the assignor to withdraw or change the notice in this type of situation.

1.5.13.  Special Bankruptcy Aspects of Assignments It may finally be useful briefly to consider any special impact of a bankruptcy on an assignment, particularly in the case of an assignment of a whole portfolio of receivables or a bulk transfer, which is a normal technique to raise financing in factoring or receivable financing and in securitisations, but is also likely to play an important role in floating charges and securitisations as already noted several times. Whatever the precise arrangement, in the context of a discussion of the bankruptcy implications, there are always three kinds of parties to consider: assignors or fund raisers, assignees or financiers, and debtors, who may all go bankrupt. As for the bankruptcy of debtors, in large financings backed by receivables or bank loans, there are always likely to be some and it does not usually disturb the arrangement a great deal, although, as we have seen, especially in recourse receivable financing there may be some special arrangements in this regard. The effect of an intervening bankruptcy of the assignor or assignee must be more carefully considered in this connection, and one sees the situation best if both are bankrupt at the same time when it remains to be determined which estate gets what. In this connection it should be considered that a bulk assignment may cover an entire process of adding and returning claims, like in recourse receivable financing, and of collections. In a floating charge they may constantly be added to the collection. Especially seen from the bankruptcy of the assignee, there are here a number of obvious questions: (a) Does the assignment remain fully operative and may the bankruptcy trustee of the assignee continue to collect accruing claims? (b) In particular, are new receivables included in the original transfer and do future claims still pass to the assignee’s estate when they arise? (c) Upon full repayment, do excess receivables automatically retransfer to the estate of the assignor regardless of the assignee’s bankruptcy?

332 See nn 261 and 265 above.

198  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights (d) In a recourse financing in particular, do receivables that are not being paid by the debtor still revert to the assignor? (e) If no notification was given (assuming it was not a constitutive requirement of the assignment itself), do any collections by the estate of the assignor still belong to the estate of the assignee and can the latter’s trustee trace these payments? (f) Can notification still be given by the trustee of the assignee to redirect collections to him even ahead of other assignees, and can he still make the assignment effective in systems which see the notification as constitutive of the assignment itself and a condition for its validity? (g) Are stays or freezes of enforcement or executions under the applicable bankruptcy statutes relevant in this connection? (h) What is the situation as regards other assignees who may have better rights than the bankrupt assignee who is collecting? May they trace any collections in the assignee’s bankruptcy? There are undoubtedly other issues that may arise in the bankruptcy of either assignor or assignee or both and the solution will depend on the applicable bankruptcy law, usually the one at the residence or habitual place of business of the bankrupt or where s/he has assets, which, if both assignor and assignee are bankrupt while residing in different countries, may lead to conflict. Yet it may be possible to make some general observations on the effect of bankruptcy in the abovementioned aspects. As far as the survival of the assignment itself is concerned, since the assignment does not seem to be an executory contract as it transfers proprietary rights, it is not subject to the right of either trustee to terminate it and to any cherry picking in this connection. It may be recalled that an executory contract is a bilateral contract that is not yet fully performed by either party. In this case, the assignor has received his money while the assignee is collecting the receivables if so agreed up to a certain number, thereupon to return the remaining receivables to the assignor. Although there are many different types of arrangements possible, it seems that in essence nothing further is expected from the assignor and the contract is therefore no longer executory, at least to the extent it is not considered to transfer proprietary interests, although arguments to the contrary may be found in the treatment of repurchase agreements of investment securities which, although transferring proprietary interests, rightly or wrongly, are often still treated as executory, especially if they concern fungible securities. The netting principle is than operative and will often be an adequate response if there are mutual positions. In any event, the collection under a conditional sale of a portfolio of receivables appears to survive, just as a security interest would survive if supporting a loan until the amount of principal and interest was collected. It would follow that if collections reach the agreed amount, the remaining receivables would be automatically retransferred to the assignor’s estate regardless of the assignee’s bankruptcy. This would clearly be the case if the receivables were transferred by way of security interest only and there does not appear to be any reason to conclude differently in a conditional transfer. In recourse financing, any receivables on which debtors are defaulting also would appear to revert to the assignor even after the bankruptcy of the assignee if that was the parties’ intent. The situation might be somewhat different as regards receivables committed to be transferred to the assignee but which are future at the time of the assignment. Under applicable law, they may transfer only upon materialising, although it may not always be easy to draw a simple line as we have seen in section 1.5.6 above. In this aspect, the assignment could still be considered executory, therefore subject to acceptance or rejection by the relevant bankruptcy trustee, although, when the receivables result from the ongoing business of the assignor after its bankruptcy, transfer

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 199 might be less likely or even considered inappropriate. Naturally, the trustee of the assignee would have a claim for damages for any discontinuation of the assignment agreement in this respect, but it would only be a competing claim in the assignor’s bankruptcy and then unlikely to be of great benefit. It must also be considered that if no notification was given to the debtor(s), the bankrupt assignor’s estate is still likely to collect, but the assignee’s trustee might still be able to trace the proceeds at least in common law countries under equitable assignments, thus when the notification is not a constitutive requirement of the assignment itself. In civil law countries this tracing may be much more difficult as a concept. Alternatively, the trustee of the assignee could attempt to give the notice and direct the collections to himself. There is obviously a greater problem in countries like the Netherlands, France, and under statutory assignments in England where the assignment itself is not valid (at least not as regards third parties with some exceptions in financing operations as we have also seen) if no notification has been given, although in England it may still stand as an equitable assignment. It raises the question whether the trustee of the assignee could still give this notification upon a bankruptcy of the assignor to validate the assignment and allow the assets to move from the bankrupt to his own estate. If, under applicable law, the assignor need not cooperate in such notification, and always assuming that the underlying assignment agreement is valid and not subject to repudiation as an executory contract by the trustee of the assignor (the latter having fully performed), there does not seem to be any strong objection to the trustee of the assignee doing so. Another situation arises if the assignee is in default under the assignment either before or as a consequence of the bankruptcy, for example where parts of the collections are not being turned over to the assignor. If the default is material, likely in such cases, it may void the assignment and the question again arises whether uncollected receivable(s) automatically return(s) to the assignor. This may more readily be the case where such a return would not require any acts of cooperation of the assignee’s trustee and thus be fully automatic. In abstract systems of title transfer, there would be no automaticity in the transfer, however, except where clearly so intended. If there is automaticity, further questions arise whether the assignor may vary or withdraw any notification already given to the debtor(s), whether in his own bankruptcy his trustee may do so, and how this can be done. The question is always to which estate the assets belong in the circumstances and whose creditors benefit: those of the assignor or assignee? Stays or freezes under applicable bankruptcy law, like the one under section 362 of the US Bankruptcy Code, do not appear to impact on collections by the assignee’s estate, but they normally have an effect on the completion or perfection of secured transactions or conditional sales. Yet there will be no effect if these are already in place, except that under security arrangements, executions or forced disposals can no longer take place or continue in reorganisation-oriented jurisdictions like the US and now also France until the restrictions are lifted by the courts or through lapse of time. Collections of a cash flow under a bulk assignment, even if only for security purposes, are not so likely to be considered executions or dispositions in this context, however, and do not appear to be affected by freezes of this sort. The debtors simply continue to pay the assignee upon notification and can always liberate themselves by doing so, at least in jurisdictions where bona fides, or in this case knowledge of the bankruptcy and possible default under the assignment, are not relevant. Finally, other assignees with better rights may assert them against the debtors. As discussed in section 1.5.10 above, it seems improper to put the burden of the determination of the better right wholly on the debtors and they should be able to pay the first notifying assignee and be liberated, regardless of the bankruptcy, except where on its face this notification was clearly

200  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights irregular. Better still would be a system under which the debtor would have to accept a duty to pay the assignee pursuant to a notification given by both assignor and assignee leading to a liberating payment per se. It means that assignees with better rights should trace the proceeds with the bankruptcy trustee of the collecting assignee in countries allowing such tracing but not bother the debtor. The alternative would be for them to garnish the debtor and let the courts determine the payment duty.

1.5.14.  Contractual and Proprietary Aspects of Assignments. Mandatory Rules. Applicable Law and the Issue of Party Autonomy Revisited The various complications of assignments especially of monetary claims identified in the previous sections and which may still distinguish them from the transfer of chattels, arise in practice in particular from the asset status of claims, their separation from the relationship out of which they arise, the possibility of their unity and possible transfer in bulk including future claims, the meaning and extent of party autonomy, and the abstraction principle and approximation to promissory notes in this connection, the type of proprietary rights that can be created in them, the meaning and effect of identification, documentation and notification requirements, and the impact on the debtors, who are always individualised. It should also be considered in this connection that any assignment in whatever form may have an autonomous effect on the status of all participants: the assignee/new creditor may have better rights against the debtors than the assignor/old creditor, the debtors may on the other hand have fewer defences and must cooperate but may have a strong position in terms of a liberating payment upon notification and payment, the assignor may remain liable for duties that may transfer with the claims, whilst subsequent assignees when collecting in good faith may be able to ignore the others. The issues revolve more in particular around: (a) the acceptance of a degree of unity in portfolios of monetary claims and the possibility and promotion of bulk assignments especially for funding purposes and the effects of any remaining requirements of identification, documentation, and notice in terms validity of the transfer of each covered claim; (b) the assignability of claims, the possibility especially of segregating monetary claims from the underlying relationship out of which they arise and the inclusion of future claims especially as replacement assets, in particular in extended reservations of title and floating charges; (c) the issue of liquidity and the approximation to promissory notes to support the unity of portfolios of claims; (d) the impact in this connection of party autonomy in the creation of proprietary rights, the assets covered, and the implied acceptance and recognition by those who knew or as professionals should have known of any such rights before acquiring an interest in the underlying claims; (e) the extent of the debtor’s protection and the status of his defences upon such assignments, especially the set-off facility, and the effect of any extra burdens and risks or cooperation duties; (f) the better rights to payment of an assignee compared to the position of the assignor and the curtailment of the effect of contractual assignment prohibitions in the underlying agreements out of which the claims arise;

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 201 (g) the consequences for the debtor of any automatic transfer of related duties and the extent to which this must be accepted and discharges the assignor; (h) the meaning of the notice if regular on its face in the enforcement against the debtor and the impact of multiple assignments, especially for the debtor in terms of his ability to make a liberating payment, his investigation duties in this respect, and the finality of his payment; (i) the conditions of the assignment in terms of disposition rights of the assignor, the validity of the assignment agreement, and any remaining formalities, the consequences of the failure of any of them especially if becoming apparent only after collection, and any investigation duties of debtors and assignees in this regard before they can safely pay or lay claim to the collections; (j) the kind of (limited, conditional or security) proprietary interests that may be created in them and any additional formalities that may be required in terms of registration or publication, the date of their effectiveness and ranking; (k) the rights to accessory security interest supporting the claims, especially if the assignment was less than a full assignment and transferred a lesser interest in the claim; (l) the ranking between the various assignees and the entitlement to collect or to collections already received by any of them. A key issue is whether under the objective law, traditionally built around identification, documentation and notification, in practice often narrowing to issues of validity, assignability and debtors protection, a situation can be created where, at least in professional dealings, often geared to asset-backed funding, these issues can basically be left to the parties, meaning that it is for banks to decide what they can accept as security for debt or as finance sales in the manner they want whilst in the process doing away with numerus clausus restrictions and debilitating transfer formalities. For the debtor the true concern is his liberating payment, its finality, and his/her subsequent full release. For the various assignees it is a question of who can give proper notice and is entitled to the collections. These issues and underlying needs and policies may acquire a special poignancy in a private international law context when there is an assignment of portfolios of assets with debtors in different countries, compounded probably when the assignment is to an assignee elsewhere, when, in the traditional conflicts of laws approach, the applicable law in the various aspects of the assignment must be determined and the characterisation of these issues in terms of validity, assignability or protection of debtors may be of particular interest and its adequacy in dealing with the contractual, proprietary and enforcement aspects especially considered. It unavoidably leads to the application of the law of different countries in the hope that together they may still create a credible legal environment for funding or other transactions in the international flow and production and distribution chains: see more particularly section 1.5.8 below. The true issue is then the operation and recognition of these rights (or the insufficiency of this approach) and their rejection in a bankruptcy elsewhere. That is in the end not different from the situation in respect of chattels and a question of disposition right, proper transfer or assignment, and formalities in the appropriate jurisdiction, therefore about the proper initiation of the assignment before recognition elsewhere and the necessary fitting in process can be considered. As we shall see, probably as the consequence of an insufficient insight in the asset status of claims, no proper distinction tends to be made here between contractual, proprietary and enforcement aspects. It means that there is hardly a model or guidance, a complicating factor being that in the absence of a clear situs of claims, compounded in the case of bulk assignments with debtors in different countries, the appropriate jurisdiction of origin can hardly be

202  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights established. Lack of unity of the assigned portfolios and individualisation of each claim are other serious impediments unless their promissory note status and a large degree of abstraction of the assignment and the notice are accepted, especially in bankruptcy proceedings wherever obtaining. A degree of party autonomy may here also help as we have seen. There might even be a kind of legal personality of portfolios of claims and separation in that sense, guided by its purpose. It would have to be considered whether a combination of these approaches can better overcome the issues of (a) formalities, (b) validity, (c) time of effectiveness, (d) assignability, (e) separation, and (f) defences of and extra burdens for debtors, also internationally. In the distinction between the contractual, proprietary and enforcement aspects, the law itself may present here further complications especially in the international flows: some of these issues are indeed purely contractual, such as the assignment agreement itself (although not the transfer of claims thereunder) and the question of amendment or novation. Others have a proprietary aspect like the question of assignability, including the effect of any assignment prohibition clauses, as well as the possibility of assignment in bulk and the inclusion of future claims. The same is true for the notification where it is a condition for the validity of an assignment and transfer. The type of proprietary right that can be created through an assignment (for example, in terms of securities or conditional ownership rights) is obviously also a proprietary issue, as are the rights of the various assignees in multiple assignments of the same claims by the same assignor and the ranking issue. The question whether changes in the underlying contract between an assignor and a debtor could affect the assignee raises another but different third-party issue. It was already noted in this regard that for the debtor there is a mixture: although he is a third party to the assignment, it does not mean, that the effects on him are always proprietary. His/her payment duty is determined by who owns the claim but in other aspects like his/her defences the issue may remain purely contractual, raising questions only in how far they are affected or disturbed by the assignment. Some derive from the assignment itself, like any extra burdens. Others are, however, in principle proprietary, notably the question who is entitled to collect upon multiple assignments of the same claims and then probably also who may give proper notice and a discharge. It will be submitted that neither the law of the underlying agreement out of which the claims arise nor that applying to the assignment agreement can alone determine the non-contractual or proprietary aspects of the assignment nor necessarily the debtor’s position, rights, duties and protections upon the assignment. For tangible assets, the lex situs is the normal reference point in the proprietary aspects, indeed much more difficult to determine and to accept for intangibles, see section 1.9.4 below. A fortiori, a contractual choice of law in either the assignment agreement or the underlying relationship cannot cover these aspects dispositively either, especially the effect on others unless one adopts the more limited equity approach in common law countries, see section 1.5.8 above. Except in this equity approach and the limited reach of the proprietary rights so created, a party choice of law or more generally party autonomy can also hardly dispense with the issue of identification and individualisation of each claim and with the formalities of the assignment in terms of documentation and notification, registration or publication, certainly in the case of security transfers and may inhibit recognition in places where it may matter most, especially in enforcement. Issues of validity are also rarely a matter of party autonomy. Assignability, therefore the question whether, for example, future or highly personal or blocked claims may still be assigned, may also not be an issue at the free disposition of the parties to an assignment and can then also not be solely determined by the law they might have chosen to cover the assignment or the underlying claim being assigned. Thus, proprietary effect, formation, validity and assignability issues are more likely to be determined by objective or even mandatory rules especially wherever enforcement is asked, probably

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 203 even the protections of the debtors, although the latter might be waivable in the underlying agreement out of which the claim arises, but there might still be public policy constraints especially in consumer claims. In any event, it would only be of help if substantially all assigned claims had the same exclusions in a bulk transfer. Indeed, objective rules are also likely to apply to the enforcement aspects in the place of each debtor, also in respect of what types of proprietary interests can be pursued, to the protection and ranking of various assignees inter se, and to the effect of the nemo dat rule in this connection, to the rights of creditors of either assignor or assignee to recover from these assets, and to the question who can sue the debtor and, if necessary, recover from his other assets. Party autonomy and a party choice of the applicable law is also unlikely to help in the determination of whether mere creditor substitution with or without amendment of the terms of the agreement took place or, upon the consent of the debtor, novation with the loss of any supporting personal or real securities. Again, it may be different in equity where that facility exists. As just mentioned, in proprietary (and enforcement) matters, in the traditional conflicts of laws approach, the lex situs is often still deemed controlling in these matters. As we shall see in section 1.9.4 below, its determination produces obvious problems for intangible assets like monetary claims. The question then becomes what the alternatives might be, but more fundamentally also whether a system of conflicts of laws relying on the application of domestic laws in the various aspects of notably bulk assignments with debtors in different countries, or even assignees, can cope and whether the cut up of the international flows accordingly still produces credible solutions or whether we must start thinking in terms of transnationalisation of the applicable law with a stronger reliance on the abstraction principle in respect of the assignment and any payment notices given thereunder, supported by a greater degree of party autonomy in the creation and functioning of these rights, assuming we understand better the need to promote bulk assignments of monetary claims in securitisations and asset-backed funding in the international flows.

1.5.15.  Uniform Treaty Law Concerning Assignments Attempts to create some uniform rules for international assignments through treaty law have been made by UNIDROIT in its Factoring Convention of 1988 and much more so by UNCITRAL in its 2001 Convention on the Assignment of Receivables in International Trade. There are also rules on assignment in the UNIDROIT Principles of Contract Law, in the European Principles of European Contract Law (PECL), and in the Draft Common Frame of Reference (DCFR). Here again, the true importance of uniform law of this nature becomes clear in professional dealings in particular in the context of funding operations and is likely to show especially in the bankruptcy of the main parties, initially of the assignor, who must deliver the receivables, but subsequently also of any assignees, and finally of any debtor(s) who must pay the assignee(s). Some of the complications were detailed in section 1.5.13 above. Mostly it can only be seen in bankruptcy whether one has got something better or different or more clearly under uniform law than under domestic laws applicable pursuant to the rules of private international law. In this connection, it should be taken into account that the applicable bankruptcy laws, which everywhere remain domestic, may add their own views to those of any conventions (or any EU rules) to the effect and sometimes override non-bankruptcy law as a specialised enforcement regime. This may especially affect receivable financing. For example, in a bankruptcy of the assignor, the true question is whether the receivables have left his/her estate and when, which is relevant especially for future receivables. Whether a bulk assignment may have been considered valid

204  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights in an insolvency at all may be another matter for the applicable bankruptcy law to consider. In particular if the bankruptcy is in the country of the assignor while this country is a Contracting State, the principles of the Convention are likely to have considerable weight and they may also be respected in a bankruptcy elsewhere if in these aspects the law of the assignor is deemed to prevail. The situation may be more difficult in the bankruptcy of debtors and assignees elsewhere. The true complication may be that the proprietary interests, which are allowed to operate or to be created under a Convention of this type, particularly if less than full ownership is conferred on the assignee, still have to be fitted into the priority ladder of the applicable bankruptcy law or lex concursus, which may be difficult to predict in advance. The place of the opening of the bankruptcy will normally depend on the location of the bankrupt, who may be situated in various countries (through branches or more incidental activities), or on the location of the bankrupt’s (major) assets. In bulk assignments, bankruptcy of individual debtors may be less relevant. There will always be some and a Convention cannot by itself improve the credit quality of a portfolio of receivables, except where it creates certainty in the payment obligations of the debtors to a (bulk) assignee. More troublesome is in this connection a bankruptcy of the assignor or assignee, see again the discussion in section 1.5.13 above. It would appear that a convention or similar instrument in this area should have the following minimum aims and also affect or amend the bankruptcy law in Contracting States: (a) promote the separation of monetary claims from the underlying relationship out of which they arise and their assignability; (b) promote the unity of portfolios of monetary claims and do away with their individualisation and objective identification requirements, back the validity of a bulk assignment through one act of transfer based on a reasonable identification or description of the assets, and accept the inclusion of future claims, with retention of rank, as least to the extent they are replacement assets; (c) do away with any individual documentation and notification requirement as a precondition for the validity of the assignment; (d) determine the basic requirements in terms of disposition rights of the assignor, the validity of assignment agreements, and any remaining formalities, and cover the situation when any of these conditions fail especially if becoming apparent only after collection has already taken place; (e) require all debtors to pay the assignee upon proper notice, valid on its face, limiting their investigation duties and implying a liberating payment and its finality as far as the debtors are concerned; (f) limit the defences of the debtors to those that are material, accepting that liquidity of monetary claims is ultimately in the interest of all, and that a measure of cooperation of debtors may therefore be demanded, also acceptance of reasonable extra burdens in particular when the funding was necessary to support the credit given in the receivable; (g) do away with the third-party effect of contractual assignment restrictions at least for monetary claims; (h) clarify the debtor’s rights and assignor’s obligations in respect of duties of the assignor that automatically transfer with the claim; (i) promote the transferability of commercial contracts subject to the transferor remaining a guarantor of the performance of his duties thereunder (j) define and recognise in all Contracting States the type of interests that can be created, promote receivable financings as conditional ownership structures, facilitate securitisation of bank loans, and accept floating charges as security interests ranking from the day of their creation;

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 205 (k) consider the effect of party autonomy in the creation of proprietary rights and the implied acceptance and recognition (or not) by those who knew or as professionals should have known of any such prior rights when acquiring an own interest in the underlying claims; (l) establish the order inter se among competing assignees and protect the bona fide collecting assignee with a search duty only for professional insiders; (m) sustain collection agreements and the notion of segregation of the proceeds; and (n) be aware of the other sources of transnational law which may supplement or even supersede such treaty law, as there may be transnational fundamental and general principle and transnational custom and practice or an enhanced status of party autonomy in professional dealings, whilst in a proper application of the lex mercatoria local laws may retain a residual gap filling function if all else fails. It is submitted that the acceptance of the abstraction principle in respect of the assignment and any payment notices given thereunder and therefore the measure of approximation of the receivable to the promissory note is one of the main conditions for the success of a convention of this nature, and the more this is accepted, the more useful such a convention is likely to be. This goes in particular to the issues of separation, abstraction and independence of monetary claims, their transferability and liquidity, types of assignment and party autonomy, and finality of payment. The alternative is a large measure of party autonomy, which may in any event supplement. This is what transnationalisation must clarify and bring. It could be that that was never sufficiently understood by the drafters of the 2001 UNCITRAL Convention and contributed to its failure. The UNIDROIT Principles of Contract Law, PECL and the DCFR suffer from similar limited perspectives and cannot deal in particular with international funding operations backed by receivables or bank loans.

1.6.  Trusts. Constructive and Resulting Trusts, Tracking and Tracing. Agency. The Civil Law Response 1.6.1.  Basic Features of the Common Law of Trust The obvious example of equitable proprietary interests in common law is provided by the trust. A trust in its simplest form is a three-party arrangement under which a settlor transfers assets to a trustee for the benefit of certain beneficiaries. The beneficiaries have no direct access to these assets, which are held and managed by the trustee and distributed by the latter to the beneficiaries in the manner set out in the trust deed and it is conceivable that they have some user and enjoyment rights. It is more frequently the case that they have income rights in the trust assets. Both trustee and beneficiaries have proprietary interests in the trust assets, which operate side by side, the one in law, the other in equity, both conveyed or granted by the settlor. That therefore also applies to the beneficial interest. This is the principal difference from what in civil law are often called economic ownership or interests, which are not proprietary and may therefore present considerable problems as to their protection, not least in a bankruptcy of the holder of the underlying assets in which these interests operate. In common law thinking, the proprietary rights of the trustee (at law) and of the beneficiaries (in equity) are not seen as directly connected or dependent for their continued existence on the settlor or on each other, and were originally enforceable in different courts (the courts of law and the courts of equity). Strictly speaking, the right of the beneficiary is therefore not commonly considered split off from that

206  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights of the trustee as legal owner, eventually being reintegrated in his ownership as a limited proprietary right or ius in re aliena in civil law terms would be (the civil law usufruct is otherwise perhaps most closely related). Rather it is considered imprinted on it, see also the discussion in section 1.3.3 above. In common law, the idea is that the beneficiaries have an altogether separate set of rights, proprietary and obligatory or fiduciary under the trust, although this may be largely semantics. The trust concept has always caused confusion in the minds of civil law lawyers, unnecessarily so it would seem. It is often said that the separation in the ownership structure, which is at the heart of the law of trust with its legal and equitable owners, is unfamiliar to civil law thinking. Civil law is, however, entirely familiar with limited proprietary rights: see also section 1.2.1 above. Indeed, one of them, the just-mentioned usufruct, can be easily structured in a trust-like fashion when conveying a benefit for a number of years and is sometimes seen as a temporary ownership right (cf Article 3.85 new Dutch Civil Code). Through conditional ownership rights, even if remaining underdeveloped in civil law (but see also section 1.7.1 below), similar splits or separations in ownership may be achieved more informally, even though technically, in civil law, the result would be limited proprietary rights rather than a separate or parallel set of rights. Again, much of this is semantics and due to the particularities of equity that developed for historical reasons as a different legal facility, which was never felt to need integration in a larger more coherent framework. The key is the split of the ownership right. The advantage of the English system is that in equity the common law structure could be ignored while in civil law its system cannot be considered irrelevant and newer proprietary rights must then be expressed in an existing context, which has proven to be a considerable handicap. This being said, also in civil law there are structures that are more properly trust-like or more particularly in the nature of split ownership rights outside the existing system, but they are more incidental and have always appeared incapable of extension or of being amenable to analogical interpretation. In civil law, the fideicommissum of Roman law and its fiducia are often thought to be the most closely related to trusts. The fideicommis allowed a person to leave its property (by will) to heirs or legatees and impose on them a duty subsequently to dispose of the property through transfer or by will in a certain indicated manner. Thus, one could leave certain property to a spouse with the obligation on her to leave it subsequently to the children and any testamentary or other dispositions by her to the contrary would then be considered void. The result was a limited ownership in the spouse that amounted to the right to take the fruits and income for life only. In civil law countries these facilities often survived: see for example section 2100 BGB in Germany. It creates forms of suspended interests or ownership and it could even lead to perpetuities. Other elaborate testamentary structures may also lead to situations more closely related to common law trusts, as in Germany the appointment of a testamentary executor (Testamentsvollstrecker) to watch over this arrangement. This person is sometimes said to have a mandate without representation. That means that he is not an agent nor is the property he manages part of his estate, even if held in his own name, a position not dissimilar to that of a common law trustee in a testamentary trust. Also, the new Dutch Civil Code accepts a similar structure (Article 4.106). The emphasis is then on management and the ownership is with the beneficiaries even if it may be immobilised in respect of them and they cannot dispose. Guardianships over minors are closely related at least under German law,333 and also lead as a minimum to a split or separation between the ownership and disposal rights in the assets. Again, in civil law thinking, the results are limited proprietary rights or more specific but also more 333 See also W Fratcher, International Encyclopedia of Comparative Law 6 (Tübingen, 1973), ch 11, ss 127–28.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 207 incidental iura in re aliena in a proprietary system that is still perceived as being one as such integrated and coherent. There is no such need or urge in common law countries. The Roman fiducia had provided a somewhat broader framework covering various forms of custody, also with split rights, although in this instance with a lesser proprietary protection for the beneficiaries than possible through the fideicommis.334 In Germany, there is as a survivor the fiduziarische Treuhand, as we shall see. It is a structure that more generally compares to the modern trust but it is now mostly considered a purely contractual arrangement and is therefore in its generality less developed, although modern statutory forms of it may still be more pronounced, but again they are incidental. This remains the basic civil law attitude and is certainly also the drift of modern Dutch law (Article 3.84(3) CC), which superseded the earlier more friendly case law disposition towards the fiducia: see also Volume 5, section 1.2.2. To repeat, even in Roman and old German law, which have both been claimed to be at the origin of the trust in a common law sense—a view rightly abandoned in modern times335—the fideicommis and this type of fiducia (cum amico) only presented special solutions. Where these structures continue to exist in civil law, it is the same and they are mostly connected with testamentary dispositions, custodial situations, indirect agencies, or otherwise with charitable foundations or the legal personality of public institutions. In the latter case, they may well go beyond what common law trusts mean to be. In view of the foregoing, there should be little place for civil lawyers’ bafflement in matters of trusts. They know various instances of informal splits in proprietary rights, but it is the ensuing potential of greater flexibility in creating proprietary rights that is likely to be the true reason for the commotion. It may be systematically unsatisfactory but it gives the common law an advantage, even intellectually. In the foregoing it has already been explained how split proprietary rights work and the trust is only one expression of them, even though a major one. Others that were identified in respect of movable property were the conditional and temporary ownership rights and the floating charge. Notably in the Netherlands, the new Civil Code having made room at least for conditional and even temporary ownership rights (although converting the latter into a usufruct) but not dealing with floating charges, was unable to formulate broader structures and concepts of this nature, even in respect of owners who created separate management structures in their assets, originally meant to be covered by Title 3.7 of the new Civil Code, later abandoned, exactly because they were deemed to be against the system. As we have seen, civil law traditionally puts extreme emphasis on the way in which assets are held. Once in someone’s name, it does not like to recognise beneficiary ownership types except if taking the form of a limited proprietary right such as the usufruct or possibly conditional ownership. That is the essence of their numerus clausus of proprietary rights. The consequence is that these beneficial ownership rights normally only have contractual status and can therefore only be defended as such. This suggests at the same time that there is no proper segregation of the assets and that creditors of the owner in name have full access to these assets. This may amount to a considerable windfall for them (and especially their creditors in their insolvencies) and is as such undesirable, for example if we think of custodial arrangements or client money that may wash up in a bankruptcy of the custodian as being considered its own, part of its

334 Both the fideicommis and the fiducia were mentioned by Gaius, the latter in two forms: the fiducia cum creditore and the fiducia cum amico: see respectively Inst I, 248 and 260 and II, 60. See for the roman fiducia, also n 377 below. 335 See R Helmholz and R Zimmermann (eds), Itinera Fiduciae, Trust and Treuhand in Historical Perspective (Berlin, 1998).

208  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights estate, and thus available for its creditors. Indeed, in business, this creates special problems in fund management, custodial arrangements and nominee accounts, when separate company structures or foundations may have to be created. Contractually created preferences or priorities (short of security interests), in French called privilèges, may sometimes help and may be more easily created or recognised in case law. In some countries, these difficulties led to special statutory intervention to achieve sufficient segregation for these types of activities. Nevertheless, the segregation issue remains problematic in the absence of clear proprietary structures in all civil law countries and also shows itself in undisclosed or indirect agency, assignments of trade receivables for collection purposes, in transfers of any other assets for management purposes including investment management, in client accounts held in an intermediary’s name, and in partnerships without legal personality. Again, special statutes may try to deal with the situation, especially the segregation issue upon a bankruptcy of the intermediary in special instances. Modern custodial arrangements for investment securities organised through book-entry systems may by statute also acquire sufficient segregation and introduce in that connection also a notion of joint ownership of the beneficiaries separate from the custodian. The traditional example is here Euroclear, which, however, may be said to operate rather on the basis of market practice (see for greater detail section 3.1.4 below). On the other hand, it has long been recognised, also in civil law, that where persons gather money from the public for charitable purposes or from a group of people with a special objective, which may even be commercial, this money does not belong to the persons having collected it. Everywhere it must be set aside (as Sondervermögen) and is separated from the estates of those who collected it. Its distribution is or should be governed by the professed purpose for which the money was collected. As such, these funds may have no owner in the typical civil law sense at all, which would seem the only way to satisfactorily deal with this situation. As soon as beneficiaries are determined by name, they acquire a proprietary interest in the collections but even that does not necessarily give them the property rights in all the moneys collected or so set aside. It is clear on the other hand that the gatherers only have management and investment duties corresponding with the professed purposes of the funds. Yet they may make disposals, always within the advertised purpose for which the funds were collected. As such they behave, at least externally, as owners but they are truly trustees. These relationships are in civil law typically not further developed.336 Civil law remains rudimentary here in what is in essence a trust situation, which in common law countries only fully evolved as an independent structure and overarching concept from the nineteenth century—with much older but also much more incidental earlier roots. The law concerning it is of major significance both in a business and family context. The segregation is the key, and uncontroversial even if threatened by an irretrievable commingling of assets. In terms of split ownership, it has already been said that civil law may conceptually come close to the common law trust also, not only therefore in charitable collections and similar situations. The conditional sale, in enlightened modern civil law thought, leads to suspended ownership rights and a duality in ownership between both parties to the transaction. Reservations of title and hire-purchases are acknowledged examples also, but there are others: see section 1.7 below. In civil law terminology, one may say that one party has here an ownership right under a resolutive condition and the other under a suspensive condition.337 It is this duality in ownership which, even in civil law, may go well beyond the limited ownership rights that it commonly allows. 336 In Germany, the Lawyers’ Association (Juristentag) discussed a general Treuhand law giving beneficiaries a proprietary right at its meetings in 1912 and 1930, but no further attempts were made to develop a unitary trust concept. 337 See also JH Dalhuisen, ‘Conditional Sales and Modern Financial Products’ in A Hartkamp et al (eds), Towards a European Civil Code, 2nd edn (Dordrecht, 1998) 525; see further s 1.7 below and Vol 5, s 2.1.5.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 209 What is notably absent, however, is the protection of the ordinary course of business or the commercial and financial flows against these interests, which are therefore not limited in their full proprietary effect to insiders, such as banks and suppliers. This may well be the true reason why these interests could not develop much further in civil law. In true trust or similar equitable structures, these split or separate ownership rights are less likely to be of a conditional nature, but they may be temporary, that is, for a number of years only. Common law was always advanced in the acceptance of future or suspended interests, especially in land law. At least in England these conditional and temporary ownership rights are now considered always to be equitable when created in personal property (and since the Act of 1925 also when created in land). Although they are often considered to operate behind a trust, they should probably still be distinguished from trust structures, as, for example, in the case of the reservation of title, which presents another type of split ownership that becomes equitable only for chattels and need not take on trust-like appearances. Given the example of the reservation of title, it is clear that conceptually there continues to be room also in civil law for a similar split ownership to operate, but again it remains a more rudimentary concept. It results in segregation, but it notably misses a management structure mostly innate in formal trusts and especially the tools to remedy any abuses in terms of breaches of fiduciary duties. Nor is it predicated on the protection of the ordinary flows, even if in civil law countries in respect of chattels bona fide purchasers are protected. However, this is a narrower concept that notably does not extend to receivables (and land). As just mentioned, in civil law, trust-like needs emerged especially in charitable collections, testamentary dispositions concerning minors with suspended interests, investment management, custodial arrangements and client accounts, and in indirect agencies where an agent operates in his own name for the account and risks of his client. In all, it is best to view the client (or economic owner) as the constructive owner of the assets which the manager/custodian or indirect agent holds or acquires for him (even in his own name), as indeed is mostly the case in custodial arrangements and undisclosed agencies of common law. What this means then needs further expression and would in a proper modern system amount to (a form of) full ownership. Short of a formal trust structure, in common law countries there is here in equity the alternative of a constructive or resulting trust (see also section 1.6.4 below) although still giving the client less than full rights. They are not legal owners proper, an issue for indirect agency discussed more extensively in Volume 3, section 3.1.6. But there is at least segregation. If in civil law these assets should not properly belong to the estate of the custodian or agent either, it lacks the proper means of expressing this in a more general manner or through a more general legal structure. Hence incidental statutory law must often come to the rescue here but may not then be expansively applied. The foregoing suggests at least seven essential points in connection with trusts or trust-like structures, both in common and civil law, although by far the best developed in common law countries: (a) In formal trusts, a fund or certain assets are unilaterally set aside for certain purposes, which determine how they are to be treated for a time which may exceed the life of trustees. (b) There is some management structure,338 which, unlike in contract, may leave considerable discretion to the managers (trustees) and cannot be eliminated339 but is subject to the courts having the right to remove trustees and to a system of fiduciary duties.340 338 This is the idea of the ‘patrimony plus office’: see GL Gretton, ‘Trusts Without Equity’ (2000) 49 ICLQ 599, 618. 339 See D Hayton, ‘The Irreducible Core Content of Trusteeship’ in AJ Oakley (ed), Trends in Contemporary Trust Law (Oxford, 1996) 47. 340 See on this development and its drawbacks also R Cooter and BJ Freedman, ‘The Fiduciary Relationship: Its Economic Character and Legal Consequences’ (1991) 66 New York University Law Review 1045 and FH Easterbrook and DR Fischel, ‘Contracts and Fiduciary Duty’ (1993) 36 Journal of Law and Economics 425.

210  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights (c) The assets do not belong outright to the managers (trustees), are segregated, and not rightfully part of their estate.341 (d) The further consequence is that in law they do not belong to the beneficiaries’ estate either (except perhaps for allocated benefits—it depends on the trust deed); in formal trusts, beneficiaries also have no joint (legal) ownership of the assets; even in constructive trusts, the beneficiaries are not the legal owners although they may have joint equitable title and may be able to demand full title. (e) In all cases there results some duality of ownership, or at least a split or separation in the proprietary disposition rights between the managers (trustees) and beneficiaries; neither is the sole owner; only together do they have full ownership rights but may not even then be able to make disposals as they please as the provider of the moneys or of the assets (the settlor in a trust) may have intended these moneys or assets to be used or treated in a specific way, at least for some time, while the managers or trustees will be duty bound to deal with the assets accordingly. (f) Trustees are subject to strict fiduciary duties in their management. (g) Bona fide purchasers are protected against these interests, a protection increasingly extended in modern times in equity or by statute to the protection more generally of the commercial and financial flows in commoditised assets, therefore to all transferees in the ordinary course of business. It means that only insiders, such as banks and suppliers, must be aware of these interests (even if not published) and have a search duty when acquiring security or other interests in the underlying assets. Technically in common law countries, the segregation of property in this manner does not lead to legal personality of the trust, although this is often also pure semantics. The trust should nevertheless be clearly distinguished from corporate entities or other legal entities in civil law, even if the charitable trust is much like a foundation in a civil law sense, but it remains different in that a trust still lacks clear legal personality. This remains an important issue. The consequence is that trustees are in the first instance always personally liable for all they do in the trust. Only if they act within their allotted powers are they released from liability and may recover their costs from the trust. This is precisely the opposite for directors/administrators of legal entities. Their actions are in principle attributed to the legal entity, and only if they demonstrably exceed their powers or ignore their duties may they be personally liable for their actions. What is therefore normal for trustees (personal liability) is exceptional for directors.

1.6.2.  Definitional Issues, Fiduciary Duties, and Court Intervention The 1985 Hague Convention on the Law Applicable to Trusts and on their Recognition attempts some sort of definition of trusts or similar structures in both common and civil law and assumes therefore some universal framework. It covers ‘legal relationships created—inter vivos or on death—by a person, the settlor, when assets have been placed under the control of a trustee for

341 Asset partitioning is indeed seen as the most important commercial function of trusts by H Hansmann and R Kraakman, ‘The Essential Role of Organisational Law’ (2000) 110 Yale Law Journal 387. They note that the partitioning may be less perfect in trusts than in companies, because there may not be much physical separation of property in trusts, which complicates the segregation as a practical matter, but it is nevertheless not less real, although differently handled. To avoid unjust enrichment, the constructive trust must often come to the rescue and reinforce the notion of segregation as we shall see in s 1.6.4 below.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 211 the benefit of a beneficiary or for a certain purpose’. Note that there is here no limitation per se to the common law trust. Specific characteristics are that the assets constitute a separate fund and are not part of the trustee’s own estate. Although the title to the trust assets stands in the name of the trustee, the latter has the power but also the duty to manage, employ or dispose of the assets in accordance with the terms of the trust and the special duties imposed upon him by law. This suggests some duality of ownership. The trustee is accountable for the exercise of his powers and the performance of his duties. The Principles of European Trust Law (Article I) (see section 1.6.7 below) are more elaborate. They also concentrate on the settlor transferring assets to a trustee with the intention not to form part of the latter’s estate and are held for the benefit of the beneficiaries. These beneficiaries have personal or proprietary remedies against the trustees or even third parties to whom part of the trust fund has been wrongly transferred. In the very nature of definitions of a phenomenon of this kind, they all tend to be incomplete and therefore only partially satisfactory, but the idea is clear. Abuse by trustees is an important issue and has always been endemic, especially in family trusts. They might be tempted to favour their own interests and deplete the trust fund with their charges. As a consequence, in common law countries, a large array of fiduciary duties of trustees was built up by the courts to deal with these conflicts of interest and the courts’ equitable powers have always been used to the full to protect beneficiaries. There is no passivity of the judiciary in these aspects. The key duties are those of loyalty, care and confidentiality. The duty of loyalty in particular requires the trustees to postpone their own interest and not to compete with the trust fund for the better opportunities. The fact that these duties and powers do not exist to the same extent in civil law may be another reason why, besides structural and fitting-in difficulties, trustlike structures were never encouraged. In civil law, these duties can only now be more extensively developed within the modern notion of good faith, here used beyond its normal contractual meaning, therefore potentially as a separate source of law, although in the approach of this book in such cases relying rather on fundamental and general principle and custom or established practices. Even then, civil law courts are not used to the same kind of activist judicial intervention as the courts of equity are in a preliminary or final manner through injunctions and similar relief, especially relevant in this area of trusts. As we have seen in Volume 3, section 3.1.4, similar problems of abuse have bedevilled indirect agency in civil law countries, where these types of agents may be prone to ignore their clients’ vital interests and compete with them for the best deals: see for the position in equity section 1.6.5 below. Fiduciary duties and activist judges are vital aspects of the law of trust and agency and are central to this part of the law in common law countries, but are not (yet) so in civil law. There is here a significant deficit in civil law. Indeed, it is clear that in common law, there is a detailed regime for trusts, which still has no obvious parallel in civil law, whether or not the concept itself is now recognised and practised, more so when countries become members of the Hague Trust Convention. In particular, in common law countries, the transfer in trust has a distinct legal character. It is notably not the same as a sale giving the trustee and the beneficiary a contractual right to delivery (although in the case of real estate, a sales contract in land by itself transfers an equitable interest in the realty). It is not considered a contractual transaction at all and can exist without consideration. It is unilateral and cannot (in principle) be undone in the manner of a contract by agreement of all concerned either. This non-contractual nature also makes the operation of informal trusts possible. We should think here of constructive and resulting trusts, see section 1.6.4 below. As already mentioned, both trustees and beneficiaries have proprietary rights against the settlor and third parties upon the establishment of the trust. The recovery rights of the beneficiaries against the trustee are often considered in personam, however, therefore still contractual

212  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights or rather more properly fiduciary in nature. The essence is that they are not then considered to be primarily proprietary, although as regards the creditors of the trustees there is a clear split in a proprietary sense (and recovery possibilities) and there is strictly speaking no direct obligatory bond between the trustees and the beneficiaries. It is possible to say in this connection that the personal rights of the beneficiaries against the trustees were allowed to attach to the trust fund itself and as such gained proprietary status. As regards third-party effect, in common law jurisdictions, the rights of the trustee in the trust fund are protected at law as ownership, but there can be little doubt that the beneficiaries have proprietary protection rights against third parties also, which are therefore of a non-obligatory nature. However, they are strictly speaking not rights against the whole world. Rather, as we have seen before while discussing equitable proprietary rights in section 1.3.3 above, they are rights that can only be exercised against a more limited number or class of third parties. They are: (a) the trustee (although the relationship with him could still be seen as personal or obligatory, but as just mentioned there is no direct bond between them and there is a segregation of assets); (b) his creditors; and (c) transferees from the trustee who acquired his title with knowledge of the beneficial interests or did not pay good value. The rights of the beneficiaries are thus rights maintainable against (some) third parties or classes thereof, especially against all who knew of the interest before acquiring the property, and are in that sense clearly proprietary. In other words, these rights can be maintained against others than the settlor and trustees. In fact, only bona fide third parties that acquire trust assets from the trustee (for value) may ignore these beneficial interests. It is the traditional way in which the common law protects third parties against an unbridled proliferation of equitable proprietary rights but does not make them less ‘proprietary’. Also in civil law, nobody would deny ownership rights because they may be undermined by bona fide purchasers. It only means that third parties may be better protected against the effect of unknown proprietary interests in the assets they acquire. It was earlier identified as the key question of transactional finality. The separate existence of trust funds in this manner means that they are protected not only against the trustee and its creditors but also against the creditors of the beneficiaries, except for the benefits themselves as defined in the trust deed once accrued or vested. In the US, in so-called spendthrift trusts, the beneficiary cannot even freely dispose of his benefit, which is then completely shielded from his creditors. Whatever the additional terms, the key is that the trust assets themselves cannot be reached by either type of creditor while the trustee’s legal rights under the trust can only be transferred subject to those of the beneficiary (except for bona fide purchasers for value). The beneficiary’s own equitable rights under the trust can be freely transferred by them (without the trustee’s consent), but not more than they have under the trust deed and applicable law (which may restrict this facility). In the main, the beneficiary is entitled to some future income stream, but s/he may also have the actual enjoyment and use of certain assets of which s/he will then acquire (equitable) possession. As just mentioned, s/he may be allowed to transfer these income rights (through assignment plus surrender) and also his/her possession to third parties, subject, however, to the limitations of his rights in them. In common law, there is no bona fide purchaser protection here. In the case of chattels, there may be, strictly speaking, no bailment either, as it could be argued that the beneficiary holds the benefit in his own (equitable) right.342 But there could be a bailment for any person to whom he surrendered actual possession.

342 See for the relationship between trust and bailment s 1.6.5 below.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 213 Trusts, except if set up for charitable purposes, have a limited duration. This is not of importance for identified beneficiaries who are alive, but under the rule against perpetuities, future benefits under a trust must vest within a period of no more than a life in being plus 21 years. At least, that is the classical rule. The same goes for all sequences of equitable future (or non-vested) interests. The life in being need not be specified and can be among a class of persons, for example all the descendants of George V or Franklin D Roosevelt living at the time of the creation of the trust (although in England that is no longer possible and ‘lives in being’ must now be drawn from a narrow group of people directly connected with the trust, such as the settlor, certain beneficiaries or parents or grandparents of them or persons with an interest prior to the non-vested interest in question). The duration of the trust for vesting purposes is then the life of the longest survivor plus 21 years. In many States of the US and as an option in England, a fixed number of years has by statute replaced the rule against perpetuities. Although the trust is normally tripartite, between settlor, trustee and beneficiaries, the settlor may convert him/herself into a trustee of his/her own assets for the benefit of others. The trustee and the beneficiary must in principle not be the same person. In that case, the legal and beneficial interests join so that the trust implodes. However, under modern law it may be possible for a settlor to create a trust in favour of him/herself as one of several beneficiaries and manage it as a trustee as long as the separateness of the trust fund itself is respected.

1.6.3.  The Practical Significance of Trusts in Common Law Countries Trusts are of immense practical significance in common law countries, to such an extent that they are in these countries a cultural phenomenon of which there is a general awareness not only among the legal community and the better off. They appear, either formally or constructively, and result all the time. It is a matter of legal separation. They may be used to create all kinds of beneficial interests. In England, the management of assets and the passing of property between generations were the traditional motive. Another point was the position and protection of minors. In the absence of well-developed rules on guardianship and given the uncertainty concerning parental rights of management of children’s assets in common law, trusts were the obvious vehicle for the management of the estate of minors, if of some value. Separation and management are here the key issues. In modern times, tax and business considerations will be no less important. In business, the segregation issue will be dominant in formal trusts but may also be achieved informally through the emergence of constructive or resulting trusts: see section 1.6.4 below. The latter are of great practical significance and play a decisive role in client accounts, fund management, and custody, and undisclosed agency. The common law (equity) flexibility here presents a great advantage over the civil law concern with system thinking and closed systems of proprietary rights. This being said, in business, in common law countries, the use of companies as alternatives or contractual arrangements are practical issues depending on the needs of the situation. In practice, it is often the constructive or resulting trust alternative that is of special interest, principally to obtain a more informal way of separation and to avoid a windfall for the creditors of asset managers.343 That type of separation cannot be achieved by contract alone. It may well 343 For these commercial uses see also S Worthington, ‘The Commercial Utility of the Trust Vehicle’ in DJ Hayton (ed), Extending the Boundaries of Trusts and Similar Ring-Fenced Funds (London, 2002) 135–62; see also HLE Verhagen, ‘Ownership Based Fund Management in the Netherlands’ in ibid 163, and D Hayton, ‘The Development of the Trust Concept in Civil Law Jurisdictions’ (2000) 8 Journal of International Trust and Corporate Planning 159, 178; J Langbein, ‘The Secret Life of the Trust: The Trust as an Instrument of Commerce’ (1997) 107 Yale Law Journal 165.

214  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights be that in this connection the acceptance of the notion of constructive or resulting trusts is more important than that of formal trusts.344 Where special trust statutes exist, especially in jurisdictions that only have a limited common law tradition, such as South Africa, Scotland and Quebec, the concept may be more rigid and less all-encompassing. That is also the likely result under the DCFR, which, since 2009, proposes to introduce formal trusts for movable property in the EU. It means that the trust notion is not fully integrated in the rest of the legal system. But this is not always so under statutory law and it would, for example, not seem to have affected the operation of the trust concept in the Channel Islands, which are (to some extent) civil law jurisdictions. Apart from the uses already mentioned, trusts are often also created to circumvent debilitating legal restrictions and thus acquire a facilitating function. In this vein, trusts are not only useful to manage tax liabilities but may also allow mortgage replacements under which the legal interest is transferred to a trust company for the benefit of a bank. This may avoid cumbersome and costly registration duties. Debtors may even transform themselves into trustees of their assets to hold them on trust for their creditors. It is a more flexible security arrangement, although in the US in the case of movable property this structure is now converted into a security interest subject to the formalities of Article 9 UCC. They remain, however, important as mortgage substitutes in land. The risk for the lender is, however, that bona fide purchasers of the assets for value are protected, which would not be the case under the legal mortgage. When covering a whole business or a multiplicity of changing assets, trusts are also often used, then called indentures, and may equally serve as security interests supporting a debt or debenture, in the US for personal property now superseded by Article 9 UCC and its filing requirements. In deceaseds’ estate planning, trusts traditionally play an important role and they are often of crucial importance as they allow a testator in testamentary trusts to make all kinds of arrangements for heirs or legatees that may afford them additional protection as trusts may deprive the beneficiaries of an actual say and thereby keep the asset from the reach of their creditors (except for the immediate benefits they receive). The trust may also include the heirs of the settlor in the beneficiary class in order to avoid the payment of estate duties upon the death of the settlor. The transfer in trust itself may, however, attract gift tax. This being said, in civil law countries, trusts are often still viewed as mainly tax avoidance vehicles. In common law countries, they are rather considered a feature of ordinary tax planning, which it must be admitted is a greater sport in common law countries, perhaps indeed because the law allows more flexibility. It was always an important argument in France against allowing trusts to operate and its modern facility (fiducie) is therefore limited and can only be used in certain circumstances and never to avoid taxes, at least that is the policy as we shall see in section 1.6.6 below. There are many other conceivable uses of the trust. It may, for example, be very useful where it replaces partnership or joint venture arrangements, as it creates a different ownership and management structure, which may prove more neutral, although the intervention of trustees, who must be paid for their services, may be costly. A trust may even acquire the shape of a company in which the trust res functions as the capital, the trustees as the board, and the beneficiaries as shareholders. This was not uncommon in the US in the nineteenth century before the concept of the limited liability company fully developed. Combating these structures gave rise to the term antitrust laws. Again, it is the flexibility that counts and the unitary legal concept that now prevails in common law, whatever use is made of trusts, has no equivalent in civil law. 344 This is often overlooked by those who believe that contract can achieve the same as trusts, see JH Langbein, ‘The Contractarian Basis of the Law of Trusts’ (1995) 105 Yale Law Journal 625.

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1.6.4.  Constructive Trusts, Tracing and Tracking, Resulting Trusts, Statutory Trusts, and Charitable Trusts The constructive trust is a less formal structure than a trust itself, although it is equally a product of equity and operates in similar ways. It results from the objective law (not from a settlor’s will therefore or even from a statute under which, however, there may be further trusts of this nature) and is often closely associated with the unjust enrichment notion. It means that it is usually imposed on the parties regardless of their intent and is as such of great importance. In England, it is often considered to follow automatically in certain circumstances; this suggests a more institutional approach and a closer connection with and structure of the formal trust.345 In the US there may be greater discretion for the judge and there may be a closer connection with the judicial granting of equitable liens; this suggests a more remedial approach. But again, in all cases it is the separation that it entails, confirms or brings about that is the key issue. In that sense, it is of great value in business and is in common law countries particularly operative in respect of client accounts or other client assets, relevant therefore in particular in the fund management and custody functions. It implies the facility of the beneficiary to track these assets and physically to recover them. Even though in principle only the equitable owner, the deprived beneficiaries may be able to demand full title. As just mentioned, at least in common law countries other than England, the constructive trust tends to be remedial, rather than institutional, although even then a constructive trust may sometimes still arise as a substitute for the trust proper. In the remedial sense, the constructive trust is the formula through which the conscience of equity finds particular expression, clear especially in the US.346 It is there seen primarily as a means by which courts order defendants to relinquish property, the retention of which would lead to their unjust enrichment. It results in an order to surrender the property and creates therefore a proprietary retrieval right in the beneficiary, not normally obtainable under an unjust enrichment action. It shows the temporary nature of this type of facility where the analogy with the institutional trust ends. The remedial function thus arises particularly when title in an asset result in someone who should not have it, for example after rescission of a contract for mistake when there is voidable title. In that case, the erstwhile buyer may be considered a constructive trustee, held to return the asset to the seller, although a similar result may be obtained by avoiding the transaction and returning the asset on that basis. The rescission itself is, however, an equitable remedy, leaving some discretion to the judge in the implementation which may lead to a constructive trust. The return of the asset is not automatic, which, as we have seen earlier, it normally is not, even at law. It should be realised that in such cases also in England the constructive trust notion can be purely remedial, for example when an asset has been sold but the title transfer is delayed. However, it may still be a narrower concept. Although the application of constructive trust principles is mostly incidental, the constructive trust arises all the time. Thus, the thief and his successors may be seen as constructive trustees for the true owner pending the return of the property, which in the case of fraud, will normally be ordered. To repeat, it should be realised that in common law even the thief may be seen as legal owner (bailee) vis-à-vis all, subject only to the better right of the person from whom he stole the asset. In countries that use the notion of the constructive trust more liberally, like the US, there is still a difference between adverse possession (at law) and constructive trust (in equity); they seem not always to be clearly distinguished, however, and may supplement each other. 345 This is also clear from C Mitchell (ed), Constructive and Resulting Trusts (Oxford, 2010). 346 See Justice Cardozo in Beatty v Guggenheim Exploration Co 225 NY 380, 386 (1919).

216  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights The equitable principle includes fiduciary duties while handling the asset even during periods of adverse possession. This could amount to bailment (see, for the relationship between both, section 1.6.5 below) and an element of overlap may result while the adverse possessor (even the thief) acquires at the same time features of a trustee. Another example of a constructive trustee may be an agent who holds the assets acquired for the principal as constructive trustee while the principal is already considered the true owner at law. Nevertheless, technically there is here often cause for confusion of concepts, as the beneficiary under the constructive trust is already the owner at law (as in the case of a theft), but pending confirmation of this status, the assets may still be considered to be held in trust by the wrongful legal owner for the rightful one, who therefore also has an equitable ownership, which is then also protected as such. A trustee who wrongly converts trust property will hold any replacement assets as constructive trustee for the trust. Here we have the concept of tracing and also the beginnings of the concept of the floating charge in equity, under which an equitable security interest automatically shifts into replacement goods and proceeds as converted assets. These floating charges may even result from security interests or conditional sales created at law, such as the reservation of title upon conversion of the asset. In the US under Article 9 UCC, this concept has been reaffirmed and extended by statute (see for replacement goods, when it must be agreed, section 9-204 and for proceeds, when it is automatic, section 9-315(a)(1) UCC). Elsewhere, tracing and constructive trust may remain more closely related and the one often presumes the other. Tracing then acquires a broader meaning and allows the beneficiary under a constructive trust to follow the original interest into the hands of any third party who is not entitled to it. As this does not concern converted assets, probably the term tracking already used above is better. All kinds of fiduciaries may thus be held responsible for assets they control but which effectively belong to others, either outright or as beneficiaries, and these goods may as such be tracked, also in equity, which is especially important if a remedy at law fails. That is also true in the shift of charges into replacement assets, but there are many other instances of tracking, especially in the US. Obviously, the effect of constructive trust, tracing and tracking is most direct and acute in bankruptcy. There is no general theory suggesting a clear approach, however, except perhaps for tracing under floating charges, and bankruptcy courts have often been reluctant to broaden the concepts. They could easily take away what little there is otherwise left for unsecured creditors. Nevertheless, in urgent cases, the concepts of constructive trust, tracing and tracking remain potent, also in bankruptcy, and especially in the US the courts allow new preferences or charges to arise, or correct, perfect or substitute old charges when such is just and equitable, albeit only in extreme cases and reluctantly. As already mentioned, the term ‘equitable lien’ is also used in this connection and is closely related. Indeed, all constructive trust or tracing rights (but by no means all tracking rights, which may arise as a sequel to ordinary property rights) are equitable (even if deriving from legal rights) and are therefore all subject to bona fide purchaser protection. Thus, any security interest in assets held by a constructive trustee and given by him for value to third parties who had no notice of the equitable interest prevails over the equitable owner.347 This situation is the same as in an ordinary trust. Naturally, there is also the problem of commingling with the constructive trustee’s own assets.348

347 See eg Department of Natural Resources v Benjamin, 40 Colo App 520, 587 P 2d 1207 (1976). 348 See, for some incongruous results, DMW Waters, ‘The English Constructive Trust: A Look into the Future’ (1966) 19 Vanderbilt Law Review 1215.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 217 A resulting trust is usually distinguished from a constructive trust (both sometimes being seen as forms of an implied trust), although where, as in England, the approach to constructive trusts is more institutional (rather than remedial) as we have seen, there may be a lesser difference. Resulting trusts are foremost created if a transfer without adequate consideration is made while there is no intention to make a clear gift. The transferor is then presumed to have had the intention to become the beneficiary. Other instances of a resulting trust may arise where an express trust fails in whole or in part. The distinctive feature is that the presumed intent of the parties is given effect, but especially where a resulting trust is imposed by law as it sometimes is in England, there may be no appreciable difference from a constructive trust. There are also statutory trusts of which the bankrupt estate is the prime example. As for charitable trusts, it has already been said that they are very similar to foundations in civil law and may under applicable law be unlimited in time. A practical difference is that the creator of a foundation normally retains power to vary the terms of the foundation, which would require a special power (of appointment) in trusts. If charitable trusts lose their objective when the charitable cause disappears, the objective may usually be varied by the courts to the nearest alternative. This may be more difficult in foundations. Another major difference is that charitable trusts have no legal personality and are in that sense still not separate from the trustees, although obviously there is segregation of assets as a fundamental structural issue.

1.6.5.  Trust and Agency. Trust and Bailment It is sometimes said that agency is to services what trusts are to goods. It means that in providing services, for example the purchase of goods for others, the agent has a responsibility in rendering this service while the beneficiaries are his principals or clients. Accordingly, the agent is under a fiduciary duty to them to do whatever is required under the agency agreement and under objective law to complete the transaction in a proper manner and postpone his own interests, much as a trustee has to do in respect of a trust fund. The added feature is that any goods so acquired by the agent are held by him in trust for the principal. In the previous sections this has already been mentioned, also that the equitable right may here coincide with the legal right as the principal is likely to have become owner already, at least in a disclosed agency. Different, specialised types of agents, such as security brokers, may have further duties in this respect, even if acting in their own name albeit for the risk and account of their clients, or commercial and collecting agents. In common law jurisdictions, brokers must obtain best prices for their clients and may not compete with them for business: see more particularly Volume 6, section 1.3.9. The assets acquired are in the meantime held for the clients (as legal owners) in constructive trust to shield them and preserve them for their clients in brokers’ bankruptcies. So, where ownership rights become involved, agency and trusts naturally come together and agents become constructive trustees pending the assertion of full ownership rights by their clients if they do not acquire it directly under agency rules. Being a beneficiary or an owner makes an important difference for the principal, however, in terms of his protection. As legal owner he must (in principle) respect any transfer by the agent to third parties. As beneficiary, he may ignore these transfers unless the third parties were bona fide purchasers for value. Trusts and bailments also have overlap.349 When goods are stored with third parties and kept in their names, there could result either a (constructive) trust or a bailment. If there is a bailment, 349 See C Uniken Venema, Law en Equity (Antwerp, 1990) 214.

218  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights the bailee could still be agent so that there may be a constructive trust at the same time. In any event, even in bailment, there may be fiduciary duties very akin to those of a trustee as we have seen. Again, there could be an important difference in the protection of bona fide purchasers in these cases. If the latter acquire the assets for value, they may ignore the trust or agency and any beneficiaries (the original or true owners) of whom they had no knowledge. Tracking against them would be impossible. On the other hand, a pure bailor has an interest at law, which results in a better title that cannot be ignored by the bona fide purchasers from the bailee (except if there is a statutory rule to the effect as there commonly is in sale of goods statutes in common law). If there is an agency at the same time there may be a constructive trust also. Constructive trusts may also operate in replacement assets in a converted bailment, in that case also subject to the better rights of bona fide purchasers. In practice, courts may opt for a pragmatic approach and equalise the results of bailment and constructive trust in these circumstances.

1.6.6.  Related Civil Law Structures It has already been mentioned in section 1.6.1 above that also in civil law the idea of certain funds being set aside for certain purposes, and therefore not belonging to the person holding them, is well known. The best example is the proceeds of charitable collections. In statutory form, trusts may exist as testamentary structures, as we have seen for Germany. Suspended or dual ownership rights are in those cases accepted, at least in principle. These dual rights are now also known in some other situations, especially in reservations of title or situations of a fiducia cum creditore or finance sale, which may all be considered to result in some form of conditional transfer and ownership. Indeed, in common law they often operate behind a trust when in movable assets, as we have seen, but they also operate at law, especially in respect of land. In modern financial arrangements these conditional sales and split ownership concepts play an important role, and can no longer be avoided in civil law either, as will be discussed more extensively in section 1.7 below. Although they are not necessarily equitable in a common law sense, there are many reasons why they are best so treated, especially in the aspects of segregation and of the protection of third parties and the ordinary commercial and financial flows. Duality of ownership is thus known, at least in principle, in all legal systems, even if in civil law again not treated as a unitary concept or structure, especially not in the proprietary effect for both parties. It has already been said that this is related to the numerus clausus of proprietary rights, which will notably in its generality not allow conditional or temporary ownership forms to operate as such. But even in civil law it cannot be denied that, especially in custody and agency, there are special needs for segregation of assets, even if held in the name of the custodian or agent, again implying a duality or conditional or temporary ownership in them, if not an outright ownership of the client. In modern client accounts the question also arises of joint but separate ownership of the assets by the clients or of a constructive trust pending distribution. So, it is in fund management, custody and in partnership forms without legal personality. In legal commentaries on civil law, trust-like structures are becoming better known. Especially in Germany, the testamentary trust and the fiduziarische Treuhand have received particular attention in this connection, the latter mostly still being considered a contractual device, however, which makes a vital difference in the bankruptcy of the Treuhänder or trustee handling the assets.350 350 See for an overview, S Grundmann, ‘The Evolution of Trust and Treuhand in the 20th Century’ in Helmholz and Zimmermann (n 335) 469. See also S Grundmann, Der Treuhandvertrag (Munich, 1997) and H Koetz, ‘National Report for Germany’ in DJ Hayton, SCJJ Kortmann and HLE Verhagen (eds), Principles of European Trust Law (The Hague, 1999) 85.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 219 Special applications of the concept may be found in client and custody accounts, in investment management and in indirect agency, where statute may have reinforced the proprietary rights of the beneficiaries. The best example in Germany may be in the Kapitalanlagegesellschaftgesetz of 1970 aiming at better protection of investors against their investment managers or brokers.351 In Germany, the security transfer or Sicherungsübereignung is often also mentioned as an example of a fiducia cum creditore, as is the Sicherungszession for receivables. As just mentioned, they were, like a reservation of title, more likely to have features of a conditional sale and transfer but are now mostly considered a security interest only. The charitable trust or Stiftung, also often mentioned in this connection, is a legal person and therefore has fewer trust-like features. We may review these structures in the light of the most obvious aspects of the common law trusts identified before and first summarised in section 1.6.1 above: (a) the separation of the estate of the trustee and the trust; (b) the duality of ownership between trustee and beneficiaries; (c) the primary liability of the trustee for its actions in connection with the trust property (the absence of legal personality), and the operation of fiduciary duties; (d) the non-contractual nature of the transfer in trust, which also allows for constructive and resulting trusts; and (e) the management structure that the trust entails. This is supplemented (f) by the protection of the ordinary commercial and financial flows against these interests. As we have seen, it means that insiders are affected, especially banks and regular suppliers, and everybody otherwise in the know, but not the public at large, especially not in respect of commoditised assets that are meant to trade. In civil law, the greatest weakness remains in the potential lack of segregation and in the consequential lack of protection of the trust assets in the case of the bankruptcy of a Treuhand or trustee (equivalent) and in the lack of refinement in the fiduciary duties and powers of the courts. The difficulty of separating client account and of collections by collection agents are prime examples, although in the latter case one solution could be to consider the collection agent the mere holder or detentor of the collections. There is also the issue of tracing and more generally the protection of the ordinary commercial and financial flows against these interests, which may well prove the key concept in their broader acceptability. At least in Germany, the first shortcoming could perhaps be overcome by a more extensive application of the regime of the Testamentsvollstrecker.352 As for fiduciary duties, some writers have concluded that a much fuller regime already operates today in Germany.353 Yet it would not bring constructive trust notions, segregation and tracing, which in business are perhaps the more urgent concerns. The inadequate (activist) judicial back-up and the need for it in order for trusts to operate properly has not so far been given much attention in civil law. In Italy, the discussion often stops with the general observation that split or separate ownership structures do not exist but there is more perceptive and flexible modern thinking.354 351 See for other incidental statutory examples more particularly Grundmann (n 350) 28ff. 352 See Koetz (n 350) 109. Creditors of the trustee aware of the arrangement are generally thought not to be able to recover from the trust assets. Earlier the German Supreme Court had already held that they were not entitled to a windfall: RGZ 45, 80 (1900), but it later changed its mind and drew a distinction between assets coming from a settlor and those coming from third parties, the latter being no longer protected: RGZ 84, 214 (1914). Newer case law is, however, more generous when the creditors are or ought to have been aware of the arrangement: BGH [1954] NJW 190. Many authors have gone back to the earlier windfall-avoiding rule: see H Coing, Die Treuhand kraft privaten Rechtsgeschäfts (Munich, 1973) 178 and Grundmann (n 350) 315. 353 See Grundmann (n 350) 478ff. 354 See M Lupoi, ‘Trusts and Civilian Categories’ in Helmholz and Zimmermann (n 335). The segregation issue is the key feature and considered promoted after acts of 2006 and 2016, Proprieta nell’interesse altrui are increasingly deemed to exist and operable against the numurus clausus notion of proprietary rights, see M Lupoi, Istituzioni del Diritto dei trust e degli affidamenti fiduciari, CEDAM 258 (2011).

220  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights In France, since 1990, there had been a renewed interest in the fiducia or fiducie.355 To create a securities transfer, it was always possible and practices exist particularly for receivables: see also Volume 5, section 1.3.5. Legislation was finally implemented in 2007 after serious objections from the tax authorities were overcome: see for the details Volume 5, section 1.3.7 It is confined, however, in its operations to formal structures and may even then notably not be used to make gifts or for estate planning. The new facility appears largely meant to manage funds for special purposes by banks and similar entities. It is therefore a facility for the commercial and especially financial sphere and may then best be considered in the context of other recent statutory interventions in France facilitating assignments of receivables, floating charges, securitisations and repos. Its nearest analogy is said to be in corporations. The key idea of segregation is clearly introduced although the settlor retains a residual liability for the debts of the trust. It remains to be seen how this new French facility will develop further. Especially the ratification of the Hague Convention by Italy may lead in that country to the acceptance of foreign trusts created to hold Italian assets.356 This may also be the situation in the Netherlands, where, as we have seen in section 1.6.1 above, the fiducia was outlawed under its new Code, thus eliminating an important support for the trust concept. In Switzerland, the environment has long been more congenial but legally no more certain.357 In Scotland, the split or separate ownership concept inherent in trusts is not recognised. Neither is the separation between law and equity and the rights of the beneficiaries are habitually characterised as in personam or obligatory. The beneficiary is, however, exceptionally protected on the basis of a separation of the trust assets to which the personal creditors of the trustee cannot lay claim.358 It is an interesting compromise. Constructive trusts and tracing as remedies in the context of unjust enrichment and of secured transactions upon conversion of the assets into replacement goods and proceeds do not appear as general concepts in civil law either. Through contract, in Germany a reservation of title or security interest can be extended into replacement assets, however: see more particularly Volume 5, section 1.4.1. New Dutch law is more reticent—Volume 5, section 1.2.2—and the creation of new preferences in this manner is discouraged.

1.6.7.  Private International Treaty Law and Trust Law Principles At the theoretical level, serious problems arise more generally in modern civil law in the area of dual, conditional or temporary ownership rights and their protection beyond the few limited 355 See especially C Grimaldi, La Fiducie: reflexions sur l’institution et l’avant-projet qui la consacre (Repertoire Defrenois, 1991) 897. 356 Arts 6 and 18 are usually cited in support, see M Lupoi, ‘Il Contratto di Affidamento Fiduciario’ (2012) 3 Riv. Notariato 513, but it may create major implementation difficulties, especially in the registration of real state in the name of a foreign trust under Art 2643 CC, amplified to this end in 2006 by a new Art 2645-ter. See for France P Remy, ‘National Report for France’ in Hayton et al (eds) (n 350) 131 and for Italy, M Lupoi and T Arrigo, in ibid 123. In France, the French Revolution meant to base all social structures on equality and consequently the law of 14 November 1792 abolished all feudal rights including the restrictions (inter vivos and mortis causa) on the disposal of property rights. Family settlements became suspect whilst intestate heirs (depending on their degree) could not be deprived from a slice of the inheritance (the reserve heriditaire). Thus, the fideicommis was curtailed. On the other hand, the fiducia was not abolished. 357 See AE von Overbeck, ‘National Report for Switzerland’ in Hayton et al (eds) (n 350) 105. 358 On the other hand, if the trust goes bankrupt, beneficiaries are entitled only to the residual assets in a distribution. See for Scotland KGC Reid, ‘National Report for Scotland’ in Hayton et al (eds) (n 350) 67, and G Gretton, ‘Scotland: The Evolution of the Trusts in a Semi-Civilian System’ in Helmholz and Zimmermann (n 335) 507. Interestingly, Gretton cites the law of Quebec (Art 1261 CC) in this connection: ‘The trust property, consisting of the property transferred, constitutes a patrimony by appropriation, autonomous and distinct from that of

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 221 proprietary rights officially recognised as we have seen. The duality that may result in the ownership concept, as particularly demonstrated in the modern reservation of title as a purchase price protection and in modern forms of financing such as finance leases, repurchase agreements and factoring of receivables, exists and may operate in principle but in civil law countries the status and consequences in law often remain unclear as will be discussed more fully below in section 1.7. They are also present in trust structures (behind which they often operate in common law countries), which structures are therefore also difficult to place in civil law. The key is the status of trust assets in a bankruptcy of the trustee and their separation. In this aspect, more sophisticated civil law countries like Germany and Scotland seem to have developed at least some workable solutions in case law. The other practical aspect is in the fiduciary duties, which are a necessary sequel to all trust law. Here again, there is no easy civil law equivalent, although it might be found in modern notions of good faith, in this connection extended outside contract law proper. Tracing and constructive trusts are other legal facilities not easily incorporated into civil law either, although German law may be more forthcoming and leaves much of this to party autonomy when it concerns replacement assets as we have seen at the end of the last section. It was noted before that the lack of activist courts is another civil law deficit in this connection. The acceptance of the trust concept through treaty law (in terms of recognition of foreign trusts), is now possible under the 1985 Hague Convention on the Law Applicable to Trusts and on their Recognition, ratified also by some civil law countries such as Italy and the Netherlands, besides the UK (also for Jersey, Guernsey, the Isle of Man, Gibraltar, Bermuda, the British Virgin Islands, the Turks and Caicos Islands), Canada (but not for Toronto and Quebec), Australia, Hong Kong and Malta. France, Luxembourg and the US are so far only signatories. The Convention itself will be more fully discussed below in section 1.8.4. The treaty covers express trusts and similar structures and its definition is therefore wide enough also to cover similar civil law arrangements if voluntarily created and evidenced in writing (Articles 2 and 3), not therefore, it would appear, resulting or constructive trust and tracing facilities. For the application of the Convention, not only its definitional structure, briefly discussed in section 1.6.2 above, and the exceptions are of importance, but also the rules of international jurisdiction. They may serve as the connecting factor and are derived in the EU from the 1968 Brussels Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters, since 2002 replaced by the EU Regulation on the same subject (Brussels I) and in other European countries from the similar 1988 Lugano Convention. They cover together the recognition and execution of civil and commercial judgments in most countries of Western Europe (with the exception of legal capacity, arbitration and bankruptcy-related matters) and provide in that context common jurisdictional standards. The relevant Article in the EU Regulation is now Article 23(4) in conjunction with Articles 5(6) and 2. Article 23(4) allows in this connection an election of jurisdiction by the parties in the trust instrument in any proceedings against a settlor, trustee or beneficiary, if relations between these persons or their rights or obligations under the the settlor, trustee or beneficiary, and in which none of them has any real right.’ It comes close to the concept of separation and legal personality of which Gretton approves (at 508, n 7). It makes the discussion of beneficiaries’ proprietary or personal rights in the assets irrelevant. It may be noted in this connection that in an ECJ Case C-294/92 Webb v Webb [1994] ECR I-1717, a situation in which a father claimed a constructive trust in real estate of a son in France was not considered a real estate matter to be decided by French courts under the exclusive jurisdiction provisions of Art 16 of the Brussels Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters of 1968, now Art 22 of the 2002 EU Regulation covering the same ground (Brussels I). It left open the question whether there was here an issue concerning a proprietary right or merely an obligatory right of the father.

222  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights trust are involved. In the absence of such an election, a settlor, trustee or beneficiary must be sued in the state in which the trust is domiciled (Art 5(6)). This is, at least in the UK, the state with which the trust has its closest and most real connections, but under Article 2 they may also be sued in their capacity of settlor, trustee or beneficiary in a Contracting State in which they are habitually resident.359 In this manner the competent court also acquires jurisdiction over the trust, which is not a separate entity. This is not without problems. If a foreign trust recognised in an EU Member State has a trustee there, while others may reside elsewhere, that resident trustee may be sued in the relevant EU country, for example to account and provide other relevant information. If trustees are delinquent in their duties, a replacement could also be demanded before the competent court in the EU country concerned. In practice, this may well be problematic as these courts will not have the tradition of acting as equity judges, may not have the power to issue injunctions, and may be generally reluctant to get involved as a common law court (of equity) would. They might even suggest that parties go to the court of the country under the law of which the trust operates. Even though the concept of forum non conveniens is not well known in civil law countries, it could amount to a similar approach in these circumstances, even if in the country of the applicable law there may not be any settlor, trustee or beneficiary at all. That is indeed likely to be the case when the law of small Channel or Caribbean Islands is chosen. In that case, the jurisdiction of these countries would be exorbitant, based only upon a provision in local laws that jurisdiction attaches to the applicable law (which is for trust law not uncommon). In any event, in the absence of execution treaties with such countries, any decision would be unlikely to be recognised elsewhere. It is likely to create great delays and extra costs. It shows the danger in recognising foreign trusts and allowing them to operate without adequate powers and experience in the courts of the recognising country to deal with them. One of the most important aspects of the 1985 Hague Trust Convention (see also the reference in section 1.6.2 above and the discussion in section 1.8.4 below), is that it may serve as a catalyst in the development of the trust in civil law to the extent that civil law countries ratify it, which Italy and the Netherlands have done, even if it only means to recognise foreign trusts. At least in Italy, it seems to allow Italians to bring their Italian assets into foreign trusts that would be recognised in Italy. Articles 6 and 18 of the Convention are here commonly cited but it creates serious implementation issues of a foreign trust in land under Article 2643CC. A similar facility may now also exist in the Netherlands.360 Domestically, trust structures are increasingly accepted in civil law countries, as we have seen, especially in inheritance matters but now also in custody and in the holding of client assets and moneys in indirect agencies.361 However, the process is slow. Principles of European Trust Law were in the meantime developed at Nijmegen University.362 They contain eight Articles, subdivided into a number of sub-clauses, and summarise the essence of trust law without going into great detail. As such they are greatly instructive, to the point,

359 See for these jurisdictional aspects also n 402 below and accompanying text. 360 It earlier tried to turn the tide against splits in ownership in its domestic law in Art 3.84(3) of the new CC: see more particularly Vol 5, s 1.2.3. Ratification of the Hague Convention would more logically have to be accompanied by the creation of a similar facility in domestic law. Only France did this. In the Netherlands, the legislator wanted more experience with the recognition regime first. The key will be the activist role of Dutch courts in respect of the operations of foreign trusts in the Netherlands, including the formulation and enforcement of the fiduciary duties of the (Dutch or foreign) trustees in such trusts. 361 See Vol 3, s 3.1.6 above. 362 See D Hayton, ‘The Developing European Dimension of Trust Law’ (1999) King’s College Law Journal 48.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 223 and seem to provide more direction than the European and UNIDROIT Principles of Contract Law, which are too detailed and elaborate, perhaps even contentious, as we saw in Volume 3, section 1.6. The same may go for the DCFR. The Trust Principles may provide the better approach and model for future efforts of this nature. Article I defines the main characteristics. It establishes the ownership of the trustee, the segregation of the trust assets, the duty of the trustee to deal with these assets for the benefit of others (the beneficiaries) of whom the trustee may be one, the ownership rights of the beneficiaries, and the immunity of these assets from claims on the trustee, notably by his personal creditors. Subject to the terms of the trust, a beneficiary can make a disposition of his benefit and may seek enforcement of the terms of the trust (Article IV (4) and (5)). In order to create the trust, the settlor must transfer the trust assets to the trustee with the intention of creating a segregated trust fund, although he may himself become the trustee by making this clear (Article II). He must be specific in his designation of the beneficiaries or must designate purposes. Excess trust assets are for the settlor or his successors (Article IV). The trust fund consists not only of the original assets and those subsequently added, but also of the replacement assets. Except to the extent that the trust was created to contravene the laws protecting the settlor’s creditors (spouse or heirs), only creditors (including beneficiaries) dealing with the trustee in his capacity as such may recover from the trust assets (Article III). Beneficiaries have a right to information to protect their interest and the trustee must account to them (Article IV (3)). The trustee must exercise his rights as owner in accordance with the terms of the trust, must take reasonable care of the trust assets, keep them separate and protect them, maintain accurate accounts, act in the best interests of the beneficiaries and honestly, and avoid all conflicts of interest. He must personally make good any loss occasioned by his breach of trust and personally augment the trust fund by the amount of any profits made by him in such breach (Article V). Courts may restrain trustees or remove them for breach of trust and order compensation. They may also declare particular assets of the trustee trust assets or regard them as security for satisfying his liability (Article VI). Third parties who obtain trust assets and are not protected as bona fide purchasers (including their successors who are not bona fide either) must make good the loss to the trust or may be ordered to hold the assets (or those into which they are converted) as part of the trust fund, therefore separate from their private patrimony (Article VII). Beneficiaries may terminate the trust and distribute the trust fund between them, the terms of the trust notwithstanding, provided they are unanimous, have capacity and all interests are vested. The trust also terminates if all funds are distributed, if there are no beneficiaries or potential beneficiaries left, by virtue of the exercise of a power of termination, or upon the end of the permitted period of the trust when the trust fund must be distributed as soon as practicable in accordance with the terms of the trust. If there are excess funds they must be held for the benefit of the settlor or his successors (Article VIII).

1.7.  Secured Transactions and Conditional or Finance Sales. Floating Charges 1.7.1.  The Importance of Conditional Sales in Finance and the Difference with Secured Transactions A person who has assets and needs money can do one of two things. He or she can sell the assets to obtain cash or can try to take out a loan secured on these assets. Everyone would agree that

224  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights these are two quite different funding techniques. The obvious difference is that in the first case the person requiring the money will not only lose the ownership of the asset but likely also the user rights in it. This may not be at all convenient, hence the attraction of the secured loan, particularly if the security may be non-possessory. Yet a loan secured in this manner may be expensive for the debtor because it is less reliable for the bank as the security is left with the debtor and therefore less safe. As far as the debtor is concerned, interest must be paid and much less than the real value of the asset may be obtained in financing. Naturally, the asset would still be lost in the case of default, although any overvalue on the security will be returned. Thus, an outright sale might be better after all, but an alternative may be a sale with a right to repurchase the asset at a certain date against a pre-agreed price. This is the sale/repurchase structure under which the seller pending the repurchase may even be able to retain the use of the asset. At least surrendering the property would not be obligatory as is often still mandatory in the case of a security interest or pledge in chattels. The economic value of this user right is likely to be added to the repurchase price, which may also contain a fee element. The total cost may be higher or lower than interest that would be charged in the case of a secured loan agreement. Market conditions will decide. The key is to appreciate that these are different facilities and different markets, each with a different price or reward structure, an important practical difference being further that in a repurchase transaction the seller is likely to obtain the full value of the asset, which may fail him in a secured transaction that may carry a large cut against the value of the property. The drawback is that, if the seller does not repurchase the asset on the appointed date, all rights in it may be lost, therefore also any right to any overvalue that may have been created in the meantime (for example, in times of inflation or in the case of market-related assets such as investment securities that may have increased in value). The buyer will have the benefit. On the other hand (unless agreed otherwise), any decrease in value will also be for the buyer whose right in the asset is now complete at the originally agreed sales price. Nothing will have to be returned. That was the risk the buyer took. For the present discussion, the key is to understand that it concerns a different way of financing with a different risk and reward structure. There are here immediately three issues to consider: first, how the repurchase right should be legally characterised; secondly how the sale and repurchase can still be distinguished from a secured loan; and (if so) thirdly how either operates. These issues are discussed in greater detail in Volume 5, section 2.1 in the context of the discussion of modern financial products and will only be summarised below.

1.7.2.  What are Sale and Repurchase Agreements or Finance Sales? The Characterisation Issue. Property-based and Security-based Funding The sale and repurchase agreement (or repos in investment securities) presents itself basically in terms of (a) a (call) option for the original seller to repurchase the asset on a given date. In that characterisation, s/he may have no more than a personal or contractual right to do so, but it may not be fully clear. This facility has long been known and was called the pactum de retroemendo under Justinian law (C.4.52.2), still existing in France as the vente à remere (Article 1659 CC). However, the sale and repurchase could also be cast in terms of (b) a right and duty of the original seller to retrieve the asset on the appointed date. In this characterisation there may more properly a proprietary right of the seller in the asset, such that in a bankruptcy of the buyer the seller may still reclaim the asset upon tendering the repurchase price. Finally, the sale and repurchase may be cast in terms of (c) a (put) option for the buyer. In Germany this is called an uncharacteristic

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 225 (unechte) repo and may be of lesser interest in this context. It is likely to give no more than a contractual retrieval right. The chosen alternative should be clearly spelled out in the repurchase contract, but the contract may be less than clear in this respect and it is then a matter of interpretation. The importance is that in the absence of a proprietary right, the reclaiming right will be contractual or personal and gives no more than a competing claim for damages in a bankruptcy, although in that case one other alternative is, as we shall see, the netting out of mutual contractual rights, which may at least result in an important preference. The arrangement under (b), therefore the one under which the seller has a right and duty to repurchase the asset on the agreed date, is the most common. It could still be seen as a purely contractual arrangement, but may be more properly a conditional sale under which, upon a timely tender of the repurchase price, the asset would automatically revert to the original seller. As just mentioned, the importance of this characterisation is first that in the bankruptcy of the buyer, therefore upon default, the seller may still be able to repossess the asset and ignore the bankruptcy, at least in countries where (a) in bankruptcy such a repossession is not stayed pending liquidation or, more likely, reorganisation proceedings; or where (b) other considerations may prevail, such as the notion of the solvabilité apparente in France, which traditionally protects the outward signs of creditworthiness; or where more generally (c) there is an impossibility under applicable law for conditions to mature against a debtor after his bankruptcy has been opened.363 An important issue is thus the reclaiming or appropriation right upon default, in other words notably the proprietary status of the repurchase right and its effects. As we shall see, the importance of the proprietary characterisation made itself felt at an early stage in a somewhat different context, especially in reservations of title, which, at least in Germany and the Netherlands, are another type of conditional sale, but it is no less relevant in the modern financing structures of the hire-purchase, finance lease, investment securities repo, and (recourse) factoring of receivables. Again, the alternative is a set-off of mutual contractual claims, assuming there are enough of them to make this meaningful. How the conditional ownership and set-off alternatives work will be briefly explained below and in more detail in Volume 5, sections 2.1 and 3.2. For the proprietary approach, which is the essence of the discussion so far, it may indeed suffice at this stage to look first at the reservation of title. Under it, a seller sells and hands over the asset to a buyer who has not yet paid, while the seller retains title for himself. The conditional nature of this transaction, at least in Germany and the Netherlands, means that the seller retains a conditional title y, subject to the payment right (and duty) of the buyer, who can make himself the full owner at any time (by payment). The buyer has a proprietary expectancy, as German case law confirms (dingliche Anwartschaft). It may, as we shall see, be better to accept that in civil law terminology and conceptualisation, both seller and buyer have a kind of title, the seller under the resolving condition of the buyer’s timely payment and the buyer under the suspending condition of his own performance. In a hire-purchase there may be a very similar situation except that the buyer is likely to pay in instalments, while at the end of all instalment payments title automatically passes to him/her. In the finance lease it is not different. The lessee orders the goods to his specifications from a supplier, but title is officially acquired by a finance company that leases the goods to the lessee against regular payments or instalments. Depending on the arrangement, the end result may be for the lessee to acquire full title after the last instalment payment, either automatically or at his 363 See s 1.4.6 above.

226  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights option, which option could be for free or for some further payment. Alternatively, all rights in the asset may revert to the lessor. It depends on the contractual arrangement. In some countries, such as the US, this latter solution is the more common for reasons that will be explained later. In civil law countries, mostly there is an option for the lessee to become the full owner at the end, but, in some countries, it may be more normal for him/her automatically to become one. Especially in that case, the arrangement could be characterised as a conditional sale and property transfer. In the repurchase agreement of investment securities or repos, what happens is that an investor wishing to acquire bonds or shares for a short time, needs to finance this transaction by obtaining funds through a sale and repurchase of the same securities with a third party, usually a bank that specialises in this kind of (repo) financing. In these repos, the seller will have accepted the right and duty to repurchase the investment securities at a certain date. This goes to the proprietary characterisation of the repurchase option as we have seen. Again, the result may be characterised as a conditional sale under which there is a proprietary reclaiming right such that the assets will automatically revert to the seller upon a tender of the repurchase price. This would activate a resolutive condition in the transfer. It could also be seen as an outright or unconditional sale and conditional repurchase with an automatic retransfer under the suspensive condition of repayment. It may not make much difference; the solution is proprietary in each case. However, the proprietary characterisation may still be affected by any fungibility of the investment securities, as we shall also see. In the factoring of receivables, also called receivable financing, their transfer may be made conditional on the approval or collectability by the assignee/factor/ funding provider, and the receivables may be automatically returned when they are not approved or cannot be collected. They may also be so returned when the total of the collections by the factor reaches the amount s/he has provided in funding plus an element of reward. Here again we see a conditional sale and transfer (assignment) of these receivables, posing the question of what happens to them if the (conditional) assignee goes bankrupt in the meantime. Reservations of title and hire-purchase agreements are sales protection devices. They do not provide funding as such but protect sales credit. Repos and factoring, on the other hand, result in a form of funding and may therefore be more properly referred to as finance sales. The finance lease is also often put in that category as it is a way of obtaining financing for capital goods. These finance sales all have in common that they are based on conditional transfers of ownership in the underlying assets and have become very important funding alternatives. Repos are now commonly used to finance large short-term investment positions and run into billions of US dollars (equivalent) per day in the main financial centres. Factoring of receivables has become a normal way to finance trade credit. Finance leases are believed to cover at least one-eighth of all financings of capital goods and are particularly popular in the aircraft industry. Real estate may equally be acquired on that basis. The finance or conditional sale used in financings is often considered a novel funding structure but is in fact quite old. Under common law, the traditional real estate mortgage was a conditional sale under which the parties in need of financing sold their land upon the condition that they could repurchase it on the appointed date while returning the principal plus the agreed interest. The difference was that there was here a true loan rather than a finance sale, as demonstrated by an interest rate structure. However, upon default there was no true execution sale and the mortgagee became full owner. There was no return of overvalue either (although it could still be agreed that the mortgagee kept the overvalue as constructive trustee for the mortgagor) nor indeed did the mortgagor need to make good any undervalue unless again otherwise agreed. Yet the courts in equity, which abhorred forfeiture, devised a special protection (the equity of redemption), allowing the debtor to repurchase the asset by still offering payment of principal

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 227 and interest during a certain time until the mortgagee asked for foreclosure of this equity of redemption to obtain the full disposition rights in the asset. In common law, these mortgages could also exist in chattels and were then called chattel mortgages, which in England now require registration as bills of sale if used by private persons. In the US, under earlier State law, they were often made subject to registration, lost their conditional sale features, and became more like ordinary security interests with disposition needs upon default. They have been superseded by Article 9 UCC, which indeed inclines to making all conditional sales, used in finance, secured transactions, which, as we shall see, created serious problems for finance leases and repos. The old common law mortgage is now supplemented by an alternative more modern statutory one in England but not necessarily in all States of the US. Historically, conditional sales are often revived and used when secured interests are not available or become too restrictive. Thus, in Germany and later also in the Netherlands, where in the nineteenth century the non-possessory chattel mortgages were outlawed (they had existed under Roman law and in the ius commune) and all security interests in chattels had to be possessory, the sale and repurchase were used to achieve a similar (non-possessory) result. It was an obvious way out when non-possessory security became a necessity in a more advanced industrial society, where equipment and inventory had to be used to support financing but could, as part of the business of the borrower, not be turned over to the financier. The same happened in the US. This was the origin of the German Sicherungsübereignung and of the Dutch fiduciary transfer, both creations of case law. In Germany it gradually transformed into a kind of security interest,364 as also happened in the Netherlands (although in a different way) where under the new Civil Code of 1992 it is now superseded by a statutory non-possessory pledge, therefore as a pure security interest. However that may be, under a conditional sale, it became thus possible to transfer equipment and inventory while retaining the physical assets, although there is still an important difference between both countries in the shift of the security in replacement assets or proceeds. It is not encouraged in the Netherlands, where floating charges thus remain problematic, but may be achieved by contract in Germany as we have seen in section 1.4.6 above. In common law, it followed in equity on the analogy of the conversion of trust funds as a form of tracing. Hence the development of the floating charge, at first only in case law, now superseded in the US by Article 9 UCC. Receivables became similarly transferable in what came to be called in Germany a Sicherungszession. In France, on the other hand, the funding arrangement through finance sales never became popular because conditional sales were handicapped in a bankruptcy of the buyer by the difficulty in reclaiming them. This was because of the general impossibility for conditions to mature in bankruptcy (except in pure sales) and in any event in view of the notion of the solvabilité apparente in respect of chattels, already discussed above in connection with the reservation of title: see section 1.4.6 above. Again, this will all be discussed in greater detail in Volume 5. In England, there was no such problem with non-possessory security as the English here developed equitable floating charges as true security interests instead of building further at law on the conditional sale structure inherent in (chattel) mortgages. As these chattel mortgages were legal interests, they had to be in specific assets while the automatic shift of the

364 In Germany, in modern lending practice, banks normally do not allow automatic return of the asset to the borrower upon repayment but prefer to keep control of the asset subject to a contractual obligation to retransfer only.

228  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights interest into replacement goods was more problematic than in equity, the reason floating charges (in equity) became more popular. Their drawback is, however, that at least in England they provide a low priority as they crystallise only at the time of default, a complication eliminated under Article 9 UCC in the US where the priority is established as of the filing date. Both in England and the US, in the nature of a true security interest, they require a form of disposition upon default with the return of overvalue and they need publication. The debtor remains responsible for any undervalue which results in an unsecured claim for the creditor. As an alternative, debtors may convert themselves into trustees for their assets and hold them for their creditors as beneficial owners. In the US, this remains a traditional way of financing real estate. True conditional sales for financing purposes are also still possible in common law countries (although for chattels and intangibles no longer in the US, as we shall see), see further the discussion in Volume 5, and do not lead to the equity of redemption, at least if not clearly supporting a loan structure. Finance leases, repos and factoring fall into that category, although it should be added that they are seldom so analysed in England, where they are not, however, considered secured loans either. Even the reservation of title is in England seen as a delayed rather than as a conditional sale and transfer, but often never as a security interest. The practice in common law countries is not inclined to go behind the wishes of the parties, except now in the US by statute under Article 9 UCC, where there results an important re-characterisation risk, transforming these finance sales into secured transactions, only partly redressed by a new Article 2A on equipment leases and for the repo by amendments to the Federal Bankruptcy Code as we shall see, which, for complicated financial structures does not encourage this re-characterisation.365

1.7.3.  The Evolution of Conditional and Temporary Transfers in Civil and Common Law In the previous two sections, the conditional or temporary sale and transfer was discussed in its modern variants (see further also Volume 5, section 2.1). It results in conditional or temporary ownership rights especially in the case of the reservation of title, hire-purchases, finance leases, repos, and recourse receivable financing. These are important structures, long underrated or even ignored in civil law but now coming back to the fore in finance. Early signs were in the use of the Roman pactum de retroemendo of C.4.52.2 in the development of non-possessory security rights in movables in civil law countries as from the end of the nineteenth century, leading, for example, to the important Sicherungsübereignung in Germany and to the so-called fiduciary transfer in the Netherlands, as we have seen. It was pointed out before that common law is essentially comfortable with such conditional rights, which in equity also operate for chattels and intangible assets. But also in civil law, there is a long pedigree which stretches through the ius commune into Roman law.366 Much of the discussion centres here on the proprietary effect of the resolving condition, which from early on was thought implicit in any alienation prohibition in contracts (the pactum de non aliendo). In Roman law, such a restriction on the transfer was not believed

365 See also Vasser (n 317) 1507, 1537. 366 Two important PhD dissertations exist in this area in the Netherlands: RP Cleveringa, De zakelijke werking der ontbindende voorwaarde [The Proprietary Effect of the Resolving Condition] (1919), and more recently AH Scheltema, De goederenrechtelijke werking van de ontbindende voorwaarde [The Proprietary Effect of the Resolving Condition] (2003).

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 229 to have third-party effect, however, on the basis of D.2.14.61 unless it was imposed by statute. Later, the resolving condition could manifest itself more independently, and the Digests give some examples, of which the lex commissoria (rescinding title upon default in a sales contract, D.18.3) and the lack of a valid sales agreement (iusta causa traditionis, see further also section 1.4.7 above) are the most important ones, but at first again mostly without proprietary effect (although less certain for the lex commissoria, D.18.3.8), a view that only changed later in the ius commune367 and ultimately in the German Pandectist School. These conditions thus became proprietary and that remains the trend in civil law to this day, even though the concept remains underdeveloped as we have seen, while modern Dutch law no longer sees the proprietary effect as deriving from the contractual condition, it being no longer considered retroactive (Article 3.38(2) CC since 1992) but rather as resulting independently from special statutory provision (Article 3.84(4) CC). That approach has been criticised, but it appears to be the position for the moment even though parties may still agree otherwise in respect of the payment condition. It leaves conditional ownership well intact, although more surprisingly, temporary ownership is now viewed as a usufruct: Article 3.85 CC. The conclusion is that in conditional forms of ownership, a split ownership right results under which the resolving condition in the one party is necessarily coupled with a suspending condition in the other party: see also Volume 5, section 2.1.4. This was an early perception, particularly strong in France—see Volume 5, section 1.3.3—and in the Netherlands—see Volume 5, section 1.2.3—although less so in Germany where an Anwartschaft or proprietary expectancy was ultimately assumed instead: see Volume 5, section 1.4.1. This latter approach also finds support in the Netherlands but no longer in the Supreme Court, at least for the reservation of title, see further also the discussion of the split ownership right in section 1.7.5 below. Although their exact proprietary effect may thus remain unclear, in principle, in civil law, conditions and terms of time are as such well known. In this connection, conditions or contingencies are uncertain events like payment in a sale under a reservation of title. There is a conditional sale and transfer under which the date at which the condition matures (or not) may be certain, but the event is not. If the event is certain, there is rather a term of time or temporary sale and transfer, for example when ownership is only transferred after a certain date, even though the date itself may be uncertain, for example death. The fact that a transfer is delayed until a certain date as in a reservation of title does not itself mean that it is not conditional. That is clear under German and Dutch law, although in France and England this seems often not to be fully understood. The difference between conditions and terms of time is, however, on the whole not great and it is therefore not normally necessary to distinguish sharply. Yet conditions may redirect title retroactively (although not now in Germany and the Netherlands with regard to the condition of payment in sales agreements, except where expressly so provided). Terms never have such retroactive effect. In the Netherlands under its new law (Article 3.85 CC), temporary transfers are converted into usufructs as we have seen, not, however, the conditional transfers. That suggests a more fundamental difference but in truth it is the re-characterisation of temporary transfers as usufruct that is artificial. It came late into the recodification project and is hard to explain or understand. In common law, the situation with respect to conditional or delayed title transfers leading to future interests is generally quite different from the situation in civil law. Common law has always accepted these conditional or future interests, first at law as defeasible titles in land and subsequently, in equity, also in chattels. Besides the fee simple, the life interests, and the estates for 367 See J Voet, Ad pandectas D.18.3 para 2. See later R Pothier, Traité de contrat de vente, Partie V, ch II, 2–5.

230  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights years or leaseholds, they arose early in common law (as defeasible title). In fact, at law there were always split ownership forms, which could largely be defined by the parties as a matter of party autonomy. Thus, future interests like reversionary interests arose if the land was supposed to revert to the grantor or there could be remainders if it was to go to someone else, again either for life or in fee simple. The future interests were either vested in the beneficiary, that is to say, subject to the passing of a term of time only, or contingent when a condition was attached. Traditionally, in a life estate, the condition was that at the end of the life interest the beneficiary of the remainder was still alive. If not, the interest would revert to the grantor. Later, other conditions became possible, such as the grant of an estate for as long as the asset served a particular purpose or for as long as the grantee behaved in a certain manner. In common law, these future interests exist in land at law beside the present interests, are fully transferable, and are not affected by statutes of limitation or, in civil law terms, extinctive prescription, although if not vested they (together) are curtailed in time under the statutes against perpetuities. They are not retroactive. It is not necessary in this context to elaborate further on what is not an easy subject in common law either, where the precise characterisation of these future interests in land (into reversions, remainders, or executory interests, either vested or not) is often complicated and they are by no means all treated the same. As just mentioned, these conditional and future interests, originating in land law subsequently became possible also in chattels, even though then only in equity (which is in England since 1925 by statute now also the situation in respect of land). It meant that the protection was largely based on an economic interest in the asset giving a limited proprietary right that could in particular not be maintained against bona fide purchasers for value of the legal interest or bailees. In England, these future interests in chattels are now mainly hidden behind trust structures as we have seen. As such they receive less attention separately. That may be different in the US, although if used for financial purposes they risk being hidden behind and re-characterised as security interests under Article 9 UCC, as also noted. Although conditional ownership exists in principle, there is no proper equivalent for these future proprietary interests in civil law, and whatever there is remains underdeveloped and has an uncertain status in a proprietary system that is in principle considered closed, as we have seen, and therefore inimical to the flexibility that conditional and temporary sales and transfers may bring.

1.7.4.  When are Finance Sales Converted into Secured Transactions? The Recharacterisation Issue Secured transactions concern loans supported by security interests in the debtor’s assets. In this sense, security interests are more particularly connected with loans, not directly with sales credit protection as reservation of title or hire-purchases are. It is true that under the UCC in the US security interests are all facilities that support any payment or performance of another obligation, monetary or otherwise: see section 1-201(a)35 UCC. In that country, reservations of title, conditional sales, finance leases and receivable financings are therefore converted into secured transactions if supporting such payments or the performance of other obligations: see sections 1-201(a)35 and 9-109(a)5–6 UCC. The consequence is that the UCC subjects them all to the same formalities in terms of publication (except charges in consumer goods: section 9-302 UCC) and disposal upon default with the duty to return all overvalue to the debtor. It is said in this connection that the UCC looks at economic realities in a unitary functional approach.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 231 This approach ignores the different risk and reward structures and the parties’ choice in this connection and attempts to eliminate, in particular, true conditional sales with their appropriation possibility and release of the buyer in favour of a system under which a disposition must always take place and overvalue is returned while the debtor remains liable for any shortfall. It was submitted before that this is not a good approach and deprives participants of an important alternative and risk management tool. To repeat, it caused considerable practical problems, especially in the area of finance leases and repos (see also the discussion in the previous section). In the new Dutch Civil Code, there is a not dissimilar resistance to funding alternatives. Here security substitutes are given only contractual effect and therefore no rights against third parties at all (Article 3.84(3) CC). Unlike in the US, there is no conversion into a security interest (subject to its formalities and safeguards). On the other hand, since security of this nature is not defined, it is difficult to determine what true security substitutes are. The conditional sale seems not eliminated, as under Article 3.84(4) CC the proprietary effect of conditions is explicitly accepted, although, as in the case of reservation of title, the new Code does not elaborate on the parties’ rights thereunder and seems not to consider duality in ownership but it does not clearly exclude it either. This has left the status of the modern finance sales in considerable doubt and required it to be determined by case law. It does not give the lessee in a financial lease a proprietary interest except where clearly so negotiated: see more particularly Volume 5, section 1.2.3. The result is the opposite of the situation in the US where the conversion into a security interest means that the lessee becomes the legal owner subject to a security interest for the lessor in the leased assets. Elsewhere, the distinction first between sales and loan credit is usually maintained so that sales credit protection, as in reservations of title, is not considered a security interest, while conditional or finance sales may present other funding techniques altogether, even if their characterisation (as conditional sales and what that means) may remain subject to (considerable) doubt. In this approach, security as distinguished from other funding techniques is narrower and connected with loan credit. Security interests thus support loans, which are advances of money subject to repayment together with agreed interest. It is an agreed interest rate structure that is the essence of this type of funding. Without it, there is no loan agreement, and without a loan agreement there can be no security interest, but if there is a loan in this sense, it is likely that any supporting structures will be re-characterised as secured transactions. Since sales credit is normally not a loan because there is no interest rate structure, reservations of title and hirepurchases are not or should not normally be converted into a security interest. If there were such an agreed interest rate structure, however, it would be normal to assume such a conversion and it would render the transaction subject to the formalities of secured transactions in terms of creation and enforcement or foreclosure. Again, a case in point is the German Sicherungsübereignung and the former Dutch fiduciary sale, both developed in case law on the basis of conditional sales to allow funding assets with non-possessory protection. Since there is here a normal loan (with an agreed interest rate), it was logical to expect the conversion of these conditional sales into security interests and that is indeed what happened, especially in the Netherlands, but in Germany the position of the bank was further eroded as in a bankruptcy of the borrower it was given merely preference status in the proceeds of a sale of the relevant assets rather than a separate repossession and execution right or self-help remedy. However, it follows from the above that if there is no such interest rate structure and therefore no loan, as there is unlikely to be in finance leases, repos and other finance sales, one should assume that there is a true conditional sale and transfer without any need for conversion. English law bears this out: see Volume 5, section 1.5.3. Such sales can indeed exist

232  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights in Germany also, but it should immediately be added that the finance lease, repos and factoring are not readily so analysed in that country and are often considered purely contractual in nature: see Volume 5, section 1.4.3. In the details the distinguishing features are as follows: (a) Secured transactions create proprietary interests that go with the asset and that are (at least in civil law) accessory to the loan they support. It means that a sale of the asset will not extinguish the security interest in it (except if the asset is a chattel sold to a bona fide purchaser or purchaser in the ordinary course of business) and that an assignment of the secured claim will automatically entail the transfer of the security interest to the assignee. (b) These security interests require upon default a disposition, therefore normally some form of public sale, or a sale which may attain some objective value of the asset, and a return of the overvalue to the defaulting debtor, while the latter remains liable to the extent of any undervalue. (c) There is also the question of the extension or shift of the interest into replacement assets and proceeds to be considered. (d) There may be extra formalities, especially in terms of publication or turning over of possession. (e) There is also the question of ranking. (f) Finally, there is the separate repossession or execution right of the security interest holder in the nature of a self-help remedy in the bankruptcy of the counterparty. As far as the accessory nature of the interest is concerned, it traditionally receives more attention in civil than in common law: see also Volume 5, section 1.1.5. In civil law it is typical for secured interests but not for conditional sales and therefore not for reservations of title. The same is true for retention rights. That is to say that if an assignee of a claim (a sales receivable) wants the benefit of the reservation of title, it must be separately transferred to him by the assignor. In the case of a retention right, the asset must be transferred with the claim. This may be important in factoring, where, depending on its terms, the creditor through the assignment of the receivable may even be considered to have been paid so that the reservation of title or retention right lapses altogether and the buyer becomes the full owner. Only in France, and probably also in Belgium under modern case law, is this different in the case of a reservation of title, which is now considered accessory to the receivable it supports: see also Volume 5, section 1.3.4. It shows French ambiguity as to the nature of the reservation of title (and implicitly other finance sales), and the security analogy is increasingly pursued. So far, an execution sale is not required but under case law any overvalue must be reimbursed to the debtor. It comes close to the situation in the US where a disposition and repayment of any overvalue to the debtor is now required under Article 9 UCC, also for a reservation of title. It is indeed typical for security interests that the debt will be set off against the proceeds upon some objective disposition and that the overvalue will be returned to the debtor. In finance sales, on the other hand, in the case of default, one key is that there will be appropriation of the asset by the financier without any return of such overvalue. Against this, there are obvious benefits for the party requiring the funding: the funding may be larger, up to the full value of the asset, and it may be cheaper. It may be quicker as formalities may be avoided in terms of documentation, publication or special treatment, which applies especially to the repo of investment securities that may fit in the normal system of transfer and settlement of investment securities rather than needing special pledge registers. There may also be tax and accounting treatment differences. The result is a different risk and reward structure, which shows security-based and ownership-based funding

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 233 as true alternatives. It also shows that conversion from the one into the other or the risk thereof can be greatly inconvenient to the parties who wanted another risk and reward. Especially giving back the overvalue to the defaulter under the circumstances might be a great disadvantage and an unexpected variation of the contractual balance achieved between the parties or desired by their economic objectives. Where the interests shift into replacement goods, the overvalue possibility is greatly enhanced but other suppliers of commodities or spare parts may become involved as well and may have to be accommodated at the level of priorities. In that case, for example where reservations of title are extended into replacement assets, one may therefore see a change into a security interest also in common law countries (apart from the UCC in the US) leading to a disposition upon default and a return of overvalue while the debtor remains liable to these secured creditors for any undervalue. Lack of formalities, especially publication of these charges (like other floating charges), may upon automatic conversion reduce the financier’s interest to the lowest secured rank. On the other hand, where a conditional sale, including a reservation of title, does not shift into replacement goods and is limited to specific goods, a disposition seems improper and unnecessary. It follows that only where a clear loan or a floating charge result in this manner a disposition with a return of overvalue is to be expected, although in the US under Article 9 UCC, in chattels, the conditional sale is no longer an acceptable funding alternative, as we have seen, even if it is in specific assets and parties opt for this structure. Again, in civil law, this shifting of the security into replacement assets is in many countries problematic, even for security interests, and that may be another reason why there remains a need for conditional sales in such countries. There are great differences, however, as we shall see in Volume 5, with German law being more liberal, allowing creditor and debtor to agree to this shifting into replacement assets (only); see also section 1.4.3 above for the complication of the future nature of the asset, which is also overcome in this manner in Germany. Dutch and French law is traditionally less generous. This also applies to conditional sales such as the reservation of title, which in these countries are not extended into replacement goods either. Then there are the formalities. In the case of the conventional pledge as secured transaction there is the old requirement of the transfer of physical possession in civil law and the creation of a bailment in common law. Constructive delivery is outlawed in this connection in most civil law countries. For non-possessory security, publication became an alternative for corporate floating charges in England and for most non-possessory security interests in chattels and intangibles in the US (through the finance statement), but there is an important difference, already mentioned before. In England, the security interest of the floating charge only crystallises upon default, and notably not upon filing, so that the floating charge gives only a low priority right (just above that of the unsecured creditors). This is not now the case any longer in the US, where under Article 9 UCC the security is perfected as from the moment of filing. Only if filing is omitted (except for security interests in consumer goods that do not require it), is the ranking just above that of the unsecured creditors. In technical language, the interest is ‘attached’, but not ‘perfected’. Civil law mostly accepts that any non-possessory interests or charges in chattels and intangibles remain hidden but are nevertheless ranked as from the moment they are created. In Germany, this is clear in bankruptcy for the Sicherungsübereignung and Sicherungszession. It was also true for the fiduciary transfer under former Dutch law, which is now replaced by a statutory facility that requires registration with a notary but only to identify the transaction and its timing. It is not a publication facility. In France, there was no general facility allowing non-possessory security in chattels but they could exist in certain types or in a business (fonds de commerce) for which

234  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights instances special publication facilities were imposed that are very different in nature. In 2006, a broader floating charge facility was introduced by statute.368 For non-possessory security interests, the formalities may thus vary considerably from country to country, in chattels especially in the aspect of publication. As a contrast, conditional sales do not normally require any publication anywhere. That is clear for the reservation of title, although when it shifts into replacement goods so that it acquires features of a floating charge, this may be in doubt in England if companies are the debtors. Conditional sales do not traditionally require other formalities either, such as special documentation or registration requirements. Then there is the ranking to consider. In pure finance sales there is unlikely to be any, although it is conceivable that the seller sells the asset twice under a finance sale. It is certainly not unknown under the German Sicherungsübereignung, but this is now largely treated as a non-possessory security interest, as we have seen, which allows a ranking according to time. In true conditional sales, the seller can certainly sell his remaining interest or reversion in the asset, but that does not, strictly speaking, amount to a ranking among his succeeding buyers. Thus, in a reservation of title, the second buyer from the original seller risks automatically losing his interest if the first one pays the original seller because the reversionary interest is lost (and he will not be protected as a bona fide purchaser if he was not given possession, which is unlikely). As far as the ranking of secured transactions proper is concerned, the first in time will be first in right although first publication or perfection may change the order. This ranking principle according to time follows in general from the nature of the proprietary right, which may be maintained against the whole world, therefore also against younger interest holders. Hence the principle of relativity or priority, also called the droit de préférence, already discussed above in section 1.1.1 and expressed in the maxim prior tempore, potior iure: first in time, first in right. Yet specific interests may rank above general ones. Thus, a younger reservation of title is likely to prevail over an older floating charge owned by someone else in the same asset (in England obtaining its rank in any event only from the moment of crystallisation). Possessory interests may also prevail over non-possessory ones. By security statute, further changes in the order may be imposed, which may also result from applicable bankruptcy laws. Finally, there is the separate repossession or self-help remedy and execution right of the security interest holder to consider. It follows in general terms from the fact that the security interest is a proprietary right that can be maintained and executed against all the world, from which also follows that it can be maintained against whomever owns and is in possession of the asset (except if they have a better, older right thereto). This is the droit de suite, or the right-to-pursue aspect of all proprietary rights, already highlighted before. The repossession and execution right are expressed in Germany as the Aussonderungsrecht; it is typical for owners and for those who benefit from reservations of title. In Germany it is denied to security interest holders in bankruptcy if they do not have a possessory interest. Thus, a pledgee in possession conducts a normal execution sale outside the bankruptcy (but with a return of overvalue to the trustee), but not therefore the beneficiary of the Sicherungsübereigung or the mortgagees of real property because they are not in possession.369 368 In France, the floating charge notion was introduced in 2006 by statute, not therefore as a general concept introducing tracing notions more broadly: Ordinance 2006-346 of 23 March 2006, see further Volume 5, s 1.3.1. 369 This changed to some extent with the implementation in Germany of the 2002 EU Financial Collateral Directive (in 2004). In the new section 1259 BGB, the security holder in possession under a commercial pledge of assets (with a market value) may upon bankruptcy not only execute his securities interest but also appropriate the asset if so agreed. This would amount to a true Aussonderungsrecht.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 235 For the non-possessory security interest holders under the Sicherungsübereignung, there is in Germany in bankruptcy otherwise only an Absonderungsrecht, which only gives a preference in the execution proceeds after a sale is conducted by the trustee. It is a typical German limitation, not often followed elsewhere. Outside bankruptcy, the position is different and the status of the Sicherungsübereignung then depends on the contractual terms. There is no appropriation facility, however, except if expressly so agreed. In France there is a special class of statutory lien holders (privilèges) who also do not have a separate execution or repossession right. Elsewhere, the repossession or self-help right of security interest holders is naturally also a key issue, especially in a bankruptcy of the debtor, whether or not they have possession. The repossession facility is mostly upheld (and German law would seem here exceptional), also for non-possessory security where it is allowed to operate. It gives the security interest holder in principle the right to ignore the bankruptcy, claim the secured asset from the trustee, dispose of it, and set off the claim against the proceeds, while only the overvalue is returned. The initiative and timing are therefore with the secured creditor who also does not need to contribute to the costs of the estate. Yet those who do not have the repossession right will have to contribute, and as the costs of the estate normally rank highest, the collection of those who cannot repossess is thereby limited even if they rank higher than ordinary creditors. Modern bankruptcy statutes, especially when reorganisation and not liquidation minded, may intrude on the repossession right to prevent a situation in which the secured creditors take most of the assets immediately so that a reorganisation under modern reorganisation statutes becomes a practical impossibility. Thus section 362 of the US Bankruptcy Code imposes a stay by law subject to the courts being able to vary the measure. It does not mean that the security is lost; its benefit is suspended, but the self-help remedy may be reinstated if no adequate protection can be offered by the bankruptcy trustee. Another measure is that security interest holders may have to accept the immediate release of overvalue and accept an alternative security interest if to the benefit of the estate, provided that they always remain adequately protected. They may now even be forced to cooperate in the reorganisation and their rights may be ‘crammed down’ under certain circumstances although they cannot be completely taken away from them against their will. Similarly, the French Bankruptcy Act of 1985 included the secured creditors in the proceedings, which was mainly meant, however, to provide a delay to facilitate a reorganisation: see also Articles 621-39ff of the Code de Commerce of 2001, which incorporates this Bankruptcy Act. The new German Insolvency Act of 1999 goes in many respects also in the direction of the US approach with its reorganisation ethos, but did not need these elaborate special stay provisions as there was never an Aussonderungsrecht for non-possessory security holders (including the beneficiaries of a Sicherungsübereignung and mortgagees) in Germany, as we have seen. The repossession or self-help facility and separate position of the secured interest holders nevertheless remains an important feature of most secured transactions and continues to give them a special place, also in modern bankruptcy statutes. It means that they may mostly still avoid sharing in the cost of the bankruptcy administration, can time their own recovery, and need not wait for the trustee and his distribution schedule, even if the repossession right may be stayed for some time pending the decision of reorganisation or liquidation.370 370 In addition, statute or case law may create statutory or similar liens with preferential rights. They could give certain creditors repossession rights or only preferential rights in the proceeds of a bankruptcy liquidation. The difference is again in initiative, timing and sharing in the cost of the estate. Tax authorities and wage earners are the best-known beneficiaries of statutory liens of either type. They normally have a high statutory preference, in civil law mostly without their own repossession and execution right, however. Modern German bankruptcy law has done away with the tax preferences altogether.

236  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights Conditional ownership rights as proprietary interests in principle also give repossession rights, as was already noted, when the condition (or term of time) matures. In bankruptcy, they may as such be maintained against the bankruptcy trustee assuming that, if the condition has not already matured in their favour, it may still do so and be effective after the bankruptcy. Thus, even in Germany, reservation of title gives an Aussonderungsrecht. Whether conditions of this nature may still mature after bankruptcy remains, as we have seen, in many countries still an important issue while in France the theory of the solvabilité apparente or of ‘apparent ownership’ may also be a further bar to the recovery rights.371

1.7.5.  The Operation of Finance Sales. Effect of the Conditionality of the Transfer. Proprietary Effect of Conditions. Duality of Ownership and of Possession in Civil Law. Openness of Proprietary Systems? Security interests have a long history and in the course of time their proprietary status and effect became accepted, systematically more particularly so in civil law where the security interest as a proprietary right of the creditor became well established. In civil law, the mortgage in real estate and the possessory and non-possessory pledges in chattels date from Roman law. The protection of the debtor through an arm’s-length sale of the asset to obtain objective values with the return of the overvalue to him was here an early concern and led even before Justinian times (lex commissoria) to an outlawing of an appropriation clause in the pledge (C.8.34.3). It did not, however, outlaw the conditional sale as an alternative that allowed appropriation as we have seen, at least not the pactum de retroemendo of C.4.54.2, cf also D.41.4.2.3. But neither Roman law nor the ius commune elaborated much on the conditional ownership theme in this connection: see section 1.7.3 above. Common law, on the other hand, in its development of security interests, stayed much closer to the conditional sale and was always more relaxed about the possibility of appropriation upon default. This may be seen in the traditional real estate mortgage, which was considered a conditional sale (even if in modern English law it can also be structured as a true security interest) resulting therefore in a full appropriation of title upon default, balanced only by the equity of redemption. In this approach, there was no return of overvalue per se; on the other hand, if the lender sought to repossess the property, there was no need for the borrower to pay any undervalue either. This followed from the nature of the conditional sale itself, which became absolute upon default. Execution and supervised sale with a return of overvalue is a more specific aspect of recent US statutory law in this area, especially for chattels, as may be seen in Article 9 UCC (sections 9-601ff).372 On the other hand, some individual creditors may also have preferential rights to the proceeds, such as (often) the unpaid repairers of assets without a retention right: see for such rights s 1.4.10 above. Since they have no repossession rights, they share in the cost of the administration and must wait for the trustee to start distribution. As we saw, they have in Germany only an Absonderungsrecht or in France a privilège. 371 In reorganisation-oriented bankruptcy statutes there is also likely to be a stay. Where conditional transfers have been converted into security interests because they support loans, they may be weakened further, like the German Sicherungsübereignung, by being treated as a mere preference so that the beneficiary of the right must share in the cost of the estate and can recover only after the trustee has liquidated the assets. Where the reservation of title is allowed to shift into replacement goods and proceeds, the end result may also be a degeneration of the proprietary interest of the seller into a preference or Absonderungsrecht only, as is indeed the case in Germany. On the other hand, modern bankruptcy statutes may make exceptions for modern financial products in terms of a stay so that self-help and immediate set-off or netting can proceed in market-sensitive structures. This will be discussed further in Vol 5 ss 2.2.6 and ss 3.2.3–3.2.4 and 4.2.4. 372 See SA Riesenfeld, Creditors’ Remedies and Debtors’ Protection, 3rd edn (St Paul, MN, 1979) 149.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 237 As noted before, in civil law, conditions and terms may be suspensive or resolutive. It is difficult to determine when they are (for whom). The reservation of title may be seen as a resolutive condition for the seller but could also be characterised as a suspending condition for the buyer at the same time (a step as yet not taken in most civil law countries). It may indeed be best to see them as complementary: see also section 1.7.3 above. Consequently, the seller in a reservation of title has ownership or title under a resolutive condition, the buyer under a suspensive condition. The sequel is in civil law that the seller has resolutive possession and the buyer suspensive possession. As the buyer under a reservation of title is normally the holder of the asset in a civil law sense, one could further say that until payment he holds the resolutive title for the time being for another (the seller) but is the possessor of his own suspensive title. The reverse applies to the seller. Once payment is made, the scene changes as the condition is fulfilled and all the seller’s conditional rights in the asset cease. The same goes for the buyer if s/he does not make timely payment, but s/he remains holder for the seller until the asset is returned. It may however be questioned whether ownership or possessory actions in the traditional civil law sense are here still the proper way to defend these split proprietary interests. They may become too contrived and tort actions may be the more appropriate response, as they now usually are for the defence of intangible assets, even in civil law. It may not matter much whether the one party has the suspensive or resolutive rights. In practice, physical possession may matter more (in a reservation of title with the buyer), as it may give the possessor in that sense the income and user rights (or even an implied right to on-sell the property) unless otherwise agreed, which also suggests that this party will be liable for the maintenance and harm caused to others (again, unless the contract says otherwise). The more important point is that there results here even in civil law a duality in ownership and an independent right for each party to defend and to transfer conditional ownership and accompanying possession. For the party not physically holding the asset, this transfer in countries where transfer of ownership or title requires delivery of possession could be achieved only through constructive delivery. It means for the seller under a reservation of title delivery through a transfer longa manu (which might under applicable law require notice to the buyer/holder as a constitutive requirement, see for example, Article 3.115(3) Dutch CC). It is also conceivable that the transfer of these conditional proprietary rights of a seller not in possession could take the form of an assignment, more likely the German approach (under which no notification of the debtor, here the original buyer under the reservation of title is required, section 870 BGB). For the party holding the asset (here the buyer), physical delivery would be possible. If to a bona fide purchaser, the latter would in most civil law countries obtain full title (including the seller’s conditional title), even if the title of the original buyer who is now selling were only conditional. If the interest of the original seller under the reservation of title were disclosed, however, the purchaser from the buyer would obtain no more than the latter’s interest. The purchaser from the original seller, on the other hand, would never obtain more than the latter’s interest (his conditional ownership right in the asset, probably transferred together with the assignment of the receivable) as in traditional civil law the constructive nature of the delivery would not make this buyer a protected party, even if bona fide: see further section 1.4.8 above. The duality of ownership here discussed is largely accepted in Germany and probably also in the Netherlands, at least for reservations of title, but seems not so far more generally developed for other forms of conditional ownership. That is also the position in the DCFR, as we shall see in section 1.11 below. In the context of the reservation of title, the Germans speak here of the dingliche Anwartschaft of the buyer or the proprietary expectancy since a decision of the

238  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights German Supreme Court in 1956.373 Rather than a combination of a resolutive and suspending interest, it is mostly seen as a new kind of proprietary right: see also the discussion in Volume 5, sections 1.4.1 and 2.1.4. Whatever the characterisation, it is an important development that pushes open the proprietary systems in civil law and gives parties considerable power to divide ownership by contract in any way they want, always subject (in the case of chattels) to the protection of bona fide purchasers of the assets in those countries that generally protect such purchasers when acquiring physical possession. One could also say that the more third parties are protected, the more likely it is that conditional sales may be able to operate.374 Where through conditional ownership concepts the duality of ownership in this manner forces itself also on civil law, it is necessary better to determine the relationship between both split owners and their respective rights in the asset, especially in cases of default but subsequently also in a bankruptcy of either (or both). It must be admitted that these aspects are not always clearly elaborated in common law either, although for the conditional sale and the reservation of title in the US before the UCC became effective there developed extensive case law,375 much less so in England. The most pressing issues are the entitlement to income and capital gains and the liability for the loss of the asset and for the harm it may cause others, already briefly mentioned above. So is the transfer of each party’s interests and the position of bona fide purchasers. Other issues are the possibility for each party to encumber its (conditional) interest. Could the conditional ownership rights also concern future assets, and may they shift into replacement goods? What is the non-bankrupt party’s position in a bankruptcy of a conditional owner in possession? The question of what the effect is of an attachment of the asset on the other (non-possessory) party’s rights in it seems related. It raises the issue of the relationship of this conditional owner vis-à-vis the secured and other creditors of the other conditional owner with possession of the asset.376

1.7.6.  Examples of Finance Sales: Finance Leases, Repos and Factoring. Finance Sales as Executory Contracts, Cherry Picking, and Netting In the foregoing a number of finance sales or ownership-based funding techniques were identified, which will be discussed more extensively in Volume 5, such as the finance lease, the repo of investment securities, and the factoring of receivables, with particular emphasis on their characterisation in terms of proprietary options or conditional sales, of which the more traditional examples are the reservation of title and the hire-purchase. These are both, however, sales credit or sales price protection devices rather than schemes to raise financing, as is the case with repos,

373 See BGH, 22 February 1956, BGHZ 20, 88 (1956); see also Vol 5, s 1.4.1. 374 From this perspective, the conceptual problem in civil law is therefore not truly the closed system of proprietary rights but the shortcomings in the protection of bona fide purchasers, especially of real estate and receivables. In common law, the law of equity protects third parties much better against hidden equitable proprietary interests as we have seen. As suggested before, it may well be seen as the trade-off in allowing their free creation: see also s 1.3.8 above. 375 See Vol 5, s 2.1.3. 376 A reservation of title may, eg, give in principle the strongest status to the seller upon a default of the buyer but if the seller retakes the asset, it is likely to be subject to any security interests the buyer has created in it in favour of others. This is certainly so if they are bona fide in those countries that protect bona fide purchasers of chattels. In those that do not, the question is whether the buyer under the reservation of title has sufficient title to make a disposal. If he could not transfer more than his own interest, that interest is at an end upon default. That could also mean the end of the rights of any transferee in the asset, including security interests.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 239 factoring of receivables and, although less obviously so, in finance leasing. It should of course be borne in mind that in all these cases there is credit provided, whether there is sales credit, loan financing through secured transactions or funding provided through conditional sales, but not all are funding schemes. Of the modern funding schemes, the finance lease is probably best developed in law, although in practice the finance repo and the factoring of receivables are probably more important. The finance lease was the subject of early statutory law in France (credit bail) and other southern European countries. The finance repo was the subject of legislation in France (the pension livrée since 1993) and to some extent also in Germany (section 340b HGB). Special factoring or receivable financing statutes are less common so far, except for the partial lifting of the notification requirement in respect of assignments in France and the Netherlands as we have seen, but both the finance lease and the factoring of receivables have drawn attention at the international level, the finance lease and factoring in UNIDROIT, and receivable financing in UNCITRAL: see again for the details Volume 5, sections 2.3.5 and 2.4.5. Thus, UNIDROIT produced Conventions in 1988 on the leasing of assets if moving trans-border and on factoring of portfolios of receivables with debtors in various countries. The result was mostly a set of private international law rules. The 2001 UNCITRAL Convention on the Assignment of Receivables in International Trade is more ambitious and attempts to provide a uniform law in the major aspects of receivables financing itself. The UNIDROIT Leasing Convention has obtained a small number of ratifications and has thus entered into force, as did the Factoring Convention more recently. The UNCITRAL Convention has not received any ratifications so far but has been signed by the US, Luxembourg and Madagascar. Finance leases should be distinguished from operational leases, on the one hand, which are mere contractual arrangements, or on the other from rental or borrowing agreements, both normally for the use of the assets for a shorter period. The finance lease is essentially for the life of the asset and has proprietary aspects. It resembles more closely the reservation of title and probably even more the hire-purchase, especially if it is an instalment arrangement under which the lessee eventually becomes the owner although there may be a mere option (possibly against further payment). Where the lessee automatically becomes the owner or has a free option (which is more common), it appears that there is a conditional sale. This characterisation is sometimes avoided (especially in England) in order to eliminate the hire-purchase analogy and the consumer protections of modern hire-purchase statutes. They are inappropriate in the finance lease, which is normally a professional financing tool. In the US, as we have seen, the concern is rather to avoid the application of Article 9 UCC and therefore the conversion of the lease into a security interest making the lessee the immediate owner subject to a security interest of the lessor that needs to be properly filed. There will therefore not be an option to acquire the asset (except for extra value) and there is likely to be a return at the end of the lease period. In Germany it seems that the finance lease remains characterised as a purely contractual arrangement for the lessee, although the latter may benefit from the general protection of a hire contract, which can survive, for example, a sale of the asset by the lessor and in this manner probably also his bankruptcy, but technically only when the lease concerns land— see section 566 BGB. Dutch case law appears to go in similar directions. In the repo of investment securities and more so in the old sale and repurchase agreement (of which the German Sicherungsübereignung was an example and which in its conditional transfer form still seems a possibility if parties expressly so provide), there may be a purer instance of a conditional sale, although again it is not widely so analysed. For investment securities there is in any event a problem with the fungible nature of these securities so that the same securities are not likely to be returned but rather only the same quantity of the same sort. This may further

240  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights undermine any proprietary claims of the seller, at least in the absence of tracing notions, unless one accepts more generally the shift into replacement assets. See for the different German, Dutch, French, English and US attitudes more extensively Volume 5, sections 1.2.3, 1.3.3, 1.4.3, 1.5.2, 1.5.3 and 1.6.2. As we shall see in Volume 5, section 4.2.1, in new German and French law on these repos, their proprietary aspect is not covered either and it remains a matter of characterisation: see further Volume 5, sections 1.3.3 and 1.4.3. At least in Germany there is, as in the case of the lease, a disposition towards a purely contractual approach. It may mean that there is much less protection for the party acquiring the funding (the seller) than there is under a security interest. The simple tendering of the repurchase price may not then result in full ownership. It has already been said that the alternative in finance has become the set-off or netting facility of mutual claims participants have against each other rather than reliance on the proprietary remedies. In factoring of receivables, on the contractual side, there are three possibilities: it may be a mere administration and collection agreement under which the creditor leaves this part of his activity to an expert who can handle the receivables more efficiently, quickly and cheaply; there may also be a credit risk transfer to the factor, which means that the factor gives some form of a guarantee of collection to the creditor; and finally there may be a funding operation under which the factor funds the receivable portfolio on a current basis. For true factoring there is always administration and collection, and there must be either a guarantee arrangement or funding or both. Mere administration and collection are therefore best seen as a contract for services (under which nevertheless there may result some conditional ownership right in the collector) and not factoring proper. Factoring proper always implies some transfer of the receivables to the factor, including a transfer of credit risk and sometimes payment as a matter of funding). This poses the problem of a bulk transfer and the inclusion of future receivables, discussed earlier. As regards the transfer itself, therefore on the proprietary side, there are also three possibilities. The (bulk) transfer may be in full, it may be as security transfer only, or it may be a conditional transfer. Often it is conditional, at least as regards the individual claims: this may be so in collections as we just saw, but receivables also may have to be approved by the factor, may have to be uncontested by the debtor, or may not be affected by an insolvency of the debtor so that there is no credit risk for the factor at all. These are forms of recourse factoring in which all claims that do not comply with the conditions are then automatically returned. It only has the first and last contractual aspect just mentioned (or also a limited version of the second aspect). The most common form of factoring—the old line or non-recourse factoring—has all three contractual aspects and is on the proprietary side best characterised as a full sale and transfer of the receivables. See more particularly the discussion in Volume 5, section 2.3.4. The alternative to finance sales having a proprietary aspect for both parties is to view them as purely contractual arrangements. As just mentioned, that is not at all uncommon and seems to be the position, especially in Germany, for finance leases and repos. It means for the finance lease that the lessor remains the full owner of the lease assets while the lessee has only contractual (and perhaps some possessory) rights, possibly subject to the protection of the lessee as if there were a rental agreement of real estate under section 566 BGB. In a repo, it suggests that the purchaser is the full owner and that the seller has no more than a personal retrieval right. In factoring, it would put the financier equally in the strongest position and the seller of the receivables could retrieve those rejected by him/her in a personal action only. This is all pertinent, especially in a bankruptcy of the financier when the counterparty may thus be in a weak position. In a long-term agreement like the finance lease, for example, the lessee risks that the trustee of the bankrupt lessor (as finance company) may attempt to repudiate the contract as executory and retrieve the lease asset if beneficial to the bankrupt estate. In the repo, it could mean that the bankrupt buyer/financier would insist on full performance of the agreement if the price of

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 241 the securities had gone down but may wish to keep them even if the seller tendered the repurchase price on the due date should they have gone up. This is called the cherry-picking option, which invariably results from the characterisation of finance sales as being merely contractual. Both in Germany and the Netherlands, there is at least a difference in that agreements covering market-quoted assets are automatically and immediately rescinded upon a bankruptcy of either party. As already mentioned, where the finance sale is characterised as a mere contract, some relief may be obtained through set-off and netting. This is an important elaboration of the set-off principle and relevant particularly if there is a netting agreement that expands the concept, in the international repo markets particularly relevant under the Repo Master Agreement as we shall see in Volume 5, section 4.2.5, provided always that there are sufficient positions either way between the same parties. It may notably occur in repos where professional parties may be each other’s financiers in different repo transactions between them. The contractual expansion of the set-off concept now commonly allows netting of claims that are not all mature or even monetary or in the same currency: see further Volume 5, section 3.1. The netting contract will have to introduce here acceleration of maturities and related discount clauses, valuation clauses for nonmonetary claims such as the one for a return of the investment securities, and an exchange rate valuation if not all values are in the same currency. As it is not clear whether such expanded set-off clauses could be upheld in bankruptcy, some bankruptcy laws, like the ones in the US (upon amendment, see sections 559 and 562 of the US Bankruptcy Code) and the new German Insolvency Act (section 104), especially so provide. It has already been said that netting thus becomes here the more normal protection tool rather than reliance on proprietary concepts and options. In fact, it may well be that the commercial practice has accepted that finance repos are not proprietary, probably because of the fungible character of the underlying securities but also because of the right of the repo buyer commonly to on-sell the property, repo it, or give it as security. It also avoids problems of re-characterisation into secured transactions, which only arise if the repurchase right is deemed proprietary.

1.7.7.  The Outward Signs of Security Interests and Ownership-based Funding. Possession or Filing To give effect to security interests or even conditional ownership rights in terms of finance sales, some outward manifestation of the interest is now often deemed desirable, also in respect of movable assets. The normal proprietary effects of security interests and conditional ownership rights are the right for the financier to pursue these interests or rights in the assets regardless of who owns them (allowing the debtor to transfer them regardless of any security interests or conditional ownership rights in them or sometimes even regardless of any contrary stipulation in the security agreement itself, cf sections 9-315(a)(1) and 9-401 UCC), the right to repossess the assets upon default (section 9-503 UCC) and, in the case of a security interest, the priority in the distribution of the proceeds upon a disposition (sections 9-609, 9-339 and 9-615ff UCC), which must, in the case of a security interest but not a finance sale, usually follow. In fact, for proprietary rights of any sort to emerge and be recognised in their third-party effect, some outward sign of them is often considered desirable to warn and protect the public as it must accept and respect these rights and could only acquire the assets subject to them. At least that is the idea, but it was posited before that publicity is not truly the source of proprietary rights—see section 1.1.3 above—although the requirement of delivery for title transfer in chattels in most civil law countries and also under the older common law (see section 1.4.2 above), and

242  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights of notification of assignments in some countries (see section 1.5.1 above), are sometimes seen as an example of such a manifestation, here of title transfer. It was, however, pointed out that delivery, at least in civil law, may be wholly constructive and many countries are dispensing with notification requirements in assignments also, notably to make financial bulk transfers or assignments possible. However, if there is no such outward sign, in modern legal systems any change in the proprietary rights in the asset might be ignored, especially in land. That is the essence of all land registration systems. Bona fide purchasers are not then protected as all are assumed to have constructive notice of any ownership rights reflected in the register. In fact, normally, no ownership can pass without amending it, although there might still be some doubts if property is acquired through inheritance or acquisitive prescription. For chattels, on the other hand, there is not normally a filing system concerning their ownership. It would be entirely impractical, not only because of the multitude of such assets but also because of their short life span. In this situation, holders may be presumed the owners, as a consequence of which bona fide purchasers of such holders tend to be protected, at least if they acquire the physical possession of the property: see section 1.4.8 above. It defeats all prior proprietary interests in these assets of which the purchaser could not know. Indeed, even for chattels and more so for intangible assets, the outward manifestation of lesser proprietary rights and certainly also of security interests (or conditional ownership rights supporting funding) in them is and has always been particularly problematic. More generally, if a person holds these assets, in the case of chattels for example on the basis of contractual user rights or a proprietary usufruct, or in the case of intangibles as a collection agent, who can say what the real proprietary structure in these assets is? Proprietary rights in personal property thus often remain hidden unless they coincide with physical possession. To minimise confusion, it has not been uncommon for the applicable law to require, at least in the case of security interests in personal property, especially chattels, (physical) possession for the validity of the interest. This was neither the Roman law nor ius commune system, as we have seen, which allowed the non-possessory security interest (or hypothec) also in chattels and even a pledge with no more than constructive possession,377 nor was it that of the common law,

377 In Roman law the security interests in assets developed as an alternative to personal security (through guarantees or sureties) and became preferred: see D.50.17.25. The oldest form was the fiducia cum creditore, which was a conditional transfer or finance sale: see also s 1.7.5 above and for the development of the condition in the Roman law of property, Vol 5, s 1.2.2, n 70. It was also used for non-funding purposes and then more a custody arrangement (the fiducia cum amico, see Gaius Inst 2.60). In neither context did clear fiduciary duties and reclaiming rights develop, a problem still apparent in the development of conditional or finance sales and custodial arrangements in civil law today: see s 1.7.5 above and Vol 3, ss 3.1.4 and 3.1.6 above. It is clear that the fiducia allowed for a transfer with constructive delivery only and could therefore leave the physical possession with the former owner of the goods resulting in a non-possessory ownership right of the financier. It seems not to have been used to cover claims even when monetary: see for the limitations on their transfer in Roman law s 1.5.1 above. The non-possessory nature of the fiducia was a risk for the new owner, but as bona fide purchasers of the former owner in possession were not protected under Roman law, which adhered to the nemo dat rule (see s 1.4.9 above) legally that risk was limited. In the Justinian compilation, the notion of the fiducia was itself deleted but not the conditional sale as such. By that time there were, however, also security interests proper: see D.13.7.9.2. The difference was in the right to any overvalue in the assets upon default, which in the case of a security would belong to the defaulting debtor. These security interests were the hypothec (hypotheca) which was non-possessory and could be used both in respect of real estate and chattels. The pledge (pignus) was always possessory and the term was then also used in respect of land: see D.50.16.238.2. The basic difference in later Roman law was therefore in possession (see Inst 4.6.7 and D.13.7.1) but even where it was required, as in the case of the pignus, it could be constructive (see D.13.7.37) so that the difference between the hypotheca and the pignus was not always great: see also D.20.1.5.1, which acknowledged this state of affairs.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 243 which accepted chattel mortgages (usually a conditional sale, however),378 but it progressively became a requirement in the nineteenth century, especially on the European Continent and It allowed for multiple transfers as security under which the oldest transferee was protected. See for the prior tempore potior iure rule, C.8.17.3 (while bona fides and/or possession of later interest holders was irrelevant), but an officially established security right (by a kind of deed or through witnesses) had a higher rank: see C.8.17.11.1. By this time, also claims could be pledged. C.8.16.4 gave the lender the actio utilis (see n 244 above) to collect. If the claim was monetary, the proceeds would be set off against the debt, but if the claim was for the delivery of goods, the security interest would shift into the assets upon their receipt by the borrower: see D.13.7.18. A closely related aspect was that future assets could be liberally included under the suspensive condition of their acquisition by the borrower: see D.20.1.16.7. C.8.16.4 suggests the possibility of general liens that could also include receivables and D.20.1.1 specifically mentions in this connection the inclusion of future assets, whether tangible or intangible. It amounted to the possibility of non-possessory floating charges, which seem to have been very popular in later Roman times. They could be established through a hypothec but also through a constructive pignus, as D.20.1.1 clearly states, and their priority would arise as at the time of the creation of the interest, not therefore of the later emergence of the assets, so that later specific security interests in any of them in favour of other lenders would be subordinated. At least D.20.4.2 seems to suggest so and the idea also finds support in D.20.1.34. In the ius commune, there was a tendency, especially in the natural law school, to limit the effect of the non-possessory interests to situations in which the asset was still with the debtor. In any event, upon a sale of the asset by him to a third party, the security interest came to an end, apparently even absent bona fides on the latter’s part: see Grotius, Inleidinge 2.48.28, at least in the case of a hypothec. It seems not to have affected the constructive pignus, which was popular, based on necessity and in Holland supported by the Supreme Court: see its decision of 13 November 1737 cited in Van Bynkershoek, Observationes Tumultuariae ed Meijers (Haarlem, 1962) IV, no 3051, but it disappeared in the nineteenth-century codifications under the influence of earlier French customary law: see n 337 below. Earlier, the general (contractual) lien as floating charge became subject to the better right of later specific security interest holders: see Grotius, Inleidinge 2.48.34 and was also in other aspects progressively reduced in effectiveness and equally disappeared in the nineteenth-century codifications. That may have had to do with the increasing emphasis on specificity and identification in the nineteenth-century development of civil law, which became here more anthropomorphic. On the other hand, some general (and special) statutory liens emerged (pignora tacita), some derived from Roman law, like the one for the tax authorities in C.8.14 (15). They sometimes prevailed over consensual liens. There also emerged preferences in proceeds without special repossession rights, which would prevail over nonsecured creditors but not over secured ones, unless so dictated by statute. In this system, confusion could easily arise. An interesting countervailing feature was that already in later Roman law lack of disclosure on the part of the borrower of any liens against its assets became a criminal offence. This is the stellionatus of D.47.20.3.1. 378 Customary law in France, which prevailed in its northern part (especially in Paris and surroundings) was unfavourably disposed to the Roman law system and required for security interests in chattels physical possession: see Art 170 of the Coûtume de Paris (of 1510) which stated the famous maxim: ‘meubles n’ont pas de suite par hypothèque, quand ils sont hors de la possession du débiteur’, from which later the general principle of protection of bona fide purchasers of chattels was deduced in France: see s 1.4.9 above. The non-possessory hypothec thus lost its significance for chattels early in France but retained it for real estate and entered as such the Code Civil (Art 2114 CC). The principle of ‘meubles n’ont pas de suite par hypothèque’ was retained in Art 2119 CC, and the transfer of physical possession became a validity requirement for all pledges of chattels: see Art 2076 CC. In real estate there remains also a possibility of a possessory security interest with the use of the asset, called the antichrèse (Art 2072 CC). It is uncommon. The floating charge had already been eliminated in the Ordonnance de Commerce of 1673, which in Art 8 required a document in which the collateral was clearly described. Art 2074 CC retains that requirement, although in the commercial sphere a document itself is not necessary (gage commercial, L 521-1 and L 110-3 Code de Commerce). Only in the more recent nantissement du fonds de commerce established by the Law of 17 March 1909 (which also covered the sale of the fonds de commerce), now codified in Arts L142–1 to L142–5 Code de Commerce, was there a more limited floating charge facility, especially in respect of a business (which need not be incorporated) and its equipment. It was a peculiar French concept not defined in law, cf also Art L144 Code de Commerce for the lease of the fonds de commerce (replacing an earlier law of 20 March 1956). It could also cover the receivables of the business but not its debt (therefore assets only). See further also F Lemeunier, Fonds de Commerce (Paris, 2001). By ordinance 2006–346 of 23 March 2006, a broader floating charge facility was introduced in France. For receivables, the pledge became uncommon in France as it was doubtful whether it allowed collection by the lender.

244  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights also in the US.379 Thus the possessory pledge became preferred and survived as the only type of security interest for chattels, therefore as a possessory interest only. The unavoidable separation between ownership and possession, also in this instance, protects the security interest holder in its proprietary or third-party rights, which cannot be surreptitiously taken away from him. It leaves on the other hand the (better) interest of the owner and of other interest holders in the asset exposed. That is a trade-off for the owner who will normally be the beneficiary of this situation as a secured borrower. Yet this method of providing security in respect of personal

A conditional assignment therefore became the more common method of using receivables for funding purposes: see Vol 5, s 1.3.5, also for the modern statutory amendments facilitating security transfers of receivables by eliminating the notice requirement. See for the development of the modern reservation of title in France, Vol 5, s 1.3.4. In Germany, the further development of the ius commune led in the nineteenth century to the elimination of non-possessory security interests and floating charges in chattels, which was borne out by ss 14 and 43 of the first all-German Bankruptcy Act of 1877, enacted before the BGB, which also accepted only one security interest in chattels which had to be possessory in which connection constructive possession was not sufficient: see s 1205 BGB. In the meantime, even before the introduction of the BGB in 1900 the German courts had accepted the principle of a conditional or finance sale in chattels (with mere constructive delivery of possession through a transfer constituto possessorio) in the so-called Sicherungsübereignung, which subsequently developed in the direction of a non-possessory security interest. See for this development and for that of the related Sicherungsabtretung for receivables, more particularly Vol 5, s 1.4.2 and for the development of the modern German reservation of title, Vol 5, s 1.4.1. 379 In England, the mortgage was a conditional sale (see Vol 5, s 1.5.2) and could also exist in chattels when, however, registration with the courts became necessary in 1854 if used in the private (and not in the corporate) sphere. They were then called bills of sale. Statutory law also established priority in accordance with the time of registration, which was more generally meant to warn unsuspecting creditors, while at the same time protecting the debtor against hasty decisions in transferring assets to obtain funding. The conditional sale nature of the chattel mortgage had been confirmed in Ryall v Rolle (1749) 26 ER 107, with emphasis on the ownership status of the buyer and his risk of a reputed ownership of the seller if the goods were left with the latter. These conditional ownership rights could perhaps have been structured as floating charges but that became progressively more difficult under statutory law, which required identification of the assets, the reason why these floating charges subsequently developed in equity, helped by the equitable tracing rights and shifts of charges into proceeds: see Vol 5, s 1.5.2. In English law, on the other hand, the pledge was a proper security interest at law and was always possessory but limited to chattels. As such, it was a form of bailment. As English law was never entirely strict in the physical possession requirement, constructive delivery could (exceptionally) be sufficient: see s 1.3.2 above. It may be difficult in such a situation to distinguish a pledge from a chattel mortgage with its formal registration requirements (in the private sphere). Like the pledge, it remained in the corporate sphere in England a fixed charge supplementing floating charges and having a higher rank. Differences between the pledge and the chattel mortgage may be found mainly in the disposition requirements, overvalue repayment or redemption facility and position of bona fide purchasers. In the case of a chattel mortgage, there is only an equity of redemption for the debtor upon default whilst bona fide purchasers of the creditor (even if not in possession) are likely to be protected against any equitable (redemption) interests of the debtor (even though in possession). In the case of a pledge, the debtor remains the owner and can reclaim his title from all purchasers of the creditor even if the latter is in possession. The sale or re-pledging of pledged assets by a debtor in possession is not likely to be subject to bona fide purchaser protection. The creditor/mortgagee will retain his rights, in which connection the publication of the interest provides an additional argument. In the US, the chattel mortgage as conditional sale was superseded in the nineteenth century in many States by State laws converting them into true security interests subject to registration. In that approach the pledge of chattels always required physical possession and there was a disposition upon default. The subsequent difficulties of creating floating charges were remedied in a number of different departures, depending on State law, partly based on conditional sales especially for reservations of title, partly on factoring acts, which aimed at general contractual liens shifting into replacement equipment and particularly inventory and receivables, and partly on assignment statutes especially aimed at funding transfers of shifting portfolios of monetary claims. All are now superseded by Art 9 UCC: see for these US developments more particularly Vol 5, ss 1.6.1, 1.6.2 and 2.3.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 245 property is costly as it deprives the borrower/owner of the use of the asset in its business. It is the reason why non- possessory security interests in personal property became a necessity after the Industrial Revolution, especially in respect of equipment, inventory and accounts receivable of a debtor, exactly to finance these assets themselves. This raised again the issue of the manifestation of these possessory interests. In some countries, mainly of the civil law and notably in Germany, the non-possessory hidden liens of the Sicherungsübereignung became accepted, although subject to bona fide purchaser protection of anyone acquiring title and physical possession in them, at least in the case of chattels as we saw. This bona fide protection against hidden liens did not exist in the case of receivables. Thus, liens in them, although hidden, were (and are) perfectly valid against subsequent assignees of these assets, even if they are unaware of the earlier interests. In the US, bona fide protection of these assignees developed: see section 1.5.9 above. Earlier in England, in equity the bona fide later assignee who collected had become protected provided the debtor paid in good faith. This was somewhat unexpected as this type of protection did not exist under common law in respect of chattels at law (and needed in that case statutory backing as was given in the US in Article 2 UCC and in the UK in the Sale of Goods Act 1979: see section 1.4.9 above). There is a related problem in the bona fide protection of the security interest holder. May the lender rely on the outward signs of the debtor’s personal property while creating the security interest and deem all included (if the security agreement is so formulated), even if the assets themselves belong to others? In respect of chattels this is indeed likely in civil law on similar grounds. In common law this may be so by statutory disposition. Section 9-203(b)(2) UCC presents (indirectly) an example of this approach. Only if there is mere possession is the debtor not supposed to have a sufficient interest in the property in its possession to transfer it to a lender as security.380 One must assume that the lender/transferee of the security interest, as a type of purchaser, must indeed be bona fide, although that idea is not clearly expressed in Article 9 UCC and does in any event not apply if the borrower has mere possession only (but voidable title is sufficient). Yet ownership in the borrower is not necessary. It exposes all those who have lent assets to a borrower or who have paid for inventory still in the latter’s possession or gave any assets to a borrower subject to custodial interests (as agents or asset managers). Assets leased to a borrower may be included as well, although no longer if an equipment lease under Article 2A.

380 Under case law concerning Art 9 UCC, it is made clear that whilst a pure bailment may not create an interest that may be claimed by a secured lender of a bailee, any rights in the assets beyond mere possession will constitute a sufficient interest in the bailee/borrower and may be covered by a floating charge in favour of the lender under s 9-203(b)(2) UCC. It is especially important when a customer or third party has supplied a bankrupt builder with materials which it may not therefore be able to retrieve: see Litwiller Machine and Manufacturing, Inc v NBD Alpena Bank 457 NW 2d 163 (1990). The UCC is here not interested in ownership rights even if mere possession is not good enough, cf also s 9-112 (old) UCC (now omitted). The question is therefore whether there are ‘sufficient’ rights, which need not be strictly proprietary. The right of the bankrupt may be an entirely personal or contractual user right, which would still lead to the inclusion of the assets in his estate (assuming he also has physical possession). Generally, title (in the sense of ownership) itself is of relatively little significance under the entire UCC and deprecated, even in the sale of goods: see also s 2-401 UCC (and this not only in respect of bona fide purchasers). Ostensible ownership by the bankrupt may here be an additional argument and also the easy facility for the customer who provides materials to the construction company to protect himself by instead granting a loan with a purchase money security interest in the assets and filing a finance statement in respect of it: see Kinetics Technology International Corp v Fourth National Bank of Tulsa 705 F 2d 396 (1983).

246  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights The alternative of a special registration facility in respect of these assets to publicise and protect the position of the lessor and true owner was specifically rejected.381 Unless clear exceptions are made as in the US for the equipment lease, appearance of ownership, apparent ownership or ostensible ownership of a borrower/transferor seem here to be sufficient, resulting in a prospective windfall for the bona fide secured lender and a risk for anyone who leaves assets with a third party. This is curious in the sense that this notion of apparent ownership, which here works in favour of secured creditors, may under modern law not or no longer be sufficient to protect ordinary, non-secured, bona fide creditors382 or even judicial or statutory lien creditors, at least no longer in the US under applicable State law. Thus, their reliance on the debtor’s outward signs of wealth, even if created by hidden non-possessory security holders leaving the debtor with their assets, no longer works in their favour. Only secured interest holders still appear to benefit from such protection. In England and France, the notion of reputed ownership to protect bona fide ordinary creditors is also clearly on the wane. The acceptance of a reservation of title creating a hidden interest of the seller is here the most important example.383 Security interest holders, even if hidden, are therefore better protected all the time unless their interests clearly arise from fraudulent conveyances.384 However, these security interests, if non-possessory, are now mostly subject to a filing requirement in the US, at least for their priority status. It is of interest in this connection to explore this US filing requirement and its meaning somewhat further, as it is often held out as a model. What does it do and what does it achieve or fail to achieve? Here we need to go into the meaning of attachment and perfection of the security interest in personal property under UCC law.

1.7.8.  Attachment and Perfection of Security Interests in Movable Property under the UCC in the US. Meaning and Weaknesses of the Filing System Under section 9-201 UCC, a security agreement is valid immediately upon its conclusion and has third-party effect. It works therefore immediately against purchasers and other creditors. For this third-party effect itself, no filing or publication is necessary; no formalities are imposed except that of a writing under section 9-203(b)(2) UCC. This is unlike a full transfer of ownership under the law of the sale of goods where section 2-401(2) still requires (physical) delivery for the property right to pass unless parties agree otherwise. It is to be noted in this connection that any public filing of a security interest does not commonly replace the delivery of possession requirement, wherever obtaining. However, in the US, the security interest

381 Art 2A UCC made one exception in s 2A-309. See further also CW Mooney Jr, ‘The Mystery and Myth of “Ostensible Ownership” and Article 9 Filing: A Critique of Proposals to Extend Filing Requirements to Leases’ (1988) 39 Alabama Law Review 683. 382 See for this notion also Vol 5, s 1.1.10 and Vol 5, s 1.3.2 for France, and for its demise in England in the Bankruptcy Act of 1986 Vol 5, s 1.5.2. 383 See Vol 5, s 1.3.3 for the situation in France and Vol 5, s 1.5.4 for the situation in England. 384 This is the English approach since the famous Twyne’s Case (1601) 76 ER 809, when a debtor transferred his assets to a friend while maintaining possession and all user and income rights. In modern bankruptcy laws, there have been added presumptions of fraud in transfers made between a certain period before bankruptcy (suspect period) but these presumptions are normally rebuttable. In civil law, this is the reach of the actio revocatoria or Pauliana.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 247 attaches immediately, therefore even before filing or the taking of (physical) possession and is under sections 9-201 and 9-203 UCC immediately enforceable provided it is in writing, value is given, and the debtor has a sufficient interest in the assets, which is any interest beyond mere possession. The priority right is in consequence also immediate. Sections 9-317, 9-102 and 9-323 UCC reflect this. It suggests that there is an immediate priority in respect of all later attaching creditors and non-secured creditors. Only filed or perfected voluntary security interests and statutory or judicial lien creditors prevail over it. As regards the latter, in bankruptcy, there is in particular the lien of the bankruptcy trustee to reckon with, which automatically pushes the attached but non-perfected security interests down. That is most important, but here a detail. The key is that the priority right of the secured creditor against non-secured creditors is attached upon the mere conclusion of the security agreement and that in principle it is also valid against purchasers of the asset unless they purchase in the ordinary course of business or are bona fide, in which connection, importantly, they do not have an investigation duty (section 9-323) and even perfection through filing does not affect these purchasers. Thus, attachment and even perfection is only of importance between secured creditors and determines their ranking. This was earlier expressed as a facility operating among insiders, here especially other lenders or banks and suppliers. This is in the nature of the operation of all equitable proprietary rights, which do not affect outsiders who have no search duty either. The ordinary commercial and financial flows are thus always protected: see also the summary in section 1.10 below. The publication/filing or perfection itself only establishes priority over later perfected (and earlier attached) secured creditors under voluntary or (often) statutory and judicial liens. That is all. In the US this filing is limited to a finance statement, which only indicates in summary terms the type of collateral covered. Its importance is the warning it gives to later secured lenders. Filing establishes the time of the priority over other (perfected) secured creditors in which connection the UCC even allows an advance filing system under which the loan and security may be agreed later and also the collateral may emerge later under an after-acquired property clause (section 9-204 UCC), while the priority always relates back to the time of the filing of the finance statement. These last two aspects (the priority and relation back) of the filing requirement are especially important and substantive law issues. The warning function, on the other hand, is a means of giving the enquirers a rough idea, but any professional lender will have to make its own enquiries anyway, ask for detailed information from the borrower, and search its accounts as a matter of due diligence. In fact, the filing under Article 9 UCC does not guarantee anything, especially not the existence or extent of the collateral or the capacity of the debtor to dispose of the assets in this manner or indeed the existence of any valid security agreement at all. Thus, the debtor may have void title although the security interest holder may be protected against a voidable title if he is unaware of it. This does not result from the filing however. The collateral may not exist as in the case of future property even though the lien may relate back to the date of filing as soon as the asset emerges while the contract to acquire a future asset may itself be pledged (as a general intangible) under section 9-102. Other assets of the debtor may be excluded because the debtor has an insufficient interest as in the case of leased property under Article 2A UCC. On the other hand, for other property in the possession of the debtor there may be inclusion, but the point is that the filing has no relevance in this connection either. It also does not protect against statutory or judicial liens in the same assets, which are not normally published, or against any purchases in the normal course of business or bona fide purchases by consumers of consumables, which will be free and clear regardless of the filing and there

248  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights is no investigation or inspection duty for these purchasers. Possessory interests of all kinds, at least in consumables, may also prevail over the filed interest. Although the filing thus guarantees nothing, it is relatively costly while in the US the filing systems in many States are still cumbersome, and the place of filing and investigation is sometimes uncertain, and could be in any one of several States where the debtor is engaged in business. The name of the debtor may have changed in the meantime or the debtor may have been subject to a merger or reorganisation. Also, here the registers guarantee nothing. Most importantly, they do not allow for the filing of adverse interests of third parties (if not themselves secured creditors) in the property to protect these interests against later security interests. The consequence is that the benefits of this filing system, which is meant to establish an easy, simple and certain method of creating priorities, are in practice much less obvious than they appear at first. Consequently, there is much less of a model in the US example than would appear from its face. Even in the US, scepticism has been expressed although no abolition suggested.385 It may therefore come as less than a surprise that filing was not foreseen in earlier drafts of Article 9 UCC.386 In Europe not much need has been felt for a similar system, particularly in Germany, understandably so, it would seem. Importantly, the 2002 EU Directive on Financial Collateral explicitly ignores all domestic filing requirements for the validity of security in, or conditional sales of stocks and shares (in dematerialised form). The DCFR prefers a filing system, however: see also section 1.11 below. Nevertheless, especially in an international academic context, more than lip service is sometimes paid to this filing facility although its significance is generally overrated. It is not a key issue at all once it is understood that such a filing system operates very differently from land registers. Thus, some form of filing also appeared as an alternative in the 2001 UNCITRAL Convention on the Assignment of Receivables in International Trade, and it is also an important aspect of the 2001 UNIDROIT Mobile Equipment Convention. Indeed, filing as some substitute for (delivery of) possession in the creation of security interests remains an article of faith in many quarters, but is not here the true issue. Again, as bona fide purchasers in the ordinary course of business are normally protected and have no investigation duties (except in the Mobile Equipment Convention, which is concerned with specific high-value items), the essence is to warn other creditors who should and will make their own inquiries. It is not immediately apparent what filing systems add here to justify their cost and expense even if access were easy and there was no confusion possible on where to look. It is true that they establish clearly the time of the perfection, but this could also be done by deed.

385 IM Hillinger, RT Nimmer and MG Hillinger, Commercial Transactions: Secured Financing Cases, Materials, Problems, 2nd edn (New York, 1999) 144 are critical and suggest that Art 9 notice requirements have long outgrown their historical roots. In Europe, the US system has been extensively studied in this aspect also with sceptical conclusions: see UH Schneider and J Miss, US-Amerikanische Erfahrungen mit dem Abtretungsregister, Institut für deutsches und internationales Recht des Spar-, Giround Kreditwesens, Arbeitspapiere (University of Mainz, Working Paper in English) 1998. The fallacy of filing systems has also been noted by PR Wood, ‘Publicity for Transfer of Property: Is the World Out of Step (except New Zealand)?’ in KP Berger, G Borges, H Herrmann, A Schlüter and U Wackerbarth (eds), Private and Commercial Law in a European and Global Context, Festschrift für Norbert Horn zum 70. Geburtstag (Berlin, 2006) 191. 386 See G Gilmore, Security Interests in Personal Property (Boston, 1965) s 15.1.

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1.7.9.  Floating Charges in Common and Civil Law. Extended Reservations of Title. The Concepts of Bulk Transfers, Asset Substitution and Tracing and the Inclusion of Future Assets. The Facility to Sell Goods Free and Clear Article 9 UCC in the US is rightly famous for the system of security interests it introduces, and in particular for the broad facility of creating floating charges (a term not itself used in the text of the UCC although it is in the Official Comment) especially in respect of equipment, inventory and receivables (or accounts). It allows in this connection the inclusion of future replacement assets, which may also be used to protect future debt: see section 9-204. In such cases, the charge may relate back to the date of the original filing. It is further noteworthy that the concept of absolutely or relatively future goods (see also sections 1.4.3 and 1.4.5 above) developed under German law does not play a restricting role. As long as the assets to be given as security can be reasonably described in the security agreement as well as the charge itself, there is no further requirement for their inclusion and security transfer. For receivables there is thus also no need for the relationship from which they derive to already exist. The future credits that are secured in this manner do not need a basis in an already existing legal relationship either. Thus, a bank may obtain security in all that the debtor has or will ever acquire (assuming these are the asset classes covered by Article 9, which include notably equipment, inventory and receivables) in respect of all that it owes or may owe the bank for whatever reason: see for the US system further also the previous section and more particularly Volume 5, section 1.6.1. In England, there is a similarly broad approach, in that country still substantially based on case law, under which the rank, however, is determined not from the date of registration in company registers but from the date of crystallisation of the floating charge, which is normally the date of default of the debtor.387 As a consequence, it has a low rank, just above the nonsecured creditors, much like the attached but not perfected security interest holders under the UCC in the US, and is therefore a less potent security. Often it may include a number of fixed charges, which acquire in respect of specific assets (notably real estate) the rank as from the date they are established. What is decisive here is the matter of control over the asset—not always an easy criterion: see also Volume 5, section 1.5.2. The existence of floating charges is a test of the modernity of any security regime as demonstrated in Article 9 UCC in the US. In countries like Germany and the Netherlands, the situation is greatly more complicated as a floating charge as such is not supported by statutory law and must be cobbled together on the basis of contractual clauses. In Germany, there are in this connection the so-called Raumsicherungsvertrag, which allows for bulk transfers of assets within a certain space, the Verarbeitungsklausel, which allows their conversion into other products in which the charge is then contractually extended, and the Vorausabtretungsklausel, which allows for an anticipated assignment of all future claims from sales of the assets: see more particularly Volume 5, section 1.4.1. See for the possibility of the inclusion of future assets if replacement assets in Germany, sections 1.4.3 and 1.5.4 above. In the Netherlands, similar clauses may be used, but the question is how effective they are in the absence of more general provisions concerning bulk transfers, asset substitution, and tracing. A particular problem arises here with respect to future assets that are acquired by a bankruptcy 387 In England, the Law Commission Paper no 164 of July 2002 suggested an advance filing system along US lines under which floating charges would acquire their rank as per the date of filing and would therefore move from lowest to (conceivably) highest rank. So far it has not been followed up.

250  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights debtor only after its bankruptcy, even though included in the charge and regardless of the earlier release of assets from the charge (for example, upon the sale to third parties or upon collection of receivables) in exchange for which the charge was extended to the future replacement goods. Not recognising them as part of the charge is the present Dutch system (see also sections 1.4.3 and 1.5.6 above) and may entail a considerable windfall for the other creditors in a bankruptcy: see further Volume 5, section 1.2.2. One way to limit the damage is to deem any further releases invalid after default or bankruptcy so that the trustee in bankruptcy cannot continue to deliver goods free and clear to prospective buyers, while the present charge over them ‘crystallises’ and gives rise to execution remedies (or Absonderung in a German bankruptcy). Yet another is to limit the vulnerability of the transfer of future assets to those that are absolutely future, therefore to those that do not yet exist at all at the date of the bankruptcy, although in truth it may well be asked whether from a theoretical perspective there is any difference between assets that do not yet exist or that do exist but are not yet in the patrimony of the transferor. Another possibility is indeed to deem all replacement assets sufficiently identified and transferable per se even if still absolutely future at the time the security agreement was agreed. That would appear to be the German approach under section 91 of its Insolvency Act of 1999 under which the transfer of absolutely future assets would otherwise be vulnerable if they have not emerged before bankruptcy of the transferor. In the Netherlands, both the transfer (if only by way of security) in absolutely and relatively future assets is now ineffective under Article 35(2) of the Bankruptcy Act. In this important aspect, it may be different for conditional sales in future assets, which may not be so affected: see section 1.4.5 above in fine. See for the transfer of future goods more generally sections 1.4.3 and 1.4.5 above and for the assignment of future claims section 1.5.6 above. In the context of a floating charge covering also future assets, one should as a minimum appreciate the vital importance and close connection between: (a) the contractual description or identification possibilities to include them; (b) the possibility of an anticipated delivery of future assets whether or not absolutely or relatively future and their automatic transfer to the chargee when future goods emerge; and (c) the concept of a shift at least into replacement goods, ‘replacement’ here meaning either a valid description and sufficient identification in the contract or being implicit in legal notions such as (i) generality of goods or bulks, (ii) asset substitution, (iii) tracing, and (iv) commingling. Another important aspect of the floating charge is the facility of the chargee to sell the goods free and clear of any charge. This is expressed in section 9-320 UCC for goods sold in the ordinary course of business. It depends therefore on the nature of the assets. Not even the bona fides of the buyer is required in such cases. As has been noted several times above, this is an extremely important and necessary modern departure, fully recognised in modern US law. Elsewhere, one may be able to say that there is an implied licence to sell regardless of the charge. Thus, if a manufacturer sells his inventory to a distributor under a reservation of title, the distributor will be able to sell free and clear. If the buyer of the distributor in order to purchase the goods needs financing and gives his financier a charge in the assets (even if they are still with the distributor but sufficiently identified), in a modern system that latter charge will prevail over the possessory rights or liens of the distributor and over any reservation of title of the original manufacturer. It is simply a function of the nature of the assets that must move and be sold. That need prevails over the rights of interest holders earlier in the chain.388

388 It is also in the nature of bills of lading or warehouse receipts on which such interests are not marked (thereby becoming incorporated in the asset), even though the endorsee might know about the charges.

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1.7.10.  Uniform Security Law and Principles of Security Laws Some uniform treaty law was developed in respect of secured transactions especially in the UNIDROIT Mobile Equipment Convention: see also Volume 5, section 2.1.8, and for finance leasing also the Ottawa Leasing Convention of UNIDROIT of 1988, Volume 5, section 2.3.5. In respect of receivables, the UNIDROIT Factoring Convention of 1988 and the 2001 UNCITRAL Convention on the Assignment of Receivables in International Trade are also relevant: see more particularly Volume 5, section 2.4.5. The attempt to formulate some principles of security laws, especially by the EBRD (European Bank for Reconstruction and Development) and its Model Law are briefly discussed in Volume 5, sections 1.1.7 and 2.1.7, and see further also section 1.8.5 below. Some early efforts were also made in the EU: see Volume 5, section 1.1.7, now further pursued in the DCFR: see section 1.11.4 below. The 1999 EU Settlement Finality and 2002 Financial Collateral Directives are more tangible examples: see also sections 3.1.3 and 3.2.4 below. They ignore local limitations and create harmonised systems of law EU wide in the area of settlement, netting and collateral or margin in or concerning financial transactions involving investment securities, albeit only in these narrower fields, in which local law could otherwise operate as a serious impediment to cross-border financial operations within the EU.

1.8.  Private International Law Aspects of Chattels 1.8.1.  When Conflicts Arise In proprietary matters, we are faced in essence with a mandatory system of law, or at least a system that, because of the effect on third parties, is in principle not at the free disposition of the parties and therefore not subject to party autonomy. Except in a limited way in equity in common law countries, in the traditional view, parties cannot freely create proprietary rights, as we have seen, and it follows that they cannot freely choose the applicable law in these matters either (except as to the manner in which the particular proprietary right functions between them, which is in such a case a contractual and not a proprietary issue, as there is no effect on others). This is in civil law the numerus clausus principle, which operates in common law countries also at law, although, again, not in equity, and which does not allow private parties to create or modify proprietary rights with third-party effect. In proprietary matters, the search is therefore on primarily for the applicable objective law, also in international transactions, and is then commonly still perceived as being a national law. It is the consequence of private law having been nationalised since the nineteenth century as extensively discussed in Volume 1. The result is that under conflicts of laws approach, domestic limitations prevail also in respect of the operation of proprietary rights internationally, therefore in respect of assets that move trans-border. The true issue is in that approach to find the appropriate objective domestic law to determine how the particular proprietary right functions domestically in tie place of its creation or transfer, and whether and how such functioning can be accepted or recognised elsewhere, especially when the underlying asset moves. In the traditional conflict of laws approach, the applicable law is the lex situs, commonly meaning in proprietary matters the law of the place where the asset is situated or can be found. The consequence is that applicable law changes when the asset moves between countries and it must then be asked how and to what extent the original proprietary right can be recognised elsewhere and under what conditions, especially in bankruptcies which also remain legally local phenomena. As we shall

252  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights see, there is no clear answer to this in private international law. At best it is a matter of fitting in foreign rights, with greater flexibility in countries that adhere to the equitable approach of the common law. It is true that, in the views presented of this book, party autonomy has an important place in modern proprietary law and could transcend some of these restrictions, even domestically, all the more so, it was submitted, at the transnational level (see further section 1.10 below). It was shown and follows from the foregoing that this has proven to be workable at the operational level provided the inroads into the numerus clausus principle of proprietary rights are balanced by proper bona fide purchaser protection, or better still at the level of the ordinary course of business or flows in commoditised products, again, so far best demonstrated and accepted in the equitable proprietary interests in common law countries. There is nothing in principle against this working also in international transactions, therefore in the international flow of goods transnationally under the modern lex mercatoria. It follows that party autonomy operates at that level but only among a group of professional insiders who are able to investigate and gauge the extent of these proprietary rights, defined by contract, whilst also claiming them for themselves in appropriate cases. They may in this manner become affected third parties as under any other proprietary right. Outsiders, especially those that buy the underlying assets in the ordinary course of business in these flows, notably consumers, are then protected against the interests so created from wherever they come and wherever these consumers are. In this book, this is more broadly considered a question of the protection of the commercial and financial flows as a public order requirement and issue of finality and now a necessity, even domestically, but because of their volume more so in international commerce and finance when asset backed. It means that, as in equity, under newer transnational law, party autonomy may operate in the creation of proprietary rights but that the rights so granted or obtained are always cut off, no longer at the level of their creation, but of their operation. That is the same as saying that the ordinary commercial and financial flows are always safeguarded against these interests. It does do away with the need to cut international transactions up into domestic parts in the hope that the different legal regimes that so become applicable (often different even for contractual and proprietary aspects of an international transaction) together add up to a manageable and efficient legal system for the transaction as a whole, which in the international flows could be seriously doubted. In particular the unity of international transactions is then recognised and it is a key issue. Even now, party autonomy may in some legal systems lead to the selection of a more suitable domestic law in proprietary matters. Overcoming unsuitable and arbitrary property law regimes is indeed the reason why common law legal systems such as the English are in this respect often more comfortable with the parties’ choice of law in international cases, for example in international sales agreements, more so probably in international assignments, see section 1.9. below. But again, this is made possible and follows only because the resulting foreign interests are accepted merely as equitable proprietary rights subject therefore to the protection of the ordinary commercial and financial flows in recognising countries (except, again, in respect of professional insiders who may have a search duty). It means that resulting foreign interests can be domesticated in equity in order to operate in the UK. Missing this (equitable) facility, civil law was always likely to be more hesitant in allowing parties to opt for a domestic law that is not the lex situs of the asset at the same time. For foreign trusts proper, as we shall see, there is the 1985 Hague Convention, which in countries that have ratified it, among which there are a number of civil law countries, maintains a more specialised regime in respect of the recognition and operation of foreign trusts in other countries, which allows, however, for a measure of party autonomy, at least in the choice of the applicable law: see section 1.8.4 below.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 253 Indeed, barring treaty law, an approach accepting the proprietary effect especially of foreign secured interests, conditional ownership and finance sales or comparable equitable or split ownership structures, whether deriving from a foreign lex situs or under a contractual choice of another domestic law, may be more difficult in civil law countries. More particularly, party autonomy leading to a contractual choice of a foreign law to determine these issues is not likely to be effective, although, as we shall see in section 1.9 below, it is now sometimes defended for intangible assets, notably monetary claims regardless, also in civil law countries, thus for the trans-border transfer or assignment of intangible assets, notably monetary claims, covering then also the proprietary aspects of the assignment or transfer. One reason or justification is that these are not considered assets in a proprietary sense, because of a lack of physicality—wrongly, it was admitted still seen here as a key aspect of property law, but probably more compelling is that there is no proper situs in respect of claims in the first place and therefore also no proper lex situs, although, as we shall see in section 1.9 below, the situs of claims may be determinable by reference to the place of the debtor or of the assignor, but this has remained contentious and neither is obvious. Beyond this, in the traditional view which always looks for a national law, we remain relegated to conflict of laws theory and lex situs notions at least as far as the creation of proprietary interests is concerned, but there is still the issue of their recognition and operation elsewhere when the underlying asset moves, where there may be third party protection issues, especially those of common creditors in bankruptcies, and other public policy order concerns. This movement between countries is now normal and to be expected in international production and distribution chains, or, even if they do not, when they end up in a foreign bankruptcy estate under the applicable (foreign) lex concursus or are deemed to do so under this law. Taking a step back once more, in general, a conflict of laws problem truly arises when several (domestic) legal systems present themselves. Conflicts in respect of the creation and transfer of proprietary rights commonly arise at the level of the contract that creates them or sets the transfer in motion only if both parties are in different countries. To that extent, the traditional private international law rules in contractual matters will apply. In a proprietary sense—that is in respect of third parties—problems of the applicable property law principally arise when assets move between countries and therefore not primarily on the occasion of their creation or transfer unless delivery in another country is foreseen at the same time. Again, the basic objective rule concerning the properly applicable law in proprietary matters remains here traditionally the lex situs,389 at least for tangible assets. It is usually no problem for land, as their location is normally easily identifiable, it does not move either, and the applicable domestic law results from it. This is mostly also no problem for chattels as long as they do not move between countries as part of the transaction or by their very nature (like ships and aircraft) or when they are caught up in foreign bankruptcy proceedings as part of the bankruptcy estate which under its own rules may cross borders. Application of the lex situs in this manner may in fact hardly be a true choice of law issue but merely a statement of fact that solves nothing when a movable asset crosses borders. In that case,

389 It was said earlier that the lex situs principle is another manifestation of a physical anthropomorphic attitude to property law and is therefore parochial and atavistic, even if it may be one expression of the closest connection. Law is about rights and obligations, not about anything physical, including in property law, and there was therefore never anything compelling in the application of the lex situs in international transactions in respect of property issues. This is borne out especially in respect of intangible assets, such as monetary claims that have no natural situs, but it is also an issue in assets that move between countries as we shall see. Even if the situs stands here for closest connection, it need not then be physical and could be purely constructive as it is in the case of claims.

254  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights it raises the question whether the old or new lex situs applies, therefore the one of the place of origin or of destination. So, in proprietary matters, the mere reference to the lex situs does not in itself produce a choice of law solution when it matters most, viz when the asset moves, as it leaves open the question whether the applicable law is the law of the situs of origin or of destination of the asset and how they may relate. As we shall see, the idea is here often that the rules of the place of origin of the asset determine the extent of the proprietary rights created in them but that upon movement elsewhere, the matter of their recognition and operation in other countries is determined by the law of that country and is then mostly seen as a public order issue. In matters of full ownership or title that may not create insurmountable problems as this notion exists everywhere, but especially in secured transactions and finance sales or reservations of title and retention rights, or in trusts, where there may be great differences, this may not be so and a measure of transformation in nearest local equivalents may be necessary for these foreign rights to operate effectively abroad, as we shall see. Barring such a nearest equivalent, these rights may lose their proprietary status in the new location of the asset altogether especially important with respect to their ranking in a bankruptcy. It has already been said that in common law countries they may only operate as equitable rights, which gives more flexibility. They will then be cut off at the level of the bona fide purchaser or the buyers in the ordinary course of business, conceivably still with greater search duties for professionals. Even when no asset moves, a transfer in bulk, either outright or conditionally or as security concerning chattels located in different countries, presents applicable property law problems although at the transnational level the notion of bulk remains underdeveloped. The problem with the traditional lex situs approach is then that there is no single lex situs. It is a great impediment to an international bulk transfer, which can only be solved if we assume that movable assets are always located at the place of the owner. That is a fiction, easier, however, to maintain for intangible claims (see section 1.9.5 below) and is more generally perhaps the direction of the modern conflict of laws in this area. It still raises the issue of any shift into replacement assets under various legal systems, including receivables, and the law applicable to it. Again, in respect of receivables, party autonomy leading to a contractual choice of law is here sometimes proposed as a more practical solution and has been upheld.390 As already mentioned in the case of bankruptcy, proprietary conflicts arise not only when assets move between countries or when a transnational transfer in bulk is considered. In terms of creditor action against the asset, conflicts arise further when enforcement action is attempted from abroad, thus away from the situs of the assets, for example in a foreign bankruptcy. Enforcement or execution is always closely connected with the situs and the applicability of the lex situs in proprietary matters may well derive from this situation and normally coincides with the lex executionis, at least traditionally for physical assets. 390 As far as security interests are concerned, the issue of their proper place and law of filing may also arise even when no asset moves as long as the owner is elsewhere, certainly if the normal filing place is at the place of the owner. The lex situs seems primarily involved but could point to the place of the owner, who may be elsewhere, for publication of non-possessory security interests. The formalities of creation would then be decided by the law of that place, although that might not ultimately be sufficient if the asset moves to a third country which has different formality requirements and becomes the place of execution. This matter has given rise to much thought in the US in the UCC, revisited in the 1998 revisions of Art 9. The emphasis is here in respect of the formalities concerning the creation of non-possessory security interests on the law of the borrower/transferor/owner who concedes the security interests rather than on that of the situs of his assets given as security. That is clearer in the 1998 revision of Art 9 than in the older text: see s 9-103 (old) and s 9-301(1) (new).

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 255 This law may itself change the proprietary rights, for example, in amending the priorities of security interests or even voiding them under certain circumstances as bankruptcy laws may do. But especially in bankruptcy, it must be remembered that the jurisdiction internationally is not necessarily based on the location of assets but often on the location or place of major activities of the debtor and that therefore at least some of its assets may be elsewhere in a different situs. In fact, conflicts of laws in matters of enforcement against the asset do not normally derive from the movement of the asset but rather from any attempt to conduct enforcement proceedings from a place other than the situs while the effect is wanted in that place. This may be a mere accounting for benefits in the foreign bankruptcy and its distribution or reorganisation, but it may also come down to a foreign bankruptcy trustee claiming the asset and/or denying limited proprietary rights therein at the foreign situs. Again, for effectiveness, this is a question of recognition and therefore ultimately of public policy of the recognising country, here in respect of foreign bankruptcy proceedings and their effect on the proprietary status of assets outside the country of the bankruptcy. In general, such recognition may not be favoured as enforcement against an asset normally requires judicial intervention while the courts of the place of the situs of the asset are usually considered to have exclusive jurisdiction here, their measures not being extraterritorial, however. Article 23(5) of the EU Regulation on Jurisdiction and Enforcement of Judgments in Civil and Commercial Matters of 2002 (Brussels I, amended in other aspects in 2014) bears this out. Foreign enforcement decisions and even preliminary attachment orders are therefore unlikely to be recognised under the Regulation in respect of assets elsewhere and courts will apply their own law in matters of enforcement against assets within their jurisdiction. This principle of exclusive jurisdiction avoids conflicts of laws in this area and underscores the applicability of the lex situs. At least that is the principle in respect of individual enforcement action but recognition of foreign bankruptcy jurisdiction may imply greater power of enforcement against domestic assets under a foreign regime. Thus, in bankruptcy, upon its recognition in principle elsewhere, the situation may be different assuming the bankruptcy decree under its own law covers all assets of the bankrupt worldwide regardless of their situs. However, effectiveness at the situs of each asset, if located elsewhere and for its collection, if necessary, still depends on recognition of this bankruptcy jurisdiction under the public policy of the country where enforcement against the assets is being sought. This is now increasingly promoted internationally, notably to avoid debtors hiding their assets elsewhere: see in particular the EU Bankruptcy Regulation of 2002, Chapter 15 US Bankruptcy Code 2005, and the UNCITRAL Model Law of 1997. It requires the foreign bankruptcy enforcement measures to be translated in terms of the effect on proprietary rights in assets located in the recognising country. Local charges or finance sale constructions therein could thus be affected to the detriment of local interests. To mitigate the effect, local sub-pools protected by local laws may be created within the foreign bankruptcy and this is very much the idea behind the EU Regulation, Chapter XV in the US, and the UNCITRAL Model Law on which it was based. In fact, in order to facilitate international recognition of its jurisdiction, the opening bankruptcy court may itself adapt its rules and take foreign interests better into account, especially in respect of assets which are not physically within its jurisdiction. In this connection, it should also be considered that the effect of the bankruptcy on assets elsewhere and on the interests therein comes in any event within the contemplation of the opening court if the interest holder is also a creditor of the estate and wishes to share in the bankruptcy proceeds. Its foreign interests will then be given their proper place and any preferential separate execution at the foreign situs may be discounted accordingly and affect the interest holder’s share in the distribution of the bankruptcy proceeds.

256  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights The conclusion of the foregoing is that modern conflict laws in many countries assume a measure of discretion for their judiciary both (a) in the recognition of foreign proprietary charges or security interests/finance sales in respect of assets that move to such countries, and (b) in the recognition of foreign enforcement and collection power, at least in respect of a foreign bankruptcy concerning assets within the jurisdiction of these countries. The result may be that on the one hand the foreign proprietary interests (like security interests or conditional ownership interests) in assets that move to another country may increasingly be given their own status and ranking with adaptations of their original status if necessary in terms of finding the nearest equivalent and that, on the other hand, upon a foreign bankruptcy recognition, foreign enforcement measures may reach local assets in which connection their proprietary status, especially in terms of secured transactions or finance sales, must also be considered and may be adjusted but within the context of that foreign bankruptcy and its rules in order to promote internationally the unity of these proceedings, although, as a kind of intermediary solution, there is also a possibility of the creation of domestic sub-pools under domestic law ancillary to these foreign bankruptcy proceedings as already noted.

1.8.2.  The Application of the Lex Situs and the Concept of Transnationalisation In section 1.8.1, the main areas in which proprietary conflicts of laws may arise were identified. They are (a) when assets travel to determine who owns what under what law and more specifically also (b) when local assets and the proprietary interests in them must be determined in foreign enforcement proceedings, especially in or under local bankruptcy laws that claim extraterritorial effect, which is common. The discussion below will principally concentrate on these two situations in order to make it less abstract. There is also (c) the issue of bulk transfers of assets and there shifting into replacement assets in international production and distribution chains, including claims located or arising in different countries and the inclusion of future payments, particularly important in respect of receivable portfolios with debtors in different countries and their use in backing up international funding operations as we shall see more in particular in section 1.9 below. At this stage of the discussion, it may be said that in the traditional conflict of laws approach the situation under (a) and (b) concerns mainly the recognition of rights properly created at the original situs and implies public policy issues in the recognising country leading to substantial judicial discretion. The situation under (c) is more complicated and fundamental as only one domestic law would need to be considered applicable to each asset transferred in bulk, which assumes at the same time in respect of all assets located elsewhere an abandonment of the lex situs in the transfer of the proprietary rights itself. As we shall see in section 1.9, this may be considered less difficult in respect of bulk assignments of intangible assets, notably monetary claims, probably exactly because the situs is here much more contentious. On the other hand, the notion of the application of the lex situs in respect of physical assets may still remain too strong to allow a bulk transfer under some unitary (domestic) law. This awaits transnationalisation. Unlike bulk assignments, the bulk transfer of tangible assets located in different countries and their shifting into replacement assets will therefore not be here discussed much further from a conflict of laws point of view and we will concentrate on situations (a) and (b). It has already been said that when assets move, normally, in the traditional conflict of laws approach, proprietary rights are assumed to be created pursuant to the lex situs of the country of origin of the asset, that is the place or situs where it was at the time of the creation of the

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 257 interest in the asset. At issue, in terms of creation of the proprietary right, are the matters of power, intent and formalities. It is a question of disposition rights of the transferor and of the contractual arrangements and proprietary implementation or formality requirements, in the case of security interests usually in the sense of some documentation and forms of delivery or registration (see section 1.4.1 above). So, it must be assumed that in the classical conflict of laws approach, always pointing to some domestic law, the lex situs of the country of origin in principle determines these issues of power, intent and formalities, including the disposition rights. This may be sufficient if the asset remains in situ. But once an asset moves to a new situs, either as part of the original transaction or later, the conditions under which acceptance or recognition may follow elsewhere are more likely to be those of the lex situs of the country of destination and are then likely to be closely related to its public order. It may at least have some relevance. Indeed, there are some tests. Under it, recognition under the law of the country of destination tends to centre foremost on the proprietary right having been properly created at the original situs. It means first that it must be properly created under the proprietary law of that place in terms of power, intent and formalities, even though it may be pursuant to a contract governed by the contract law of yet another country that may not know or accept the interest in its own law, or may even forbid it, as the fiducia is now forbidden (or at least cannot have proprietary effect) under newer Dutch law. Secondly, there should be no adverse policy or public order requirement in the recognising country. One must assume that no such adverse policy exists if there are the same or equivalent proprietary rights operating in the recognising country as a matter of acquired rights.391 The key is thus to accept that in the case of conflicts in a proprietary sense, principally occasioned when assets move (therefore a problem especially recognisable for chattels), or recognition of foreign enforcement power (a typical foreign bankruptcy recognition matter), it is necessary to work at two levels: the proper creation of the interest in the country of origin and the proper recognition of the interest in the country of destination, which may involve a kind of adaptation especially for the limited proprietary rights which tend to be more country specific, the ownership right itself being more universal, but pledges for example, if non-possessory, or finance sales are not. This means that if the interest is properly created under the law of the country where the asset was at the time of creation and the country of destination has a similar proprietary right under its own lex situs, the proprietary right created in the country of origin of the asset may be more readily accepted at the new situs. In the case of a full ownership right, this will normally be the case and recognition will be implied.392 Again, it seems to be a matter of the acceptance of acquired rights assuming there was proper power and intent in the situs at the time of creation or transfer and that the formalities were observed whilst more problematic may then be the recognition of more limited ownership interests such as temporary ownership rights, especially reservations of title or other conditional ownership rights, security rights or common law equitable proprietary interests (like floating charges which are likely to involve bulk transfers of assets in transformation or future assets), or such as those of the beneficiary under (constructive) trusts. On the other hand, when good value is given in the country of origin for

391 The problems in this connection are as yet little discussed, but see CGJ Morse, ‘Retention of Title in English Private International Law’ [1993] Business Law Journal 168, 174, and further also HLE Verhagen, Conflit mobile bij roerende zaken (Studiekring Offeraus, Kluwer 2007). 392 This is so even if it concerns goods stolen at the original situs, subsequently transported and sold in another situs to bona fide purchasers and offered by them for resale in the original country, an example, frequent in the art world: see in England, Cammell v Sewell (1860) 5 H&N, 278, and Winkworth v Christie, Manson and Woods Ltd [1980] Ch 496; see also Morse (n 391) 184.

258  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights the creation of these more limited interests, it is difficult to see how these proprietary rights, even if more atypical, could be altogether ignored elsewhere, although particularly their rank and status might still be affected in an execution against the asset. This is then primarily a question of the lex executionis or of the lex concursus in the case of bankruptcy operating or imputing to operate at the (new) situs.393 Another problem is that special formalities in terms of documentation and registration or publication may obtain at the new situs for the creation and maintenance of these rights. Even if a foreign security interest might have some equivalent under the lex executionis or lex concursus, the formalities of this foreign law may not have been observed at the creation stage. Recognition could then create an important disparity among creditors with similar interests in the recognising country. In other words, if charges in assets require registration in the country of execution and local creditors are subject to this rule under penalty of losing their security, foreign creditors without such registration duty in the country of origin but with an equivalent charge could seek to prevail at the (new) place of enforcement. It will be a (public) policy question of the recognising court to what extent this discrepancy can and will be accepted. It cannot be denied or avoided and should be repeated that the recognising court exercises here considerable discretion and there is no clear conflicts rule. Even if full ownership rights rather than security interests or charges are involved, the creation aspect itself may still need some further consideration if movement is considered at the same time. This may be best illustrated by an example. German law requires delivery for title transfer in goods; English law does not: see section 1.4.2 above. If as part of the sales agreement the asset must be delivered in the other country, the question arises whether the transfer of title will be under the law of the country of origin or of destination. Thus, if a German resident and an English resident conclude a sales contract in Germany concerning an asset in Germany that under the agreement must be delivered by the German seller to the English buyer in England, the question is when title passes and therefore what law applies to the title transfer. Is it the law of the country of origin or of destination? In line with what has just been said, one would expect the applicability of the law of the country where the asset is at the time of the conclusion of the sales agreement as to the time and manner of the creation of the ownership right, here German property law, requiring delivery even if it will not take place in Germany while the sales agreement itself may be under English law and the buyer is in England. It may be recalled that proprietary issues are in principle not at the free disposition of the parties because of the third-party effect and parties cannot therefore select or formulate by contract the applicable legal regime at will. It means that the asset, upon arrival in England, is still owned by the German seller, even though under English law the title would already have passed (unless meant to be delayed), while title transfers in England only upon the delivery and the asset remains part of the seller’s estate until that moment, relevant especially if the seller should go bankrupt in the meantime. In the reverse situation, in which the contract had been concluded in respect of a chattel in England that was to be transported for delivery by the English seller to Germany, the goods upon arrival in Germany would already be owned by the German buyer, English law not requiring delivery for title transfer, and they would no longer be part of the English seller’s estate in his intervening bankruptcy even if German law applied to the sales agreement. Where in this last case title has already transferred in the country of origin, this title transfer would be a matter of recognition in the country of destination, here Germany. In the circumstances, it is likely

393 See also JH Dalhuisen, ‘International Aspects of Secured Transactions and Finance Sales Involving Moveable and Intangible Property’ in D Kokkini and FW Grosheide (eds), Molengrafica (Lelystad, 1994) 405, 430.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 259 that German law would accept that the title transfer had already happened, as in the case of a transfer of the full title there is an obvious equivalent proprietary interest in Germany. The situation might be different, however, if only an equitable or limited ownership or security right had been created in this manner in England, for example under a trust which, at the English situs of the asset, could have been perfectly legally created by a German settlor, even pursuant to a German contract in favour of a German resident beneficiary in respect of an asset located in England. But the question of equivalence and public policy would still arise in terms of recognition of this interest upon arrival of the goods for use by the German beneficiary in Germany, particularly if there arose a subsequent German bankruptcy of the settlor in which the proprietary interest of the beneficiary in the asset upon its arrival in Germany would have to be considered. Would it be respected in Germany where there is no clear equivalent? This may be much more doubtful. The consequence would be that the beneficiary might have no more than a contractual claim to his benefit rather than a proprietary right and could therefore only claim damages for loss of it as a common, unsecured creditor. However, this may turn out, it follows that the validity of the interest created at the original situs of the asset depends on the law of the situs of that asset (in terms of power, intent and formalities) at the time of the conclusion of the agreement and not on where or under which law the agreement itself was concluded or operates or where the asset is meant to go. So, contractually, parties can agree any type of proprietary interest they want (perhaps even against the public policy requirement of a foreign law of contract under which they operate as long as the asset is elsewhere), but, whether and when such a proprietary right attaches, depends in the now traditional conflict of laws view on the objective law of the situs of the asset at the moment of the conclusion of the agreement. In this vein, it is possible to create in one country under its contract law security interests in an asset that is located in another country, provided the formalities (if any) of that other country are complied with. If subsequently the asset were to move to the first country or to a third country, the security interest would still be subject to the recognition process in that country and if the interest so created is not allowed in the recognising country or has no equivalent there, recognition is likely to be withheld or the interest may be varied to the nearest equivalent while its ranking may be further determined by any formalities (for example in terms of publication or filing) required in the recognising countries for the effectiveness of security interests of that sort. There are many aspects to the operation of proprietary rights internationally and many possible variations when the asset moves, but the above pattern as to finding the applicable proprietary law and its effect is likely to remain the same under modern private international or conflicts law. To highlight yet another variation, the following example may also be of interest. Assume that two German residents conclude a sales agreement in Germany, under which an asset in England is sold by the one to the other for transfer to Germany. As we have seen, title in the asset would under the lex situs transfer immediately. Yet if the Germans had expressly agreed that title was to pass only upon delivery or if that followed from their relationship, for example in a cost insurance freight (CIF) contract when title transfers on the tendering of the bill of lading by the seller to the buyer, the title transfer in England could under English law still be delayed pursuant to the intention of the parties. It may vary the normal rule of instant transfer under English law. In such cases, the delay is still a matter of the English law of the original situs, however, which allows it, and not of German (contract or proprietary) law. One could of course argue that it was always the intention of the German parties that title should pass upon delivery, as they would not know any better, but English law, as the law of the situs at the time of the conclusion of the agreement, would probably require a clearer expression of the intention to delay title transfer under sections 17 and 18 of the Sale of Goods Act 1979,

260  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights although in a CIF sale the delay may indeed be implied: see section 2.1.5 below. The question is whether the delay in title transfer until delivery in Germany subsequently makes German law applicable in the title transfer and delivery formalities it requires. That seems to be the result, as it can only take place when the asset arrives in Germany, therefore at the new situs. If the German contract itself proved invalid, the effect on the title transfer would again be a question of the lex situs, and if the asset were still in England, English law would apply. As we have seen, it maintains on the whole an abstract system of title transfer except in the case of fraud and the title would therefore not automatically return to the seller in Germany, even less so in the case of a rescission of the sale agreement upon default: see also section 1.4.7 above. It was earlier identified as the important issue of finality. Rights of bona fide purchasers of an asset are also determined in the first instance by the law of the location of the asset at the time of the title transfer, therefore by the lex situs of origin. Thus, if the German seller of the English asset were not the owner, his German buyer could not rely on his bona fides under German law but only on the narrower concept of it under English statutory law: see section 1.4.8 above. Had the asset been in the US, where for chattels delivery is still required for title transfer (except where the parties agree otherwise), title transfer would only have taken place in Germany upon delivery in that country, and the German bona fide purchaser protection would in that case have prevailed, therefore the law of the new situs under which delivery took place. A special complication may present itself, however, if, under the law of the situs of origin, delivery could have been constructive, whilst for bona fide purchaser protection it would have had to be physical (therefore to the buyer in the country of destination). The sale to the bona fide purchaser could therefore not be completed under the original lex situs and the protection must then be determined by the new lex situs, even if it did not itself require physical delivery for that protection. If, on the other hand, the original lex situs did not have that requirement, the delivery would be complete under that law in respect of the foreign bona fide purchaser and his/her own law should recognise that, even if it maintained itself the physical delivery requirement for that protection, as the bona fide buyer would already be the owner of the goods upon their arrival in the country of the buyer. Of course, the picture could be blurred further by countries of transit, when the asset is a res in transitu. The discussion so far assumes that the question of ownership is always a matter of a national law and that no internationalised or transnational forms of ownership exist or can develop. In the case of documents of title and negotiable instruments such as bills of lading and bills of exchange, these were originally of the transnational variety but were also substantially nationalised following the codifications in Europe at the beginning of the nineteenth century, although never entirely satisfactorily so: see more particularly section 2.1.1 below for the bill of lading. The modern Eurobond as a bearer paper may be an example of a more compelling recent variant and expression of a transnationalised ownership concept in terms of a negotiable instrument: see Volume 1, section 3.2.2. It is a fundamental thesis of this book that if the concept of transnational ownership is so (re)established, there is no reason in principle why it should not start operating more broadly, therefore also in other types of assets that may be considered internationalised. There is in any event no reason why this concept should not be further explored: see also section 1.1.9 and the introduction to section 1.8.1 above. It would probably mean that party autonomy as expressed in the parties’ contractual arrangement and the law applicable thereto would acquire a greater significance in the proprietary aspects of professional dealings. Greater party autonomy may here be especially relevant for intangible assets (see section 1.9.1 below) always subject, it was submitted, to the unhindered protection of the commercial flows (assuming public policy does not require otherwise). This law could itself be the lex mercatoria (see further section 1.8.7 below), as it probably always remained for negotiable instruments and

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 261 documents of title. To begin with, this may then apply to all assets that habitually move across borders, such as ships and aircraft, or to assets that may be permanently on the high seas such as oil rigs, but there is no reason not to extend it to all assets that move under the contract as in trans-border sales, now in international production and distribution chains. Although in a transnationalised environment, the creation of proprietary rights may be left more fully to professional parties operating at an international level, the third-party effect of the type of property rights so created cannot be left entirely to the will of the parties either and is not truly a matter of party autonomy, as it never was in purely domestic systems either, including in common law where there is nevertheless greater freedom in the creation of equitable proprietary rights, as we have seen in section 1.3.1 above and as was highlighted many times thereafter. Because of the third-party effect, there is here always some objective or mandatory limiting element or public policy aspect, in civil law countries often connected with the numerus clausus and even then, with further requirements of (some) publicity of the interest so created or of possession of the asset, either physically or sometimes constructively. Again, more practical would be a reinforced (uniform) protection of bona fide purchasers or rather of all purchasers in the ordinary course of business of commoditised products to cut out all adverse proprietary interests in chattels and intangible assets (except, therefore, in respect of insiders such as banks and major suppliers who are able to make their own enquiries), whether domestic, foreign or transnational, in order to protect the commercial and financial flows as a public interest and policy issue in the international marketplace except for professional insiders who would still have an investigation duty. Again, it is the more normal approach in England towards all foreign proprietary interests whilst considering them equitable in principle. As will be further discussed in section 1.10 below, it is not to be excluded that these mandatory concepts and protection needs in respect of the ordinary commercial flows are themselves becoming transnationalised. This could at the same time allow for greater party autonomy in this area and make it manageable. Fundamental legal principle, of which ownership is an important aspect, and supporting transnational custom may provide here the objective elements necessary to establish ownership at that level vis-à-vis third parties (and creditors of the interest holders so created): see more particularly also Volume 1, section 3.2.2. Again, the trend has long been clear in negotiable instruments, especially Eurobonds, and most likely also for documents of title such as bills of lading. Where monetary claims are increasingly commoditised and their free negotiability established regardless of contrary contractual clauses and defences (see sections 1.5.4/5 above), the same could apply to them in the nature of promissory notes and there is no reason why chattels should then be exempt. This would also affect the manner of title transfer (or creation of other proprietary interests in the asset) and indeed the protection of bona fide purchasers or purchasers in the ordinary course of business of these assets. It is in fact somewhat unexpected that in international sales that require movement of the goods, the transfer of ownership, which is its real objective, still remains largely unsettled even in traditional private international law. The total value of the trans-border trade in goods is estimated by the World Trade Organization to have reached a US$ equivalent amount well beyond 15,000 billion per year, title in which thus remains largely unclear, at least until the moment of physical delivery. The somewhat humbling conclusion for conflicts lawyers must be that this does not on the whole seem to matter a great deal or to present a substantial impediment to international trade. Neither do the considerable vagaries of the international sales laws in their contractual aspects, which also often remain unsettled, even under the Vienna Convention (see Volume 3, section 2.3). But it is very different for security interests and finance sales.

262  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights In any event, it could be argued that the surge of international trade is now such that it no longer accepts domestic laws and concepts as an impediment to it and seeks to transform the proprietary and other legal concepts, if necessary, at a transnational level. It is entirely appropriate and indeed necessary to study the law in the commercial or professional sphere increasingly from this perspective. This was the subject of Volume 1. Again, in proprietary matters, this is especially obvious in respect of assets that move to another country as part of the sales process but it was always appropriate for assets that habitually operate and move between countries, such as ships and aircraft. They have no situs proper or at least no situs of any permanency except if we equate it with the place of registration of these assets (assuming they are so registered). The same is true for receivables, where the need to transfer them in bulk regardless of location is another issue as we shall see in section 1.9 below. But also, the operation of security interests in transnationalised assets such as ships and aircraft needs to be considered further. The same goes for repos and other types of finance sales cross-border, such as finance leases of ships and aircraft, see also the 2001 UNIDROIT Cape Town Convention and Aircraft Protocol. Another issue is the need to transfer future assets, especially as security if replacement assets are to be included. On the other hand, in international sales without purchase money securities or other security interests attached, there is a particular reason why the international proprietary problems should not be exaggerated. In these sales, the accent is normally on the transfer of risk, the allocation of costs and income in connection with the asset and the place of the physical (not legal) delivery and the cost of transportation and insurance. These matters can all be decided in the contract and are not proprietary. It is the reason why in the US the UCC in its Article 2 on the sale of goods no longer attaches great importance to the title transfer and seems to consider the concern about ownership largely a metaphysical urge. The 1980 Vienna Convention on the International Sale of Goods does not deal with proprietary issues at all, although for different reasons: there was hardly a unifying concept. Nevertheless, wherever assets may be and whatever rights may be created in them, proprietary aspects still figure in respect of purchasers of the interest and creditors of the interest holders, especially in execution sales and in bankruptcy, and may then figure very large indeed. For bankruptcy, it may mean those of other countries in which all assets potentially figure, relevant especially upon foreign bankruptcy recognition. Who owns what or who has security interests of whatever nature and rank in these assets or were they transferred in a finance sale? These events require clarity in the proprietary aspects, especially when these assets are used for funding purposes or sales price protection. Buyers need to be clear in a legal sense about what they buy even though under the lex situs they may be protected if bona fide and in sufficient control of the asset, which reduces their exposure but again there may be differences. Finality especially remains an important issue here, as we shall see, and may itself become a matter of transnationalisation to provide the necessary clarity and avoid unnecessary conflicts.

1.8.3.  The Notions of Equivalence and Adaptation; Temporary and Conditional Ownership, Finance Sales, Security Interests, and Retention Rights Requiring equivalency for recognition of foreign proprietary rights in assets that move may sound rational but is a legal criterion of dubious value. A reservation of title might, for example, exist in both the country of origin and that of destination, but may still be very different.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 263 In France, the right is of an accessory nature,394 and therefore transfers with the receivable (like a security right), for example to a factoring company. The factoring company/ assignee will be the new creditor under the assignment, suggesting in the meantime that the seller/assignor under the reservation of title has been satisfied but without, apparently, the debtor/buyer obtaining full title as a consequence and there is still protection for the assignee. In countries like Germany and the Netherlands,395 on the other hand, the reservation of title is a conditional ownership right not accessory to the underlying indebtedness. It is then likely to be lost in the case of an assignment of the receivable to a factoring company, or at least is not automatically transferred without. The assignment will indirectly result in payment of the seller, so that sales price protection no longer has any meaning for him. This result might be avoided if the factoring is construed as a pure collection agreement only, in which the factor is the agent of the seller and does not pay for the receivable assigned to him. In that case, the assignment is made only to facilitate the collection process (giving the factor the facility to sue if he needs to). In the US, under Article 9 UCC, reservation of title, even if the term is used, is, as we have seen, fully equated with a security interest to the point that it requires upon default an execution sale with reimbursement of any overvalue to the debtor, while in Europe a US reservation of title remains more likely to be seen as a conditional sale everywhere even if not always treated similarly. The conclusion is that what may look the same is therefore legally often treated differently and may be subject to transformation or adaptation upon a cross-border move of the asset. Thus, even similar rights might be substantially transformed in the country of recognition. They may as such be upgraded or downgraded. Other security rights may be converted altogether into the nearest equivalent, for example a typical non-possessory security interest in a car created at its situs in France might be converted into the general German non-possessory security interest (Sicherungsübereignung) upon arrival of the French car in Germany.396 Whether the reverse could be true for a German car moving to France without publication of the security interest there (Germany does not require such publication, but France does) is another matter. The result would be published and unpublished interests serving the same purpose operating side by side, a problem emerging in all cases upon recognition of foreign security rights if the local equivalents require domestic publication or registration for their validity and ranking as we have already seen. Whatever the result, it is clear that the equivalence test cannot be taken at its face value. As far as the formalities are concerned, it follows that a US reservation of title in a piece of professional equipment may easily be accepted in the Netherlands and may well allow the US seller to repossess the asset in the Netherlands upon shipment of the asset to that country, even though the seller could not have done so in the country of origin. A Dutch seller would certainly not have a similar repossession right in the US when the relevant asset in which he had reserved title in the country of origin was subsequently shipped to a US port. Without having filed a finance statement in the US, the Dutch seller of professional equipment may have lost his protection altogether upon shipment of his asset to that country (as only reservations of title in consumer goods do not need this type of publicity in the US). The interest is not perfected although it may still be considered attached, ranking it just above the ordinary

394 Cour de Cass, 15 March 1988, Bull civ IV, no 106, see also Vol 5, s 1.3.4). 395 HR 18 Jan 1994 [1994] RvdW 61. 396 BGH, 20 March 1963, BGHZ 39, 173 (1963).

264  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights creditors. For perfection, filing is thus likely to be an extra recognition requirement in the US, which other countries might not similarly impose. For example, although non- possessory pledges created in the Netherlands now require a form of registration (although not in a public register), it does not exclude the recognition of foreign charges, which are not registered in the Netherlands. It helps here that the registration in the Netherlands is not meant to achieve publicity but only determines the time of the grant of the security interest. Further questions may be asked in the case of finance sales, especially finance leases and repos. In the traditional private international law or conflict approach, which always looks for a domestic law to apply, the key for recognition of foreign limited proprietary rights is thus in the adjustment and conversion of the foreign proprietary right as part of the determination of its status and rank in the law of the recognising country upon movement of the asset to that country, at least if it concerns a foreign security or similar right, particularly relevant in an execution at the new situs, particularly of interest in a bankruptcy in that country. Everywhere, the execution judge clearly has a measure of discretion. The solution is therefore not here in a hard-and-fast conflicts rule. In that sense, reference to the lex situs of the country of origin or even of the recognising country may not mean a great deal. The question is whether the interest was properly created in the country of origin (while the asset was there) and to what extent it must or can be adjusted in the country where it is invoked (upon the asset moving to that country), which adjustment may then also apply to the execution or bankruptcy laws of the recognising forum themselves.397 It could even introduce a measure of transnationalisation of the interest, but in most countries the discussion is unlikely to take that direction for the moment. In the case of retention rights, as a matter of private international law, the lex situs of the asset will in principle also determine the proprietary aspects and any appropriation of title or conversion into a security right thereunder (and its rank upon execution) or any conversion into a mere preference to the execution proceeds. It should be recalled that in common law countries these retention rights are often statutory liens not giving rise to an execution facility. In civil law that is the same except under some more modern statutory law, such as that of the Netherlands: see also section 1.4.10 above. When the retentor moves the asset to another country, the nature of the retention right may be affected in these aspects at the same time and there may then also arise questions of adaptation and adjustment in the same way as just mentioned for security interests in goods that are moved to other countries.398

397 Another example may throw some further light on the problem. A French reservation of title in a car after it has been moved to Belgium, where the law did not accept reservation of title to be effective in a Belgian bankruptcy until 1998, did as a consequence not have much effect in a subsequent bankruptcy of the buyer in Belgium even though properly created at its original situs and not rejected as such in the country of destination. It would have required the Belgian courts to make special room for it on the basis of the foreign properly acquired right (for value), which would seem unlikely: Commercial Court Brussels, 22 March 1988 [1989] RDCB 633, cf also F Rigaux, Droit international privé II (Brussels, 1979), no 1111. It would have such effect, nevertheless, if the car were subsequently moved to the Netherlands and a Dutch bankruptcy of the buyer would follow, as Dutch law accepts the consequences of the reservation of title fully under its own bankruptcy law: see further JH Dalhuisen, International Insolvency and Bankruptcy (New York, 1986) 3–398ff. 398 On the other hand, for retention rights, the law applicable to the obligatory relationship between both parties may more properly determine the questions of reciprocity and connexity: see for these aspects of retention right s 1.4.10 above. It is conceivable that retention rights may be denied proprietary effect altogether if their proprietary status is not accepted by the law covering their creation, which will be the lex situs of the country of origin, even if the retentor moves the goods later to a situs the law of which is more congenial to these rights. It remains then purely contractual.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 265 It has already been said in the previous section that the notion of the nearest equivalent may acquire a special interest in common law countries when foreign interests are made subject to greater party autonomy in terms of the applicable law. It is likely that all foreign interests so created will be considered equitable proprietary interests, as nearest equivalents further subject to bona fide purchaser protection in the recognising common law country. This may even concern assets that never moved from or to a common law country if their status becomes an issue there, for example, in bankruptcy. This protection makes party autonomy and any inroads into the numerus clausus of proprietary rights it is likely to entail more palatable, also at the international level, for example in an international sale between parties from different countries in which the assets do not move. As we have seen, it is an important feature of conflicts law in common law countries in respect of foreign interests.

1.8.4.  Trusts: The 1985 Hague Convention on the Law Applicable to Trusts and their Recognition In section 1.6 above, a basic outline of the common law of trusts was given. In cross-border situations the first question that usually arises is the status of the trustee in relation to the trust assets (his powers in them and their separation from his own estate). Under the traditional rules of private international law, the status of the trustee is usually fully accepted as is his power over the goods, provided the trust was properly created in the country where the assets were at the time of the creation (which is unlikely to be the case with offshore trusts, however, such as those in the Channel Islands or in the Caribbean) and the trustee took control of the assets. Normally, the trustee may defend these assets and his title therein, also in a foreign country or in foreign bankruptcy, as he is considered the full owner for these purposes even in (civil law) countries that do not accept the trust notion. In that case, they will probably consider these assets part of the trustee’s estate, however, which might even include assets located in the recognising countries. It immediately raises segregation issues, which may be much harder to accept and may then become a major issue. In short, it concerns the international recognition of the proprietary protections of beneficiaries, naturally a major issue, especially problematic in civil law countries. That would be all the more an issue if the assets were in the meantime moved from their original common law situs into civil law countries, especially if the trustee were in the meantime declared bankrupt in the country to which the assets were moved. Again, the question is the rights of the beneficiaries and especially the segregation issue, certainly in the absence of nearest equivalents. As it is likely that in most civil law countries there is no such equivalent in terms of beneficial ownership rights, the recognition of the beneficial rights itself may thus be in doubt. The result may be only a contractual enjoyment or income right for the beneficiaries, which they may lose in a bankruptcy of the trustees. Particularly if the trust was a substitute security interest (for example an indenture under which a debtor had transformed himself into a trustee holding the assets for the benefit of the lender), it is possible that in countries that do not have their own trust laws, the trust assets might still be considered part of the bankrupt estate of the debtor but subject to a security interest of the lender if that were considered the nearest equivalent (see for this structure section also section 1.6.6 above), especially relevant in bankruptcy proceedings in the recognising country. It would be relevant especially if the assets were moved to the country of the bankruptcy, although the rank of the security interest would still have to be determined. However, if the asset was still in the original country, whilst the end effect is not similar, the result would be less likely to

266  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights be accepted in the original assuming the trust in respect of them was created there, even if the foreign bankruptcy itself could be recognised in principle in that country. More complicated is the question whether assets at the time of the creation of the trust located outside the country where the trust is created may also be included if the lex situs itself does not have the concept, quite apart from the question whether any trust so created could be recognised in the country of the assets concerned. This is the situation with offshore trusts, which are often assumed to be able to cover such foreign assets. Yet there could be legitimate doubts in this aspect as the creation of proprietary rights normally follows the he lex situs. This may be especially true in respect of real estate. The Hague Convention on the Law Applicable to Trusts and on their Recognition of 1985 attempts to facilitate the recognition of foreign trusts and has so far been ratified by Australia, Italy, the United Kingdom (also for Jersey, Guernsey, the Isle of Man, Gibraltar, Bermuda, British Virgin Islands, Turks and Caicos Islands), Canada (but not for Toronto and Quebec), Malta, Hong Kong and the Netherlands, while France is still contemplating ratification. It is mainly a vehicle for recognising the typical common law trusts, although according to the Preamble, similar civil law structures are also covered,399 and among civil law countries Liechtenstein and Luxembourg in particular developed them:400 see for approximations also section 1.6.5 above. France has now also introduced a form of trust as we saw, which could also benefit from the recognition facilities of the Convention if showing the characteristics of Article 2. The approach of the Convention is to recognise trusts that are created according to the law applicable under the conflict rules of the Convention (Articles 6–10), assuming that such applicable law provides for trusts (Article 5). Key is here that this law may be selected by the parties. This is an important concession that introduces a measure of party autonomy in proprietary matters. Such trusts will then be recognised in their most salient aspects (Article 11) in Contracting States, no matter whether the country of their creation (including the law chosen to be applicable) is itself a Contracting State. Yet they will not necessarily be recognised in all their third-party effects or against relevant mandatory rules. It depends on the law objectively applicable pursuant to the conflict rules of the forum (see Article 15). Recognition may in particular be withheld if the trust assets are substantially connected with a country that does not recognise the trust in its own law (Article 13) or if there are serious tax avoidance problems (Article 19) or other public policy considerations against recognition (Article 18). The Convention does not give a clear definition of trusts, even of the types it means to cover. Article 2 refers to a situation in which a settlor places assets under the control of a trustee for the benefit of a beneficiary or for a certain purpose. It further describes three characteristics: (a) the assets must constitute a separate fund and not be part of the trustee’s own estate; (b) title to the trust assets must stand in the name of the trustee or in the name of another person on behalf of the trustee; and (c) the trustee must have the power and the duty, in respect of which he is accountable, to manage, employ or dispose of the assets in accordance with the terms of the trust and the special duties imposed on him by law. One sees therefore as essential elements the principle of separateness of the trust assets and the fiduciary duties of the trustee in respect of

399 If they show the characteristics of Art 2 in their own law (Art 5) resulting as applicable under Arts 6–10. This suggests not a functional but rather a structural likeness: see also A Dyer and JHA van Loon, Report on trusts and analogous institutions in Actes et Documents de la Quinzième Session of the Hague Conference (The Hague 1985), no 13. Thus, conditional ownership structures or foundations do not benefit from the recognition regime of the Convention. 400 See for similar structures in other non-common law countries also ibid, nos 33ff.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 267 them. One does not, however, see here clearly the in rem protection of the beneficiaries and their rights to trace their interest in replacement goods or to follow them, but at least the latter rights result under Article 11 in the case of recognition. It implies the acceptance of the separate status of the trust assets, of the capacity of the trustee, and of the recovery rights of the beneficiary if the trustee has commingled the trust assets with his own or alienated them, assuming that the law applicable to the trust provides for these remedies. The rights of third-party holders of the goods are determined according to the applicable law under the choice of law rules of the forum, which will normally be the lex situs of the assets, at least if tangible, see Article 11(d) and also Article 15(f). That would also determine the rights of bona fide purchasers of trust assets. Here the applicability of the (chosen) law applicable to the trust itself comes to an end. The Convention applies only to trusts created voluntarily and that are evidenced in writing, although this does not mean that writing is a constitutive requirement. They are principally the express trusts which may, however, also be testamentary and could in that case even cover the status, position and powers of an executor under a will if also appointed trustee of the property, and this regardless of whether probate has been granted in the country under the law of which the will was drafted or the executor operates. This may be particularly relevant for any foreign assets of the deceased’s estate and similar civil law structures are likely here to be covered. It follows, however, that constructive and resulting trusts are not covered (except where Contracting States include them under Article 20), unless they result as ancillary to the trusts covered by the Convention, for example if resulting as a consequence of following the trust property under Article 11 or upon termination of the trust but before distribution of the assets. Even then, local law would still appear to decide the effect, see Article 11(d). That may exclude their remedial nature, see for the segregation concept section 1.6.3 above. At least remedial constructive trusts (see section 1.6.4 above) would not appear to be covered or, if they were, their effect in terms of segregation would be determined by the law resulting from the applicable private international law rules (Article 11d), which would in case of property most likely be the law of the situs of the asset. Statutory trusts, like those concerning a bankrupt estate, are always outside the scope of the Convention. The Convention according to Article 4 does not cover either preliminary issues relating, for example, to the validity of the transfer into trust itself or to the underlying testamentary, matrimonial or paternal dispositions, gifts, financial or other structures or security transfers in this regard. The trust is normally the result of such underlying relationships or objectives, the legality or validity of which may thus be an issue. This would be relevant, for example, in the case of lack of capacity, intent or formality, in the absence of consideration (not normally considered a formation issue) or because of fraudulent conveyance considerations or other restrictions on gifts or similar legal acts. As these aspects are not covered by the Convention, it means that the applicable law according to the conflict rules of the forum will determine these issues, which may be all the more important when the trust covers assets outside its country of origin but is invoked in that country or in any other. This raises also the question of jurisdiction in trust matters.401 Article 21 allows Contracting States to limit the application of the Convention to trusts the validity of which is governed by the law of Contracting States. So far, this reservation has not been entered by any ratifying country. The basic idea is that all foreign trusts that qualify under

401 The rules of international jurisdiction in trust matters derive in Europe from the 2002 EU Regulation and the 1988 Lugano Conventions on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters. They are important, see for details s 1.6.6 above.

268  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights Articles 5–10 are covered regardless of the country in which they were established or which law is applicable. The Convention is retroactive and applies therefore to trusts regardless of the date on which they were created except where ratifying states enter a reservation, which so far none has done (Article 22).

1.8.5.  The Details of the Trust Convention As to the details of the Convention, they should be considered against its basic objective which is to determine the applicable law in Articles 6 and 7. It was already said that the broad powers for the settlor to choose an applicable law in this regard are somewhat surprising and not normal in proprietary matters, certainly if the resulting regime is at variance with the law of the situs of (most of) the assets. It is not part of the traditional conflict rules concerning trusts either, although before the Convention the conflict approach had been uncertain while literature on the subject was sparse.402 However, Article 8 makes it clear that the applicable law resulting from this choice applies only to the validity of the trust, its construction, its effects and the administration of the trust, and it does not appear to cover the proprietary aspects proper: see also Article 11 in fine and Article 15. The choice of law by the settlor is also ineffective if the chosen law does not provide for the trusts or category of trusts involved (Article 6). Article 7 gives a uniform conflict rule in the absence of a choice by the settlor, and opts in that case for the law with the closest connection when regard is to be had especially to: (a) the place of administration; (b) the situs of the trust assets; (c) the place of residence or business of the trustee; and (d) the objects of the trust and the places where they are to be fulfilled. It is of interest that the language of Article 6, requiring that the applicable law so established provides for trusts, is not repeated in Article 7. Again, the applicable law so established does not cover the proprietary aspects (see Article 8). In fact, the applicable law resulting under Articles 6 and 7 (including the parties’ choice) appears to govern only: (a) the appointment, resignation and removal of the trustee and the latter’s capacity to act; (b) the rights and duties of trustees among themselves if there are more than one; (c) the right of the trustee to delegate his functions or the exercise of his powers, particularly relevant when he must manage the trust property; (d) the powers of the trustee to administer and dispose of the trust assets; (e) his powers of investment; (f) the restrictions on the duration of the trust (law against perpetuities) and on the accumulation of income; (g) the relationship between the trustee and the beneficiary including the trustee’s personal liability to the beneficiary; (h) the variation and termination of the trust; (i) the distribution of the trust assets; and (j) the duty of the trustee to account for his administration. While it is thus clear that the law applicable pursuant to Articles 6 and 7 does not cover the proprietary aspects of the status of the trustee proper and the proprietary protections of the beneficiary’s rights and his tracing facilities, at least the tracing powers are matters of recognition under Article 11, as we have seen. While the Convention does not therefore specifically mention the beneficiary’s in rem protections, it is also made clear that the trustee’s own creditors cannot reach the trust assets (it is not made clear if and when the same applies to the beneficiary’s creditors). Article 11 in fine and Article 15 state on the rights of bona fide third parties who become holders of the assets and leave the determination of their rights to the law

402 See for the Recognition of Trusts Act 1987 giving effect to the Hague Convention and more extensive comment, Dicey and Morris on the Conflict of Laws, 15th edn (London, 2012) 1485ff.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 269 applicable to the choice of law rules of the forum, which, as far as tangible assets are concerned, will likely centre on the lex situs. Article 11 also deals with the technique of recognition of foreign trusts. The principle is that any trust created in accordance with the law specified in the Convention (under Articles 6 and 7) shall be recognised in Contracting States, at least in the admitted aspects, and this without special proceedings. To that extent, it allows the recognition of trusts in whatever assets, wherever located, even if this law is only applicable by virtue of the settlor’s choice provided again that the trust construction is known and operates under that law (Article 6). This is a liberal approach, balanced, however, not only by public policy considerations in the recognising country (Article 18) but also by the more elaborate provisions of Articles 13 and 15, already mentioned above. Where the applicable law results from the more objective choice of law rule of Article 7, the same rebalancing is possible but probably less necessary. The recognition according to Article 11 implies as a minimum that: (a) the trust property constitutes a separate fund; and (b) the trustee’s capacity is recognised. The recognition also implies elaboration of these two principles, but only to the extent that the applicable law so provides or allows and is then in particular likely to imply: (a) the lack of recourse by the trustee’s personal creditors against the trust assets; (b) the exclusion of the trust assets from the trustee’s estate upon his insolvency; (c) the exclusion of the trust assets from the trustee’s matrimonial property regime; and (d) the tracing rights of the beneficiary, which is subject to the protection of bona fide holders if they are protected under the law applicable pursuant to the conflict rules of the forum in this aspect (normally the lex situs, as we have seen). Except for the tracing point, it is curious that the other three consequences of recognition are still made subject to the applicable law since, without them, a trust would hardly exist. Article 13 limits recognition if the trust (except for the choice of the applicable law, the place of administration, and the habitual residence of the trustee) is more closely connected with states that do not have the trust in their own law. Article 15, moreover, accepts that the recognition of foreign trusts cannot go against applicable mandatory rules of the recognising country (expressed as not being able to go against the mandatory rules of the law applicable under the conflict rules of the forum). These rules may in particular (but not only) concern: (a) the protection of minors and parties lacking capacity; (b) the personal and proprietary effects of marriage; (c) succession rights, especially with regard to the legal minimum distribution rights of relatives; (d) the transfer of title to property and security interests in property; (e) the protection of creditors in insolvency; and (f) the protection in other respects of third parties acting in good faith. The Convention has a number of unavoidable weaknesses, which may still be softened or remedied by the implementing legislation into domestic law. Thus, Dutch implementing legislation allows its own mandatory rules concerning the transfer of title and of security interests and the protection of creditors in the case of insolvency (Article 15(d) and (e)) to be superseded by the recognition of foreign trusts even in respect of trust assets located in the Netherlands at the time of the creation of the trust. Article 15(d) and (e) could in fact have led to the substantial frustration of recognition in the Netherlands. Clearly the Dutch legislator meant to provide for a broader recognition possibility and any limitations are to be restrictively interpreted. In respect of trust assets located in the Netherlands, it means a deviation from the lex situs principle (except that in respect of real estate in the Netherlands the interest of the trust will require registration, compare also Article 12 of the Convention and Articles 3.17(1)(a) and 3.26 CC). A similar deviation from the lex situs is also increasingly common in the conflict’s rules concerning matrimonial property rights and in inheritance matters. It may also result from a more liberal recognition of foreign bankruptcies.

270  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights Although Dutch law itself has not chosen to introduce the trust domestically at the same time, it is clear that it will not allow typical domestic considerations, even of a proprietary nature, or its own proprietary system (and the closed nature of its proprietary interests) to hinder the recognition of foreign trusts even in respect of Dutch assets. Its own explicit rejection of fiduciary ownership and substitute security rights under Article 3.84(3) CC (see Volume 5, section 1.2.2), is also not seen as an impediment while it is expressly left to the Dutch courts to fit the foreign structure into the Dutch system of proprietary rights. The impression is given that the Dutch legislator, aware of the untenable aims of Article 3.84(3) in its new Civil Code of 1992, accepts the recognition of foreign trusts with Dutch trust assets as a way to rectify the situation to some extent. Under the Convention, a close connection of the trust with a country other than the recognising one remains necessary for recognition. In this sense, the trust must be a truly foreign trust. A mere choice of law in favour of the law of a foreign country or the choice of a foreign trustee or a fictitious foreign place of administration is not sufficient to achieve foreignness in this sense, especially if there are substantial trust assets in the country where recognition is sought. It seems therefore likely that only trusts that substantially function outside the recognising country are capable of recognition so that the trust assets in the recognising country may not be substantial or at least not a substantial part of the total trust assets. Unavoidably there remains here an element of doubt about where the line must be drawn and there is a measure of discretion for the recognising judge. The Dutch implementation statute in its favourable bias towards recognition may well have given the Dutch courts greater freedom here.403 Similar approaches may be taken in other countries to make the recognition regime of the Hague Convention more meaningful.

1.8.6.  Uniform Laws Concerning the Proprietary Aspects of Chattels Attempts at a uniform law regime, especially in respect of secured transactions in chattels, were made by UNIDROIT in its 2001 Convention on International Interests in Mobile Equipment (see Volume 3, section 2.1.10) and for finance leasing see also the Ottawa Leasing Convention of UNIDROIT of 1988 (Volume 5, section 2.4.5). In respect of receivables, the UNIDROIT Factoring Convention of 1988 and the 2001 UNCITRAL Convention on the Assignment of Receivables in International Trade are also relevant (see section 1.9.5 below and Volume 5, section 2.3.5). There is further an earlier Geneva Convention of 1948 on the International Recognition of Rights in Aircraft. It was widely adopted and was followed by an International Convention on Maritime Liens and Mortgages also concluded in Geneva (in 1993), which met with less success. Together they concern aircraft and ships and accept the law of the country of registration of these assets as decisive for the security interests created in them. No substantive law is created here. There is also a 1926 Brussels Convention on the Unification of Certain Rules Relating to Maritime Liens and Mortgages, followed by another one in 1967. These Conventions concern substantive law and have been widely incorporated into domestic laws, although often in quite different ways. In 1994, the EBRD presented its Model Law on Secured Financing. This will be discussed in Volume 5, sections 1.1.8 and 2.1.9. Some efforts at harmonisation were also made earlier within

403 For Italy, the liberal inclusion of domestic assets in foreign trusts has been advocated by Professor Lupoi, ‘Trusts and Civilian Categories (Problems Spurred by Italian Domestic Trusts)’ in Helmholz and Zimmermann (n 335) 507.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 271 the EU (see Volume 5, section 1.1.8) and also now pursued in the DCFR (see section 1.11 below). The sum total of efforts in this area remains limited and they are geared to special areas of the law.

1.8.7.  The Modern Lex Mercatoria Concerning Chattels. Earlier Approaches in the Law of Admiralty: The Maritime Lien In Volume 1, section 3.2.2 and in section 1.8.2 above, the important development of the lex mercatoria in proprietary matters was discussed and especially the notion of transnational ownership in connection with negotiable instruments, documents of title, and the modern Eurobond. For security interests in them, the key here is possession or control. This was also demonstrated in their relationship to assets on the high seas: see also section 1.1.7 above. So far, there appears to be little latitude for more sophisticated non-possessory security interests under the lex mercatoria. It was also said, however, that there may be room especially for conditional sales and title transfers and that may be the more appropriate manner to organise chattel-based funding under the lex mercatoria, dispensing with numerus clausus restrictions but subject to better bona fide purchaser protection, at least to the extent they are given adequate control. This is considered in this book the essence of a dynamic movable property law operating at the transnational level, first mentioned in Volume 1, section 1.1.6 The contours of a modern property approach transnationally, particularly important in international finance, were already described in section 1.8.1 above and will be further explored below in section 1.10. The Hague Trust Convention may also be of use here if newer asset-backed funding structures are operated behind formal trusts, but it should be noted that the Convention does not present uniform law and is cast in the traditional mould of a choice of domestic laws only and their recognition elsewhere. In the previous Volumes of this book, the continuing impact of the lex mercatoria has been demonstrated (see in particular Volume 1, section 1.4.4 with respect to negotiable instruments, in modern times more particularly relevant for Eurobonds). However, the law of admiralty should not be overlooked in this context either, here especially for the effect of the maritime lien on ships following from its operation and the contribution of third parties thereto in terms of wages, but also unpaid freight, salvage and torts. The subject has received little attention in academic writing in more recent times404 and has remained more of a practitioners’ concern where their practices remain important. Assuming local courts accept jurisdiction, which in common law countries they do restrictively subject to a hefty forum non conveniens approach, they are likely to reinterpret their own laws to make way for these liens. This means that they are commonly accepted for what they are in admiralty, whether or not supported by treaty law, such as the Brussels Convention of 1910, although they are transformed so far as necessary in domestic laws. This is much like recognition at the situs of destiny as the general rule in all international proprietary issues under the more classical conflict of laws approach, with the difference that in admiralty there is this transnationalisation of the concept on the basis of the practices in the international maritime markets.405 Similar attitudes result when, as in a

404 One has to go back to the writings of Ernst Rabel and Albert Eherenzweig, see E Rabel, The Conflict of Laws 4 (Ann Arbor, MI, 1958) and AA Ehrenzweig, Private International Law 1 (St Paul, MN, 1974) 196. 405 Cf in the US, Brandon v Denton 302 F 2d 404, 410 (5th Cir 1962) and Barnouw v SS Ozark 304 F 2d 717 (5th Cir 1962).

272  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights bankruptcy, local public policies may be at stake, for example in matters of ranking or set-off. In other words, the more the foreign interest impinges on local ones, the more likely it is that local courts will protect own (governmental) interests. It was also said that this may be different in international arbitrations, international arbitrators having no natural lex fori to apply or to defend, while their awards in these matters also have international currency under the New York Convention, even though still subject to the public policy bar of that Convention in recognition countries. This is itself, however, increasingly interpreted in a restrictive manner—see the discussion in Volume 2, section 1.6.

1.9.  Private International Law Aspects of Assignments 1.9.1.  Conflicts of Laws Issues. Special Problems with Bulk Assignments of Portfolios of Monetary Claims with Debtors in Different Countries. Unity of Portfolios of Debt? The international aspects of the rights in claims remained long ignored in private international law and this part of the law may even now be underdeveloped as the law of assignment itself in most countries still is. This is relevant in international finance and regards especially the asset status of monetary claims and their use in the international commercial and financial flows in asset-backed funding operations like receivable financing and floating charges, and has also great relevance for bank loans in securitisations.406 It was already said that in this context individual assignments are hardly relevant and we must foremost consider the effects of portfolios or classes of monetary claims potentially as replacement assets with debtors in different countries and the management and collection issues that may arise in that connection, even without an assignment proper. Subsequently, the possibility of an assignment must be considered, and its nature as a full assignment or only a security or conditional assignment for funding purposes, either to an assignee in the same country or to one in another and its effect on the management and collection rights in respect of debtors elsewhere and the right to the collections if there are various assignees. That goes more properly into the proprietary (and enforcement) aspects of assignments in bulk or classes of assets including future ones when it must also be determined whether these claims especially when monetary (for this purpose) can be sufficiently separated from the relationship out of which they arise and be so transferred, again in outright assignments with a transfer of full ownership or in security assignments or in conditional or temporary finance sales or perhaps usufructs and to what extent there can be recognition and under what conditions in the place of the debtors when it comes to collection and the manner thereof in other countries. It concerns their liquidity and enforcement in the international marketplace or commercial and financial flows. The situation is complicated because of the issues already identified in section 1.5 above which may be summarised as follows: (a) the problems with the asset status of claims and that they are property, domestically problematic especially in Germany but also in England at law; 406 JH Dalhuisen, ‘Business Law in Europe after Brexit. The Need for Legal Transnationalisation in the International Market Place and The Example of International Assignments’, SSRN Working Paper Series 2021.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 273 (b) the importance of their separation from the legal relationship out of which they arise and the need for abstracting the proprietary or external aspects from the obligatory or internal aspects or its history; (c) the lack of a clear insight in the conditions of the transfer or assignment of monetary claims in terms of power, cause and formalities—again especially when their proprietary status is still in doubt, the need and importance of (individual) identification, documentation and notice requirements in this connection, and the consequences of the lack of any and its effect when becoming apparent only after collection; (d) the question of their transferability, especially in bulk, including future (replacement) assets, the differences in the types of proprietary rights that may be created in them, their liquidity, and the need to consider the unity of portfolios of monetary claims for funding purposes; (e) the lack (often) of a proper distinction between the contractual, proprietary and enforcement aspects of assignments and the need to determine when conflicts of laws arise and how and in what manner private international law becomes relevant; (f) the meaning of party autonomy in the creation of proprietary rights in monetary claims and the effect on those who were aware of them or, especially as professionals, should have been before they acquired an interest in the property; (g) the concept of abstraction of the assignment itself and of the subsequent payment notice and the approximation of trade receivables to promissory notes, a similar situation obtaining for commoditised bank loans; (h) the effect on the defences and the impact of any resulting extra burdens or excuses for the debtors, the legal status of contractual assignment restrictions, the issue of materiality and the cooperation duties of debtors; (i) the complications deriving from the tripartite nature of these transactions, the consequences for assignor, assignee, and debtors, the rebalancing of their interests and protections in international production and distribution chains, and the nature and importance of bona fides and cooperation in all relationships; (j) the question of the liberating payment to the first notifying assignee, its finality for the paying debtors, their search duties and liberation in this respect and the question who is entitled to the collections if there are various assignees; (k) the problems internationally with determining location of an assignment, commonly considered a key element in finding the applicable (domestic) property law under traditional conflicts of laws rule; (l) whether proprietary rights in these assets can find acceptance elsewhere, notably in a foreign bankruptcy or in other types of enforcement proceedings against foreign debtors, and in what circumstances, under what conditions, or with what kind of adaptation; and (m) the resolution between different public policies in countries most directly connected. As even domestically there is often a poor understanding of the legal nature of (monetary) claims, the proprietary rights in them and their operation, and of the modern needs in this regard, especially for bulk assignments of present or prospective monetary claims, this is unavoidably reflected in their uncertain legal status at the international level and is demonstrated in private international law which has found it difficult to cope, especially in the proprietary (and enforcement) aspects, even more so than for chattels as was already noted in section 1.5.14 above. There are here major unresolved policy issues and practical complications which, as we shall see, result in considerable differences in approach between the various domestic legal regimes and their courts and may complicate in particular the collection in other countries.

274  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights As further complication, private international law has found it always difficult to cope with the nature of tripartite legal structures, not only in connection with proprietary rights and structures. That is so for trusts and agency and investment security holdings in custodial systems and then also applies to assignments. It may be innate in such situations and should be well distinguished from third party or proprietary effect which come on top, but are not always activated by assignments as we shall see. One consequence may be that the approach to the transfer of chattels in private international law is not broadly followed in respect of the transfer of claims which means, however, that there is hardly a recognised traditional legal framework for assignments in the conflicts of laws, the more fundamental reason being the problems with their asset and proprietary status. As we have seen in section 1.8.2 above, the approach to chattels is based on the proper creation or transfer of any proprietary rights created in them at their situs of origin with recognition of the rights so acquired elsewhere, if necessary in terms of finding the nearest equivalent in the country of destination always within that country’s perspective on the numerus clausus.407 This approach is not commonly adopted in respect of intangible assets, also because their situs is more difficult to ascertain, see section 1.9.5 below. It was further submitted that the unity of portfolios of claims regardless of the location of the debtors must increasingly be respected as a practical requirement and economic need in international asset-backed funding, for the law in this area to remain meaningful, especially in the international commercial and financial flows or manufacturing and distribution chains. It was demonstrated that the situation is acute particularly in floating charges, and securitisations involving assignments with debtors in many countries, and in receivable financing and factoring, and may also concern the inclusion of replacement (future) assets when the issue of the applicable law could even arise between a (security) assignor and (security) assignee in the same country in enforcement against debtors elsewhere. If assignor and assignee are in different countries there may be further complications. The resulting emphasis on the transfers of claims in bulk may differentiate them further from the situation with chattels, where bulk transfers are mostly not (yet) a major issue in private international law, although the status and transfer of classes of chattels in or moving between different countries as part of the production and distribution process in international chains is now also becoming a more important issue when, again, their likely transformation in replacement assets is another key aspect particularly in terms of the nature and preservation of security interests and their ranking or of finance sales when working capital for this entire international process must be obtained and asset backing offered, see the discussion in section 1.8.3 above. For reasons of efficiency and clarity, the particular question is then indeed whether under the rules of private international law it may be possible to find and promote one single legal regime or unitary approach under one domestic law that would cover the transfer of each claim in the same manner, the effect of which then putatively being also the same at the place of and in the enforcement against each debtor wherever located. The proposition in this book is that such unity can only come from (a) accepting the abstraction principle in respect of (i) the separation of claims from the legal relationship out of which they arise, (ii) the assignment itself, and (iii) payment notices given thereunder, treating all monetary claims in international funding operations like promissory notes, (b) from, or together with a greater degree of party autonomy in the description of the assets covered and in the type of interest transferred, (c) supplemented by the protection of bona fides in the various participants to ignore competing rights. The issue of

407 A common law variant is to recognise such foreign interests as equitable rights only, therefore subject to the protection of bona fide other interest holders in the recognising country, see, ss 1.8.2 above and 1.9.4 below.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 275 abstraction was dealt with in sections 1.5.9 and 1.5.10 above and party autonomy was discussed in sections 1.5 and 1.5.14. Private international law does not have a clear way to deal with these issues, except perhaps if, at the place of enforcement, under its laws, uniform concepts and policies are accepted and local law is willing to re-characterise and treat foreign assignments accordingly. It would appear that in all these aspects, short of the unitising effect of transnationalisation through international custom or treaty law (or in the EU through Regulations), it is hard to find a unitary national law that might find common acceptance in the traditional conflicts of laws approach because there is not likely one national law for bulk assignments of claims with debtors in different countries that might convince, be effective and recognised as such in debtor countries. The law of the assignor would be the most practical solution and is often proposed as we shall see in section 1.9.5 below, but it would probably be ignored in enforcement against debtors elsewhere under their own laws, likely a matter of public policy especially if these interests conflict with the numerus clausus of proprietary rights (or similar limitations for obligatory rights) in the enforcement country. It would be necessary to ask whether traditional private international law is able to deal with universal principle, which would amount to recognition of transnationalisation guided by international need and practice at least in the recognition process (and the conditions) of such assignments elsewhere. Mere acceptance of the application of the law of the debtor would not be enough. Party autonomy needs here further exploring and it was already noted that it may be easier in common law countries where greater party autonomy might result in equitable proprietary rights, affecting and diluting any numerus clausus notion, but it still raises issues, all centring ultimately on the question of the debtors’ protections against such interests and on the collection facilities thereunder under their own laws (or in their bankruptcy wherever opened), and whether these protections can be so affected, even curtailed, without consent and under what law.408 On the other hand there may be cooperation duties to consider. It would indeed assume that inroads into the numerus clausus principle of proprietary rights are more universally acceptable at least if they are balanced on the one hand by adequate protection of bona fide collecting assignees (or even all assignees collecting in the ordinary course of business), and on the other by adequate safeguards for the debtor to obtain a proper release upon payment to such assignees wherever s/he may be located. It is practical and may overcome unsuitable and arbitrary local property and assignment regimes at the same time and may also ease the problem of adaptation of these rights in other countries, but it is not the way private international law operates which looks for the application of national laws in all these matters and could not rely on transnational custom or the modern lex mercatoria and its hierarchy of norms operating in the professional sphere to promote in this way the use of receivables in international finance as well as the transfer of loan assets and avoid unnecessary conflict. It should be realised that party autonomy is not then a particular solution of a conflict of laws and choice of a domestic

408 Parties may, of course, try to be more specific in the underlying agreements out of which the claims arise, anticipating their future assignment. For example, they may define the situations in which an assignment will be possible or agree that defences shall not be raised by debtors against particular assignees but they may also try to introduce assignment restrictions or strengthen the defences. The important issues of set-off and netting may also arise and a waiver may be possible in the underlying agreement. But in the case of a bulk assignment, to be efficient, it would suggest similar clauses in all underlying contracts. This may be a practical impossibility. Statutory intervention is now the readiest domestic approach to limit at least assignment restrictions in their third-party effect, see for these issues the discussion in ss 1.5.4 and 1.5.5 above. Again, they raise the issue of the applicable law and the attitude of enforcement courts in the recognition of these assignments elsewhere.

276  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights law problem but rather concerns the operation of the international marketplace itself, in which connection the abstraction principle and the bona fides concept cutting out competing rights would prove to be just as important. At least in common law countries more generally a foreign law might be more freely chosen and accepted in respect of the proprietary and enforcement regime even for chattels to avoid unsuitable and arbitrary property law regimes at the situs. That is also the approach in countries like Germany that have difficulty with the asset status of claims and their proprietary aspects although there might still be controversy whether such a party choice of law must be made in the assignment agreement or in the relationship out of which the claim arose assuming it was contractual. In either case there is no reason why it could not be the modern lex mercatoria. However, that may be, in common law countries it is not only a question of choosing a foreign law, but equity allows itself more directly access to the desired structure. Foreign (proprietary) interests are here recognised as equitable, which means that professional parties in countries of enforcement might still have a search duty and be mindful in particular of other prior interests but the general public could ignore them altogether.409 It translates for debtors in a protection of payment to the first notifying creditor if the notification is regular on its face.

1.9.2.  When Is There a Conflict? Contract, Property and Enforcement Issues It was shown before that the transfer of any proprietary right concerns in particular the aspects of power, intent, and formalities (see section 1.4.1 above) under the applicable law, more particularly the determination of the disposition right in the relevant assets, the contractual requirements for their transfer or for the creation of more limited proprietary rights therein (especially capacity and intent), and any documentation, notification or registration needs or other formalities in this connection. The applicable law would then also deal with the consequences of failure of any of these requirements. Another important point to repeat in this connection is that the types of proprietary rights that may operate in claims and how they are created, transferred or assigned, are (as for all assets) in principle also subject to the prescriptions of the objectively applicable property laws and are, because of third party effect, as such commonly not considered matters of party autonomy or subject to a contractual party choice of law or a unitary approach that could in this way be created for all claims in a portfolio regardless of the place of the debtors, unless we perceive this party autonomy as equitable in a common law sense as per the discussion in the previous section, supplemented by notions of abstraction and bona fide protection in respect of debtors and assignees in their payments and collections, and in appropriate cases cooperation duties. The dominance of the objectively applicable law was found to be clear in particular in terms of (a) the creation of proprietary rights in monetary claims and their transfer or assignment for whatever purpose, (b) the defences against others (assignees) who may claim to be creditors, but it also concerns (c) the enforcement of these rights against the debtors wherever they may be, and (d) the protection of payments and collections. Especially in respect of (b), (c) and (d), it may concern the application of a legal system other than that of their assumed situs, which is the normal starting point for tangible assets, as in respect of intangible assets 409 See s 1.8.1 above.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 277 there may be other views on possible connections in respect of proprietary rights supported by the fact that their situs may not be easy to determine, see section 1.9.4 below. Again, the tripartite nature of assignments makes here for further complication but should not be confused with third party effect which comes on top. Importantly, and it was already mentioned, it should also be considered that even if no transfer or assignment takes place, one may still have to ask what the legal status of a claim is internationally, in particular when creditor and debtor are in different countries, and under which law this is to be determined, how enforcement is going to take place, and what the protections and cooperation duties are especially in respect of debtors. This may more properly go back to the original creation of the claim. Although there might be some more room for party autonomy as we have seen, defining better uses of the claim and cutting out some defences and excuses, it concerns in essence the realisation of the property or collection right of creditors when upon a subsequent assignment, for example the third party effect of contractual assignment restrictions has to be determined, see section 1.5.5 above, and then also the type of proprietary right that was created or transferred and the question who amongst the various assignees had the collection right and is entitled to the collections. Again, it is a matter for the applicable property law assuming that it can be credibly established. The essence is that the proprietary right may not be affected by an assignment at all as it is a question of enforcement of a payment right against the debtor(s) that is not changed, likely in a full assignment. It is and remains essentially a question of the debtor(s) own laws, where property and enforcement laws are likely to come together. To associate this with an assignment may be unhelpful and confusing even if the assignee is in another country than the assignor. No further complications should arise although even in the case of a full assignment the concept of abstraction may facilitate the payment and collection better. This may be the situation in securitisations. Yet it is likely to be different when assignments are used to create specialised proprietary rights in these assets, like security interests or finance sales with which the law of the place of enforcement may be concerned particularly in terms of its numerus clausus or more in particular the protection of debtors. Like in the case of chattels, it may be useful and necessary to distinguish here between the contractual, proprietary and enforcement aspects, assuming the proprietary status of claims is accepted in principle, whilst adding, the protection of the debtor as a special concern. As we have seen, each can have third party aspects but in different ways. Some consider the replacement of the creditor in the claim simply as deriving from the tripartite nature of assignments even though there is no need for consent. In fact, debtor’s protection straddles all of them even if it reflects foremost the internal aspect of the asset, and would therefore be obligatory in principle but there are likely to be proprietary consequences also, notably when it comes to contractual assignment restrictions and their third-party effect, and to payment and collection. There may also be the question of lack of disposition right in the assignor and the failure of the assignment agreement itself before or upon any collections as we have seen in sections 1.5.2 and 1.5.9 above. That is also proprietary. From a conflicts of laws point of view, proper distinctions are here necessary; yet they are seldom made. If we consider for the moment the origin and operation of the claim in the law of obligations, it is clear that for claims the contractual aspects of a conflict of law normally arise only when debtor and creditor are in different countries.410 The ordinary conflict rule is here 410 The origin of the claim itself is an obligatory issue, in contract law at the international level in the EU foremost a matter to be determined under Arts 3 and 4 of the 2008 Regulation on the Law Applicable to Contractual Obligations (Rome I), see s 1.9.6 below.

278  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights the application of the law of the country of the most characteristic performance. In the case of the subsequent assignment, normally that is the law of the transferor or assignor. As for the proprietary and enforcement aspects, which can largely be dealt with together (ignoring bulk assignments for the moment), conflicts of laws are foremost likely to arise (as they do for chattels) when the asset moves between countries. In the traditional view, it would result in a change of situs—from that of the place of origin to that of the place of destination, fairly easy to determine for chattels but for claims much harder, it was already mentioned. If the place of the debtor may be considered primarily controlling in this regard, as will be suggested in section 1.9.5 below as the better even though still imperfect rule especially in bulk assignments, but seemingly unavoidable in matters of enforcement in the traditional conflicts of laws approach, one may conclude that true conflicts in the proprietary and enforcement aspect of claims only arise when the debtor moves to another country.411 The situation is not different when a bike is sold in Paris between a seller in England and a buyer in the Netherlands if it is not supposed to be delivered elsewhere. Movement of the debtor is rare for private persons but could be increasingly relevant for companies, banks or trusts. In a large portfolio, there may always be some. It raises the issue of adaptation of the proprietary interest and enforcement regime in the new country or change of the proprietary regime from the country of origin to the country of destination or enforcement. The fact that debtors do not commonly move is probably the true reason why in international assignments—thus even in assignments between an assignor and assignee in different countries—the proprietary aspects long received little attention.412 To repeat, the law concerning the enforcement action against the debtor will normally remain unchanged upon a full assignment, although there will be a different creditor and there might be or result other impediments in terms of extra burdens potentially assuaged, however, by cooperation duties, whilst the defences may also be fewer, see section 1.5.4 above; again, the law of enforcement is in control and is normally that of the debtor,413 who does not move. But it may be different when new rights are created in these assets through specialised assignments in terms of security interests, conditional sales or usufructs, which, again, more in particular may raise issues in terms of the numerus clausus of proprietary rights at the place of enforcement and debtor protection. It also may raise more in particular the question who has the collection right and is entitled to the proceeds.

411 Following the analogy of movable tangible assets in the case of the asset moving between countries, see s 1.8.3 below, this poses first issues of the proper creation of the debt or any other proprietary interest therein (such as a conditional or temporary ownership right or a security interest or, in common law countries, equitable proprietary interests such as floating charges) in the country of origin of the debt and subsequently issues of recognition of ownership of the debt and the characterisation of any other proprietary interests therein in terms of nearest equivalents in the country of its enforcement. Issues of power or disposition right, intent or contract, and formalities such as documentation and publication or registration in the country of origin arise primarily in that context. The more important realisation must be that there is here commonly a degree of judicial discretion in the recognition and transformation process in the country of enforcement, which is not truly an issue of choice of law, rather a matter of the lex fori by default. 412 Another reason why the private international law or conflicts aspects of assignments have until more recently not raised a great deal of interest is that claims, even if monetary, were not considered important asset classes. This is changing and particularly bulk assignments of trade receivables and bank loans are of ever greater importance. 413 It may be noted that in the case of an enforcement action against the debtor under a foreign bankruptcy, meaning a bankruptcy in a country other than that of the debtor, exceptionally there may be the issue of the impact of foreign enforcement regime on the debtor, and is then a matter of foreign bankruptcy recognition in its country in which case this law must be considered in terms of the rights of the assignee and those of the debtor.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 279 To repeat, was there at the start sufficient power in the assignor to dispose in a bulk manner, was there a valid assignment agreement, and were the conditions and formalities observed and under what law? In particular, was there a valid (bulk) assignment agreement and transfer pursuant thereto and what if the assignment was deemed to have failed, established only after (some of) the claims were already transferred (and collected)? Which laws must be considered applicable, not merely in the contractual aspects therefore, but also in the matter of transfer of title (and its potential undoing) and actual payment? Again, the ultimate question is the recognition of the assignment in the countries of the debtors and the conditions, likely to be always those of the lex fori of the debtor as a practical issue and therefore not truly a matter of a choice of law. In private international law there appears no clear or single answer to these questions. In case law, as we shall see in the next section, rather than on power, intent and formalities more generally and on the conditions for recognition more in particular, the question of the applicable law appears to have concentrated on the validity of the assignment, which poses contractual and proprietary issues, foremost the one of individualisation and identification and whether, under the applicable law, documentation and notification are constitutive requirements for the assignment and actual transfer in terms of formalities. Again, bulk assignments might then hardly appear possible to organise under the relevant national law of the assignment, potentially still different for the purely contractual and proprietary effects which need to be distinguished. It may also affect their recognition in enforcement at the place of the debtor unless its law favours it. The further question would be which law determines whether the arrangement may be a simple security interest, a floating charge in a whole cash flow, or a conditional/finance sale, and what kind of action is necessary upon the debtors’ default in these various facilities, and who is entitled to the collections and overvalue in the portfolio. Also here, the law of the place of enforcement may take a different view from that of the place of origin of the assignment, again not truly a question of choice of law, rather one of discretion of the recognising enforcement court and perhaps an issue of its public policy. A related question concerns the moment of effectiveness of the transfer (either at the time of the assignment or upon notification of each individual transfer) and any ranking that may follow. Here again the enforcement court may think differently from that of the place of origin of the assignment, wherever that may be in proprietary issues. Besides validity, in case law, there is then also the issue of assignability. Again, it may have contractual and proprietary aspects. It concerns foremost the transferability of highly personal claims, claims for services but again, perhaps more fundamentally, there is here the matter of the assignability of future claims and how that is done and under what law, then more likely connected with proper identification and the required specificity in many legal systems. Another issue may be the assignability of contractually blocked accounts and in this connection especially the third-party effect of any clauses in the underlying contract out of which the claims arise limiting the assignability, see section 1.5.5 above. Again, it may leave open the question for what purpose the claims were assigned, which might make a difference. A third cluster of case law concerns here more in particular the debtor’s protection, therefore the defences and extra burdens or any counterclaims of debtors and whether and to what extent they can still be raised against an assignee, in which connection any counterclaim or set-off right are of particular interest. It was already said that this is a typical complication deriving from the tripartite nature of assignments, which raises contractual and proprietary issues. The question is then which extra burdens or risks debtors may encounter as a result of the assignment and must reasonably accept, for example in terms of a different place and method of payment, but also in terms of being sure that any payment to an assignee is liberating. These are often typical debtor protection issues in the internal relationship and may then be dealt with in that (contractual) context and waived. But it raises also the question of the notification, now for its form, manner

280  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights and effect, and bona fide payment or collection. Who is able to instruct and collect and is entitled to the collections, again under what law? This is no longer purely contractual with the law of the place of enforcement probably having again the last word, problematic especially in bulk assignments of monetary claims in the absence of unitary customary or treaty law.

1.9.3.  Terminology, Characterisation Issues, and their Overlap Rather than the framework of contractual, proprietary and enforcement aspects, or references to power, intent, formalities, and disposition rights in the proprietary aspects as in the case of other assets, it may thus be noted that the terms more commonly used or the distinctions made in this connection in conflicts of laws doctrine concerning assignments of claims are validity, assignability or protection of the debtor, not therefore proprietary status, or even enforceability. This terminology was already identified in the previous section but is necessarily tentative. One problem is that these terms are poly-interpretable and may considerably overlap both in the contractual and proprietary aspects, although this is not always fully appreciated. Yet when there is overlap, all distinctive value disappears and its significance in the matter of the determination of the applicable law evaporates. It may be said straight away that in these various aspects, the 2008 EU Regulation (Rome I) hardly achieved any greater clarity, see section 1.9.6 below. The related problem is that by using these terms, there is no distinction at all between the contractual and proprietary effects which are then both covered by the same conflict rule. Here at least the EU Regulation got unstuck leading ultimately and correctly to the elimination of proprietary issues from its coverage by the ECJ,414 but it remains to be considered whether this will clarify at the same time the terminology more commonly used. It might have been better if it and the earlier Rome Convention had left the subject of assignments altogether alone for the moment. Especially, the lack of proper distinction between proprietary and obligatory issues and the matter of party autonomy bedevilled the text quite apart from the apparent desire to still find some domestic law in all aspects. All the same, it means that after the clarifying ECJ case law, in each EU country, short of transnationalisation, the normal rules of private international law continue to prevail in the proprietary (and enforcement) aspects of assignments and there is no EU uniformity in approach to the choice of law issues in these matters. A 2018 Draft EU Regulation on the Law Applicable to the Third-party Effects of Assignments, went into (some) third party effects but has so far not been convincing either and the project is suspended, see again section 1.9.6 below.

414 The ECJ in its decision of 9 October 2019, BGLBNP Parisbas SA v Teambank AG, Case C-548/18, ECLI:EU:C:2019:848 decided the issue and considered the 2008 Regulation not applicable to proprietary issues, and it may be assumed not to enforcement issues either. The reasons given were that a choice of law was scrapped in the text of Art 14(3) and further the clarification in the draft 2018 Regulation even though not law. The Preamble (38) to the 2008 Regulation had tried to clarify that Art 14 also meant to deal with proprietary aspects of assignments, but quite apart from the legal effect of a declaration in the Preamble, there were considerable problems with the terminology, as it seemed to be limited to the relationship between assignor and assignee. It has already been said that the nature of proprietary rights becomes apparent truly in respect of third parties so that one could conclude that the new Preamble (in its innocence) only served to underline that the ‘real’ proprietary effects of the assignment were excluded. Art 14(3) was added in 2008 and appeared to bear out the idea that the proprietary aspects were also covered where it extended the reach of Art 14 to outright assignments and security assignments, without, however, indicating the applicable law.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 281 As for the poly-interpretable terms often used in this connection, ‘assignability’ figured in Article 12(2) of the 1980 EU Rome Convention on the Law Applicable to Contractual Obligations, now replaced by Article 14(2) of the EU Regulation of 2008 (Rome I), making the law of the relationship out of which the claim arises applicable, but it could mean many things: a reference not only to (a) the transferability of highly personal, future or blocked claims (and the validity of any contractual restraints on alienation in this connection), or to their very existence as present or future rights, or to the ability to split at least monetary claims out of the rest of the contract; but also to (b) the type of proprietary right that might be created in them, such as a security interest, a conditional or temporary right, or usufruct, thus whether the claims are so assignable; to (c) the modality of the transfer, thus whether the claims are assignable in bulk also in their proprietary aspects; to (d) the protection of the debtor whose debt might not be transferable (as to him) if the assignment creates extra burdens for him; and to (e) the position of various transferees or assignees inter se, who might find that an earlier assigned claim was no longer validly assignable by the same assignor, at least as regards them. The reference to validity, also often used in this connection in the application of Article 14(1) (although strictly speaking not in the text or that of its Article 12(1) predecessor), suggesting applicability of the law applicable to the assignment, could imply a reference to: (a) the validity of the assignment agreement, including the documentation; (b) the formalities required for the assignment, such as notification (in some countries) or registration for certain security interests in these assets (if a constitutive requirement for the validity of such security interests); (c) the validity of proprietary interests created in the assignment; or to (d) the possibility of a bulk assignment as such and to the type of interests created therein (an outright transfer, a security interest, a conditional sale or a collection arrangement), when individual notification of each assignment thereunder or identification of each claim to be assigned may create further impediments; and (e) the inclusion of future debt and the definition of what is future in this regard. Equally, the reference to the protection of the debtor, also often used (although not so broadly in the old Article 12(2), now Article 14(2)), making the law of the underlying agreement out of which the claims arise applicable, may also have many meanings. At least the relationship between assignee and debtor is thought to be covered by the law applicable to the original relationship between debtor and assignor and might cover (a) the right of the assignee to claim payment and the debtor’s defences, in first instance contractual issues, but the concerns of the debtor are likely also and perhaps more importantly (b) his liberating payment to the assignee given his vulnerability to creditors of the assignor, as well as to other assignees (or their creditors) when claiming better collection rights, who also may attempt to recover from his other assets (like those located in their own countries if more convenient) or invoke guarantees or execute security interests given by the debtor if he defaults as regards them; (c) the type of notice he may or must accept and any subsequent payment request; (d) any need for his bona fides as regards putative better collection rights of others; and (e) the question who may force him to pay and collect. The issues under (b) to (e), are not contractual and can hardly be covered by the law applicable to the underlying relationship between assignor and debtor. In section 1.10 the issue was more properly identified as one of the status of any notification to the debtor and the liberating effect of any payment thereto. References to proprietary or third party interests (not directly made in Articles 12 (old) or 14 (new) either, but referred to in Preamble 38 and much the concern of the 2018 EU Draft Regulation, see section 1.9.6 below, may mean references to: (a) the types of interests that can be created in terms of a full, security, or conditional assignment; (b) the relative priorities of the various assignees of the same claim and in this connection to the role of notification; or

282  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights (c) the rights of assignors pursuant to a default under the assignment or upon the fulfilment of the conditions leading to an (automatic) return of some or all receivables, and (d) the issue of the liberating payment by the debtor, the reference to enforcement potentially covering similar ground, see below. Again, the most pressing issues of a proprietary nature may be the recognition of a portfolio of receivables as one assignable class of assets regardless of the place of the debtors, and the issue of segregation of these claims from the contracts out of which they arise wherever the debtors are. The EU in its 2018 Proposal in Article 2(d) states that ‘third party effects’ mean proprietary effects, that is, the right of the assignee to assert his legal title over a claim assigned to him towards other assignees or beneficiaries of the same or functionally equivalent claim, creditors of the assignor and other third parties. But this is only a partial definition, see further the discussion in section 1.9.6 below, and appears limited to issues of ranking between various assignees, and notably does not cover the asset status of claims and the modalities and formalities of their transfer, all property issues. The segregation of the claims and the recognition of the rights concerning them elsewhere in the EU seems assumed and collection and enforcement rights against the debtor and his/her defences are not mentioned. It was already noted before that third party effect in an assignment may arise foremost from the emergence of a new creditor, the assignee, who is a third party to the original agreement out of which the assigned claim(s) emerge(s), but the consequences might still be purely contractual in terms of the payment right of the assignee against the debtor and the latter’s defences. It would not appear to concern third party effects as was considered under the draft Regulation. Any reference to enforcement (also not directly made in Articles 12 (old) or 14 (new)) could mean a reference to: (a) the collection right of the assignee; (b) the relative rights of various assignees in this respect; (c) any rights of their creditors (and perhaps those of the assignor) to garnish the debtor; or (d) any rights to execute under security interests granted by the debtor into his other assets or any other right to recover from such assets if the debtor refuses to pay. Ultimately the true issue might be the recognition and where necessary and possible the adaptation of foreign proprietary rights into nearest equivalents in the enforcement regime of the debtor which could lead to quite different results depending on his location. It should be clear from the above that use of the terms: ‘assignability’, ‘validity’, ‘protection of the debtor’, ‘proprietary aspects (or third-party effects)’ or ‘enforcement’ may all lack sufficient precision. In private international law terms, the use of these terms and the different legal characterisations they suggest are unreliable but nevertheless used, all leading to different (national) legal systems being made applicable in different aspects of assignments, but it is unsatisfactory. From a choice of law perspective, their overlap means that they solve nothing and these characterisations may therefore hardly determine the applicable law without further analysis and may not be adequate in themselves but contribute to confusion. Thus the effect of a German bulk transfer of present and future receivables, some of which arose subsequently in the Netherlands, was qualified by the Dutch lower courts as a matter of validity of the assignment to which the contractual law applicable to the assignment was deemed applicable in the manner of Article 12(1) (old) of the Rome Convention, but the Supreme Court qualified it as a matter of assignability and applied the law of the underlying receivable on the basis of principles derived from Article 12(2) (old) of the Rome Convention. There was no further investigation of the contractual or rather proprietary and enforcement aspects of the assignment.415 415 HR, 11 June 1993 [1993] NJ 776, see also n 421 below.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 283 Following ECJ jurisprudence, it would now appear necessary at least to distinguish sharply between the contractual and proprietary aspects in each instance regardless of the terminology and characterisations used as the latter are not covered by the Regulation at all but revert for their coverage to each Member State’s private international law regime concerning them.

1.9.4.  Mandatory Proprietary Laws Relating to Assignments. The Situs Issue It was submitted that however desirable a degree of party autonomy may be, especially to achieve through a party choice of law clause some unity of law in matters of bulk assignments and to avoid atavistic or inappropriate assignment statutes, the proprietary (asset status and modalities and formalities of the transfer) and especially any enforcement aspects more generally may not be so captured (except in a more limited manner in equity in common law countries) as they affect third parties. It was already noted repeatedly that they are not at the free disposition of the parties, and are in private international law traditionally subject to the lex situs as the more objective domestic law.416 This notion of the situs is understandably contentious for claims because of a lack of physicality. First there is confusion whether intangible claims can have asset and proprietary status at all, which in that view is confined to physical assets as we have seen. In section 1.5.1, it was submitted that this is erroneous and that all that has economic value is an asset in a legal sense. Second, although it is clear that, in the case of intangible assets, the situs cannot be taken in a physical sense, it does not necessarily follow that it cannot legally exist. It is much the same as with possession; at least in civil law there can be legal possession of claims as we have seen in section 1.5.1 also, but it is constructive and cannot of course be physical. So could be their situs, but it must still be determined where it is which is obviously more complex in the case of intangible assets. In should be repeated in this regard that as non-contractual matters, proprietary and enforcement aspects of assignments could not truly be considered covered by the Rome Convention and its replacement Regulation, see section 1.9.6 below. They deal only with contractual obligations, which is the internal aspects of claims, where party autonomy may indeed be relevant, but would not then go into proprietary and enforcement aspects, now confirmed by ECJ case law as we have seen. Gradually it became recognised that nothing of this could be at the free disposition of the parties and that they cannot choose an applicable law in these matters, which, albeit belatedly, became also the view of the EU in the 2018 draft Regulation on the Law Applicable to the Third Party Effects of Assignment of Claims, further discussed in section 1.9.6 below. The situs issue was here avoided by simply opting for the law of the assignor. Although the draft still struggled with both the proprietary aspects as such and ignored the enforcement aspects, it accepted at least an objective unitary approach in the third-party aspects it covered and eliminated any freedom to choose the applicable law under Article 3 of the Rome I Regulation. That appears now to be generally understood, although in an equity approach it might still be otherwise. It is submitted all through that this is highly important, but it was not explored by the ECJ. Probably more indicative of the Regulation’s shortcomings was that the law applicable to bulk assignments was never properly considered (although it inadequately was in the 2001 416 See also P Lalive, The Transfer of Chattels in the Conflict of Laws (Oxford, 1955) 114.

284  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights UNCITRAL Convention on the Assignment of Receivables in International Trade, see sections 1.9.6/7 below), nor the issue of separation of monetary claims from the legal relationship out of which they arose, the abstraction of the assignment and payment notice given pursuant thereto, and the analogy of the promissory note. Neither was the issue of party autonomy and its proprietary reach in establishing the unity of a bulk assignment, and the type and recognition or adaptation elsewhere of the various rights created therein, earlier identified as truly the basic issues in the international marketplace and the real challenges in private international law. The reason for the ineffectiveness was also not properly identified and lies in its failure to understand the need for the use of portfolios of claims as asset backing in funding operations. Truly, monetary claims and their assignments are only significant and relevant in that context, always understood in the US in the UCC, individually claims and their treatment or transfers are unimportant in this context. It requires an insight in the nature of financial claims, their separation, the concept of class or bulk, and a unitary or uniform legal regime for their assignment in the financial markets, assuming it could then also be accepted in enforcement against debtors in different countries, which may remain in serious doubt without uniform recognition and adaptation conditions either derived from transnational custom or treaty law. Traditional private international law cannot provide it. It was shown that it has difficulty even with making the proper distinctions within its own approach between the contractual, proprietary and enforcement aspects of international assignments and also with the assignment conditions in terms of power, validity and formalities or the consequences of the lack of any. It cannot deal with classes of assets or claims, potentially prospective. Added may be typical issues of protection of the debtor, with the difficulty of distinguishing between tripartite contractual and third-party proprietary aspects, supplemented by the problems in enforcement proceedings elsewhere and the adaptation in that context of the proprietary interests originally created in the underlying portfolios of debt, which is then a numerus clausus issue in the enforcing jurisdiction or indeed a special issue of debtor protection.

1.9.5.  Current Approaches to Choice of Law Issues in International Assignments: Different Views of the Legal Situs of Debts In Germany, established opinion remains that the law of the contract out of which the receivable arises also determines its proprietary regime, transfer possibility, and transfer method.417 It allows in principle for party autonomy or at least a party choice of a foreign law in property

417 See for the German approach to assignments more in particular, G Kegel, Internationales Privatrecht, 6th edn (Munich, 1987) 478; C Von Bar, ‘Abtretung und Legalzession im neuen deutschen Internationalen Privatrecht’ [1989] RabelsZeitung 462 and C Reithmann and D Martiny, Internationales Vertragsrecht, 5th edn (Cologne, 1988), nos 214ff, cf also EM Kieninger, ‘Das Statut der Forderungsabtretung in Verhältnis zu Dritten’ [1998] 62 RabelsZeitung 678, who argues for the law of the residence of the assignor, which will normally follow in this view if under the law of the assignment approach the assignor performs the most characteristic obligation, which, in a bulk assignment, is the delivery of the receivables. The applicability of the law of the assignment in proprietary matters is supported in two German dissertations on the Rome Convention: see H Keller, Zessionsstatut im Lichte des Übereinkommens über das auf vertragliche Schüldverhältnisse anzuwendende Recht (Munich, 1985) 145, and E Kaiser, Verlängerter Eigentumsvorbehalt und Globalzession (1986) 219; see also Kieninger, cited above. See for the lex situs principle in proprietary matters, H-P Mansel, Staudiger BGB Art. 4-46 EGBGB Internationales Sachenrecht (Munich, 2015) and the limitation of the relevant provisions in German private international law (Arts 43–46 EGBGH) to physical assets only, see p 17 which are substantially individualised (Bestimmtheitsgrundsatz), see p 262ff for the problems with floating charges.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 285 matters. It is one way to dispense with any lex situs uncertainty and takes essentially a contractual approach in proprietary matters. It remains relevant in that country now that the ECJ has decided that third party effect is not covered by the 2008 EU Regulation and remained therefore an issue of each Member State’s common private international law, although in the process the ECJ also rejected the contractual approach in proprietary matters. There is apparently not much of a general principle involved in Germany probably as a consequence of German law understating the proprietary aspects of claims as assets altogether. However, reliance on the law of the underlying contracts virtually rules out bulk transfers (Globalzession) internationally, reason why German doctrine sometimes switches to applicability of the (proprietary) law of the assignor in that case, again without much principle or giving much consideration to the consequences elsewhere of proprietary interests so created and the defences of debtors (and cooperation duties) and or assignees (and their creditors) in other countries.418 There is in so far a benefit that recognition of foreign assignments and any contractual choice of law therein may be easier whilst the adaptation to the German regime in enforcement proceedings in that country may be facilitated because of its lack of formality. Also in France, leading authors often side step the location issue and still opt for the law of the underlying contract out of which the claims arise,419 bulk transfers not having been of great interest because of the notification requirement before the Loi Dailly of 1991. In Switzerland, Article 145 of the Act on Private International Law of 1989 accepts on the other hand the law chosen by assignor and assignee, but this law may not detrimentally affect the debtor except where he agrees to it. The default rule is the applicability of the law of the place of the creditor or assignor, although it is not clear whether this also covers all protection and proprietary aspects. It is unlikely to cover enforcement elsewhere. In the Netherlands, there is no unity of view, but probably a greater acquiescence at the moment in party autonomy, much in the German manner.420 418 See Kegel (n 417) and Kieninger (n 417). 419 See Y Loussouarn and P Bourel, Droit international privé, 3rd edn (Paris, 1988) nos 424 and 425 and H Batiffol and P Lagarde, Droit international privé, 7th edn (Paris, 1983) no 611, but cf also B Audit, Droit international privé, 3rd edn (Paris, 2001) no 762, who opts for the law of the residence of the debtor. 420 In more recent Dutch case law, even in the proprietary aspects of assignments, sometimes the law of the underlying claim and in other cases the law of the assignment have been upheld as applicable following Art 12(1) and (2) of the 1980 Rome Convention rather than the law of the debtor or that of the assignor. This is then considered to allow for party autonomy and a contractual choice of law in proprietary matters under Art 3 of the Regulation. There are in the Netherlands three Supreme Court cases in this connection, the last two of which have elicited considerable international interest: see HR 17 April 1964 [1965] NJ 23, HR, 11 June 1993 [1993] NJ 776, and HR, 16 May 1997 [1997] RvdW 126. See for a discussion of the first two cases, JH Dalhuisen, ‘The Assignment of Claims in Dutch Private International Law’ in Comparability and Evaluation: Essays in Honour of Kokkini-Iatridou (Dordrecht, 1994) 183 and for the last one THD Struycken, ‘The Proprietary Aspects of International Assignment of Debts and the Rome Convention, Article 12’ (1998) LMCLQ 345. In 1964, with reference to the never ratified Benelux Uniform Private International Law Statute (Arts 17 and 21), the law governing the underlying claims was deemed applicable to their assignability and to the requirement and formalities of assignment when Indonesian subsidiaries assigned their claims on an Indonesian bank to their Dutch parent for recovery out of the assets of the bank located in the Netherlands, except that the law of the debtor was considered applicable to his protection (liberating payment) and to the protection of other third parties. In the proprietary aspects proper, as in the position of subsequent assignees, there was some suggestion at the time (in the opinion of the AG) that the law of the assignment applied. In this case, the assignments were deemed properly made under the applicable Indonesian law governing the claims (excluding the expropriation laws, which were considered discriminatory) and recovery in the Netherlands was allowed against assets of the Indonesian bank there, therefore regardless of a nationalisation decree concerning the assignors. In 1993, the issue was a German Globalabtretung of future claims by a German supplier to his German bank. Later sale of the supplier of caravans to a Dutch customer resulted in the Dutch view in (future) receivables that under Dutch law could not have been validly assigned as, at the time of assignment, they were absolutely future.

286  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights In common law countries, the law of the assignor is accepted for global statutory assignments, notably in bankruptcy in respect of the transfer of the estate (worldwide) to the trustee. It is unlikely to find universal support at the place of the account or receivable debtors, however, if The buyers as a consequence refused to pay the German assignee bank. The problem was resolved by the Dutch Supreme Court with reference to Art 12 of the Rome Convention (although not yet in force at the time), and was ultimately identified as a problem of assignability under Art 12(2), and therefore governed by the law of the underlying claim, rather than as an issue of the validity of the assignment (as the lower courts had found) covered by the law of the assignment under Art 12(1), although strictly speaking Art 12(1) does not refer to the validity requirements and formalities of the transfer, where in 1964 the HR had accepted the law of the underlying claim. In the end, the characterisation of the issue in terms of assignability rather than validity determined the issue and aligned the 1993 decision with the one of 1964. In 1997, the issue was a verlängerter Eigentumsvorbehalt (a reservation of title extending into the receivable) under which according to German law the sale of goods to a Dutch manufacturer who sold them on to an enduser resulted in a claim in which the original German supplier had a preferred position. Dutch law does not accept the verlängerten Eigentumsvorbehalt and the assignment of absolutely future claims it entails. It now also requires notification for such an assignment to be valid except where a security interest is created according to Dutch law while all alternative securities are invalid (Art 3(84(3)). The Dutch manufacturer went bankrupt and the question was whom the end-user had to pay. This was resolved in favour of the German supplier with reference to the applicability of the law governing the assignment pursuant to Art 12(1) of the Rome Convention, therefore the law covering the validity of the assignment rather than the assignability under Art 12(2), which would have resulted in the applicability of the law of the underlying claim. Who had the collection right, therefore whom the debtor should pay, was the issue in both cases and is in truth a proprietary issue, according to most authors not covered by the Rome Convention, now supported by the ECJ, see n 415 above and s 1.9.6 below. Not so, or no longer so at the time, in the opinion of the Dutch Supreme Court, which applied Art 12(1) in proprietary matters, probably by way of analogy. Whether these proprietary issues are put under Art 12(1) as a question of validity of the assignment (as the HR did in 1997) or under Art 12(2) as a matter of assignability (as it did in 1993), both solutions seemed to allow for party autonomy in the proprietary aspects of an assignment, either as a matter of party choice of law under the assignment agreement (Art 12(1)) or under the contract producing the assigned claim (assuming it was contractual). In the matter of party autonomy and choice, Dutch case law seems here to follow German law, which has always had difficulty in distinguishing between the proprietary and contractual side of assignments as we have seen in s 1.5.2 above. Neither does modern Dutch law (see s 1.5.1 above) although, as just mentioned, German law looks to the law of the underlying contract rather than to the law of the assignment in this connection although there is also some support for the law of the assignment: see n 419 above. It was already mentioned that there is no anonymity in the Netherlands. The law covering the assignment agreement may now be more likely to be controlling under Dutch law, see CO Hoekstra, ‘Het toepasselijke recht op de derden werking van een international cessie’ [The law applicable to third party effect in international assignments] (2020) WPNR 7274. On the other hand, the applicability of the law of the underlying claim is defended in the proprietary aspects in an older Dutch dissertation: see LFA Steffens, Overgang van Vorderingen en Schulden in het Nederlandse Internationaal Privaatrecht [Transfer of Claims and Liabilities in Dutch Private International Law] (Deventer, 1997). Earlier in the Netherlands, RIVF Bertrams and HLE Verhagen preferred the law of the assignment: ‘Goederenrechtelijke Aspecten van de Internationale Cessie en Verpanding van Vorderingen op Naam’ (1993) 6088 Weekblad voor Privaatrecht, Notariaat en Registratie 261. THD Struycken, above, prefers the law of the residence of assignor. Dalhuisen, above, defends the applicability of the law of the residence of the debtor. See for a defence of party autonomy in these matters and therefore the acceptance of the use of private international law as a route to open up the numerus clausus system of proprietary rights in civil law (without much emphasis on the equivalency test), A Flessner and HLE Verhagen, Assignment in European Private International Law, Claims as Property and the European Commission’s Rome 1 proposal (Munich, 2006). They allow the applicable (unitary) law to be selected in the assignment agreement (therefore to be agreed between assignor and assignee), also in the case of a bulk assignment of the different types, also the German approach in that case. As a default rule, they opt for the law applicable to the underlying claim, which could conceivably also be chosen by the parties, in that case by assignor and debtor. That would hardly help in the case of bulk assignments unless all underlying agreements were similarly drafted and had the same choice of law. It suggests a major search exercise. In all cases a party choice of law would run up against the enforcement regime in the place of the debtor. Note that there is here no search for nearest domestic equivalents in the proprietary rights that may be so created when recognition abroad becomes an issue, mainly in the place of the various debtors in enforcement under security or conditional assignments.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 287 in other countries. It would amount to full foreign bankruptcy recognition. For non-statutory or ordinary assignments, in England, there is a preference, at least in matters of validity (whatever its meaning), for the applicability of the law of the assignment421 which may be chosen by the parties. As a clear distinction between the contractual and proprietary aspects is not made, this chosen law might then also cover proprietary aspects, although enforcement always seems to be covered by the law of the debtor. On the other hand, assignability and priorities are often thought to be governed by the law of the assigned claim.422 But an important, more commercially oriented train of thought considers the law of the debtor applicable in such aspects.423 In this vein, bank accounts, whether in credit or debit, are normally deemed located in the place of the bank branch in which they are opened, therefore of the debtor, but rights of claimants under non-negotiable share or bond certificates are usually deemed to be located at their register. It could be the same for investment securities in book-entry systems.424 Negotiable instruments and documents of title are deemed located in the place of their physical whereabouts, which is at the debtor’s place upon their presentation. Again, under present insights it all points away from the place of the claimants to the place of the debtors or obligors under these arrangements and therefore not to the place of the assignors/creditors/obligees. The emphasis is the different line of thinking on the practicabilities of enforcement and collections. It was already said that in the English approach, there is room for party autonomy, including the choice of a foreign law in proprietary matters, but it only leads to equitable rights in the recognising country and is balanced by an adequate protection for bona fide purchasers or collectors of the underlying asset, which is mostly not available as a matter of domestic law in civil law countries, as we have seen. It may facilitate the acceptance of foreign proprietary rights in the recognition of international assignments subject to their conversion into equitable proprietary rights, probably in terms of nearest equivalents but cut short by the protection of bona fide collectors or earlier legal interests existing in the recognising country, of which at least a professional assignee could have known before they acquired the proprietary interests by making proper enquiries. This is a different line of thinking, although it has already been said that it does not solve all third-party issues, but at least between professionals it may ease the problems. In line with common law thinking, the law in the US may also rely on the law of the assignment and party autonomy in this area, probably also subject to the re-characterisation of the ensuing (foreign) interests as equitable proprietary rights (as nearest equivalents) leading to bona fide purchaser or collector protection assuming always a search duty for professionals. The place (situs) of the assignment to which reference is commonly made in this connection in the conflicts of laws as the default rule is for its determination itself then made dependent on the applicable law and is therefore not a useful departure point. In practice, it appears to

421 See Dicey and Morris on the Conflict of Laws, 14th edn (London, 2012) 1354; see also see CGJ Morse, ‘Retention of Title in English Private International Law’ [1993] Business Law Journal 168. 422 Earlier the English Court of Appeal had suggested that there were at least five possible theories on the law governing the validity of the assignment alone: see Republica de Guatemala v Nunez [1927] 1KB 669; see more recently also Raffeisen Zentralbank Osterreich AG v Five Star General Trading LLC [2001] 1 All ER (Comm) 961 in support of the law of the assigned underlying claim also for the validity of the assignment (in situations when the Rome Convention does not apply). 423 See Goode (n 30) 1241 and M Moshinsky, ‘The Assignment of Debts in the Conflict of Laws’ (1992) 109 LQR 613, except for bulk assignments which are thought to be covered by the law of the assignor) and Dalhuisen (n 420). 424 For the notion of PRIMA (Place of the Relevant Intermediary Approach), see s 3.2.2 below.

288  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights be the place of the contract of assignment rather than the situs of the claim,425 but there is at least in case law also support for the law of the debtor in terms of the lex situs of the debt.426 The UCC firmly opts, however, for the applicability of the law of the borrower who offers the receivables as security, therefore of the assignor (section 9-301(1) UCC), at least in matters of perfection of security interests or transfers of receivables under Article 9 UCC and for its effects. This applies more generally also to goods that are mobile and are normally used for

425 See eg Barbin v Moore 85 NH 362 (1932). 426 The most important case in this connection is Harris v Balk 198 US 215 (1905), which has been overruled in other aspects, see Shaffer v Heitner 433 US 186 (1977), but its debt situs holding remains unimpaired in matters of garnishment of the debt. In the US, as probably elsewhere, there is, however, not one rule and the context needs to be considered also. Thus, in the UCC, there is another rule in respect of secured transactions involving chattels and accounts (receivables) applying the rule of the secured debtor, therefore of the assignor in the case of receivables, see s 9-301(1), at least in domestic (bulk) assignments of receivables. In act of state matters, the issue of the applicable law has acquired yet another setting and concerns the question whether a receivable may properly be considered expropriated within the jurisdiction of the expropriating authority so that its expropriation cannot be reviewed (because of respect for the foreign acts of state). The issue was litigated particularly in connection with claims of depositors on branches of foreign banks operating in Cuba that were expropriated, while in addition some freezing orders were put on some deposits (of certain individuals while the foreign head offices were asked to remit to Cuba sums equal to these liabilities, which they usually did). The question was whether in such cases the American head office still remained liable for repayment to the original depositor, see Garcia v Chase Manhattan Bank NA 735 F2d 645 (1984) in which it was so held in the case of (non-negotiable) certificates of deposit in dollars seemingly guaranteed by the head office in the US and therefore deemed located at that office in the US, therefore outside the reach of the act of state doctrine. In Perez v Chase Manhattan Bank 61 NY 2d 460 (1984), it was found in a similar situation, however, that the debt was not exclusively payable in the US (there was no guarantee either) and the act of state doctrine was applied (so that no review of the expropriation took place). In the case of promissory notes in US$ and payable in the US but issued through a Costa Rica branch of an American bank put under a domestic (Costa Rica) order not to pay foreign currency notes to protect the local economy, it was believed on the other hand that since the notes were not wholly extinguished by the order, they could still be collected in the US where they were deemed located for this purpose, see Allied Bank International v Banco Credito Agricola de Cartago 757 F2d 516 (1985) and the interest of Costa Rica to change the payment terms was not deemed sufficient to reach them. In Alfred Dunhill of London v Republic of Cuba 425 US 682 (1976), receivables payable in New York were held to be located there, as a consequence still owned by the former owners of a nationalised Cuban cigar company and payable to them. In such cases it was assumed that the power to enforce payment depends on jurisdiction over the debtor, see also Menendez v Saks 485 F2d 1355 (1973). In a similar vein, a bank that closed its foreign branch voluntarily (in Saigon before the collapse of the old regime) was considered to retain the deposits on its books in the US, see Vishipco Line v Chase Manhattan Bank NA 660 F2d 854 (1981). Vietnamese depositors (in local currency) who had placed deposits in branches of French banks in Saigon were not allowed to claim at the head offices in France, however, French courts finding that under private international law these deposits were covered by Vietnamese law as the law of the place where the deposit was made and this law did not allow payment in French francs equivalent abroad, see Trib Gr Inst Paris, 8 March 1985, DS Inf Rap 346 (1985). This is another (private international law) way around a nationalisation or payment freeze order in which the public law element is deemed subsumed in the private law governing the case but the situs issue also arises. In the US, this approach is not unknown either: see Wells Fargo Asia Ltd v Citibank NA 852 F2d 657 (1990) in respect of a dollar deposit made in Manila that could not be repaid there. Ultimately New York law was held applicable under which the head office of Citibank was held responsible for repayment as under this law a creditor may collect or enforce a judgment wherever he can obtain jurisdiction over his debtor. In all these cases there is otherwise not much of the old banking rule that deposits are deemed to be made at the branch where the money is taken in and the account is held, meaning that without further arrangements it can only be withdrawn at that branch. This may be different for certificates of deposits when the deposit is not reflected in a deposit account balance in the bank but in the certificate itself. If it is negotiable, it would represent the deposit itself, which therefore would be located at the place of the holder. Note that in Garcia and Perez the certificates of deposit were non-negotiable so that it could be maintained that their situs was not that of the holder.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 289 security in more than one jurisdiction (like aircraft) and is in line with the situation for chattels more generally, where under the UCC the law of the debtor/transferor of the security interest is preferred above the lex situs: see again section 9-301(1).427 Enforcement of a foreign bulk assignments with debtors in the US may be impeded by a lack of filing in the US which means that the foreign interests are at best attached but not perfected, therefore subject in priority to any such perfected (domestic) liens. Again, in equity, these foreign interests are subject to any domestic interests at the place of enforcement in the US unless the latter were acquired by a transferee aware of the former. For the assignment of accounts receivable, the most important issues in this regard in the US are the conflicts arising in double assignments or in garnishments of the assigned accounts, when the law of the assignor’s business is sometimes held to be the most appropriate to apply.428 As just mentioned, modern opinion, especially among commercial lawyers, makes a much sharper distinction between the contractual and non-contractual aspects of assignments and often opts for the law of the debtor in the latter aspects.429 They see it as a normal extension of the lex situs notion, which they perceive as a legal not a physical concept,

427 As far as security interests are concerned, the issue of their proper place and law of filing may arise even when no asset moves as long as the owner is elsewhere, certainly if the normal filing place is at the place of the owner. The lex situs seems primarily involved but could point to the place of the owner for publication of non-possessory security interests. The formalities of creation would then be decided by the law of his place, although that might not ultimately be sufficient. If there is or cannot be a filing in the US, the question of ranking may arise in the case of enforcement against US based debtors if there are other security interests in their debts. This matter gave rise to thought in the UCC, revisited in the 1998 revisions of Article 9. The emphasis is here in respect of the formalities concerning the creation of non-possessory security interests indeed on the law of the borrower/transferor/owner who concedes the security interests rather than on that of the situs of his assets given as security. That is clearer in the 1998 revision of Article 9 than in the older text: see s 9-103 (old) and s 9-301(1) (new), but it does not solve the ranking issue concerning receivables in the US. 428 See the authoritative ‘Comment’ (1958) 67 Yale Law Journal 401, 418, but see also AA Ehrenzweig, A Treatise on the Conflict of Laws (St Paul, MN, 1962) 640, warning against a dogmatic approach in this area. In any event adequate protection of the debtor may dictate otherwise. Where the assignor continues to collect, the relevant receivables could still be considered included in his estate upon a bankruptcy of the assignor: Benedict v Ratner 268 US 353 (1925), although not all State courts followed this. Garnisheeing creditors have been held protected by the law of the state of garnishment, likely to be that of the debtor’s residence: Lewis v Lawrence 30 Minn 244 (1883). The assignability issues, including the effect of contractual limitations on the assignability, are mostly held to be governed by the law of the underlying relationship out of which the claim arose, but policy considerations may supersede this approach, especially to support justified expectations of the debtor: In re Poma’s Will 192 NY Supp 2d 156 (1959). The matter of set-offs and defences has in the main been settled by statute preserving for the debtor all those arising until the date of notification, while his own courts would naturally protect him in collection suits when the lex fori includes such a statute, cf also ss 2-210 and 9-404ff (9-318 old) UCC. 429 See Goode (n 30); Dalhuisen (n 420); A Sinay-Cytermann, ‘Comment’ (1992) 81 Revue critique de droit international privé 35; Moshinsky (n 423), although preferring the law of the assignor in the case of bulk assignments. See for support for the law of the debtor also Re Helbert Wagg & Co Ltd’s Claim [1956] Ch 323 and C Schmitthoff, The English Conflict of Laws, 3rd edn (London, 1954) 211. See for the early acceptance of the lex situs notion in this connection and of its close relationship to the place of enforcement, F von Savigny, W Guthrie (trl original 1849 text), A Treatise on the Conflict of Laws and the Limits of their Operation in Respect of Place and Time, 2nd edn (1889) 366: see also the original view of AV Dicey, A Digest of the Law of England with Reference to the Conflict of Laws (London, 1896) 533. In more recent times AA Ehrenzweig accepted the law of the debtor in matters of his protection: see n 429 above, 641; cf also E Rabel, The Conflicts of Law, A Comparative Study 3 (Ann Arbor, MI, 1950) 424, 434: see in the US from an early date Moore v Robertson 17 NYS, 554 (1891). In the meantime, Art 2(g) of the EU Bankruptcy Regulation of 2002 defines the situs of a claim as the Contracting State in which the debtor has its main interest. This is an important definition, as the doubts on the principle of the lex situs applying in the proprietary and enforcement aspects of receivables usually derives from the difficulty in agreeing the proper situs of claims.

290  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights and emphasise the close relationship between proprietary and enforcement matters, the latter also being normally governed by the law of the debtor (except where enforcement is sought against his assets in other countries). Indeed, attachments and garnishments necessarily take place at the place of the asset, which in the case of claims would appear to translate into the place of the debtor. Modern case law confirms this tendency and it has often been held that a debt is situated where it is properly enforceable, thus normally at the place of the debtor.430 In England, it does not strictly-speaking rule out another place if payment is agreed elsewhere, provided, however, there is an enforcement possibility in that place. If not, the situs of the claim is for this purpose still at the debtor’s residence, it being always the residual enforcement place.431 In fact, creating a contractual enforcement jurisdiction away from the place of the debtor may not change the location of the debt, which requires a more objective criterion. Again, it suggests as proper legal situs of a debt the place where claims are normally enforceable, which is the place of the debtor (and only changes when he moves to another country with the related re-characterisation and adjustment problems, especially if the assignment is conditional or for security purposes only). It has also been argued that assets are located where they are controlled, which is therefore more likely to be at the place of the owner or assignor.432 This is clearly not always so in the case of chattels and need therefore also not be so in the case of intangible claims. It has nevertheless the attraction that in the case of a bulk transfer the law of the residence of the assignor would apply in principle in the proprietary aspects rather than the law of the debtor, which would mean a different regime for each assigned receivable,433 but it has already been noted several times that there is perforce such a difference in regime when it comes to enforcement of the proprietary claims and recognition of their assignments and its modalities elsewhere. The unity that may be achieved by locating all assets at the place of their owner thus exists only at the surface and may still be considered artificial.434 To avoid more problems than necessary, in practice, bulk assignments are normally in respect of portfolios of claims grouped per country of debtors.

1.9.6.  EU Regulation and Treaty Law Approaches to the Law Applicable to Assignments: The Choice of Law Provision of Article 14 of the EU Regulation. The EU 2018 Draft Regulation on the Law Applicable to Third Party Effects of Assignment of Claims and the Uniform UNCITRAL Convention on the Assignment of Receivables in International Trade Article 12 of the Rome Convention on the Law Applicable to Contractual Obligations concluded between the EU Member States in 1980 provided as follows: 1. The mutual obligations of assignor and assignee under a voluntary assignment of a right against another person (‘the debtor’) shall be governed by the law which under this Convention applies to the contract between the assignor and assignee. 430 See the Privy Council in Kwok Chi Leung Karl v Commissioner of Estate Duty [1988] 1 WLR 1035: see also Art 2(g) of the EU Bankruptcy Regulation referred to in n 430 above. 431 Re Herbert Wagg & Co Ltd [1956] Ch 323. 432 See Struycken (n 420) 345, and Kieninger (n 417). 433 See also the approach of Moshinsky (n 423) and Kegel (n 417) for bulk assignments. 434 The law of the assignee is normally not considered and recommends itself only as the most efficient in the case of the assignee’s bankruptcy.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 291 2.

The law governing the right to which the assignment relates shall determine its assignability, the relationship between the assignee and the debtor, the conditions under which the assignment can be invoked against the debtor and any questions whether the debtor’s obligations have been discharged.435

The 2008 EU Regulation replacing the Rome Convention in Article 14 now reads as follows: 1.

The relationship between assignor and assignee under a voluntary assignment or contractual subrogation of a claim against another person (the debtor) shall be governed by the law that applies to the contract between the assignor and assignee under the Regulation. 2. The law governing the assigned or subrogated claim shall determine its assignability, the relationship between the assignee and the debtor, the conditions under which the assignment or subrogation can be invoked against the debtor and whether the debtor’s obligations have been discharged. 3. The concept of assignment in this Article includes outright transfers of claims, transfers of claims by way of security and pledges and other security rights over claims. It is clear that sections 1 and 2 (except for the addition of contractual subrogation) are essentially unchanged. As mentioned already, section 3 might suggest that the proprietary aspects may also be covered even in this Regulation on contractual obligations (as Preamble 38 also did); it was in so far incomplete that it did not cover conditional or temporary title transfers and usufructs, which technically remained therefore outside the scope of the Regulation. More importantly, even if proprietary aspects were covered it was unclear how and whether they fell under section 1 or 2 or whether there was another applicable law depending of some concept of situs. In fact, as already noted, the EU 2018 Draft Regulation on the Law Applicable to the Third-Party Effects of Assignment of Claims did not consider them covered in Article 14, all reasons why in 2019 the ECJ at last rejected the coverage of third-party effect by the 2008 Regulation.436 The major shortcomings in the text were always: (a) the absence of a clear concept in the question of separation of monetary claims from the relationship out of which they arose, their liquidity, and the status of future claims; (b) confusion on the proprietary and enforcement aspects, in section 2 both covered by the applicable contract law, and goes back to the problems with the asset status of claims; (c) the absence of the concept of bulk assignments with debtors in various countries and the problems they raise, especially in terms of recognition at the place of the debtors even if a unitary law could be agreed by assignor and assignee and for the effect of which in enforcement there is no real answer without a substantive (transnational or uniform) rule which may also cover their adaptation; (d) the lack of understanding of why international assignments of this nature are necessary and why the unity of portfolios of monetary claims needs to be respected and promoted as such in international asset back funding; (d) how and to what extent a contractual choice of law could help and the role of party autonomy more generally; (e) the significance in this regard of the abstraction principle and the approximation of receivables

435 It may in this connection be of interest to cite an earlier draft (then contained in Art 16): see (1973) 21 American Journal of Comparative Law 589: ‘Obligations between assignor and assignee of a debt shall be governed by the law applicable under Articles 2 to 8. The law governing the original debt determines whether the debt may be assigned; it also regulates the relationship between the assignee and the debtor and the conditions under which the assignment may be invoked against the debtor and third parties.’ Again, no distinction between obligatory and proprietary rights. The Official Report by Professors Giuliano and Lagarde suggested that the first section could have been drafted more simply as was at one stage proposed: ‘the assignment of a right by agreement shall be governed in relations between assignor and assignee by the law applicable to that agreement’. 436 See n 415 above.

292  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights to promissory notes; and (f) the related matter of recognition elsewhere of any interests created through the various forms of assignment and the conditions in terms of adaptation and finding the nearest equivalent in enforcement countries.437 On its face, it appears that the assignment itself in its contractual aspects is governed under section 1 by the proper law of the assignment found pursuant to the general rules (Articles 3 and 4). They focus on the choice of law of the parties and, failing such a choice, on the law with the closest connection, which is the law of the party performing the most characteristic obligation (since the 2008 Regulation supported by a list approach in Article 4(1), which does not have a bearing on assignments). One must assume that it is normally the assignor who performs that obligation as he must deliver the intangibles except in collection arrangements where it is the assignee who must administer and collect, usually for the benefit of the assignor. It was already said that the validity of the assignment may then also be covered but hardly in its proprietary aspects, which may also be an aspect of assignability. In other aspects, section 14(2) suggests the applicability of the law of the underlying contract (or other legal relationship) out of which the claims arise. According to the text, that applies in particular to the assignability (again not or no longer in its proprietary aspects), to the relationship between assignee and debtor (again not in any proprietary aspect, therefore who can notify and collect and when is payment liberating), and the conditions under which the assignment can be invoked (which may relate more in particular the defences of the debtor). It says nothing about the relationship between various assignees and the ultimate right to the collections. Neither does it cover the question of recognition or adaptation elsewhere of the various rights that may be created pursuant to the different forms of assignment. It remains a fact that the debtor’s special duties pursuant to an assignment and his protections are not clearly covered either. The reference to ‘the conditions under which the assignment … can be invoked against the debtor’ remains particularly obscure. It has already been noted in section 1.9.3 above that the terms commonly used here are poly-interpretable and may overlap although it may be less of an issue now that it has been established that the 2008 Regulation does not deal with proprietary and enforcement issues, assuming always that these can be clearly distinguished.438 It remains a question of analysis what is then contractual and what is not; notably which assignee has the better right to collect from the debtor can hardly be determined by the law applicable to the underlying contract and the claims arising out of it. It should perhaps also be asked why, in the contractual aspects of the assignment, there is a different rule for the (formation and) validity aspects and for assignability, which even in the contractual aspects may overlap: see again the discussion in section 1.9.3 above. As already suggested in section 1.9.1 above, if one continues to believe that traditional conflicts of laws doctrine can still satisfactorily provide the answers in terms of the applicable law (with reference therefore to a domestic law per se) also covering international bulk assignments for financial purposes with debtors in different countries, it would seem the simplest to continue to use as a general direction the approach in respect of other assets and indeed clearly separate the contractual and proprietary/enforcement issues, the former being controlled by the law applicable to the assignment as resulting from the normal provisions of the Rome Convention, the latter to be governed by the law of the location of the debtor as the more obvious lex situs of claims. 437 Since it is now accepted that the Regulation covers assignments only in their contractual aspects, it may be assumed that it does not deal with the law applicable to their asset status. Again, the reason is that there is no clear understanding of the asset status of proprietary claims. 438 Before the ECJ clarification, the undefined nature of the assignment aspects covered in s 14(1) and (2) unavoidably led to confusion as was shown in the Dutch case mentioned in n 421 above.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 293 If one wanted a unitary regime for bulk assignments, it would (in terms of a domestic law) have to be the law of the assignor to be meaningful, but it was already noted that it would be artificial and still leaves the question of recognition and characterisation of the particular interests so created in the country of each debtor in terms of enforcement and the rights thereto and the law covering the protection and liberation of the debtor would in practice still be the law of the debtor. It was submitted that only the promissory note analogy or party autonomy in the limited sense it can be accepted in proprietary matters would be the solution but could not merely be a contractual choice of law in the assignment agreement or in the underlying contracts out of which the claims arose creating proprietary rights against all the world. The EU 2018 draft Regulation on the Law Applicable to the Third-Party Effects of Assignment of Claims hardly clarified the issues except for choosing the law of the assignor to cover third party effects impacting on all (Article 4(1)). From the Report it would appear that at least the requirements of the transfer and the priority issues were to be covered. In order to be effective, this would require also some idea of the proprietary assignment requirements in terms of disposition rights, a valid assignment contract, and the formalities (identification, documentation and notification), and of the effect of the failure of any of these requirements discovered after collection, the separation of claims, the possibility of bulk assignments including future (replacement) assets and debtors in different countries, a determination of the rights of the debtors in enforcement in such bulk assignments, the role of party autonomy and of the abstraction principle and approximation to promissory notes, and the recognition in other Member States. Again, it is hardly credible that all can be sensibly covered by the domestic law of the assignor. Article 2(d) states that for the purposes of the draft Regulation ‘third party effects’ means proprietary effects, that is, the right of the assignee to assert his legal title over a claim assigned to him towards other assignees or beneficiaries of the same or functionally equivalent claim, creditors of the assignor, and other third parties, not including debtors. This definition covers limited ground. In Article 5, the Draft attempts to define the scope of the applicable law (being the law of the assignor) which is meant to cover (only) (a) the requirements to ensure the effectiveness of the assignment against third parties other than the debtor, such as registration or publication formalities, (b) the priority of the rights of the assignee over the right of another assignee of the same claim, (c) the priority of the rights of the assignee over the rights of the assignor’s creditors, (d) the priority of the rights of the assignee over the rights of the beneficiary of a transfer of contract in respect of the same claim, and (e) the priority of the rights of the assignee over the rights of the beneficiary of a novation of contract against the debtor in respect of the equivalent claim. It was already noted that the operation and recognition of these rights elsewhere in the EU then seems assumed; the collection rights against the debtor and his defences are not mentioned, which all remain subject to the mandatory law of the forum (Article 6), particularly crucial in the case of enforcement or bankruptcy. What is notably missing is the duty to accept any rights of which participants knew or should have known as professionals before they acquired an interest of their own in the underlying assets. That is the equity approach in common law and accommodates the party autonomy concept and facility in professional financial dealings. In fact, the draft excluded party autonomy altogether when it came to the choice of a domestic law in the third-party effects. The promissory note analogy and the issue of the abstraction of the assignment and notice given thereunder were ignored also. There was never much awareness of context, hence also a lack of understanding of the special features of and need for bulk assignments in international funding operations. It is its essence. Ultimately, the issue is always who can collect and keep the collection. That is what third party effect truly means and underscores the liquidity nature of monetary claims. In the aspects

294  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights it means to cover, the law made applicable under the draft Regulation would have proved wholly inadequate and arbitrary. All would depend on the place where an assignor happens to be located. Banks and major sales organisations may have to create subsidiaries in more friendly jurisdictions but would have to run their portfolios then from elsewhere.439 In fact, the draft seemed to be mainly concerned with the priority issue, important as it may be. Again, it should be noted that it did not appear to apply the law of the assignor (or any other) to the asset status of claims, to the separation issue, to bulk assignments, and to the creation and transfer of proprietary rights and the types thereof except for registration and publication formalities which seem to be unified under the law of the assignor but only in respect of third parties other than the debtors (who are in principle supposed not to be adversely affected by any assignment). The bottom line is that the EU even in as far as its own marketplace is concerned still allows domestic laws to interfere with the free flow of these assets for no clear reason except antiquated paradigms and doctrinal reasoning. The draft is hard to evaluate but also shows, as the 2008 Regulation had already done, that there is barely any legal predictability in texts like these or indeed in the traditional conflict of laws approach concerning the subject. It was submitted repeatedly that one national law can hardly cover complex multiple international tripartite situations satisfactorily, further complicated where the basic structure concerning assignments of claims in bulk in international finance and its importance remain insufficiently understood especially in its proprietary and enforcement aspects. It cannot be repeated often enough that it is foremost a liquidity issue and efforts like these may complicate further where clarification and simplification would be needed for them to become credible.440 It is difficult to see how the international marketplace can be served in this manner. Rather, liquidity may be further impaired. Why? It offends even the internal market. The marketplace had not asked for any effort of the sort, it was an academic project. The EU Council was not convinced and suspended the project on 24 May 2019, correctly citing the complexity of the proposal.441 It may be noted that the UNIDROIT Convention on International Factoring of 1988 has uniform rules but no private international law rules.442 This is different in the 2001 UNCITRAL Convention on Assignments of Receivables in International Trade, which covers the law applicable to bulk assignments and is therefore of considerable interest. It fails, however, to give a uniform rule for notification, documentation and formalities and it is not clear which laws apply here for bulk assignments.443 There is no uniform rule for priorities either. As a consequence, it still has a number of conflict rules (Articles 26–32) supporting its Article 8, which requires supplementation of the Convention on the basis of private international law rules unless the issue can be settled in conformity with the general principles on which the Convention is based. It was language derived from the 1980 Vienna Convention on the International Sale

439 Another issue is here that the assignor, especially if a professional corporation or bank, may move country when the originally applicable law remains effective under the Proposal. But could this still make sense when it comes to subsequent assignments and multiple assignors? 440 There may have been some exuberance on the part of the drafters especially in Rec 15 which seeks to cover all proprietary effects of assignments of claims between all parties involved, even between assignee and debtor, subsequently excluded in Art 5, cf A Dickinson, ‘Tough Assignments: the European Commission’s Proposal on the Law Applicable to the Third-Party Effects of Assignments of Claims’ (2018) 38 IPRax 337. The debtor is a different type of third party, better understood in the context of the tri-partite nature of assignments. 441 EU Council Progress Report 9562/19. 442 See Vol 5, s 2.3.7. 443 See Vol 5, s 2.3.8.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 295 of Goods (CISG) (Article 7), which was written for an entirely different situation in which all proprietary issues were excluded.444 It would likely lead to considerable problems, as it is not immediately obvious what these general principles may be. It undermines the usefulness of any uniform regime as any doubt about its interpretation and meaning (which cannot truly be separated from supplementation) may end in a further search for local rules. Many gaps can easily be construed. The references to domestic laws in such cases will not be aided by the fact that the conflicts rules of Articles 28ff were closely modelled on Article 12 of the Rome Convention, which we now know does not apply to proprietary and enforcement issues but in the structure of the UNCITRAL Convention still might. As a consequence, there remain considerable questions about the applicable proprietary and enforcement rules. A Convention like that of UNCITRAL can be considered only to have meaning if sufficiently self-contained and specific, therefore allowing interpretation and supplementation in the usual manner to cover all issues, except when clearly not meant to. The presumption should be that it does and that otherwise the other sources of transnational law should help. Adding rules of private international law suggests otherwise, unnecessarily distracting from whatever unity the Convention was meant to bring. This must be a major reason why in the end the UNCITRAL Convention, important as its subject was, proved a disappointment and did not attract many ratifications. A contributing factor may have been that the concept of bulk assignments and what they are meant to achieve were still not clearly understood. The separation and liquidity issues were notably avoided. In section 1.5.15 above, the minimum requirements for such a convention to be successful were already indicated and the policy questions that must be resolved in that context.

1.9.7. The Lex Mercatoria Concerning Bulk Assignments for Funding Purposes In the previous section it was concluded that one national law or even an accumulation of them cannot satisfactorily cover complex multiple international tripartite situations, further complicated in the case of assignments by the fact that the asset status of claims remains controversial whilst the basic structure concerning assignments of claims in bulk in international finance may be insufficiently understood in its contractual, proprietary and enforcement aspects. That includes also the role of party autonomy in the creation and recognition of these rights, meaning that professionals amongst themselves, rather than objective notions, might decide what works best for or against them. Ultimately, it was submitted, it is the issue of risk management and liquidity, if necessary, of whole portfolios of claims with debtors in different countries, which the law should enhance rather than frustrate. In this connection, it is possible and probably necessary to take a much more radical approach and allow transnational concepts to take over especially in the non-contractual aspects of assignments, notably in the aspects of debtor protection and duty, in the proprietary and enforcement aspects, including the asset status of claims, the separation of monetary claims from the legal relationship out of which they arise, their operation in bulk and the unity of the relevant portfolio, potentially including future claims, the creation, modalities, and transfer

444 See also Dickinson, n 440 above.

296  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights of proprietary rights therein, and in their operation including what types of assignments are possible, what their effect is on the collection right of various assignees against the debtor, and where it leaves the creditors of the assignor and assignee. Party autonomy and its limits need to be determined and supported in principle when meant to promote unity. The abstraction principle and promissory note analogy also need to be further considered in this context. It would seem an unavoidable progression in international finance to support especially bulk assignments of present and future monetary claims with debtors (and possibly also assignees) in different countries. Again, in section 1.5.15, the issues and challenges were more specifically spelled out and categorised. Concepts could be derived from domestic laws, especially the equity example in common law countries and in the US the approach in Article 9 UCC. They could also derive from international Conventions such as the UNIDROIT Factoring Convention and the 2001 UNCITRAL Convention on Assignments of Receivables in International Trade, even in non-Contracting States, whose true problem was, however, that it could not make the leap to treating receivables in the nature of promissory notes, was not comprehensive, and continued to have problems with bulk assignments of claims with debtors in various countries, especially in collection and enforcement. In the international marketplace, newer rules could more directly derive bottom up from fundamental legal principle, international custom, general principles derived from domestic laws, or even from some form of party autonomy (subject to the protection of bona fide purchasers/assignees/collectors against adverse interests so created and of which they could not know when acquiring their own interest and of debtors whilst making payments to assignees): that is the modern lex mercatoria.445 It would allow other than purely domestic proprietary rights to be created pursuant to whatever assignment agreement and operate regardless of the otherwise applicable domestic laws. This results in another, more informal but probably also more responsive type of uniform law and facilitates international bulk assignments, even the recognition of rights in the receivables when the debtor moves to another country or when the type of collection right so created needs enforcement against assets of the debtor elsewhere (if there is no voluntary payment) or in a foreign bankruptcy. The key question is always who has the collection right and may retain the collections and whether the debtor was right or wise not to pay the assignee in view of his own defences or of the better rights of other assignees or perhaps even the creditors of assignors and assignees in a chain. Transnational law, particularly international custom and practice, may here set uniform standards also to be recognised in local bankruptcies and they should be encouraged to do so. Again, this is more properly the area of modern international finance. The direction in market and liquidity terms is that of the promissory note and the more traditional example derives from negotiable instruments and in more modern times from their Eurobond variety. The more the notion of abstraction or independence is accepted in respect of the transfer of monetary claims when they are commoditised, the more like negotiable instruments or semi-chattels they become: see section 1.5.9 above. That would also mean that they become more susceptible to transnational ownership and assignment facilities regardless of more traditional identification requirements and numerus clausus restrictions. Party autonomy in the equitable common law sense completes this picture. This allows newer security and conditional or temporary transfers to operate in the international marketplace subject to its own transnational regime of purchaser/collector and debtor protection. It is suggested that this is the better way forward, at least for international bulk assignments in commerce and finance. 445 See Vol 1, s 3.2.2.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 297 Private international law depending entirely on some domestic legal regime even in major international financial transactions is, quite apart from the considerable confusion that reigns here in the subject of assignments itself, no longer likely to provide satisfactory answers. Local laws often do not do so even nationally and traditional private international law concepts furthering them can no longer carry the day and are likely to add to the problems, hinder risk management and liquidity, and their usefulness and credibility are in this area coming to their natural end.

1.9.8.  What to Do? The Technique to be Used It may finally be asked what the technique is by which this newer law can develop. The proposed method was that of public international law and its sources, following the universalist approach of Grotius that before the nineteenth century indeed applied to all law and its application. The main issues are the ones summarised in section 1.5.15 above. In real life, it ultimately depends on the recognition of the needs, practices, and perceptions in the international marketplace and their acceptance in domestic bankruptcies, bankruptcy as an enforcement measure remaining in essence national as the most basic expression of sovereignty in its monopoly in the enforcement function. But it should also be asked how such practices or customs can be formed and what progress through mere contractual arrangement means here. That is party autonomy, but, without support in customary law, the contractual structuring approach may not be sufficient to deal with proprietary issues, not even in the more limited terms of equitable proprietary rights, as proposed in section 1.9.1 above, which have only a limited third party effect that is cut off at the level of debtor who pays in good faith to a bona fide collector or assignee who may be able to retain the collections if not aware of prior rights when acquiring its own interest, although there is likely a search duty for professionals. Like under Article 9 UCC in the US, the parties in their contract would take the lead whilst describing the proprietary interest they mean to create and the assets that they want to be covered (Section 9-108). That was always equity, now further developed in the US in statutory law. Custom and practices will also start with such financial structuring and therefore with contractual arrangements. When can they be lifted to the higher plane of international custom substantially in the manner of what equity provides in common law countries as the most ready example? That is general usage in the community it concerns, here the international commercial and finance community and this can be rapid once such a community starts to conform. It was already noted that it is generally accepted that the Eurobond acquired the status of a transnational promissory note, traded, settled, and held through a system of security entitlements in that world. They represent the largest capital market in the world. Interest rate and currency swaps, the way they operate and the set-off and netting mechanism in that market, which is the largest of all, have acquired similar transnational status. The world of assignments of monetary claims moves in the same direction and must be allowed and be recognised to do so and be as such respected particularly in local bankruptcies in countries that want their businesses to participate in the international marketplace and its funding opportunities. It is clear that national bankruptcy laws would still be the final arbitrator in enforcement but need to accommodate if they want to remain serious. In section 1.5.15, the essence of an international claims and assignment regime was summarised as follows: separating receivables from the underlying relationship out of which they arise, allow bulk assignments through one document or act of transfer based on a reasonable party description of the assets covered and of the interests created therein with effectiveness or ranking

298  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights as of that date, debtors to pay the creditor upon proper notice with a full release, defences to be limited to those that are material and extra burdens to be accepted to the extent reasonable, doing away with third party effect of assignment restrictions, establishing the ranking between successive assignees subject to the protection of the bona fide collecting assignee with material search duties only for professional insiders, sustain collection agreements and the notion of segregation of collections thereunder, and promote the transfer of commercial contracts subject to the transferor remaining the guarantor of the obligations. It would also be the essence of successful treaty law or EU Regulation in this area but it is not truly necessary and would probably take long to arrange and can hardly be the product of international compromise imposed from above. It is not requested by business and greater formalisation would not appear to be required until such time that the international community itself asks for help, but accommodating national bankruptcy laws is a start and states should signal so. Legal scholarship can help in formulating general principles which may derive more particularly from more advanced national systems and from the needs of the marketplace and any public policy confines through exercises in comparative law. Naturally if all goes off the rails public policy and international minimum standards might still be imposed from above but it is not in the interest of the international marketplace to let it come to this. In section 1.5.14 it was said that the various complications of assignments especially of monetary claims arise in particular from the asset status of claims, their separation from the relationship out of which they arise, the possibility of their unity and possible transfer in bulk including future claims, the type of proprietary rights that can be created in them, the meaning and effect of identification, documentation, and notification requirements, and the impact on each of the debtors who must still be individually considered when it comes to enforcement. The autonomous effect of bulk assignments in the international marketplace, especially in asset-backed funding operations, on the status of all participants was noted: the assignee/new creditor may have better rights against the debtors than the assignor/old creditor, the debtors may have fewer defences and must cooperate but may derive a stronger position in terms of a liberating payment upon notification, the assignor may remain liable for duties that may transfer with the claims, whilst subsequent assignees when collecting in good faith may be able to ignore the others. The complications that arise in this connection when there are debtors in different countries were also identified, compounded when there are assignments to various assignees elsewhere. It was submitted that private international law was unlikely to come here to satisfactory solutions which may only be reached through transnationalisation of the applicable law. Again, it does no longer mean top-down law formation and systematic perfection but is a reflection of the practical needs in the international business community as it sees them and of help where it needs it and asks for it unless public policy requires direct action. For state law the issue is foremost to create room in as far as possible and accommodate new international financial structures especially in domestic bankruptcy laws and signal that accommodation. On the whole, it is better to state here principle and indicate the direction than to draft formal texts which invariably fall short. The Justinian Digests as a final throw correctly warned that all definition in law is dangerous and it is not different here and concerns in fact all texts. Those that do the round like the ones of the UNCITRAL, UNIDROIT, PECL and DCFR show so in abundance in respect of professional dealings. The 2018 EU draft Regulation concerning its third-party effect was not different. Waiting for the occasional case law is no help either. It is better first to acquire a better understanding of the economic realities and the policy issues and choices. The law of assignment has acquired great importance in the last generation as by-product of modern financing techniques in a highly leveraged society. Whatever the merits of such leverage,

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 299 it is not likely to be reversed. Better credit facilities mean cheaper credit and the law can be instrumental provided it remains responsive, now at the international level. This requires at this juncture abandonment of private international law notions in favour of gaining a better understanding of what is going on and is needed and of how and in which way transnationalisation can contribute and how legal scholarship can help in this effort and hopefully explain and simplify the argument. At this stage, it is submitted that this is a matter of providing guidance. Legal texts are never more. A good example may have been the formulation of Trust Principles by Professor Hayton at Nijmegen University in 1999.446 It brought clarity to the subject and reduced it to its essentials. More is not truly needed at this stage for international assignments and here informed legal scholarship can help and it is its task.

1.10.  The Modern Law of Chattels and Intangibles 1.10.1.  Traditional and Newer Approaches In this book, the law of chattels and intangibles, therefore of personal property in common law terminology, is considered primarily part of the law of commerce and finance it describes. It does not strictly speaking aspire to a broader intellectual platform in private law as a whole. In common law terms, this is no more than the continuation of the present situation. In it, the sale of goods was traditionally at the heart of commercial law and it followed that the transfer of title, at least in chattels, became a commercial law matter also. A special feature was in sales the protection of bona fide purchasers, outside equity not a common law feature but introduced by statute (Sale of Goods Act 1979 following the earlier Act of 1893): see sections 1.4.8 and 1.4.9 above. That is the issue of transactional finality, in common law countries by statute limited to the lack of disposition rights in the transferor as we have seen. More uncertain is the position when the underlying contract fails after title has been transferred, but it was shown that in England case law protects the transferee also in such cases except probably when there was fraud, see section 1.4.7 above. Then there is the notion of reliance in common law to help and the lesser emphasis on intent in matters of validity of the commercial contract. In the common law other proprietary aspects of the law of chattels were subsequently considered commercial matters too, which went to all issues of title and possession (or bailment) of chattels, including possessory security, later extended to non-possessory security interests, including floating charges and other equitable proprietary interests. Bills of lading and bills of exchange as well as other negotiable instruments, especially promissory notes, were also part of this commercial law, and then largely treated as chattels, although even within the commercial law there was not necessarily one unitary proprietary regime for all commercial assets either. At least that was not the aspiration and this is clear, for example, in the important matter of the protection of bona fide purchasers or holders in due course of these negotiable instruments. Such protections developed especially for them and were recognised in case law, while, perhaps surprisingly in view of the commercial setting of the law concerning the sale of goods in common law countries, it was not for chattels, where it required statutory intervention, in England in the

446 See s 1.6.7 above and also D Hayton, ‘The Developing European Dimension of Trust Law’ (1999) 10(1) King’s College Law Journal 48.

300  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights Sale of Goods Act. It meant that the issue of liquidity and transaction and payment finality was not the key issue, not even in commercial law. It also suggested from the beginning a fractured often product-oriented approach to proprietary issues or at least a pragmatic attitude. Analogy was here not always the answer either. In this approach to commercial assets and the law concerning them, in common law countries their transfer as security for debt became then also a commercial law matter and therefore no less the types of security interests, at least to the extent they were possessory (as part of the law of bailment). Subsequently, there developed a close connection with equity when in commerce the need arose for non-possessory security interests and the inclusion of future or replacement assets. As we have seen, in equity, the system of proprietary rights is in essence open subject to a strong protection of bona fide purchasers of assets, further expanded, in more modern law, to all buyers in the ordinary course of business (and to collecting assignees in the case of monetary claims).447 This provided important flexibility, especially for all kinds of non-possessory security interests and finance sales to develop. It also allowed interests in future assets or a shift of the interests into replacement assets, including receivables, as in floating charges. Thus, modern floating charges in particular were especially dependent on equitable notions of inclusion of future assets, tracing rights, shifting interests, and constructive trusts. This is at the heart of the use of future commercial flows and income streams as back-up for present and future funding dependent on simple description of the assets and rights created therein (cf section 9-204 UCC). Again, a crucial aspect was that the public at large was protected against such charges, which could increasingly be more freely created and transfer with the underlying assets but being cut off at the level of the bona fide purchaser or rather the public at large Equity influence could also be detected in the important and connected facility of bulk transfers of tangible assets and of bulk assignments of receivables, and altogether in the modern law of assignments. It is indeed this close connection with the law of equity in common law countries that was earlier identified as a most important feature of modern commercial (and financial) law: see Volume 1, sections 1.1.3 and 1.1.5. In the English-speaking world, this has given modern financial law, which now drives commercial law, its flexibility and sophistication.448 It was shown that risk management and asset liquidity became major guiding policies. We then also see a strong emphasis on finality through the protection of the ordinary commercial flows: again, purchasers in the ordinary course of business of commoditised products being protected against these equitable proprietary interests or charges. In the case of assignments of monetary claims, it concerns the protection of assignees and debtors.

447 Discussions of these issues are few, however, especially in the US, where equity has long disappeared from the law schools’ curricula. See also n 11 above for a certain standardisation in the development of equitable proprietary rights which did not, however, constrain the further development of floating charges and finance sales, although eventually in the US directed by the UCC, therefore by statutory law; see more particularly Vol 5, s 1.6.1. 448 It was mentioned before that in equity—a facility civil law never had—we may find the greatest practical private law differences between the common and civil law. It is highly significant and covers key areas, giving the common law its flexibility and sophistication, in modern times especially in finance, but equity is not an alternative or supplementary system of law and only offers incidental protection. As explained in Vol 1, s 1.3.1, equity is not therefore a system that allows for a general influx of good faith and reasonableness notions into common law. It developed a limited set of rules only in certain areas, such as equitable proprietary interests in assets including trusts and future (or conditional or temporary) interests in chattels, assignments of proprietary rights in intangibles, client protection in agency and in other situations of dependency through fiduciary duties, and equitable liens or floating charges. Only in the law of trusts, bankruptcy and companies is there a fuller equity system, now mostly supported by statute.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 301 Another area where equity was active was in the conditional and temporary ownership rights, their creation, operation and transfer, for our purposes again especially important in personal property, including monetary claims, and finance sales concerning them. Again, a product approach here becomes apparent in the sense that common law in its equity variant would allow proprietary structures to develop separately, for example for repos and finance leases. In recent times, the law of payments and payment systems, of book-entry systems for investment securities and the custodial holding and transfer of these entitlements became other commercial law matters (in a common law sense), again with a strong equitable bent in the proprietary aspects as we shall see in Part III below. The law of guarantees and letters of credit, although not proprietary as such, built in this connection also on notions of independence and bona fide payee protection, therefore on strong notions of finality borrowed from negotiable instruments. Here, credit risk protection (guarantees) and payments stand alone and are separated and considered independently from the underlying contractual framework out of which they arise. Origin or history become irrelevant. This was earlier identified as a key support of the notion of finality, which in an abstract system of title transfer also protects a transfer of assets after it is completed even if the underlying contract fails. In cases of an invalid contract, it underpins finality of a transfer beyond the protection of the bona fide purchaser (or purchaser in the ordinary course of business of commoditised products) who buys from a transferor without sufficient disposition rights (see section 1.4 above and also Volume 1, section 1.1.7). The effectiveness of these instruments or transfers is thus immunised against any legal defects in the steps leading up to the protections given or transfers (and payments) made. Again, the notion of finality, the certainty it is supposed to bring at least in the transactional aspects and its legal underpinnings are now increasingly considered crucial for all kinds of commodity and financial transactions including payments. These finality issues are proprietary and are in this book at the centre of the discussion closely connected with risk management and liquidity issues, the other issue being bankruptcy resistancy and the question of asset segregation and concern all user, income and enjoyment rights and their operation in all types of assets. Given these trends in commercial law, receivables began to be treated as ordinary assets in a way similar to chattels so as to promote their assignability or transfer, its finality, and their use in funding schemes. As an asset class, they often remained legally underdeveloped especially in the aspect of bulk assignments of future claims or where there were contractual assignment restrictions. However, the analogy with negotiable instruments is becoming more obvious (see also section 1.5.9 above, not different from letters of credit). Again, in common law countries equity came to the rescue, sometimes supported by statute, especially in the US, first in reducing the effect of assignment restrictions—see sections 2-210 and 9-406(d) UCC. Thus, in common law countries, their liquidity may be enhanced. Subsequently, bulk transfers or assignments in floating charges creating liens covering not only inventory, but also receivables and cash proceeds as a (shifting) class including future replacement assets became important funding devices too, again all considered part of commercial law (and in the US ultimately covered by statutory law in Article 9 UCC). In fact, these developments explain much of the structure of the UCC in the US. It deals in Article 2 with the sale of goods, in Article 3 with negotiable instruments, in Articles 4 and 4A with payments, in Article 5 with letters of credit, in Article 7 with documents of title such as bills of lading, in Article 8 with investment securities entitlements and their transfer, and in Article 9 with secured transactions in chattels and intangible assets. In Article 2A it deals with equipment leases and separates them from secured transactions under Article 9. A significant feature in all of this is that different proprietary structures are developed per product or asset class and there

302  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights is no unitary proprietary approach, even for chattels, nor is there any desire to create one.449 Risk management and notions of asset liquidity may differ and modern bankruptcy protection is then also likely to be different per product, especially important in modern finance.450 In truth, these approaches, which, it is submitted, are now becoming an important focus of transnational commercial and financial law, are being reinforced in finance which is becoming so much of the motor of all commercial law rather than the old mercantile needs. This is a significant trend (that may also be seen in company law where finance is also an ever more important topic), already highlighted several times before. It reconfirms strongly the vital importance of the law of chattels and intangible assets and its link with the law of equity in a common law sense. This introduces tensions, particularly in the civil law tradition, in the way that the more traditional proprietary notions are being expanded. It is a development probably more fundamental than it may seem at first and still goes largely unnoticed. Reference may be made in this connection to Volume 5, Part II, where a number of the more important modern financial instruments are discussed and characterised in law from these newer perspectives. Because of its very different background and strong affiliation with the common law tradition, which is to some extent language driven (English having become the lingua franca of this world), but also a matter of greater flexibility and creativity, the legal consequences of transnationalisation along these lines are likely to be more far reaching for civil law countries than for the countries of the common law. This is not to say that all is clear or plain sailing in common law countries either. Even in the US, not everything is taken care of in the UCC. Especially repos, securitisations, different forms of factoring, modern derivative transactions, systems of clearing and settlement, and modern netting methods have not found coverage in it. It may be that no need has been felt, but there are also a number of structural and circumstantial reasons why the UCC, although ahead of other domestic law in these areas, is not always as perceptive as it might have been. Here federal bankruptcy law sometimes had to come to the rescue.451 An important structural problem is the UCC’s approach in funding schemes to conditional and temporary ownership transfers, to finance sales therefore, which it tried to suppress in Article 9, as we have seen, while converting them into secured transactions. It had a near fatal effect on finance leases, some of which had to be given a separate home in a new Article 2A UCC (although not for all of them), on repos of investment securities, which were in due course indirectly exempted from Article 9 through an amendment of the Federal Bankruptcy Code (section 559), and on forms of factoring when the collection and risk had not been entirely

449 In the UCC in particular, it is clear that in proprietary matters, an approach per product is now favoured leading to a different attitude to proprietary rights and their transfer in Art 2 (sale of goods) where the emphasis remains eg on the goods being in existence to be part of a sale (s 2-105), which approach is entirely abandoned in Art 9 in respect of security interests in future assets (s 9-204), whilst Art 2A on finance leases, Art 4A on electronic payments, Art 8 on interests in security entitlements and their transfer again maintain different approaches, none of which are interconnected. 450 See Vasser (n 317) 1507. 451 Thus, qualifying repos are now specifically defined (but still limited to repos in certain instruments, although steadily increased in number) in s 101(47) of the Federal Bankruptcy Code as last amended by the Bankruptcy Abuse Prevention and Consumer Protection Act 2005. Forward contracts are defined in s 101(25), investment securities contracts in s 741(7), swaps in s 101(53B) (A) and commodity contracts in s 761(4). Particularly, ipso facto termination clauses upon bankruptcy remain effective in respect of these financial products: see ss 559, 556, 555, 560, and 556 respectively. See for master netting agreements s 561 and for set-off and netting agreements also s 362 exempting them in particular from automatic stay, preference and fraudulent transfer provisions. See further also Vol 5, Pt II.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 303 transferred to the factor or receivable financier (sections 9-607 and 9-608 UCC). This is the issue of the unitary functional approach to asset-backed funding in Article 9 and the re-characterisation issue under which all asset-backed financing was considered a secured transaction. It has also raised its head in securitisations: see Volume 5, section 2.5.4. It undermines for no good reason many perfectly normal modern funding transactions which have a sale of assets rather than a pledge structure at their core.452 Even the sales price protection device of the reservation of title was affected. Circumstantial problems derive here from the international character of the modern financial practices and products, leading unavoidably to further characterisation issues under the laws of different countries where these products may operate or where they are tested, especially in local bankruptcies, therefore also in the US. The perception of many that these problems must still be solved with reference to domestic laws creates great tension and may seriously undermine these practices and products in international transactions, again for no good reason, quite apart from the fact that conflicts rules proved hard to formulate in this area, as we have seen in sections 1.8 and 1.9 above.453 In the international flows, legal transnationalisation is the unavoidable answer, that is to say that fundamental and general principle, international custom and practices, and party autonomy must precede the application of domestic laws and must ultimately be accepted by domestic bankruptcy courts, at least in all countries that want to participate in globalisation, seek its benefits and must then also abandon parochial legal thinking. This concerns the issue of the new lex mercatoria and its operation as a hierarchy of autonomous sources of law or norms in the manner as explained throughout this book: see more particularly Volume 1, section 3.1.2. In the proprietary area, this poses in particular the issue of party autonomy where it is traditionally not believed to operate because the nature of a proprietary right is its effect on third parties. Thus, the proprietary or third-party effect is (in principle properly) believed only to derive from an objective law (which could be transnationalised) and not therefore from the will of private parties. It makes these proprietary rights at the same time effective in bankruptcy in the sense that assets backing up funding could be reclaimed by the financier regardless of the bankruptcy of the person or entity requiring and having received the funding and the claims of their (other) creditors. However, it has been shown that through financial structuring, party autonomy is becoming more important in the proprietary aspects of modern financing, also by the facility to choose a more appropriate foreign (domestic) law in the modern law of receivable financing and in the assignment techniques that underlie it. This was noted in section 1.9 above. For trusts it was noted in section 1.8.4 above. Contractual choice of law in proprietary matters through which more favourable domestic proprietary regimes may be selected by the parties may now also apply to the

452 The Bankruptcy Code s 559 did not fully take care of the re-characterisation problem in respect of repos in particular, but courts now seem less than keen to re-characterise in respect of sophisticated financial products; see also Vasser (n 317) 1537. 453 Further problems may be spotted in the new approach in the EU 2008 Regulation (Rome I, Arts 4(1)(h) and 6(4)(e)) to financial markets and their operation; see also B Bierman and T Struycken, ‘Rome I on Contracts Concluded with Multilateral Systems’ (2009) Nederland Internationaal Privaatrecht 416. The idea is that the law of each market system covers all its transactions regardless of the rule that ties the applicable law to the most characteristic obligation. This includes also the regulatory laws. However, it is not quite clear which market systems are included and it may also be asked whether parties can elect another regulatory law, which the Regulation leaves open but it would seem ineffective as these are matters not at their free disposition. Consumer sales are excluded, but in this connection the more obvious question is the protection of smaller investors.

304  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights legal regime covering securities entitlements.454 The situation in equity, even in purely domestic transactions in common law countries, was extensively and repeatedly discussed above and allows more directly a measure of party autonomy in the creation of proprietary rights, which transfer with the asset and are not then cut off at the level of their creation but rather at the level of their operation through the protection of the bona fide purchaser or more generally of all purchasers in the ordinary course of business of commoditised products with similar protections for assignees and debtors in respect of monetary claims. Liquidity is also promoted by these interests going with the asset but being cut off at the level of the bona fide purchasers in their ordinary business or life. Short of this, these freely created property rights would still be bankruptcy resistant as all property rights in principle are and would therefore affect the ordinary creditors in particular In Volume 5, section 1.1.11, it will be noted that there is here a substantial shift in perception. Bona fide purchasers are increasingly protected but bona fide creditors may be the losers. It was observed before that the consequence is the opening up of the limited number of proprietary rights, now at the transnational level and the abandonment if the individual identification requirement in respect of each asset for its proprietary use and manifestation. Again, common law countries became used to this in equity, subject to a strong protection of the ordinary commercial and financial flows as we have seen. It is suggested in this book that the common law in equity is in essence followed at the transnational level, allowing therefore for a measure of party autonomy in the creation of proprietary rights subject to this strong cut-off facility in respect of adverse interests at the level of bona fide purchasers or even purchasers in the ordinary course of business or even assignees, regardless of their knowledge, at least in respect of commoditised products or monetary claims. This is all unusual from a civil law perspective, which continues to think in what is in essence a closed system or numerus clausus of proprietary rights with a narrow concept of what assets can be their object, in which these rights are systematically connected and form one pattern, as we have seen. Although in the civil law approach, the nature of the underlying asset (in terms of immovable and movable tangible or intangible property) and the type of products in which proprietary rights were used became increasingly de-emphasised in favour of one approach to all and physical notions of holdership, so strong at law in common law countries were also abandoned in favour of a more rights-based system, this development is by no means complete: see section 1.2.2 above, 454 In respect of the transfer of security entitlements, the US first accepted party autonomy and the possibility therefore of a contractual choice of law in the proprietary aspects of the transfer (s 8-110(e)(2) UCC). It is probably explainable because of its practicability. Security interests and their ranking in favour of third parties/ financiers would then be determined by the law agreed between investor and custodian, which third parties/financiers could verify by asking for a copy of the account agreement. This appears to work satisfactorily. It suggests, however, different regimes for a seller and a buyer of securities if they use different custodians, less strange where in fact only book entries are eliminated, respectively created, between the seller and buyer and their custodians. In that sense there is no (trans-border) transfer. It was followed in Art 4(1) by the 2002 Hague Convention on the Law Applicable to Securities Held with an Intermediary, although there is a limitation here: the relevant intermediary must have an office in the country of which the law is chosen, which office must handle the security account: see more particularly s 3.2.2 below. In Dutch case law, even in proprietary aspects of assignments, sometimes the law of the underlying claim and in other cases the law of the assignment have been upheld as applicable following Art 12(1) and (2) of the 1980 Rome Convention on the Law Applicable to Contractual Obligations, now replaced by the 2008 EU Regulation, Art 14(1) and (2), rather than on the (objective) law of the debtor or that of the assignor: see more particularly n 407 above. This would appear to allows for party autonomy and a contractual choice of law in proprietary matters, even without much of a search for the nearest equivalent right in domestic Dutch law and any extended protection of bona fide assignees/collectors against any foreign interests, but note in this connection also the more recent case law of the ECJ rejecting coverage of the Regulation in the proprietary aspects of assignments, see n 252 above.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 305 to which the requirement of individualisation may still testify and also the denial of asset status to monetary claims in many countries. As shown, equitable flexibility in particular, which is also rights based and often product specific, has so far found no place in civil law. It was already said that although the notion of property seems innate in the perception of the human race, legal systems have had considerable difficulty expressing the concept. The comparative analysis in this Volume was meant to show this for both civil and common law. The civil law, although seemingly more sophisticated, appears in practice to have the greater handicap because of its systematic rigidity. It is the conclusion of this book that its basic attitude, at least in commerce and finance, must now be abandoned. There are no clear public order reasons why it should be otherwise. Rather than a limited number of proprietary rights in identifiable and individualised existing assets, modern risk management and liquidity requirements demand a more dynamic concept of movable property law in commerce and finance that can deal with asset flows and expand the proprietary interests that can be created therein especially through financial structuring by the parties (see also Volume 1, section 1.1.6 for an introduction and summary). On the other hand, as we have seen, the ordinary commercial and financial flows require protection against a host of adverse newer proprietary interests that may be so created, therefore against full party autonomy in this area. They only work against professional insiders. This is the balance that is here struck and ultimately resolves into the key issue of transaction and payment finality and risk management amongst the professional insiders.

1.10.2.  The Modern Structure of Proprietary Rights as Promoted by International Commerce and Finance. Liquidity and Bankruptcy Resistancy. Transnationalisation The law of chattels and intangible assets (movable property in civil law or personal property in common law terminology) remains underdeveloped in both civil law and common law largely as a result of the fact that until quite recently no great value resided in them (unless they were documents of title or negotiable instruments). In all of this the key of modern property law development, it was submitted, is in the operation of the law of chattels and intangibles in an international commercial and especially financial setting. The concern is here the legal expression or proprietary characterisation of the operations in the international flows of goods, services, money, information and technology, now often combined in the product streams in international supply and distribution chains. In finance, the [particular focus is then the bankruptcy resistance of modern financial products in which movable assets of a counterparty or ultimately entire commercial flows and related income streams are used in new ways to raise financing (such as in floating charges or finance sales). This poses in particular the issue of separation and ultimately the issue of the protection of the proprietary interests in these flows, which are by their very nature bankruptcy resistant, meaning that (in principle) any assets owned by others although in possession of the debtor or assets of the debtor in which others have (limited) proprietary rights, such as security interests, are not part of the debtor’s estate and may be repossessed (in principle) by these third parties. An opening of the proprietary system through party autonomy then means further intrusion into the rights of creditors in bankruptcy situations. That process is much in progress, see Volume 5, section 1.1.11 facilitated in tie knowledge that common creditors very seldom get much out of a bankruptcy anyway. Bankruptcy was always about the rights of different factions of creditors, therefore about complete separation or ranking.

306  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights Thus, in finance, we are particularly concerned with the survival of these facilities and their inbuilt protections in a bankruptcy of a counterparty requiring asset-backed funding. As such, newer proprietary insights often remain conceptually undervalued and do not yet get the attention they need and deserve. But certain trends are clear and they direct the modern transnational law and new lex mercatoria, particularly but not only in finance. They may perhaps be summarised as follows: (a) Modern property law is rights based and proprietary rights are as such always intangible. That means that they always concern rights and obligations in respect of underlying assets (which may themselves be tangible or intangibles) which may as such be maintained against other legal or natural persons not themselves directly involved in their creation or acquisition. (b) It concerns here in particular the use, income and enjoyment of these assets and the protection and the effect vis-à-vis others of the creation or transfer of the benefits. All must respect them as the new status quo even if not themselves party to the transaction. This is so even if these rights have not yet risen to proprietary status, but remain obligatory as even then they are assets and can be transferred, although less valuable in a bankruptcy of the counterparty or debtor as they do not allow separation of the underlying asset. (c) In a rights-based system, it follows that even in a proprietary sense, it is wrong to say that we own our car, see further sections 1.1.5–1.1.7 above. Legally, we only have an ownership right in our car, which will normally give us the right vis-à-vis all others to claim and operate it or to sell and transfer it. That is clearer when there is a usufruct or a security interest in someone else’s car. In such cases, we will say that we have a usufruct or security interest in the car. In fact, all three may operate in the same car at the same time, and we may as a consequence not even be able to claim and operate the car that we say we own. (d) The relevant proprietary rights are thus abstracted from physical realities. Although the nature of the underlying assets may still have some impact on how these rights can be exercised, protected or transferred, especially in the case of intangible monetary claims or industrial and intellectual property rights, also in civil law that otherwise prefers a unitary system (see sections 1.1.7 and 1.2.1 above), assets should not be confused with the legal rights and obligations concerning them. In terms of proprietary rights and their operation, the nature of the underlying asset is in a modern legal system substantially immaterial as long as there is economic value. (e) Indeed, in such a more modern system, all assets that have a commercial value will be capable of being the object of user, income and enjoyment rights in this sense. That also includes intangible rights themselves. Thus, not only chattels but also monetary claims like receivables, patents, copyrights, trademarks, domain names, etc are all capable of being the object of such user, income and enjoyment rights, and may as such be protected and made transferable either outright, conditionally, as security, or as a usufruct/life interest, etc. (f) Statutes may back this up, especially in the area of intellectual and industrial property, but also of assignments. The principle itself is more fundamental and universal, although when it comes to the more limited proprietary rights in assets belonging to others, there may still be limits in what can be proprietary regardless of asst status. (g) In this context, we say that user, income and enjoyment rights in assets are proprietary if they can be defended vis-à-vis legal or natural persons that have not been involved in their acquisition. It is then commonly accepted that they can be maintained against all the word or at least some classes of third parties not involved in the creation or transfer of these rights. Rights to or in underlying assets thus come in two forms: either obligatory or proprietary, but both can be further transferred as they are all asserts, although if proprietary likely not through mere assignment and there may be further formalities

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 307 (h) In civil law thinking, the expression and operation of these (user, income and enjoyment) rights as proprietary rights are limited (that is the numerus clausus of proprietary rights), the main ones being ownership, usufructs, some long leases and servitudes (in land), and security interests, although there may increasingly also be temporary and conditional ownership rights, which, as we have seen, could allow for some greater flexibility but their operation remains more contentious and is in its incipiency in civil law, exactly because of the numerus clausus notion. (i) Nevertheless, all user, income and enjoyment rights, even though contractually created, have the potential, it was submitted, to become proprietary, even in civil law and incline towards them, which was identified as a liquidity and risk management issue: these rights go and transfer with the underlying asset to promote their liquidity. The key issue then becomes the prior knowledge of these rights in the transferee of the underlying assets. Proprietary rights need not then be restricted at the level of their creation but rather at the level of their operation, cut out as we have seen at the level of the bona fide purchaser. That was the analogy with equity in common law countries in which party autonomy has an important function in the creation of proprietary rights between professionals. (j) In civil law, proprietary rights may be proven and claimed or manifested and protected in limited ways. The basis of rights so claimed lies in the acquisitive prescription, itself depending on bona fide possession of these rights, in the sense of control over the underlying assets and the relative rights therein for an unbroken number of years. In civil law, that leads in essence to the revindication of the relevant proprietary right (and not strictly speaking of the underlying asset), which means that there is a special proprietary action in this connection, which is strong. While there continues to be confusion in countries like Germany in respect of obligatory claims as these countries do not recognise the asset status of these assets, this may be considered a detail for the moment and should not distract from the general (civil law) picture. (k) In a civil law sense, possession as compared to ownership of a proprietary right is simply the appearance of it and a different way in which the (proprietary) rights are expressed, delivered and protected. It follows that possession is non-physical (the way a proprietary right is held) and may be entirely constructive in respect of the underlying asset. It always was in respect of intangible assets. The emphasis is here on control of rights to or in assets, not on holding anything physically. In truth no one can physically hold on to their assets all the time. Control of the relevant right is the key and may give rise to possessory actions in respect of each proprietary right and its reclaiming as an alternative to the revindication. It is often an easier way to protect as only control of the relevant proprietary right is sought to be re-established, and it is not as strong a remedy as the revindication, as it is based on a better, not on an absolute right. (l) Holdership of the relevant proprietary right forms here yet another category of its expression and protection. It concerns the rights and protections of persons that hold proprietary rights for others. This is likely to result from agreements under which user, income and enjoyment rights are transferred purely contractually, for example when assets are lent or otherwise made available to other persons for a short period of time. The manner of protection differs here between different civil law countries, notably in the rights of the holder as compared to those of the legal possessor: see section 1.2.2 above. When user, income and enjoyment rights are merely held, they cannot be freely transferred to others without consent of the owner/possessor although subholderships are then possible. The way they are held is commonly contractual, not proprietary, although the rights themselves are proprietary. Holdership of them is not a proprietary right but, like possession, merely a way a proprietary right is expressed and protected.

308  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights (m) For the present summary, it is sufficient to note that in traditional civil law, there are thus only a limited number of proprietary rights and only three ways in which they can be expressed and protected. This approach in essence dates from Roman law although it was analysed in this conceptual manner only much later. It was ingenious especially in developing at an early stage an abstract system in which possession, although related to a particular asset (corpus) is foremost a state of mind or animus: it was the willingness to keep a proprietary right in an asset for oneself and control it, indeed not necessarily to hold the asset as a physical condition.455 (n) This is very different from the situation in common law, which first has different ways of formulating and protecting different assets classes such as land, chattels and obligatory claims. Second, their legal protection still depends, especially for chattels, on physical possession. Possession is here considered a proprietary right, which can be transferred as such, not merely a way in which a proprietary right is expressed and protected. As a consequence, the ownership right is weaker: see section 1.3.2 above. In this approach, for obligatory claims the concept of possession plays no role at all (in land it is the remnant of the feudal system—seisin—which makes for a different way of protection altogether), and the concept of ownership is here also problematic as we have seen. The actual protection of one’s chattels or intangible assets is in any event always in tort. In common law, there are no ownership or possessory actions proper. This approach in chattels may be seen as more primitive than in civil law. All remains primarily physical, which originally also affected the transfer of these assets, which required physical delivery. It notably does not allow for a more universal concept of control that may also cover other asset types. Such a system is not rights based. (o) It may be noted in this connection, however, that in common law countries, equity had always been less strict in matters of physical identification, and as a consequence more easily allowed transfers by class or in bulk and of future assets (even chattels), including a shift of the interest into replacement assets as we have seen. Physicality is here abandoned, much is left to party autonomy, but it did not lead to a more fundamental reappraisal; common law remains, as usual, pragmatic and moves step by step through case law on the basis of practicalities. If necessary equity must help out It left not only much to the description of the parties in terms of asset definition and the rights to be created therein but opened in the process also the system of proprietary rights itself while allowing trusts, conditional and temporary ownership rights and floating charges to operate in chattels and intangible assets besides the proprietary interests at law, always subject, however, to the protection of the bona fide purchaser or transferee against such legal interests, even of the purchaser in the ordinary course of business of commoditised products. The issue thus becomes the protection of the ordinary commercial and financial flows and of finality here especially relevant for consumers. These developments in equity in common law countries proved highly original. 455 It may still be true that for bona fide purchaser protection in the case of chattels, physical possession remains a requirement in civil law as it is under sale of goods statutes in common law, but it is exceptional and never was a requirement eg for bona fide purchaser protection in equity in respect of unknown equitable proprietary rights and is also not required for this protection under Art 9 UCC. As noted, in civil law it is not a requirement of eg, acquisitive prescription either. As we have seen, in common law countries under more modern law, all tangible or intangible movable assets transferable in the ordinary course of business might increasingly be acquired free and clear of adverse proprietary rights regardless of physical possession or even bona fides of the transferee (see s 9-320 UCC). Bona fide assignee protection will also increasingly be demanded in assignments where the requirement of possession could in any event not be physical, although, alternatively, in the case of intangible claims, it could still be required that the right of a bona fide assignee/payee is only protected to the extent the assignee collects. That is a common law variation and could still be seen to equate to the position of the bona fide purchaser of chattels who obtains physical possession.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 309 (p) It followed that a physical and anthropomorphic attitude to property was increasingly abandoned in both the civil and common law system but in very different ways. In civil law, the situation was from early on no longer determined by what individuals could see, feel, imagine and handle. This also affected the manner of delivery of possession, which could be entirely constructive. Conceivably this could even have affected the close connection introduced in the early nineteenth century between the identification and specificity requirements (Bestimmtheitsprinzip), narrowing the definition of an asset and the disposition possibility therein as a key requirement for a valid proprietary transfer. Civil law is here at best only in its incipiency and it is not the direction of present development, which is further constrained by the stringent numerus clausus principle, which still seeks to cut off the proprietary rights at their creation, not their operation. (q) A more abstract system of proprietary rights (and obligations), de-emphasising physicality and anthropomorphic ideas, creates, on the other hand, the important possibility of proprietary rights vesting in intangible assets such as monetary claims, but also in future assets, especially those in transformation in a production process, while creating at the same time disposition and transfer possibilities in them, including the possibility of their transfers in bulk. This is the issue of proprietary rights attaching to classes of assets. Reasonable description of the asset (not physical existence) becomes the key issue here in terms of identification. (r) As in civil law the concept of possession may be entirely constructive, also where a form of delivery (of possession) is still required, bulk transfers and the tracing of a proprietary interest into (future) replacement assets are then possible. In a rights-based approach, there is nothing fundamental either against proprietary rights shifting into (replacement) assets that can be identified but may not yet exist. It could also allow for a final disposition in respect of future assets that is effective also in a future bankruptcy of the transferor in respect of any replacement goods once they emerge (even after the bankruptcy). It means that classes of assets could be structured so as also to cover assets in transformation and replacement assets. (s) That becomes essential, it was submitted, when we talk about the proprietary right in respect of the international commercial and financial flows. Transfers of related income streams or giving them as security then also become possible. Yet, in civil law these facilities are in need of rediscovery, remain embryonic or are not much noted or encouraged. This is evident in the DCFR as we shall see in section 1.11 below. In fact, one may note a nineteenth-century regression because of the re-emphasis in modern codifications of identification and disposition rights, which soon acquire a physical character, much more so than in the earlier ius commune. Common law, even though even more obsessed with physical possession, here took a much greater step forward but only in equity. (t) In a proprietary system of pure rights and duties, the legal independence of a transaction in relation to the steps leading up to it may also more easily be assumed. It means that once a right in or to an asset is transferred, the invalidity of the underlying transfer agreement will not automatically void the transfer: see also section 1.4.6 above. The opposite system depending on causality is then likely to be considered anthropomorphic and atavistic. This ultimately also concerns the issue of transactional finality, which was identified as an important proprietary matter in that the status of a transfer, assignment or payment, once completed, is not then to be affected by extraneous defences of the transferor, assignor or payor, or by legal sophistry. (u) This notion of abstraction or independence is in particular underpinned by the German approach to title transfer that sees it basically as abstracted from the transfer agreement and its validity: see section 1.4.6 above. It has a long pedigree, as we have seen, but is in fact highly modern. The concept of independence was earlier established also in negotiable

310  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights instruments and documents of title, where underlying relationships out of which they arose and any defects therein were not to affect the paper and its transfer either. One sees it also in letters of credit. Similar notions of abstraction and independence are increasingly used in all commodity transfers and provide also a modern approach to receivables and their use and transfer in (bulk) assignments regardless therefore of any underlying relationships out of which they arose or contractual assignment restrictions contained therein. This was discussed in section 1.5 above. (v) Nineteenth-century will theories may here also be increasingly abandoned, and the rescission of a contract on the basis of a lack of will is not then encouraged as a way to undermine a transfer that took place. Bona fide purchaser protection is another important underpinning of the notion of finality in this sense (see section 1.4.8 above). Rather than to the invalidity of the underlying agreement, it goes in civil law more in particular to the issue of lack of disposition rights, which are then also de-emphasised. It is in truth a question of further protection of the commercials flows against unexpected adverse interests. In terms of transactional and payment finality, the notion of reliance fulfils here a similar support function as we have seen in section 1.4.6 above, although in civil law the notion of finality is commonly still linked to the transfer of chattels only, based on the idea that the physical entrusting of an asset to a third party who may sell it entails a risk on the part of the entruster, but the real issue is the protection of the ordinary flow of business as a public order requirement. This ultimately has nothing to do with the entruster nor with the physical handing over of the asset and concerns also intangible assets, especially receivables and their assignment. (w) Although a modern rights-based system of proprietary rights in the above sense, at least in chattels and intangibles, allows for one systematic approach in respect of all assets, it need not be one unitary system per se and it was shown that in modern law the type of proprietary right is more likely to be determined by the type of (commercial and financial) product that is being served rather than by the type of asset. This may have an effect also on the mode of transfer of these rights (and obligations), and then becomes a liquidity issue.456 Thus in the US, in the UCC, the transfer of a chattel under Article 2 is perceived quite separately from the creation of a security interest in Article 9, or an equipment lease under Article 2A, or a payment under Articles 4 and 4A. (x) It has already been said that party autonomy may be acquiring here an important role through financial structuring, especially where temporary or conditional ownership rights, floating charges, and shifting liens are created as modern alternatives to or elaborations of secured transactions. Again, it means the end of the traditional civil law notion of the numerus clausus of proprietary rights subject always to a broad protection of bona fide purchasers or transferees in the ordinary course of business, especially of commoditised products or monetary claims. The restriction is therefore no longer in the number of rights that move with the asset and are then proprietary but in the operation of these rights. (y) Party autonomy in this area operates here only among insiders, especially lenders and suppliers, and may be supported by filing systems but they will not impose search duties on any others. Again, one sees here the influence of equity in a common law sense. Knowledge by others becomes the basis for the third-party effect of these rights as they can be maintained against all who knew of them when acquiring an interest or should know of them,457 456 See more particularly n 450 above. 457 Prior knowledge in third parties may itself be a purely subjective or alternatively a more objective requirement. In the latter case, as for filing systems, it could become entirely constructive (therefore always presumed to exist) as it is in land. Not checking the land register normally means therefore that there is no excuse and

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 311 but conversely not against bona fide transferees or purchasers in the ordinary course of business.458 The ordinary commercial and financial flows are here protected. In this book this is perceived as the way forward in commerce and finance, especially at the transnational level. (z) It has already been said that in this manner, all economic interests in terms of user, income and enjoyment rights may in modern law increasingly find legal protection against third parties to the extent they were aware of these interests when acquiring the underlying asset, at least in commerce and finance. That was earlier identified as a liquidity issue at that level. It follows that if third parties acquire the underlying assets, these third parties would have to respect adverse user, income and enjoyment rights of which they knew. They may be pursued against them and may become protected in tort, even in their bankruptcy. There may not be a right to specific performance on the part of the beneficiaries, but there would at least be a right to damages as a preferred claim. (aa) This was earlier identified (in sections 1.3.7 and 1.3.8 above) as presenting a major legal advance and potentially substantial approximation between civil and common law of property at the practical level and a major approximation between proprietary and contractual rights in respect of assets at the same time. Newer law will then also develop more specific concepts of bulk or generalities of assets, of future assets, of replacement assets and of tracing, facilities in their generality all commonly absent from civil law codes, even the most modern ones.459 (bb) It must then also review the concept of disposition rights and the formalities of transfers and assignments, in all of which again the law of equity presents the more ready example in common law jurisdictions. It was suggested that this is likely to happen first at the transnational level in the professional sphere. It was always the true challenge in the DCFR to identify the issues here and move things forward. That did not happen as we shall see.

bona fide purchasers are not protected. Here proprietary rights have the broadest scope. That is as we have seen not normally the approach in respect of filing systems of security interests in movable property, which are only meant to be relevant for other lenders, not for purchasers. Here knowledge has retained its subjective element in cutting off proprietary rights and it may even become entirely irrelevant in respect of acquisition of commodities, at least under Art 9 UCC (s 9-320(a)), which protects any buyer in the ordinary course of business (regardless even of bona fides). Here proprietary rights acquire a limited scope while the notion of finality is always sustained. A more basic expression of publicity was sometimes thought innate in the transfer of (physical) possession of chattels and in notification of assignments of claims to the debtor. But as has already been mentioned several times before, physical possession does not denote ownership at all while the delivery of possession can be entirely constructive in civil law and the notification of an assignment to the debtor has no publicity value in respect of anybody else. In s 1.1.3 above it was pointed out that publicity is not the key issue in proprietary rights. It is eg, clear that putting a notice in a newspaper concerning a user right in an asset does not make that right proprietary (therefore operative vis-à-vis all), again an indication that publicity itself is not the cause of a proprietary right. It is much more likely to be actual knowledge of prior interests except for those (old) proprietary rights that were always protected, when publicity or even knowledge are not truly relevant. 458 In this book, prior knowledge in the third party is considered the underlying idea of all equitable proprietary rights in a common law sense, although not necessarily so analysed by all. But the physical nature of proprietary rights is here abandoned. In terms of the proprietary regime of the modern lex mercatoria in the manner here explained, this is nevertheless an important pointer where one may thus observe the overtones of the law of equity although it never produced one coherent underlying proprietary concept. Instead, it concentrated on special, more incidental areas such as trusts and trust-like structures, conditional and temporary ownership rights, and floating charges: see, for some form of standardisation and the resulting more incidental approach in common law countries even today, n 313 above. 459 In the original draft of the new Dutch Civil Code (Art 3.1.1.11), a definition of the generality of goods and the concept of tracing in replacement assets were considered but these efforts were abandoned.

312  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights (cc) At the same time, not only the concept of identification and the notion of the numerus clausus of proprietary rights but also the civil law triptych of ownership, possession and holdership in respect of all proprietary rights and the specific proprietary expression and protections they give may lose its significance. Protection may be rather in tort as even in civil law in respect of intangible assets and holdership it already commonly is. This may also mean the end of the very special position possession holds in civil law in terms of control, at least for the possessory action. (dd) Yet in an international setting, for example in respect of offshore oil rigs, one may also still see some return at first to a more extreme (and it could be said more primitive) physical notion of possession and control that hardly allows for a notion of ownership to develop separately; see also section 1.1.9 above. It is the old notion of seisin, which did the same at law in England. However, once such an approach starts to be balanced, as in England, by other concepts, through equitable notions and their rights-driven more abstract approach to property rights, other interests will emerge. Non-possessory security interests may thus be created, to be reinforced through direct notice of the interest, for example to other creditors or banks. We see here a double root of modern property law—the one physical and more primitive, the other more sophisticated, rights based and flexible—potentially operating side by side at the transnational level under the modern lex mercatoria: see also Volume 1, section 3.2.2. (ee) Eurobonds may provide here a vivid example of this development, which was originally based on the physicality of this type of bond as bearer instrument at the transnational level (local laws not having been sufficiently flexible to allow for an expanded notion of promissory notes that allowed many conditions to attach), now superseded by concepts of security entitlements with their own ways of transfer, trading and settlement. It also concerns the proprietary rights that can be established in them, especially repos. Although there is a tendency to re-domesticate these products, of which the Hague Convention provides an example, transnationalisation is here the better perspective: see also section 3.2.2 below, reason probably why interest in the Hague Convention has waned. (ff) It may also allow for the protection of various beneficial interests regardless of the ownership right in the underlying asset and for protection of these interests in a bankruptcy of an owner who knew of the interests before acquiring the property. One may subsequently ask whether such interests could be freely transferred without the consent of anybody else, including the physical holder of the asset (who may, however, have to be notified in order to make the transfer effective). It also raises the question whether contractual positions may increasingly be transferred as property: compare again section 2-210 UCC, which favours it. (gg) Finally, it should be understood that this development concerns primarily the law between professionals or professional dealings. Having traditionally been captured in commercial law in common law countries, it reflects these newer tendencies and explains the more flexible and specialised nature of this type of law, which is geared to better risk and liquidity management. It may well be that for consumers very different needs present themselves, dictated by different protection requirements, especially in the absence of sophisticated knowledge or access thereto. It is another world and there is no obvious need for similar proprietary structures in both while in professional dealings a unitary approach may no longer be sustainable as we have seen and is unlikely to be a disaster.460

460 See more particularly Vol 1, s 1.1.10. Professionalisation is obvious in connection with modern financial dealings, even domestically. If one takes the UCC as an example, it is clear that Art 2 on the sale of goods still maintains a more general notion of ownership and its transfer that also obtains between non-professionals, but in Art 2A on

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 313 (hh) There is, however, the issue of segregation and the effect in bankruptcy to be considered. Proprietary rights suggest separation pr priority in distribution in respect of the underlying asset or asset classes. Common creditors may thus suffer. It is a fact that they never received much, that was their risk and were always eclipsed by proprietary security interests. To increase these or the possibility of finance sales will not help them but it may be questioned whether it makes a great difference for them. The newer instruments are more likely to reshuffle the protections and choices amongst the insiders. But it is a demonstrable fact, that bona fide purchasers are ever better protected in the sense indicated and bona fide creditors ever less. It may be a change in paradigm, see also Volume 5 section 1.1.11. (ii) It is favoured by regulators who want better risk management in banks even if at the expense of common creditors. They like modern finance sales in repos and finance leases or in forms of factoring, as we have seen, and also the swap industry. To avoid disputes about the obligatory or proprietary nature of repos and swaps, they commonly favour the set-off and netting principle to create and promote preferences instead but with similar effect. See for these facilities further the discussions in Volume 5. As we shall see, there is here no policy guidance in the DCFR which is by default regressive in its theoretical and system thinking.

1.10.3.  Paucity of Modern Property Theory In section 1.1.8 above it was said that there hangs a veil of intellectual impotence over movable property law, perhaps especially in civil law countries, because it needs a more dynamic approach, which its notion of specificity and identification of assets, its limited number of proprietary rights, and its systematic attitude to their expression and protection can hardly provide. The demands of liquidity, finality and risk management or separation in bankruptcy situations, and their connection with property law and its operation in modern commerce and finance are often poorly understood and little explored. Thinking seems paralysed. It was noted in this connection that in contract, civil law was ultimately able to develop a more dynamic and less anthropomorphic attitude, mainly by introducing the good faith notion as a liberal interpretation tool: see Volume 3, sections 1.1.4 and 1.3.3 above. The common law of contract needed this much less because it had always been less will and intent oriented, looked more at the nature of the relationship, notions of dependency and reliance, and implied conditions (see Volume 3, section 1.3.7 above), although especially in the US it is now additionally accepting good faith notions too. As was shown, in property law, common law jurisdictions have long had greater flexibility through equitable notions and equitable proprietary interests especially leading to trust structures, conditional and temporary ownership forms even in personal property, and to floating charges, always subject to bona fide purchaser protection or the protection of the ordinary course

equipment leases and in Art 8 on the trading and holding of modern investment securities entitlements, the emphasis is increasingly on professional activities (of intermediaries and on the relationship of investors with them). Proprietary rights are then only defined incidentally, that is for each structure specifically without any resort to general proprietary principles or a unitary system of proprietary rights: see n 450 above. That is also true in Art 9 on secured transactions, which in its new 1999 text tends to address itself principally to professionals as well (therefore excluding consumer transactions, cf eg, s 9-109(d)(13)). In Art 4A (s 4A-108) on electronic payment, consumers are explicitly excluded. They are also excluded in Art 5 from the practice of issuing letters of credit (s 5-102(9)(b)). This confirms the assumption that because of the specialised nature of these arrangements they cannot be handled or are less suitable or even dangerous for non-professionals.

314  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights of business. The civil law has here no ready equivalent although it is making limited progress in the direction of sometimes tentatively recognising proprietary effect on the basis of the knowledge of the party acquiring the underlying assets, especially in respect of covenants that may thus start running with the land, such as contractual passage rights.461 By introducing non-possessory security interests, at first often through case law, and by increasingly accepting conditional ownership rights in reservations of title and on the back of it in finance sales, the civil law system is also prised open, but much still has to be done, especially in the area of floating charges and finance sales. This also concerns its notions of specificity, identification and disposition rights and then segregation issue in bankruptcy. What is clear is that there is no sense of direction462 as the DCFR also shows; see further the discussion below in section 1.11. In particular, it is not fully appreciated that in professional dealings there is a need for more room for party autonomy, in finance as a matter of risk and liquidity management, balanced by a more elaborate and broader approach to bona fide purchaser protection, or to the protection of the ordinary course of business more generally, although in bankruptcy potentially all at the expense of general creditors. Here we may need a policy shift and better consider the implications. A similar approach is needed in respect of intangible monetary claims, their acquisition and protection as a major asset class. In this way, proprietary user, income and enjoyment rights can indeed be more freely created and operate more flexibly in respect of all types of assets and in respect of different kinds of third parties. Another problem demonstrating a lack of perception is that the concept of finality itself is seriously weakened in the DCFR through the abandonment of the abstract system of title transfer in favour of the causal system. In commerce and finance, this is unrealistic. In the DCFR, generally, certainty is promoted but clearly without much of a view of what it is or can be. While the key concept of transactional and payment finality could easily have been strengthened, it was weakened and is basically ignored. Although property rights may be cast in terms of an effective allocation of personal and social benefits, some of which was discussed in section 1.3.9 above in the context of the modern functional US approaches, it was said before that property rights are intuitive in respect of all that has economic value. It was always fundamental in terms of ‘mine and thine’, but how the law expresses this has perpetually been problematic. We have seen that the common law of property was traditionally physical (and anthropomorphic) in that in land law (estates or tenure) and in chattels (bailment), it used to put and still does put considerable emphasis on physical possession (seisin). It remains in this respect primitive but also practical. However, a proper system of proprietary rights can hardly develop if physical possession continues to play such a strong role. Nevertheless, that remains in common law countries in essence the situation at law in respect of chattels. In such a system, even the owner is for its protection dependent on the physical possessor except when s/he has a right of immediate repossession: see section 1.3.2 above. Again, in such a system, proper ownership notions hardly develop and the asset status of intangible assets can also barely be considered. As we have seen, in common law countries, this physical approach became vitally balanced by the developments in equity. One may think of floating charges in particular. Equity also provided for an easy transfer of claims, even of future assets, and for future or conditional and temporary interests. In terms of transfers and assignments, it also allowed for the concept of bulk and for

461 See nn 44 and 45 above plus accompanying text. 462 See s 1.2.1 above.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 315 interests shifting into replacement goods. It suggests a facility (particularly confirmed in the UCC in the US) to deal with new proprietary concepts, now even per product. Here we seem to shift from one extreme to the other: from mere physical possession as the basic root of the proprietary system (at law) to an advanced rights-based system of rights and charges (in equity), whose protection is based in essence on knowledge of the (equitable) interest in any successor when acquiring the underlying asset, which knowledge may only be constructive in respect of professional insiders. In the civil law, starting in Roman times, the essence was analysed above as being in a different concept of possession and in the operation of the more limited proprietary rights, especially in assets owned by others (iura in re aliena). Roman law managed to alleviate the pitfalls in the notion of possession by making it a strictly legal or abstract concept, which was not physical per se but signified the willingness to hold the relevant proprietary right in the asset for oneself (animus). As such, possession became a matter of control over assets exercised through the various proprietary rights rather than their physical holding as we have seen, in turn closely connected with the disposition right and ability, not then considered physical either. The other continental European achievement in this area, only completed in the ius commune, was to integrate the iura in re aliena, therefore the proprietary rights in the assets of other persons such as the usufruct or servitudes and even the secured interests together with the ownership right, into one coherent system of proprietary rights, which ultimately became identified as a closed system, the famous numerus clausus. In this system, which was thought of as unitary, therefore in principle applying to all assets,463 the proprietary rights that are recognised, starting with ownership as the most complete right, which can be unbundled, allowing for a few, more limited, proprietary rights that others may acquire in the same asset, are thus interconnected and manifested either through ownership (here in the sense of the property right or title itself or other proprietary rights), possession or holdership of these different proprietary rights, all as legal concepts in the manner explained in section 1.2.2 above. The important by-product was a better understanding of the difference between proprietary and obligatory rights, the first in principle operating against all, therefore even those not aware of them before they acquired the property, and the latter only against identified counterparties (in contract, tort or unjust enrichment). It led to the identification of the key proprietary concepts in civil law in terms of the right to pursue (droit de suite) and the right to a preference or separation (droit de préférence): see more particularly section 1.1.1 above. It should be appreciated that both in common and even in civil law, the law of property was shaped in response to practical needs, not to grand ideas. It took a long time before its

463 Earlier, the problem with intangible assets, still leading to a different approach notably in Germany was identified as a remnant of an anthropomorphic and physical attitude to ownership rights: see s 1.1.4 above. The lack of intellectual depth in the new Dutch Civil Code, especially in respect of the notion of assets, liquidity, types of proprietary rights and the abstract or causal nature of the transfer, is now more fully recognised by one of its main authors: see W Snijders, ‘Ongeregeldheden in het Vermogensrecht’ [Irregularities in the Law of Property and Obligations] (2005) WPNR 6607/8. It is not necessarily seen as a disadvantage and it is suggested that this gives judges greater flexibility, but it also confers extraordinary powers of law making on the judiciary. A case law approach is here preferred over statutory amendment, but present Dutch case law, not unnaturally, shows a great propensity to follow rather than to redirect the new Code. It should be noted in this connection that in the US functional analyses, the preference is sometimes given to statutory intervention instead: see TW Merrill and HE Smith, ‘Optimal Standardisation in the Law of Property: The Numerus Clausus Principle’ (2000) 110 Yale Law Journal 1, 59; see further s 1.3.9 above. It may indeed be doubted whether with present insights, case law can be the answer at the national level and create greater dynamism in proprietary law. On the other hand, it is not clear why vital tools of risk management should be regulated by statute only.

316  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights contours became intellectually clearer and could be described and generally understood. Civil law, being by far the more intellectual, reached here greater sophistication. Even if a system was ultimately found to exist, it must be realised that this was a result of all that went before. It may be possible in retrospect to reinterpret the development as a response to ethical, social and efficiency considerations, but they do not explain the system as such and even less its specifics, the limitation of the proprietary rights to the ones particularly recognised (and not others) and the considerable differences in the detail between common and civil law. It was explained before that it took until later in the seventeenth century, when on the European Continent in the ius commune the differences could be identified empirically on the basis of existing legal practices.464 Hence the manner of expression and protection, either against some identified parties (in contract) or against all the world (in property), the different types of rights (proprietary or contractual income, user and enjoyment rights) that could be held in them, the manner they could be created, transferred, and protected, the finality of such transfers, and the ranking between various claimants. Eventually, also in civil law, it was noted that there arose the question of the status of future assets, their transfer and protection, and the shift of rights into replacement assets, either in the production process, or upon a sale in replacement inventory or proceeds, especially important with respect to security interests (resulting in forms of floating charges). Future interests in terms of conditional and temporary ownership rights could no longer be ignored either, regardless of the numerus clausus idea. Again, the common law in equity had the advantage.465 This process of evolution guided by practical needs continues unabated, for example in finance sales, but has hardly started in civil law doctrine. Trust and trust-like structures as well as floating charges cannot then be far behind. In the past, this development always progressed fragmentarily, regardless or even ignorant of any deeper thought, as we have seen, and is undoubtedly spurred on at the moment by the practical needs of international finance where civil law is losing out. It is connected in particular with nineteenth-century notions of disposition rights and of specificity, which acquired physical aspects and were superimposed on the more rights-oriented ius commune.

464 See nn 23 and 43 above. It led to a sharp distinction between proprietary and obligatory rights or rights in rem and in personam and the definition of proprietary and obligatory rights. Indeed, only in eighteenth-century Germany did it become fully understood that the essence of proprietary rights is that they can be maintained against the whole world, obligatory rights only against identified counterparties. Hence it became possible to identify the existing proprietary rights on that basis, to note empirically the fact that they survived transfers of the asset (droit de suite) and were as such limited in number, and to define also their status in a bankruptcy of a debtor with residual interests in the underlying assets (droit de préférence). Various proprietary rights could subsequently be ranked among themselves according to time, obligatory rights, on the other hand, being all of equal status. This was the result of careful observation of what already existed. It was not a new design. 465 In equity, common law thus made room eg, for conditional and temporary ownership rights in chattels (besides trust structures and floating charges). They originated in land law: see s 1.3.1 above. Again, they are lost to the extent a purchaser of the underlying assets is not aware of them. In civil law, we also see an increasing recognition of conditional ownership rights. Reservations of title are a basic example but there may be others, like hire-purchases. Modern finance leases and repurchase agreements may have a similar structure. Reservation of title produced in Germany the notion of the dingliche Anwartschaft: see s 1.3.8 above. As in a conditional sale, the condition may be anything, it suggests a more fundamental opening up of the entire system of proprietary rights in civil law. Yet it may still produce serious re-characterisation issues, even in common law: see Vol 5, s 2.1.4. Earlier, the development of non-possessory security interests in Germany (Sicherungsübereignung) and even of floating charges happened in the context of conditional sales too: see s 1.2.1 above. They were based on practical need, were non-statutory and went against the closed system of proprietary rights.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 317 Later emphasis on the physical nature of possession in German law did not help here either. To repeat, an anthropomorphic attitude to property and property rights is particularly unhelpful and increasingly needs to be challenged in a more modern system. But as important was to note that in a more modern commercial and financial setting, there is no longer much of a unitary system either, at least at the practical level in the operation of modern proprietary rights in financial transactions between professionals. That was already identified earlier for documents of title and negotiable instruments. This is only to repeat that modern proprietary rights are increasingly diverse and product specific.466 As a consequence, even in civil law, the system opens up but it is a slow process, the reservation of title being an important example. So was the Sicherungsübereignung in Germany and the attempts there to create floating charges through contract. We are thus seeing a class of user, income and enjoyment rights that, although contractually created, may increasingly be maintained against all subsequent interest holders in the underlying assets as split ownership rights that are not enumerated in the Codes but can be maintained against all who knew of them, even in civil law. In civil law terms, this is potentially an important intellectual expansion of the notion of proprietary rights and their operation, increasingly allowing room for trust structures, finance or conditional sales, and floating charges,467 but this development remains searching and hesitant. Again, there is no clear sense of direction, which the DCFR demonstrates only too clearly as we shall see. It suggests nevertheless that there are some broader underlying currents concerning the operation of assets and their protection in terms of private rights and obligations and how they function. A modern transnational system of proprietary rights is likely to be more flexible and dynamic than civil law offers at present. There are of course also some clear external exigencies. Important for our purposes is that there is a need for greater flexibility, especially in terms of better risk and liquidity management between professionals, but then also for a strong protection overall of the ordinary course of business (therefore of the economic environment), therefore of the commercial flows, and hence, in respect of movable assets, in particular for an ever stronger protection of bona fide purchasers and even assignees who manage to collect in good faith or in the ordinary course of their business. This is no less a public order requirement closely related to the need for transactional and payment finality in respect of consumers. It naturally limits the reach of newer structures and may even lead to the protection of all buyers in the ordinary course of business regardless of any knowledge of adverse claims in the underlying assets as we have seen. Again, this becomes an issue of finality and suggests that at least for movable property all rights of others in assets and their use, whether contractual or proprietary, are vulnerable. Any residual physical element in terms of a need for possession by bona fide transferees or for collection by bona fide assignees may then also be increasingly

466 See also the discussion in ss 1.1.5 and 1.1.10 above and n 450 above and n 470 below. This applies also to intangible claims, eg, bank balances and security entitlements or derivatives. The status of bank account balances and their transfer are discussed in Vol 6, s 1.4.1. In particular, the fact that in bank transfers we have a sui generis manner of transfer (see Vol 5, s 3.1.5) suggests that we may have here also some different product that, although intangible, may not be moved by assignment. For book-entry entitlements for investment securities, there is also a special regime discussed in Pt III below. Again, it raises issues of transferability, liquidity and protection in respect of this facility. Financial derivatives are usually considered contractual rights and are as such transferable though they are normally hedged or could otherwise be unwound with the counterparty: see more particularly Vol 5, s 2.6.2. Risk protection as a commodity in credit swaps may become another newer asset class in the context of that product only. 467 See for the dubious role of publicity in the context of proprietary rights and their third-party effect s 1.1.3 above.

318  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights de-emphasised.468 To repeat, the consequence is greater party autonomy in the formulation of proprietary rights subject to the limitations of their operation against outsiders, like the public. The type of proprietary rights is thus likely to depend ever more on the type of commercial or (especially) financial products in which it functions and the nature of the relationship in which it functions, different in professional and consumer dealings, rather than on a system or on the nature of the asset.469 Again, in this book, from a legal point of view, an asset simply is all that has economic value and can be reasonably identified as such and then be used in commercial and financial structures, which could vary from a simple sale of goods to a transfer of a security entitlement or a temporary or conditional ownership right and finance sale or trust structure in assets of a composite nature or in bulk. It suggests some control (or disposition power) over these assets but again in a modern system that kind of control need not be immediately physical either as is clear in the case of receivables or other intangible assets and the constructive notions of possession and delivery, at least in civil law. It has already been said that nobody can carry all their belongings with them all the time, and even in common law it must be admitted that that has no effect on the protection of bailment. It is always control that matters and that is not physical. Barring public policy (such as governmental intervention in state embargos or trading licensing) and public order considerations (in terms of fraudulent or other abusive behaviour), all valuable assets (unless highly personal like a right to a good name) must further be assumed to be transferable and their liquidity is in most legal systems indeed promoted. In modern terms, it may be better to say that it is not merely their transferability and liquidity but rather their being usable in commercial and financial structures which further defines them legally as assets, although this presupposes transferability and liquidity. Hence also the great importance of the liquidity of receivables, which may equally be seen as a public order requirement in a modern society. It may be statutorily supported, for example in respect of intellectual and industrial property rights, but even without such statutes these rights are commercial assets all the same and as such in principle transferable and protected.470 Legally, in a modern system, 468 See nn 456 and 459 above and more particularly ss 1.1.7 and 1.4.8 above. 469 This product-specific direction of modern property law may even manifest itself in the different use of the same asset in different schemes. There seems to be no desire nor manifest need much longer for a unitary system of proprietary rights, their creation or transfer and protection, even in respect of the same asset. It may thus make a difference whether the same assets were used in a sale, a finance lease, in repo financing, or as security for debt. There are ample indications in the UCC in the US that this is the modern trend: see also text at nn 404 and 399 above. Bona fide purchasers may then also have a different status per product or facility. In civil law terms, notions of ownership, possession and holdership might then also operate differently per product or become irrelevant in respect of some of them: see s 1.10.2 above under (v). It goes also to the issue of acquisitive prescription and its relevance. These remain important structural issues in civil law. Product orientation is also clear in more conscious international harmonisation efforts. It is clear from the 2001 Mobile Equipment Convention, which introduces a new international interest resulting from a security agreement, reservation of title, or finance sale of mobile equipment (see Vol 5, s 2.1.8) and from the EU Collateral Directive, which introduces new types of collateral in cash deposits and security entitlement holdings including conditional transfers in financial instruments and organises indirectly also a floating charge under which the interests may shift from investment securities into proceeds and back and may therefore also include future replacement assets: see further s 3.2.4 below. Especially in respect of the Collateral Directive, which in truth introduces equitable proprietary interests EU wide in finance, the incorporation into local law is of major interest. It has led to great complications in many civil law countries and may still lead to great differences in the applicable regime. It is an important event and a major departure in many civil law countries although limited to the narrow field of financial dealings. 470 See more generally also n 29 above for more modern theory. Especially in intangible assets, such as trademarks, copyrights, patents, security entitlements and carbon dioxide emission rights, statutes may provide a more specific system of proprietary rights, their transfer (either outright, conditionally or as security for debt), and their

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 319 such assets may be present or future, provided always that they are capable of sufficient description and some control. This inclusion of future assets re-emphasises the fact that the physical element is abandoned, that we are talking here only in terms of (future disposition) rights and duties, and that the control element might be entirely prospective. The key is to determine whether in a bankruptcy of the seller such a future interest may indeed be deemed to have passed to the buyer should the assets only emerge in the (physical) control of the seller after its bankruptcy. That is the issue of separation and the true test for a sufficient (prospective) proprietary right having been duly acquired by the buyer in these assets. The example given earlier was of the air we breathe. It is free and not legally owned but if we capture it (even temporarily in our lungs) we own and can conceivably sell it. Our property right in it may then be activated and protected even though it is likely to be only temporary. Even a future capturing of such air may create a sufficient asset base in modern law and there may be a transfer to anyone who wants to deal. Replacement air may here be easy to identify or describe. Whether it is worth it, is a business matter to be determined by the buyer and is the latter’s risk.471 protection. Here the proprietary regime becomes product specific also. That appears to be a more universal direction at this moment. In security entitlements the proprietary right may thus manifest itself simply in the entitlement holder having a claim against any bankruptcy trustee of the intermediary/custodian for removal of his entitlement to a new custodian with the simultaneous release of the back-up entitlements. In more recent times domain names have also acquired asset status. They may also find further support and backing in legislation. They have also acquired some international status. Under the classic rules of private international law great differences could arise here and forum shopping be encouraged. To avoid this, the World Intellectual Property Organization (WIPO) developed a simplified procedure concerning domain names conflicts. The WIPO procedure allows everyone to ask online to be entitled to use a domain name registered in the name of someone else. WIPO will then appoint an arbitrator who decides within six weeks. If the arbitrator finds in favour of the claimant, the respondent may appeal to the normal state courts to get his domain name back. At first these cases were decided on general principles and on those derived from national laws, but are now increasingly determined on the basis of the (transnationalised) case law of these arbitrators themselves, which can be accessed online. There are other modern examples of new legal assets in the law of artists’ rights, where modern law is starting to allow painters and sculptors to retain some residual rights in their creations after sale. Important here are the right to integrity, which requires the artist’s permission for alteration or destruction, and resale royalty rights. Statutory backing will be necessary for these rights to operate fully, also against bona fide purchasers. They are to that extent more special in that they are not commonly alienable and may be considered to fall in the class of highly personal rights. They may also be limited in time. The Berne Convention on the Protection of Literary and Artistic Works recognised the integrity right. The US ratified in 1988 after having adopted the Visual Artists Rights Act allowing artists to retain an integrity right in their work. It applies to writers of recognised stature (undefined). The statute supports the presumption that the artist has retained this right unless waived in a standard form that is transferable with the art object. In the US, these rights only endure for the life of the artist. Elsewhere they may be perpetual and inalienable (in France, for example). Resale royalty rights allowing artists to claim a percentage of the price upon each resale were rejected. They can only be contractual and therefore have no third-party effect (in the US at the federal level). They are recognised, however, in California (under State law since 1979). Other asset classes may be found in the modern emission rights in respect of the emission of CO2 gases in the atmosphere. They have become fundamentally tradable, supported by legislation in many countries. This acts as a kind of commercial licensing system. In the EU, they are now traded under an EU emission trading scheme (ETS). Another question is whether public licences or concessions may become more generally tradable also or will normally remain confined by the law under which they are granted, maintaining a distinct regime. It raises the question whether they may be transferred by the beneficiary if nothing to the contrary is said in the relevant statute and, if they may be traded, whether the transfer regime (and its incidents) is one of predominantly public or private law (should nothing more be said in this respect in the relevant enactment either). 471 Thus, under modern law, the interest one has may be very little and entirely prospective: see Vol 5, s 1.6.2 with reference to s 9-203(1)(c) UCC. The risk of value is thus largely on the transferee, who may nevertheless be able to claim whatever he honestly thinks belonged to the transferor. This is bona fides protection based on appearance of ownership in the transferor (no longer favouring common creditors: see Vol 5, s 1.1.9) without any requirement of physical possession in the transferee.

320  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights It is then no longer a legal issue. Eliminating this possibility, as older law did, meant in fact no less than limiting business choices for no obvious reason. Although conceivably it may harm prospective future common creditors in any prospective bankruptcy of the transferee, there seems to be no fundamental issue of protection involved, at least not between professionals who should be able to assess these risks. In terms of other (more limited or divided or partial) proprietary interests such as security interests, usufructs, etc, we may then also create them in these assets (in the sense of prospective objects of economic value), even (in floating charges) if they are future. In modern law, this may particularly include classes of assets such as inventory of future manufactured assets and of receivables connected with their sale. But we may be able to sell them free or clear or collect regardless of the security interest so as not to impede liquidity and the ordinary flows. If so, in a modern system, the security is likely to shift automatically into the replacement assets (replacement inventory, receivables or proceeds), while the security interest in these replacement goods (which are as such sufficiently identified even being future at the time of creation of the interest) will survive in them at its original rank. One other aspect is here that these security interests may also prove good in protecting future debt (again always at the original rank). That is indeed the system and achievement of Article 9 UCC in the US and generally acclaimed. In Germany, it was possible to achieve through contract (party autonomy) a facility that comes fairly close—see Volume 5, section 1.4.1—but that flexibility does still not obtain in most other civil law countries and was not even incorporated into new codes such as that of the Netherlands in 1992, which retains the notion of physical identification of individual assets and of physical disposition rights: see more particularly Volume 5, section 1.2.2. The connection of physical identification with the disposition right is here particularly fatal as it is also in the DCFR as we shall see. In such a system, future transfers and floating charges cannot thrive.472 By loosening the limited number of proprietary rights and allowing new contractual ones (created by a form of party autonomy) to operate at least in respect of all who know of them when acquiring the property, the sharpness of the distinction between proprietary and contractual rights is reduced in respect of all user, enjoyment and income rights in assets, the latter ones, even if in origin merely contractual, being strengthened. On the other hand, the original ones were for chattels weakened by bona fide purchaser protection, which is also the limit of the reach of contractual user and enjoyment rights in terms of economic or equitable proprietary interests. It was pointed out that we see here approximation not only between proprietary and contractual user and enjoyment rights, but also between common and civil law at the same time: see section 1.3.8 above. This supports all the more the direction of the modern lex mercatoria in this area. Together with the notions of abstract rights and obligations and the abandonment of physical anthropomorphic ownership and possession concepts, the above 472 New Dutch law is here regressive and states at least in the case of bankruptcy of the transferor that the transfer is not complete until the assets have not (physically) accrued to the transferor before his insolvency, see Art 35(2) Dutch Bankruptcy Act (as amended in 1992 at the time of the entering into force of the new Dutch Civil Code). It means that at least in the case of a bankruptcy of the transferor the disposition right can no longer be deemed transferred in advance (not, in countries requiring delivery, through a so-called anticipated delivery constituto posessorio either). Such a delivery can then only become effective once the asset emerges in the patrimony of the transferor. This is an exception to the more general rule formulated in this respect under Art 3.97 of the new Dutch Civil Code. It has already been noted that in France through an Ordinance of 23 March 2006, floating charges are now being made possible by statute subject to further implementation decrees. It is an important departure that strays far from the system of the Code Civil and will put it under further stress. As we shall see in Vol 5, s 1.3, in France modern financial products started to depend heavily on statutory intervention often derogating fundamentally from the regime of the Code, eg, in terms of reservations of title, bulk assignments, securitisations and repos.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 321 presents in essence a simple modern system of rights and obligations in or to assets, although there may still be differences in the type of protection: proprietary actions for the old proprietary interests suggest specific performance, at least in civil law; tort actions for economic or equitable interests suggest damages in both systems with, however, the important extra of the preferential status of such damage claims in a bankruptcy. There is also the question of a more product-specific approach. Whether in this environment the civil law triptych of ownership, possession and holdership retains validity and efficiency in terms of the modalities of expression and protection is another matter already raised before, as was the connected concept of acquisitive prescription. The common law, which protects proprietary rights only in tort, normally therefore in terms of damage actions across the board, may well here also show the way of the future in the modern lex mercatoria. Although specific performance is not likely to result, it means all the same full or adequate protection in bankruptcy, either by the estate paying the full damage amount or handing over the asset. Even now in civil law a similar approach is often taken in respect of intangible assets, especially monetary claims when used as security. A similar approach is conceivable in respect of conditional and temporary ownership rights and the expectancy that they raise in the reversion, although a dual ownership structure is here also possible (see section 1.7.3 above) and perhaps more understandable in civil law. It suggests that the civil law notions of ownership, possession and holdership and its concept of acquisitive prescription may lapse in respect of contractual user, enjoyment and income rights when protected against third parties on the basis of their prior knowledge. It follows that these proprietary and equitable rights are then more likely to be protected on the basis of their being the better rather than the absolute right. Again, that is the common law approach. Finally, one could ask whether there is here still some greater or more modern underlying concept of property altogether, a question which may not yet be capable of a meaningful answer. It may not even be relevant. In fact, a search for one new unitary system, regardless therefore of the type of product, would appear premature, although there are unifying aspects in: (a) the proprietary protection of modern contractual interests of which there is knowledge in the acquirer of the asset; (b) the protection of the ordinary course of business against such charges through the notion of finality; (c) the protection of the modern proprietary interests basically in the tort; and (d) the distinction of proprietary rights being enforceable against the whole world and obligatory rights only against identified counterparties remaining valid,473 but in economic or equitable interests there follows an important middle ground. In section 1.3.9 above, a reference was made to a more functional analysis in modern US legal scholarship, especially in connection with the limitation of the types of proprietary rights under the objective law, leading to modern support for the numerus clausus notion.474 There is here 473 This traditional distinction, although much less clear in common law, especially, as we have seen, because of the operation of equitable proprietary rights, is nevertheless maintained by more modern thinkers in the US: see H Hansman and R Kraakman, ‘Property, Contract, and Verification: The Numerus Clausus Problem and the Divisibility of Rights’ (2002) 31 Journal of Legal Studies 373. 474 In Europe, no fundamental effort has been made either, although problems have been spotted, especially in connection with the proprietary status of modern security entitlements, but there remains a difficulty in recognising intangible assets as being capable of giving rise to proprietary claims while on the other hand there continues an inclination to search for an underlying unitary system: see eg A Pretto-Sakmann, Boundaries of Personal Property (Oxford, 2005).

322  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights no broader investigation, however, into the whole of modern property law, which is ever more clearly demanding greater flexibility and rejects physical, individualisation, and numerus clausus notions. The US functional theories would therefore seem remote from reality and out of touch. They are not even a proper reflection of the present common law (especially equity) approach. In particular, there is here no discussion of the risk management and liquidity aspects of modern property law and the need to allow variations per product. In fact, any defence of a numerus clausus in the modern circumstances seems bizarre in the professional sphere. Rather, we need a more dynamic concept of property rights. Predictability remains an important issue, but as we speak here of transactions between professionals it is foremost for them to understand their products and the proprietary consequences. In fact, in the simple system here proposed, with its strong emphasis on the protection of bona fide purchasers and of ordinary commercial life, finality is enhanced and certainty or the lack thereof becomes a dubious concept beyond it. Indeed, a more pragmatic approach is now needed which, in this book, is not guided by theory but finds its empirical foundation in modern commercial and financial needs and practices, particularly in terms of risk distribution and liquidity management. There is not and never was an obvious public policy argument against such an approach except potentially when it comes to the protection of bona fide common creditors in bankruptcy. There is here a paradigm shift and an emphasis instead on ranking rather than equality, see Volume 5 section 1.1.11.

1.11.  The European Draft Common Frame of Reference (DCFR) 1.11.1. Introduction It may finally be of interest to consider the DCFR, which served at one time as a model for an EU private law codification, and how it approaches the subject of proprietary rights in movable assets. The DCFR was discussed in Volume 3, section 1.6 in respect of its coverage of contract law. In that connection it was explained how the DCFR came about and what its objectives may be. This development was also signalled in Volume 1, section 1.4.21 in the context of the harmonisation of private law at EU level and of the limited EU jurisdiction in these matters. A general codification project of private law is not within the EU’s present legislative authority and the founding treaties do not envisage it. Without proper authorisation in the founding treaties, which would have had to be given by each Member State, a project of this nature is illegitimate and an EU overreach. So far, the principle holds that no Member State is to be deprived of its own private law. A similar attitude has always existed within the US. The promotion of the internal market under Article 114 TFEU is often considered a ready substitute, but it limits projects of this nature to cross-border dealings only and superimposes the continuing need to promote the internal market as leading interpretation principle in any EU law so introduced. Even consumer protection and similar considerations could thus become subservient to it lest the whole basis of this jurisdiction collapses. In any event, any such backdoor legislative jurisdiction needs to be narrowly construed and a demonstrably positive effect on the operation of the internal market needs to be established. The hubris with which the Commission announced the presumptive benefits for the internal market of its initiative in the sale of goods (CESL), now withdrawn, which was a DCFR carve-out as we have seen in Volume 3, section 1.6, bordered on the delusional and further undermined the credibility of this project, whose fundamental problem was, however, a lack of quality: see the comments in Volume 3, section 1.6.13. Nevertheless, the DCFR tried to synthesise and presented the first attempt to cover substantially

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 323 the whole field of the private law of obligations and movable property at the EU level. While in contract there were earlier studies such as the European Principles of Contract Law and also the UNIDROIT Principles as we have seen, in property it involved substantially a new effort largely inspired by German law. Real estate is excluded and is rightly perceived as remaining a domestic matter, even though it must still be asked how, in a system approach, it will then fit the model and how two different property regimes per country may cohabit. It has already been pointed out before that methodology was never considered in this project and the DCFR is uncritically cast in the traditional civil law codification mould, built on formal legislative texts, and is as such top down, statist, prescriptive, static, and positivist. This law has technique and logic at its heart, supposed to issue from a coherent text that is deemed to be a comprehensive reflection of reality and capable, if properly interpreted, of producing all answers. Other sources of law are not considered or accepted as valid, except where specifically so provided, and there is no decentralisation in that sense. In this approach, even fundamental principle or deeper values only operate by statist fiat. It follows that the DCFR functions as a proposal for a national code, now at EU level, and presents without questioning old-fashioned codification thinking in the civil law tradition, which has always sought to monopolise the field and push out all competition in law formation and interpretation or supplementation. This then also applies in principle to cross-border dealings within the EU, which is here considered one internal market and the private law concerning it henceforth a domestic matter throughout the EU. For dealings cross-border within the EU, the modern lex mercatoria is then ignored even though, as has already been said, the EU has at most only limited authority for cross-border transactions under Article 114 TFEU and never, it would appear, has authority to abolish at the same time the force of other sources of law unless it can prove that they also hinder the internal market, something that may be difficult to maintain. The now abandoned project for a common sales law or CESL, having been the first one officially proposed by the EU in this connection, only applied to cross-border sales in the EU which was indeed the consequence of the constraints under the founding treaties. As a project, the DCFR in its aspirations did not limit itself to cross-border transactions: it was never an official proposal (unlike CESL) and merely an academic exercise. First drafts were presented in 2008, mainly concerning the law of obligations, the contract part of which was discussed in Volume 3, section 1.6. In 2009, further chapters were added in the area of movable property while the Introduction was rewritten. It especially struggled with the notion of fundamental principle without being able to assign it a proper place, although the horizontal effect of human rights had already found a place in the text and was allowed to operate in the interpretation of the DCFR but may be of little consequence in private professional dealings. So may be the other accepted fundamental notion of anti-discrimination in Article II-2.101. The essence is that the DCFR purports here to have made all the necessary choices, fundamental principle operates by its licence only. Again, it is the competition with all other sources of law, especially fundamental principle, industry practices or custom and general principle, that remains beyond the contemplation of the drafters. In this vein, also the important issue of the impact of party autonomy in proprietary matters eluded them. The approach in equity in common law countries is here also ignored. Perhaps there was not even awareness of it. It can only be repeated that in particular for modern professional dealings, this is becoming seriously problematic. The attempt is by its very nature unfriendly to all more spontaneous law formation including the autonomous transnationalisation of private law. The DCFR did not understand the modern developments and needs in this direction, and still assumed that through codification of this nature, basically in the anthropomorphic consumer law approach of

324  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights the nineteenth century, a complete system of property law can still be devised, basically the same for business and consumers, that continues adequately to cover all eventualities for all types of participants in a unitary manner in their present and future transactions, now EU-wide. There is no fundamental awareness nor much special consideration of the nature of the relationship of the participants and of the needs and modern demands of professionals and their commercial and financial transactions. The idea is to have one text for all of the EU that simultaneously covers professional and consumer dealings in a parochial model. Business and its legitimate needs remain an unknown world for the drafters of these texts. It is no wonder that in this approach modern forms of asset-backed financing find no place or are distorted. Conditional and temporary sales, including reservation of title, repos and finance leases suffer. Floating charges remain underdeveloped. The entire law of intangibles and assignment is adrift. It has already been pointed out in Volume 3, section 1.6 in connection with contract law that the DCFR, at least in its perspective and mentality, remained in truth a consumer law text extended to the professional sphere. That remains the civil law tradition and approach, but the result is a continuation of what is in essence an anthropomorphic concept of private law, including property law, with physical concepts of possession, disposition rights, and specificity requirements. Prescriptive consumer law notions further float into professional dealings. Again, the result is an antiquated movable property framework that does not properly cater for modern financial needs, products, risk and liquidity management, and transactional and payment finality. It may be recalled in this connection that the UCC in the US follows here largely a product and not a unitary approach and advanced greatly the law concerning modern finance, be it in Article 9 (secured transactions), Article 8 (investment securities), Article 4A (electronic payments) or Article 1A (equipment leases). Generally, its endeavours in these areas have been greatly welcomed and its innovative thinking admired. There is nothing of this mentality to aid, facilitate, and find new and better ways in the EU. That is the true reason why projects like the DCFR do not catch on. The professional practice does not recognise itself sufficiently in these efforts. In particular, the consumer mentality hamstrings all activity in the professional sphere, which is not properly distinguished and set apart. It has been said many times before that this lack of relationship thinking is one of the basic flaws of projects of this nature besides an unwillingness to respect other sources of law and allow through them alternative bottom-up or immanent law formation, subject of course always to legitimate public policy and public order concerns, intellectualisation, system creation and thinking not being amongst them. Again, this attitude was demonstrated in Volume 3 in particular in contract law but it is no less evident in movable property. It led to a prescriptive and censorious attitude fed by a suspicion of market forces that far exceeds normal public order concerns. Hence still the physical notion of possession, which operates in the German manner (in the nature of the old German gewere notion, see section 1.2.3 above), and the rejection of a more advanced and more modern fully rights-based approach. Hence also the problems with intangibles and with their asset status. In the German way, they are still covered under the law of obligations (Book III, chapter 5) and are still not considered objects of property rights as we have seen. This no longer makes much sense but is an unavoidable consequence of the fact that property is still seen as something physical and not as a system of rights and obligations, as all law is. In this vein, problems also emerge with the transfers of future assets and those in bulk, more so even than under present German law. There is no concept of future commercial flows and related income flows or their status and there is here also regression. The notion of finality is not given its proper (central) place

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 325 either; the concept of certainty in interpretation (Article I-1:102(2)(c)) does not adequately cover it—see further section 1.11.6 below—but far worse is that the abstract system of title transfer is abandoned in favour of a causal system (Article VIII.-6:102), indeed another anthropomorphic notion that in this instance undermines the key concept of transactional and payment finality in professional dealings. It seems that for the DCFR in these areas, there was hardly any proper comparative law analysis or consideration of policy. The result is that the common law experience was generally ignored except for the important introduction of the trust in Book X but only as a formal separate proprietary right in the numerus clausus. Notably it is not associated with the important notions of constructive trust and separation of economic interests. Again, the true issue is the operation of equitable proprietary rights more generally and their significance in commerce and finance in which connection it was said before that a legal system that considers property merely physical, cannot deal with a generality of assets or classes of them, nor with the concept of trusts, or party autonomy in property, can no longer succeed and these are markers on the road to failure. Especially the concept of knowledge of adverse interests in the transferee when acquiring an asset and their protection should have been considered in their fundamental aspects but are not developed as general concepts. The modern role of party autonomy in property law (subject to the protection of the commercial flows and transactional and payment finality) and risk and liquidity management through a freer creation and operation of more specialised proprietary rights are here ignored. A dynamic concept of modern property law as primarily a risk management tool cannot develop in this environment, even for professional dealings. The end result was, as in contract, substantially some update of the old German BGB and the proposals had to be seen in the context of the German discourse on the subject with its basic aversion to commerce and its modest understanding of professional dealings and financial products and services. Germany is an industrial nation and misses an insight into the flexibility required in services and the handling and management of risk. It mistrusts freedom and sees all activity covered by a statist legal framework that without such coverage bears the suspicion of illegitimacy. The social constellation is in this view always a statist framework of licence. That remains also the unacknowledged undercurrent, philosophy and method of the DCFR and an unresolved issue in the EU, especially after Brexit. We thus see a closed system of proprietary rights maintained and no awareness of its opening, even in terms of conditional and temporary ownership rights. Although the concept of conditional ownership is provided for in Article VIII-2:203, which also distinguishes between resolutive and suspensive conditions, its use in finance in particular is not further considered and it is not clear how this type of property works. Unlike under present German law, the reservation of title is separated out (see Article VIII-2-307) while hire-purchases and some finance leases follow this regime (Article IX-1:103(2)). The sale and lease-back as well as the repo are re-characterised as secured transactions (see Article IX-1.104(4)) probably without it being realised what this truly means in terms of funding alternatives. The finance lease is perceived to be purely contractual in the traditional German manner unless ownership is transferred at the end when it becomes a reservation of title; see also section 1.11.4 below. The floating charge is not favoured either and is mainly seen as some contractual extension of existing property rights (Article IX-2:307). The result is a number of new, narrowly described property rights. There is no use for deeper, more fundamental building blocks in terms of conditional and temporary ownership rights, segregation and constructive trusts, or of future flows in commerce and income. Again, this is very German and may well continue to work for the Germans in their domestic dealings, but the DCFR would appear to be regressive in these areas even compared to

326  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights present German law475 and suggests less flexibility and in any event no conceptual clarity for transnational professional dealings in the international flow of goods, services, money, information and technology. Neither is there any clear awareness of the more conceptual matrix of proprietary rights and the way they are commonly held and protected in civil law, which is otherwise followed: see section 1.2.2 above. To repeat, the approach is not rights based but one of identification of the ownership right with the asset coupled with a physical notion of possession, all operating at the level of common speech in the consumer or anthropomorphic manner, but even then, without much practical insight. The DCFR thus misses the opportunity for reform that a more abstract, rights-based, approach offers. The basic division is here along the lines of the nature of the asset, either tangible or intangible, not in terms of transaction or product or type of counterparty.

1.11.2.  Chattels and their Transfer. The Issue of Physical Possession In the DCFR, property rights only attached to physical assets, therefore in so far as movable property is concerned, only to chattels, and it is, as a consequence, foremost concerned with the way they are physically held, transferred and defended.476 Real estate remains domestic and is not covered, which is quite understandable, although, as already noted, one may wonder how a duality in the applicable property law may operate in countries which, like those of the civil law, engage here in unitary system thinking. The key is ownership, defined in the traditional manner as the most comprehensive right a person can have over the property (Article VIII-1:202) but in the DCFR, following the BGB and earlier von Jhering in the style of the old Saxon gewere (which still very much corresponds with the English bailment or seisin notion), the true perspective is still physical possession, quite different therefore from the Roman law that was adopted and is still taught to be the basis, but is not truly the ultimate model in Germany as we have seen. Articles VIII-1:202 (ownership) and 1:204 (iura in re aliena) enumerate the proprietary rights that may exist in chattels. For physical movable assets, this is the continuation of the traditional numerus clausus notion, only widened for reservation of title and formal trusts in Books VIII and X. The manner in which chattels are held and defended is dispersed, however. We find the ownership right in Article VIII-6:101 (the revindicatio) supported by acquisitive prescription, and in Article V-4:101 (based on possession, which must have been be continuous for periods that seem unusually long for chattels). For the other proprietary rights, the defences are less clear. For security interests, they may have to be found in Book IX, for the reservation of title also, and for trusts in Book X; the usufruct appears forgotten altogether.477 475 It would seem that contrary to present German practice, the bulk transfer of chattels, including future assets and their anticipated transfer, is endangered under the text of Art VIII-2:101(1)(a). The Globalzession or bulk assignment including future debt appears no less in trouble under Art III-5:104(1)(a), also of major consequence in securitisations and receivables financing, see Vol 5, s 2.2.4. This narrowing of present-day German facilities in these areas may also affect the possibility of an erweiterten or verlängerten reservation of title, see Vol 5, s 1.4.1. See for floating charges also s 1.11.4 below. 476 They are here called ‘goods’, which acquires a narrower meaning following the common law tradition, see Art VIII-1:201. 477 In respect of each of the iura in re aliena or limited proprietary rights, there is in Art VIII-1:204 still a reference to national laws in respect of user rights; it would be interesting to hear why and how this is to work if various proprietary rights are established in the same assets. The General Provisions of Book I apply but, while making it clear that proprietary rights in movables are covered, they do not enter into the relationship to domestic laws in respect of them. It may in this connection further be noted that the good faith and reliance notions of the General Provisions (Art I-1:103(2)) also cover proprietary dealings, which raises finality issues (as mentioned above, ignored in the DCFR: probably a further indication of its consumer law orientation).

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 327 As just mentioned, in the DCFR physical possession or at least control stands beside ownership (not as a proprietary right but as a strong base for protection), the preference, however, in a more theoretical sense still being for the revindicatio as the proper defence of the ownership right itself (not necessarily for the other proprietary rights). That is also the German tradition (never mind its interest in physical possession), not necessarily followed in this aspect elsewhere in civil law and in any event different in the common law, although (at law) equally physical where bailment gives then altogether the stronger protection: see section 1.3.2 above. In terms of possession, the emphasis in the DCFR in the area of protection is in fact on restoring physical control only, however obtained (under proprietary or other rights). Indeed, possession is defined in Article VIII-1:205 in terms of physical control (not, therefore, as the shadow of each proprietary right) and appears protected only in that limited sense (Article VIII-6:201). In the German manner, we have here further direct and indirect physical possession (corpus), the latter through another person (holder). Again, possession in this sense is meant to be factual, in derogation of Roman law (animus), therefore in the manner of the old idea of gewere, but where there is reliance on control, it can hardly be mere fact. It may here also be seen that holdership is no longer distinguished from legal possession. Thus, the mere holder or indirect possessor defends also on the basis of possession: Article VIII-6:201. The holder who holds the asset for someone else thus ‘borrows’ the possessory action from the latter. For title transfer, there is a need for delivery as a separate legal act, also still captured in a largely physical manner followed by protection of bona fide purchasers (also based on control in this sense), not of the commercial flows as such. This protection may not be relevant in respect of the operation and transfer of other proprietary rights. In this system, transfer of title is also physical (Article VIII-2:104) (although it may sometimes be constructive, see Article VIII-2:105).478 See for the physicality of this transfer also the sections in the chapter on sales: Article IVA-2:101(b) in conjunction with 2:201, and Article IVA-3:101(b) in conjunction with 3:104. It may well be questioned whether this is still the most sophisticated approach; again, it goes back to physicalities. Further requirements for the transfer of ownership (only) are (Article VIII-2:101) that the goods exist, are transferable by nature, that the transferor has sufficient disposition rights, and that there is a contract or similar juridical act. Again, all this is basically perceived as physical. It follows that there are the usual problems with transfers in bulk (see Article VIII-2:305, which still relies on goods being in a defined space or area for purposes of their transfer) and of future assets, and the difference in this regard between absolute and relative future assets, all again connected with physical notions of delivery and a (related) limited concept of disposition rights in chattels. This is also typically German, but (against the German tradition), there follows here the adaptation of a causal system of title transfer (in defiance of all modern trends) as has already been mentioned. Again, this is a perception also mired in anthropomorphic thinking unaware of key finality needs, especially in commodity trading. Finally, it may be of interest to consider how in this system assets sold and delivered but not yet paid for are treated from a proprietary point of view, an issue not generally dealt with in the DCFR nor in its chapter on sales (Book IV, Part A). It may be recalled that there are here often aspects of equitable interests in civil law.479 They may also figure as so-called economic interests, 478 It concerns here the transfers brevi and longa manu and the constitutum possessorium. Curious is the addition that where there is a document containing a promise to deliver the goods to the holder, the transfer of that document is equivalent to delivery of the underlying assets. This is not implicit in many legal systems (see also s 2.1 below on international sales) and commonly does not affect bona fide purchasers of the goods who acquire physical possession. 479 See s 1.3.7 above.

328  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights again, aspects that do not receive attention in the DCFR either. It may further be remembered that a third area where a type of equitable interest may arise in civil law is in the contractual right of passage if disclosed to the buyer before a sale of the serving property. Since this is a real estate matter, it is not part of the DCFR.

1.11.3.  Intangible Assets and their Assignment. The Problem of Asset Status As for intangible assets, the DCFR also follows the traditional German approach, not even the somewhat diluted more recent Dutch version of 1992.480 As the general German property approach to assets is that they must be physical, as we have seen, there is no concept of ownership, possession or acquisitive prescription in intangible assets, the asset status of which is not considered; the rights in or to them are defended in tort. As a consequence, in Germany, assignments are contracts, not transfers of title, even though it is not denied that the transfer takes place at the same time as the conclusion of the assignment: see also section 1.5 above. In fact, in Book IX DCFR, claims are all of a sudden given asset status and treated as such when serving as security. It is only further testimony of the confusion in German law in these matters. An advantage of sorts was always that even absolutely future claims could then be included in an assignment, and that it could also be in bulk, although now specifically hemmed in by the DCFR in Article III-5:106, which would appear to be here seriously regressive compared to present German law. In fact, Article III-5:104 requires the rights to be assigned to exist and to be assignable, the assignor having proper disposition rights in them, while there must also be a contract or similar juridical act. Interestingly, it may be observed in this connection that this language entirely tracks that for the transfer of chattels in Article VIII-2:101, which makes it even less understandable why the transfer of intangible assets is still treated as if they have no asset status. It is positive in this connection, however, that in the DCFR contractual assignment prohibitions have largely lost their third-party effect—see Article III-5:108, which also tracks the situation for tangible movable assets (see Article VIII-1:301), all the more so for receivables (see Article III-5:108(3)(c)). It was said earlier that the real policy issue here is whether receivables are increasingly to approach the status of negotiable instruments and are treated as such: see section 1.5.9 above. In traditional German thinking, the extended facilities for the transfer of claims largely follow from the absence of a need for a document and notification of the debtor. The abstract system of title transfer appears still to be implied here also: see section 1.5.1 above. Again, this approach in respect of claims generally allows a greater degree of party autonomy as it operates outside the ordinary civil law proprietary regime and its numerus clausus of proprietary rights. That could even allow for equitable interests in them in a common law sense, including conditional and temporary transfers or security transfers of all kinds, also floating charges. This was earlier considered an advantage of sorts, but only derived in Germany from an analysis of asset status (or the absence thereof) that is defective. In the meantime, it would appear that the DCFR is more restrictive. It means that the law of assignment is increasingly copying the law of transfer of tangible movable assets. Theoretically that makes sense, but means that the current more flexible German approach in respect of intangible assets and their transfer also into tangible 480 The DCFR was here preceded by later chapters of the UNIDROIT Principles of Contract Law and of the Principles of European Contract Law (PECL).

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 329 movable property (doing away with physicality throughout) is abandoned. Incorporating this approach for all assets would have been more significant progress. Where the liberal German approach to receivables and their assignments still fell short was in the lack of approximation of receivables to negotiable instruments, the consequent limitation of the defences of the debtor to the minimum, the need for the debtor to cooperate in such assignments, especially if for security purposes (which is likely to make the own credit possible), and in particular in the lack of protection of bona fide assignees. Here the DCFR may do better, even though it still retains many of the old impediments: see in particular Article III-5:116. Interestingly, it protects the bona fide assignee, but forgets to require collection: see Article III-5:121(1).481 It is finally also of interest to consider whether contracts as such can be transferred under the DCFR. It may be recalled that the tendency in the US (at least in the sale of goods as we have seen) is to allow it unilaterally (without consent of the creditor) but that the transferor remains in such cases the guarantor of his undertakings or duties under the contract (now transferred). Only if there is a demonstrable special interest of the creditor may the latter object: see section 1.5.4 above. There is no such idea in the DCFR, which always requires consent of the contractual counterparty: Article III-5:302. Even if merely a new debtor is added (incomplete substitution) and the original debtor remains the guarantor, it appears that the creditor can still reject: Articles III-5:203(3) and III-5:206.

1.11.4.  Security Interests. Treatment of Reservation of Title, Finance Sales, and Floating Charges Much has already been said about secured transactions and more will be said in Volume 5, but the real test in a modern law is the approach to finance sales as security substitutes and to the floating charge. The rest is detail in terms of modernisation, although in countries like the Netherlands it has given great problems, particularly in respect of monetary claims. It was intimated earlier that the DCFR fails on both accounts. It now reserves a special place for reservation of title as purchase money security. Its nature as conditional sale is abandoned, which is further evidence that the DCFR omits substantially to bring the conditional and temporary transfer within the overall structure of proprietary rights. It may be mentioned in this connection that Article VIII-2:203, introducing the resolving condition, withholds retroactive effect; the suspensive condition works, more naturally, only for the future, although it was said before that it might not always be clear who has the one or the other. Temporary ownership rights are not considered. In this way, one must assume that the drafters meant to keep the system of proprietary rights firmly closed. To repeat, Article VIII-2:307 avoids the terminology of conditional ownership in connection with the reservation or retention of title and only reserves for the transferee a proprietary right of sorts in the nature of an expectancy, in Germany more properly called a dingliche Anwartschaft—see for the discussions in this connection in Germany itself, Volume 5, section 1.4.1. The DCFR does not explain how this expectancy operates. When picking up the concept of reservation of title in Book IX in the context of secured transactions (see Article IX-1:101(1) (b) and 104), only the connection with Article IX-2:104(4) still suggests the operation of 481 Of interest is also the position of the assignor as collection agent and the preferred right of the assignee to the collections if reasonably set apart from the rest of the assignor’s assets, Art III-5:122.

330  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights a conditional ownership right. Importantly in this connection, the finance lease as sale or lease-back is considered a security interest and does not stand alone. So surprisingly is the repo (Article IX-1:102(4)(c) and (d)). This is a matter, therefore, of re-characterisation under a unitary concept of securities, which has given so much trouble in the US. Hire-purchases are on the other hand sorted under reservation of title, as is the finance lease, assuming the lessee may acquire the full ownership at the end of the lease. Otherwise, it is a mere contract: see Article IX-1:103(2)(b) and (c).482 The practical difference between a security interest and a retention or reservation of title is notably in the appropriation facility under the latter: see Article IX-7:103(3) and 7:105(5). It was submitted before that there is here a substantive element: this facility to appropriate in finance sales results from the lack of an interest rate structure, which sets the finance sale apart from the security, which supports a credit, not a sale. The DCFR does not appear to draw a similar fundamental line with the result that it is hardly clear why a repo is a secured transaction, some finance leases conditional sales, and others mere contractual arrangements. Again, it may be recalled that in the US the re-characterisation of the repo as a security interest was always considered a disaster and is avoided in case law (regardless of Article 9 UCC)—see Volume 5, sections 1.6.2 and 1.6.3—while repo netting is subject to a special regime under the Federal Bankruptcy Code, which favours it and does not accept appear to accept the re-characterisation as a security interest in bankruptcy. For the creation of a security interest proper, Article IX-2:102 starts with the requirement that the underlying assets must exist and are transferable. This signals serious danger for a modern system. Disposition rights and a security contract are required in Article IX-2:105, but bona fide creditors are protected if in possession or registered in good faith (assuming the asset was not stolen), which also applies to earlier security interests created in the property: Articles IX-2:108 and IX-2:109. To repeat, this approach begs the question whether receivables and other intangible assets may be the subject of similar secured interests and bona fide creditor protections. Article IX-2:104(2) allows them to be used as collateral, even if the underlying claim is itself not transferable as long as it can be reduced to money, cf also Article IX-2:301(2) in conjunction with Article III-5:108(1). Future or generic assets may also be transferred (perhaps also future claims, it is not fully clear) but the security interest arises in such cases only when the asset comes into existence or can be specified: Article IX-2:104(3). For receivables, there are further provisions in Article IX-2:301 which notably exclude the protection of bona fide security assignees under Book III, chapter 5. They have to accept earlier interests, why is not obvious. Again, there are no provisions for a conditional or temporary assignment as we may see in some forms of recourse financing: see Volume 5, section 2.3.4. They are, however, not excluded either. It should be repeated that the bulk transfer of chattels, including future assets and their anticipated transfer, is endangered under the text of Article VIII-2:101(1)(a), which requires them to be existing. The Globalzession or bulk assignment of German law, including future debt, would seem equally in trouble under Article III-5:104(1)(a), both of major consequence for floating charges, securitisations, and receivables financing: see Volume 5, section 2.2.4. Again, Article VIII-2:101(1)(a) requires any transferor to have the disposition right, which may further inhibit the transfer of future assets. Article III-5.104(1)(a) does the same for claims, which affects in particular the bulk assignment and is not retrieved in Article IX for security transfers. This apparent narrowing of present-day German facilities in these areas also affects the

482 In this connection it may also be noted that trusts for security purposes also follow the rules of Book IX: see Art IX-1-101(2)(a) and Art X-1:102.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 331 possibility of an erweiterten or verlängerten reservation of title (see Volume 5, section 1.4.1) and spells further trouble for floating charges. There appears to be no concept of future commercial or cash flows, even as replacement assets. The situation may be retrieved to some extent by Article IX-2:307, where security interests can be extended by agreement to replacement goods (chattels). This may also cover proceeds (see Article IX-2:306) and follows present German case law, but it would have been better if the whole structure of security interests in movable property, including intangibles, had been more fundamentally reconsidered and the floating charge had been more solidly founded in the structure of the security rights itself. Essentially, it is no longer tenable to maintain as a general principle that security transfers can only be created in specific existing assets and then only attach when they do emerge. The protection of the commercial flows is the subject of Book IX, chapter 3. For non-possessory securities including reservation of title (even in respect of consumer goods) a registration system is introduced: see Article IX-3:102. Article IX-5:204 protects the commercial flows, however, and allows the sale of inventory free and clear, cf also Article IX-6:102. There is no search duty, not even for professionals. Equipment may only be disposed of free and clear if so authorised by the creditor. At least, receivables and proceeds may be encumbered regardless of earlier charges and assignment restrictions as we have seen, but bona fide collecting security interest holders appear to be subject to earlier charges under this Article IX, notwithstanding Article III-5:121(1). Upon enforcement, whether through a sale, appropriation (where allowed), or upon collection in the case of receivables, the transferees are protected against the security provider and junior interest holders (those lower than the one of the enforcing creditors and his own): see Articles IX-7:213ff. A rule under which all interest holders would be paid out of the proceeds according to rank, leaving the buyer free and clear, might have been more sensible and especially facilitates execution sales.

1.11.5.  Trusts. The Question of Systemic Integration Book X deals with trusts in the formal sense only. Except for awkward terminology (‘truster’ instead of ‘settlor’ and ‘storer’ instead of ‘custodian’), the main observation to make is that the trust structure is here isolated and not an all-pervading equitable notion. Constructive and resulting trusts are thus excluded or cannot generally arise. The important issue of separation that is entailed in them is thus lost and tie protection of economic interest holders undermined. It follows that in the perception of the drafters, there is merely another proprietary right while the system of proprietary rights itself remains firmly closed. The result is that creditors may be able to lay claim to large parts of a debtor’s assets that are only the latter’s in name. It was said before that this may amount to a great benefit and major unjust enrichment of creditors in respect of assets the debtor held for third parties. One may refer here in particular to custodial and client accounts or to collecting agencies. It is more generally a basic flaw in civil law proprietary systems that the DCFR did not seek to address.

1.11.6.  Certainty, Finality, and Predictability It has already been said that the key issue of transactional and payment finality is not squarely met in the DCFR either and this is an issue that should be revisited once more. It was explained before that in a modern transactional environment, finality is an essential element in the creation and operation of proprietary rights and in payments. In the professional sphere, no amount of

332  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights legal sophistry should unsettle completed transactions of this nature except if there is fraud. It was shown that the notion of finality is in modern times particularly underpinned by the protection of: (a) bona fide purchasers (or all those purchasers in the ordinary business concerning commoditised assets to protect the commercial and financial flows); (b) the abstract system of title transfer; and (c) the notion of reliance. It is further reinforced by (d) de-emphasising the psychological nature of the will, notably in matters of contractual validity and the notion of mistake that could otherwise easily undermine any transaction, even the delivery itself as a legal act where still required. The concept of independence (or abstraction), well known from negotiable instruments and letters of credit, is here also further support. One may see the abstract system of title transfer as a particular example of it, but there are other instances such as the independence of the receivable vis-à-vis the contract out of which it arises (and once transferred it cannot be easily invalidated under it) and in assignments, the abstract nature of the rights of the assignee: see more particularly section 1.5.9 above. Finality should not be confused with legal certainty. The latter is an objective of the DCFR (see Article I-1:102(3)(c)), there only relevant in interpretation and, even then irrationally so, it was argued, as it condemns participants to antiquated notions that could be so out of date that certainty of this nature may mean low-quality law. One may recall the quote of Jerome Frank referring to a child-like need for stability and the earlier remarks to the effect that future needs can often not be adequately covered by extrapolations of past experiences. Indeed, the true issue is rather transactional finality in title transfers and payments, a narrower proprietary, but also more forceful, concept, and otherwise predictability, which is a dynamic concept that should also be well distinguished from the notion of ‘certainty’: see for this discussion more particularly Volume 1, section 1.1.7. It can only be repeated that the DCFR showed little appreciation of this key concept of finality. It is not central to it and it even seems to prevaricate, especially in rejecting the abstract nature of the title transfer, ultimately to embrace the causal system as we have seen at least in the transfer of chattels (Article VIII-2:202) but perhaps even in the assignment of claims (Article III-5:118(2)). It has already been said that this makes little sense in a modern commodity-driven and trading environment. By moving away from the present German system, which in this aspect showed the greater insight, the drafters of the DCFR confirm that they have little idea of real needs and none of the marketplace. Nevertheless, the DCFR still adopts the principle of separation between contract and transfer (see Article IVA-2:101), which still requires a separate act of transfer to effectuate a change of ownership in the sale of goods. From Articles II-7:212 and II-7:303, it appears that the effects of nullity or avoidance of the underlying contract are determined by the rules on unjust enrichment. In this connection, Article VII-2:101(2) states that if the contract or other juridical act is void or avoided retrospectively, the enriched person is not entitled to the enrichment on that basis. This would still appear to suggest a need for a retransfer, therefore an abstract system as borne out also by Article VII-5:101, which specifies that, where the enrichment consists of a transferable asset, the enriched person reverses the enrichment by transferring the asset to the disadvantaged person. Whatever the correct interpretation of these sections, in so far as finality goes, the DCFR’s various facilities add up to a concept of finality that is too weak for the commercial and financial practice, especially in the adoption of the causal system of title transfer as the general rule. The problems are aggravated in particular in connection with the transfer of rights in intangible assets where bona fide assignees still only receive a limited protection. Again, the main problem is that transactional finality is not a central theme in the DCFR as it must be in modern property law among professionals and must cover also intangible assets, especially receivables and their use in financial funding schemes.

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1.12.  Uniform or Harmonised Statutory or Treaty Law. The Alternative of Transnationalisation and the Need for and Emergence of a Dynamic Movable Property Law 1.12.1.  Consumers and Professionals It was observed in Volume 3, section 1.6 that the DCFR’s basic unwillingness or inability to distinguish properly between consumer and professional transactions or indeed between consumer and professional needs is at the heart of its insufficiency and lack of credibility.483 In fact, it has no clear idea of professional dealings or the operation of the modern marketplace or modern finance and the risk and liquidity management tools in that connection, neither of their needs in terms of transactional and payment finality, nor even of justified contrary public order concerns in this area, as there might be in bankruptcy in particular. It continues to assume a nineteenth-century anthropomorphic and physical ethos coupled with a twentiethcentury prescriptive consumer mentality and confuses in the process certainty with finality and predictability. In accepting the old-fashioned territorial codification mode and unitary approach, unaware of the international flows and modern finance or the needs of professional dealings in the international marketplace, it still assumes that all problems can be settled in the ambit of its text and that the result is satisfactory per se for all participants. There is no need for empirical research nor indeed for much comparative analysis either. In this approach, the system, being assumed to be sufficiently coherent and in accordance with past insights and interpretations, will itself continue to provide the right answers for the present and future, at least that is the idea. But it is a misconception. It is nevertheless the background from which the DCFR hailed and it remains its philosophy, which bears in it the seeds of intellectual failure and practical insufficiency. Again, this must be contrasted with the obvious success of the UCC in the US, due to its forward-looking perspective, confident guidance, respect for the marketplace, and acceptance of and respect for other sources of law to operate besides it.

1.12.2.  Different Sources of Law in the Professional Sphere In the approach of the DCFR, there is no need for an understanding of the variety of sources of law that in particular operate at the transnational level. In this book, the operation of these various sources of law and their hierarchy are considered the essence of the modern lex mercatoria and its operation in the international commercial and financial legal order: see in particular Volume 1, section 1.4.13. Again, the DCFR considers here the EU one domestic market in which it arrogates to itself the monopoly of all private law formation, top down in the statist manner. Thus, as far as the DCFR is concerned, fundamental principle, although mentioned and much struggled with in the new Introduction of 2009, is not given any independent status in the text except for (the horizontal effect of) human rights and the combating of discrimination but then only as a matter of licence or concession (Article I-1:102(2)), in principle not going beyond what Member States have admitted in this connection. The same goes for good faith (Article I-1:102(3)

483 See also Vol 1, s 1.1.10 for this distinction and definitions.

334  Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights (b)), behind which, it was submitted upon a better analysis, these other sources of law now often hide in professional dealings. Custom and party autonomy similarly are not independent sources of law either (and are in any event only allowed to operate in contract law, see Articles II-1:104 and II-1:102), nor is general principle. In fact, it is somewhat curious that the laws of Member States do not figure in terms of general principle either. The reason is that they are meant to be superseded (except notably for real property and in family law, wills and succession, and employment matters). The basic problem in all of this was found to be that the momentum of the international markets is not recognised, appreciated or accepted, again driven by the idea that the EU is henceforth some domestic marketplace that is basically ordered or regulated by government. It is true that civil law has never been particularly perceptive in this area as its main protagonists, France and Germany, are not traditionally trading nations, although France more recently has made strident efforts to at least keep abreast of modern financial developments.484 But even the Netherlands in its 1992 Code surrendered to the continental attitude and the Dutch were also not able to make the necessary changes for the professional sphere. They should have been a great deal wiser. The result is not geared to a modern, mainly finance-driven society, admittedly with all the dangers and pitfalls of such an environment on which modern society has nevertheless become totally dependent.

1.12.3.  Dynamic Movable Property Law In Volume 1, section 1.1.6, much was made of the need for a dynamic contract and movable property law in the context of its transnationalisation in the commercial and financial sphere for it to remain functional, relevant, and living. Both become here essential risk management tools in the professional sphere. That change of paradigm was seen as an essential contribution of the transnational law merchant or modern lex mercatoria, which allows for a substantial measure of party autonomy in devising new proprietary structures operating among professionals subject to adequate protection of the ordinary commercial flows against such interests. It speaks to a different and, for the uninitiated, often more dangerous world. Property rights are here a matter of risk and liquidity management, which operate worldwide. It may require special public order limitations but that is then foremost a matter of regulation. There should be no confusion here. How this modern lex mercatoria is structured and operates on the basis of different autonomous sources of law, also in this area, was the subject of Volume 1 and need not be rehearsed. It is clear that in so far as international business is concerned, the DCFR lives in a past world of legal nationalism in the consumer mould. As for the future, the DCFR mainly extrapolates past anthropomorphic experiences, now transfigured into consumer notions, and seeks to apply the end result to all. It tries to clarify the legal meaning as much as academic committee insight can. That would appear to be ‘safe’ in the sense of taking the least risk and in terms of certainty as the DCFR perceives it, but, in the view of this book, academia is nothing and cannot make a real contribution if it is not imaginative and innovative at the same time while being aware of and responding to ever newer practical needs and ever evolving public policy requirements. The DCFR presents here no view of the future and in particular no view of the different place and

484 See notably Vol 5, s 1.3 and for a summary Vol 1, text at n 71.

Volume 4: Ownership and Limited, Future, Temporary, or Beneficial Proprietary Rights 335 dynamic of modern (international) commerce and finance. This is not surprising—the present author is more than aware of how difficult it is (and how long it takes, given that six volumes in this present series are now required) to present some coherent view and understanding—but it would have been better if the drafters of the DCFR had been more conscious of their lack of international experience, and of commerce and finance in particular, had therefore been less ambitious, and had limited themselves to consumer dealings, not only in the law of contract, but perhaps even more so in the law of movable property. For an effort of this nature to succeed, there must be a different structure of investigation and drafting where practitioners and other participant or stakeholders meet with academics in a stable institutional environment, which can avoid the lowest common denominator impulse that bedevils all committee work. The American Law Institute may be an important model and serve as a proper example. It will be of interest whether the fledgling European Law Institute set up in Vienna in 2011 as an independent institution will acquire credibility. So far it concentrates on the common constitutional traditions in the EU and left the DCFR well alone. Here the essence is, that in commerce and finance, these efforts should be requested by its participants, as in the EU only the Collateral Directive was, or be suggested by overriding public policy concerns as may exist in consumer dealings and in bankruptcy. Where the EU is addressed, in all cases, it should have sufficient authority and legislative jurisdiction to progress, which under the founding treaties it does not have at the moment to codify private law nor indeed to eliminate all other competing legal sources including the modern lex mercatoria and its hierarchy of norms in crossborder transactions including those within the EU. As things now stand, for all these reasons, the present DCFR project, including the sales carve-out in the EU CESL proposal (already withdrawn, see Volume 3, section 1.6.13 above), which did not even manage to deal with title transfer, although it is the principal objective of all sales, and with transactional and payment finality, are better left for what they are and forgotten until we get some better idea. Consumers are already helped through a myriad of EU Directives and should otherwise be protected by their own governments. If we now need a special private law for them, which must also be doubted (and there is still the problem with EU jurisdiction), it should in any event be clearly distinguished from the private law for professional dealings where so far nobody has seriously asked for help in the creation of a new private law system at EU level and no such help would therefore appear to be needed. It is likely to be feared by professionals for its inaptitude and lack of responsiveness.

336

Part II Negotiable Documents of Title and Negotiable Instruments 2.1.  The Role of Documents 2.1.1.  Bills of Lading and Warehouse Receipts The international sale of goods is mostly still considered the key contract in international commerce. At least in common law, the emphasis is mainly on the contractual side as we have seen and the transfer of title, which is its objective, is often ignored or also seen as a contractual issue and the proper proprietary distinctions are not commonly made, helped by the fact that in England title transfers upon the mere conclusion of the sales agreement. It is a typical common law approach that is not concerned with concepts but these issues become different and clearer when the goods must be transported and the help of intermediaries is needed. Indeed, if the goods must be moved under these sales agreements, there are often intermediaries in the shipping and warehousing arrangements. As a result, some documents are likely to emerge, if only as receipts, as the bill of lading and the warehouse receipt originally were. Traditionally, a bill of lading was given when the seller physically delivered the goods to a carrier at the ship’s rail or a warehouse receipt was given when a good was delivered in a warehouse, although a bill of lading could also be issued if the goods were delivered in a warehouse of the carrier. It was then called a received for shipment bill of lading. Once the goods were received on board, these bills would be stamped with the ‘on board’ stamp and become an on-board bill of lading. It is this on-board bill of lading that is normally referred to when we speak of a bill of lading. It testifies to the receipt of the goods on board rather than at the ship’s rail or in the carrier’s warehouse. This is an important difference. The seller will be given this document either in its own right under a CIF contract or as agent for the buyer under an FOB (free on board) contract as we shall see.485 This document allows full use to be made of the intermediaries’ safe harbour function, referred to in the context of international sales Volume 3, section 2.2.1, the goods thus being in neutral hands, the full extent of its importance becoming clear if the document can be considered to incorporate the underlying assets when it is called a document of title, all the more so if it also becomes negotiable. That is usually deemed to be the case if it is expressed to order or bearer.486 Here we see the proprietary aspect of the arrangement more clearly, meaning the determination

485 See for CIF and FOB sales, Vol 3, s 2.3.9 above. 486 Note that a bill of lading need not be negotiable in order to be a document of title. A so-called straight bill or named bill (see s 2.1.8 below) is an important example.

338  Volume 4: Negotiable Documents of Title and Negotiable Instruments of ‘who got what and when’ during and at the end of the transportation process. It means first that the goods, now being in the hands of neutral third parties, can be traded by the absent owner who has the bill which may be negotiated without the danger that the seller may not deliver the goods (for all kind of reasons). They can be claimed in ownership from the neutral intermediary by anyone who has the bill. Second, in this facility, the goods are traded and title is transferred at the level of the bill of lading, which legally incorporates them. The result is that once the bill of lading is negotiated, meaning sold and transferred to the buyer, the intermediary must release the goods to him as new owner upon the mere presentation of the bill (subject only to payment of any remaining transportation or storage charges). This facility has proved crucial in international sales, and provides great flexibility in any resale or trading arrangements, very common especially in the oil industry. It was indeed the direction in which the on-board bill of lading and warehouse receipt developed. It meant that, regardless of the whereabouts of the goods and their ultimate arrival in the place of destination, the issuing of this type of document achieved a simple method of handing over the (rights in the) goods to third parties. They may thus claim these assets as full owners against presentation of the documents without further formalities. The safe harbour function, which is achieved by means of using intermediaries, here the carrier, also allows seller and buyer to make special delivery and payment arrangements while the goods are under the control of a third party, therefore out of the seller’s reach and beyond its retention rights but also as yet beyond the physical control of the buyer. In this system, the buyer may be given the documents (normally the on-board bill of lading plus the insurance documents) mostly through the banking system, and thereby the reclaiming rights in the goods, but only against payment in the agreed manner by the relevant bank. In this way, the intermediary bank will objectively verify the documents and release the bill of lading (assuming the bank’s charges have been paid) to the buyer upon payment to the sellers, so that the buyer gains effective control of the goods only thereafter (while the goods themselves may still be in transit). It is inherent in this system that the payment cannot be threatened by a buyer making all kinds of counterclaims on the basis of the quality of the goods upon delivery as this delivery can take place only after the payment is made and the documents are handed over, allowing the buyer to claim the assets. In fact, not only the reclaiming documents but also the title is then commonly deemed transferred to him and there are no further legal formalities in respect of the transfer of the underlying assets. It follows that a direct connection between delivery and payment is restored in this manner and creates considerable comfort to the seller. Thus, retaining the bill of lading while the goods are in transit and reaching their destination re-establishes a simultaneity in the performance of both parties, allowing payment to be made against delivery of the document rather than the goods themselves. In fact, it provides protection for either party in a sale: upon tendering the documents through the banking system, the seller receives (immediate) payment and the buyer is put in possession of the bill of lading and is able to collect the goods upon arrival without the cooperation of the seller. Parties may still argue over the details later, especially the safe arrival and quality of the goods and any counterclaims and their effect on the price, but at least the seller has the money and the buyer the goods. This is very much the idea behind collection arrangements and letters of credit.487 As we shall see, negotiability of this nature may in some legal systems (but less so in the UK) also imply a measure of independence and abstraction resulting in justified reliance of a transferee

487 See for the ‘pay first, argue later’ nature of this payment Vol 3, s 2.2.3 above and Vol 5, s 3.3.12. See for collection arrangements and letters of credit more particularly Vol 5, ss 3.3.7–3.3.8.

Volume 4: Negotiable Documents of Title and Negotiable Instruments  339 on the wording of the bill and therefore a reduction in the possible defences (or the so-called equities) of the carrier deriving from underlying relationships of which the transferee did not know. A bill of lading can be seen in this connection as combining the following characteristics: (a) acknowledgement of receipt of the goods; (b) prima facie proof of the transportation or carriage arrangements (although as between the original shipper (usually the seller) and the carrier their underlying transportation agreement may remain determining)488 and of the right to request performance and present claims and, if necessary, renegotiation of the shipping arrangements;489 (c) expression of the shipper’s (usually the seller if also arranging the transportation) presumed ownership or at least constructive possession of the goods and especially of the reclaiming right; (d) confirmation of the apparent condition of the goods, that is of their proper aspect and packaging;490 and (e) being a negotiable document of title creating a simple and speedy transfer facility of the goods through delivery of the document to bearer (or through endorsement plus delivery if made out to order), which may also imply a measure of independence in respect of the underlying relationships and the defences deriving therefrom. In civil law, these features of the bill of lading are now normally confirmed in codifications. Also in common law countries, such as England and the US, statutory law now normally covers them: see the Bills of Lading Act 1855 in England, supplemented by the Carriage of Goods by Sea Act (COGSA) of 1992, and Article 7 UCC for State law in the US, although in England and also in France, for reasons that will be explained below, the bill of lading is often not a fully-fledged document of title in the above sense but only a quasi-negotiable instrument. One difference is, as we shall see, that the transfer of the bill of lading if a true negotiable document of title also implies the transfer of the underlying transportation contract. This would be so both in respect of the rights (of carriage) and the related duties, such as payment of the freight and insurance (although this payment may already have taken place under a CIF term).491 488 In modern container shipping, the transportation document may include land carriage as well to achieve a door-to-door service, which has become common in this type of transportation. 489 A bill of lading should be clearly distinguished from a charterparty, which is a document that covers the terms under which a shipper or group of shippers lease a ship from the owner of the vessel for a period or for one or more voyages. Thus, there are time and voyage charters. Normally the owner will continue to be responsible for the management and control of the vessel (except in bareboat charters). The lessees of the vessel may subsequently carry goods for other shippers and issue bills of lading to them. These may be made subject to the terms of the charterparty, which are not then repeated in the bill of lading. This may cause problems for later holders who may not be aware of all the terms. More generally, this may be a problem whenever the bill of lading is not complete in this aspect. As just mentioned in the text, the bill of lading is only prima facie evidence of the transportation term, although as between the carrier and any bona fide transferee, the bill of lading is assumed to be controlling and transferees might thus be able (if bona fide) to ignore transportation terms unknown to them. 490 A clean bill of lading in this connection is a bill that contains no clause or notation identifying a defective condition of the goods and/or the packaging. The opposite is a claused bill of lading. A seller who tenders such a bill does not then automatically have a right to be paid, at least not if there was a breach of the sales contract. The statement of the carrier is in this connection prima facie evidence. This being said, the carrier is not held to more than a superficial inspection of the goods and a clean bill is not a quality certificate. One may also find clauses like ‘weight and quantity unknown’. Where the goods are labelled FCL (Full Container Load), the carrier has no inspection duty at all and will refer to ‘packed by shippers’, normal in container traffic. Generally, the carrier must deliver goods in the same condition as he received them, subject to fair wear and tear. So, it is in his interest to note on the bill of lading all defects he can find. 491 As for an arbitration duty, this may still require the arbitration clause to be included in the bill of lading and reference to general trade conditions may not be sufficient.

340  Volume 4: Negotiable Documents of Title and Negotiable Instruments Much against the normal rules of delegation of duties (see section 1.5.3 above), usually therefore by statute, the transfer of the document then implies a full discharge of the previous holder of the bill by the carrier (unless it is the original party to the contract of carriage) in respect of all his duties without the need for the carrier’s consent, provided always that these duties are clearly marked by the carrier on the bill of lading, as in the case of ‘freight collect’. One could assume here an implied consent of the carrier, but in truth it is an issue of liquidity. It was already said in section 1.1.1 above, that a transfer of related duties is innate in all transfers of proprietary rights to promote their transferability as a matter of liquidity, identified as a key issue in the international flow of goods, and we see it here extended to the transportation arrangements concerning these goods which are integrated in them and the liquidity concern manifests itself here in the proprietary character of the bill of lading itself, although the original holder is not fully discharged, but the interim holders are. The immediate result is that it makes the present holder and the original contract party the sole persons liable to pay the transportation cost. On the other hand, becoming a party to the contract of carriage in this manner reinforces the position of the new holder of the bill of lading against the carrier. It also implies the assignment of the relevant insurance policies (without the insurer’s consent), at least if the insurance policy itself is not a similarly transferable document when it needs to be transferred separately. Even then consent of the insurer is an unlikely requirement.

2.1.2.  The Concepts of Document of Title and Negotiability As already mentioned, documents of title, such as bills of lading and warehouse receipts, whether or not negotiable at the same time (therefore properly expressed to bearer or order), are proprietary instruments, the essence of which is that the holder of the bill may be considered the prima facie owner of the underlying assets. That is indeed the German and Dutch approach, where the normal way to transfer title in chattels is otherwise through delivery of the goods themselves. It provides for an easy way of transferring the underlying assets and is in respect of them a substitute delivery.492 The term ‘holder’ has in this instance a different meaning from the one common in civil law where it means possession with the will to hold for someone else: see section 1.2.2 above. That is not normally the issue here.493 As already mentioned, the situation is more complex in countries like England and France, where title to the goods normally transfers not upon delivery but immediately at the conclusion of the sales agreement: see section 1.4.2 above. For a bill of lading to operate as a document of title in these countries in the above manner, some intent to delay title transfer in the underlying goods until the presentation of the document must then be implied or demonstrated. In these countries this is indeed normally deemed the case under the CIF term and possibly also under the FOB term, certainly if payment against documents is agreed. It must be realised, however, that in all systems, there is an obvious complication with documents of title as the goods still maintain their own life and are by definition in the hands of

492 Note that in Germany, delivery may also take place through an assignment of the reclaiming right against the carrier. This assignment may also be deemed incorporated in the document however (this is a traditio longa manu: see s 1.4.2 above). 493 In common law, it is not unusual to consider the bill of lading a possessory document rather than a document of title. The emphasis is then on the transfer of possession (in a common law sense) rather than ownership. In this approach, the transfer is considered subject to any superior ownership claims to be sorted out later. It reconfirms at least for the UK the status of the bill of lading as quasi-document of title only: see s 2.1.5 below.

Volume 4: Negotiable Documents of Title and Negotiable Instruments  341 someone other than the holder of the bill, like the carrier or the warehouse owner. The latter could still physically (even though improperly and without proper disposition right)494 dispose of these goods to, for example, a bona fide purchaser, who might subsequently be protected, potentially leaving the holder of the bill of lading without any effective proprietary rights in the assets at all. So, the question always arises what the status of the document of title truly is. In practice, it may not be able fully to incorporate the rights to the underlying assets. Negotiability, on the other hand, is normally thought to result from the mere wording of the document itself: if it is issued to bearer or order, it is presumed to be negotiable,495 and then transfers either through physical delivery (if to bearer) or through endorsement (signature) plus physical delivery (if to order). It was already said that strictly speaking a bill of lading not expressed to bearer or order is a document of title without negotiability. Any transfer would then be under the normal rules of transfer of a document of that sort, which might have to be a form of assignment under which the carrier may have to be given notice. In any event, any holder, although prima facie entitled to the goods, would still have to prove rightful holdership of the bill itself if questioned. Although such a holder may be able to do so merely on the basis of its bona fide acquisition of the bill for value, this may not be possible if the bill is not expressed as a negotiable instrument and it may not even then be so in common law countries as they do not normally accept exceptions to the nemo dat rule by statute). But as we may be concerned here with an expression of the law merchant and not of a traditional common law principle, this protection is normally considered implicit—it shows the continuing importance of the transnational law merchant even in England. It also confirms that there is no need for consideration to render the transfer of the bill valid. Nevertheless, even if the bill of lading is considered a true negotiable document, at common law, any prior rights of others in the underlying assets remain valid, no matter whether the bill of lading itself was acquired bona fide. In other countries, as we shall see, any holder of the document, if bona fide and having acquired the bill of lading for good value, may be entitled to the underlying assets on the basis of the mere holding of the document and receives them free and clear of any proprietary charges. Indeed, as regards later holders of the bill, in civil law they are likely to be considered full owners of the goods independently of the original underlying arrangements with the carrier or the precise relationship with or between the previous owners of the assets or holder(s) of the documents or any charges therein. Here one may note a fuller incorporation of the underlying assets in the bill itself and a better expression of the notion of abstraction and independence. Any defects in the transfer of the assets or documents between them is then also irrelevant, at least until proof of any better title in the goods is established, for example by bona fide purchasers for value of the underlying assets who acquire physical possession of them in countries that protect them as such. Similar principles apply to the warehouse receipt, although its status in law is often less clearly developed. Except in countries like England where the bill of lading is often considered to be only a quasi-negotiable document of title, as a consequence, documents of title might give a better right to succeeding third-party holders of the documents (and indirectly of the underlying assets) than to succeeding buyers of the underlying goods under ordinary sales agreements (at least in countries that do not protect bona fide purchasers of goods), but it is a matter for the applicable law to determine the status of the bill of lading in this respect.

494 See Lord Denning in the leading English case Sze Hai Tong Bank Ltd v Rambler Cycle Co Ltd [1959] AC 576 (PC). 495 See eg, Art 8.413 of the new Dutch CC.

342  Volume 4: Negotiable Documents of Title and Negotiable Instruments Bona fide holders of such bills may further ignore all personal defences of their predecessors, such as default in payment by any of them. Depending on the applicable law, they may probably also ignore all real defences in terms of the consequences of theft (thus going into the issue of a lack of disposition rights, cf section 7-507(2) UCC in the US but differently Article 3.86(3)(b) of the new Dutch CC), nullity, illegality and the like of any transfer in the chain of succeeding endorsements or deliveries of the documents including defects in the document itself. Again, this is inspired by the old law merchant in which documents of title and negotiable instruments of this kind have their origin. What this illustrates is that the special transfer and protection regime for documents of title is based on their own status under the law merchant, in essence independent from domestic law it is submitted. In fact, this is so for all bearer and order paper. This concerns ultimately the finality of the transfer, which for documents of title and negotiable instruments is traditionally highly prized, and is indicative of the continuing importance of lex mercatoria in this area and provides an important unifying theme, here clearly also operating in the proprietary aspects. As such in international trade upon a proper analysis, the bill of lading may still claim a transnational status: see more particularly Volume 1, section 3.2.2. It follows that the more bills of lading abandon their international form and come to be covered by typical domestic principles, the more they are likely to lose their status of documents of title and become mere receipts. The simple replacement facility of the previous holder under the contracts of carriage and insurance, and particularly the transfer of the duties thereunder to the new holder without express consent of the carrier or insurer, may then also be lost. Nevertheless, the protections of the holder of the bill of lading are not absolute, even under the law merchant and in countries that accept in this manner a high degree of independence and protect bona fide holders of the bill. They are often less extensive than those of the holder of a bill of exchange—see more particularly section 2.2.9 below—even though the protection against previous holders might be similar. Again, this is so because the bill of lading cannot incorporate the tangible goods it represents as fully as the bill of exchange is considered to incorporate the underlying intangible claim to payment so that these goods are still likely to lead their own life separate from the bill of lading and may surface in the hands of a bona fide possessor for value, as we have just seen. This may also occur under a bill of exchange but this is less likely, and holders of claims, even if bona fide, are in any event less well protected: see also section 1.5.9 above. The potential separation between bill and goods also means that the new holder of a bill of lading must still pay for the goods even if they have physically disappeared or if their whereabouts are unknown. The only thing he may be left with is a claim under the insurance policies. It suggest that in an international context, under traditional conflict of laws notions, often still deemed applicable in the international flows, and which then always point to the application of some national law, the situs of the underlying goods will unavoidably remain relevant when bills of lading are presented. This may be important when the underlying assets are moved to countries other than those in which the bill of lading was originally issued, all the more so if the transnational nature of the bill is not itself recognised. From the point of view of the applicable law, the physical whereabouts of the goods therefore may remain quite relevant. Nonetheless, the easy transfer possibility of the underlying goods, even in common law countries and in countries in the French tradition normally implied in a bill of lading under a CIF contract, greatly facilitates international trade. Although differences in its status in the different legal systems cannot be denied and holdership of a bill of lading never provides absolute protection of the rights in the underlying goods, in most circumstances the bill of lading provides adequate safeguards. To avoid the considerable problems and inefficiencies attached to the handling of paper in a more modern environment, electronic bills of lading are increasingly being considered. They, as well as the consequences for their status, will be discussed below in section 2.3.2 in connection

Volume 4: Negotiable Documents of Title and Negotiable Instruments  343 with the dematerialisation of negotiable instruments and documents of title and the issue of electronic transfers more generally. Discussion of the possible effect of the blockchain will follow. As we shall see, this may also affect the documentary letters of credit practice.

2.1.3.  The Origin and Nature of the Bill of Lading and its Operation in the Proprietary Aspects of the Transfer of Goods As already mentioned in the previous section, there is no unanimity internationally on the precise meaning and status of the bill of lading in its proprietary aspects. It once was undeniably a transnationalised instrument that substantially operated under its own rules in the context of the law merchant of those days but, like the bill of exchange, the law affecting it became nationalised in the nineteenthcentury era of the codifications or, in countries like England, through domestic legislation, although in international transactions never fully so. Nevertheless, there is no longer complete unity. As to its origin and operative significance, the pre-eminence of the bill of lading is closely connected with the development of the CIF trade term, which became standard when regular shipping lines started to operate from the end of the eighteenth century, so that the carriage of the goods was no longer done by the parties (buyers or sellers) themselves, who were now able to leave the goods for transportation with independent third parties such as shipping companies. At first, the bill of lading was undoubtedly considered to be based on the custom of merchants.496 It acknowledged the negotiability of the bill of lading to order (or assign). In the 1805 English case of Newson and Another v Thornton and Another,497 it was indeed confirmed that property could be transferred with the bill of lading, thus recognising its potential status as a document of title. Above, it has already been said that the principal divide in the views on the status of the bill of lading appears to be between countries that require delivery for title transfer, like Germany and the Netherlands,498 and those that normally do not, like England and France. The consequence is that in the first type of country the bill of lading is normally considered primarily a negotiable document of title (if expressed to bearer or order). In these countries, it embodies the possession of and ownership in the underlying assets,499 which are in principle transferred with the delivery of the document itself. Other ownership rights or more limited proprietary rights created in the 496 See the 1787 case of Lickbarrow and Another v Mason and Others [1794] 2 TR 63. 497 Newson and another v Thornton and another (1805) 6 East 17, with reference to the much earlier 1697 case of Evans v Marlett (1697) 1 Ld Raym 271. See for this history also DE Murray, ‘History and Development of the Bill of Lading’, (1983) 37 University of Miami Law Review 689. 498 In these countries the handing over of the bill of lading is perceived as a substitute delivery of the underlying assets, cf ss 363II and 650 of the German HGB and Art 8.417 of the New Dutch CC. This assumes that the bill is negotiable and transferable to bearer or order and there is a presumption of full negotiability: see Art 8.413 Dutch CC (unless marked differently on the document). In this system, regardless of the CIF and FOB term, holdership of a bill of lading always denotes prima facie possession of the goods and therefore ownership in civil law terms, at least for third-party (bona fide) holders of the bill until proven otherwise. Under German law, there is the complication, however, of the real agreement (or dingliche Einigung: see s 1.4.6 above) as German law (and often also Dutch scholarship) sees the delivery not merely as a physical act but rather as a separate juridical act requiring the parties’ intention to transfer the title in the underlying goods. This may complicate the holdership of the bill by a paying bank if it has not agreed the real status of the bill of lading with the beneficiary in respect of any ownership or security rights therein. It may thus be unclear whether the bank, while holding a bill of lading (to bearer or endorsed in blank, which are the most common forms), has also received a proprietary right to the underlying assets. 499 Even in systems like the German and Dutch, the presumption of ownership of the underlying assets is (a) not necessarily valid in relation to the immediately preceding holder of the bill, who may still have a better (proprietary) right to the assets. It depends primarily on how the bill was acquired. Among the original interested parties

344  Volume 4: Negotiable Documents of Title and Negotiable Instruments underlying assets at the same time or later but not marked on the bill, such as a reservation of title, might then be ignored by any bona fide holder of the bill upon negotiation. In this system, the holder of the bill may also be able to ignore any earlier proprietary rights of others in the underlying assets upon the bona fide acquisition for value of the bill, unless they were stolen.500 In fact, for the bona fide holder of the bill, it operates as dual release as he may ignore any prior interests not only in the bill (except if marked thereon), but also in respect of the underlying assets.501 In France502 and England,503 on the other hand, where title in chattels in principle transfers upon the conclusion of the sales agreement, as we have seen, the bill of lading can be a document (such as seller/shipper, carrier and buyer), the existence of the bill of lading may also have (b) little proprietary meaning, in the case of the buyer who has the bill, as long as the bill has not been handed over to a third party. This is commonly referred to as negotiation. So, a buyer who has not paid for the goods cannot claim them on the basis of the bill of lading in his possession. Mere notice by the seller to the carrier may then be sufficient to stop the delivery, cf also Art 71(2) of the 1980 Vienna Convention on the International Sale of Goods. The buyer must in these circumstances return the bill to the seller. Until negotiation, the bill of lading is therefore not much more than a receipt. To repeat, without negotiation, the bill of lading does not truly come into its own. Only upon negotiation would it appear that the questions of abstraction and independence properly arise. The true proprietary effect of a bill of lading is therefore likely to become apparent only upon such negotiation, which suggests that as far as the new holder is concerned, the goods have been paid for by the previous holder. To put it differently, the original seller takes a considerable risk in handing over a bill of lading to a buyer who has not yet paid him. Abstraction or independence here also mean that the carrier may no longer contest the terms of the bill of lading in respect of a third party. This is in these countries the so-called conclusive evidence rule. To repeat, in all cases it needs also to be considered that (c) the goods still retain their own life and, if disposed of regardless of the bill of lading, bona fide third parties acquiring physical possession may still be protected and be able to ignore the bill of lading under the applicable law of the situs of the assets. 500 Thus normally, in systems requiring delivery for title transfer, when a bill of lading exists and has been negotiated (including presentation to a bank) whilst the goods are still with the carrier, the delivery is made through the mere handing over of the document (with endorsement if issued to order) to any subsequent holder who will in this way receive possession of the goods and therefore presumed title, cf Art 8.441 of the Dutch CC (a similar rule does not exist for the warehouse receipt under new Dutch law). 501 If more than one bill of lading is issued, the first endorsee has the best right among any subsequent holders, assuming he can prove the time of his acquisition, can show he was bona fide, and that he acquired the bill of lading for value: see also Art 8.460 of the new Dutch CC. Normally the shipper, the carrier and the buyer or his agent receive an original, but sometimes there are more. The existence of several bills of lading in respect of one cargo is undesirable and when one of the bills of lading travels with the cargo in order for the buyer to be able to claim the goods immediately upon arrival to avoid the costs of delays, it may destroy any built-in payment protection for the seller. It is more common in respect of sea waybills, which are not documents of title. In the US, s 7-402 UCC makes the issuer liable for any damage caused to holders of duplicates not so marked, while the duplicate holder has no rights in the goods. Generally, performance under one bill of lading renders the others void (cf Art 8.413 Dutch CC). 502 The relevant statute was Law 66-420 of 18 June 1966 on contracts of affreightment and maritime transport, as amended, now found in the revised Arts 131ff Code de Commerce. It emphasises the nature of the document as presumption of proof of receipt of the goods while upon negotiation no evidence to the contrary may be presented (Art 18). It is logical that in a system like the French, which transfers title in goods ‘par l’effet de l’obligation’ under Art 711 CC, the accent is not on the document-of-title nature of the bill of lading. That is clear in ordinary FOB sales as we shall see, even though they are deemed to delay title transfer until loading, but if in an FOB sale payment against documents is agreed, it is assumed that title transfer is always delayed by common agreement of the parties under Art 1583 together with Art 1138 CC until that moment and it is then thought that the transfer of title in the goods is effected only through the delivery of the bill of lading to the buyer, which may in that case more properly be considered a document of title, see Lamy Transports Maritimes (under the direction of Pierre Brunat 2000). Under the CIF term, title transfer is in France more commonly considered to take place only at the moment of loading, at least between the original seller and buyer, if the sale is made at that moment. It is further postponed, however, if individualisation of the goods can only take place later or when payment against documents is agreed, when the accent is again on the delivery of the bill of lading as ‘titre représentatif des marchandise’ to the buyer upon his payment, see Lamy/Brunat, cited above, No 276. 503 See R Colinvaux, Carver’s Carriage by Sea, 13th edn (London, 1982) 113.

Volume 4: Negotiable Documents of Title and Negotiable Instruments  345 of title only if parties have explicitly or implicitly postponed the title transfer to a later moment, in this case presentation of the bill by the buyer. The nature of the bill of lading as a document of title then may still depend on some intention of seller and buyer,504 and any subsequent bona fide holder of the bill takes in principle subject to that intention and is accordingly at risk, although this may not be fully clear under French law.505 Importantly, what is intent in this connection may be determined largely by custom and practice. It is relevant especially if the goods were sold subject to a reservation of title that is not itself marked on the bill. In England, the holder of a bill of lading is not considered free of equities either, as already shown. It means that the holder cannot acquire better title than its predecessors except where so provided under statute, as was done in a limited way in section 47(2) of the Sale of Goods Act 1979. Also, negotiability if intended must be practically possible, as demonstrated by the requirement that the assets it represents have been sufficiently set aside, cf section 16 of the Sale of Goods Act 1979, and are not commingled (although in some other countries co-ownership may result). As we have seen, it is one of the most important reasons that the bill of lading is often qualified in the UK as no more than a quasi-negotiable instrument and its status as a document of title should not be presumed, especially in an FOB sale. Even in a CIF sale, it remains rebuttable and may not be complete. As we have already seen also, in common law (therefore not in countries like France and Belgium), the holder takes subject to all earlier proprietary rights of others in the underlying assets created before the issue of the bill of lading. That is true even if the bill was intended as a negotiable document of title and the holder is bona fide and unaware of these rights, as in common law the protection of bona fide purchasers does not generally apply to the purchasers of goods because of the nemo dat rule (see section 1.4.8 above) unless provided by statute. This protection commonly applies to holdership of the bill of lading itself, but again only as an expression of the rules of the law merchant in this field and this does not affect the rights granted earlier in the underlying assets before a bill was issued, regardless of whether or not they are marked on it.506 This is also confirmed in the US where State law now accepts the presumption of the bill of lading being a document of title (in a system that normally requires delivery for title transfer in goods unless parties agree otherwise), but the bona fide holder of the bill still takes subject to any proprietary rights in the assets themselves established before the first negotiation.507

504 In England, even if the bill of lading is clearly expressed in negotiable terms through the use of ‘bearer’ or ‘order’, the intent as to it being a document of title still appears to be determining, see Henderson v Comptoir d’Escompte de Paris (1873) LR 5PC 253. It follows that in England, the bill (if existing) has no function per se in the transfer of title and is therefore foremost an instrument in terms of securing performance under the sales contract by giving the buyer access to the goods. 505 See in France, Tribunal de Commerce de Nanterre, 31 October 1990, Bull des Transports et de la Logistique, 136 (1991). It means that in the case of a reservation of title by the seller not marked on the bill of lading, the bill may not acquire any proprietary effect at all. Upon default, the title is deemed to have remained with the seller and the bill of lading in the hands of the buyer may be null and void, at least in its proprietary aspects. Bona fide holders take subject to this impediment, which means that the goods are returned, unless the bona fide holders of the bill acquired physical possession of them in the meantime. 506 As in France, a particular problem presents itself in England when buyer and seller agree that ownership passes upon conclusion of the contract, but a bill of lading is issued later and payment is agreed to be against this document. Unlike in France, in England, it is assumed in such cases that, since the bill of lading clearly was not intended to have a function in transferring the ownership in the underlying assets, ownership is not affected by it and is firmly established in the buyer. As the goods may not be physically delivered to the buyer without him presenting the bill of lading, there results only some kind of indirect retention right for the seller and his/her instructed bank, although the position of the buyer as title holder is all the stronger if somehow s/he obtains the goods from the carrier without the bill of lading: for English case law see the text below. 507 In line with common law practice, the UCC in the US explicitly recognises all legal and security interests in the goods obtained before the issuing of the bill of lading, including any granted by the mere operation of the contract

346  Volume 4: Negotiable Documents of Title and Negotiable Instruments As already mentioned, under applicable domestic laws, use of the FOB or CIF term may itself imply the parties’ intent to postpone the title transfer in France and in England, at least to the moment of loading at the ship’s rail, and this may be explored a little further.508 Especially under the CIF term, under which the seller makes the transport arrangements—see also Volume 3, section 2.3.9 above—there is normally a bill of lading that operates as a negotiable document of title transferring title to the goods each time the bill is transferred. Indeed, under a CIF term, the on-board bill of lading is normally presumed to be a document of title, including in England (when any other moment of title transfer indicated in the sales contract may become irrelevant). However, this remains rebuttable while the first transfer (to the original buyer), if made at the time of loading, may still be considered to take place at that time and not therefore through the handing over of the bill of lading to the buyer.509 In an FOB sale (when the buyer traditionally organised the transportation in his own transport facilities: see again Volume 3, section 2.3.9 above), there may also be a bill of lading, although it is not its essence. It may be collected by the seller but in this case as agent for the buyer who is technically in charge of transportation and as a consequence primarily entitled to the bill. In countries like England and France, the issue of a bill of lading is here less likely to be indicative of any creation of a document of title and could acknowledge a mere receipt of the goods. The presumption of a document of title is therefore less strong and at least in England not automatically accepted in FOB sales. That may be so even in countries like Germany and the Netherlands as title transfer under the FOB term is everywhere more typically at the ship’s rail, in which a bill

(like a transfer of title without delivery, cf s 7-503 UCC), yet it accepts the nature of the bill of lading as a document of title in respect of the underlying goods (if not fungible), but only upon its negotiation and thus not for the first holder (the shipper or his principal): s 7-502(1) UCC. The more ready acceptance of bills of lading as documents of title in the US may be connected with the fact that delivery is the normal moment of title transfer in the sale of goods except where parties agreed otherwise (see s 2-401 UCC). The subsequent holder has a strong position, apparently even if the goods have been surrendered by the carrier to bona fide purchasers for value (who are as a general rule less protected under common law: see also s 1.4.8 above) and whether or not the bill of lading was intended to be negotiated (except when marked as nonnegotiable). Also, serious defects in the chain of holders, even theft, fraud or other forms of misrepresentation, do not impair the rights of the present holder of the document (s 7-502(2)) provided he is bona fide and paid good value (s 7-501 UCC), but always subject to the rights of others in the goods dating from before the first negotiation. The situation in the US is more complicated, however, as there is also a set of federal laws concerning bills of lading. It equally abandoned the English approach by means of the Pomerene Act of 1916 (as amended), which supplements the earlier Harter Act of 1893, which was more hesitant in defining the status of the bill. The 1916 Act (see 49 USCS s 80102) applies when the bill is issued for transportation between the various States of the US, to foreign countries or in the US territories and the District of Columbia. Federal law is in fact of greater importance than the UCC which is pure State law applying to movement within a State only. Under Federal law, the bill is considered negotiable if made out to order and represents the title to the goods, see 49 USCS s 80105(a)(1)(A), and (b). It operates as such for any holder who negotiated the bill in good faith and for value, but the proprietary rights to the goods the bill represents are always subject to the earlier rights of third parties obtained before the first negotiation. Here the general common law approach is followed under which bona fide purchasers are not generally protected (except where there is statutory law to this effect). 508 See to this effect in England for the FOB term Carlos Federspiel & Co SA v Charles Twigg & Co Ltd [1957] 1 Lloyd’s Rep 240 and for the CIF term TD Bailey Son and Co v Ross T Smyth and Co Ltd (1940) 56 TLR 825 and The Future Express [1993] 2 Lloyd’s Rep 542. 509 See in France Cour de Cass, 11 June 1991, Bull des Transports et de la Logistique no 2443, 591 (1991), but in England it is more properly at the moment the bill of lading is tendered to the buyer: see TD Bailey Son and Co v Ross T Smyth (n 508) and The Glenroy [1945] AC 124. It could be still later in France, particularly when the first sale occurred later or when the original parties agreed to a payment against documents (or when the goods are appropriated to the contract later, or possibly when there is a reservation of title, which in that case should be marked on the bill), cf in England also Enichem Anic Spa and Others v Ampelos Shipping Co Ltd (the Delfini) [1990] 1 Lloyd’s Rep 252, and in France Lamy/Brunat (n 502) II No 219 (2000).

Volume 4: Negotiable Documents of Title and Negotiable Instruments  347 of lading does not necessarily figure. If the bill is marked ‘received for shipment’ instead of ‘on board’, it is in any event only a receipt (and carriage agreement) and title will pass upon conclusion of the sales contract in France and England and upon delivery of the goods in Germany and the Netherlands (and not of the bill). As already mentioned, in England (but not under State law in the US) and in France, the presumption under an FOB term is normally that the bill of lading (even if ‘on board’) is not a document of title, except where there is clear evidence to the contrary. There is such evidence if the seller is entitled to retain and present the document for payment when title transfer is deemed postponed until presentation of the bill of lading in that context.510 It has been reported that in the North Sea oil trade, title transfer is always deemed to be postponed until the handing over of the bill of lading to the buyer or its endorsement if to order, also in an FOB sale regardless of whether the sales contract specifies another moment of title transfer, and even if the bill is not used to retain title pending payment. In fact, it is usually the oil terminal rather than the carrier that prepares the bill of lading (on its own terms), which is subsequently signed by the ship’s master or an agent and handed to the first FOB seller regardless of who arranged the transportation.511 This may even lead to bills of lading circulating before the oil is loaded or produced. It is normal that in a chain of North Sea oil sales, the sales are FOB until the oil has been loaded, thereafter CIF, but it does not appear to make any difference to the (other) terms of the contract, and moment of title transfer, which is always upon endorsement of the bill of lading.

2.1.4.  Consequences of the different Attitudes to Documents of Title when the Underlying Goods are Transferred to Transferees Other than Through a Transfer of the Bill of Lading In the German and Dutch approaches, a buyer without the bill of lading if one has been issued— especially likely to be the case pending payment—is in a vulnerable position. First, any holder of the bill including the original seller or an intermediary bank, may transfer or negotiate the bill to others, who, if bona fide, acquire proprietary rights in the underlying assets. On the other hand, if the buyer somehow manages to appropriate the goods and takes physical possession upon their arrival (which is not uncommon), its position may be enhanced. The seller and its bank holding the bill for payment may then find their protection endangered. This problem also exists in England and was identified before. As noted, except in a CIF sale, under English law the bill of lading has no prima facie title function, but only plays a role in terms of (constructive) possession providing access to the goods as part of the seller’s performance under the contract of sale (unless otherwise agreed). Indeed, in Bristol and West of England Bank v Midland Railway Company,512 goods were delivered by the carrier to the buyer before the bill of lading had been negotiated by the seller to his bank, which, upon receipt of the bill, found itself left with only a claim for damages against the carrier, which could not then deliver.

510 See for France, n 463. It is sometimes said that a ‘received for shipment’ bill of lading is no more than a waybill, but that may be incorrect as the waybill testifies at least to the receipt of the goods on board. 511 See RM Wiseman, ‘Transaction Chains in North Sea Oil Cargoes’ (1984) Journal of Natural Resources Law 134. 512 Bristol and West of England Bank v Midland Railway Company [1891] 2 QB 653. It was followed by a long line of cases, cf lastly The Future Express [1992] 2 Lloyd’s Rep 79.

348  Volume 4: Negotiable Documents of Title and Negotiable Instruments If a bill of lading has been negotiated to a third party, including a bank or a pledgee, the original buyers of the goods upon receipt of them are unlikely to be so protected if they are aware of the existence of the bill, which they normally would be. At least in the Dutch and German systems, they would not receive title under the circumstances. Protection could still result, however, for the buyer in a situation in which the seller is obliged to deliver the goods to him or her at their place of business and uses a carrier that issues a bill of lading to the seller without the buyer’s knowledge. If this carrier, aware of the contractual obligations of the seller, hands the goods over to the bona fide buyer without the bill of lading, the latter would be protected. In the English and French systems, under which title is normally transferred upon conclusion of the sales agreement or in a CIF sale at the latest upon the tendering of the documents to the buyer (unless payment is against documents only, when it will be at that moment), the acquisition of possession of the goods under these circumstances is more generally likely to fully protect the buyer even regardless of its bona fides. Another way of approaching this situation, more particularly in England, is to say that in cases where a buyer is unaware of the shipping arrangement and receives the goods without knowledge of the existence of the bill of lading, the intention of the seller/shipper and carrier must have been that the bill of lading was no more than a receipt and not a document of title in the first place, even if expressed in such a way as to make it negotiable. Better still may be a reference to custom and practice. If the seller in possession of the bill negotiated this bill of lading, the subsequent rightful holder of the bill would then have no rights in the assets if transferred to the original buyer, although he would of course still have a personal action for damages against the original seller in respect of a double sale or wrongful conversion of possession and possibly against the carrier for having released the goods without the holder’s authorisation as long as the carrier knew of any legitimate interest of the original seller/shipper that he should not do so. A similar system appears to prevail in France. The presumption of the bill being a document of title generally renders the intention irrelevant, however, in systems like that of the new Dutch Civil Code, which also protects the bona fide holder of the bill against any further interests being created in the underlying assets by others, at least as long as they know or should have known of the existence of the bill of lading.513

2.1.5.  The Transfer of Risk The transfer of risk in the underlying assets is not now commonly related to the title transfer and therefore also not to the handing over of the bill of lading to the buyer. They are different issues. Under modern law, the risk is normally associated with the physical possession of the assets: see

513 Thus in Germany and the Netherlands also the carrier or any other handling agent, naturally aware of the existence of the bill of lading cannot claim a pledge or other contractually created security rights or liens in the assets they hold, even under the contract of affreightment or storage, although commonly included in their standard conditions, eg in order to recover their costs by priority (although they may still benefit from statutory liens or privileges, cf explicitly ss 7-307–7-308 UCC in the US for the carrier), because they cannot legitimately claim to have become the holder of the goods in their own right (they hold for the holder of the bill), without also obtaining or having retained at the same time the bill of lading (unless the bill of lading itself states on the pledge facility), except again, it seems, if the bill has not yet been negotiated by the original holder (a distinction implicit in the Netherlands, cf HR, 26 November 1993 [1993] RvdW 15.108). In countries like England, it follows from the fact that the bill of lading was never meant to be more than a receipt, except in CIF sales, when, however, prior claims to the assets still survive.

Volume 4: Negotiable Documents of Title and Negotiable Instruments  349 section 2.1.9. More old-fashioned approaches such as that of French law, which still associate the risk with ownership, continue to pass the risk with the title transfer, in which connection the status of the bill of lading as negotiable document of title may still be of importance.514 Nevertheless, the passing of the risk may always be determined freely by the parties to the sales contract and trade terms are likely to do so, in which connection the FOB and CIF terms refer to a special risk distribution under which the risk passes upon loading regardless of the existence, nature or holdership of the bill. This is confirmed in the Incoterms: see Volume 3, section 2.3.10 above.

2.1.6.  The Named or Straight Bill of Lading and Sea Waybills There is no doubt that the named bill of lading (or straight bill of lading under the 1916 Pomerene Act in the US) in which the person entitled to the goods is specifically mentioned (without the document being at the same time to order), can present problems as regards entitlement to the asset under it as it is not truly a negotiable document. In such cases, it is not necessarily so that the person named in the bill has the exclusive rights to the assets, for example a bank may be named in such a bill of lading (as consignee) under a letter of credit but it is still no more than an agent, and upon reimbursement by the buyer, it is the latter who is entitled to the goods and the bank would be required to make the necessary arrangements. This could not be endorsement as these named bills are not truly endorsable (they are not to order). An assignment would therefore appear to be the proper way of transferring the bank’s rights under the bill, but even without it, the buyer may not be without proprietary rights. First, the transportation contract may indicate who is entitled to receive the goods while the entitlement to them may also be proven in other ways. Again, it would appear that any collection of the assets by the bank is in these circumstances only done as agent for the buyer and that the buyer is the rightful owner of the assets even if the agency remains undisclosed. The named bill of lading is now often considered a sea waybill. This is a document in principle in the nature of a receipt only and not a negotiable document of title. This is by implication even statutory law in the US and the UK. It confirms that there is no negotiability and that third parties obtaining such a named bill from the bank are not protected. It need not be presented to collect the assets. However, in countries where the named bill is not so ‘degraded’, its status remains ambivalent and it may still be necessary in order to claim the goods. This may be very inconvenient if it does not arrive on time or is still with the bank for payment under a letter of credit. That may also happen with ordinary bills of lading and can be a real problem, but they at least have the balancing advantage of being documents of title. It also follows that if a named bill is made out to the buyer, a bank that has paid the seller under a letter of credit but retained the bill under a retention right pending reimbursement by the buyer is in a weak position. It cannot dispose of the bill in an execution sale, even in countries that normally allow execution under a retention right, as the buyer is marked as the rightful owner of the goods and is certainly no agent for the bank. This may also be a problem for the bank if the bill of lading is issued to the buyer or his order. There may, however, be specific statutory provisions to the contrary: see in this respect, for example, section 9-601(a) UCC in the US, which in the case of an execution sale of documents of title allows either the document or the underlying goods to be reached.

514 See Cour d’Appel Aix en Provence, 24 October 1980, Bull de Transports, no 186 (1980).

350  Volume 4: Negotiable Documents of Title and Negotiable Instruments Even the precise status of the sea waybill is in many countries still unclear except that (unless otherwise intended) it is not considered a document of title. The Comité Maritime International (CMI) issued in 1990 Uniform Rules for Sea Waybills. Under these, only the sender of the goods may give instructions concerning them and the goods must be delivered to the addressee assuming reasonable identification, but both have a claim to them. As for the liability for the transportation, the rules are the same as if the sea waybill were a bill of lading. The sea waybill is assumed to describe the goods adequately and no proof to the contrary may be presented against the addressee who relies on the description in good faith. Here again there is a parallel with the rules for bills of lading. The sea waybill is normally used in transportation to subsidiary companies within the same group or wherever the goods are not likely to be sold to others while being transported or when documents are not required in the payment circuit.

2.1.7.  Private International Law Aspects of Bills of Lading Since the carriage of goods by sea is normally an international business, it is important also to consider the private international law complication resulting from different attitudes concerning the status of the bill of lading as document of title and possessory instrument or mere receipt, which itself will also be a characterisation issue. Short of full transnationalisation or full acceptance of the international law merchant or modern lex mercatoria in these matters, we are here foremost concerned with the proprietary aspects under applicable local laws. Is it in present conflict of laws theory, always pointing to some domestic law, (a) the law of the place where the goods may be claimed applicable (as their lex situs), or (b) perhaps the law of the underlying contractual transportation agreement, or (c) the law applicable to the bill itself even if this law is chosen by the parties? (d) Could it be the law of the place where the bill of lading was issued or is held? The last option would amount to a lex situs approach, now in respect of the bill itself. If it is the first option, then it is likely that the nature of the bill changes and is adjusted depending on the location of the underlying goods even if acquired rights are given some protection in principle, as in the case of the recognition and execution of foreign security rights in movables: see section 1.8.2 above. This is perhaps the more likely approach, which assumes that the lex situs of the underlying goods determines the status of a foreign bill of lading in respect of them, but it may still be necessary to determine whether under the law of the place of issuance of the bill, it was meant to be a (negotiable) document of title in the first place. If so, there may also be some adjustment to the nearest equivalent in the recognising country, which may well concern the negotiability, the question of abstraction or independence, and bona fide holder protection. If it is the second or third option, then it is conceivable that proprietary issues in respect of the underlying assets are decided by the parties’ mere choice, not on the whole believed desirable or even possible in proprietary matters, which by their very nature affect third parties. If it is the last option, then foreign proprietary rules, especially in respect of bona fide holders of the bill or of the assets, could prevail at the final delivery point of the goods against the notion of their lex situs. This last option makes the lex situs of the bill, or more likely the law of the issuance of the bill, the dominant one and allows it to prevail over the lex situs of the goods. If the bill of lading is considered a fully negotiable document of title subject to the law of its own location from time to time (situs of the bill), at least in the aspects of its negotiability, and the

Volume 4: Negotiable Documents of Title and Negotiable Instruments  351 validity of the title in the bill itself,515 there remains a particular problem in the relationship to the underlying assets and their transfer or entitlement which have their own lex situs, although the location of the bill will in the case of presentation normally coincide with the place of the location of the goods upon unloading (country of destination), so that there is only one lex situs in respect of both, but only at that moment. It would present a clean solution as far as the ultimate claiming of the goods is concerned, although in other aspects the law of the situs of the bill could profoundly affect the rights that can be exercised under it. It could in particular affect the negotiability and use of the bill in the payment circuit. Thus, if a bill conceived as a negotiable document of title in the place of issue is presented in England, the parties’ intent could become relevant in determining its status and affect any negotiation of the bill. Alternatively, if a bill intended to be merely a receipt in England were subsequently negotiated and presented in another country it could then be considered a prima facie document of title if that is the status of such bills in that country. This may be the reason why applicability of the lex situs of the bill is now normally avoided but it still appears in adjusted form: in order to be given the status of a fully negotiable document of title in another country, it would appear necessary as a minimum for a bill of lading to be at least created with such status under the lex situs of the place of its issuance. The place where the bill of lading is issued will normally be the place of loading of the goods (country of origin, although the issuing function may now be centralised at the headquarters of shipping companies). So normally, the law of the place of loading may be considered relevant, also in respect of the continued capacity of the original seller/shipper to engage in further sales of the goods after any negotiation of the bill. If not created with this status at its original situs, the applicable law could be a question of discretion of the recognising courts in the country of negotiation or more particularly a question of the lex situs of the place of unloading (therefore of the country of destination) as to what extent its negotiability could be accepted. Indeed, it would ultimately appear to be the lex situs of the goods that would give guidance on the status of the bill and also determine the question of how the bill could subsequently be fitted in the proprietary system of the recognising country as a document of title, thereby determining the title in the underlying assets in competition with the proprietary rights of any other claimants in these goods. As just mentioned, it may be a matter of adjustment and finding the nearest equivalent in the law of the country of destination. This process of recognition and adjustment of the bill of lading then becomes similar to the one more commonly encountered in the recognition of foreign proprietary rights: see section 1.8.2 above. The result is that a proper distinction should be made between the status of the bill of lading itself and the rights in and transfer of the underlying assets. The law of the country of origin would affect the bill in terms of its status as a negotiable document of title, but the law of the country of destination of the goods would decide the proprietary effect of the bill on the assets and ultimately determine the effect of the bill of lading in that context. The lex situs of the underlying assets is thus dominant.

515 See for the attitude in connection with bills of exchange, Dicey and Morris (n 402) 2074. Authority is scarce on the subject of the law applicable to documents of title cf the lack of a reference to bills of lading even in the 15th edition of 2012, 1940ff except for short references to the Carriage of Goods by Sea Act (COGSA) 1971 incorporating the Hague Rules 1924 as amended by the Hague Visby Rules 1968, and the COGSA 1992, which established that the lawful holder of the bill had all the rights and duties under the carriage contract as evidenced by the bill of lading, thereby repealing the Bill of Lading Act 1855 in this respect. See more extensively AA Ehrenzweig, Private International Law (Leyden 1964) 226 and E Rabel, The Conflict of Laws: A Comparative Study 4, 2nd edn (Ann Arbor, MI, 1958) 280ff.

352  Volume 4: Negotiable Documents of Title and Negotiable Instruments Only party autonomy in respect of the bill of lading and the law applicable to it in its proprietary aspects would allow this law to coincide with that of the country of destination of the goods (assuming the destination is not changed in the meantime), but in proprietary matters such party autonomy is not favoured, as noted many times before, and would at least require a broad bona fide purchaser protection in respect of any intervening transactions in the underlying assets, which might not be sufficiently available under the law of the country of destination. It is in this connection perhaps clearest to consider the bill of lading as a document that may autonomously create proprietary interests in chattels, therefore as a facility that aims at a special transfer regime.

2.1.8.  Lex Mercatoria and Uniform Treaty Law Concerning Bills of Lading. The Hague, Hague-Visby, Hamburg and Rotterdam Rules Finally, it is possible to treat the bill of lading as what it originally was: a typical transnational document of title, negotiable if properly so expressed, that was derived from the law merchant and substantially operated under its own principles and rules supplemented by treaty law where available. This is likely to be the more productive direction of modern research. While uniform treaty law has been produced in this area, this is mainly the case only in the transportation aspects of the bill of lading, and not in its status as a document of title. Absent treaty law, in a transnational legal environment, in a more responsive approach, this status is foremost to be determined on the basis of the intrinsic purpose and logic of these documents themselves, thus on the basis of established practices subject to any fundamental legal principle and further to be interpreted and supplemented on the basis of the principles common to domestic legislation in this area in mercantile nations and only ultimately on the basis of the application of a national law if deemed applicable on the basis of the prevailing principles of private international law. This approach conforms to the hierarchy of norms which may be considered the essence of the modern lex mercatoria: see more particularly Volume 1, section 3.2.2. It is likely to emphasise the status of the bill of lading (if expressed to order or bearer) as a negotiable document of title at the expense of parties’ intent. As far as treaty law in the transportation aspects is concerned, in this connection the Hague, Hague-Visby, and Hamburg Rules are relevant. Again, they mainly deal with the transportation aspects of the bill of lading and not with its status as a negotiable document of title. The need for uniform law in this area appeared first after World War I when the freedom of the parties to agree the transportation conditions in practice left the carriers great bargaining power to impose their conditions while there was often a lack of clarity even on the transportation terms as printed on the bill of lading. In the US, the federal Harter Act of 1893 had first achieved here some order and provided a mandatory infrastructure for the carriage of goods by sea (between different States of the US) and achieved a compromise between the conflicting interests of shippers and carriers. The US subsequently pursued this policy internationally and the International Law Association (ILA), which is a voluntary body of legal practitioners existing since 1873, took this over. It led to the Hague Rules, accepted by the ILA in 1921 in the Hague, amended and translated into French in 1922. Subsequently, these Hague Rules became the subject of a diplomatic conference in Brussels in 1923 leading to the Brussels Convention incorporating them in 1924. Under it, mandatory rules, especially in the area of carrier liability, were agreed for the period of the carriage of the goods (not for their handling by the carrier in the port of loading or discharge). It thus remained a very partial codification and only unified rules for bills of lading with regard to damage occurring

Volume 4: Negotiable Documents of Title and Negotiable Instruments  353 between the time of loading and discharge (to hull cargo other than live animals) (see Rule I(b)(c) and (e)), while Rule III (8) stressed the mandatory character of the rules if embodying a prohibition or restriction rule. Choice of law or forum selection clauses likely to result in a limitation of the liability as determined by the Rules are now mostly ignored, at least by fora in the Contracting States, which, as in the case of the Netherlands, may sometimes assume jurisdiction themselves on the single ground that the cargo is destined for ports within their jurisdiction. The Brussels Convention left Contracting States the choice of ratifying the Convention or incorporating its rules in national law, which incorporation took place in some countries in various succeeding steps (as in the Netherlands where this process was completed only in the 1950s). In the UK, the COGSA, incorporating the Hague Rules, was adopted as early as 1924. The US COGSA dates from 1936. The result was the emergence of unavoidable differences in implementation between the various countries adopting the Rules. In particular, problems continued to arise in the determination of the carriers’ liability and the validity of negligence clauses in bills of lading. An attempt at greater uniformity was made through amendments resulting in the Hague-Visby Rules agreed in Visby in 1967 upon the initiative of the CMI. These were adopted by a diplomatic conference in Brussels in 1968, the relevant Protocol becoming effective in 1977. The Hague-Visby Rules notably increased the limits of the liability of the carrier. Since 1979 these limits have been expressed in special drawing rights (SDRs) of the International Monetary Fund (IMF). In the meantime, the character of the Hague and especially Hague-Visby Rules as customary law applicable regardless of their ratification and/or incorporation into local law even as mandatory rules was noted.516 They may also apply to transportation arrangements other than under bills of lading, such as those under sea waybills or charterparties (if not already clarified under incorporation statutes). The Hague-Visby Rules have been widely adopted: see for the UK the COGSA 1971 replaced in 1992, for France a law of 1977 and for the Netherlands a law of 1982. The US and Germany remain party to the old Hague Rules and have so far signed but not ratified the Hague-Visby Rules. Several countries, such as France, extended the coverage to sea waybills. Pressure from less developed countries for greater carrier liability, especially in respect of servants and agents, also during handling in the port of loading and discharge and therefore not only during the carriage of the goods, led to the Hamburg Rules. They are an UNCITRAL compilation adopted at the diplomatic conference in Hamburg in 1978 and became effective in 1992. They replaced the risk allocation of the Hague-Visby Rules in favour of a rebuttable presumption of liability of the carrier. It proved controversial. As a consequence, the Hamburg Rules have been ratified only by a number of smaller countries, among which is Austria. The US and France signed but have not so far ratified. Some East European and African countries have ratified without apparently repealing the Hague or Hague-Visby Rules to which they had become a party. As a consequence of all these developments, various countries may now apply the Hague Rules, Hague-Visby Rules, Hamburg Rules or their own rules (if not incorporating any of the others). This may give rise to conflicts. The Hague Rules are applicable to contracts of carriage covered by a bill of lading or any similar document of title in so far as such document relates to the carriage of goods by sea (Rule I(b)), assuming that the law of a Contracting State applies to the bill of lading. They do not apply to carriage covered by sea waybills or a charter party under which no such document is issued (although some countries did extend their application to sea waybills, as we have seen). As mentioned before, the Hague Rules put emphasis on the transportation aspect

516 See WE Haak, ‘Internationalism above Freedom of Contract’ in Essays on International and Comparative Law in Honour of Judge Erades (The Hague, 1983) 69. See for a similar public order characterisation of the Hague-Visby Rules, W Tetley, Marine Cargo Claims, 3rd edn (Montreal, 1988) 944.

354  Volume 4: Negotiable Documents of Title and Negotiable Instruments and not on the documentary aspect of the bill. The bill of lading is in truth considered prima facie evidence of receipt of the goods only (see Rule III (4)) and there is notably no definition of the bill of lading itself. According to Rule X, the Hague-Visby Rules apply to all carriage of goods by sea under a bill of lading: (a) issued in a Contracting State; (b) concerning carriage from a port of loading in a Contracting State regardless of any other choice of law clause; and (c) in which a choice of law is made in favour of the law of a Contracting State. They continue to view the bill of lading as prima facie evidence of the receipt of the goods but no longer allow proof to the contrary upon negotiation (Rule III (4)). The Hamburg Rules define the bill of lading as a document of title if expressed as a negotiable instrument (Article 1(7)) and also apply to incoming carriage of goods by sea under a bill of lading. It may thus be confirmed that the various Rules are not primarily concerned with the bill of lading as a negotiable document of title in terms of proprietary effect. The Hague-Visby Rules are the least controversial and therefore probably the most important standard. They do not clearly state that the bill must be in writing or manually signed. The carrier must, however, issue a bill of lading upon the demand of the shipper, in which connection reference is made to documents and to information that must be supplied therein: Rules III (3), V, VI and X. Most incorporation laws require a document and, in most countries, there must be a hand-written signature.517 The bill of lading must also contain leading marks to identify the goods (see Rule III (3) of the Hague Rules). In 2009 via UNCITRAL, a new set of Rules appeared (the Rotterdam Rules), which covered the situation where the transportation was partly by sea and partly by land.

2.2.  Negotiable Instruments 2.2.1.  Bills of Exchange It has been established that the concept of the bill of exchange or draft was used in the large European fairs as early as the fourteenth century AD to avoid the need for traders at these fairs to carry large amounts of cash (gold and silver). Through the banking system of those days, the Lombard bankers present at these fairs would offer these traders the facility of receiving the cash they had collected at these fairs in their home residence. To this end, the Lombard banker would take the trader’s cash and instruct his correspondent to make the necessary payment in the residence of the trader. These instructions would be in writing and would be given to the trader, who would present them to the correspondent banks in his own town upon his return. It subsequently also became possible for buyers at these fairs to draw cash from the correspondents of their home banks present at these fairs, to which end they would carry a written instruction of their own banks. The bankers operated a form of clearing among themselves to reduce their own subsequent need to send cash to other places. The banking instructions used in this connection were subsequently made negotiable and developed into the modern bill of exchange. However, bills of exchange as negotiable instruments as we know them today date more properly from the end of the eighteenth century, when, in the earlier stages of the Industrial Revolution, trading and shipping of goods became more frequent

517 See also AN Yiannopulos, ‘Ocean Bills of Lading: Traditional Forms, Substitutes, and EDI Systems’, General Report XIVth International Congress of Comparative Law (The Hague, 1995) 3.

Volume 4: Negotiable Documents of Title and Negotiable Instruments  355 and new payment methods had to be designed. In this context, the old drafts were refashioned to suit the new needs. Like the bills of lading, they then acquired their present legal form.518 The modern bill of exchange in its simplest form is no more than an irrevocable instruction (in writing) a creditor to his debtors to pay their debts on the appointed date to the bearer of the bill or to the person indicated by the creditor (who may be the creditor himself) on the bill or to that person’s order. Normally the instruction is given by a seller (the drawer) to his buyer (the drawee), ordering the latter to pay whatever he or she owes the drawer to a third person/beneficiary (the payee). The reason for this payment to a third party will often be that the drawer519 owes the payee something himself. It is then an alternative way of paying the payee and the bill of exchange operates in that case much like an assignment. The difference is that the drawer and the drawee upon acceptance of the draft lose all defences derived from their underlying relationship in respect of any subsequent holder of the bill. The survival of the defences against an assignor, which may also be levelled against an assignee, were identified in section 1.5.3 above as a major problem in assignments and a source of uncertainty to any assignee. These problems do not arise in respect of a payee who has accepted a bill of exchange once it is negotiated and, it was submitted, should arise less and less also in respect of receivables, which are increasingly treated like instruments. Industry practice is likely to evolve in that way. A bill of exchange must be in writing, must be for a sum certain and payable on a specific payment date. There is no prescribed form or type of paper that must be used, and the instruction may be written on any material and in any manner as long as it is duly signed by the drawer. There must be a sum certain but this may include a specified interest rate unless it is a floating rate.520 The payment cannot be conditional or the sum payable otherwise vague. The bill of exchange must instruct the drawee to make immediate payment or payment at a later date. In the case of an instruction to make an immediate payment, we speak of a sight draft or sight bill, which the drawee either refuses or pays upon presentation. In the latter case, the drawee will subsequently hold the sight bill as proof of liberating payment. It becomes a receipt. In the case of a payment at a later date, we speak of a time or term draft or bill, which the drawee either accepts or ignores upon presentation. The due date may be specified on the draft or may be expressed in a number of days after sight (that is after presentation) or after the date the bill of exchange was drawn. The basic principle of a bill of exchange is that nobody is bound under it except those who have signed the bill itself—thus the drawer is always liable (relevant upon negotiation, for example, to a bank), as are a drawee if he has accepted the bill by putting his signature on it, the payee, but only upon endorsement, which means the sale of the bill by him to someone else, and all other endorsers. Anyone else who signed the bill will be considered to have done so as guarantor (aval in civil law terms). Acceptance by the drawee is crucial but only for time bills (it is neither relevant nor possible for sight bills). Without it, a time bill has little value. Acceptance does not mean payment, but rather the commitment of the drawee to pay on the due date, of which his signature on the draft is the acknowledgement. An accepted time draft thus signifies not merely a special liability of the debtor upon negotiation of the instrument, but also a benefit in terms of credit for the drawee. It means that during the period of the bill the seller cannot invoke default

518 In England, the modern development of the bill of exchange is associated with the name of Lord Mansfield; see also G Gilmore, ‘Formalism and the Law of Negotiable Instruments’ (1979) 13 Creighton Law Review 441, 446–50. It was a product of the law merchant but became incorporated into the common law, which in turn affected its further development: see also Vol 1, s 1.1.3, and JS Rogers, The Early History of the Law of Bills and Notes (Cambridge, 1995). 519 See for assignments competing with bills of exchange, s 2.2.8 below. 520 Except in Germany, see s 5 Wechselgesetz [Bill of Exchange Act] 1933.

356  Volume 4: Negotiable Documents of Title and Negotiable Instruments remedies such as a reservation of title or other security given to protect the underlying indebtedness of the drawee. Acceptance is not novation, merely confirmation of a postponement of payment probably already agreed in the sales contract and is otherwise an amendment thereto. The main practical significance of a time draft is, however, that it may be discounted with a bank for immediate payment. This implies a discount related to the prevailing interest rate to maturity taking into account also the creditworthiness of the drawee as ultimate debtor under a bill of exchange. As we have seen, a sight draft cannot be accepted. It is either paid or refused upon presentation. It can therefore not be discounted either. Technically, it may still be negotiated—that is, sold to whomever wants to buy it—so that there may also be holders (in due course) of sight drafts, but in view of the lack of acceptance this is rare. As just mentioned, the main relevance of sight drafts is in the order to pay a third party immediately, implying the drawee’s discharge if the latter obeys the order and collects the sight draft as a result. If made out to the order of the drawer (as payee), possession of a sight draft gives the paying drawee written proof of his payment and a release vis-à-vis his creditor/drawer as he becomes the rightful holder of the draft upon payment. We see here a doubling of functions, which is common in bills of exchange. Similarly in a time draft: the drawer may be the payee at the same time (when the bill of exchange is to the drawer’s own order or in German a frassiert-eigener Wechsel). This makes sense if the agreed payment takes place only later and the drawer wants a facility to receive immediate payment from a bank through discounting. This is a method of raising cash on bills of exchange that mature later. Banks will provide this facility at a discount. If the time draft is to bearer, it usually means that the drawer retains the bill of exchange. He is then in the same position as if the draft had been to the drawer’s own order; he is payee at the same time. It is also possible that the payee is not the drawer/seller himself but rather its bank, which in this case is not a true third party but will collect as agent on the drawer’s behalf in this manner. The drawee and the payee of a time draft may also be the same. This means that the drawee is instructed by the drawer to pay to himself (or order) on the payment date. This makes sense if the drawer owes the drawee money at some date earlier than the bill’s maturity and wants to give the drawee a facility to raise cash by discounting the bill upon its own acceptance. The drawer may also be the same as the drawee. This means that a drawer has drawn the bill of exchange on himself in favour of a payee. The draft is then treated as a promissory note (assuming the drawer has accepted the bill of exchange drawn on himself at the same time, therefore as a promise to pay the payee a sum certain upon demand or at a certain date).521 The terms ‘to order’ or ‘to bearer’ were used before. This is standard language in bills of exchange (as it is in documents of title) and denotes negotiability of the paper. It means that if proper language is used and the instrument is to a named payee or his order or to bearer, it will be negotiable and can be transferred by endorsement and delivery if to order, or by delivery only if the bill was to bearer. The result is that bills of exchange become negotiable instruments. It is true that in civil law the bill of exchange to bearer is often discouraged, unlike in common law. Under the Geneva Conventions of 1930 (see section 2.2.10 below) the bill of exchange to bearer is

521 See also I Ronse, Wissel en Orderbriefje (Gent, 1972) nos 144, 55. It may, however, also happen that a head office draws a draft on an establishment or branch of the company elsewhere, in which case it is less likely that a mere promissory note will result. For purposes of the bill of exchange, the establishment may here be assumed to have sufficient independence, even though not itself a legal person separate from the company. The result is that the drawer and drawee are not considered to be the same.

Volume 4: Negotiable Documents of Title and Negotiable Instruments  357 even considered void, but a similar result is achieved when the drawer draws a bill of exchange to his own order (making himself the payee), while endorsing the bill in blank. The pure bearer bill is considered negotiated when in third-party hands. This is relevant for its status as an abstract obligation: see section 2.2.4 below. Only the holder of the bill of exchange may request payment. When the holder is in good faith, he is called a holder in due course and may have a better right to ask for payment than his predecessor as the holder takes free and clear of earlier defects in the chain of transfers of the document (but not of any in the transfer to himself). As such the holder may demand payment from anyone who has signed the bill, except from a drawer or any endorser who has put ‘without recourse’ next to his signature, or from any signatories indicating that they are signing only as agent or representative of others. Pure guarantors or avalists might also have a special status in this respect and might only be liable after other signatories are in default of their payment obligations (in which case the guarantee is only a secondary obligation). As just mentioned, the holder in due course may ignore defences arising from irregularities earlier in the chain of transfers but also in the creation of the instrument unless apparent from its face. In demanding payment from the original payee, the drawer or the drawee, the holder in due course may thus also ignore all defences derived from the underlying relationships between drawer and drawee or drawer and payee. If any earlier endorser is asked to pay, the latter has recourse against any signatory before him (except a drawer or any endorser without recourse) but not after, so that ultimately the drawer and any drawee who accepted the bill of exchange are liable under it vis-à-vis the payee and all his successors in interest.

2.2.2.  Acceptance and Discounting of Time Bills The practical importance of bills of exchange is mainly in the possibility of discounting accepted time bills or drafts. There is on the whole no obligation for the drawee to accept a bill of exchange and thereby incur greater liability if the bill is discounted or otherwise negotiated to third-party holders as upon acceptance the drawee loses the defences he or she may have had against their creditor/drawer: see section 2.2.5 below. In some countries, however, there is a duty to accept, notably in France and the Netherlands. It has been a traditional feature of the Dutch law of bills of exchange that they must be accepted by the drawee if the seller/drawer has fully performed its obligations under the contract, therefore in the case of a sale upon delivery of the goods. A seller who remains unpaid at that moment may therefore draw a time draft on the buyer for payment to the payee (or himself) on the payment date, which bill of exchange the buyer must accept. It is nevertheless an onerous legal act on the buyer’s part and the acceptance duty must be considered outdated and is certainly not required by the Geneva Conventions of 1930: see section 2.2.10 below. Belgium deleted the acceptance obligation from its own law (Article 8 of the Bill of Exchange Law 1872, which had been thought to reflect commercial custom) in 1930 on the occasion of the incorporation of the Geneva Conventions into Belgian law. Of course, it is always possible that the sales agreement itself imposes a duty on the buyer to accept the bill of exchange drawn on him in respect of the sale price, but under Dutch law acceptance concerned a statutory right of the drawer under the stated circumstances. It does not, however, itself effect acceptance (as it did at one time in Belgium), and even a judgment ordering acceptance cannot take its place if the debtor remains unwilling. Specific performance action would be required. In France, the acceptance duty dates only from 1938 (Decree of 2 May): see Article 124 of the French Commercial Code (old) now L 511-15 (penultimate paragraph). The Cour de Cassation

358  Volume 4: Negotiable Documents of Title and Negotiable Instruments had earlier rejected the obligation.522 As a sanction, a buyer refusing to accept loses his sales credit and the price becomes due immediately. The usefulness of the acceptance obligation is debated in France as the acceptance is required only upon full compliance by the seller and there may always be some doubt on that point. At least it is easy for the buyer to find excuses in the quality and delivery of the goods.523 Also in France the contract itself may impose an acceptance obligation. More intriguing is whether commercial usage may also impose a duty to accept, as was earlier the Belgian view.524 The drawer, while handing a time draft to the payee (after giving notice to the drawee), guarantees acceptance (except where he indicates otherwise on the bill). He also guarantees payment by the drawee. This liability cannot be excluded under the Geneva Conventions but it can be under common law: see section 2.2.3 below. Acceptance is a condition for the discounting of bills of exchange. Banks that make a business out of the discounting of time drafts themselves become the holders of the drafts they discount and they will present them to the drawees on the appointed dates. They therefore incur the credit risk of the drawee but they have recourse against anyone who has signed the bill as all signatories (except those who sign as disclosed agents or without recourse) are assumed to have guaranteed that the drawee will have sufficient funds on the payment date. This concerns principally the drawer and payee.

2.2.3.  The Persons Liable under a Bill of Exchange: Recourse The basic rule is that under a bill of exchange all those whose signatures appear on the bill are in principle liable. They all function as guarantors of payment vis-à-vis the holder. They are principally the drawer and any endorsers, except for the latter if they signed ‘without recourse’. As we have seen, under Article 9(2) of the Geneva Convention, the drawer may not do so, but he may under common law: see section 16 of the English Bills of Exchange Act 1882 and sections 3-414 and 3-415 UCC in the US. This is likely to complicate and change the chain of recourse. Any special guarantors or avalists (in civil law terminology) may have a lesser guarantee obligation. In some legal systems, they may not be considered primary guarantors. It means that others liable under the bill of exchange must first default before the avalist may be required to pay. The aval may be limited to non-payment by certain parties. The aval is often thought to be relevant for time drafts only. It is in any event unlikely to be given without acceptance of the draft by the drawee. In English law, these special types of guarantors are usually not distinguished from endorsers, although in terms of recourse they may still come later and are as such more properly considered quasi-endorsers. It requires their place in the line of endorsers to be established.525 If the signatories are without recourse (which would make no sense in the case of an aval) any discounting bank is likely to apply an extra discount for assuming the full credit risk. The drawee himself becomes liable on the bill only through his own signature as token of acceptance. Without it, the draft has value to holders only as a guarantee of acceptance and payment by the drawer (without defences derived from the underlying contract giving rise to the claim) or any endorsers (provided they have not signed without recourse). It is clear that

522 10 April 1878, D.78.1.289. 523 See also G Ripert and R Roblot, Droit Commercial 2, 16th edn (Paris, 2000), nos 1986ff. 524 This was earlier also suggested in the leading Dutch treatise of FG Scheltema and J Wiarda, Wissel en Cheque Recht (Groningen, 1950) 285. 525 See on this problem, which will not be discussed here any further: Goode (n 30) 542.

Volume 4: Negotiable Documents of Title and Negotiable Instruments  359 a bearer draft is, from the point of view of protection, less interesting to the holder, as it will have only the signature of the drawer and of the drawee in the case of accepted term drafts. An advantage for the holder of a bearer draft is, however, that the latter cannot and need not show a continuous line of endorsements so that it is easier to establish that he is the proper holder. Endorsers against whom recourse is taken do not strictly speaking become holders in due course as a consequence of their payment. They have recourse only against their predecessors (in principle according to their order) and therefore not against all signatories of the bill of exchange.526 The idea is that, in terms of recourse, ultimately the original payee, and thereafter the drawer in that order, are reached. A drawee who has accepted is the principal obligee (as are any avalists if primary guarantors) and can in that position always be asked to pay. The drawee is not therefore a recourse debtor who can only be reached in the order of endorsement. If the bill of exchange is not accepted, as in the case of the sight bill, the ultimate debtor is the drawer, who may, however, still be able to solicit payment from any guarantors of the bill and from the drawee but only as debtor under the original sales contract. The bill need not be presented on the due date, but the periods thereafter during which this may still be done are likely to be limited under applicable domestic laws.

2.2.4.  The Principle of Independence or Abstraction The key to the understanding of the bill of exchange is that as an ‘instrument’ embodying a claim (a) it is at least upon negotiation independent of the underlying creditor/debtor relationship between the drawer and drawee; (b) it has its own manner of transfer, which is not through assignment (and its formalities under local laws) but is achieved through the handing over of the paper (with endorsement if to order); and (c) it also has its own way of protecting bona fide holders for value (or ‘holders in due course’). These principles all derive in origin from the law merchant rather than from national law (which only introduced more refinement). Any national law not accepting these principles destroys the essence of the bill of exchange. The principle of independence under (a) is particularly important in this connection and serves as major support for the negotiability of bills of exchange, which in turn implies its own mode of transfer and protection of third parties. It makes the bill of exchange (like bills of lading) a proprietary instrument that cannot be directly fitted under the general rules of property of the applicable legal system. They continue to have their own separate status everywhere. This notion of independence, which is also called the principle of abstraction, is not relevant as between the seller (drawer) and the buyer (drawee), although in England a cheque being a sight draft is often given independent status in respect of the payee: see also section 2.2.6 below. The better view is, however, that if the drawer retains the bill made out to his own order or to bearer (where possible) and presents it to the drawee on the due date, the ordinary defences as between them still prevail

526 It is of interest to note that under a bill of exchange endorsers become liable by adding their signature. They thus guarantee to their successors that the drawee will have sufficient funds upon presentation of the bill to the latter. No similar guarantee structure is implied in the endorsement of bills of lading and the endorser of such bills does not therefore guarantee in any way that the goods are with the carrier and are collectable upon presentation of the bill of lading.

360  Volume 4: Negotiable Documents of Title and Negotiable Instruments even if the drawee accepts the bill. There is an effect in so far that the burden of proof may shift to the drawee upon acceptance, as any drawer will in the first instance sue on the bill of exchange and not on the basis of the underlying relationship. The abstraction is thus more particularly relevant for any third-party holder acquiring the bill in good faith, thus for the holder in due course.527 It protects against all defences from those with whom the holder did not deal. Indeed, the 1990 Comment on the UCC (at section 3-302) explains that the ‘holder in due course’ doctrine applies only in cases where more than two parties are involved. The essence is that such a holder does not have to suffer the consequences of a defence of the obligor (on the instrument) that arose from an occurrence or relationship with a third party of which the holder did not know. It means that in connection with payment of the purchase price in a sale, the drawer or a drawee, while being asked to pay on a sight or accepted time draft by a holder in due course, cannot invoke any defences derived from the underlying agreement between seller/drawer and buyer/drawee in order to refuse payment. They cannot reclaim any (full) payment made under those circumstances either. In this connection, it should be noted that the original payee is not strictly speaking a holder in due course either and may therefore have a weaker position, at least under English law.528 In the presentation of the bill to the drawer, the payee may thus still be faced with the defences derived from its own underlying relationship with the drawer giving rise to becoming the payee in the first place. This may not apply when presenting the bill of exchange to the drawee. At least in England, payees may also be able to claim the status of holders in due course vis-à-vis the drawer if they later negotiated the draft and became an endorsee.529 Thus, the underlying relationships are not superseded by the issuance, acceptance or endorsement of a bill of exchange. In those relationships, the bill of exchange is only a means of achieving a payment and the transfer of the proceeds, no more. There is notably no novation but only an additional set of obligations created through the issue, acceptance or endorsement of the bill of exchange itself. In Swiss law, this is expressly so stated: see Article 116(2) OR.

2.2.5.  The Holder in Due Course. Personal and Real Defences. Other Types of Holders As we have seen in the previous section, the holder in due course of the bill is strongly protected but must make sure that the bill of exchange is not overdue, incomplete or irregular on its face. It also means that a bill to order must have a continuous line of endorsements. At least in common law, the holder in due course must also have acquired the bill of exchange for value and, under all legal systems, in good faith as regards any prior defects in the chain of transfers. There should not be any notice of a previous dishonour. The transfer of the bill to the holder will also be subject to the normal rules, defences and exceptions in terms of capacity of the parties and validity of the contract. With this proviso it is, however, possible to say that holders in due course do not derive their rights from their predecessors but rather out of the documents themselves, which is a common feature of all negotiable instruments and even documents of title. As a consequence, subsequent

527 See s 17 German Wechselgesetz, L 511-12 French Commercial Code and s 3-305 UCC in the US. 528 See RE Jones Ltd v Waring & Gillow Ltd [1926] AC 670. 529 See Jade International Steel Stahl und Eisen GmbH & Co KG v Robert Nicholas (Steels) Ltd [1978] QB 917.

Volume 4: Negotiable Documents of Title and Negotiable Instruments  361 holders in due course need not be concerned about defects in the issue, acceptance or negotiation, lack of capacity or any nullity or illegality of transfers earlier in the chain in which they were not involved and of which they did not know. However, there may still be some differences in the various national laws in the area of these so-called defences. As in bills of lading, it is not uncommon to distinguish here between personal and real defences. Personal defences are those derived from the relationship between a plaintiff and a defendant in an action concerning a bill of exchange. They only operate between parties that entered direct relationships with each other and therefore not against endorsees. Real defences are based on the nature of the bill of exchange itself and concern defects in the instrument or its transfer or chain of endorsements. Personal defences in an action between a drawer and drawee are therefore most likely to be based on their underlying sales agreement. Between succeeding holders, they are any defects in the negotiation or discounting of the bill. Personal defences do not affect the status of a bill of exchange itself but affect only the current holder of the bill. They concern its status as holder in due course, therefore the requirements of that status, such as proper acquisition or otherwise the bona fides itself, or, in respect of the immediate predecessor, the circumstances under which the holder acquired the bill of exchange. As already mentioned before, between drawer and drawee their underlying relationship may still be invoked as a defence even if the bill has been accepted. As we have seen also, vis-à-vis the payee, the drawer may have certain defences derived from their underlying relationship which gave rise to the drawing of the bill of exchange in the payee’s favour in the first place. In any event, if the bill is not accepted or is dishonoured, the original relationship is re-established and may always be sued upon between a drawer and drawee. Real defences concern the bill of exchange itself and its validity and may relate to forgery of signatures, alterations to the bill, nullity or illegality of the issue of the bill or its transfers, but also to lack of capacity or other defects in drawing or transferring it earlier in the chain of transfers. They thus signify an irregularity in the creation or continuing existence of the bill of exchange itself or a break in the chain of title transfers. It is not strictly speaking true that these occurrences are always irrelevant to the holder in due course, at least in England,530 but they may only be invoked as a defence by parties who became signatories of the bill prior to the irregularity. For them the (changed) bill of exchange (for example, the amount), later forged signatures or irregular transfers are not relevant at all and they may ignore them. But later signatories are considered new drawers or endorsers of the bill and cannot deny liability vis-à-vis subsequent holders of the bill of exchange on the grounds of earlier invalidity, irregularities or other real defences. Common law often makes a further distinction between the types of holders and, besides the holder in due course, there may also operate the notion of the normal holder as distinguished from the mere holder. Under English law the (mere) holder, the (normal) holder for value, and the holder in due course,531 each have different defences. It is all a question of powers and defences and they become stronger for each type, the holder in due course having the strongest position. Continental law distinguishes only between the (mere) holder and the holder in due course.

530 See s 24 of the Bill of Exchange Act 1882. On the Continent, the forgery may not distract from the right of bona fide purchasers of the bill: see s 7 of the German Bills of Exchange Act 1933. This is also the situation in the US: see s 3-404 UCC. Theft of a bearer instrument may equally be irrelevant to the holder in due course: see Art 3.86(3) (b) of the new Dutch CC. 531 See Goode (n 30) 533.

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2.2.6. Cheques Cheques are still common in common law countries, also among professionals, although now fast being overtaken by electronic bank payments. They are simply sight drafts to order, drawn on one’s bank and ordering it to pay to a third party (payee or his order). They may also be issued and handed to a payee in blank, creating a bearer instrument until the holder fills in his own or somebody else’s name. As a sight draft, in most countries, a cheque cannot be accepted by the bank and the bank either pays the third-party payee (usually debiting the current account of the drawer) upon presentation of the cheque by the payee or dishonours the cheque by simply refusing to pay. The bank will normally dishonour the cheque and is allowed to do so if there is an insufficient balance in the drawer’s account unless other arrangements were made in terms of overdrafts on the account. Negotiation has a meaning here only in the sense that the cheque, if not crossed (a typical English practice that requires the cheque to be paid into the payee’s own bank and not to him directly or to anyone else as endorsee), may be transferred by the payee or his order or otherwise by any bearer to a third party who will subsequently present the cheque for payment to the bank with recourse on its predecessors and the drawer if no payment is received in this manner. It is particularly important in this connection that at least in England, as between the drawer and payee, the cheque creates an independent payment obligation, even if, as in the case of bills of exchange, the payee is not truly a holder in due course and the drawer therefore still retains the personal defences against the payee derived from their relationship that gave rise to the issuing of the cheque in the first place. Negotiation is not therefore necessary to activate this protection. It follows that if the bank does not pay, the payee may (at his option) still sue the drawer for payment on the cheque rather than on the underlying contract or relationship. This is likely to be simpler, and writing a cheque therefore implies a risk for the person doing so.

2.2.7.  Limited Modern Use of Bills of Exchange and Cheques The bill of exchange has lost much of its attraction in modern times, particularly in countries that have an easy way of assigning receivables as security, that is particularly in countries that do not require notification as a constitutive requirement for assignments. In countries that still do, as those in the French tradition used to (see section 1.5.1 above), this requirement could be avoided by drawing a bill of exchange in favour of the third party, which could then be handed over as possessory security to lenders, who would subsequently collect. As the bill of exchange is usually presented for such payment at the place of the debtor (drawee), the attendant country and political risks attached to the transfer of the proceeds meant that, in international transactions, it was eclipsed by the letter of credit: see for these letters of credit Volume 5, section 3.3.8, which are normally payable in the country of the seller. A bill of exchange may, however, still be used in that context and is then often drawn as a domestic bill on a confirming bank under the letter of credit in the home country of the seller. In all cases, the chief advantage of a bill of exchange, if a time draft, remains that it allows for the facility of acceptance and subsequent discounting for the drawer to obtain immediate cash, which latter facility is not inherent in the letter of credit facility. It is in a sense in factoring of receivables, but the difficulty of a bulk assignment and the possibility of defences of the debtors under these receivables often made straight discounting complicated. Hence the alternative of bills of exchange on the one hand and the need to make receivables themselves more abstract undertakings on the other (see section 1.5.8 above), coupled with a bulk assignment facility. Here

Volume 4: Negotiable Documents of Title and Negotiable Instruments  363 the bill of exchange is at a disadvantage as it cannot be arranged in bulk (therefore in respect of different drawees at the same time). In some countries, dishonouring an accepted bill of exchange by the drawee or failing to provide recourse by the other signatories may give rise to criminal penalties and is in any event considered a grave undermining of one’s own credit standing. As a consequence, drafts still have some advantages, although in international trade their overriding importance has disappeared as other payment methods have become more popular, and modern communication facilities have allowed greater informality, especially between parties who are now in closer contact and better known to each other. One may also say that the risk inherent in international trade has been substantially reduced as a consequence of the modern communication facilities and the increased possibilities of following goods and payments from afar. On the other hand, cheques continue to be used extensively in countries such as England and the US in the consumer sphere, but electronic payments through banks are now superseding them rapidly. In England there was even a recent proposal (rejected) to eliminate cheques altogether. Earlier they were the subject of much attention and modern legislation to protect consumers better. Also, the processing of thousands of cheques on a daily basis has required legislative action to make handling easier for the banks, although it remains an expensive and cumbersome process. Much of the modern legislation concerning negotiable instruments has been in this area without affecting the fundamental principles for professionals. These consumer aspects are outside the scope of this book.

2.2.8.  Bills of Exchange and Competing Assignments of the Underlying Claim The problem of competition between a bill of exchange and an assignment of the underlying claim may present itself especially in the factoring of a portfolio of receivables. It raises the question of the status of any bill of exchange drawn on a debtor by its creditor in favour of a third-party payee, either before or after a bulk assignment of receivables to a factor or other financier. Especially where notice of the assignment to the debtor (drawee) is not necessary under applicable law for the assignment to be valid, any later notice to the drawee with a request for payment to the assignee may conflict with the debtor/drawee’s earlier duty under an accepted bill of exchange to pay the payee or any holder in due course on the payment date. May or must the drawee refuse any notice and payment request of the assignee under the circumstances? In principle, a debtor may ignore any assignment materially detrimental or burdensome to him (see section 1.5.3 above) and may, if a payor has already honoured the bill, be able to refuse any payment to the assignee on that ground or as a defence under the original contract with the drawer out of which the claim arose in the first place. If the drawee has not yet accepted the time draft or if a sight draft is presented after payment to the assignee, he will naturally not accept or honour when requested to do so. Where there is an acceptance duty there may be a greater problem for the drawee. The drawee if forced to pay twice will probably have recourse against the drawer, not under the bill of exchange, but rather under the original contract or perhaps as a matter of unjust enrichment of the drawer. On the analogy of the bill of lading, in common law countries, it may be possible to say that the holder of a bill of exchange is always subject to the rights of third parties in the underlying claim, in this case the assignee, at least if the assignment was made before the bill of exchange was drawn or accepted. Even in civil law countries, there is here no exception to the nemo dat rule as it concerns the transfer of receivables. Their incorporation into a negotiable instrument is not therefore likely to protect the payee and his successors

364  Volume 4: Negotiable Documents of Title and Negotiable Instruments against earlier rights of others. It would mean that the right of the earlier assignee is always stronger than that of the later holder in due course of the bill of exchange and that the drawee may plead that right as a defence against the holders in due course while paying the assignee. It does not oblige the drawee to pay the assignee unconditionally, certainly if an endorsee has already been paid and paying the assignee will entail double payment. If he must subsequently also pay the assignee, he may be able to recover from the earlier endorsee. He would certainly be able to recover any double payment from the drawer/assignor. As the bill of exchange is only another method of payment, it could also be said that any later assignments affect the drawee equally, even if holders in due course may then be better protected. It means that they may be able to keep their collections also if the drawee is subsequently forced to pay the assignee. In that case, the drawee is more likely to recover any double payment from the drawer/assignor than from the holders in due course.

2.2.9.  Position of the Holder in Due Course of a Bill of Exchange Compared with the Bona Fide Holder of a Bill of Lading Because the bill of exchange is likely to incorporate the underlying claim more fully than the bill of lading can incorporate the underlying goods, the position of the holder in due course of a draft is likely to be stronger than that of the bona fide holder of a bill of lading, who may easily face a situation in which the goods are in the hands of a third party (such as handling agents) claiming rights in respect of them without being at the same time the holder of the bill of lading, even though in respect of the holder in due course of a bill of exchange there may still be a competing assignment, as we have seen in the previous section. This problem in respect of bills of lading was discussed in section 2.1.5 above. At least in common law countries like England, but also in civil law countries like France, the absence of the need for delivery to transfer title in the underlying assets makes the holder of the bill of lading extra vulnerable to alternative alienations or even the vesting of security interests of others in the underlying assets. In any event, in these countries, the status of the bill of lading as negotiable document of title depends on the intention of the parties creating the instrument, and any holder of the document takes subject to that intent. This is less of a risk in countries like Germany and the Netherlands requiring delivery for title transfer, as we have also seen, and the handing over of the documents will always be a good substitute regardless of intent, even if one cannot avoid the underlying assets still leading an independent life especially if in the hands of those that do not know of the bill of lading or when acquired by bona fide purchasers. This is here also less of a danger in the case of bills of exchange which, as just mentioned, more truly incorporate the underlying asset and have their own more exclusive method of transfer and protection, also in common law,532 although, as noted in section 2.2.5 above, the defences of earlier endorsers cannot always be ignored by the holder in due course of a bill of exchange either, especially if derived from the face of the bill. As we have seen in the previous section, bills of exchange also remain subject to the prior rights of others in the underlying claim. That is also true for bills of lading in common law countries. In countries like Germany and the Netherlands, on the other hand, the creation and negotiation of a document of title are likely to erase all earlier proprietary rights in the underlying assets in respect of bona fide holders of the document.

532 See also CM Schmitthoff, The Law and Practice of International Trade, 9th edn (London, 1990) 573.

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2.2.10.  Foreign Bills of Exchange: Private International Law Aspects Under domestic legislation, so-called foreign bills of exchange sometimes have a somewhat different status, as for example under the English Bills of Exchange Act 1882 (section 4). They are in English law defined as bills of exchange drawn by non-residents or drawn on a person resident abroad and payable abroad, which normally (but not necessarily) follows. The main difference is that foreign bills of exchange as distinguished from inland bills of exchange must be formally protested upon dishonour by non-acceptance or non-payment (section 5). It means that dishonour must not only be notified to the drawer and each endorser but must also be established formally by a notarial deed. This formal protest, which will be marked by the notary on the bill of exchange, is not necessary in England (unlike in other countries) for inland bills. Also, the interpretation of the endorsement abroad of a bill governed by English law is different (section 72(2)). The Act further contains in section 72 some detailed conflict of laws rules dealing with validity, interpretation, the preconditions for the right to recourse, the effect of the bill of exchange, and discharge.533 It is quite clear that bills of exchange may be drawn by a seller in one country on a buyer in another, who is likely to accept the bill in its own country. This bill may be in favour of and handed to a payee in a third country and may be payable in a fourth. The bill of exchange itself may subsequently circulate in yet more countries and be delivered and endorsed in any of them. There are here four basic areas of conflict: (a) the creation of the bill of exchange in terms of formalities, capacity and validity; (b) any subsequent transfer in the same aspects; (c) the acceptance and the effect of the bill of exchange elsewhere when ultimately presented for payment to the drawee, but no less when presented for recourse by the holder to any signatory of the bill which goes into the strength of any defences levelled in those situations against the presentation; and (d) any payment and discharge under the bill of exchange. The basic rule, at least in England, is that the creation and transfer are complete when the instrument is delivered to the party concerned. That means, as far as the creation of the document is concerned, its handing over to the payee. For acceptance it means its return by the drawee (to the payee) and for transfer it means its delivery (upon endorsement if to order) to the subsequent holder. In each case it is considered that the law of the place of delivery (or receipt even though the delivery itself may be constructive, for example through an agent) applies to the relative legal act (creation, acceptance and transfer) in its formalities, capacity and validity. It is therefore not the law of the place of the signatures but rather the law of the place where the bill of exchange is sent after it. The law applicable to these acts therefore has nothing to do with the law applicable to the underlying contract between the drawer and drawee, for example of sale giving rise to the drawing of the bill, or to the underlying contract between the drawer and payee giving rise to this type of benefit for the payee, or to any underlying contracts between succeeding holders giving rise to the transfer of the bill. The impact of conditions is another problem. Where, in a documentary bill of exchange,534 acceptance is subject to a bill of lading being handed over and/ 533 See also Dicey and Morris (n 402) 2081ff. 534 A documentary bill of exchange is a bill of exchange to which a bill of lading is attached. It is sent to the buyer of the goods together with the bill of exchange. The buyer may keep the bill of lading only if he accepts the bill of exchange if a time draft or honours the bill of exchange immediately if a sight draft. The drawee must return the bill of lading forthwith if he does not pay on the due date.

366  Volume 4: Negotiable Documents of Title and Negotiable Instruments or having been genuine, the effects of this conditionality are again determined by the law of the place of delivery of the bill upon acceptance and not by the law of the place where the condition was entered. Yet emphasis on the law of the place of delivery may not require full compliance with all its rules and especially not with typical domestic complications like stamp duty requirements in the UK. It only concerns rules which are of a typical bill of exchange nature and conform to its basic purposes. There is here still a whiff of the international law merchant. Emphasis on the law of the place of delivery in these aspects of creation, acceptance and transfer, which are not strictly or, in any event, not only contractual, is logical from the point of view that the bill of exchange is likely to circulate in that place and must therefore exert there the desired effect (of delivery). Even then, the law held applicable is likely to relate only to the personal defences and, upon negotiation of the bill of exchange, it may no longer be relevant and other rules may apply. It nevertheless suggests a close relationship to the lex situs which more properly applies in the proprietary aspects of the bill of exchange as if it were a tangible movable asset. What concerns us here principally is the question whether the holder may be truly considered the owner of the bill of exchange even upon forgery or theft, particularly relevant to the holder in due course but also to pledgees. It also concerns the kind of (personal and real) defences that may be used against them if they present the bill for payment or for recourse. In all instances upon circulation in other countries, it is likely that the new lex situs will adjust rights acquired earlier under a bill of exchange to its own system as a matter of adaptation to the nearest equivalent but in a positive sense so as to respond best to the purposes for which bills of exchange are used. The law of the place of payment or recourse may well make further adjustments in this sense and may also have its own formal requirements, notably also as to the timeframe for payment. See for the adaptation technique particularly in proprietary aspects, section 1.8.2 above. To demonstrate this approach, the examples of the effect elsewhere of an acceptance of a bearer draft, of a blank endorsement, or of any endorsement may be illuminating. That would be so especially in countries which allow a forced acceptance like the Netherlands, do not allow bearer bills like most continental European countries, do not allow a blank endorsement as once was the case in France, or do not allow an endorsement if the bill is not expressed ‘to order’ as in the US. It appears that whether an acceptance can be imposed would in this approach not depend on the law of the residence of the drawee but rather of the payee, often the drawer. Whether effectively the courts in the country of the debtor would accept this is another matter as public policy may be involved. A German creditor could, however, draw a bearer bill on a drawee in Switzerland, payable in England if returned to the payee in that country. A blank endorsement, although invalid in the country of the endorsement, may still be valid in the country of the endorsee upon delivery there and enforceable against the payee in a country which accepts blank endorsements. An endorsement of a bill to a named person only may be perfectly valid if delivered to the endorsee in a country such as England, which accepts such endorsements under its own law. The attitude in all these cases may be contrasted with the more traditional approach in conflict laws which would as a minimum requirement insist on the act of which recognition elsewhere is sought being valid in its country of origin, but (except in the case of forced acceptances) it conforms to international standards concerning bills of exchange, a result here achieved by giving preponderant weight to the law of the country of delivery even in the creation of the instrument as a matter of adaptation. As suggested above, there may be further adaptation at the place of endorsement or of payment or when the bill of exchange is being presented for recourse. Thus, German bills of exchange, which under their own law cannot allow interest to be added to the amount payable, may be perfectly valid against a drawee outside Germany, notably upon presentation for payment in England. Set-off rights of the signatories if under applicable law qualified as

Volume 4: Negotiable Documents of Title and Negotiable Instruments  367 a matter of discharge rather than as a personal remedy may be invoked against the holder in due course when payment is requested. Yet what the applicable law in this respect should be is less clear. There must be a bias against these set-offs. Lack of consideration in the country of origin or transfer for the various undertakings of the different parties becoming signatories and thereupon a kind of guarantor, is a typical common law complication, but also, it is submitted, alien to the concept of bills of exchange (except perhaps as regards the position of holders in due course, who are not signatories as long as they do not endorse the bill), and therefore unlikely to affect the bill of exchange if delivered elsewhere or presented for payment or recourse outside common law countries. More complicated may be the question whether a choice of law by the parties may have a bearing on the applicable law, and in what aspects. The first requirement would be that it is indicated on the draft, which is not usual (it is much more common on bonds as promissory notes). Even so, it could prevail in the aspects of form, possibly presentation and acceptance or in the contractual aspects of a transfer, but much less likely so in the aspects of validity of the creation and transfer of the instrument and especially in the proprietary aspects. There is legitimate doubt about the impact in these areas of a contractual choice of law clause, even if reflected on the bill of exchange.535 The second of the 1930 Geneva Conventions deals with certain aspects of conflict of laws concerning bills of exchange. The obligations of the drawee who has accepted are covered by the law of the place of payment (Article 4(1)). The form and other obligatory aspects are determined by the law of the place where the relevant signature was placed on the bill of exchange (Article 3). Conflict of laws problems are difficult to resolve in all tripartite situations, as we have already seen in the case of agency and trusts: see Volume 3, section 3.2 above. It is also clear in respect of bills of lading: see section 2.1.9 above. There is no simple singular conflicts rule conceivable which may cover all situations. This begs the question whether references to domestic laws in this fractured manner as a result of the application of private international law rules may be at all satisfactory or realistic or solve anything.

2.2.11.  Uniform Treaty Law Considerable differences developed in the details of the law of negotiable instruments as a consequence of the various codifications in the nineteenth century (France in the Code de Commerce of 1808, Belgium in the Bill of Exchange Act of 1872, the Netherlands in the Commercial Code of 1838, Germany in the Allgemeine Deutsche Wechselordnung of 1848, England in the Bills of Exchange Act of 1882, and the US in the federal Negotiable Instruments Law of 1896, later followed by uniform State law in Article 3 UCC). The result was the emergence of basically three types of approaches: the French (including Belgium and the Netherlands), the German (including Switzerland and Italy), and the Anglo-American. In the French group, the bill of exchange was basically viewed as the sale of the underlying claim, therefore as an alternative to an assignment, which required the payee to give (or to have given) counter-value, while another basic requirement was that the draft needed to be payable in a place different from the one in which it was drawn, although in the course of time both requirements were eroded in case law. The German group accentuated the abstract nature of the draft and tended to ignore the underlying relationships, even between the original parties, so that an underlying default did not affect the status of the bill of exchange as between them, while the Anglo-American group protected 535 See also Dicey and Morris (n 402) 2087.

368  Volume 4: Negotiable Documents of Title and Negotiable Instruments the holder in due course but withheld this protection to the parties to the bill of exchange. This proved the more sensible and viable approach. For civil law countries, the differences were narrowed for bills of exchange in the Geneva Conventions of 1930 and for cheques in the Geneva Conventions of 1932, which were concluded upon the initiative of the League of Nations (in both fields as a set of three Conventions dealing respectively with certain material, conflict of laws, and stamp duty aspects). Although common law countries participated in the deliberations, they ignored the results while a number of South American countries signed but did not ratify (except notably Brazil). As a consequence, the Conventions became mainly European affairs, with the Scandinavian and Benelux countries, France, Germany, Italy, Portugal, Switzerland, Austria, Poland, Hungary and the Soviet Union as parties, although outside Europe, besides Brazil, Japan also ratified. The Conventions led, however, to different forms of incorporation into domestic law and also allowed certain deviations and reservations. Moreover, the incorporation legislation was differently interpreted. Nevertheless, the Conventions introduced a substantial measure of unification of the law in civil law countries and were particularly important in redefining the status of the holder in due course, much along common law lines. As a consequence, there is now much greater uniformity in the material aspects of bills of exchange worldwide and the remaining differences between the civil and common law group are mainly in a number of technical issues: the civil law mostly does not accept a bearer draft and in some countries like France and the Netherlands the drawee may be forced to accept time drafts under certain circumstances.536 In the details, UNCITRAL, in its Convention on International Bills of Exchange and International Promissory Notes of 1988, attempted to narrow the differences between civil and common law concepts further for the so-called international bill of exchange. It is defined as a bill of exchange which specifies in it two of the following five places as being in different countries: the place where the bill of exchange is drawn, the place indicated next to the signature of the drawer, of the drawee, and of the payee, or the place of payment, provided that for the Convention to apply either the place where the bill is drawn or the place of payment is in a Contracting State. It illustrates the complex nature of this Convention, also obvious in many of its other aspects. Following the UCC, it distinguishes between the holder and the protected holder and their various powers and defences in a convoluted manner. The position of the various types of guarantors (avalists) and their defences also remains complex and can only be understood by tracing a large number of sections of the Convention. This lack of conceptual clarity prevented early ratifications.

2.2.12. The Lex Mercatoria Concerning Bills of Exchange In section 2.2.1 above, reference was made to the fact that the bill of exchange (like the bill of lading) is the product of the law merchant and that local legislation concerning it only developed later and cannot deny or contradict the basic nature of these negotiable instruments in terms of (a) the principle of independence, (b) the method of transfer, and (c) the protection of bona fide holders of the bill. There is here an independent legal regime and nowhere do the rules

536 See for a further discussion, also M Rowe, ‘Bills of Exchange and Promissory Notes—Uses and Procedures in International Trade’ in N Horn (ed), Studies in Transnational Economic Law, Vol 6, The Law of International Trade and Finance (Deventer, 1989) 243, with an Appendix B comparing the Geneva Convention with Art 3 UCC and the English Bills of Exchange Act 1882.

Volume 4: Negotiable Documents of Title and Negotiable Instruments  369 concerning bills of exchange follow completely from the general rules of the applicable domestic laws. They are unlikely to fit international transactions, although since the nineteenth century many efforts have been made to ‘nationalise’ the bills of exchange and fit them into domestic legal regimes. Modern treaty law, in order to be successful, must reinforce the innate general principles and practices governing bills of exchange, and it is desirable and efficient to continue to view these negotiable instruments as operating under their own transnational rules supplemented by treaty law to the extent existing and applicable (and always subject to its own rank among all sources of law of the modern lex mercatoria). Certainly, if operating in international commerce, they should be brought under the various layers of law making up the hierarchy of norms of the lex mercatoria: see more particularly Volume 1, section 3.1.1. It accepts that these instruments are best covered by their own customary law, as elaborated by treaty law to the extent existing and applicable under its own terms (and always subject to fundamental legal principles and customary practices). Interpretation and supplementation should primarily take place on the basis of the intrinsic purpose and logic of these instruments themselves, the basic principles and rules concerning them, common principles developed for them in the national laws of mercantile states and only ultimately through application of a domestic law selected on the basis of the applicable private international law rules.

2.3.  The Dematerialisation of Documents of Title and Negotiable Instruments; Electronic Transfers 2.3.1.  The Traditional Use of Documents of Title and Negotiable Instruments. Their Inconveniences and Risks. Sea Waybills and Indemnities Negotiable documents of title, such as bills of lading, and negotiable instruments, which are documents of title concerning money, such as bills of exchange (and promissory notes), greatly facilitated the international transfer of goods and payment in the manner described above. The use of them in payment or collection schemes is more extensively discussed in Volume 5, section 3.3.7. Yet the need physically to handle these documents is cumbersome, compounded by the need physically for them to travel to the person who is entitled to them. In the case of bills of lading in particular, there may even result costly delays in the handling of the goods when, for example, these documents need to be checked physically before they can be handed over to the buyer to collect the goods, as in the case of documentary letters of credit, which are discussed in greater detail in Volume 5, sections 3.3.8ff. The consequence is that a buyer of goods may well receive the bill of lading and the facility to collect the goods after their arrival and time will be lost in the process of presentation to the carrier (or warehouse). A more legitimate reason for the delay may be longer credit given under the sales agreement allowing a bank under a letter of credit or collection to hold on to the bill of lading. This may cause serious further delays for the carrier, who is not authorised to release the goods to the buyer without the presentation of the document. The carrier may thus incur extra (demurrage) costs while the ship is held up. This may even encourage neglect of the goods or the handing over to the buyer without presentation of the bill of lading, although often in exchange for an indemnity. This may be understandable but it fatally undermines the effective use of the bill

370  Volume 4: Negotiable Documents of Title and Negotiable Instruments of lading as security in the payment circuit, which depends on the bill of lading being retained by the seller or his agent until payment and the goods not being delivered in the meantime. Allowing the bill of lading to travel with the goods instead of the seller retaining it for presentation to the bank is a common solution to avoid these delays but its role as a security instrument under letters of credit is then equally diminished. The need for the carrier to deliver the goods immediately upon arrival has given rise to the use of sea waybills instead of bills of lading. See for waybills further section 2.1.6 above. They are mere receipts and only sometimes reclaiming instruments, but are not negotiable. They do not therefore have the status of documents of title and may not be necessary for taking delivery of the goods at all as, without a bill of lading being issued, the carrier may make delivery to anyone who can prove that he is entitled to the goods. Their lack of proprietary status allows them more easily to travel with the ship should their presentation still be required. The carrier who normally issues the bill of lading will know that there is none so that he is safe to hand over the goods to the party entitled to them. Only in the US has the status of these sea waybills been the subject of comprehensive legislation, see 49 USCS sections 80101ff (1994) as an amendment to the federal Pomerene Act of 1916. The consequence of the status of these sea waybills is that there is no proper function for them in the payment circuit, as they cannot as such fulfil the function of a proprietary instrument for payment under documentary letters of credit: see also the discussion in section 2.1 above. Nevertheless, banks do sometimes accept them for documentary credit purposes provided the waybill is given some reclaiming status. That was the aim of the Cargo Key Receipt System, developed in Sweden, but all the dangers connected with the bill of lading travelling with the ship then re-emerge, plus the extra danger that the carrier may still issue bills of lading to others later. Under the Hague Rules (Article 3.3) and the Hamburg Rules (Article 14), he must do so whenever the shipper (often but not always the seller or its agent) requests it. It would render the sea waybill ineffective as a reclaiming document at the same time. Naturally, a shipper of the goods should only request a bill of lading when the latter is still in control of the sea waybill. However, in the case of less scrupulous or careless shippers, a bill of lading issued under these circumstances may end up outside the payment circuit set up by the seller (even if the buyer makes the necessary arrangements with the issuing bank) and fatally undermines any payment protection in terms of documentary letters of credit if based on the presentation of a waybill. In these circumstances, the seller may not be able to present a bill of lading for payment to the issuing bank and the buyer only has a void waybill upon payment. In any event, if there is no bill of lading but only a sea waybill, the carrier may have to hand over the goods to someone claiming better rights. Still, presentation of the sea waybill may require the issuing bank to pay under the terms of the letter of credit but the bank will not then have any proprietary leverage against a buyer who has not yet put the bank into funds. If the buyer already has, the latter will obtain the sea waybill from the bank but may not be able to retrieve the goods on the basis of it. The danger that a bank may lose its recourse against the buyer in this manner has increasingly led to demands for indemnities by banks from sellers while making payment to them under a letter of credit if there is only a sea waybill. It defeats the whole purpose of documentary letters of credit, which are normally organised by buyers and meant to give sellers untrammelled payment expectancy. Even carriers may now ask for indemnities, in this instance from buyers presenting sea waybills, certainly if they have issued bills of lading to the shipper or, if not, because others with better proprietary rights may, in the absence of any bill of lading, still claim better rights in the goods later.

Volume 4: Negotiable Documents of Title and Negotiable Instruments  371 The problem of indemnities has become endemic and has particularly been felt in the oil industry.537 In the absence of the presentation of a bill of lading upon arrival of the oil for whatever reason (which could be that longer credit has been given by the seller), in this industry indemnities are commonly asked for by the carriers from a seller (oil company) if arranging the transportation on the mere ground that the buyer is less well known to the carrier. The result is that also the sea waybill route has become ever less attractive to speed up delivery. No wonder that in this situation there has been a search for better and especially quicker ways of dealing with bills of lading proper, including their endorsement through the use of the modern electronic filing, registration and communication facilities. They could at the same time shorten the time required to handle these documents by banks when presented to them by sellers under letters of credit. The physical handling of bills of exchange, including their endorsement and the verification of the authenticity and order of signatures, may be equally slow. It may delay payments under letters of credit further and also payments through collection schemes if under them use is made of bills of exchange, which still remains common: see also Volume 5, section 3.3.7. Also, here ways of electronic filing, registration and communication might help and it is logical that moves in this direction have been afoot in order also to achieve greater certainty, speed and efficiency for these instruments. In the area of the identification and transfer of ownership in shares and bonds, there has been a particular need to reduce paperwork and facilitate the handling of a large number of sale transactions of millions of shares or bonds per day where physical handling of the instruments becomes an impossibility. Also, here the solution may be found in the use of electronic identification of ownership and the electronic recording of transfers. Progress has probably been the most urgent and greatest in this area through the introduction of book-entry systems, which will be discussed in greater detail in part III below. In modern times another concern has joined the extensive use of documents of title and negotiable instruments. It is the relatively simple possibility of fraudulent use of duplicate documents in the case of bills of lading or of falsification of the bill of lading itself to obtain goods or payment, respectively from a carrier or from a buyer/drawee or its bank, either by the fraudster or by a bona fide holder of fraudulently used duplicate documents or falsified documentation. These holders may be protected under duplicate documentation at the expense of the true beneficiary but may themselves be the victims if under falsified documentation there are no goods at all or the drawee indicated in a bill of exchange is non-existent. Falsifying documents is often a question of false signatures or of effacing or changing certain markings on the bill, for example altering ‘received for shipment’ to ‘shipped’ so as to convert a mere receipt into a document of title. Modern recording methods may allow greater verification possibilities here and therefore added protection for participants. The same may apply to shares and bonds where still physical pieces of paper.538 The electronic systems that may increasingly be used in this connection are computer-tocomputer exchange of information systems which rely on predetermined format methods. They are also referred to as electronic data interchanges or EDI, of which SWIFT is a most important

537 See FL de May, ‘Bills of Lading Problems in the Oil Trade: Documentary Credit Aspects’ (1984) Journal of Natural Resources 197. 538 Another situation presents itself when the bill of lading indicates a lesser quantity (or different quality) than is actually shipped. In a CIF sale this is a problem for the buyer who will have to prevail on the carrier to release the missing part; in an FOB sale the seller will still be liable to provide the missing part to the buyer and will have to retrieve the goods from the carrier: see in England Hindley & Co v East Indian Produce Co Ltd [1973] 2 Lloyd’s Rep 515.

372  Volume 4: Negotiable Documents of Title and Negotiable Instruments application in the interbank payments and money transfer circuit. A similar system is conceivable to create electronic bills of lading. For bonds and shares, book-entry systems have been developed (see sections 3.1.5 and 3.1.6 below), which are not exclusively based on EDI but which could also be helped by it. In the international markets, the modern practice is that the bonds and shares are physically deposited with a depository who maintains a register of ownership and changes in it, which changes might be electronically communicated to it: see Part III below. For bills of lading, such an approach was at one stage proposed in the Seadocs Registry project of Chase Manhattan Bank in 1984 and may still be the simplest because it does not profoundly change the legal foundations of the system but only introduces a custody facility. It was superseded by more recent CMI proposals for a more truly electronic bill of lading, to be discussed in section 2.3.2 below. The best way forward may indeed be to look at the different industries and types of documents and to determine in respect of each of them the most appropriate or convenient approach. Within each area the emphasis will then be on international systems developed by the relevant industries themselves with their own set of rules of a transnational nature, just as the Eurobond developed into a transnationalised instrument with its own transfer system and legal infrastructure, particularly aided by Euroclear and Clearstream: see also section 3.1.2 below and earlier Volume 1, section 3.2.3. The main legal issues in electronic data transfer systems of this nature are: (a) the authenticity and evidentiary effect of signatures or their alternatives (upon loading and unloading) and documentation; (b) access by the most directly concerned parties and their successors (shippers, carriers, banks and insurers to the extent they have a legitimate interest) to the electronically stored information without the facility to change it; (c) negotiability as far as the electronic documents of title and instruments are concerned and the way this should be organised; (d) the maintenance of the abstraction principle and of the exclusive evidence rule in respect of bona fide third parties (being the holders by due negotiation) who acquire the rights to the electronic document;539 (e) the identification of the competing rights of all claimants and in that connection especially the time of electronically created proprietary rights and of charges in them, of particular importance in enforcement; (f) the flawless operation of this new type of bill in the payment system and the access of banks to the system in terms of verification especially for collections and letters of credit; (g) liability for faulty messages, communication failures and systems breakdown; (h) applicability of the mandatory Hague-Visby Rules (which automatically follows if there is a bill of lading or similar document but might have to be stipulated if there is not); (i) the confidentiality of the system; and (j) determination of the applicable proprietary law as the lex situs principle based on the location of the bill of lading loses its meaning, hence the increasing importance of customary law as part of the modern kex mercatoria. 539 It may be recalled that such a person acquires title to the documents and to the underlying assets, including all rights to goods delivered to a bailee after the document was issued, all rights under the law of agency and estoppel, and to receive the goods from the issuer of the bill according to the terms of the bill free and clear of most defences or claims by the issuer. At least in the US, this right to the goods is also superior to the rights of stoppage of the goods, the rights of a prior holder of the document against which the negotiation was a breach, a person who was defrauded of the document, or any third party to whom the goods were sold (UCC 7-502). The result is that upon negotiation the transferee of the bill will have a better title than the transferor.

Volume 4: Negotiable Documents of Title and Negotiable Instruments  373 Overriding practical issues are the expertise, stability and independence of the operators, the costs of the systems, and who must bear them.

2.3.2.  Electronic Systems and their Importance in Replacing Transportation Documents. The CMI Rules and Bolero. Clearing and the Use of Central Counter Parties? Internally, carriers now use electronic means to maintain and amend their records of loaded and unloaded goods, to achieve the best stowage, and to advise their agents of dates of arrival. However, in relation to their clients or third parties (such as banks under documentary letters of credit or insurers), there is a practical limit, which has to do with the legal status of documents of title and of their possible alternatives under electronically driven communication systems. It is the reason that so far electronic bills of lading have not developed, but electronic data and communication systems have started to be used in some countries for reporting sea waybill information, especially to allow the buyer to obtain the goods even without presenting the sea waybill in the port of destination.540 An earlier experiment for bills of lading concerned a kind of bookentry system through the Sea Docs Registry, which was a private venture of Chase Manhattan Bank going back to 1984, already referred to in the previous section. Under it, this bank was to be the depository of the bills of lading and maintain a register of ownership and any changes therein, which transfers could be achieved electronically. The project failed because of lack of transparency in the cost structure but probably also because there was a fear about confidentiality and the exclusive control of the system by one bank. It would have been better if it had been an industry initiative and project, just as Euroclear was in the Eurobond market. An important key to success of any alternative electronic system is in the ability to maintain the functions of the bill of lading as an object that could also be used as security and retain its function in documentary letters of credit rather than being a mere source of information like a receipt or confirmation of the transport agreement. The problem is to find the right way around the need to produce the bill, its signing and endorsement and handing over, thus its physical aspects, which are becoming undesirable as they are inefficient. At least many domestic COGSAs now allow contracts of carriage covered by a sea carriage document to be in the form of a data message. The international community is generally also receptive to the notion of electronic bills of lading, as shown in Article 14(3) of the Hamburg Rules, which refers to them, but they do not provide any suggestions or criteria. To progress, in 1990, the CMI developed Rules for Electronic Bills of Lading. It allowed the carrier to maintain a registry. Rule 11 provides that any national law, custom or practice requiring the bill of lading to be evidenced in writing and signed is satisfied by the transmitted and confirmed electronic data residing on computer data storage media displayable in human language on a video screen or as printed out by a computer. The nature of these new rules is contractual, supposedly until they may be qualified as industry practice or custom as the Hague Rules and the Uniform Customs and Practice for Documentary Credits (UCP) are now often considered to be. The system is based on delivery of the goods to the carrier who subsequently transmits a receipt message to the shipper’s electronic address. It must 540 See also AN Yiannopulos, ‘Ocean Bills of Lading: Traditional Forms, Substitutes, and EDI Systems’ General Report XIVth International Congress of Comparative Law (The Hague, 1995) 3. See further MN Boon, ‘Het Digitale Tijdperk’ [The Digital Age] Presentation Paper Kortryk 2006, discussing among other things the nine points raised in the previous section in the context of electronic bills of exchange and electronic documents.

374  Volume 4: Negotiable Documents of Title and Negotiable Instruments contain the name of the shipper, the description of the goods, the date and place of receipt, the carrier’s terms and conditions or a reference thereto and the ‘private key’ to be used by the shipper in subsequent transmissions. This receipt message must be confirmed by the shipper immediately upon receipt and is then the equivalent of the traditional bill of lading while the private key makes endorsement possible. Any transfer instruction requires the carrier to send a new message with the same information to the transferee who must accept the transfer. The new owner will thereupon receive a new private key and the valid private key holder is the only one who can claim the goods. This system may conceivably work but places a great burden on the carrier and his reliability and professionalism in these matters. That is the true weakness in this system. This may also create additional liability. The resulting electronic bill of lading would appear to be a creation solely of the law merchant, which as yet may be considered by some as an insufficient basis for its effectiveness. Transfer would in effect be through (a transnational) assignment of the instruction right, which could require additional formalities (still deemed applicable under domestic laws). The acknowledgement by the carrier introduces a uniform rule here, but it is less clear whether the assignor is entirely discharged as his duties may not sufficiently transfer at the same time. Electronic communication is through a number of ‘private key’ messages as just mentioned. Although the CMI in these Rules showed an approach that could work, there was no sufficient confidence in the operational aspects, especially not in the ability of carriers to maintain proper systems and in their ready cooperation in the acknowledgement of transfers. Also, the legal aspects were probably covered in too rudimentary a fashion and the transnational or customary (or uniform) status of the contractual arrangements on which the approach was based may (in the eyes of some in the industry and their lawyers) still have been too uncertain or weak. Other organisations have also attempted to deal with the matter, if only collaterally. In 1993 the UNCITRAL EDI Working Group published Uniform Rules on the Legal Aspects of Electronic Data Interchange and Related Means of Trade Data Communication. They concern the exchange and storage of electronic data generally and do not take a product approach. It was not necessary, as they do not cover the substance of the transaction either. The Rules mainly contain provisions to solve the problems connected with the requirement of a written document and signing under national laws and allow in this connection that the terms ‘signing’, ‘writing’ and ‘original’ also cover electronic documents and give them evidential effect. There was no provision on transferability of the underlying rights, which was to be dealt with later. Until such time it seems that these UNCITRAL Rules have no special meaning for bills of lading and bills of exchange. In 1996 there followed an UNCITRAL Model Law on Electronic Commerce. Articles 16 and 17 are particularly relevant. Article 16 contains a long list of actions to be taken by the parties concerned in the case of carriage of goods by sea. They may be of a practical, contractual or even proprietary nature (Article 16(f)) and are as such split up and separately considered in terms of electronic communication and storage. Article 17 deals with transportation documents. It follows under this approach that these documents are in essence the result of a number of data messages, the legal status of which is not explored further. No proper, or at least legally reliable, substitutes for bills of lading therefore result. The American Bar Association produced a Model Trading Partner Agreement in 1990 for EDI use in commercial sale transactions and communications but, as it is limited to the sale of goods, it has no significance for bills of lading or bills of exchange. The International Chamber of Commerce (ICC) adopted in 1987 Uniform Rules of Conduct for Interchange of Trade Data by Teletransmission (UNCID). They concern the transfer and receipt of messages in terms of identification of the parties, completeness, confidentiality and storage of data, but not in any way documents of title or their negotiability. Similar international or local standards have also been

Volume 4: Negotiable Documents of Title and Negotiable Instruments  375 set for EDI by the UN (UN/Edifact), which particularly relate to the trade in goods and services and also cover a syntax and format for the recognition of shipping documents, regardless of the hardware and software used. EDI associations in countries like the UK, Australia and Canada have produced standard EDI agreements for use by commercial partners. The EU Commission also produced a model agreement in 1990 (TEDIS). None of them has any specific relevance for bills of lading or bills of exchange. In the area of transferable documents of title, an English research institute, Marinade Ltd, prepared a more specific study for TEDIS (Mandate, 1995). It led to a system called Bolero (Bills of Lading Electronic Registry Organisation), which became operative in 1999 as a commercial venture in which SWIFT and the TT Club (Through-transport Mutual Insurance Association Limited) participate. It does not attempt to change the present processes used in international trade but intends to find the electronic equivalents, including those for the bill of lading where used. As between its participants, the Bolero bill of lading is intended to have exactly the same effect and create the same obligations as a paper bill of lading. To this end, it replicates the functionality of the traditional paper bill and makes it also negotiable. It does not mean to change the existing commercial and shipping laws.541 At the centre there is a multilateral contract between participants governed by the Bolero Rule Book.542 The succession in rights and obligations is here by way of a form of novation, which does not, however, entirely discharge predecessors, while new holders carry on the obligations of the shipper in terms of disclosure (for example of dangerous substances) and timely unloading.543 The system544 is governed by English law and gives the English courts jurisdiction in the case of disputes. It suggests that the Bolero bill of lading has similar problems with its status as a document of title to those that the paper bill of lading has in England. However, the underlying transactions may also be governed by the law of the parties’ choice. In all this, it should be appreciated that at least in the proprietary aspects some domestic laws may still consider themselves absolutely mandatory in the carriage of goods from and to the country of this domestic law, thus still ignoring the legal transnationalisation of the concepts. Bolero has been criticised for its cost, complexity, lack of flexibility (particularly in switching from electronic to paper bills and back, and handling the mix), and its severe limitation of liability for goods being wrongly released. The more ready solutions would appear to be a central registration or book-entry system, as originally contemplated by Seadocs, for which the operations in the international bond market through Euroclear and Clearstream may well provide the best model. If this is now not the direction, one could consider the aspect of security for payment in isolation. If the whole field of the sale of goods and their transportation is to be considered,

541 See the information memorandum prepared by Bolero International Ltd: Bolero Bills of Lading under US Trade and Commercial Law, 8 November 1999. 542 This system is described by R Caplehorn in C Reed, I Walden and L Edgar (eds), Crossborder Electronic Banking (London, 2000) ch IV. 543 This follows the much-criticised s 3 of the UK COGSA of 1992. 544 Operators wishing to use the system must first join Bolero Association Ltd, which is appointed as agent for the purpose of entering into a contract under the Bolero Rule Book. This of course severely (but unavoidably) limits the reach of Bolero. The system is essentially governed by two registries: the Bolero Core Messaging Platform (BCMP) allowing users to communicate electronically with each other and the Bolero Title Registry (BTR), which keeps a record of all Bolero bill of lading holders and the transfers in ownership. Participants accept Bolero digital messages as if they were in writing, relevant in particular in respect of the carrier’s representations on quantity, quality and appearance of the goods. They also undertake not to challenge the validity of documents electronically encrypted by Bolereo. Rule 3.7 entitles the holder of a Bolero bill to demand a paper bill at any time before the delivery of the goods.

376  Volume 4: Negotiable Documents of Title and Negotiable Instruments UNCITRAL may have to provide a better transnational legal infrastructure even if its success in achieving treaty law is modest.545 Another alternative may be a system where Central Counter Parties (CCP) are interposed with whom all dealings in the underlying assets are conducted subject to close-out facilities: see for the operation of CCPs more particularly Volume 5, sections 2.6.5 and 4.1.4. It provides an easy transfer possibility and also introduces the possibility of clearing but still raises the important issue of the alternative to the bill of lading in the payment circuit, especially in the documentary letter of credit practice. However, if connected with a proper clearing and settlement facility, even the letter of credit practice could become obsolete.

2.3.3.  The Bill of Lading and the Potential of the Blockchain The electronic bill of lading in Bolero has proved to be a limited success. Its main problem is that it has not achieved general acceptance in the industry and therefore only operates between a small circle of (sophisticated) shippers and carriers and that is not enough for success. Notably outsiders may still ask for a traditional paper bill of lading upon negotiation and the papermill continues unabated in the shipping industry. Its role in the payment circuit remained ambiguous. Even though domestic laws have tried to incorporate the concept of the electronic bill in their legislation as in the US the UCC has done by using the notion of control in the definition section 1-201(5), it depends on the system reliably establishing the person to whom the document is transferred or issued. Internationally, the UNCITRAL Rotterdam Rules (not yet entered into force), in Articles 8, 50 and 51(4), also admits electronic bills as does the UNCITRAL (draft) Model Law on Electronic Transferable Records, which will only be a model and therefore never be directly effective. This has altogether not proved to be a sufficient incentive; these rules or proposal are in essence technology neutral and merely facilitating. Article 9 of the Rotterdam Rules require in this connection functional equivalence and concentrates here also on control (as does the Model Law in Article 17(1)) and in that context on a) the method of issuance and transfer of record, b) the integrity of the record, c) the manner in which the holder can demonstrate his title, and d) confirmation that a delivery has been effective. Only industry custom could help out. It has already been mentioned that this indeed happened in the Eurobond market. The Eurobond itself became a negotiable instrument under transnational customary law when it became clear that the domestic laws made applicable by the issuer (usually of England or New York), could not deal with negotiability in the international marketplace of a document that was far more complex than these local laws would allow for it to be negotiable whilst party autonomy in whatever manifestation could not by itself elevate its proprietary status, see the discussion in Volume 1, section 3.2.3 because of the effect on third parties. Only transnational principle and custom could and this became acknowledged although it remains debatable whether and how this affects all practices in this market including repoing and bond lending or rehypothecation and more especially the holding of these investments through custodial entitlement arrangements. As we have seen, the practices in the international carriage of goods have not developed that far. Even the Seadock approach which much copied the securities entitlement system in custodial

545 In the meantime, the EU E-Commerce Directive in Art 9 imposed on Member States the duty to render the electronic conclusion of contracts possible. It will be of interest to see whether Member States will also deem this an obligation to deal with transportation agreements and the documents issued in connection therewith.

Volume 4: Negotiable Documents of Title and Negotiable Instruments  377 holding systems was met with suspicion as we already have seen also. Transnationalisation is not identified in this market as a major issue although much of the customs and practices of the international carriage of goods are of that nature, it was already said that the Hague Rules were from early on identified as being a part of it. The absence of a clear situs in virtual registration systems is here further inducive to legal transnationalisation and shows its urgent need. It means that if sets of international rules, like the Rotterdam Rules, emanating from treaty law, find sufficient acceptance through ratifications, it is in the view of this book still conditioned by the practices and customs of the international marketplace and even by fundamental and general principle of which, as to the latter, the UNCITRAL Model Law just mentioned could be an important example. To repeat this tracks the methodology of public international law, embodied in Article 38(1) of the Statute of the International Court of Justice and for peremptory law in Article 53 of the Vienna Convention on Treaty Law, whose sources of law and their hierarchy were in this book proposed to be adopted by analogy also in international commerce and finance, thus returning to the pre-nineteenth-century law merchant formation and application method and resuming its progress as transnational law in the operations between professionals in the international flows of goods, services, money, information and technology where transportation is a main issue. Bills of lading or their equivalents are here the cornerstones of present-day practices captured and covered as such by the transnationalisation of the law in this market and its shipping practices in order to be fully effective. A robust legal regime is necessary but it can hardly be merely domestic any longer or even solely dependent on treaty law. In any event it was argued that even treaty law in its interpretation will be up against the other sources of law and their hierarchy. In other words, treaty law must find its own place in the competition with other sources of law. In section 2.3.1 a list was presented of legal items that should concern us in this connection. It centres on the identification of the instrument (and the guarantee of uniqueness or singularity), its separation from the relationship out of which it arises and from previous holders (the abstraction principle), and its negotiability, the position of the holder by due negotiation, the rights and rankings of competing claimants, and the operation in the payment system. Dependence of the state of mind of a (bona fide) transferee introduces here a subjective element. In an electronic system, it probably comes down to permit users to add additional information as to facts that they might have or discover regarding specific claims or defences which would trigger warnings or flags in the smart or self-executing contracts which constitute the computer protocols and allow the performance of contracts with new parties in a trackable and irreversible manner. It limits due negotiation and inhibits the liquidity of the bill; in fact, the bona fide holder would find his/her protections reduced and the search duty increased. That may not suit everybody but is on the other hand a consequence of enhanced transparency. The question is now what the blockchain might conceivably contribute and how we must envisage the legal regime applying to it and how it may operate.546 Main legal issues arising for all bill of lading substitutes were already identified in section 2.3.1 above and are identification for uniqueness, negotiability, maintenance of the abstraction principle, and the absence of defences against a holder by due negotiation (unless marked on the bill or otherwise known). As a practical matter, the system would not be anonymous in the manner of bearer paper. Each user would be identifiable by its applicable digital signature which the computer would match to the relevant

546 See K Takahashi, ‘Blockchain Technology and Electronic Bills of Lading’ (2016) 22 JIML 202 and JA Estrella Faria, ‘Uniform Law and Functional Equivalence; Diverting Paths or Stops Along the Same Road? Thoughts on a New International Regime for Transport Documents’ (2011) 2 Elon LR 1.

378  Volume 4: Negotiable Documents of Title and Negotiable Instruments name. Transactions are validated by all users collectively, after which it is written into the blockchain. This is the distributed ledger which is nearly impossible to manipulate and is fundamental to the blockchain. Uniqueness is guaranteed. The first thing to realise is that the blockchain bill of lading in order to be fully effective cannot emanate from a (closed) permissioned system which is limited to a defined group of participants. That proved also a problem in Bolero. For negotiability to be effective it must be an open permissionless system, which so far is expensive, slower to operate and has serious problems of scale. This may well prove to be the real limitation for the time being, but no less will be the robustness of the legal system. It is submitted that this could no longer be a domestic legal system or a succession of them when the bill of lading may still be deemed to start moving. That is the situs issue which hardly can be established any longer. Where is the blockchain, even if standardisation within the system through smart contracts may make legal issues less frequent. An extension of the possibility to add additional information may make the relationships also more objective but is likely to extend the defences and could impact on the liquidity of the blockchain bill. The marketplace shall have to figure out with what it can live and whether it wants to trade paper inefficiency for potentially more defences.

2.3.4.  The Situation with Regard to Bills of Exchange: Electronic Bank Transfers. The Facility of ‘@Global Trade’ As may appear from the previous section, so far there are also no specific EDI rules concerning or producing electronic bills of exchange, although that would appear a normal sequel once electronic bills of lading are developed. Electronic bank transfers may, however, substitute the payment functions of negotiable instruments and have already substantially reduced the use of: (a) cheques drawn on banks to pay a foreign creditor, which proved a lengthy process potentially causing much payment delay or conditionality and expense; (b) bankers’ drafts purchased from the bank drawn on a bank in the country of the creditor, which was quicker but costly as the bank was guaranteeing the payment; and (c) telex transfers to achieve a foreign payment, which depends on the foreign correspondent network of the bank and could still be costly. It is this last method of electronic transfers which is refined by EDI. It should be distinguished from SWIFT, which, although itself an EDI, is an interbank money transfer system. It is likely to be used in this connection as an alternative by the banks for interbank operations. These electronic bank transfers are no substitute for endorsement and negotiation or discounting of negotiable instruments. It must be admitted, though, that these facilities had already lost much of their earlier attraction as the important ability to raise cash on them has now often been overtaken by receivable financing and related forms of factoring. Electronic transfers are in any event normally preferred by parties that habitually deal with each other and are cheaper: for the modern use of negotiable instruments, see section 2.2.7 above. Yet, particularly in the context of letters of credit and collection schemes, bills of exchange appear to remain more commonly used: see Volume 5, sections 3.3.7ff. As in the case of bills of lading, the issue of negotiability requires extra attention and a special facility in the electronic transfer process, which in the case of negotiable instruments has not yet received much attention. One of the problems is that bills of exchange now mainly operate in international trade (connected to certain types of letters of credit) for which there is no uniform regime, while their status under the international law merchant may be further undermined by

Volume 4: Negotiable Documents of Title and Negotiable Instruments  379 making them electronic. Largely the same legal problems arise here as in the case of electronic bills of lading: see section 2.3.1 above in fine. ‘@Global Trade’ may provide a new departure. It is an internet-based trade servicer, which aims at enabling buyers and sellers to conduct commercial transactions in a secure, cost-effective and efficient environment while bringing all parties in a trade chain together on the same electronic page. It is an end-to-end system for completing cross-border trade transactions and settlement over the internet, and aims to adhere to ICC rules and standard banking practices. It considers itself flexible enough to handle a mixture of paper and electronic messages and even introduces in this connection an electronic bill of lading. The end-to-end approach is undoubtedly a rational and desirable approach. The question is how it can be translated into a system that can generate and find the necessary legal support to create a sufficient degree of finality in delivery and payment. This is a major task, which requires a sophistication, imagination and international cooperative spirit that may not be presumed naturally to exist, even between professionals in their dealings internationally among themselves.

380

Part III Investment Securities 3.1.  The Different Types of Shares and Bonds 3.1.1.  Traditional Distinctions. Negotiable Instruments and Transferable Securities. Dematerialisation Investment securities are instruments issued and used to raise capital in the capital markets. In Volume 6, section 1.3.1, the nature of investments of this type will be more fully discussed. The most common types are bonds and shares. Bonds are promissory notes of an issuer, which may be a private person but is now more likely a company or a government or governmental agency. They signify a form of lending/borrowing and are the prime instruments of the debt market. Shares, on the other hand, are rather participation instruments denoting some form of ownership of the company issuing them. They are more typically connected with the financing of corporations. Although the joint shareholders are often still considered to own the company, in the case of limited liability it should be clearly understood that they do not own any of its assets directly, nor are they directly liable for its debt. Rather their shares only give them some typical rights, normally those to (a) dividends, (b) voting in shareholders’ meetings, (c) any liquidation surplus, and (d) corporate information. They do not have a direct say in the management. If they nevertheless involve themselves, they may have the limited liability lifted. This is an example of the piercing of the corporate veil, a risk inherent particularly in parent–subsidiary situations, or oneshareholder companies. Banks, while interfering in daily management, may also take some risks here although they are not shareholders at all. Shares and bonds come in several varieties. Shares (sometimes also referred to as equities or stocks) may be distinguished according to the dividend rights they give. Thus, ordinary shareholders share the dividend pro rata, but preferred shareholders have a preferred right to dividends and they therefore take before the ordinary or common shareholders in the way as set out in the charter or by-laws of the company. Other classes of shareholders may have extra dividend rights, which are often also preferred at the same time (for example the cumulative preferred shareholders). Shareholders may also be distinguished according to their voting rights and some classes may be given more voting rights than others. There might even be altogether non-voting shareholders. Bonds also come in different types. There are fixed and floating interest rate bonds or notes. Notes are bonds with a shorter maturity; the terminology is here not stable. As far as the maturity is concerned, there is short-, medium- and long-term paper. Short-term instruments are also called money market instruments and often come in the form of commercial paper (CPs) issued by commercial companies, and of certificates of deposit (CDs) issued by banks. Medium-term paper may take the form of medium-term notes (MTNs). Long-term paper may even take the

382  Volume 4: Investment Securities form of a perpetual bond. Bonds may also be subordinated and then approach shareholdings, although in a liquidation these bond holders will still be just ahead of shareholders in any distribution of a liquidation surplus but lower than the ordinary creditors (including the other bond holders). In each instance, their precise terms, manner of issuing, and way of trading need to be carefully considered and could be very different. There are also hybrids such as bonds convertible into shares at a certain striking price. There may also be warrants, which are a special type of option issued by a company at a certain price and allowing the owners to acquire new shares in that company at a specific issuing or striking price on a specific date in the future. Intermediaries holding a portfolio of these shares or options to acquire them sometimes also issue these warrants, therefore warrants (or options) in another company. Investment securities often imply a trading facility by being transferable. This is a different but highly important issue and concerns their liquidity, which is the facility to reduce them to money (through a sale) at any time. On the European Continent, investment securities that are intended to be traded were historically issued as negotiable capital market instruments. These are to bearer or order and as such documents incorporating title in the securities, which title is transferred with the document. Their trading traditionally took place on regular stock exchanges, on which they were quoted for this purpose, but this trading could also be informal in the so-called overthe- counter or OTC markets and is for the more important issues now frequently conducted in the international (telephone) exchanges largely created by the large investment banks: for greater details of the operations in these markets, of which the Euromarkets are the most vivid example, see Volume 6, sections 1.3.4 and 1.3.5. In this process, international market practices may transform, change and even reinforce the status of these investment securities as negotiable instruments as happened, for example, in the case of Eurobonds: see Volume 1, section 3.2.3. As just mentioned, investment securities are often issued as negotiable instruments. As such they are to bearer or order, transferable respectively through handing over the document or through endorsement plus handing over. This is particularly clear for bonds which are promissory notes, but the same applies to shares if issued to bearer or order. As we have seen, in common law countries, there is no need for consideration to support such transfers. In fact, these structures are a product of the markets and were legally supported by the law merchant (section 2.2.1 above). At least for bonds, this also goes to the issue of independence of the instrument and abstraction of the transfer and the notion of holder in due course meaning the protection of the bona fide holder and the issue of finality of the transaction: see more particularly section 2.2.4 above. The bearer type of shares and bonds was the common type of tradable investment securities on the European Continent and was also preferred in the international capital markets, as witnessed in particular by the traditional Eurobond. Shares and bonds to order were uncommon in Europe but not in several States of the US (if endorsed in blank, they become bearer securities). Under the company laws of the various States of the US (which are not uniform), Memoranda and Articles of Association of corporations may vary the nature of the shares considerably and thereby also the manner of their transfer. These shares could also be of the purely register type, as they are mostly also in England when negotiability is not implied, even though these shares are commonly still transferable. However, such a transfer depends on notification to and a change in a share register held at the company. Notice must thus be given. A certificate could still be issued to the investor but it would not be negotiable, only a record. In the EU legal terminology, in order to cover all types, the broader notion of transferable securities is now often used in this connection (rather than that of negotiable instruments, which is a term of art that represents a narrower class of transferable instruments, excluding notably registered securities); see also Volume 6, section 1.3.1. Mainly for regulatory purposes (including prospectus requirements in respect of public offerings), it no longer puts emphasis on negotiability

Volume 4: Investment Securities  383 per se but more generally on all forms of transfers in respect of publicly offered securities and may even cover contractual rights, such as futures and options, as long as they are transferable and publicly traded (often through formal derivative exchanges like LIFFE in London, which in truth provides a system for closing out contractual positions: see more particularly Volume 5, section 2.6.5). In the US, Article 8 UCC, which presents perhaps the most important modern statutory instrument in this connection, deals with investment securities, but only in terms of investment security holdings/custodial arrangements and security entitlements, as we shall see. It was last fundamentally changed and updated in the Revision of 1994. In the US, issuing activity itself remains covered by State company statutes and for public issues also by federal regulation (the 1933 and 1934 Securities and Securities Exchanges Acts). Article 8 UCC still reflects the traditional situation as regards the types of bearer and order securities or registered shares and continues to follow in this respect the practices under State company laws. Article 8 UCC does not therefore itself create new types of shares or bonds, but captures them in terms of book-entry entitlements in custodial systems of securities holdings while creating a special transfer facility for these entitlements (only)—see sections 8-501ff UCC547—the nature and importance of which will be discussed shortly. This model is broadly followed in Europe. Its popularity has much to do with the problems of handling paper in the volumes that would otherwise be required in modern exchanges and became destructive. Article 8 UCC confirms that in essence in bearer form, securities proper transfer through mere delivery (section 8-301(a)(1)). In the registered security certificate form, the owner is indicated on the certificate but it is no more than proof of ownership and at least in England not itself a negotiable instrument. In the case of trading, the certificate is returned to the registrar who will issue a new certificate to the new owner. Transferability (not negotiability) is then achieved by the company having to accept the transfer instructions from the registered owner. These registers are thus indicative of the ownership of the securities (even if rebuttable) and any document issued is no more than proof of registration. It makes for a cumbersome transfer system that has all the disadvantages of shuffling paper and none of the advantages of a pure registration system. In the US, many state company laws did not until quite recently provide for any type of shares other than those to bearer or order but most now also allow registered shares, although usually fully dematerialised. That is an important progression and means that these dematerialised securities transfer only through registration of the new holder in the company’s register, notice of which is normally sent to the investor electronically and there are no longer certificates.548 There is no document or certificate at all.549 547 Indeed, according to s 8-102(a)(15), investment securities themselves (therefore the securities underlying any book-entry entitlement) continue to be obligations of an issuer or a share or other participation or interest in the issuer. For purposes of Art 8, they may be represented by a security certificate in bearer or in registered security certificate form, or (only since the earlier 1977 Revision) by uncertificated or dematerialised securities, which are investment securities only marked in the books of the issuing company under applicable State law. 548 Dematerialised securities should not be confused with fungible securities, although it often results, but fungibility is foremost connected with custodial arrangements, not with issuers. There is a parallel in so far as in neither case is the investor entitled to specific (physical) securities, only to a number of the same sort, although dematerialised securities being intangible are still capable of identification by number. These rights may thus be determined not only in the quantity of shares but also in register numbers. It is probably a detail as it allows them nevertheless to be part of a custody portfolio (on which entitlements might be based as we shall see) and book-entry systems. Indeed, as we shall see, the result of a book-entry system is usually that all security entitlements based thereon are fungible. Fungibility of securities should also not be confused with fungibility of bank deposits. In the latter case there can only be a contractual claim against a bank and pari passu status of the depositor. In fungible securities, the investor may still have some proprietary right but only to his pro rata part of a pool which will convert into a purely contractual claim only if the pool is no longer sufficiently segregated from the other property of the custodian. 549 In the US, this type of security may, however, still transfer through delivery of a certificate with endorsement to the new owner (s 8-301(a)(3)). This certificate is then negotiable in the nature of an instrument to order, but

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3.1.2.  The Notions of Immobilisation, Book-entry Systems, Security Entitlements and Compartmentalisation. Securities Accounts and Bank Accounts Distinguished It was indeed the paper-shuffling aspect of securities transfers, either using bearer or order securities, or registered securities still requiring some certificate, that brought the system of securities transfers to its knees, first in New York in the 1970s. The original remedial step was the introduction of fully dematerialised registered securities which allowed electronic settlement through securities accounts that investors held with issuers. It was, however, not the route the practitioners ultimately chose to go. They opted instead for a book-entry system in respect of end-investors. The registration facility leading to dematerialised shares (therefore to shares without a certificate proper as mere intangible property rights) should therefore not be confused with the modern book-entry system, which is the subject of the 1994 Revision of Article 8 UCC proper. In such a book-entry system, first a depository function is created, under which the issuer places all securities with a depository (or a small number of them) who thereby becomes legally the owner of all the issued securities.550 If there is only one, it is also referred to as the central securities depository (CSD). A depository holding securities in this manner (as owner) leads to so-called immobilisation of the underlying investment securities at the level of the depository (which themselves need not be dematerialised) but the depository acquires the shares in the ordinary manner either as bearer or order paper or certified shares. At this level there is no dematerialisation per se.551 Second, investors will hold security entitlements552 against these depositories, expressed in securities accounts that they keep with them. This allows the entitlements to transfer through a debiting or crediting of these securities accounts and implies dematerialisation at this level. In practice, the system may be more complicated. End-investors will hold entitlements against their brokers in this manner, meaning that they have securities accounts with them only. These brokers will in turn have entitlements again the depositories. In fact, there could be more intermediaries (or sub-custodians) in the chain, holding accounts with each other. The result is a so-called tiered system in which there are layers or tiers of ownership rights. It poses the important question of the legal nature of the book-entry entitlement, especially in terms of the rights of end-investors in the

the new owner will in addition have to be registered in books maintained to that effect by the issuer (s 8-102(a) (13)) and may not be entitled to dividends or bond interest payments before that is done. Full negotiability of the certificate is thus lost (or at least affected) but there is no dematerialisation. 550 Even now, not all securities are necessarily so held and especially units or shares in collective investment schemes often continue to be held directly, although there may in some countries now also be regulatory requirements in this respect. 551 Indeed, immobilisation may go together with dematerialisation but that depends entirely on how the ownership of the underlying securities is handled: either through negotiable (bearer) instruments when there is no dematerialisation at that level or through registration in a shareholder (or bond) register when there is. There would seem to be dematerialisation always at the level of the sub-custodians (and also fungibility) as we shall see. The holdings through a depository in this manner usually come about at the request of the issuer who has therefore only one (or a limited number of selected) owner(s) of the securities to deal with, which has considerable advantages for him in terms of costs. The depositories keep these securities per type and class in the form of pools in which the investors (or their brokers) as clients are therefore entitlement holders through a booking system that operates much like bank accounts in a bank. These entitlement holders when not themselves end investors hold these entitlements for their clients and are then called sub-custodians. 552 Instead of ‘securities entitlements’ now most commonly used following Art 8-102 UCC, the term ‘intermediated securities’ is sometimes also used to distinguish them from the underlying securities.

Volume 4: Investment Securities  385 underlying securities deposited by the issuers with the (central) depositories. As will be discussed later, this becomes relevant especially in a bankruptcy of a sub-custodian or broker who is part of this system on behalf of its clients/end-investors. The idea is thus that clients or end-investors hold entitlements against their immediate intermediary only, who in turn holds corresponding entitlements against the depository (or any other intermediate sub-custodians in the system). This is called compartmentalisation. In this system the intermediary or sub-custodian is obliged to balance the entitlements of his clients against his own entitlements higher up in the chain: see section 8-504 UCC. This is the asset-maintenance obligation. In this tiered system, the end-investor has no rights (in principle) against any higher tier in respect of any back-up entitlements. There is thus no pass-through right.553 In such a tiered system, it is quite normal for a French end-investor who buys Dutch government bonds to have an entitlement against his French broker (say BNP), which has an entitlement against a Dutch broker (say ABN/Amro), which has an entitlement against a Dutch (central) depository (normally Negicef). It may also be that both BNP and ABN have a securities and bank account at Euroclear in Brussels where the positions are settled while Euroclear in turn has an entitlement against the Dutch depository of government bonds. If the French investor wanted German government bonds, a German broker (say Deutsche Bank) would become involved. Settlement could still be at Euroclear in Brussels, which would maintain a corresponding entitlement in respect of these German government bonds against Clearstream in Frankfurt, which is the normal or central depository in Germany. Investors will thus have security accounts with their brokers (rather than bearer shares or bonds or registered shares), who have them with the depository (either directly or via other subcustodians in a system of layers or tiers), much in the way a depositor has an account with a bank. Security and bank accounts thus become similar in many aspects. It follows that security transfers are booked and credited or debited in a similar manner as bank accounts are credited or debited as we shall see. But there is still an important difference in that the securities intermediaries in respect of their clients do not become owners of the underlying securities as a bank becomes the owner of the deposits (making the depositor a mere creditor with a contractual claim only). Rather, investors have a proprietary right against their brokers under their securities accounts with them. It follows that each operator of a book-entry system in its tier may not dispose of its back-up entitlement with the depository or other intermediaries as if it were their own (at least to the extent that the entitlement corresponds to their clients’ investments and not their own). They may not pledge these entitlements either. Yet the nature of the proprietary right of the end-investor, although in principle existing, may under applicable law (absent full transnationalisation) still not be as clear or undisputed as would be desirable.

553 The pass-through right is in fact a reminder and remnant of the earlier system and now often excluded by statute. However, if share or bond certificates exist or are still issued by the issuer to the depository, at least in the US the entitlement holders may still have a so-called pass through right and the intermediary must obtain the underlying certificates if the entitlement holders so request (s 8-508 UCC) unless this right is waived by investors, which is now normally the case. In the meantime, the depository has a duty to collect payments, vote in accordance with the directions of the entitlement holders, and supply them with the information the issuer must by law pass to investors (ss 8-505 and 8-506 UCC). As already mentioned, depositories will be paid for that service as part of the custody fee they charge their clients, which are usually sub-custodians for end-investors, which also means that the duties dribble down through the tiers of sub-custodians, so that the payments, proxy forms and information ultimately reach the end-investors.

386  Volume 4: Investment Securities The right of each entitlement holder is often understood (in civil law)554 in terms of a pro rata co-ownership of these underlying pools or (in common law) in terms of beneficiaries under a (constructive) trust arrangement in which only the depository is the legal owner of the shares, in the nature of a trustee. This latter approach is the better as we shall see as compartmentalisation really means that there are no direct rights of investors in underlying pools. Civil law introduces 554 Among civil law countries, only German law has attempted to devise a full regime for security entitlements within their civil law system of proprietary rights. It has been hard work and the result may not be entirely convincing, the reason probably being its much longer pedigree. The key text is the Depotgesetz (DepG), which has a history going back to 1937 and which allows for the holding of fungible securities (Sammelverwahrung), but the general law concerning custody is still derived from the BGB, especially relevant for the proprietary and transfer aspects of securities, also in the form of entitlements. This still poses the question of sufficient segregation. Dematerialisation through global notes (Sammelurkunde) has in the meantime also become common in Germany and allows for fast and effective clearing (Effectengiroverkehr), normally done through Clearstream Banking Frankfurt, which is the only German entity conforming to the requirements of the DepG in this respect (as Wertpapiersammelbank). It is therefore the only German entity that may operate as depository. Section 1 DepG makes clear that this statute applies not only to traditional custody of paper securities, but also to dematerialised securities entitlements or securities accounts (Gutschriften in Wertpapierrechnung). Regardless of the still overriding structure and impact of the BGB, leges speciales have thus developed as some form of capital market law (Kapitalmarktrecht) besides the more traditional banking law and may deviate from the BGB norm. As much of this is professional dealing, further rules may be contained in the German Commercial Code (Handelsgesetzbuch or HGB) which may override the BGB. The Banking Act or Kreditwesengesetz may also retain some relevance in this area, but the most important statute is the DepG. The Negotiable Instruments Act or Wertpapierhandelsgesetz has under its own terms no relevance for custody services in connection with securities trading. The Special Conditions for Securities Dealings (Sonderbedingungen für Wertpapiergeschäfte) normally used by all intermediaries are also relevant as an expression of party autonomy. Clearstream Frankfurt also uses a special set of business conditions of its own: the Allgemeine Geschäftsbedingungen Clearstream Banking Aktiengesellschaft. The sum total of these various legal instruments may be summarised as follows. The first result is an atypical contract with the securities intermediary under which there is a form of custody (Verwahrung, s 688 BGB, which is not in itself compatible with fungibility) and service providing (Dienstleistung, s 611 BGB) in which connection there may also be some rules about instructions (Entgeltliche Geschäftsbesorgung, s 675 BGB). Intermediaries may engage sub-custodians under the DepG (Drittverwalter). All act and hold the securities with sub-custodians in their own name. The problem in this system is (as elsewhere) with the ownership structure. The end-investor in a domestic context is the legal owner and must ultimately be marked as such through the chain of intermediaries. The German challenge is to express this in terms of its traditional notions of possession or holdership. In this system the depository is considered no more than holder for the end-investor (unmittelbarer Allein und Fremdbesitzer, s 854 BGB), but this holdership is based on no more than an obligatory right under the custody agreement with sub-custodians. The end-investor only has a contractual relationship with his broker or intermediary but can in this system of contractual rights still reach the holder or issuer directly. Yet a problem still arises where the ultimate investment is not physically represented by paper. This problem occurred in the past in respect of registered securities. Rights or mere claims of this nature are not then protected in a possessory manner, but, since 1940–42, by statutory instrument (Verordnung über die Verwaltung und Anschaffung von Rechtsschuldbuchforderungen and Verordnung über die Behandlung von Anleihen des Deutschen Reichs) all are treated by way of a legal fiction in the manner of paper securities and subject to similar proprietary protection. That is now also deemed the case in respect of depositories of dematerialised securities. Thus, it is not Clearstream but the end-investor who under German law is considered the owner of the securities in this manner. Clearstream as depository has only a personal holder’s right in the securities, which belong to the investor, who can protect himself through proprietary actions. It is even accepted that in this system the end-investor has a passthrough right and may at least in principle physically demand their delivery. In this regard it is interesting that the fiction of paper is maintained to give the end-investor the semblance of ownership in the traditional sense. The rules of subletting are analogously applied (s 546(2) BGB). This is done to achieve a form of segregation from the estate of intermediaries. The problem of re-characterisation of the investor’s interest in a modern system of securities accounts does not therefore strictly arise in German law as the thinking remains paper and delivery based, even if this is now so by way of fiction only. However, it is impossible to ignore the fact that in modern systems, this pass-through right is eliminated and may therefore also be contractually abandoned in German law. It is in any event not possible to exercise if there are no shares or only global notes and the continuing importance of the fiction must then be found in the segregation it effects between the property of the intermediary and its clients.

Volume 4: Investment Securities  387 here in truth a beneficial ownership interest in defiance of its closed system of proprietary rights (see Volume 5, section 2.7.1) as the intermediaries and their end-investor clients have no more than beneficial ownership rights in the underlying pools and ultimately the securities, which rights need to be defined and consist in practice of the right to coupons and repayment of principal in the case of bonds and in the case of shares to dividends, voting, liquidation proceeds and corporate information. Again, these beneficial ownership rights against the depository are held through a tiered system of security entitlements in which these beneficial rights may (in principle) only be exercised against the most immediate tier. The question for the end-investor remains, however, how strong these rights to the backup assets are in the case of the bankruptcy of an intermediary. Hopefully, the above structure leads to a pro rata beneficial ownership right or some similar sui generis pooled proprietary or co-ownership right against the intermediary in its bankruptcy but it suggests at best an indirect right in the underlying pools. The key is that investors are classified as pro rata beneficial owners mainly so as to be able to seek at least a separation of the assets backing up their own entries with the intermediary in an insolvency of the latter.555 In the US, Article 8 UCC decides so at all levels of entitlement holdings, therefore also at the level of the depository (section 8-508 UCC). The interest of investors is not truly defined in this connection and therefore neither is the exact nature of their proprietary right; rather a number of consequences are identified.556 A joint beneficial ownership under a constructive trust is probably the English approach, equally at all levels.557 In the absence of statutory support, in England there may still be a more explicit reliance on the trust concept and the fiduciary relationship between legal owner (broker or custodian) and equitable owner or beneficiary (the entitlement holder),558 but it is easy to note that the statutory approach of Article 8 UCC in the US is in reality no different. It means that in respect of the underlying beneficial ownership rights in each tier (therefore in each entitlement) the intermediary acts as trustee for the entitlement holder in the next tier (who therefore has a beneficial right in respect of his intermediary) in what was itself never more

555 Section 8-102(a)(17) UCC, comment 2, reflects in this connection: ‘A security entitlement is both a package of personal rights against a securities intermediary and an interest in the property held by the securities intermediary’. In s 8-503, comment 2, it is said that: ‘A security entitlement is not a claim to a specific identifiable thing; it is a package of rights and interests that a person has against the person’s securities intermediary and its property’. 556 The approach to proprietary rights and protection is here product specific, an approach also used in Art 2A UCC in respect of the rights of equipment lessees. It is a consequence of the US attitude, which is not interested in abstract or systematically interconnected ownership notions in chattels and intangible assets, to which in sales Art 2 UCC also testifies. 557 See R Goode, Legal Problems of Credit and Security, 3rd edn (London, 2003) 6-08. 558 It may be illustrative in this connection to compare the right of a security entitlement holder with that of an investor in an open-ended fund or, in UK terms, a collective investment scheme which (again in the UK) may be an (authorised) unit trust, an open-ended investment company or a recognised overseas scheme (see Financial Services and Markets Act 2000 s 238). Under unit trusts, the investor receives a unit in exchange for his investment. In an investment company he receives shares. In either instance he must wait for the winding up of the trust or company before he can receive physical shares (if existing). Otherwise, the rights to these shares or the legal characterisation of his investment are obscure. It is of course easy to say that he is either a beneficial owner under the trust or a shareholder of the investment company, but that does not say much about the actual rights he has. In truth, it would appear that either the beneficial owner or the shareholder in this kind of open-ended scheme can only expect money as dividends or as the proceeds of sale. His expectation is therefore different from that of a security entitlement holder. The extra protection the investor in a fund has over a depositor in a bank is that he has more than a mere personal claim. He is also entitled (together with all other investors in the fund) to segregation of the investments from the estate of the manager of the fund. In that respect, the situation is similar to that of a securities entitlement holder vis-à-vis his intermediary.

388  Volume 4: Investment Securities than a number of beneficial rights against the depository, it being understood that the entitlement holder as beneficiary is not normally entitled to claim the rights in the underlying investment securities held by his intermediary as trustee. There is here thus a layering of beneficial ownership rights, in which the beneficiary in the one tier, if an intermediary, is at the same time the trustee in the next one.559 In truth, the nature of the proprietary rights of the end-investors may remain somewhat obscure even in common law countries,560 somewhat strange if one considers the economic interests at stake here and the legal risks involved for end-investors.561 But at least most everywhere there now follows some special regime for investors in the bankruptcy of their immediate intermediary. It shows that there are more than purely contractual rights. Again, this is notably different from bank accounts. The true meaning is that the investor may in insolvency of its immediate intermediary instantly shift its entitlement to another broker with the duty of the bankruptcy trustee to shift the back-up entitlement also. There is no pass-through right in the true sense and the end-investor does not move into the higher tier, but at least it means that the back-up entitlement does not belong to the estate of the intermediary. That is the true expression and embodiment of the beneficiary’s proprietary right against the intermediary and goes to the heart of the legal characterisation of the ‘entitlement’ right, which is therefore more than contractual and properly segregated. Naturally, the complications deriving for the investor from a bankruptcy of the intermediary (broker or even depository) in book-entry systems are the main concerns in systems of this nature, although they also arise outside a book-entry system where a broker holds client assets either directly or in a (pooled) client account. There are here also important issues of segregation and tracing, which may indeed be more easily handled or are even implicit in a book-entry system: see more particularly section 3.1.3 below. As already mentioned, in the US, these entitlements come about and are treated and transferred in the manner described in sections 8-501ff UCC. In this connection, it should always be understood that this tiered system is only an administrative arrangement. Although of the greatest importance in facilitating the modern holding and transfer of securities in an efficient and safe manner while avoiding any confusion through the strict compartmentalisation of the holding and transfer structure in this manner (which does not therefore go beyond the tier), it is nevertheless true that, even if in principle the entitlement can only be claimed against the immediate intermediary and certainly not directly against the depository or the issuer, the end-investors still have direct rights against the depository should all intermediaries somehow disappear. On the other hand, if all end-investors somehow disappeared, the intermediaries would still have no proper right against the issuer or depository, who would owe them nothing. It could also be said that as a consequence, the entitlements of the intermediaries are not truly of the same order as those of the end-investors who are the true

559 See for an important discussion and summary of the diverse views in this respect, L van Setten, The Law of Institutional Investment Management (Oxford, 2009) 223ff. 560 In the US, Art 8 is based on the law of trusts but clarifies some aspects when the structure is used in this connection. It in particular clarifies that all back-up assets of the intermediary are the common fund of the investors in the next tier. It further clarifies that the book-entry is valid without back up, which means that the back-up pool is diluted: see Art 8, ss 8-503(b) and 8-501(b) and (c) respectively. It should be noted that in England no special statutory law was deemed necessary to clarify the position (which thus remains somewhat unclear). 561 Most end investors consider themselves quite wrongly still the owners of the original underlying securities, as indeed most depositors think themselves the owner of ‘their’ money in banks. Although, as previously mentioned, the position of both in proprietary terms is quite different, it does not solve the riddle of what investors truly have. It is surprising how little attention this issue got when the paper crisis demanded some kind of solution.

Volume 4: Investment Securities  389 beneficiaries. It follows that end-investors can pledge their entitlements but the intermediaries not (unless themselves end-investors). Indeed in the US, Article 8 UCC creates here a sui generis proprietary right as a package of a number of rights against an intermediary under which the investor loses direct access to the underlying securities (or entitlements higher up in the chain except if otherwise agreed),562 but, whatever the layers of holdings and regardless of the lack of access to the issuer and depository, retains the exclusive right to the coupon and principal repayment in the case of bonds and to income or dividends in the case of shares and then also to the voting rights, any winding-up proceeds, and to corporate information.563 It is important to repeat that to achieve this objective, book-entry systems of securities entitlements have in principle nothing much to do with the issuer and the way or form in which the securities are issued, but everything to do with the way investment securities are now normally held (first by the depository and thereafter through brokers or other sub-custodians as intermediaries) and transferred in other tiers. They will be discussed more fully in section 3.1.6 below. The result is that in a book-entry system, the entitlement holder is a person identified only in the records of his immediate securities intermediary (rather than the issuing company). There is here nevertheless important clarification. In a traditional purchase of securities, the delivery of securities to a broker for the account of his purchasing client led to a form of ownership of the broker (who was acting in his own name but as indirect or undisclosed agent), from which subsequently his clients’ entitlements resulted. Under applicable rules of agency, title to the securities would shoot through to the clients immediately, assuming always that the securities could as such be identified per client, which in practice could be highly problematic for fungible securities. In book-entry systems, on the other hand, as a consequence of a purchase, theoretically an entitlement is shifted from the broker of the seller (who would debit his selling client’s security account at the same time) to the broker of the buyer, as a consequence of which the broker for the buyer will create a client’s entitlement vis-à-vis himself and credit the buyer’s security account accordingly. The end-investor thus has a direct right against the intermediary, never mind any identification of underlying securities. This is important progress. Similarly, in a sale, this entitlement would be transferred from the seller’s entitlement with his broker to the buyer’s entitlement with his broker through adjustments of both brokers’ entitlements in the previous layer. In modern securities dealing of this sort, there is not necessarily direct contact between brokers nor indeed a direct connection between seller and buyer. Indeed, in practice, in the case of a purchase, the buyer is credited immediately (and unconditionally) by its broker. Brokers of a seller do the reverse and immediately debit the seller’s account. The mechanism and details will be discussed more fully below, but in reality, there is no transfer of shares through the system from a buyer to a seller (or between their brokers), as there is in the case of payment through the banking system between payor and payee. In securities dealings, the buyer (or its broker) will never know who the seller (or his broker) was. There is no direct connection unlike when payments are made. In that case, the payor and payee are directly

562 Although all end-investors together are jointly entitled to all beneficial interests their joint intermediary holds for them through his own entitlement with the depository or other intermediary, s 8-503(b), the characterisation of their interest as common or joint property (as is usual in civil law) is less satisfactory. 563 It is relevant in this connection that the 1994 Revision of Art 8 UCC in the US was foremost meant to facilitate the safe and efficient operation of the systems for clearance and settlement of investment securities in the US and started to promote book-entry facilities in this sense in that context. It was not meant to change the basic structure of security holdings to any other effect or diminish the rights of investors more than absolutely necessary to achieve this limited objective.

390  Volume 4: Investment Securities connected by way of credit transfers through the system: see Volume 5, section 3.1.5. Here the adjustments are made as part of the asset-maintenance obligations of intermediaries, who will either increase or decrease their back-up holdings as a result of the transactions of their clients. Naturally, it is not uncommon for brokers to access stock exchanges for larger trades or when they want to adjust their own entitlements. In the former case, they may still be acting as agent while only other brokers are their counterparties, either acting for themselves or customers. In such cases, an end-investor may well have a claim for entitlements against his broker if the latter has been credited for the necessary back-up as a matter of (indirect) agency while the end-investor is not yet credited. That would then also hold true in the broker’s bankruptcy. But technically speaking the title does not shoot through and the end-investor will not become a participant in the higher tier as would probably have been the case in the old system of bearer securities.

3.1.3.  Transfer Instructions and Finality. Tiered and Chained Systems of Transfer In a book-entry system, normally end-investors only deal with the market as such through their immediate intermediaries (or brokers), who, while using security accounts for their clients, debit and credit them instantly on the basis of market prices copied from or established through the market mechanism (normally a stock exchange). Ultimately, these intermediaries adjust their own positions through their balancing and asset-maintenance obligations (in which clearing may play a further important role so that there may only be net adjustments between intermediaries as we shall see). Statutory law may further require the intermediary to follow the entitlement holder’s instructions and the intermediary may not be accountable in this regard for invalid or improper transfers (section 8-115 UCC). It is an important elaboration of the notions of abstraction or independence better known from letters of credit and negotiable instruments, in the latter case personified by the strong position of the holder in due course, or bona fide transferee protection. It is extremely important and no book-entry system could operate effectively without such a rule. Systems would become paralysed if they had to assume the reversibility of instructions and transfers on grounds that they were invalidly given or a mistake (except perhaps between two intermediaries if the transfer has not yet involved others in the ‘pipeline’ or if there was clear fraud in the instructions when the ultimate transfer to the buyer may have to be prevented or any credit to him reversed). This raises at the same time the important issue of finality, which comes up in all professional dealings. Also here, security entitlement transfer instructions and transfers show a close likeness to payment instructions: see Volume 5, Part IV and for finality, section 4.1.2. In this connection, a sales order is an instruction to transfer an investment security given by the client to its intermediary (section 8-507 UCC). Although the result is a mere debit in the security account and a credit in the cash account, it retains the idea of transfer of negotiable instruments in so far as the transfer can only be challenged on very narrow grounds, as is also the case in payment systems. It lays stress on the system as one of communications and administrative entries only from which proprietary consequences flow nonetheless, although only to the extent specifically defined. To promote finality, it is, as we have seen, normally enhanced by: (a) deprecating or objectivising notions of capacity and intent in the instructions; (b) notions of abstraction and independence of the transfer; (c) notions of bona fide transferee protection; and (d) notions of reliance of a transferee who was owed the entitlements and received them. Here again, as in payments, the sui generis nature of this kind of transfer leaves special room for these fundamental notions that enhance the finality principle, which is key for the transfer of commoditised instruments of all

Volume 4: Investment Securities  391 sorts and their liquidity. In this aspect of finality, there is a particularly clear similarity with bank accounts and payment systems, demonstrated also by the absence of bailment in either case, even if for securities entitlements this does not lead to the intermediaries’ ownership of the rights in the underlying assets.564 A distinction must be made here also in the sense that modern securities holdings represent tiered systems and modern bank account holdings chained systems. In the case of transfers, it means that in a tiered system there are no credit transfers through the system proper, therefore no push system either. In chained systems like modern payment systems this is different. The end-parties, here payor and payee, are directly connected and there is a chain of connected transfers in a push or credit transfer system in which all intermediary banks are credited in order to push the credit from the bank of the debtor to that of the creditor: see more particularly Volume 5, section 3.1.5.565 This does not normally happen in book-entry systems (except perhaps in security lending): see Volume 5, section 4.1.2. In such systems, there remains as a consequence an important risk for the end- investor. Even though intermediaries must retain sufficient back-up entitlement, they may not have done so, in which case the pool and the pro rata shares of investors are diluted. This may happen through the emergence of (bona fide) purchasers from a fraudulent intermediary who sells more entitlements than it has a back-up for and ignores its asset-maintenance obligation. That is the risk of clients when choosing their broker. The immediate result is that too little dividend money will be cascading through the system and in a bankruptcy of the broker, there will not be sufficient back-up assets to be transferred (together with the end-investors’ securities accounts) to other brokers.566

3.1.4.  Negotiability and Transferability of Investment Securities under Domestic and Transnational Law. Use of Securities Entitlements to Enhance Transferability and Liquidity As mentioned in section 3.1.1 above, shares and bonds were traditionally issued in certificated form and were, at least on the European Continent, meant to be negotiable instruments (normally expressed to bearer) in order to allow an investor to change its investments instantly. When we use the term ‘certificated’ that is what it means. It was facilitated by regular securities exchanges, which

564 This has the important consequence that, unlike in the case of bank accounts (and earlier in many legal systems when client securities were irretrievably commingled with those of his broker), the client does not here assume the insolvency risk of the intermediary but retains (in principle) his pro rata entitlement in the latter’s bankruptcy. Of course, it should be realised that the security and cash account usually go together and are mostly held with the same broker who may or may not be a bank. A credit of the security account (which is a purchase) will then go together with a debit of the cash account for the purchase price. If the broker is not a bank, the segregation issue arises in respect of client money. If the cash account is held with a different institution, there will be bank transfers between the broker and that institution for the account of the client. 565 See for a clear exposition also JH Sommer, ‘A Law of Financial Accounts: Modern Payment and Securities Transfer Law’ (1998) 53 The Business Lawyer 1181, 1203. The reason for the difference appears a practical one. Banks do not like to tier deposits, which would lead them to hold balances with their corresponding banks larger than needed to run a payment system. That is not efficient for them. It appears on the other hand cost-effective for them to use higher-tier intermediaries to satisfy their asset-maintenance requirement. It reconfirms the usual practice for large brokers to directly credit or debit their clients’ security accounts. Smaller (introducing) brokers may act differently and still go through some chain until they find someone maintaining an entitlement system for clients (clearing brokers). There may even be a full chain when both end parties are identifiable as in the case of securities lending. But those are not transfers proper. 566 See for other complications in terms of shortening of the securities, their pledging, finance sale or repo-ing and re-hypothecation, Vol 5, ss 4.1.3 and 4.2.

392  Volume 4: Investment Securities would centralise liquidity in respect of the issues they listed. Negotiable instruments themselves denote a special, simplified form of transfer in this connection in that all rights of the investor and obligations of the issuer are assumed to be incorporated in the document and transfer with it. As negotiable bearer or order instruments, they had as such a status that could not easily be altered in the Memorandum and Articles of Association of a company without depriving the shares and bonds of this negotiability at the same time. To put it differently, if there were limitations on the transfer in the Memorandum or Articles, they were unlikely to affect the (bearer) instruments unless marked thereon. If so marked, these instruments would most likely no longer be negotiable instruments in the traditional sense and could not be traded on the official exchanges or only in a particular section thereof. This status as negotiable instruments derived from their legal roots in the old law merchant. Again, it could be changed by domestic laws or the rules of the exchanges on which these instruments traded, but like for bills of exchange and bills of lading, in making such changes the negotiability of the instruments could be easily undermined and would then start to depend on these domestic laws or exchange rules themselves. International off-exchange trading practices, as in the Euromarket, could, on the other hand, also serve to enhance the status of investment securities as negotiable instruments. This proved especially relevant for Eurobonds as bearer securities. Because many conditions could be printed on them in connection with payment of interest and principal, while the interest rate could even be floating (therefore not being certain at all), these bonds often did not qualify under local laws as bearer instruments proper, since they were not simple and no sum certain was due under them. These impediments could exist and be amplified even under those laws that were made explicitly applicable to these bonds by the issuer (often English or New York law). In such cases, to save these bonds and their negotiable status, international market practices were likely to be invoked instead and imposed their own proprietary regime and notion of negotiability. So, the bearer status would be maintained regardless: see also Volume 1, section 3.2.2. That transnational status now probably also extends to the book-entry entitlements created in them through Euroclear and Clearstream, which are the habitual depositories and clearing and settlement agencies in the Euromarkets. At least that is posited in this book—see further the discussion in section 3.2 below. It suggests a transnational notion of transferability and transferee protection, even if, in the case of security entitlements, no longer cast in terms of negotiable instruments. It should immediately be noted in this connection, however (as will be further explained below), that in the opinion of many the introduction of a book-entry system in this manner and the consequential acceptance of a new form of transferability is serving to destroy the transnational character of Eurobonds and their transfer and (as in the case of register securities) means the return to purely domestic laws. It is submitted that this is a short-sighted and undesirable attitude and definitely not the better view, although now also the underlying philosophy of the 2002 Hague Convention as we shall see below in section 3.2.2. This is seriously regressive and serves no one. It is true, as noted in the previous sections, that under purely domestic laws, register(ed) shares do not have the status of negotiable instruments either (unless certified securities in the US) and are therefore primarily domestic instruments also. This allows easy limitations on their transferability in the Memorandum or Articles of Association, by domestic company law, or local (stock exchange) regulation and at the same time limits their international operation. Modern security entitlement systems could be a great help here. It has already been said that in continental Europe, the bearer securities variety was normal and still implied some uniform way of transfer under the law merchant but it commonly existed only for publicly quoted companies, therefore not in private companies, which are companies typically not quoted on stock exchanges, such as GmbHs in Germany, Sarls in France and BVs in the Netherlands. These companies tend to have register shares only and normally restrict the transfer of these shares while commonly submitting

Volume 4: Investment Securities  393 them to first-refusal rights of other shareholders or to company approval. They never were negotiable instruments but dematerialised investment securities have long existed in these situations also, the difference from the modern dematerialised registered shares for public companies being that they were never meant freely to trade while their issuance was not directed to the public either. If still tradable it would be done in a specialised forum, often off exchange. As we have seen, transfer of registered (non-certificated) shares, even if not restricted, was always unlikely to be through a simple handing over of a document and endorsement. Legally, a type of assignment could be required, which may, besides registration as a constitutive requirement of such an assignment under local law, further depend on other formalities such as specific documentation. It is on the whole not therefore useful to develop the assignment analogy much further and apply its rules. As with payments, it is better to assume here an own or sui generis way of transfer as expressed in company law. Like registered shares, they are less easy to handle in an international context on foreign exchanges or in internationalised informal telephone exchanges, which may, as a minimum, raise formal, stylistic and linguistic problems in a transfer.567 Even when transferability in such dematerialised securities is encouraged, local formalities in this respect may still prove to be particularly destructive of transfers if the securities are internationally traded. Foreign listing may be impossible, although a company may seek here to maintain a special register in the relevant foreign country. This may (partially) lift the transfer out of the lex societatis of the issuing company at the same time and may create a different regime of transfer, which may imply fewer (or different) limitations on and formalities of the transfer. It could also allow for foreign pledges or similar security interests to arise in such securities. Alternatively, it may also be that the domestic share register is adapted to accept foreign types of transfer notices. It may thus change the traditional way of notification or even its impact in the case of registered shares. It may, for example, be done in a foreign language with different stipulations. The more important development here is that by using security entitlements in respect of these securities, the tradability of such underlying securities may be enhanced, also internationally. It follows that using securities entitlement in a more modern system may here be the more ready answer. As in the case of Eurobonds, it may facilitate the transnationalisation of the regime of ownership and transfer of all types of (underlying) investment securities.568 Again, one may say that, as in the case of the traditional negotiable bearer certificates, book-entry entitlements may, in the case of international trading, by themselves start conforming to an international or law merchant type of transferability, which goes beyond its local statutory form. To repeat, this happened earlier with the Eurobond as a (materialised) bearer security of a transnationalised type. It is not a new phenomenon therefore and should be considered reinforced now book-entry systems are becoming common in international markets and may also affect the tradability of (underlying) domestic shares that have limited transferability under local law. This would be a most important and valuable development, which may impose itself further with the increase in international trading.

567 In the US, on the other hand, restrictions on transferability results mainly under private placement arrangements without SEC registration rather than from company law provisions. The shares if physically existing would then be marked as such. In the US, in the case of modern non-certificated registered shares, any transfer restrictions of this nature will be marked on the register. 568 As in the case of register securities, transfer restrictions or formalities may also result under rules of stock exchanges on which these investment securities are listed or, if unlisted, from local securities or company law (which on the European continent for private limited companies may even necessitate notarial deeds for transfer and company approval while there may also be a right of first refusal for existing shareholders, as we have seen).

394  Volume 4: Investment Securities The creation of book-entry entitlements as transnationalised proprietary structures separated from the underlying securities and the nature in which they are held and transferred (through the intermediation of depositories) may not only promote their transfer and liquidity internationally, but may also promote the versatility in the type of other interests that may subsequently be created in them, such as security interests, repos or conditional or temporary interests for financing purposes. The key is that through book entries a different interest tier is created, which may be legally transnationalised independently and which is in any event separated from the underlying securities and not per se covered by their applicable laws. Such transnationalisation suggests a great advance in the potential liquidity of these assets. Thus, through a book-entry system, domestic securities may become indirectly transnationalised. In any event, even now they may become subject to the domestic laws of another country, for example that of the place where a depository or intermediary/custodian is located if this is preferred (assuming that their law is sufficiently sophisticated to handle the new interests). If that is now a possibility, there is in principle nothing against a transnational law prevailing in the international markets. In the ultimate phase of transnationalisation, it would mean that domestic laws become irrelevant at the level of depositories and conflict of laws rules redundant in this area. They may in respect of book-entry systems (or even international share registers) also become fortuitous for lack of sufficient domestic contacts. This will be discussed more fully in section 3.2.2 below. It is likely to create a more efficient system and also enhance finality. Indeed, at least in respect of the status of securities entitlements and the type of proprietary interests that may be created through them or in them (such as repos, conditional transfers, pledges and the like), domestic laws found so applicable may not contain much guidance, even domestically. This applies no less to the protection of bona fide purchasers and in the issue of segregation of the client’s interest from that of its broker or other intermediaries, which in turn relates to the entitlement representing some proprietary interest. Transnationalisation is here a good development that creates uniformity on the basis of market requirements and reasonable expectations. It avoids conflict and is the ultimate opportunity to provide greater certainty and finality internationally. It promotes the liquidity and risk management facility. Issuers, if not actively promoting this transnationalisation, are likely to accept these results, which are ultimately dictated by the interests of international investors and not by those of the issuers or their legal systems. Again, through the tiering inherent in book-entry systems, in reality (if not also legally), the nature and status of domestic securities may be transformed indirectly and the trading therein at the same time in the interest of all. In any event, it can be seen as the risk an issuer takes while encouraging international trading in its investment securities, whether through special share registers abroad or through depository arrangements coupled with book-entry systems. So far, this may be clearest for Eurobonds but the same pressure applies to all investment securities or entitlements to them that are internationally traded with (or even without) the encouragement of the issuer.

3.1.5.  The Risk Factors in the Holding and Transfer of Investment Securities and Securities Entitlements. Bankruptcy Issues and Risk Reduction Techniques. The EU Settlement Finality Directive Investment securities always carry the risk of the insolvency of the issuers but also the expectancy of their prosperity. These are risks and expectations that are probably the essence of these instruments and largely determine their value. The investors seek these investments out for this

Volume 4: Investment Securities  395 reason. As risk selection, not risk elimination, is likely to be the issue here, these commercial risks and expectations will not be further discussed. A connected risk is that of liquidity. That is the risk that the security, although transferable, cannot be sold readily or even then only at a large discount or can only be bought at a large premium, as there is no ready (official or unofficial) market in them. It is a reflection of the efficiency of markets, or rather of the lack of it, therefore of their inefficiency. Liquidity is thus another important aspect of investing proper but a risk that will not be further discussed here either. More important for the present discussion are the operational or collateral risks, especially of a legal nature, for the investor if not physically holding the investment securities himself (assuming that they are negotiable instruments). There may also be the issue of confidentiality. We are here concerned with the transactional and depository or custodial arrangements with brokers who hold securities for their clients, now often resulting in book-entry systems and security entitlements as explained above. There are risks in the holding of securities through third parties as we shall see. There are others in the clearing and settlement of investment securities. In practice, when an investor wants to deal, he will approach his broker. This broker must act promptly so that the price does not start to vary and seek the best one for his client (either buying or selling). To this effect, the broker will do one of the following: (a) Deal from his own account (self-dealing), which means in the case of a purchase that he will credit the client’s security account immediately (and debit his cash account at the same time). The price will be the best one prevailing in the market at that moment. The broker may have the back-up in its own portfolio or it will come later as part of the broker’s assetmaintenance obligation, which must be fulfilled promptly. Pending the back-up, the broker is here exposed as the price may move against him in the meantime. (b) Match buy and sell orders among his clients in the same securities (internalisation). This is efficient and saves costs but these orders may not be or not be sufficiently concurrent and the broker cannot wait for a match when fulfilling the order. Rather he may wait for them to minimise his own back-up requirement but again that entails a risk as prices may start varying. (c) Go into the market to purchase the investments for the client. In that case, the back-up comes before the execution of the order. This is less normal in liquid securities. Delays are still likely to be the broker’s responsibility if the price moves against the client. The broker is more likely to go into the market later for his own back-up requirements, therefore after a client’s order has been fulfilled. In terms of back-up through the ordinary markets, the securities are likely to come to the broker after a process of clearing and settlement as a market facility under which mutual claims to securities (and cash payments) between brokers are being set off. This should not affect the moment of the bookings for the client. For the uninitiated, the key is to understand that when we buy investment securities, we will not know who the ultimate seller is. This is lost in the system. In a modern book-entry system, it is our broker who simply credits our securities account and debits our cash account at the prevailing market price. It could be said that the latter simply creates the entitlements anew (or destroys them in the case of a sale) every time and they are not pre-existing and traded as such. For us, that is the end. But even if the broker goes into the market for us, he will normally obtain the investment securities anonymously through the clearing system of the relevant market. Only if he buys from other brokers or market makers would the situation be different as to him, but his client would not know of it. Even then, the broker would not know the final counterparty either, only the other broker, who may have pooled his orders. Even then the securities the broker ultimately acquires may be a resultant in the clearing process.

396  Volume 4: Investment Securities One of the operational risks which the investor will obviously seek to minimise in these situations is the risk of a bankruptcy of the broker during the transaction (dealing, clearing and settlement) and subsequently as custodian or agent with whom or in whose name the investment securities are kept or acquired and against whom the investor therefore has in modern terms an ‘entitlement’. This has already been mentioned before but may need some further elucidation. The issue arises broadly in several different ways which may be summarised as follows: (a) Even before entitlement systems became common, there was always the question who owns certificated (fungible) investment securities held by a broker for his clients upon the broker’s bankruptcy. If the client kept the certified securities in his own safe there would obviously not be a problem, but if not, a distinction could usefully be made between situations in which the insolvent broker (i) held the securities identified (preferably by number) for his clients and still had them at the time of his insolvency, (ii) held the negotiable bearer instruments directly for his client but in his own possession as fungible assets, or (iii) had them pooled in client accounts with a third-party custodian. In the second case, the client would be at risk and also in the third case if the client account was held in the name of the broker and not sufficiently marked and separated from the broker’s own accounts. There was obviously also a risk if the third-party custodian went bankrupt and had not kept these assets sufficiently segregated from his own. (b) The further question then was whether this situation could be affected by operating a bookentry system. Does it automatically entail a form of segregation? This proved to be one of the benefits of the entitlement system explained above and made the client less vulnerable to the broker’s bankruptcy but the price was loss of anonymity. (c) The situation could be additionally complicated in respect of a broker who went bankrupt while transfers remained unexecuted or only partly executed. In the case of a purchase, the cash account could already have been debited but the securities transfer not yet credited. If obtained in the market the securities could have been credited to the broker already but not yet to the client. We have here agency questions: if the back-up is already there, the security, even though only in the form of an entitlement, may still ‘shoot through’ to the client, who is at risk, however, if the cash account is already credited but nothing further was done.569 (d) Other issues arise when there are booking mistakes and corrections must be made which an intervening bankruptcy of the broker may further complicate, although it should be clear that in general, bookings once made cannot easily be corrected if already notified and acted upon in good faith. This is a question of finality. In this system, the lack of back-up never gives a right to annul a purchase. This is simply the result of compartmentalisation in a tiered system. (e) The greater danger is, however, that there is no sufficient asset back-up as the broker has not fulfilled his asset-maintenance obligation promptly and properly. The consequence is a shortage in back-up per type of security and the question is pro rata distribution of the shortage among all holders of the same securities—or do the last clients take that risk? A variation is the illegitimate pledging of the back-up by the broker. If bona fide, it must be

569 The Dutch Supreme Court in a decision of 23 September 1994 [1996] NJ 461 characterised that kind of claim to delivery as no more than a personal right. The clients do not, therefore, under current Dutch law automatically stand in the place of their bankrupt broker vis-à-vis third parties. It is another vivid illustration of why internationalised custody systems should not be seen to become involved in the vicissitudes and peculiarities of local laws with which they have only a fortuitous relationship through their location. Domestically the answer is in a special arrangement in terms of some form of statutory assignment of such claims.

Volume 4: Investment Securities  397 assumed that all clients will be equal and suffer pro rata. Again, it is the consequence of compartmentalisation under which both tiers are not connected and the problem is simply the risk of all clients having chosen the wrong broker. (f) Other problems could derive in this connection from the applicable bankruptcy law itself and its effect on orders and on the clearing and settlement in terms of the finality of instructions already given, assets or collateral received or given, and any retroactivity of the bankruptcy in this respect. More precisely, in this connection, there arise: (a) proprietary questions, which have to do with the nature of the holding of the investors in terms of proprietary, co-ownership or beneficial (or similar) rights against intermediaries and the acquisition of investments and moneys by using (undisclosed) agencies; (b) finality issues, which have to do with the power of the insolvent intermediary still to give transfer and settlement instructions, the latter’s (continued) functioning in the relevant clearing and settlement facilities, the effect on this participation in the netting, and any retroactivity of the bankruptcy in this regard until the beginning of the day of the bankruptcy (which is a common bankruptcy rule and undermines all transactions in which the bankrupt was involved on the day of his bankruptcy); and (c) the question whether any transfer to clients under these circumstances was prejudicial or preferential in respect of the general creditors of the intermediary. In the EU, the EU Settlement Finality Directive of 1999 sought to deal especially with the problems under (b) and (c), and provides for a harmonised regime, which was in the first instance meant to protect the position of the European Central Bank in its function of providing liquidity to the banking system. It is based on repo financing, which means that banks will transfer securities to the Central Bank as collateral for the liquidity which it provides: see for this repo technique more particularly Volume 5, section 4.2.570 As to the problems under (a) as already mentioned, in a bankruptcy of the broker holding securities for its clients, a distinction should first be made between whether the broker holds these assets physically (in the case of negotiable instruments) for its client or is registered as owner of them (in the case of registered or dematerialised securities), operates client accounts with third-party custodians or maintains a book-entry system. As a consequence of agency notions, it may now often be accepted that securities held physically or in a register for a client are owned by the client, assuming that they can be clearly identified, by the printed numbers in the case of bearer instruments or by sufficient identification in the register entry, or by their being held through a segregated client account, title shooting through as a consequence of disclosure (in common law) of the agency or on the basis of a special rule in respect of indirect agency in civil law. Especially if they are in a client account, it is likely that these securities are pooled with others, assuming they are sufficiently segregated from the broker. This may then lead to forms of co-ownership. Again, the assumption is here always that the investments can be segregated from those of the intermediary when there are still the serious problems of commingling and fungibility. It is

570 Most EU countries have implemented the Directive to apply more generally. The Directive side-stepped intentionally the issues under (a), which therefore remain unharmonised in the EU. A limited effort has been made in the Collateral Directive to deal with (some) rights (in terms of securities or repos) that can be established over securities entitlements (see s 3.2.4 below) without, however, defining these entitlements and their nature either. The Directive also did not enter the subject of finality more generally or the underlying theories that may back it up: see for these theories, Vol 1, s 1.1.7.

398  Volume 4: Investment Securities also a serious issue when client moneys (even in client accounts) are reinvested by the broker in his own name. For the reasons indicated, in many legal systems the rights of investors in pooled accounts may remain under serious threat, especially in the case of fungible assets, which in the worst scenarios may lead to no more than a personal right for delivery of investment securities of the same sort or client money against a broker rather than a proprietary claim in the bankruptcy of the relevant intermediary or custodian. The result is that investors will get no more than the pro rata share in the liquidation proceeds of their bankrupt broker, which they must share with all other creditors. The latter ones thus receive the benefit of the commingling confusion, which could mean a substantial windfall for them. This would seem inappropriate as long as investors can still identify how many securities they contributed, assuming the totals add up. Trust notions and beneficial ownership may here be the more appropriate characterisations for the investors’ rights. Otherwise, there must still be some reliance on co-ownership notions, an uncertain approach more likely to be tried in civil law countries. It has already been said that these two proprietary approaches (co-ownership and trust) should be clearly distinguished.571 Civil law is often condemned to the former in the absence of a trust concept. Common law has the advantage here and traditionally provides the better tools of protection.572 Again, security entitlement systems are here a further important step in the direction of investors’ protection as in this context the notion of fungibility, segregation and pooling of assets is further developed, often statutorily in civil law countries, and the rights of the investors in the underlying investment securities more fundamentally addressed. The question of beneficial ownership and co-ownership rights of entitlement holders arises here more directly, leading to the possibility of simply moving or shifting these rights (as book-entry credits) to other brokers after a bankruptcy of the first one in the ordinary manner of shifting accounts. The back-up (in so far as it exists) moves with and completes the segregation as already mentioned. This is also called ‘porting’.573 Indeed in modern book-entry or security entitlement systems, that right is now institutionalised and segregation is to that extent presumed. The ideal is always that the business of the depository, broker or other intermediary should not impact on the business they do for their clients. Their personal creditors should therefore not obtain a windfall in having recovery or setoff rights in client assets. It is in truth a question of unjust enrichment. Apart from these important ownership, settlement and clearing risks when intermediaries are or become insolvent, another risk for investors in this connection is that intermediaries have not collected and transferred to them in a timely manner any distribution on the investment securities, have not (in a timely manner) followed their instructions, for example to obtain and deliver the underlying security certificates (if a pass-through right still exists in a book-entry system), or have not in a timely manner made the necessary sales (or purchases) or created the required security interests in respect of their creditors. In the US, Article 8 UCC has special provisions in this connection. Many of these risks are not typical for book-entry systems but arise wherever investors’ assets are handled by others (brokers or custodians), but may be more specifically dealt with in these newer immobilised systems of securities holdings. 571 Notions of co-ownership prevail, however, always when there are too few underlying securities in a pooled arrangement so that the shortage must be divided pro rata among the participants (pending a claim against the custodian for the missing securities). 572 In fact, it is possible to identify in civil law underlying trust structures in the relevant modern statutory protections provided in this connection and an opening up of the proprietary system in this manner. 573 This is an important concept, which, in the EU under the so-called EMIR regulation (see Vol 6, s 3.7.6), is proposed to be extended to clients of insolvent clearing members in a central counterparty (CCP) system in respect of their derivative dealings and supporting margin.

Volume 4: Investment Securities  399 There are other risks more typically connected with the transfer of securities or entitlements. They are essentially twofold. The first one is that the transaction will not close or settle. That is the settlement risk, thus the risk that the intermediary does not amend the securities accounts for his clients. The risk that the deal will not close because the broker fails to perform (for reasons other than bankruptcy) is real. It has already been said that at least if the back-up is there, the client may have protection. In this connection, there is a closely related risk, which derives from order mistakes (to be distinguished from mistakes in the instructions). It is therefore important that buy and sell orders can immediately be matched so that any mistakes or misunderstandings as regards number and class of investment securities are resolved promptly, the necessary corrections made, and so that the deal does not close before that is done. But again, this is all only relevant to the extent the intermediary goes into the market to fulfil the order. That will often not happen, as already explained. The second risk is that, unknown to the buyer, the back-up securities or entitlements did not legally belong (in full) to the intermediary because of defects in their acquisition (even though substantiated only in a mere book entry) or, perhaps more relevant, because they are encumbered or may have been given as security by the broker for his own debts. This therefore affects the legal status of the back-up entitlements and the further question then is whether a bona fide purchaser of a security or security entitlement who is effectively credited with the securities is (proprietarily) protected against such failings. Under modern law, it is normally established that intermediaries may not encumber their own entitlements that back up those of their clients, yet they may have been acquired subject to existing interests of this nature. Market practices may have something to say in this regard and protect the bona fide purchaser but perhaps also the bona fide intermediary buying the back-up. These are issues still subject to some doubt, but protection of the buyer is the natural consequence of a tiered system and compartmentalisation under which the two layers are not connected. It has already been noted that the result is that any shortfall is borne by all investors in the same type of securities.

3.1.6.  Modern Clearing and Settlement Systems. Their Internationalisation Technically, clearing and settlement organisations usually operate on a membership or participants basis subject to a membership agreement or general conditions.574 In the case of a transfer, 574 The following techniques are commonly used in this connection: (a) A settlement agent or central depository system requires the participants to enter into bilateral relationships with the settlement agent under which that agent holds cash and securities accounts in which intraday debits and credits are netted out on a bilateral basis between the settlement agent and the participant. The modern book-entry systems on which security entitlements are based are an important example of this system and function also between a broker and his clients (assuming that the broker operates a book-entry system). (b) A clearing house system, which has two phases in the settlement process and which in principle involves all participants. In the first one, the payment and/or delivery instructions are calculated and netted out between the participants for a period (say one day). Subsequently (either the same trading day or within an agreed period thereafter, say T+1 or T+2) any resulting balances are settled by payment or delivery to and from each participant. In practice in the Euromarkets that is the system of settlement through Euroclear and Clearstream and most modern payment systems: see for investment securities Vol 5, s 4.1.4 and for payments Vol 5, s 3.1.6. (c) A CCP system allows all transactions to be conducted with the same counterparty through back-toback transactions, while this counterparty nets and closes out (either the same day or within an agreed period thereafter) all deals outstanding between it and any participant in its system. It is often exchange connected (especially in derivative exchanges) under which in the case of a transfer between two endusers who have matching trades, the CCP becomes technically the buyer from any potential seller and the seller to any potential buyer, see Vol 5, s 4.1.4.

400  Volume 4: Investment Securities the modern clearing systems themselves may guard against default by the broker, of which the CCP technique is the more advanced.575 It implies a guarantee of the operation of the system by one central counterparty, who takes over all rights and obligations from the participants (through a kind of novation or more likely through a chain of agencies) and nets out on a continuing basis all mature obligations in terms of security transfers and payments. Again, this is of foremost importance when the intermediary goes into the market either for his client directly or merely for his own back-up obligation. If he gets off the transaction between his own clients, this is less relevant. In the case of Euroclear and Clearstream, the system has not yet developed so far, but similar net calculations are being made on a daily basis between members in respect of their securities and cash transactions. They are the established underwriters, brokers and traders in the Euromarkets.576 In addition to their general conditions for membership,577 these organisations commonly develop their own international practices. As we have seen, the regime under which they operate is substantially a book-entry system (either supported by the relevant bond certificates or, to save costs, now more likely by a global note, which may eliminate the right to ask for certificates altogether).578 Indeed, by introducing the book-entry system, early on these organisations substantially did away with the physical aspects of bond trading in the manner that will be discussed in greater detail in section 3.1.7 below. Although technically still subject to domestic legal regimes, respectively those of Belgium and Luxembourg,579 the manner of their operation in the Euromarkets, the functioning of their book-entry system,580 the rights in the pools,581 From early on, the DVP or ‘delivery versus payment’ was the standard settlement method, at least in the Eurobond market, based on a shortened settlement cycle. Within it, there were several more specific techniques practised—see also the ‘Delivery versus Payment in Securities Settlement Systems (1992)’ Report of the Committee on Payment and Settlement Systems (CPSS) of the BIS or Central Banks of the Group of Ten Countries, which distinguished between: (a) real-time gross settlement, which meant simultaneous trade-by-trade execution of the securities and of the payment transfers; (b) gross settlement over a time period, in which the trade-by-trade approach is maintained but the securities and the payment streams (often guaranteed by banks) are netted out at the very end of the cycle; and (c) net settlement, in which all is simply netted out between participants at the end of the settlement period (but still on the basis of simultaneity). The practical difference is in the liquidity requirements of the participants. Regardless of DVP, bankruptcy laws may still undermine the system in the case of an intervening bankruptcy of one of the participants. This is the concern of finality legislation as in the EU’s Settlement Finality Directive of 1998: see s 3.1.3 above. 575 See for clearing also HF Minnerop, ‘Clearing Arrangements’ (2003) 58 The Business Lawyer 197. 576 See for a description of them, RM Goode, ‘The Nature and Transfer of Rights in Dematerialised and Immobilised Securities’ in F Oditah (ed), The Future for the Global Securities Market (Oxford, 1996) 107. 577 The Terms and Conditions Governing Use of Euroclear and the Operating Procedures of the Euroclear System. 578 Global notes are substitutes for certificates, not for registrations. They may be permanent, semi- permanent or temporary. The permanent global note rules out any individual rights in the issue and the investor’s relationship can therefore only be with the custodian. In a semi-permanent note, the investor still has an option to acquire certificates. Euroclear and Cedel have done away with this possibility. It means that a Eurobond investor who wants to hold certificates cannot operate through Euroclear or Clearstream. The temporary note is only held for a limited period until certificates are delivered. The global note as another way of avoiding materialisation (besides registration) is favoured by Euroclear and Cedel. It means that the traditional Eurobond as bearer bond now only operates outside the Euroclear and Clearstream system. Physical bonds outside this system are often preferred by small investors who personally collect the coupons to avoid taxes. 579 See Belgian Royal Decree No 62 of 1967 (as amended) and the Grand-Ducal Decree of 1971 (as amended). 580 Technically Euroclear and Clearstream hold no physical custody but they have sub-custodians in the countries of the currencies of the issues, which they therefore indirectly hold in an immobilised manner. 581 Technically, the Belgian Decree backing up the Euroclear system, see n 580 above, does not state on the ownership rights of entitlement holders in the pools. Market practice considers the participants co-owners; see also the Euroclear Communication on ‘Rights of Participants in the Euroclear System in Securities Held on Their Behalf in the System’ of 4 April 1997.

Volume 4: Investment Securities  401 the manner of clearing, settlement and netting, the repo business in, and methods of pledging of, the assets, even the nature of the Eurobond itself, at first as a transnationalised negotiable bearer instrument and later as a book-entry entitlement, the transferability of these book-entry entitlements and the protection of bona fide purchasers, all became substantially subject, it was submitted, to the practices of the Euromarkets and should as such be considered transnationalised. This was posited in the previous sections, see further also Volume 1, sections 3.2.2 and 3.2.3, and section 3.2.1 below. It should neutralise not only the legal problems derived from any lex situs as applicable law in respect of the underlying bonds or other investment securities, but also the problems connected with the location of the book-entry system itself, which is no less fortuitous and, in any event, bears little relationship to the place of the transaction. Thus, inappropriate leges situs concerning the proprietary aspects of Eurobonds and their transfer (or even inappropriately chosen domestic laws to cover the instrument) and inappropriate or inadequate domestic (Belgium or Luxembourg) laws concerning the system could be neutralised or overcome by established transnational market practices. At least in the Euromarkets, it allowed a system of transfer, bona fide purchaser protection, repos and pledges to develop in respect of euro-securities even regardless of the laws of these two countries and sudden changes therein, for example through adverse case law (such as the 1996 Tilman case in Belgium: see the next section).582 The result is less legal risk and also a more predictable and cost-effective system, although, as already noted, among legal scholars much lip service is still paid to private international law notions in this connection, unnecessarily as it would seem and as will be discussed further in section 3.2.3 below.

3.1.7.  The Evolution Towards Security Entitlements: Depository Receipts and the Earlier Developments Towards Dematerialisation and Immobilisation In the foregoing, the modern book-entry system of holding and transferring securities was outlined but its development may be discussed more fully. Already by the late 1960s, the transfer of shares and bonds as negotiable instruments in the informal international Eurobond market

582 A shock resulted in this connection from the decision of the Belgian Supreme Court of 17 October 1996 (SartTilman) [1995–96] RW 1395, note Storme, ruling out the fiduciary or conditional transfer of assets in Belgium. It greatly increased the re-characterisation risk in respect of ownership-based funding through Euroclear and raised the spectre of the need for the execution of a pledge agreement in all cases and the crediting of the investment securities to the special Pledge Account in Euroclear under Art 5 of the Royal Decree of 1967 pertaining to Euroclear, assuming Belgian law was applicable. The situation was remedied through new legislation of 15 July 1998 concerning ‘amendments to certain legal provisions regarding financial instruments and securities clearing systems’ (Art 30) [1998] Moniteur Belge 28.934. The better view is that the 1996 case was not relevant in the first place as market practice applies to euro securities and the way they are held and transferred through Euroclear. Belgian law at most applies residually. That also appeared to be the view in the market before the remedial legislation became effective. The Belgian legislation of 1998 covered more than the operations in Euroclear but is limited to situations where the transferor is a bank or other financial institution or performs investment activities for its own account or for the account of third parties (or is a foreign company or institution with a similar status). In other words, it only applies to fundraising in the professional sphere (but can be done on behalf of customers). The re-characterisation risk was eliminated in Luxembourg much earlier through the Grand Ducal Decree of 19 July 1983 on fiduciary agreements entered into by credit institutions, but the protection is limited to securities located in the Grand Duchy, which raises the issue of the location of securities entered in a book-entry system: see for the modern solutions (also in Euroclear and Clearstream), s 3.2.2 below.

402  Volume 4: Investment Securities was proving increasingly cumbersome because of the great volume of transactions, which each time involved a great number of physical (bearer) certificates. It was one of the reasons for the creation of Euroclear and Clearstream (Cedel) as centralised custodial, clearing and settlement institutions through which order verification and matching, payment and delivery were to be directed and facilitated. As noted before, purely domestically, the creation of register shares and bonds, which did not need physically to exist, could have simplified the transfer system, based as it was on register entries and dematerialised securities. That was the route Article 8 UCC in the US first chose as we have seen. Changes to Article 8 UCC in 1977 (section 8-313) introduced the possibility of electronic transfers precisely by allowing a system of registration to develop in which certificates would be entirely abolished. It meant therefore complete dematerialisation. The idea was that in this manner electronic transmission systems could become efficient and settlement a matter between the various settlement departments of the intervening brokers and the companies’ registers. In this system, individual shareholders would continue to appear as the shareholders on the companies’ registers. It meant converting all shares into registered shares and doing away with their status as negotiable instruments altogether. Transferability was to be maintained only on the basis of these register entries, shareholders’ instructions and statutory backing. It could easily have allowed for electronic trading and settlement. However, as it was still normal (especially in England) also to issue some type of certificate, even if not itself negotiable, this made the procedure for transfer no less cumbersome than in the case of the transfer of bearer certificates. Internationally, it raised the complication of registration in company registers itself, which registers could be far away. They could also imply domestic restrictions on the transfer of such register shares (or bonds), often hampering that type of trading also. In the event, this statutory initiative did not succeed but an alternative practitioners’ approach developed in the US through the use of the Depositary Trust Company (DTC), which came into being as a result of the back-office problems caused by an excess of paper securities. It did not rely on dematerialisation, but rather on immobilisation of the securities as explained. Unlike dematerialisation, immobilisation technically breaks the link between issuer and investor by introducing an extra layer of holding the securities. These are the depositories. It became the key to the new system and was based on custody of the investment securities by a custodial company that would be the legal owner (normally called ‘depository’) of the underlying shares and maintain a book-entry system as proof of its clients’ entitlements to the securities, much in the same way as Euroclear and Clearstream (Cedel) had already started to do. Thus, in the US, the DTC was likely to hold substantially all the shares of an issuer for ever and issue entitlements against it. Only the latter would change when investors traded. For US government bonds, a similar system was developed by the Federal Reserve (which is the Central Bank of the US) as depository/custodian. It is this system that is now supported by the 1994 Revision of Article 8 UCC. It has also become the domestic system in many European countries (like Germany and the Netherlands)583 and for Eurobonds had already been introduced earlier by Euroclear and Clearstream (formerly Cedel).584 The English electronic transfer system (Crest), on the other hand, is not based on this custody or immobilisation approach but retains an approach under which shareholders (instead of their intermediaries) remain directly connected to the share register of each company but in an increasingly electronic way. 583 In Germany under the Depotgesetz, see further n 504 above, and in the Netherlands under the Wet Giraal Effectenverkeer (Wge). 584 See also RD Guynn, ‘Modernizing Securities Ownership, Transfer and Pledging Laws’ (International Bar Association, 1996) section on Business Law.

Volume 4: Investment Securities  403 Immobilisation thus means a tiered system of holding securities. In it, the issuer will only deal with a limited number of depositories, who in turn deal with the brokers who have the endinvestors as their clients. This system is only truly efficient if it is permanent, which results when an issuer only issues a global note to a depository, or will only recognise one depository (or a small number of them) as shareholder (or bondholder). It may be semi-permanent when it still allows an end-investor an option to obtain shares or bonds in his own name (the ‘pass-through’ right), which option technically still exists in the Euromarkets and is also backed up by statute in the US assuming certificates are still issued: see section 8-508 UCC. In fact, it does not give here an absolute right but only speaks of eligible entitlement holders and the pass-through right may be excluded by contract or by the nature of the way the securities are issued (through a global note) or held (as in a book-entry system only). This exclusion has become normal, also in the US. As we have seen before, in the case of immobilisation, there are in the client tier only entitlements (and not securities) that change hands upon trading, which is likely to be followed by settlement through modern clearing systems, especially between intermediaries in connection with their back-up or asset-maintenance obligations. In the depository tier, there is an unchanged owner of the corporate shares and bonds in so far as the company is concerned. All income flows and information supplies are directed by the issuer to the depository, who deals with his clients and will be paid by them for that service. Consequently, there is here an important cost-saving element for issuers. Naturally, these clients could and are likely to be intermediaries themselves, like brokers, who have in turn a system of client accounts under which their clients will have entitlements against them. As mentioned in the previous sections, in modern systems there is likely to be pooling at each level in respect of fungible securities of the same type. In the US, the new Article 8 UCC framework is based here on a distinction between investment securities held directly by share or bond holders and those held indirectly by intermediaries on behalf of their clients. Part 5 of Article 8 applies to this second type of holding, therefore to securities entitlements. Under it, intermediaries may hold among their assets securities indirectly owned by their clients through a book-entry system. Again, dematerialisation is here less important than immobilisation and the book-entry system also works in respect of shares and bonds represented by certificates in the various layers. In book-entry systems, the true or economic owners of the investment securities (the endinvestors) thus receive an interest either through their brokers in the pool of the relevant type of securities deposited with another intermediary or sub-custodian and ultimately the depository institution (in the US the term ‘depositary’ is also used). Changes are communicated between the settlement departments of the intermediaries and depository institutions, which communication is increasingly electronic in EDI fashion. This electronic data interchange method has already been discussed in section 2.3.2 above. Again, it means that the brokers are the sole entitlement holders vis-à-vis the depository institutions, which cater for them as members, while their clients’ entitlement will only be marked in the brokers’ own books. Pooling therefore results at different levels. It should be clearly understood and cannot be sufficiently repeated that (in the absence of a pass-through right) in such an immobilised system there is no legal right of the investor (and his creditors) in the underlying securities. There is no claim against any other tier than the immediate one. That is compartmentalisation. Only in a bankruptcy of the intermediary is there a variation and form of separation, as explained earlier. As already mentioned in section 3.1.4 above, the book-entry facility acquires a special meaning if the underlying shares are not themselves freely transferable. In such cases, it provides for an indirect way of making them so. Book-entry systems may also provide a special transfer facility at the international level if transfers of the underlying registered shares require cumbersome registration in domestic corporate registers or are subject to other restrictions. That need not be

404  Volume 4: Investment Securities an issue in international trading as the depository as registered owner remains the same, and only book entries change in a simplified manner, as agreed between the depository and his clients or members. This facilitating of international transfers was earlier often the objective of depository receipts (DRs), which function in a similar two-tier manner (and which may themselves be negotiable instruments). They re-created, however, the logistical problems of their own transfer and may now themselves become subject to immobilised depository and book-entry systems at the DR level. In these DR systems, there may still be a facility to receive the underlying shares (the ‘pass-through’ right), however. If not, there may be a particular problem with pledgees or similar security interest holders whose repossession right would then be limited to the DRs.585

3.2.  The Transnationalisation of Custodial and Settlement Systems and its Opportunities 3.2.1.  The Role of the Euromarket for Bonds and the Effect on International Share Trading. The Dominant Role of International Practices and the Bankruptcy Law Implications In the foregoing, the effect of the internationalisation of the investment streams on the nature, status and trading of the underlying investment securities has already been noted and might, from a legal point of view, be summarised as follows: (a) The Eurobond developed as a transnational negotiable instrument, detached from domestic laws, even those chosen by the parties or made applicable to it by the issuer at least in its proprietary aspects, and, while still a bearer instrument, was undeniably subject to the practices of the international Euromarkets: see Volume 1, section 3.2.2. (b) Market underwriting and trading practices also developed in that market at the transnational level; they are subject to the rules and recommendations of the International Primary Markets Association (IPMA) and International Securities Market Association (ISMA formerly the AIBD or International Bond Dealers Association), since 2005 merged into the International Capital Market Association (ICMA), which are in the first instance explained and enforced by market practitioners on the basis of their transnational practices: see Volume 1, section 3.2.3. (c) In this international market, there further developed special clearing and settlement facilities, which meant: (i) verification of all trades in Euroclear or Clearstream (formerly Cedel) without which the transfer could not settle; (ii) a delivery versus payment (DVP) method and moment of transfer, which is upon payment and not delivery; (iii) a clearing system for intermediaries, which does not itself result in the transfer (or undermine the DVP system, but now only for net balances), but makes the transfer process safer, quicker and less costly; (iv) the possibility of creating transnationalised limited proprietary rights in these instruments in terms of pledges, repos, securities-lending, and conditional or temporary transfers; and (v) the development of individual transnationalised rules for finality of the transaction and payment, including a rule for the protection of bona fide purchasers.

585 The limitations on the pass-through right in Europe often resulted from schemes organised by a company to prevent an unfriendly take-over of the underlying shares.

Volume 4: Investment Securities  405 (d) Subsequently, there also emerged in that market custodial arrangements with immobilisation of the securities and a book-entry system as another practitioners’ development with the entitlements based on their fungibility, transferability, manner of transfer or substitution, co-ownership or beneficial ownership and limitation of pass-through rights, the effects in a bankruptcy of an intermediary, the types of limited proprietary and security interests that could be created in them, the manner in which this was done and their protection and enforcement,586 all being determined and further developed by (euro-)market practices.587 (e) It is demonstrable that these practices prevail over the lex situs of the underlying securities, largely because of the fortuitous nature of the situs in respect of negotiable instruments, although in the case of a global note there may have been some doubt on this point. There may now be even more doubt in respect of security entitlements, although as intangible assets, they hardly have a location either. In truth, these practices prevail (in the view of this book also in the case of security entitlements) because of their recognition by the international law merchant, which leads to uniform transnational treatment regardless of location of the underlying investment securities. (f) Upon a proper analysis, these market practices being transnational thus also prevail over the domestic laws of the place of the book-entry systems or over conflict rules pointing to other domestic laws in respect of them, prima facie also because of their fortuitous location but in truth more particularly because domestic laws are often inadequate and inappropriate to apply to transactions conducted away from the place of these systems. (g) These domestic laws have in any event often an unclear view of the nature of the book-entry entitlement in terms of co-ownership or beneficial ownership rights or proprietary rights sui generis, and the effects of transactional finality, which (if domestic laws were applicable) even for international entitlements could then change depending on the place of the custodian or intermediary operating the book-entry system. That would also affect the type of other interests that could be created in them, such as repos and security interests or conditional ownership rights, when these entitlements are used for financing or are the subject of securities-lending. (h) Transnational practices demonstrate the decisive influence of the investors and traders (rather than issuers) and the impact of their market arrangements with their custodians or other intermediaries that operate book-entry systems.

586 See, for the complications of a purely local view of pass-through rights, M Dassesse, ‘Taking Collateral over Euroclear Securities: A Belgian Pledge Too Far’ [1999] Journal of International Business Law 141. Whether there is a pass-through right of clients of Euroclear members in the latter’s Euroclear entitlements would appear to be a question of Euroclear rules or Euromarket practices. It could not operate in favour of non-members of the system. If there is such a right in principle, any pledgees of the clients would receive the pass-through right when they foreclose their pledges against the client. If this is possible, the next question is whether there is then also a pass-through right in the underlying securities and whether that could be pledged. That would again be a matter of Euroclear rules and Euromarket practices, but would also affect the issuer in the case of registered securities (as distinct from bearer securities deposited with Euroclear) and could therefore in the case of shares become a matter of the internal rules of the issuer as expressed in its Articles of Association or its lex societatis. It is clear that one must distinguish here between the various layers at which entitlements and pass-through rights work. 587 This should avoid re-characterisation risk if re-characterisation is not common in that market and it is not. It is the risk that ownership-based funding is re-characterised as a security interest, relevant especially for repos. See for the distinction between ownership and security-based funding in this connection Vol 5, s 2.1. See for the EU Financial Collateral Directive, s 3.2.4 below.

406  Volume 4: Investment Securities (i) It also shows, however, that the proprietary protections and the proprietary rights that may so be created cannot ultimately be decided by private arrangements alone. For their thirdparty effect, which is the essence of proprietary rights, international book-entry entitlements must be supported by market practices, therefore by usage or custom, supported, if necessary, by general principle, all as part of the modern lex mercatoria, in order to be recognised and enforceable in the market as a whole and against all its participants (but not necessarily others). (j) In this process, general conditions and operating practices formulated by the market itself become of great significance. There is therefore an important impact of party autonomy but only in the context of the operation of the market and its products and participants as a whole; it also means that market practices may be fluid as they must instantly react to market realities and changes in those realities. Here, custom is not static, as in truth it never can be if reflective of market practices. The practice-based legal system for Eurobonds developed very effectively and rapidly in this manner and allowed a market to emerge that was largely offshore, operated under its own rules, and became the largest capital market in the world. The lack of rigidity has proved a great advantage, much better than any illusory certainty that the application of domestic rules could have brought, even if they had been tailored to this market. For international markets and their participants flexible law is always preferable to wrong or underdeveloped mandatory laws—contrary to what is often said by practitioners. It has already been said several times that certainty on the basis of applicable domestic laws can be of such a low quality that it is much better to do without in favour of the force of transnational practices and their dynamics. They have always been the essence of the Euromarkets, in which, upon a proper analysis, domestic laws are only used to the extent compatible with them unless relevant domestic public order or public policy requirements mitigate against it and demand otherwise but that could normally only be so in respect of conduct and effect under the international transaction in the relevant country and not elsewhere. The internationalisation of the security markets has also moved in the direction of covering (domestic) shares that are substantially internationally traded: see section 3.1.7 above. Once expressed in securities entitlements, this is greatly facilitated as they have their own simplified transfer method as we have seen.588 It may even lead to foreign proprietary interests, such as pledges and similar security interests or repos created in them, subject to the laws and practices of the countries of the next layer.589 It would be better still to accept the transnationalisation of such interests at least to the extent these interests are supposed to operate transnationally. Indeed, transnationalisation of the international flows in securities and of the trading facility in them

588 Immobilisation may be less complete for shares if still largely traded and settled through domestic stock exchanges and settlement agencies. These may practise similar book-entry systems, but in the case of a domestic variety are subject to domestic laws. In international trading the result may be a flow between these book-entry systems and Euroclear and Clearstream. 589 The details of attachments and perfection of these interests are not further discussed here, but all aim at possession whether actual or constructive (through registration in the relevant share register) in which case the term ‘control’ is often used. There is here no need for sophisticated filing systems, now customary in the US and some other countries, especially in respect of non-possessory security interests or floating charges. If the subject of such a floating charge, a separate marking on the securities or entitlement register would probably still be necessary in respect of internationally traded securities in order for these security interests and any pass-through rights thereunder to be effective. All still comes down to constructive possession, or indeed control.

Volume 4: Investment Securities  407 suggests the further dilution of the impact of the lex societatis in favour of a transnationalised concept of transferability even of register shares and the interests that can be created therein. It has already been shown in section 3.17 above, that issuers encouraging these securities to be traded through internationalised book-entry systems enhance that development. Naturally, the question arises of what all this means in the bankruptcy of one of the participants, especially the broker or similar intermediary maintaining a book-entry system, under the applicable bankruptcy laws. How do these transnationalised rights fit, especially under bankruptcy laws that have so far remained domestic? At this stage, it is not possible to generalise, but a number of observations may be made: (a) The entitlement tier concerned is important. If a domestic broker with many domestic clients is declared bankrupt in his own country while in the bankrupt estate there are entitlements supporting a higher domestic layer or tier (either in the same or another country) or even an international book-entry system, the lex concursus may in the first instance determine whether the end-investors/ clients can step into the shoes of the broker in respect of the back-up entitlement or (more likely) may immediately transfer (as a matter of ‘porting’) their accounts to another broker with the corresponding adjustments of the back-up entitlements of the bankrupt broker. (b) If the client or end-investor has no direct right to the back-up entitlement of the broker in the next tier under applicable local bankruptcy or other laws in the above manner, that need not be the end of it in respect of a foreign book-entry system maintained by the bankrupt broker outside the bankruptcy jurisdiction, in which respect there may be a further difference when the end-investors are also foreign. (c) It may also make a difference when the broker declared bankrupt is himself outside the bankruptcy jurisdiction. The status of the end-investors/clients: (i) outside the country of the bankruptcy, (ii) in respect of a book-entry entitlement of their broker with a custodian also outside the bankruptcy jurisdiction, while (iii) the broker itself may have been declared bankrupt being outside the bankruptcy jurisdiction, becomes then first a matter of the bankruptcy’s extraterritorial effect or reach on that foreign book-entry system under the applicable bankruptcy law but subsequently also of the acceptance or recognition by the law of that foreign book-entry system of the consequences of the application of the relevant bankruptcy laws. (d) This extraterritorial effect of bankruptcy is normally not accepted elsewhere except under treaty or uniform law; such law is mostly non-existent, but was in the EU introduced through the Insolvency Regulation and similar Directives for the winding up of banks and insurance companies.590 In the US there is a favourable (unilateral) regime in the form of the new Chapter XV of the US Bankruptcy Code 2005 (following the UNCITRAL Model Law on the subject, now also incorporated in the UK); even then, the foreign bankruptcy measure may not affect the legal (proprietary) rights and practices in the recognising Member State without an adjustment process.

590 It should be noted in this respect that Belgium has a liberal recognition regime and is also the country with most bankruptcy Conventions: see JH Dalhuisen, Dalhuisen on International Insolvency and Bankruptcy 1 (Deventer, 1986) 3-162, which might still be relevant to Euroclear if its book-entry system were considered Belgian.

408  Volume 4: Investment Securities (e) It could in this respect be argued that the proprietary regime in respect of entitlements to assets of an internationalised clearing institution operating under its own practices would demand acceptance by the applicable bankruptcy law as a precondition for any extraterritorially and its recognition elsewhere.591 (f) In view of its international status, this may even be so if this institution was within the bankruptcy jurisdiction itself. Thus, in a Belgian bankruptcy of a Belgian broker, the broker’s Euroclear entitlements might be distributed to its domestic and foreign clients or, more likely, pro rata to their new brokers under the practices of distribution of entitlements within Euroclear and the Euromarkets pending an insolvency of the intermediary, not therefore pursuant to Belgian bankruptcy legislation if different. This would be very much clearer where there still is a pass-through right. (g) An important further complication may be in the type of right that is held by third parties in the entitlement. One may think primarily of security interests, repos, or conditional or temporary transfers, where entitlements are used for financing purposes. It creates a further layer (of a different type, however) while such third parties/interest holders may indeed become the entitlement holders upon default of the original one. (h) They should not be affected by a bankruptcy of an intermediary either, but to what extent these rights of outside financiers or investors may be safeguarded in a bankruptcy of the broker or custodian maintaining the book-entry system in another country will pose further legal questions connected with the recognition of such security interests or repos elsewhere in the bankruptcy (in which connection the transnationalisation of these rights themselves may again be a facilitating factor) or their possible adjustment by the bankruptcy court to establish their status and rank under the lex concursus. (i) This highlights a particular problem in international cases of this sort, which has to do with a trebling of the level of uncertainty: (i) the characterisation of underlying book-entry entitlement may be legally uncertain in terms of the (proprietary) rights it confers; (ii) the types of security and similar interests that may be created in them and how this is done may as a consequence also be uncertain; while (iii) a third uncertainty results from the lack of transnational status of such interests themselves. (j) An important factor remains here the lex concursus and its competency in the case, which will have to do with the entity that is bankrupt, the location of the bankrupt and whether the bankruptcy is opened at that location or elsewhere, whether in the latter case the bankruptcy can be recognised at the location of the bankrupt, and what such a bankruptcy or recognition means in terms of security or other rights held by third parties/financiers in the entitlement of end-investors. It is submitted that the transnationalisation of investment security transactions is in full swing and is a natural sequel to the globalisation of the capital markets in which domestic transfer restrictions and impediments are increasingly felt to be excessive and outmoded. In this evolution, the

591 In the case of Euroclear, it would mean that the bankruptcy of a non-Belgian participant would not prevent the clients of the foreign broker taking its place vis-à-vis Euroclear in Belgium whatever the foreign bankruptcy regime would say even upon recognition (in principle) of the foreign bankruptcy in Belgium. As Euroclear would not want these customers as participants, in practice it means that each customer’s theoretical pro rata share would be transferred to the new or replacement intermediaries (‘porting’).

Volume 4: Investment Securities  409 dependence on local legal peculiarities becomes atavistic and practitioners will do everything to circumvent them. The market itself is likely to lead here, enforcing harmonisation on participants, and imposing freer, easier and cheaper transferability. Bankruptcy courts, even though still domestic, must here become increasingly accommodating of transnational practices and risk management facilities if their countries want to participate in the benefits of globalisation. It may be of interest in this connection to reconsider how international security transactions are now structured in which connection an example given above may usefully be repeated. It has become quite normal, for example, for a French end-investor who buys Dutch government bonds to have an entitlement against his French broker (say BNP), which has a back-up entitlement against a Dutch broker (say ABN/Amro), which in turn has an entitlement against a Dutch depository. It may also be that both BNP and ABN have a securities and bank account at Euroclear in Brussels, where the positions may be settled, while Euroclear in turn has an entitlement against the Dutch depository of government bonds (normally Negicef). If the French investor wanted German government bonds, a German broker (say, Deutsche Bank) would become involved. Settlement could still be at Euroclear in Brussels, which would maintain a corresponding entitlement in respect of these German government bonds against Clearstream in Frankfurt, which is the normal depository in Germany. The simplification and new possibilities that internationalised book-entry systems offer in this respect are likely to increase in importance as they provide not only a means of overcoming logistical problems, but also domestic transfer restrictions and other local peculiarities internationally. On the other hand, one may note that international instruments like Eurobonds are now often considered to be held through a series of what may be considered local entitlements governed by local laws. That seems indeed to be the tendency in much legal writing, even in respect of underlying securities that may themselves be considered internationalised. But as has already been said this is seriously regressive and it would be better if these entitlements were treated uniformly. It is the thesis of this book that globalisation offers a great opportunity to avoid conflicts of this nature and to do things better, free from inappropriate or even irrational domestic constraints, techniques and disabling or out-of-date legal structures. On the whole, that would be a healthy development, is likely to remove layers of unnecessary legal ballast, and would allow legitimate market practices favouring the (international) investment flows to flourish. Ultimately, the law follows here the commercial and financial needs and the justified requirements of the commercial and financial community, which is substantially internationalised.592 However, at the present stage in this development, domestic contacts can by no means be entirely eliminated or wished away, as in the following situations: (a) Book-entry systems may remain entirely domestic especially those that are connected with domestic exchanges and their settlement systems; yet, they may easily be connected with domestic book-entry systems in other countries, for example, for shares traded on the exchanges of those countries.

592 The emphasis here is on the reliability of the operators of international custody, settlement or corporate registration systems and their efficiency. These aspects have rightly become matters of international regulatory concern. See the Group of 30 Think Tank in its 1989 Recommendations, followed in 1993 by a Euroclear study entitled CrossBorder Clearance, Settlement, and Custody: Beyond the G 30 Recommendations. The G30 Recommendations were themselves refined in 1995 by the International Society of Security Administrators (ISSA). As suggested above, this development, driven by the globalisation of the markets, itself suggests a transnationalisation of the applicable law in the sense of the new law merchant or lex mercatoria as will be further explored: see s 3.2.3 below. These Recommendations are likely to play an important role within the lex mercatoria.

410  Volume 4: Investment Securities (b) This may also be relevant for international book-entry systems such as Euroclear and Clearstream. If the latter hold (directly or indirectly) a back-up entitlement through a domestic book-entry system in another country, this entitlement is likely also to have to conform to the domestic practices and laws in respect of them. If the domestic systems hold accounts with internationalised systems, they should on the other hand conform to international practices.593 (c) Where brokers lower in the chain operate with end-investors, it is likely that they also operate at the purely domestic level within a domestic legal framework. In such cases, even foreign clients seeking out a domestic broker could be deemed to have submitted to that local regime in terms of their entitlement against the broker, but this could all be different if the underlying instrument itself is internationalised (like Eurobonds). (d) It may not always matter a great deal, but the unity transnationalisation brings is in particular important in the proprietary aspect, that is to say in the asset-maintenance obligation affecting tiers in other countries, the protection against insolvent intermediaries who have back-up entitlements elsewhere, any remaining pass-through rights through tiers in other countries, the prohibition on the pledging of back-up entitlements and the issue of re-hypothecation, the way end-investors may themselves encumber their entitlements or transfer them conditionally, the matter of finality, the protection of bona fide purchasers, the danger of a shortfall in entitlements if there is insufficient back-up, and the effect of intervening bankruptcies on clearing and settlement.594

3.2.2.  The Law Applicable to Transactions in Investment Securities of the Book-entry Type. The 2002 Hague Convention In the more traditional discussions on the law applicable to book-entry systems, legal writers still attach much relevance to domestic laws and as a consequence also to the applicable conflict of laws rules.595 Often this is still believed to lead to greater stability and certainty. This approach is then preferred not only in respect of clearly domestic custodial and book-entry arrangements, but also in those that are internationalised and deal with international products. This is not the approach of this book, which seeks a higher-quality form of certainty and is more comfortable with transnationalisation serving the international flows as a consequence of globalisation. Nevertheless, the more conventional approaches cannot yet be ignored. In this connection, at least five possible conflict rules present themselves: the lex situs of the underlying investment securities, the lex societatis of the issuer, a combination of both, the lex loci actus of the bookentry system, or the law chosen by the parties. All have their defenders. The differences in view

593 On the other hand, in the case of domestic register securities it has already been noted that if the issuer actively promotes the international trading of its registered securities, it may allow or institute a foreign register to operate and may have to accept the consequences in negotiability, transfer formalities and limited proprietary rights that can be created in them and eventually also pass-through rights, while losing the domestic restrictions and limitations in this connection. The shares may alternatively be held by an international depositary/custodian in an international book-entry system. 594 Some (but by no means all) of these issues are in particular considered by the EU Settlement Finality and Collateral Directives, see s 3.1.3 above and s 3.2.4 below. 595 See eg, H Kronke, ‘Capital Markets and Conflict of Laws’ 286 Receuil des Cours (Hague Academy of International Law, 2000) and earlier Goode (n 30) 107. See also JH Sommer, ‘A Law of Financial Accounts: Modern Payment and Securities Transfer Law’ (1998) 53 The Business Lawyer 1181, 1206.

Volume 4: Investment Securities  411 are indicative of the considerable problems in this area and, in the approach of this book, further proof of the undesirability of the domestic law approach under private international law for lack of a sufficient consensus. However, it is accepted that local law may remain relevant for domestic end-investors and, in the approach of this book, constitutes in any event still the residual rule within the modern lex mercatoria, which will be summarised in the next section. Here these five possible conflict approaches and their variants will be briefly discussed: (a) The lex situs makes the law of the location of underlying investment securities applicable to the proprietary rights established in them and to their transfer. It assumes that the investment securities exist separately from the issuer, for example as bearer instruments, attracting their own lex situs. Traditionally, this approach has recommended itself in respect of negotiable instruments like bearer securities that are treated as chattels, but it still presents problems if they move cross-border so that the legal regime concerning them changes.596 The result is also less than clear where depositories hold the assets physically through sub-depositories in other countries as in the case of Euroclear and Clearstream where there is usually still a split as the underlying securities (if physically existing) are mostly held by sub-custodians in the country of the issuer (in the case of shares) or currency (in the case of bonds). (b) For investment securities, the lex situs is often also considered the natural rule for immobilised securities and would then operate foremost in the place of their immobilisation, so normally at the place of the depositories, although in particular in respect of underlying register shares that may still be contested. More importantly, this lex situs could conceivably be extended to the book entries in respect of them but the disparity this may create in the law applicable to each underlying pool of securities may make such a system based on the lex situs of the underlying securities unworkable.597 (c) For book entries proper as intangible entitlements, the lex situs to be separated from the underlying securities would appear to hold hardly any message at all. It would only be of use if the situs for this purpose could be defined down the various tiers, as otherwise there would likely result disparity per tier if they are in different countries. So, the lex situs idea would only work well if all tiers were in the same location as the depositories while the underlying securities were also in that location. In fact, this is no more than saying that there is hardly an international aspect at all, even if the end-investor was elsewhere. (d) The lex societatis or the law of the issuer is another possibility but in fact not much more than a variation on the lex situs, feasible more particularly for securities registered in the books of an issuer (who could also be a government or governmental agency in the case of government bonds when this law corresponds with the law of the country or issuing agency). The result is unity in the applicable law at the level of an international or foreign book-entry 596 Indeed, the lex situs has long been the preferred conflicts rule for chattels. It was copied from the law of immovable property where it is on the whole clearly appropriate (see s 1.8 above) although it was said before that since there is nothing physical about legal rights and obligations, a physical approach to the applicable law may in its generality be based on a misunderstanding. In any event, for chattels the complication of their movement presents a problem as it would suggest at the same time a change in applicable law (the problems connected with application of the law of the place of origin and place of destination (or both) were discussed in s 1.8 above). They also arise when negotiable instruments are traded internationally; see for the law applicable to negotiable instruments s 2.2.10 above. For assets that constantly move cross-border, the lex situs rule is clearly unsuitable. That may also apply, eg, to bills of lading and Eurobonds. An alternative is then application of the law of the place of the owner, who, however, changes in the case of a transfer, leaving again the question what law applies to such a transfer if buyer and seller are in different countries. 597 See for this objection also Goode (n 30) 134, and J Benjamin, ‘Immobilised Securities: Where are They?’ [1996] Journal of International Banking and Financial Law 85.

412  Volume 4: Investment Securities system as the rules concerning the entitlements would depend on the location of the issuer of the underlying securities or perhaps on the place of the register itself (although there could be several in different countries). But in respect of each intermediary, there would result a different applicable law per entitlement depending on the underlying securities. (e) The lex situs and lex societatis approaches could combine and result in a clear preference for the law of the place of the depository in immobilised securities systems, a reinforcement therefore of the situation described under (b) above. This approach is sometimes also referred to as the paper-based approach even though there may no longer be any paper around. It may still not provide a single solution as there may be several depositories in different countries. More importantly, the location or place of the depositories may be in doubt and could be considered that of their incorporation, registered office, or place of operation or main activities, or place where they hold the physical securities (through sub-custodians) or register. (f) To protect book-entry systems more properly, the applicability of the law of each intermediary, sometimes also referred to as the lex loci actus or the record-based approach (therefore the law of the place where the changes are made or the transfer is effected) has also been proposed. This is therefore the place of the administration of the accounts or of the system (and not necessarily the place of the incorporation or main activities of the relevant intermediary, although that may be the back-up rule). This may also be considered a variation of the paper-based method (which is itself a lex situs variant), moving from depository to intermediary, therefore to a level lower among the various tiers. However, no unity results in the applicable law, which may thus still vary per tier. It is the system now often preferred and also called PRIMA (Place of the Relevant Intermediary Approach). (g) The law chosen by the participants is a last possibility. On its face, it has little to recommend itself. In proprietary matters, full party autonomy is mostly not believed to be acceptable. There are, however, modern instances of it as we have seen. In international assignments, some indeed accept the application of the law of the claim in its proprietary aspects. That law could then be determined by the parties. There is some case law to that effect in Europe: see for a discussion also section 1.9 above. In this book, party autonomy in proprietary matters is defended as unavoidable, subject, however, to a much stronger bona fide purchaser protection, in a book-entry system based on crediting accounts rather than on a transfer: see section 3.1.6 above. Without it, party autonomy in proprietary matters should not be introduced through the back door of conflicts law. All the same, section 8-110(e) UCC suggests party autonomy for the proprietary law applicable to investment security entitlements598 even though it has been questioned.599 As we shall see, it is also the approach favoured (with limitations) in Article 4 of the 2002 Hague Convention on the Law Applicable to Certain Rights in Respect of Securities Held with an Intermediary. This approach is less surprising in legal systems such as those of the States of the US that are not used to a sharp distinction between the proprietary and contractual aspects, at least not in intangibles, in an environment, moreover, where between the various States the conflicts are also not likely to be severe. More importantly, the resulting proprietary rights are equitable, that means that their operation is in any event subject to the requirement of the promotion of ordinary flows of business, which will protect the purchasers in the ordinary course of business against excess.

598 The normal rule is, however, the law of the securities intermediary (and his book-entry system): see s 8-110(b) and (e)(2) UCC. 599 See R Goode, ‘Securities Entitlements as Collateral and the Conflict of Laws’ Oxford Law Colloquium 1998, 16.

Volume 4: Investment Securities  413 Party autonomy is also more understandable if set against industry practices, which are largely determined by its members and often reflected through the general conditions of their systems. Although contractual in origin, these general conditions may thus soon acquire the status of industry practice, while the line between contract and custom cannot always be sharply drawn. It is submitted that the emphasis should always be on industry practices as objective law, for international transactions duly transnationalised, even if started by contractual arrangements among members. These practices can of course be entirely domestic, but for international agencies like Euroclear and Clearstream they are transnational as such with a strong claim to prevail over domestic laws. In a proper lex mercatoria approach, these practices, being proprietary in nature, could not be deviated from by mere contract. In this connection, the easy choice of a more convenient law by simply interposing a broker in a more convenient country shows that there may be no great fundamental inconvenience in practice against party autonomy in this area and may avoid extra effort and cost. It would also allow non-members of Euroclear and Clearstream to opt for the law concerning these systems including their international practices. In this manner an underdeveloped local law could be avoided while doing business with a broker operating from a country with poor legal support. In short, on practical grounds much may be said for party autonomy in these matters. The serious drawback for the intermediary is, however, that each client may opt for a different legal regime. PRIMA was adopted instead for security interests in investment securities legally recorded on a register, account or centralised system located in a Member State of the EU in Article 9(2) of its Settlement Finality Directive, which became effective in December 1999 and was meant to underpin the collateralised liquidity operations of the new European Central Bank (even if the precise language left something to be desired).600 The approach was earlier accepted for Euroclear and Clearstream by the laws of Belgium and Luxembourg.601 After party autonomy, the applicability of the law of the immediately involved securities intermediary (and its booking system) is the residual rule in the US: see section 8-110(b) and (e)(2) UCC. It is for security interests

600 European Parliament and Council Directive 98/26 of 19 May 1998. The concern for proper settlement systems was inspired by Art 18 of the Statute of the European System of Central Banks (ESCB) and of the European Central Bank (ECB), according to which the ESCB lending operations (as instrument of monetary policy) must be based on adequate collateral. Within that framework, adequate settlement procedures became a concern and as a consequence also the applicable law: see also s 3.1.3 above. The title (‘Finality’) derives from the need to achieve a prompt system of settlement that cannot be unwound or reversed. In that connection, the effects of a bankruptcy on a settlement system and its participants are also curtailed and any retroactivity of the adjudication abandoned: see Arts 6, 7, 8 and 9(1). See for the English case law on this subject, Macmillan Inc v Bishopsgate Investment Trust Plc (No 3) [1995] 3 All ER 747. The lower court rightly pointed out that the place of the transfer and the lex situs would almost always be the same but there may be a discrepancy if security interests are created in register shares while trading and held in other countries. Is there a pass-through right under the foreign law or the lex societatis? What is the proper lex situs? In this case the confusion was increased because certificates were involved even though in the UK not negotiable instruments themselves. The lower court chose the law of the place where the transfer entry was to be made. The Court of Appeal referred in this context to the lex situs: [1996] 1 All ER 585. The result was the same. A better approach would have been to rely on a transnationalised concept of the good faith acquisition for value of transferable property but see also see W Blair, ‘Book Review’ (2002) 118 LQR 482 noting that ‘the financial players themselves continue to hanker after the certainty of reference to a particular legal system’. It is probably more the nationalistic upbringing of the advising lawyers than the parties themselves, but it indeed underlies the entire PRIMA approach, which is as such defensive and temporary in its (complete) reliance on domestic laws no matter how atavistic or parochial. 601 See for Euroclear Royal Decree No 62, Art 10, as amended in 1995; see for Clearstream (Cedel) the GrandDucal Decree of 7 June 1996.

414  Volume 4: Investment Securities in investment securities also the approach of the EU Directive on Financial Collateral of 2002 (Article 9): see in particular section 3.2.4 below.602 Even at the practical level, PRIMA leaves some important open questions, however, especially about the creation or enforcement of collateralised rights such as security and similar interests and also whether the rule could apply to internationalised book- entry systems operating within the EU, which appears to be accepted. It may still be a workable solution, but is difficult to operate at the level of security interests in foreign investment securities and in any pass-through rights flowing from them. Pass-through rights would naturally have to concern themselves with the laws applicable to the securities or entitlements so reached while travelling through several tiers in different countries. It should also be noted that the applicable law found in this manner is based on a formalised notion of location that has nothing to do with the place of the transaction and the practices concerning them, much against the essence of all modern conflict rules. The result is therefore artificial and makes the financial transactions also dependent on whatever atavistic or underdeveloped law so found unless (again) in international transactions international custom and practices may be considered to prevail or precede the application of domestic laws. It should further be repeated that for intermediaries, including international custodians like Euroclear and Clearstream, their location is mostly entirely fortuitous and the application of Belgian or Luxembourg law as the law of the country of the book-entry system seems for them coincidental at best. It would lead to the largest capital market (the Euromarkets) being substantially covered by Belgian or Luxembourg laws, which would appear incongruous. It has already been argued that for the Euromarkets and its instruments, transnational law has prevailed for a long time. In truth it applies its practices also to the Euroclear and Clearstream book-entry systems if only at that level. In a proper lex mercatoria approach, these practices precede an application of domestic laws (and the application of conflict rules). In fact, when adverse case law appeared in Belgium in 1996,603 it was quite rightly ignored. With that important correction, which suggests priority for international dynamics and harmonisation, and notwithstanding the difficulties mentioned above, PRIMA could work or at least present the residual rule. If not so corrected, PRIMA may only provide a low-quality certainty that could easily go against the dynamic development of the international financial markets. It is exactly this dynamism and this willingness to shape their own rules that has always been the essence of these markets and of their prosperity. This should be remembered also when considering that after the initial euphoria,

602 There are problems in the formulation of the rule, however. Article 9(2) of the 1999 EU Settlement Finality Directive (which is limited to situations in which one of the parties is a financial institution) applies the law of the place of the register (considered the place of the administration of the account, which may leave some doubts on the location) to the type of security (collateral) interests that can be created in the entitlements (leaving some further doubts on whether this concerns the creation or only the execution of such a right) without providing a conflicts rule for characterising the legal nature of the entitlement itself. Indirectly it must be assumed that the characterisation of the underlying interests is a matter for the same law (although further confusion arises from Recital 21, appearing to suggest the operation of the lex situs of the underlying investment securities, which is a difficult, even undesirable, concept in this connection). Article 9 of the 2002 EU Collateral Directive refers here to the country in which the relevant account is maintained and is more elaborate in identifying a number of specific issues as being covered by the law so made applicable, notably whether the entitlement holder’s right is overridden or subordinated to security interests or conditional sales, the legal nature of any such rights, their creation and effect, the position of bona fide purchasers in this connection, and the execution of such interests. A problem remains also the complication of the clearing in which there is only a net amount delivered to the receiving intermediary subject to unscrambling. One must assume it to be done under the law of the receiving intermediary. 603 See n 583 above.

Volume 4: Investment Securities  415 the enthusiasm for the 2002 Hague Convention based on purely domestic law in the PRIMA approach soon petered out and so far, it has received only two ratifications (Switzerland and Mauritius). The conclusion must be that a formal conflict rule that cannot accept transnationalisation (therefore the international practice to prevail) could not successfully operate without a substantial unification of the laws at national levels. In the EU, a limited attempt at harmonised law has been made in the Financial Collateral Directive discussed in section 3.2.4 below. It reduces the need for any conflict rule, at least within the EU, although the PRIMA rule remains residually applicable (Article 9). Full coverage is the objective of the UNIDROIT 2009 Geneva Convention as we shall see below in section 3.2.4, but it is too contrived to convince and equally short of ratifications so far. The consequence of the PRIMA conflicts approach is now that, since the location of brokers becomes determining for most (client) entitlements, the applicable law can be changed simply by moving to another broker in another country—as already mentioned. Even for members of Euroclear and Clearstream, Belgian or Luxembourg law can be avoided by using another broker, for example in a tax haven country or in a country of which the applicable law is deemed more favourable. That is also significant in respect of security interests that may subsequently be created in the entitlements or any repo transactions or conditional or temporary sales. One might recall, however, that PRIMA is now only the residual rule (Article 5) in the 2002 Hague Convention, where party autonomy is preferred in the choice of the applicable law (Article 4(1)). This is an important variation and addition to the approaches of Article 9(2) of the EU Settlement Finality Directive and Article 9 of the EU Collateral Directive. As already noted, it is also the UCC approach (section 8-110(e)). Unlike in the UCC, there are, however, a number of limitations on party autonomy in the Hague Convention. Foremost, the relevant intermediary must (at the time of the custody agreement) have an office handling the securities accounts in the country of which the law is chosen. In view of the US experience, it is unclear why there is this limitation. It reflects reality in so far as an intermediary may have offices in different countries and may change its activity to any of them electronically. But once the law has been determined in the custody agreement, the change of the custody function to an office in another country should not affect the applicable law. Some other curiosity has been spotted in the approach of the Hague Convention in so far as the resulting applicable law is concerned. It is likely to be different for a seller and a buyer who may have different custodians. The crediting and debiting may therefore be under different laws. It follows that different intermediary accounts involved in a transfer of entitlements may operate to different legal regimes in respect of the same transaction. Thus the seller may have an intermediary with whom the account is held in one country and the buyer in another while their intermediaries both have an account with a custodian/depository in a third country, for example Euroclear.604 It should be noted, however, that in an investment security entitlement

604 To balance the system, bookings may take place in all four accounts. The seller or more likely his broker may instruct the intermediary of the seller (if not the broker himself) to debit his securities (entitlement) account, followed by a debit of the corresponding entitlement account of the intermediary at Euroclear. Subsequently Euroclear will credit the entitlements account of the intermediary for the buyer, who ultimately will reflect this credit in the securities entitlement account of the buyer, held with this intermediary. Proceeds will move through bank accounts in the opposite direction in a similar manner. Three securities registers are involved in three different countries. It follows that the debiting in the country of the seller will be according to the law of the seller, the debiting and crediting in the accounts with Euroclear according to Belgian law and the crediting of the account of the buyer according to his law (unless otherwise agreed, assuming the Hague Convention is going to apply).

416  Volume 4: Investment Securities system, seller and buyer are not directly connected while there is original entitlement creation and destruction by each broker as explained above so that the differences in the applicable law may be more readily acceptable. In this connection, the Hague Convention is specific, referring in Article 2(1) first to the crediting of a securities account. That is ultimately the most important booking, as it establishes the new entitlement holder and his proprietary position vis-à-vis others. It further refers to the legal nature and effects against the intermediary and third parties of a disposition of securities held with an intermediary, to the requirements for perfection of other rights in the entitlements, to the question of priority of such collateral and other rights in the entitlements, to the execution of such interests, to the rights of bona fide purchasers in respect of intermediaries, and to the question whether a transfer extends to the rights to dividends, income or other distributions or to redemption sale or other proceeds. Not all problems are resolved in this manner, however, especially not those that arise from the nature of the entitlement itself and its status in a bankruptcy of the intermediary which is likely to be mandatory under the applicable bankruptcy law. In any event, regardless of the law so deemed applicable to the entitlement, it would appear that the exercise of voting rights and the collection of dividends is always according to the law of the book-entry system. It is notably not affected by a contractual choice of law whomsoever the ultimate investor may be and whatever its agreement with its intermediary may say in terms of choice of law.605

3.2.3. The Lex Mercatoria Concerning Transnational Investment Securities Transactions In the above, two separate developments were signalled: first the changing nature of securities holdings and their transfer in book-entry entitlement systems; and second their transnationalisation, two developments that are not only simultaneous but also related. On the nature of the entitlement and its transfer, in summary, a number of final remarks can be made, which also relate to modern bank accounts and the way bank payments are now effectuated. In fact, in securities dealings increasingly both must be considered immediately connected as most end-investors will have securities and cash accounts at the same intermediary, such that a debit in the one will result in a credit in the other and vice versa. In any event, securities accounts are now handled in much the same way as bank accounts and both may be made subject to similar collateral arrangements, although the important structural differences between the two were emphasised above: see sections 3.1.3 and 3.1.6. One key is that in both, the type of right and its transfer are no longer primarily seen from the perspective of ownership rights in the traditional

605 Under the applicable rules for each tier, different claimants may arise, but it would appear unavoidable in so far as the voting or dividend collection is concerned in each tier. Only an internationalised system could prevent this from happening and it must be doubted whether a contractual choice of law could be decisive here. Also, a (uniform) internationalised approach would be necessary to determine absolutely the status of book-entry entitlements in a bankruptcy wherever opened so that entitlement holders may always move their accounts to another intermediary resulting in an automatic corresponding reduction of the entitlement of the bankrupt intermediary against higher intermediaries wherever operating. An internationalised system is also necessary to determine the position of collateral holders where again a contractual choice of law per layer in favour of a foreign collateral law and its rules of perfection or control may not prove effective, at least not when it comes to collection of dividends and the exercising of voting rights in such situations.

Volume 4: Investment Securities  417 sense, not even in terms of handling negotiable instruments in the capital sphere (shares and bonds) or in the payment sphere (cheques and bills of exchange), which has also fundamentally affected the traditional choice of law approach in this area and made it moot and therefore uncertain or even inappropriate (quite apart from other problems that afflict modern conflict of laws approaches, either in terms of hard-and-fast rules pointing to underdeveloped domestic laws or in terms of interest analyses). Instead, there are entries or accounts that are intangible and administratively adjusted. In banking, bank accounts never denoted more than a personal right against the bank. For securities, this remains different and modern securities accounts denote a pro rata beneficial share in a pool of fungible assets which has a sui generis proprietary character (as was discussed above, needs therefore to be further defined, centres on the notion of segregation, and does not necessarily flow from the general notions of traditional property law), while both bank and security accounts transfers are mainly operated through sets of (electronic) instructions, but only in the case of banks through a system of credit transfers down the chain. In this connection, both payments of this nature (at least in the securities business) and security transfers of this type were viewed largely as professional activities, which is likely to have consequences in terms of a stricter regime of finality of transfer instructions,606 but also in the type of collateral, therefore in the type of security interest or finance sale (like in repos) that can be created in them,607 and in the way this is done, which again may be similar for bank and securities accounts and turns on a measure of control for the collateral taker. It can be expressed in terms of a possessory charge, especially relevant for bank accounts, or as a title transfer or repo, especially relevant for securities entitlements. In a modern commercial setting, similarities between bank and securities accounts and payments and securities transfers often outweigh the differences. Speed, reliability and finality have become key notions here, not proprietary or contractual characterisations.608 Nevertheless, legal characterisations are important but often remain uncertain, in which connection it was submitted before that in international transactions traditional conflict of laws theories and approaches may be a further disturbing element. Modern commercial law must accept the new world and adjust and the lex mercatoria and its modern revival reflect these fundamental changes. Thus, where once the law of negotiable instruments dominated the field of

606 A severe attitude to finality may well conflict with consumer interests. It is one of the reasons why consumer payments were excluded from Art 4 AUCC in the US. They may not issue letters of credit under Art 5 (s 5-102(a)(9)) either and the revised Art 9 also focused increasingly on professional dealings whilst prohibiting consumers from granting security interests in their bank accounts (s 9-109(d)(13) (new)). 607 The former version of Art 9 prohibited security interests in bank accounts altogether (s 9-104(1)) and had a special regime for collateral in securities accounts (s 9-317) since the new Art 8 (under the old one of 1978, securities interests in securities could not be perfected through filing: see s 8-321(1) (old)). See for the new set-up ss 9-304 and s 8-110 UCC. 608 A new form of formalism may arise here as was signalled for commercial law and the law of contract, see Vol 3, s 1.1.5 above. Good faith notions, individual protections, anthropomorphic thinking in terms of transfers as legal acts of persons subject to capacity and disposition rights must now all be seen in a commercial professional context and may as such be curtailed or ignored. Notions of abstraction or independence of each tier or layer replace here the equally formalistic proprietary notion of the holder in due course or the protection of bona fide possessor of earlier law. In the new system, thirdparty protection means the ability to ignore earlier problems in a chain and independence from actions or failures in other tiers. On the other hand, holdings and transfers in this system cannot be seen without regard to the systems themselves and their chains or tiers and ways of operation. The (unavoidable) inherent weakness is in fact the dependency of the clients on the intermediaries operating the system: on their honesty, management skills, and adequate structure. In this world professionalism is all. Regulatory supervision will help, but cannot prevent individual lapses.

418  Volume 4: Investment Securities international payments and investments, it is now largely redundant and intermediaries and their relationships with their clients have filled the gap. In respect of investments, this is not agency either, although until such time that the new developments are completed and fully understood and refined, there may be a residual need for agency notions when brokers still act for clients in the market rather than credit and debit securities accounts at prevailing market prices (subject to their asset-maintenance obligation) or when clearing agents still operate systems for others rather than acting as central counterparties or CCPs. As far as the applicable rules in international securities transactions are concerned, the discussion in the previous sections brings us back to the internationalisation of the modern investment securities business and to the transnationalisation of the applicable law. The key is the globalisation of the marketplace. Again, the application of the lex mercatoria, in this book perceived as a hierarchy of norms, quite naturally presents itself. Fundamental principle dictates the binding force of agreements concerning investment securities holdings and transfers at that level and also operates an ownership concept, very clearly where the investment securities are negotiable instruments, like Eurobonds, but in more modern times also where securities entitlements are created as pro rata beneficial shares in fungible pools of back-up entitlements, held in and transferred by way of a credit or debit through international book-entry systems such as those of Euroclear and Clearstream. The way these entitlements are held, traded, settled and paid for, the type of proprietary interests that can be created and maintained in them, including pledges and repo interests, the pass-through rights in the underlying securities, if any, and the manner in which they can be exercised, will then all be determined in the first instance by the proprietary regime and transfer practices operating in the international marketplace itself. International mandatory usages or practices, especially relevant in proprietary aspects and their newer forms and in the aspect of finality of transfers and transfer instructions, follow in the hierarchy of norms. Mandatory uniform treaty law is here largely absent although as we shall see in the next section there is now the UNIDROIT Geneva Convention of 2009, not yet in force. The EU Settlement Finality and Financial Collateral Directives are here so far more relevant—see for the latter also the next section—although they do not deal specifically with book-entry systems and their operation. General principles of property law operating in this area in modern nations with similar domestic custody and book-entry systems may produce further guidance. The next level in the hierarchy is party autonomy, which, as mentioned in the previous section, is not in itself likely to affect the proprietary and transfer aspects, except conceivably among the professional insiders subject to bona fide purchaser protection for the rest, and, if incorporating or creating standard practices, will be reflective of or add to the higher transnational mandatory proprietary practices just referred to. Directory practices are the next phase in the hierarchy of norms but are not likely to contribute greatly to the proprietary aspects of internationally operating custody and book-entry systems, which are not directory in nature. Finally, if a solution still cannot be found, conflict of laws rules may point to the law of a particular country, which could well be the country where the relevant intermediary maintains the book-entry system (PRIMA) or be determined by party autonomy (as under the 2002 Hague Convention and Article 8 UCC, where PRIMA is only the residual rule). Even then it will not automatically apply if the domestic rule is clearly contradictory, dysfunctional, inadequate, or antiquated. If, on the other hand, domestic contacts clearly arise, as they may in the exercise of any remaining pass-through rights in respect of issuers or purely domestic custody and settlement organisations or in respect of domestic end-investors, it still seems appropriate to consider the applicable domestic laws in greater detail and more directly. What this comes down to in respect of the Hague Convention is that the domestic law or party autonomy principle under it will be preceded by mandatory customary rules and mandatory

Volume 4: Investment Securities  419 harmonised treaty or (in the EU) EU Directives law where they operate, or even general principle if suggesting an international normativity in the area of property law. In other words, the Hague Convention, even if it should become widely ratified, is not absolutely dominant in the area but must find its place within the ranking of norms in the modern lex mercatoria. Ultimately, much depends in these matters on the behaviour and insight of (bankruptcy) judges, while in the day-to-day running of clearing, settlement, custody and book-entry systems much depends on the integrity and professionalism of the operators. Few legal problems have arisen so far. It is unlikely that many will. Considerable protection derives from the fact that all participants are professionals and few go bankrupt as shown even during the financial crisis of 2008–09.609 This has created the right climate for the continuous expansion of market practices supporting the international securities markets and protecting all its participants in the most legally effective (through transnationalisation) and cost-efficient manner. Ultimately, it is submitted, this will also affect the applicable law in purely local securities dealings and make it conform. It may at the same time explain why, after an initial flurry of enthusiasm, interest in the 2002 Hague Convention has substantially waned. Even the 2009 UNIDROIT Geneva Convention, which introduces uniform law, has so far been substantially ignored.

3.2.4.  Uniform Law: The EU Financial Collateral Directive. The UNIDROIT Project, and 2009 Geneva Convention In the meantime, under pressure from the financial services industry, especially the International Swap Dealers Association (ISDA),610 and with the Settlements Finality Directive as an example (which was particularly concerned with the collateralisation of liquidity supply to the banking system by the ECB and harmonised the (bankruptcy) laws in EU countries in a number of so-called finality aspects—see also section 3.1.5 above), the EU agreed a Financial Collateral Directive in 2001, implemented by 2004 (although in the event, only three Member States met the deadline). This Directive is concerned with the provision of investment securities and cash as collateral or in finance sales (including repurchase agreement and stock lending) as well as in derivatives, see recitals (3), (5), (7) and (8), and is a significant development, which, even though limited to financial transactions, aims to introduce at EU level a modern law in this area, a project which, in terms of collateral or security and similar protections has so far eluded EU countries for personal property more generally, the DCFR here being hardly an adequate response either, see section 1.12 above. Investment securities are broadly defined, including all tradable investment instruments, therefore also book entries in security accounts and derivatives. Cash must be understood as money credited to an account, therefore normally bank balances, provided they are connected to financial transactions (collateral or finance sales) and close-out netting (trade receivables thus being excluded unless tradable investment assets, which they may be when incorporated in negotiable instruments). Here, margin money springs particularly to mind. Although it is a private law measure meant to support the wholesale financial markets (being for professionals or rather ‘non-natural persons’), the Collateral Directive is surprising in its comprehensiveness in the limited area it covers, given also the EU’s limited powers in these

609 See, however, also the discussion in Vol 2, s 2.4.3, also for the different role of judges and international arbitrators in this regard. 610 See ISDA EU Collateral Report (2000).

420  Volume 4: Investment Securities matters. It was based on Article 95 of the EC Treaty, now Article 114 TFEU, seeking to further the internal market through an approximation of laws and the result of an industry initiative that asked the EU for help. It was earlier submitted that this is the way to go about uniform private law, which in the professional sphere should always be led by participants unless public policy and public order require otherwise. The professed aims of the Directive were the removal of major obstacles to the cross-border use of collateral in financial transactions, the limitation of administrative burdens, formal acts and cumbersome procedures, and the creation of a simple and clear legal framework. In fact, it applies to transactions between financial intermediaries (public sector bodies, central banks, international financial institutions, supervised financial institutions, central counterparties, settlement agents and clearing houses). Corporates may also be included provided their counterparties are one of those just mentioned. It may be seen that it is not particularly geared to book-entry systems and their support but has a broader scope. The most important features of the Directive are as follows: (a) There are simplified uniform rules for the creation, perfection and enforcement of collateral, more particularly security interests and rights under finance sales, which (as just mentioned) are here limited to cash and investment securities (as described above) given to support financial obligations. They must be expressed through bank accounts for moneys and in book-entry entitlements for securities. (b) There is a sharp distinction between pledge and title transfer (or finance sales) leading to the enforcement through a sale in the former case and appropriation of full title in the latter case; re-characterisation both at the time of perfection and enforcement are avoided. (c) Non-possessory security is not being considered (Article 2(2)) and constructive dispossession is necessary in all cases, but it would appear that a floating charge may be created in which securities and cash are both captured within the same collateral agreement.611 (d) All formalities are dispensed with in terms of registration or publication of collateral or in terms of an execution sale/appropriation. Only a document is required to record the collateral transaction. For the interest to attach, the simple marking of the (possessory) pledge or title transfer in the books of the intermediary indicating the pledgor’s or seller’s interest is sufficient. (e) In the case of an enforcement, any execution sale may be informal subject to a commercial reasonableness test, important especially when selling to related entities. Provided there is a proper valuation formula, there may also be appropriation; bankruptcy stay provisions are suspended in respect of the enforcement, which is cast in terms of a pure self-help remedy.

611 Some confusion in the use of the term ‘floating charge’ may easily be created. In English law, the charge becomes fixed depending on the measure of possession or control of the chargee, see Vol 5, s 1.5.2. This would suggest that under the Directive there is no floating charge in that sense, but the charge will shift into replacement assets and floats therefore in this vital aspect: see Art 8(3) and Recitals (5), (9) and (16). In this sense, floating charges need not necessarily always be non-possessory. Thus, under the Directive a (possessory) charge may shift from securities once sold at the instruction of the chargor into (future) replacement securities or proceeds with retention of the original rank. The fact that important notions are here put only in the Preamble complicates the determination of the applicable regime. An express provision covering floating charges was suggested at the time in England. It would have avoided delineation questions, taken the matter out of the established English terminology and doctrine altogether (especially the crystallisation and connected ranking problem), and would also have clarified any remaining registration needs under s 396 Companies Act 1985 in the UK, if there had been some form of floating charge in the more traditional sense.

Volume 4: Investment Securities  421 (f) In the case of a title transfer, there is a recognition of close-out netting arrangements (Article 7), particularly relevant for repos under the repo master agreements. (g) Domestic bankruptcy rules are here suspended; this also applies to the top-up requirements in respect of collateral, which are not considered preferential as long as they were not agreed in the face of an impending insolvency (Article 8(2)). As mentioned, the Directive is mainly concerned with the narrower issues of collateral, and notably omits any consideration of protection of bona fide purchasers and does not go into the nature of the underlying assets either (provided they are money or investment securities held in bookentry systems). Therefore, the legal nature of the underlying securities and especially of securities entitlements is not considered and as a consequence nor are the important segregation and pooling issues and any underlying (constructive and resulting trust concepts). Here conflict of laws notions may remain paramount in which connection the Directive follows in its Article 9 the Settlements Finality Directive and opts for PRIMA, therefore for the law of the most immediately concerned intermediary with whom the account is held. The problems with this approach were highlighted in section 3.2.2 above, and the absence of any sensitivity towards market practices and international custom in respect of book-entry systems remains an important shortcoming. Another problem in the Directive is that even for the uniform perfection regime it introduces, reference is still made to conflict rules while local registration requirements remain applicable as long as they do not undermine the validity of the relevant security interest or title transfer. Ranking is also specifically left to the law found to be so applicable. It would of course still be subject to the applicable execution or bankruptcy rules. On the other hand, close-out netting agreements are fully recognised in line with the approach of the Settlement Finality Directive. Three narrower issues arose. First, the Directive is limited to professional dealings of considerable size. The financial services industry had asked for all financial dealings in the EU to be included but it was considered that private investors do not have the same facilities as to membership of clearing and settlement institutions and therefore have fewer options to choose a more convenient law by going to another broker. For them, there are also problems of disclosure in connection with suitability rules. Second, the industry asked for the right to top up security through collecting margin in respect not only of market risk but also of credit risk, regardless of any bankruptcy avoidance provisions on the basis of preferential transfers. This was accepted. The third issue was the possibility of re-hypothecation of any collateral collected under a pledge arrangement—see also Volume 5, section 4.1.3—which possibility was in the end also accepted if the original collateral agreement allowed it, but the two agreements in respect of which collateral is given in this manner must be coterminous so that both charges come to an end at the same time.612 If earlier different assets were returned under the sub-charge, the original charge would retain its original rank in any replacement assets, even if absolutely future at the time of the original agreement. Here we see some other features of a floating charge. 612 There were some specific legal problems. In civil law, re-hypothecation is not favoured, and the original pledgor can reclaim his pledge as a matter of ownership right once he has paid off his debt. There is no protection of a sub-pledgee on the basis of his bona fides if it concerns an interest in an entitlement (it would be different for bearer securities). In common law, the pledgee is a bailee who has sufficient power to give a further pledge over the property he has acquired as pledgee. The original owner cannot reclaim his interest until the re-hypothecation is unwound. The problem does not arise where there is a finance (or conditional) sale when there is a sufficient ownership right to pledge the asset. This being the case, it was not illogical to allow it also in the case of a pledge of entitlements.

422  Volume 4: Investment Securities The Directive called for a review by the end of 2006, and there were minor amendments. In 2005, France and Luxembourg were faulted by the Commission for not having incorporated the Directive in a timely manner. In other countries, it created upheaval, and in Germany and the Netherlands it proved difficult to incorporate the ideas and notions of the Directive into the existing system of proprietary rights, eventually leading to special sections in their Codes. Civil law is particularly unused to the notion of finance sales and shifting interests, as noted in section 1.7 above. In that sense, the Collateral Directive is a truly new departure in civil law countries in terms of the reform of the system of proprietary rights, the importance of which should not be underestimated. In the meantime, UNIDROIT started work on a Convention on securities held with an intermediary, aiming therefore at some uniform law in this area, a first draft being published in 2005. It ultimately resulted in the Geneva Convention of 2009 on Intermediated Securities, not so far having received sufficient ratifications for its effectiveness. The aim is domestic reform that supplements the Hague Convention and the objective is a more comprehensive regime than the Collateral Directive provided for the EU. One major issue is indeed the attitude towards security entitlements being held as security or being used in finance sales, especially repos. The Convention only applies when the law of a Member State is applicable to the transaction (Article 2). This is in the classical conflict of laws tradition not now always followed in uniform treaty law (see for example, the CISG). In the implementation, interpretation and application, regard is to be had to the purposes of the Convention, the general principles on which it is based, its international character and the need to promote uniformity and predictability in the application. This is a faint recast of Article 7 CISG, with elimination, however, of all domestic law (Article 4). In respect of security entitlements, it talks about income, distribution and voting rights, not the right to information (Article 9(1)(a)). These rights work against third parties (Art 9(2)(a)) and are thus considered proprietary, the meaning thereof being explained in Articles 11–12. The duties of the intermediary are contained in Article 11, in particular the asset- maintenance obligation of Article 24 (any shortfall being pro rata distributed under Article 26) and the obligation not to dispose of the securities without authorisation. The mere crediting or debiting of the securities account denotes acquisition or relinquishment of the securities (Article 11). Article 12 deals with other types of transfers: secured transactions or other limited interest, such as, presumably, usufructs or those resulting in repos or from conditional and temporary sales. The conditions or formalities are set out in Article 12(3). The effect in insolvency is covered in Article 14, which provides that all the proprietary rights in intermediated securities are effective against a bankruptcy trustee. Finally, Article 18 protects the bona fide acquirer even though in truth there is no real predecessor and the entitlement is always created anew.

3.2.5.  EU Activities in the Field of Clearing and Settlement. The Blockchain Potential The perception at EU level has for some time been that in matters of clearing and settlement (see also section 3.1.4 above) the situation in the EU is not what it should be. Part of the problem may be that this area of financial activity has remained largely unregulated. On the other hand, it is true that no major problems relating to investors’ protection have surfaced in this area. There may be inefficiencies, a lack of competition, and high cost. Indeed, it was often said that clearing and settlement in Europe was five times as expensive as in the US. That would be a matter for the competition authorities. Part of the problem was the complications innate in trans-border

Volume 4: Investment Securities  423 settlement. How to better interconnect a structure which remains largely fragmented along national (or stock exchange) lines then becomes the true issue. Euroclear and Clearstream on the other hand have long experience in cross-border dealings. Even so, that may not eliminate an extra layer of cost and exploitation of international inefficiencies and lack of transparency. What may be wrong with cross-border clearing and settlement in the more technical sense has been the subject of some important studies in Europe and elsewhere. Thus, as early as November 2001 the International Organization of Securities Commissions (IOSCO) presented its Recommendations for Security Settlement Systems. In January 2003, the Group of Thirty (G30) published its Plan of Action for Global Clearing and Settlement, which was closely aligned to the IOSCO findings. In the meantime, the European Commission was relying on the knowledge and experience of the Giovannini Group, which had functioned as an advisory committee to the Commission since 1996. In this capacity it produced three reports: the first focused on the impact of the introduction of the euro on capital markets and especially on the redenomination of public debt (1997); the second on the EU repo markets, their differences in infrastructure, practices and tax treatment (1999); and the third on the euro-denominated government bond markets and their efficiency (2000). It was subsequently asked to prepare a report on an efficient clearing and settlement system in the EU and released a First Report in November 2001 on CrossBorder Clearing and Settlement Arrangements in the EU. In the event, the Group did not propose an altogether new system or approach but concerned itself foremost with greater efficiency and certainty in the existing fragmented system. In this connection highly technical issues arose first and policy issues only later. The Group identified 15 barriers and recognised the practical but also legal problems deriving from insufficient transnationalisation (page 54) in which connection a difference between shares and bonds was (rightly) identified, the latter being much more capable of transnationalisation: see Volume 1, section 3.2.2. The Report proposed specific action and a timetable (two to three years) to remove these barriers. It identified the responsible actors in terms of public authorities such as regulators, central banks or legislators or private bodies such as the European Central Securities Depositories Association (ECSDA), SWIFT and the IPMA (now ICMA) and proposed co-ordinators where several were involved. Subsequently the EU issued a First Commission Communication on Clearing and Settlement in the EU (May 2002), followed by a Second Giovannini Report in 2003 and a Second Commission Communication in April 2004. Ultimately the ECB and the Committee of European Securities Regulators published their Standards for Securities Clearing and Settlement in the European Union in September 2004. It produced 19 standards to increase the safety, soundness and efficiency of securities clearing and settlement systems in the EU. In connection with clearing and settlement, the most important issues were identified as follows: (a) the effective operation of national book-entry entitlement systems in respect of immobilised and dematerialised securities; (b) the problems connected with the access to and interconnection of these systems and the technicalities of international clearing and settlement; (c) pricing of the various services and anti-competitive practices; (d) legal risk, in particular the protection of investors against claims of creditors of the intermediaries/custodians in their bankruptcy, and the international dimensions of such protections; (e) the issue of finality of instructions and settlement; (f) the recognition of bilateral netting; (g) simplification of the collateral regime; (h) the impact of legal fragmentation and its effect on cross-border dealings;

424  Volume 4: Investment Securities (i) the impact of different regulatory regimes; and (j) the impact of different tax treatment. The original inclination of the European Commission was to leave the technical aspects to the market and evolving market practices subject to competition review. It followed that the accent shifted to the legal issues and to the impact of legal fragmentation, but the EU also saw a need for a framework Directive in this field to guarantee access and choice and provide a proper regulatory framework. To leave action solely to national legislators and regulators was from early on thought to lead to inadequate progress. A functional rather than institutional approach would concentrate on risk and its proper management. To remove the barriers identified earlier in the Giovannini reports, a Clearing and Settlement Advisory and Monitoring Expert Group (CESAME) was established by the EU in July 2004. It was chaired by the Commission with the Giovannini Group acting as policy adviser. In a legal sense, the EU proposed to address eight issues in particular: the nature of the bookentitlement, its transfer, the finality of the transfer, the treatment of the upper-tier attachments, investor protection against insolvency of intermediaries, the position of the bona fide purchaser, corporate action processing in respect of entitlement holders (and the exact moment as of which they may be so considered, for example for dividend payments), and an issuer’s ability to choose the location of its securities (and their listing in any particular market). To deal with these legal issues, a Legal Certainty Group was established in January 2005. It was also chaired by the Commission. In its proposals, the Group was faced with the potential impact of its recommendations on the system of property, company and insolvency law in each Member State. Its success thus depended largely on a proper understanding and recognition of the transnationalising forces that operate in this area to the benefit of all. In the meantime, in 2006, the EU Commission threatened action through Directives if the industry itself could not come up with a more efficient system. This entire area of clearing and settlement subsequently became caught up in the financial crisis of 2008–09 and the need to restructure financial regulation more generally. This will be dealt with more extensively in Volume 6, section 3.7.6 in connection with the European Market Infrastructure Regulation (EMIR). The blockchain potential will be dealt with in Volume 5, section 4.1.8.

INDEX Introductory Note References such as ‘178–79’ indicate (not necessarily continuous) discussion of a topic across a range of pages. Wherever possible in the case of topics with many references, these have either been divided into sub-topics or only the most significant discussions of the topic are listed. Because the entire work is about ‘transnational law’ and ‘commercial law’, the use of these terms (and certain others which occur constantly throughout the book) as entry points has been m ­ inimised. Information will be found under the corresponding detailed topics. @Global Trade  378–79 abandonment  256, 304, 314, 320 absolute rights  70–71, 80, 83, 86 Absonderungsrecht  235–36 abstract and causal system  122–34 abstract system  119, 123–29, 132–34, 136–37, 139, 160–62, 308–9, 332 abstraction  133, 154, 188–90, 192–93, 202–3, 205, 273–77, 359–60 and independence  310, 341, 344, 390 acceptance  133, 204–5, 220–21, 257, 286–87, 355–58, 360–63, 365–67 duty/obligation  357–58, 363 forced  171, 366 implied  200, 205 accounts  168, 195, 222–23, 245, 362, 395–96, 412–13, 415 bank  26, 104, 385, 388, 391, 409, 416–17, 420 securities  25–26, 384–85, 390–91, 395, 399, 415–17, 419, 422 acknowledgement of receipt  339 acquiescence  179, 285 acquired rights  257, 350 acquirers  5, 13, 67, 83, 130, 137, 139–41, 321 acquisition  64, 67, 122, 137–39, 306, 311, 397, 399 bona fide  64, 67, 107, 138–39, 341, 344 acquisitive prescription  61–62, 64–68, 70, 83–84, 107, 136, 138–39, 321 actio Publiciana  61, 64 actio utilis  155, 243 activities, professional  313, 417 actual knowledge  16, 45, 112, 191, 311 actual possession  83–84, 141 adaptation  256–57, 262–64, 273, 275, 282, 284–85, 291–92, 366 adimpleti contractus  143, 145 adverse interests  96, 248, 296, 304, 310, 325

agency  133–35, 208–9, 211, 217–19, 389–90, 397, 411, 418 agreements  133, 217 disclosed  217, 358 indirect  207–9, 211, 219, 222, 389–90, 397 undisclosed  134, 209, 213 agents  184, 209, 216–18, 346–47, 349, 356–58, 364–65, 370 bankrupt  81 collecting  150, 184, 217, 219 collection  63, 183, 217, 219, 242 commercial  141 indirect  209 agreements agency  133, 217 assignment  156–57, 173, 175–76, 197, 199, 201–2, 276–77, 286 collateral  420–21 collection  149–50, 164, 169, 183, 205, 240, 263, 298 custody  76, 415 factoring  182, 196 netting  241, 421 rental  5, 20, 27, 64, 240 repurchase  35, 198, 221, 224, 226, 239, 419 sales, see sales, agreements security  184, 241, 245–47, 249–50 transfer  55, 120, 122–28, 154, 156, 182, 309 underlying  119, 123–27, 129–31, 170, 199–200, 202–3, 309–10, 360–61 aircraft  36, 226, 253, 261–62, 270, 289 amendments  118, 158–59, 169, 178–81, 187, 202–3, 353, 356 analogical interpretation  206 animus possedendi  61, 63 anthropomorphic approach  38–40, 43, 115, 118, 309, 313–14, 317, 323–25

426  Index anti-competitive behaviour  41 anticipated delivery  120 anticommons  96–97 Anwartschaft  87, 229, 237, 329 appearance of ownership  52, 54, 190, 194, 246 applicability  48, 254–55, 258, 267, 281, 285–88, 292, 412–13 applicable domestic law  359, 369, 418 applicable law  198–99, 253–54, 265–69, 341–42, 366–67, 369, 411–12, 414–16 appropriation  22, 113, 143, 225, 232, 236, 331, 420 facility  235, 330 of title  146, 236, 264 approximations  40, 83, 87, 89–91, 102, 311, 320, 329 to promissory notes  152, 154, 160, 200, 273, 293 arbitration  221 international  34, 272 arbitrators  319 international  419 asset-backed funding/financing  41, 43, 102, 201, 203, 271–72, 274, 303 asset classes  10, 23, 40, 42, 103–4, 301, 308, 313–14 asset-maintenance obligations  385, 390–91, 395–96, 403, 410, 418, 422 asset status  20, 22–23, 305, 307, 314, 319, 324, 328 of claims  150–51, 200–1, 272, 276, 282, 291, 294–95, 298 of debt  146, 151 of intangible assets  1, 146–54, 314 asset substitution  1, 249–50 assets back-up  387, 391 burdened  18, 101, 183 classes  1, 4, 31, 39, 103–4, 149, 152–53, 309 as classes identified through mere description  31–34 client  81, 90, 215, 222, 388, 398 commercial  23, 299–300, 318 commoditised  14, 19, 56, 60, 98–99, 104, 210, 219 composite nature  6, 23–24, 34, 318 foreign  266–67 fungible  396, 417 future  30–31, 39–40, 113, 115, 120–22, 249–50, 308–9, 327 immovable  35 individualised  1, 3, 7, 28, 103, 305 intangible, see intangible assets liquidity  18–20, 22, 41, 43, 45–46, 91–94, 122, 300 movable  21, 26, 35, 40, 89, 102, 147–49, 328 ordinary  9, 146, 162, 179, 188, 301 physical  64–65, 148, 151, 171, 175, 254, 256, 326 replacement  31–33, 120–21, 153–54, 161, 174–76, 216, 232–33, 300–1 segregation  19, 98–99, 102, 153, 212, 217–18, 301 in transformation  2, 4, 9, 30–31, 257, 309 trust  44, 205, 211–12, 219–21, 223, 265–70

types of  7, 21 underlying  4–5, 19–21, 86–89, 306–7, 311–12, 340–45, 350–52, 364 assignability  165–66, 174–75, 182, 185, 200–2, 279–82, 286–87, 291–92 future claims  178 assigned claims  161–62, 165, 167, 169, 186–88, 286–87 assignees  164–67, 169, 173, 178–80, 182–204, 281–82, 290–92, 363–64 bankrupt  197–98 bona fide  160, 164, 173, 194–95, 205, 317, 329, 332 collecting  160, 164, 192, 194–95, 197, 200, 298, 300 competing  189, 205 first  164, 191, 195 first notifying  157, 190–92, 194, 199, 273 professional  160, 164, 184, 188–89, 193–94, 287 assignment agreements  173, 175–76, 197, 199, 276–77, 279, 286, 296 assignment contracts  288 assignment documents  6, 191–92 assignment restrictions  166, 171–72, 187, 298, 301, 331 assignments  159–62, 164–83, 185–93, 195–96, 198–99, 281–84, 286–93, 362–64 and bankrputcy  197–200 bulk  182–83, 202–4, 256, 272, 283, 290–93, 295–96, 300–1 of claims  39, 195, 332 competing  191, 363–64 conditional  179, 182, 244, 272, 281, 286 of contractual claims  161 double  157, 193–94, 289 earlier  157, 160, 189–90, 195 effective  166, 168 equitable  40, 74, 89, 121, 176–77, 195, 199, 287 EU law  290–95 international, see international assignments invalid  189–91 legal  121, 163–64, 195 mandatory prprietary laws relating to  283 modern law of  37, 154–55, 300 multiple  154, 182, 192, 201–2 notification requirements for  181, 242 objectives  166, 181, 183 and private international law  272–99 proprietary aspects  287 of receivables  56, 118, 164, 208, 220, 294 security  152–53, 157, 159, 173–74, 177, 185, 188, 192 special issues  197 statutory  199, 286 subsequent  189, 193, 277–78 types and objectives  181–86 valid  169 assignors  163–74, 176–80, 182–94, 196–204, 277–79, 281–83, 285–86, 290–94 unsatisfied  189, 191

Index  427 attachment liens  68 attachments  68, 145, 238, 246–47, 290 auctions  136, 138 Australia  221, 266, 375 Austria  57, 109, 125, 127, 139, 353, 368 authenticity  371–72 authorisation  145, 192, 322, 348, 422 statutory  145 authority  118, 140, 323 automatic return  122–24, 129–30, 132, 197 automatic transfer  160, 166, 170–71, 201, 250 automaticity  199 autonomous legal sources, see autonomous sources of law autonomous sources of law  19, 303, 334 custom and practices  303 general principle  303 party autonomy  303 autonomy  43–44, 251–53, 260–61, 283, 285–87, 303–5, 412–13, 418 party, see party autonomy avalists  357–59, 368 avoidance  133, 332 back-up  184, 300, 390–91, 395–96, 398–99, 403 assets  387, 391 entitlements  319, 385, 388, 391, 399, 407, 409–10, 418 bad faith  79, 138, 140 bailees  69, 76–77, 81–87, 116, 135, 137, 140, 218 bankrupt  84 bailment  36–37, 39, 59–60, 74–77, 81–87, 93–94, 212, 216–18 bailors  77, 81, 116, 137, 218 balance  26, 29, 122, 135, 138, 188, 233, 305 contractual  233 bank accounts  26, 104, 385, 388, 391, 409, 416–17, 420 bank guarantees  133 bank loans  150, 158, 174, 178, 188–89, 197, 204–5, 272 bank transfers, electronic  378 banking  338, 354, 379, 389, 397, 417, 419 system  338, 354, 389, 397, 419 bankrupt agents  81 bankrupt assignees  197–98 bankrupt bailees  84 bankrupt brokers  398, 407 bankrupt estates  11–12, 68–69, 84, 87, 122, 126, 265, 267 bankruptcy  67–70, 84–87, 119–27, 197–99, 203–5, 231–36, 253–55, 407–9 Belgium  408 brokers  390, 396 civil law proprietary defences  67–70 courts  216, 255, 408–9 foreign  253–56, 265–66, 269, 273, 296 France  110, 125–27, 130, 145, 178, 225, 227, 235–36 Germany  120–21, 124–25, 218–19, 221, 231, 233–36, 241, 258–59

intervening  31, 79, 86, 114, 120–21, 176–77, 396, 400 jurisdiction  255, 407–8 law  69–70, 79–81, 84–87, 130–32, 203–5, 232–33, 320–21, 407–8 laws  69, 105, 198–99, 203–4, 297–98, 302, 397, 407–8 Netherlands  119, 121, 123, 125, 127, 231, 241, 250 resistance  18, 80, 301, 305 trustees  12, 67, 69–70, 80–81, 125, 131, 200, 235–36 banks  5–7, 347–49, 354–56, 362–63, 369–73, 378, 381–82, 417 intermediary  338, 347, 391 bargain  123 bargaining power  352 bearer bills/drafts  357, 359, 366, 368 bearer instruments  312, 362, 392, 396–97, 401, 404, 411 bearer securities  382, 390, 392–93, 411 Belgium  109, 124–26, 156, 232, 357–58, 367, 400–1, 413–15 bankruptcy  408 beneficiaries  50, 61–64, 79–80, 85–86, 205–8, 210–23, 265–69, 386–88 third-party  180 true  371, 388 bilateral contracts  170, 198 bills of exchange  133, 260, 299, 342–43, 354–69, 371, 374–75, 378 and competing assignments of underlying claim  363–64 foreign  365–67 independence/abstraction  359–60 lex mercatoria  368–69 limited modern use  362–63 persons liable under and recourse  358–59 and private international law  365–67 bills of lading  259–61, 299, 301, 337–55, 359, 361, 363–65, 367–79 and blockchain  376–78 electronic  342, 372–73, 376, 378–79 lex mercatoria and unifrom treaty law  352–54 named  349–50 on-board  337–38, 346 origin, nature and operation  343–47 paper  375–76 and private international law  350–52 straight  349 binding force  418 Blackstone  117 blame  8 blockchain  49, 101, 343, 376–78, 424 potential  376–78 Bolero  373, 375–76, 378 bona fide acquisition  64, 67, 107, 138–39, 341, 344 bona fide assignees  160, 164, 173, 194–95, 205, 317, 329, 332 bona fide collectors  75, 160, 287 bona fide creditors  246, 304, 313, 330

428  Index bona fide holders  342, 344–45, 348, 350, 359, 364, 368, 371 bona fide possession  61, 65–66, 136, 139, 307 bona fide possessors  342 bona fide purchasers  37–41, 64–67, 79, 125–28, 133–42, 193–94, 260–61, 298–301 of chattels  64, 107, 126–27, 139, 160 protection  55–56, 65–67, 125–28, 134, 136–37, 139–42, 193–94, 260–61 bona fide third parties  60, 117, 184, 212, 268, 344, 372 bona fide transferees  86, 92, 157, 194, 311, 317 bona fides  6–7, 65–66, 79, 102–3, 135–41, 172–73, 188–95, 273–74 bonds  25–26, 371–72, 381–83, 385, 391–92, 401–4, 409, 411 book-entry entitlements  44, 383–84, 392–94, 401, 405–7, 416, 420 book-entry systems  371–73, 384–85, 388–98, 400–5, 407–10, 412, 414, 418–21 domestic  409–10 foreign  407, 411 international  407, 409–10, 418 borrowers  12, 21, 227, 231, 236, 243–45, 247, 288 Brazil  42, 368 breach  87, 112, 142, 173, 187, 196–97, 223 brokers  25, 217, 384–85, 387–91, 394–400, 402–3, 407–8, 415–16 bankrupt  25, 390, 396, 398, 407 bulk assignments  163–64, 174–75, 196–97, 199–201, 203–4, 278–81, 290–98, 300–1 international  292, 296 bulk transfers  39, 113–14, 157–58, 249, 254, 256–57, 285, 300–1 burdened assets  18, 101, 183 burdens, extra  165–71, 179, 186–88, 200, 202, 204, 278–79, 281 buyers  110–13, 122–27, 133–36, 224–25, 237, 337–38, 343–49, 369–71 bona fide  120, 135, 140–41, 260, 348 defaulting  70, 123, 129–30 first  71, 112–13, 131 ordinary  3, 5, 171 original  113, 237, 346, 348 in possession  126, 131, 133 second  112–13, 234 Canada  221, 266, 375 capacity  66–67, 106–8, 118–20, 123, 126, 221–23, 267–69, 360–61 lack of  66–67, 107, 118–20, 123, 126, 267, 361 capital, working  2–3, 148, 153, 274 capital goods  104, 226 capital markets  25, 104, 297, 381, 406, 408, 414, 423 carriage  339–40, 342–43, 350, 352–54, 373–75 contracts of  340, 342, 353, 373 carriers  15, 337–42, 344, 346–48, 352–54, 369–74, 376 liability  352–53

case law  87, 114–15, 125–26, 130, 159–60, 227, 231–32, 414; see also Table of Cases France  114, 126, 130 Germany  156, 191, 225, 331 good faith  160, 330 modern  232, 290 Netherlands  119, 239, 286 United Kingdom  159–60 cash accounts  390, 395–96, 416 cash flows  37, 42, 45, 184, 199, 279, 331 cash sales  110, 117, 132, 143 causa traditionis  139 causal system of title transfer  119, 122–28, 130, 133, 148, 325, 327, 332 causality  100, 309 CCPs (Central Counterparties), see central counterparties Cedel, see Clearstream central counterparties (CCPs)  20, 376, 400, 418, 420 central securities depositories (CSDs)  384 certainty  46, 204, 301, 331–33, 406, 410, 414, 423–24 certificates of deposit  381 certified securities  392, 396 CESL (Common European Sales Law)  322–23, 335 chained systems  390–91 chains  2, 66–67, 107, 127–28, 346–47, 357–58, 360–61, 384–85 of assignments  189, 196 of transfers  107, 120, 357, 360–61 characterisation  182, 184, 224–25, 230–31, 238–41, 280, 282–83, 286 proprietary  80, 225–26, 305 characteristic obligations  292 charges  2–4, 11, 13, 115–16, 145–46, 216, 233, 249–50 equitable  79, 115 fixed  176, 249 floating, see floating charges possessory  143, 417 proprietary  96, 341 charitable collections  208–9, 218 charitable trusts  210, 215, 217, 219 chattel mortgages  75, 78, 115, 227, 243 chattelisation  189, 194 chattels  25–27, 35–40, 63–67, 70–72, 74–78, 104–10, 118–21, 134–41 approximation of common and civil law systems  87–92 common and civil law approaches distinguished  86–87 equitable proprietary interests in  78 interests in  36, 74, 76, 230 law of  35–37, 39–40, 72, 74, 137–38, 288–90, 299, 305 legal and equitable interests in  72–76 modern law  322 ownership and possession in common law  76–78

Index  429 and private international law  251–72 transfers of  105–46, 156, 159, 166, 198, 200, 328, 332 legal requirements  105–8 uniform laws concerning proprietary aspects  270–71 cheques  359, 362–63, 368, 378, 417 cherry picking  198, 238 choice of law  252–54, 267–70, 279, 286, 291–92, 353–54, 367, 416–17 clauses  353–54 party  151, 164, 202–3, 276, 283–84, 286 choses in action  26 choses in possession  26 CIF (cost insurance freight)  259–60, 339–40, 345–49 contracts  259, 337, 342 civil codes, see codification; Table of Legislation and Related Documents civil law  11–17, 48–58, 60–77, 79–93, 205–14, 217–22, 236–38, 304–18 approach  40, 42, 47–48, 53, 83–84, 135–36, 312–14, 321 codification  68, 323 countries  62–65, 109–11, 118–19, 124, 221–22, 237–38, 264–66, 363–64 judges  211, 222 lawyers  206 modern  36, 39, 45, 50, 74, 79, 90, 138 possession in  23, 58, 64, 236 terminology  3, 21–22, 73, 76, 108, 208, 225, 358 thinking  206, 307 claims  11–12, 20–28, 62, 175–79, 185–88, 190–93, 195–97, 290–92 asset status  150–51, 200–1, 272, 276, 282, 291, 294–95, 298 assigned  161–62, 165, 167, 169, 186–88, 286–87 classes of  156–57 competing  12, 69, 199, 225 damage  50, 69, 321 for damages  50, 170, 199, 321, 347 future  154, 156–58, 164–65, 174–75, 178, 196–97, 200, 249–50 intangible  29–30, 35–37, 42, 48, 149–50, 153, 166, 172 monetary  11, 20–22, 24–25, 164–65, 186–87, 192, 203–4, 300–1 obligatory  21–22, 68, 307–8 personal  22, 140, 187, 279 portfolios of  284, 290, 295 proprietary  22, 61, 240, 290, 398 restitution  24, 27, 37, 48, 161 tort  161, 177, 195 transfers of  154, 291, 296, 314, 328 underlying  281, 285–86, 330, 363–64, 367 clearing  373, 376, 390, 392, 395–404, 408, 410, 418–24 systems  395, 403–4 Clearstream  372, 375, 400, 402, 404, 409–11, 413, 415

client accounts  116, 208–9, 213, 215, 218–19, 388, 396–98, 403 client assets  81, 90, 215, 222, 388, 398 client money  207, 398 closed system of proprietary rights  45, 53, 93–94, 121, 213, 304, 315, 325 closely related rights  152, 160, 169 co-operation  186, 199, 204, 338, 374 duties  187 co-ordination  95–96 co-ownership  345, 386–87, 397–98, 405 codification  14, 17, 68, 73, 323, 333, 339, 343 approach  68, 127, 323, 333 civil law  323 ethos  38, 333 France  127 Germany  68 nineteenth-century  333 partial  352 private  323 private law  322 collateral  8, 177, 247, 251, 395, 397, 416–17, 419–21 agreements  420–21 collecting agents  150, 184, 217, 219 collecting assignees  160, 164, 192, 194–95, 197, 200, 298, 300 collection agents  63, 150, 183, 217, 219, 242 collection agreements  149–50, 164, 169, 183, 205, 240, 263, 298 collection arrangements/schemes  281, 292, 338, 369, 371, 378 collection rights  151, 183, 186, 272, 293, 296 collections  160–61, 182–85, 192–99, 201, 240, 272–73, 276–80, 296–98 charitable  208–9, 218 collectors  75, 153–54, 160, 164, 183, 240, 287, 297 bona fide  75, 160, 287 commercial agents  141 commercial and financial legal order  91, 104–5, 333 commercial arbitration, see arbitration commercial assets  23, 299–300, 318 commercial contracts  204, 298–99 commercial dealings  135 commercial flows  14, 17, 98–99, 104, 135–36, 324–25, 327, 331 ordinary  14–15, 17, 19, 41, 261, 300, 334 commercial practice  92, 241 commercial transactions  379 commitments  133, 355 commodities  1, 3, 8, 88, 104, 115, 301, 311 commoditised assets  14, 19, 56, 60, 98–99, 104, 210, 219 commoditised products  75, 94, 96, 99, 300–1, 304, 308, 310 common creditors  11–12, 29, 80, 86, 305, 313, 320, 322 Common European Sales Law, see CESL

430  Index common law  26–29, 34–38, 47–50, 72–94, 105–10, 140–46, 211–15, 226–30 approach  24, 43, 45, 48, 321, 337, 346 countries/jurisdictions  12–17, 206–15, 264–66, 299–302, 311–14, 341–42, 362–64, 367–68 courts  78, 81, 205, 211, 216, 218, 222, 226 judges  211, 222 old  57, 60, 73, 75, 80–81, 135, 137, 180 terminology  305 traditional  73, 83, 214, 222, 302, 341–42 trusts  205–11, 219, 266 common principles  369 communication facilities  95, 363, 371 communications  94–95, 371, 374, 390, 403 company law  302, 392–93 comparative law  36, 45 compartmentalisation  384–86, 388, 396–97, 399, 403 competing assignees  189, 205 competing assignments  191, 363–64 competing claims  12, 69, 199, 225 competition  96, 98, 192, 323, 351, 363, 377, 422 completeness  374 completion  2, 114, 129, 199 composite nature of assets  23–24, 34 concessions  187, 266, 319, 333 conditional assignments  179, 182, 244, 272, 281, 286 conditional owners  190, 238 conditional ownership  225, 229–30, 237–38, 240, 262–63, 318, 325, 329–30 rights  45, 49, 236, 238, 241–42, 307, 310, 314 conditional sales  184–86, 198–99, 218–19, 223, 223–34, 236, 238–39, 329–30 conditional title  225, 237 conditional transfers  87, 90, 184–85, 196, 198, 218, 226, 229 conditionality  121, 143, 236, 366, 378 conditions  196–98 market  224 resolutive  197, 208, 237 suspensive  208, 225, 229, 237, 243, 325 conduct  140, 191, 374, 379 and effect  34, 105, 406 confidentiality  211, 372–74, 395 conflict of laws  251, 253–57, 259, 273–75, 277–78, 367–68, 417–18, 421–22 conflict rules  266–69, 280, 294–95, 303, 405, 410, 414–15, 421 conflicts of interest  211, 223 conform delivery  160, 167, 170–71 confusion  22, 26, 52, 59, 243, 248, 328, 334 conscience  74, 215 consensual liens  145, 243 consensus  3, 123 consent  20, 150–51, 154–55, 164–68, 179–80, 275, 277, 329 debtors  155, 158, 161–62, 167, 173, 179–80, 187

consideration, requirement  123 constant transformation  8, 152 constitutive requirements  157, 159, 174, 176–77, 189, 191, 198–99, 279 constituto possessorio  54, 59, 111, 113, 115, 117, 139, 143 construction  114, 184, 268 constructive delivery  77, 84, 113, 115, 120, 124, 233, 237 constructive knowledge  16–17, 50, 89, 137, 160 constructive possession  39, 52, 59, 76–78, 83–84, 111, 242, 244 constructive trustees  215–17, 226 constructive trusts  42, 45, 70, 79, 81, 210, 215–21, 325 remedial  116, 267 consumer dealings  153, 318, 324, 335 consumer goods  13, 72, 136, 177, 230, 233, 263, 331 consumer law  8–9, 33, 93, 153 consumer products  9, 41, 153 consumer protection  239, 322 consumer sphere  38, 152, 363 consumer transactions  313 consumers  5–6, 8, 13, 98–99, 101–4, 312–13, 324, 333 and professionals  333 continuation  2–3, 69, 142, 176, 180, 299, 324, 326 contract interpretation  180, 187, 225 contract law  6, 8–9, 203, 205, 221, 223, 322–24, 334–35 modern  43, 91 contract performance, see performance contract theory, modern  43 contracts assignment  191, 288 bilateral  170, 198 of carriage  340, 342, 353, 373 CIF  259, 337, 342 commercial, see commercial contracts executory  25, 69, 198–99, 238 invalid  107, 122, 127, 136, 301 original  5, 160, 181, 187, 363 privity of contract, see privity professional  18 sales  106, 109, 116–19, 122–23, 129, 346–47, 349, 356 self-executing  377 service  165 smart  378 underlying  122–23, 125, 172–73, 285–86, 292–93, 299, 301, 365 valid  66–67, 71, 76, 127, 136–38, 162, 194 contractual arrangements  76, 80, 207, 225–26, 239–40, 257, 260, 297 contractual assignment prohibitions  172, 200, 328 contractual assignment restrictions  7, 22, 167, 171–72, 273, 277, 301, 310 contractual balance  233

Index  431 contractual choice of law  157, 202, 253–54, 285, 291, 293, 303, 416 clauses  367 contractual claims  9–10, 146, 161, 225, 259, 385 assignment of  161 contractual description  3, 23–24, 29, 31, 42, 99 contractual duties  4 contractual interpretation, see contracts, interpretation contractual obligations  44, 122, 170, 179, 281, 283, 290–91, 348 contractual performance, see performance contractual positions  21, 23, 77, 170–71, 312, 383 contractual remedies  131 contractual restrictions  103, 169, 171 contractual rights  5–6, 12–14, 18, 20–21, 85, 89, 311, 320 and proprietary rights distinguished  10–15 contractual subrogation  181, 291 contractual terms, see terms contractual user rights  5, 7, 12, 16, 19, 54–55, 316, 320–21 contractual validity  118, 259, 282, 292, 332, 367 contractualisation  90, 93 control  31, 52, 57–58, 176, 307–8, 318–19, 327, 338 intent to  108, 118 physical  327, 338 Convention on the International Sale of Goods, see Vienna Convention convergence  88 conversion  6, 216, 220, 227, 231, 233, 239, 264 cooperation  168, 186, 199, 204, 273, 338, 374 duties  154, 160, 168–70, 186–87, 273, 275, 277–78, 285 corporate information  381, 387, 389 corpus  52, 59, 61, 76, 308, 327 Corpus Iuris  128 corrections  35, 104, 125, 396, 399, 414 cost insurance freight, see CIF costs  95, 180, 183, 235–36, 262, 369, 373, 375 extra  222 frustration  94, 105 information  6, 15, 93–95, 97–98, 105 verification  95–96, 100, 102, 105 counterclaims  189, 279, 338 counterparties  16, 20–22, 85–87, 179–80, 232, 305–6, 315, 321 central  20, 400, 418, 420 identified  97, 315, 321 country of destination  257–58, 260, 274, 278, 351–52 country of origin  256–58, 262–64, 267, 278, 351, 366–67 courts, see also case law bankruptcy  216, 255, 408–9 covenants  88, 314 restrictive  195 creation of proprietary rights  5, 7, 9, 13–14, 19, 89, 304, 307

credibility  45, 105, 297, 322, 333, 335 credit  164–65, 167–68, 172, 301, 329–30, 349, 369–73, 389–91 credit risk  19, 121, 165, 183–86, 240, 358, 421 credit transfers  91, 390–91, 417 creditor substitution  155, 165, 178–81, 203 creditors  68–69, 179–81, 212–14, 232–33, 235–36, 246–48, 268–69, 329–31 bona fide  246, 304, 313, 330 common  11–12, 29, 47, 68, 80, 86, 126, 189 new  154, 159, 179, 263, 282 ordinary  235, 246, 263, 304, 382 original  155, 161, 181 personal  220, 223, 269, 398 secured  11, 68, 115, 142, 233, 235, 247–48 creditworthiness  126, 225, 356 cross-border dealings  322–23, 423 cross-border sales  323 cross-border transactions  323, 335, 379, 420 crypto currencies  101 crystallisation  122, 234, 249 CSDs (central securities depositories)  384 custodial systems  25, 274, 383 custodians  207–9, 218, 387, 396, 398, 405, 407–8, 415 third-party  396–97 custody  51, 76, 85, 207, 213, 218, 222, 402 agreements  76, 415 arrangements  62, 73, 207–9, 395 domestic  418 custom  91–92, 95, 343, 345, 348, 373, 406, 413–14 industry  376 customary law  15, 243, 353, 369, 372, 376 damages  68, 70, 77, 80, 82, 167, 170, 347–48 claims for  50, 170, 199, 321, 347 DCFR, see Draft Common Frame of Reference dealings commercial  135 consumer  153, 318, 324, 335 cross-border  322–23, 423 financial  8, 40, 91, 158, 172, 421 professional, see professional dealings debt  144–45, 176, 181, 185, 281, 284, 288, 290 asset status  146, 151 security for  1, 23, 148, 150, 201, 300 debtors  148–52, 154–61, 164–75, 177–81, 183–204, 245–50, 272–82, 284–98 bankrupt  3, 68 consent  155, 161–62, 173, 179–80, 187 defaulting  84, 183, 197, 232 defences  165, 181, 285 substitution  165, 179–81 ultimate  175, 356, 359 declarations  54 default  69–70, 122–26, 132–33, 141–43, 183–86, 196–99, 224–30, 232–33 rules  109, 285, 287

432  Index defaulting buyers  70, 123, 129–30 defaulting debtors  84, 183, 197, 232 defences  83–84, 88, 165–68, 170–71, 179–81, 357–58, 360–66, 377–78 contractual  146, 151 debtors  165, 181, 285 loss of  186 personal  361–62, 366 proprietary  80 definiteness  26 delays  235, 259–60, 340, 369–70, 395 delegation  165, 167, 187, 340 delivery  106–20, 124–25, 127–31, 139–43, 257–60, 338–40, 356–58, 364–66 act of  109 anticipated  120 conform  160, 167, 170–71 constructive  77, 84, 113, 115, 120, 124, 233, 237 as formal requirement  116–18 physical  71, 112, 118, 141–42, 237, 246, 260–61, 341 place and time of  365–66 of possession  54, 56, 59, 109, 111, 142–43, 309, 311 requirement  55, 59, 107–8, 112, 117–18, 124–25, 130, 134 right to  116, 170, 211 for title transfer  87, 109–14, 124, 134, 143, 258, 343, 345 dematerialisation  343, 369–79, 381, 383–84, 393, 397, 401–3, 423 dependency  313 depositories  372–73, 384–89, 394–95, 398, 402–4, 411–12 central  384–85 depositors  21, 385 depository receipts  401, 404 deposits  35, 381, 385 derivative proprietary rights  56 derivatives  34, 105, 419 description  1, 7, 39–42, 45–46, 48, 99, 104, 176–77 mere  1, 13, 31, 45, 99, 120 reasonable  33, 105, 115, 164, 204, 309 destination  254, 257–58, 260, 262, 274, 278, 338, 351–52 place of  278, 338 detention  16–17, 51–53, 57–58, 77 detentors  59, 62–63, 66, 219 Digests  128, 229 dingliche Anwartschaft  87, 225, 237, 329 dingliche Einigung  66, 112, 118, 124–25, 129–30, 132, 134, 139 diplomatic conferences  352–53 direct actions  298 direct rights  386, 388 Directives  251, 407, 418–19, 424; see also Table of Legislation and Related Documents directory law/rules  418 disclosed agencies  217, 358

disclosure  21, 40, 243, 375, 397, 421 discounting  356–58, 361, 378 discretion  78, 81, 140, 209, 215, 256, 258, 264 judicial  256 dishonour  360, 362, 365 disposition  29–30, 107–8, 120–21, 126–27, 133–34, 148–49, 231–33, 318–20 free  47, 202, 251, 258, 283 rights  31–32, 39, 105–8, 118–20, 126–28, 134–37, 309–11, 327–28 lack of  64, 66–67, 107, 120, 126–28, 133–34, 136–37, 189–90 sufficient  31, 39, 119–20, 127, 134, 160, 193, 301 testamentary  206–7, 209 dispute resolution  34 distribution  12, 46, 255, 267–68, 398, 408, 416, 422 chains  1–2, 8, 33, 36, 148, 151–53, 253, 273–74 process  2–3, 6, 30, 46, 67, 274 risk  322 distributors  250 dividends  25, 176, 381, 384, 387, 389, 416 documentary letters of credit  343, 369–70, 373, 376 documentation  158–60, 174–75, 185–86, 200–2, 257–58, 279, 281, 293–94 individual  175, 204 requirements  7, 157–59 documents, role  337–54 documents of title  25, 35, 260–61, 340–43, 345–54, 369, 371, 374–75 negotiable  339, 343, 345–46, 349–52, 354, 364, 369 status  342, 370, 373 domain names  28, 306, 319 Domat, J  117 domestic custody  418 domestic laws  44, 269–71, 292–96, 374–76, 392, 394, 404–6, 413–15 applicable  296, 346, 359, 369, 418 domestic public policy  41 double assignments  157, 193–94, 289 double sales  71, 108, 110, 112, 348 Draft Common Frame of Reference (DCFR)  17, 45, 47–48, 58, 60, 120–21, 314, 322–35; see also Table of Legislation and Related Documents drafters  42, 205, 323–24, 329, 331–32, 335 drawees  133, 355–68, 371 drawers  133, 355–63, 365–66, 368 duality of ownership  18, 45, 51, 208, 210–11, 218–19, 231, 236–38 due course, holders in  189, 299, 357, 359–64, 366–68, 382, 390 due diligence  21, 95–96, 98 duress  131 duties  4–6, 165–67, 169–71, 180, 187–88, 210–11, 222–26, 339–40 co-operation, see co-operation duties connected  165, 170–71, 180, 187 contractual  4

Index  433 cooperation  154, 160, 168–70, 186–87, 273, 275, 277–78, 285 inspection  248 investigation  96, 98, 101, 103, 171–72, 190–94, 201, 247–48 payment  151, 192, 200, 202 renegotiation, see renegotiation, duties search  6–7, 13, 89, 98–99, 160, 164, 182–84, 189–90 special  102, 211, 266, 292 dynamic movable property law  35, 99, 271, 333–35 dynamism  43, 414 easements  4, 37, 56, 66, 106 economic interests  75, 79, 87–89, 92, 230, 311, 325, 327 economic value  1, 9, 22–23, 26–29, 33, 314, 318, 320 economics, law and  17, 92 effect and conduct  34, 105, 406 effectiveness  187, 196, 201–2, 255, 259, 293, 297, 301 efficiency  97–98, 316, 321, 371, 395, 423 eighteenth century  49, 139, 343, 354 Einigung  124–25, 134, 157 electronic bank transfers  378 electronic bills of lading  342, 372–73, 376, 378–79 electronic identification  371 electronic payments  313, 324, 363 electronic systems  371, 373, 377 electronic transfers  343, 369, 378, 402 empirical research  333 employees  76, 83 end-investors  384–85, 387–91, 403, 407–8, 410–11, 416, 418 endorsees  192, 360–62, 364, 366 endorsement  339, 341, 347, 355–56, 359–61, 365–66, 371, 373–74 endorsers  355, 357–59, 361, 364–65 enforcement  95–96, 201–3, 221, 254–55, 272–80, 282–87, 289–98, 420 foreign  255–56 international  221, 255, 282, 292, 296 England, see United Kingdom enjoyment  4–7, 9–10, 12–13, 50–51, 53–56, 61–62, 96–97, 306–7 rights  5–10, 12–15, 19–22, 52–56, 62–64, 85–89, 95–98, 306–7 enrichment, unjust  21–22, 73, 79, 119, 122, 215, 220, 331–32 entitlement holders  319, 386–90, 398, 403, 408, 424 entitlements  182–83, 383–85, 387–91, 394–96, 399, 402–3, 407–10, 414–16 back-up  319, 385, 388, 391, 399, 407, 409–10, 418 entrusting principle/notion  139–42, 194 equality  67, 322 equilibrium  122, 188 equipment  42, 44, 227–28, 245–46, 249, 310, 313, 324 professional  263 equitable assignments  40, 159, 161, 163–64, 176–77, 194–95, 199, 287

equitable charges  79, 115 equitable interest holders  82, 84, 90 equitable interests  72, 75, 78–80, 85–86, 88, 211, 321, 327–28 equitable liens  74, 215–16 equitable owners  80, 206, 215–16, 387 equitable proprietary interests  13, 18, 252, 257, 299–300, 313, 320, 325 equitable proprietary rights  16–17, 45, 69, 71, 79–80, 212, 261, 287 equitable remedies  215 equitable rights  75, 79–80, 86–87, 212, 254, 287, 321 equitable servitudes  18, 101, 183 equitable title  78, 210 equity  9–10, 40–43, 73–76, 78–80, 85–90, 160–63, 226–30, 299–302 approach  43, 101, 202, 283, 293 and common law  86 in common law countries  12, 14, 19, 42, 50, 88, 137, 307–8 courts of  205, 211 judges  80, 222 law of  41, 51, 74, 94, 101, 300, 302, 311 of redemption  78, 163, 226–28, 236 equivalence  259, 262 error  119 estates  4, 37–38, 69–71, 73, 197–99, 208–11, 229–30, 235 bankrupt  11–12, 68–69, 84, 87, 122, 126, 265, 267 in land  26, 37, 48, 86 life  52, 230 estoppel  140 EU law assignments  290–95 clearing and settlement  422–24 Financial Collateral Directive  251, 415, 418–19 Eurobonds  45, 47, 296–97, 392–94, 401–2, 404, 406, 409–10 market  91, 104–5, 373, 376, 382, 393, 400–1 modern  47, 260, 271 traditional  382 Euroclear  372–73, 375, 385, 400, 402, 404, 408–11, 413–15 Euromarkets  382, 392, 400–1, 403–4, 406, 408, 414 European Continent  36, 38, 41, 49, 93, 115, 382, 391 exceptio non adimpleti contractus  143, 145 excess  121, 184, 402, 412 exchange  106–7, 133, 342–43, 354–69, 371, 374–75, 378, 392–93 excuses  8–9, 358 execution sales  11, 138, 144, 226, 232, 234, 262–63, 349 executors  267 executory contracts  25, 69, 198–99, 238 expectancies  31, 120, 176, 321, 329, 394 expectancy  31, 120, 321, 329, 370, 394 proprietary  87, 225, 229, 237 expropriation  84, 100

434  Index extended reservation of title  120–21, 174–75, 178, 200, 249 externalities  29, 94–95 extra burdens  165–71, 179, 186–88, 200, 202, 204, 278–79, 281 factoring  90–91, 182–83, 226, 228, 232, 238–40, 263, 302 agreements  182, 196 of receivables  121, 221, 225–26, 238–40, 362 recourse  93, 240 failed sales agreements  124, 126, 141 fault  8, 135 federal law  346 fees  37, 186, 229–30 feudal system  15, 37, 72, 76, 80, 308 fideicommis  206–7 fiducia  206–7, 218–20, 257 fiduciary duties  90, 209–11, 216–19, 221, 266 fiduciary relationships  387 fiduciary transfers  233 fiducie  178, 214, 220 filing  141, 164, 195–96, 233, 241, 246–48, 259, 264 facilities  195–96, 248 requirements  214, 246–47 systems  89, 242, 246, 248, 310–11 finality  18–20, 126–28, 133–36, 300–1, 308–11, 331–33, 390–91, 417–19 issues  107, 122, 252, 317, 382, 397 payment  41, 45–46, 133–34, 310, 314, 317, 325, 390–91 settlement  251, 394, 397, 400, 413, 415, 418, 421 transactional  14–15, 18, 103, 106, 192, 194, 331–32, 335 finance  42, 225–28, 230–32, 238–40, 301–2, 305, 313–14, 324–25 companies  225, 240 international  44, 91, 271, 296, 316 leasing  19, 90, 225, 231, 238–40, 251, 270 modern  17, 40, 302, 324, 333 sales  148–50, 185–86, 226–28, 230–32, 238, 240–41, 261–62, 419–20 statements  164, 177, 195, 233, 247, 263 Financial Collateral Directive  251, 415, 418–19 financial crisis  419, 424 financial dealings  8, 40, 91, 158, 172, 421 financial flows  43, 45–46, 209–10, 218–19, 252, 272, 304–5, 308–9 financial instruments  19, 35, 41, 43, 89, 181, 302 financial law  19, 34, 41, 46, 91, 300, 302 financial legal order, see commercial and financial legal order financial practice  20, 90, 92, 303, 332 financial products  29, 95, 106, 128, 224, 305, 318, 325 financial regulation  46, 424 financial services  23, 419, 421 financial structuring  20, 34, 41, 47, 297, 303, 305, 310

financial transactions  40, 55, 297, 301, 317, 324, 414, 419–20 financiers  121–22, 188, 195, 197, 227, 232–33, 240–41, 250 financing  49, 51, 169, 195, 197, 224, 226, 228 finished products  3, 8–9, 31, 33, 98, 153 first assignees  164, 191, 195 first buyers  71, 112–13, 131 first notifying assignees  190–91, 194, 199 fixed charges  176, 249 floating charges  17–19, 91–93, 114–15, 233–34, 249–50, 299–301, 316–17, 328–31 equitable  75, 227 flows  2–3, 7, 33–36, 41–42, 45, 103–5, 107, 252 financial  43, 45–46, 209–10, 218–19, 252, 272, 304–5, 308–9 free  6, 94, 294 international  7, 13, 33, 36, 40, 105, 406, 410 ordinary, see ordinary flows FOB (free on board)  337, 340, 345–47, 349 force majeure  9, 135 forced acceptances  171, 366 foreign assets  266–67 foreign bankruptcy  253–56, 265–66, 269, 273, 296 foreign bills of exchange  365–67 foreign enforcement  255–56 foreign interests  255–56, 258, 261, 265, 272, 289 foreign law  35, 253, 258–59, 276, 284, 287 foreign proprietary rights  262, 264, 282, 287, 351 foreign trusts  220–22, 252, 266–67, 269–70 recognition  221, 252, 266, 269–70 forfeiture  226 forgery  361, 366 formal requirements  39, 55, 116, 118, 156, 158, 169, 175 formal trusts  18, 85, 209–10, 213–15, 271, 326 formalities  106–8, 148–49, 160–61, 201–2, 230–34, 257–60, 279–86, 293–94 lack of  107, 148, 190, 233, 285 transfer  106, 157, 182, 201 formation of law, see law formation forum  222, 264, 266–67, 269, 271, 293, 353 selection  353 shopping  319 fourteenth century  354 France  117–18, 123–27, 139, 142–46, 156–58, 178, 180–81, 343–48 bankruptcy  110, 125–27, 130, 145, 178, 225, 227, 235–36 case law  114, 126, 130 codification  127 law  109, 126–27, 139–40, 142, 144, 178, 232–33, 366–68 Northern  127 fraud  41, 119, 123–25, 127, 129, 131–32, 136, 140 free disposition  202, 251, 283 free flows  6, 94, 294

Index  435 free on board, see FOB freedom  9, 85, 109, 164, 261, 270, 283, 352 contractual  109 Fremdbesitzer  65 frustration  269 costs  94, 105 functional approaches  17, 72, 92–93, 184, 230, 303, 314 functions  214–15, 250–51, 268, 270, 317–18, 356, 370, 373 residual  44 safe harbour  337–38 fund management  208, 213, 215, 218 fundamental principles  261, 296, 323, 333, 352, 363, 369, 418 funding  19, 168, 184–88, 226, 231–33, 239–40, 242, 303 asset-backed  41, 43, 102, 201, 203, 271–72, 274, 303 operations  93, 154, 169, 203, 240, 272, 284, 298 ownership-based  232, 238, 241 purposes  164, 187–89, 200, 244, 262, 272–73, 295 schemes  239, 301–2 security-based  224 fungibility  226, 397–98, 405 fungible assets  396, 417 fungible securities  198, 389, 403 future assets  30–31, 39–40, 113, 115, 120–22, 249–50, 308–9, 327 future claims  154, 156–58, 164–65, 174–75, 178, 196–97, 200, 249–50 assignability  178 future receivables  121, 153, 156, 163, 176, 178, 203, 240 futures  20–21, 383 Gaius  24, 105, 128, 155 garnishment  157, 196, 200, 282, 290 general liens  145, 243 general principles  91, 96, 319, 323, 331, 334, 418–19, 422 generality of goods  114, 250 Germany  62–66, 120–25, 143–44, 218–21, 227–29, 231–37, 239–41, 258–60 bankruptcy  120, 235, 250, 259 case law  191, 225, 331 Civil Code  49, 123, 143, 206, 227 codification  68, 127 Historical School  24, 49, 156, 229 law  118–19, 135, 156–58, 174–75, 258–60, 285–86, 323–26, 328 gewere  36, 49, 58, 76, 80, 84, 324, 326–27 gifts  77, 84, 106, 122, 217, 220, 267 globalisation  2, 34, 41, 99, 101, 103–4, 408–10, 418 Globalzession  151, 175, 285, 330 good faith  137–38, 140–41, 159–60, 189–90, 193–96, 211, 313, 360 case law  159–60, 330

civil law  74, 82, 140, 160, 211, 313–14 common law  43, 74, 82, 160, 245, 346, 360 good value  135, 193, 196, 212, 257, 341, 346 Goode, R  131 goods  33–36, 112–17, 140–43, 249–50, 258–62, 337–54, 369–71, 373–77 capital  104, 226 consumer  13, 72, 136, 177, 230, 233, 263, 331 generality of  114, 250 international flow of  33, 35, 72, 122, 252, 305, 326, 340 ordinary flow of  41, 67, 126, 128, 134, 136 replacement  114–15, 216, 220, 228, 233–34, 238, 315, 320 underlying  340–42, 346–47, 349–50, 364 governmental intervention, see intervention grantors  50, 54, 62–63, 230 Grotius, H  24, 49, 109, 117, 243, 297 guarantees  133, 181, 196, 240, 247–48, 281, 301, 357–58 bank  133 guarantors  21, 167, 179, 204, 329, 355, 357–59, 367–68 primary  358–59 habitual residence  269 Hague Convention on the Law Applicable to Trusts and Their Recognition  265–70; see also Table of Legislation and Related Documents hardship, clauses  9 harmonisation  270, 322, 409, 414 private law  322 heirs  37, 155, 206, 214, 223 hidden interests  45, 132, 246 hierarchy  41, 44, 275, 303, 333, 335, 377, 418 of norms  352, 369, 418 hire-purchase  35, 62, 225–26, 228, 230–31, 238–39, 325, 330 holders  54–55, 62–66, 68–70, 83–84, 135–40, 340–42, 344–48, 356–66 bona fide  342, 344–45, 348, 350, 359, 364, 368, 371 in due course  189, 299, 357, 359–64, 366–68, 382, 390 new  340, 342, 344, 375, 383 physical  131, 137–38, 312 security interest  4, 11, 67, 96, 232, 234–35, 243–47, 331 subsequent  346, 355, 360–61, 365 third-party  267, 341, 357, 360 holdership  51–54, 57–58, 63–65, 69–70, 88, 118, 312, 321 physical  83–84 holdings  389, 395, 418 land  16, 72, 76 securities  383, 391, 398, 416 Hong Kong  94, 221, 266 horizontal effect  323, 333 human rights  17, 84, 323, 333 hypothec  115, 242–43

436  Index ICC, see International Chamber of Commerce identification  28–32, 39–40, 106–7, 113–16, 309, 313–15, 371–72, 377 electronic  371 physical  308, 320 requirements  31–32, 39, 106–7, 145, 200, 204, 296, 304 and specificity  31, 37, 88, 158, 243, 313 sufficient  30, 113, 175, 250, 319, 397 identity  26, 28–29 illegality  66, 119, 123, 129, 132, 342, 361 immanent law  324 immediate repossession  69–70, 77, 81, 83, 140, 314 right of  83, 87, 116, 140, 314 immobilisation  384, 401–3, 405, 411 immovable assets/property  26, 35–36, 45, 66, 107, 118, 133 impediments  20, 22, 178, 251, 254, 261–62, 278, 281 practical  171 implementation  8, 47, 112, 125, 159, 178, 215, 270 implied conditions/terms  165, 313 impossibility  155–56, 225, 227, 235, 371 practical  235 incapacity  119, 129, 132 income  1, 3, 5, 54–56, 61–63, 178, 237–38, 306–7 rights  3–7, 9–10, 12–14, 19–22, 53–55, 85–89, 92, 306–7 streams  10, 212, 300, 305, 309 incorporation  341, 353–54, 357, 363, 368, 412 Incoterms  349 indemnities  176, 369–71 independence  188–90, 309–10, 332, 338–39, 341–42, 344, 359, 390 notion/principle  188, 359, 368 independent sources  334 indirect agencies  207–9, 211, 219, 222, 397 indirect agents  209 individual notification  156, 281 individualisation  1–3, 7, 9, 103–4, 155–56, 158–59, 202, 305 individualised assets  1, 3, 7, 28, 103, 305 industrial property rights  25, 97, 318 industry custom  376 industry practices  46–47, 91, 323, 355, 373, 413 information  1–3, 23, 34–35, 102, 104–5, 222–23, 373–74, 377–78 corporate  381, 387, 389 costs  94–95, 105 infrastructure  352, 372, 376, 423 inheritance matters  222, 269 initiative  235, 322, 353, 368 injunctions  211, 222 innovation  29, 97 insiders  6–8, 13–14, 16–18, 96, 98, 104–5, 209–10, 310 professional  6–7, 13, 34, 45, 53, 252, 305, 315 insolvency  83–84, 240–41, 269, 387–88, 394, 407–8, 421–22, 424; see also bankruptcy

insolvent intermediaries  397, 410 inspection duty  248 instructions  133, 350, 354–55, 390, 397–99, 402, 417, 423 payment  192, 390 insurance  165, 171, 181, 262, 338–39, 342, 375 companies  407 policies  340, 342 intangible assets  14–17, 23–27, 35–40, 55–56, 72–76, 146–47, 304–10, 328 asset status  1, 146–54, 314 assignment  106, 253 modern law  322 proprietary rights in  55, 146 transfer  107, 120, 146, 155, 165, 328 intangible claims  29–30, 35–37, 42, 48, 149–50, 153, 166, 172 intangible rights  21, 28, 306 intangibles, see intangible assets integrity  105, 319, 376, 419 intellectual property rights  15, 28, 99, 306 intent  53, 106–8, 118–19, 257, 276, 279–80, 345–46, 351–52 to control  108, 118 presumed  217 intention  57, 169, 211, 217, 223, 259, 345, 348 interest holders  11, 56, 60, 79, 243–44, 250, 261–62, 331 competing  12, 154 equitable  82, 84, 90 junior  11, 331 secured  235, 246 interest rate structures  186, 226, 231, 330 interests adverse  96, 248, 296, 304, 310, 325 in chattels  36, 74, 76, 230 competing  12, 100 economic  75, 79, 87–89, 92, 230, 311, 325, 327 foreign  255, 265, 272 hidden  45, 132, 246 junior  11, 64, 183, 331 justified  171 legal  38, 60, 75, 78–79, 214, 227, 230, 287 legitimate  348, 372 life  1, 4, 20, 37, 74–75, 229–30 limited  4, 75, 258, 422 non-possessory  17, 56, 233, 235, 243–44 ownership  11, 135, 387 possessory  84, 234, 244–45, 248 prior  16, 45, 164, 276, 311, 344 proprietary, see proprietary interests secured  141, 179, 227, 232, 253, 315, 330 security  9–12, 51–56, 141–46, 230–36, 239–49, 255–59, 261–65, 329–31 shifting  87, 300, 315, 422 special  128, 183, 213, 265, 329 suspended  206, 209 temporary  40, 314, 394

Index  437 intermediaries  337–38, 384–85, 387–91, 397–400, 402–5, 407–8, 412–16, 420–22 immediate  385, 388, 390 insolvent  397, 410 securities  385, 413 intermediary banks  338, 347, 391 intermediated securities  422 internal market  322–23, 420 internal relationships  188 internalisation  29, 395 international arbitrations  34, 272 international arbitrators  34, 272 international assignments  151, 203, 252, 278, 284, 286–87, 291, 299 bulk  171, 292, 296 international book-entry systems  407, 409–10, 418 international cases  107, 252, 408 International Chamber of Commerce (ICC)  374 international commerce  2, 43, 91, 252, 305, 337, 369, 377 international commercial and financial legal order  333 international convergence, see convergence international dealings, professional  41 international finance  2, 7, 43–44, 91, 94, 271–72, 275, 294–97 international flows  7–9, 13, 33, 35–36, 40–41, 98, 340, 342 of goods  33, 35, 72, 122, 252, 305, 326, 340 international harmonisation, see harmonisation international law merchant  91, 350, 366, 378, 405 international marketplace  41, 45, 105, 272, 294, 296–98, 333, 376–77 international markets  41, 45, 105, 333–34, 372, 393–94, 404, 406 international normativity  419 international practices  400, 404, 410, 413, 415 international professional dealings  41 international promissory notes  368 international recognition  255, 265, 270 international sale of goods  261–62, 265, 337–38, 344 international trade  248, 251, 261–62, 294, 296, 342, 363, 375 international transactions  44–45, 48, 105, 251–52, 362, 369, 413–14, 417 internationalisation  399, 404, 406, 418 interpretation  177, 180, 295, 323, 325, 332–33, 365, 369 analogical  206 contracts  180, 187, 225 liberal, see liberal interpretation uniform  295 intervening bankruptcy  31, 79, 86, 114, 120–21, 176–77, 396, 400 intervention  211, 214, 318 judicial  90, 210–11, 255 statutory  32, 172, 194, 208, 220, 299 invalid assignments  189–91

invalid contracts  107, 122, 127, 136, 301 invalidity  66–67, 118–20, 124, 126, 128, 130–32, 136, 309–10 inventory  32, 35, 114, 148, 184, 227, 245, 249–50 investigation duties  135, 138, 191, 247–48 investment securities  25–26, 35, 42, 224–26, 232, 238–39, 301–2, 381–424 law applicable to book-entry transactions  410–16 and lex mercatoria  416–19 transnationalisation of custodial and settlement systems  404–24 types of shares and bonds  381–404 underlying  384, 388, 398, 404–5, 410–11 uniform law  419–22 investments  9, 376, 381, 385, 391, 394–95, 397, 418 investors  382–92, 394–99, 402–3, 405, 407–8, 410–11, 416, 421–23 private  421 ISMA (International Securities Market Association)  404 issuance  350–51, 360, 376, 393 issuers  381, 384–85, 388–89, 392, 394, 402–5, 407, 410–12 Italy  2, 31, 54, 64, 67, 127, 219–22, 367–68 iura in re aliena  4, 52, 55–56, 61, 70, 148, 182, 315 ius commune  127–28, 131, 155–56, 227–29, 236, 242–44, 309, 315–16 ius tertii  71, 83 iusta causa  128, 139 Japan  368 Jhering, R von  326 judicial discretion  256 judicial intervention  90, 210–11, 255 judicial liens  68, 247 judiciary  211, 256 junior interests  11, 64, 183, 331 juridical acts  118, 327–28, 332 jurisdiction  199, 201, 221–22, 255–56, 289–90, 322, 353, 407–8 bankruptcy  177, 255, 407–8 legislative  322, 335 justice  377 justified interests  171 justified reliance  338 Justinian  127–28, 138, 224, 236 knowledge  5, 13, 15–16, 19–21, 45–46, 190–92, 310–12, 314–15 actual  16, 45, 112, 191, 311 constructive  16–17, 50, 89, 137, 160 prior  5, 7, 13–16, 20, 46, 307, 321 lack of capacity  66–67, 107, 118–20, 123, 126, 267, 361 lack of disposition rights  64, 66–67, 107, 120, 126–28, 133–34, 136–37, 189–90

438  Index land  13–16, 26–27, 35–38, 48–50, 55–56, 72–76, 79–80, 229–30 estates in  26–27, 37–38, 48, 86 holdings  16, 72, 76 law  35–38, 73–74, 81, 209, 230, 314 registers  16, 50, 55, 137, 148, 248 law and economics analysis  15, 17, 92 law formation  104, 323, 333 law merchant  341–43, 345, 352, 368, 374, 378, 382, 392–93 international  91, 350, 366, 378, 405 law of chattels and intangibles  35–36, 60, 72, 299, 302, 305 leasing  90, 239, 251, 270 finance  19, 51, 90, 225, 231, 238–40, 251, 270 legal acts  107, 109, 111, 118–19, 124–25, 127, 129, 156 separate  54, 66, 117, 119, 125, 127, 327 legal assignments  121, 163, 195 legal capacity, see capacity legal dynamism, see dynamism legal interests  38, 60, 75, 78–79, 214, 227, 230, 287 legal orders  41, 104 legal owners  57, 79, 85, 206, 209–10, 215–17, 386–87, 402 legal personality  202, 207–8, 210, 217–19, 221 legal positivism, see positivism legal possession  15, 57, 62–66, 84, 118, 129, 136, 175 bona fide  65–66, 136 legal possessors  52, 54, 58, 62–66, 81, 138, 307 legal pragmatism, see pragmatism legal principles  352, 369 common  352, 369 fundamental, see fundamental principles general, see general principles legal risk  25, 44, 388, 401, 423 legal scholarship  13, 298–99, 321 modern  321–22 legal sources, see sources of law legal status  6, 28, 36, 47, 273, 277, 373–74, 399 legal systems  1–3, 22–23, 31–33, 120–21, 142–43, 242, 252–54, 305–6 legal transnationalisation, see transnationalisation legislative jurisdiction  322, 335 lenders  19, 114, 236, 243, 245, 247, 265, 310–11 secured  246–47 lessees  44, 83, 225–26, 231, 239–40, 330 lessors  27, 44, 83, 226, 231, 239–40, 246 letters of credit  133, 301, 310, 313, 349, 362, 369–73, 378 documentary  343, 369–70, 373, 376 lex commissoria  123, 125–27, 130, 229, 236 lex concursus  204, 253, 258, 407–8 lex contractus  36 lex executionis  254, 258 lex fori  272, 279 lex mercatoria  41, 43–44, 46–47, 91, 271, 333–35, 368–69, 416–19

approach  43, 72, 271, 321, 352, 411, 413–14 and bills of exchange  368–69 and investment securities  416–19 old  311 operation  303, 333 transnational  41, 47, 49, 91, 271, 306, 342, 352 lex rei sitae, see lex situs lex situs  251–57, 259–60, 264, 266–67, 269, 288–89, 350–51, 410–12 lex societatis  393, 407, 410–12 lex specialis  112 liability  219–20, 223, 350, 352–53, 355, 357–58, 372, 374–75 carrier  352–53 contractual  170 non-contractual  219 liberal interpretation  15, 177 liberating payments  155, 200, 355 liens  68, 74, 143–45, 243, 245, 247, 250, 270–71 attachment  68 consensual  145, 243 equitable  74, 215–16 general  145, 243 judicial  68, 247 maritime  270–71 shifting  45, 310 statutory  143, 243, 264 life estates  52, 230 life interests  1, 4, 20, 37, 74–75, 229–30 limitation, statutes of  65, 67, 83–84, 103, 107, 134, 230 limitation of proprietary rights  92–93, 96–97 limited interests  4, 75, 258, 422 limited proprietary rights  55–56, 61, 63, 69–70, 74–75, 206–7, 255, 315 liquidation  3–4, 25, 225, 235, 382, 387, 398 surpluses  381–82 liquidity  3–9, 13–14, 20–22, 96–100, 102–6, 168–72, 318, 394–95 and finality  15, 55, 102, 105 management  312, 314, 317, 322, 324–25, 333–34 promotion  93, 99, 154 requirements  20, 92, 400 loading  346, 349, 351, 353, 372 port of  352–54 time of  346, 353 loans  4, 6, 25, 35, 176, 184, 223–24, 230–32 bank  150, 158, 174, 178, 188–89, 197, 204–5, 272 secured  186, 224, 228 location  204, 255, 273–74, 350–51, 405, 408, 411–12, 414–15 longa manu  54, 59, 111, 115, 135, 139, 237 Louisiana  38 loyalty  211 Luxembourg  109, 125, 221, 239, 266, 400–1, 413–15, 422

Index  439 management fund  208, 213, 215, 218 liquidity  312, 314, 317, 322, 324–25, 333–34 structure  207, 209, 214, 219 mandatory rules  200, 202, 261, 266, 269, 352–53 mandatory uniform treaty law  418 maritime liens  270–71 market conditions  224 market forces  19, 46, 121, 324 market practices  382, 392, 399, 405–6, 409, 419, 421, 424 market prices  390, 395, 418 markets  105, 376–77, 381–82, 393–96, 406, 408–9, 418–19, 423–24 capital  25, 104, 297, 381, 406, 408, 414, 423 Eurobonds  91, 104–5, 373, 376, 382, 393, 400–1 financial  284, 414, 419 international  41, 45, 105, 333–34, 372, 393–94, 404, 406 swap  41, 91, 105 maturity  186, 241, 356, 381 mere description  1, 13, 31, 45, 99, 120 mere possession  245 methodology  323, 377 minors  118, 206, 209, 213, 269 misrepresentation  119, 123, 131–32, 346 mistake  119, 123, 126, 129, 215, 332, 390, 399 models  8, 36, 40, 43, 60, 246, 248, 322–23 modern contract law  43, 91 modern lex mercatoria, see new lex mercatoria monetary claims  20–25, 152–54, 164–66, 168–72, 186–90, 203–5, 272–74, 295–98 approximation  154, 160 in bulk  32, 188 intangible  188, 306, 314 unity of portfolios  204, 273, 291 morality  100 mortgagees  226–27, 234–35 mortgages  4, 19, 36–37, 56, 177, 227, 236, 270 chattel  75, 78, 115, 227, 243 mortgagors  78, 226 movable property/assets  13–15, 26, 35–36, 39–41, 48–49, 101–3, 117–18, 328–29 movables, see movable property/assets multiple assignments  154, 182, 192, 201–2 named bills of lading  349–50 national laws  251, 253, 275, 294–95, 352–53, 359, 361, 373–74 natural law  49, 109, 117, 243 school  49, 109, 117, 243 natural persons  6, 108, 153, 306 negligence  81, 353 negotiability  261, 338, 340–41, 343, 349–51, 376–78, 382–84, 391–92 negotiable documents of title  339, 343, 345–46, 349, 351–52, 354, 364, 369

negotiable instruments  188–89, 260–61, 301, 337–79, 381–83, 390–93, 404–5, 417–19 and uniform treaty law  367–68 negotiation(s)  344–46, 351, 354–55, 359, 361–62, 364, 366, 376–78 nemo dat  134–35, 137–38, 140, 142, 192–96, 203, 341, 345 Netherlands  66–68, 220–22, 227–29, 263–64, 269, 285–86, 353, 366–68 bankruptcy  119, 121, 123, 125, 127, 231, 241, 250 case law  119, 239, 286 courts  270 law  23–24, 114, 135, 177, 179, 181, 286, 357 Supreme Court  286 netting  47, 238, 240–41, 397, 401, 419, 421, 423 agreements  241, 421 new law merchant, see new lex mercatoria nineteenth century  27–28, 30, 35, 38, 227–28, 243–44, 367, 369 early  228 nominal values  181, 183 non-owners  64, 84, 139–40 non-possessory interests  17, 56, 233, 235, 243–44 non-possessory pledges  236 non-possessory securities  51, 92, 115, 227, 233, 235, 331 non-possessory security interests  47, 53, 56, 233–34, 244–45, 299–300, 312, 314 non-professionals  313 non-secured creditors  216, 233, 243, 247, 249, 259 normative approach  43 normativity  46 norms  41, 44, 275, 303, 335, 352, 369, 418–19 notification  55–56, 156–60, 163–64, 168–69, 174–78, 189–92, 198–202, 281 individual  156, 281 requirements  156–57, 159, 178, 181, 200, 204, 239, 242 novation  151, 155, 161, 178–81, 202–3, 293, 356, 360 nullity  332, 342, 361 numerus clausus  5–8, 13–15, 17, 92–99, 102–3, 148, 274–75, 321–22 objective law  50, 201, 215, 217, 259, 283, 321 objectives of assignments  166, 181, 183 obligations  19–21, 23–24, 38, 144–46, 149, 290–92, 323–24, 357–58; see also duties characteristic  292 contractual  44, 122, 170, 179, 281, 283, 290–91, 348 law of  27, 64, 146, 282, 323–24, 357, 367 payment  204, 357, 362 secondary  187, 357 obligatory claims  21–22, 68, 307–8 obligatory rights  12–13, 49, 51–52, 62, 70, 73, 315, 321 and proprietary rights distinguished  49–51 offer  44, 123, 354, 409 offshore installations  47

440  Index offshore trusts  265–66 on-board bills of lading  338, 346 open system of proprietary rights  41, 43, 56, 85, 87, 92, 102, 142 openness  85, 93, 97, 236 optimal standardisation  94–95 order securities  383–84 ordinary assets  9, 146, 162, 179, 188 ordinary commercial flows  14–15, 17, 19, 41, 261, 300, 334 ordinary course of business  39–41, 45–46, 88–90, 96–97, 134–36, 138–42, 300–1, 310–11 ordinary creditors  235, 246, 263, 382 ordinary flows  6–8, 19, 34, 209, 320 of business  135, 169, 310, 412 of goods  41, 67, 126, 128, 134, 136 origin  76–77, 174–75, 254, 256–58, 260, 262–64, 277–79, 342–43 place of  254, 278–79 original owners  1, 65, 99, 135, 138–40, 142, 194 original promisors  167, 187 original rank  2, 6, 31, 153, 320, 421 original sellers  224–25, 234, 237, 344, 347–48, 351 originators  14, 34, 98 ostensible ownership  246 outsiders  7, 34, 53, 96, 192, 247, 252, 318 overvalue  11, 184–86, 224, 226, 230–33, 235–36, 263, 279 return of  226, 228, 233–34, 236 owners  4–5, 10–13, 53–58, 61–65, 67–77, 80–88, 143–46, 382–85 conditional  190, 238 economic  209, 403 equitable  80, 206, 215–16, 387 legal  57, 79, 85, 90, 206, 209–10, 215–17, 386–87 new  4–5, 10–11, 13, 135, 138, 190, 374, 383–84 original  65, 135, 138–40, 142, 194 real/true  57, 71, 73, 134, 140, 144, 215–16, 218 succeeding  50, 86 ownership appearance of  52, 54, 190, 194, 246 concepts  38, 71, 74, 77, 218, 220–21, 312, 314–15 duality of  18, 45, 51, 208, 210–11, 218–19, 231, 236–38 interests  11, 135, 387 ostensible  246 protection  39–40, 51–55, 64–65, 70–72, 79–80, 84–87, 89–90, 136–39 reputed  115, 130, 132, 246 rights  36–40, 51–57, 59–62, 68–71, 77–80, 85–90, 206–10, 387–88 conditional  38–39, 49, 51, 60, 206–7, 228, 236–38, 241–42 temporary  38–40, 42, 60, 74–75, 85, 87, 206–7, 228 split  45, 90, 206, 208–9, 218, 229–30, 253, 317

temporary  85, 206, 218, 229 transfers of  35–36, 55–56, 64, 105–9, 111–13, 119–20, 122, 237–38 ownership-based funding  232, 238, 241 pactum de retroemendo  224, 228, 236 Pandectists  24, 49, 156, 229 paper bills of lading  375–76 partial codification  352 partnership  208, 214 party autonomy  5–7, 40–46, 181–84, 251–54, 273–77, 283–87, 303–5, 412–13 degree of  40, 157, 163, 202–3, 274, 283, 328 in proprietary matters  75, 323, 412 party choice of law  151, 164, 202–3, 276, 283–84, 286 passing of title  109, 139 payees  41, 355–63, 365–68, 389, 391 original  357, 359–60 third-party  362–63 payment circuit  350–51, 370, 376 payment duty  151, 192, 200, 202 payment finality  9, 34–35, 41, 45–46, 98–99, 102–3, 133–34, 324–25 payment instructions  192, 390 payment obligations  204, 357, 362 payment systems  301, 372, 377, 390–91 payments  129, 131, 134, 225, 301, 371–72, 389–90, 416–18 electronic  313, 324, 363 immediate  355–56 liberating  155, 159, 193, 200–1, 204, 281–82, 292, 298 payors  181, 309, 363, 389, 391 penalties  258 perfection  35, 149, 185, 194, 199, 246–48, 416, 420 performance  88, 122–23, 131, 143–44, 179–81, 230, 321, 338–39 specific  18, 86, 88, 113, 131, 144, 311, 321 perpetuities  103, 206, 213, 230, 268 personal actions  26–27, 129–30, 133, 137, 196, 240, 348 personal claims  22, 140, 187, 279 personal creditors  220, 223, 269, 398 personal defences  361–62, 366 personal property  26–27, 35, 37, 72, 80–81, 86, 242, 244–46 security interests in  142, 246 personal rights  28, 50, 69, 71, 212, 221, 319 personality, legal  202, 207–8, 210, 217–19, 221 in personam rights  22, 49–50, 73, 151, 178, 187, 211, 220 philosophy  325, 333 physical assets  64–65, 148, 151, 171, 175, 254, 256, 326 physical control  327, 338 physical delivery  71, 112, 118, 141–42, 237, 246, 260–61, 341 physical existence  46, 309

Index  441 physical holders  131, 137–38, 312 physical holdership  83–84 physical identification  308, 320 physical movable assets  1, 31, 52, 107, 326 physical possession  36–40, 59–60, 64, 82, 88–90, 135–40, 142–43, 326–27 physical possessors  40, 69, 82, 85, 90, 97, 137, 314 physical transfer  116–17, 129 physicality  30–31, 38, 40, 42, 111–12, 149, 160, 327 pignus  243 place and time of delivery  365–66 place of destination  278, 338 place of enforcement  258, 275, 277–80, 289 place of origin  254, 278–79 place of payment  366–68 pledges  74, 76–77, 118, 145–46, 148, 404, 406, 420 non-possessory  236 possessory  145, 244 pledgors  420 Poland  109, 368 policies, insurance  176, 340, 342 political risk  362 poly-interpretable terms  280–81 pools  89, 391, 400, 403, 417 underlying  386–87, 411 port of loading  352–54 portfolios  21, 183–86, 188, 200–2, 204, 272–74, 276, 294–95 assigned  186, 202 of claims  284, 290, 295 of receivables  20–21, 148, 150, 183–86, 189, 197–98, 204, 239–40 Portugal  138, 368 positive law  91, 93–94 possession  51–54, 56–68, 70–90, 106–11, 115–18, 135–43, 241–48, 307–9 actual  83–84, 141 bona fide  61, 65–66, 136, 139, 307 buyers in  126, 131, 133 in civil law  23, 58, 64, 236 constructive  39, 52, 59, 76–78, 83–84, 111, 242, 244 delivery of  54, 56, 59, 109, 111, 142–43, 309, 311 legal, see legal possession physical  36–40, 47–49, 58–60, 74–78, 82–84, 88–90, 135–40, 326–28 sellers in  143, 348 transfers of  39, 64, 106, 108, 117–18, 143, 233 possessors  54–55, 57, 62–65, 70, 77–79, 81–84, 90, 237 bona fide  342 current  18, 102, 183 legal  54, 58, 62–66, 81, 138, 307 physical  40, 65, 69, 82, 85, 90, 97, 137 possessory actions  23, 57, 59, 62–63, 71, 237, 307–8, 312 possessory charges  143, 417 possessory interests  84, 234, 244–45, 248 possessory pledges  145, 244

possessory rights  62, 78, 83, 250 possessory security interests  299, 362 powers  153–55, 210–11, 217, 219, 222–23, 257, 265–68, 279–80 sufficient  129, 137, 279 tracing  268 practical impossibility  235 practices  41, 89–91, 93–95, 117, 296–97, 376–77, 404–8, 413–14 international  400, 404, 410, 413, 415 market  382, 392, 399, 405–6, 409, 419, 421, 424 transnational  152, 404–6, 409 practitioners  72, 271, 335, 352, 384, 402, 404–6, 409 precedence  175 predecessors  120, 138–40, 142, 194, 342, 357, 359–60, 362 predictability  2, 322, 331–33, 422 preferences  68, 86, 95, 145, 225, 235, 313, 315 preferential rights  87, 236 preferential transfers  421 prescription  68, 103, 136, 139, 276 acquisitive  61–62, 64–68, 70, 83–84, 107, 136, 138–39, 321 presumed intent  217 presumptions  130, 295, 319, 345–48 rebuttable  353 prices  5, 110, 179–81, 183, 186, 224, 382, 395–96 market  390, 395, 418 purchase  126, 138, 360 repurchase  122, 224–26, 240–41 PRIMA, (Place of the Relevant Intermediary Approach)  412–15, 418, 421 prima facie evidence  354 principals  217 principles common  369 fundamental  261, 323, 333, 352, 363, 369, 418 general  91, 96, 319, 323, 331, 334, 418–19, 422 Principles of European Contract Law, see PECL prior knowledge  5–7, 13–17, 20–21, 46, 160, 307, 321 priority  67–70, 144–45, 176, 195, 228, 233–34, 246–48, 293–94 private international law and bills of exchange  365–67 and bills of lading  350–52 and chattels  251–72 modern  49, 271, 352, 401 rules  203, 239, 265, 267, 274, 294–95, 367, 369 and trusts  220–23 private investors  421 private law  27, 41, 46, 251, 299, 319, 322–24, 335 codification  322 domestic  323 formation  333 harmonisation  322 nature  324

442  Index sources of  334 transnationalisation of  41 uniform  420 private parties  76, 251, 303 private property  37, 100 privatisation  105 privity  3, 5–6, 20, 103 pro rata shares  104, 391, 398 procuratio in rem suam  155, 161 production process  1–3, 6, 31, 104, 274, 309, 316 products  40, 42, 46, 89, 91, 301–5, 321–22, 324 commoditised  75, 94, 96, 99, 300–1, 304, 308, 310 consumer  9, 41, 153 finished  3, 8–9, 31, 33, 98, 153 modern financial  29, 94, 106, 128, 224, 305 professional activities  103, 313, 417 professional assignees  160, 164, 184, 188–89, 193–94, 287 professional contracts  18 professional dealings  6–8, 13–16, 45–46, 89–91, 102–3, 152–54, 324–26, 333–35 international  41 professional insiders  5–7, 45–46, 96, 98, 182, 184, 252, 305 professional parties  5–8, 20–21, 95–96, 98–99, 101–5, 312–13, 317, 331–35 professional sphere  5, 7–8, 10, 41, 91–92, 101–2, 324, 333–34 professionalism  374, 419 professionals, see professional parties promises  25, 43, 45, 78, 356 promisors  167 promissory notes  20–22, 25, 168–69, 188–89, 192–94, 292–93, 296–97, 367–69 property, see also Introductory Note immovable  26, 45, 118 law  14–15, 33–36, 38–44, 48–49, 71–74, 313, 324–25, 418–19 applicable  115, 253, 276–77, 326 modern  38, 40, 42–43, 306, 312, 322, 325, 332 notion  1 personal  26–27, 35, 37, 72, 80–81, 86, 242, 244–46 real  26, 36, 234, 334 trust  216, 219, 267–69 proprietary actions  61–64, 69, 79, 86, 143, 307, 321 proprietary aspects of assignments  287 proprietary characterisation  80, 225–26, 305 proprietary charges  96, 341 proprietary claims  22, 61, 240, 290, 398 proprietary defences, common law  80 proprietary effect  6–7, 13, 15, 123–24, 158, 160, 228–29, 279–80 proprietary expectancy  87, 225, 229, 237 proprietary expression  153–54, 312 proprietary interests  10–11, 68–69, 203–5, 256–57, 259, 261, 305, 320–21

equitable  16, 72, 75, 78–79, 142, 299–300, 313, 320–21 foreign  256, 261 limited  75 senior  11, 68 proprietary protection  53–54, 59, 62, 64, 85–86, 150, 162, 164 proprietary regimes  23–24, 37, 48, 278, 284, 319, 408, 418 proprietary remedies  211, 240 proprietary rights, see also Introductory Note in civil law  49–71, 286 closed system  45, 53, 93–94, 121, 213, 304, 315, 325 in common law  72, 86 and contractual rights distinguished  10–15 creation  5, 7, 9, 13–14, 19, 89, 304, 307 equitable  16–17, 45, 69, 71, 79–80, 212, 261, 287 in equity  48, 75 foreign  262, 264, 282, 287, 351 in intangible assets  55, 146 limitation  92–93, 96–97 limited  23, 32, 52, 55–56, 61, 206, 306, 315 modern structure  305–12 nature and structure  51–56 and obligatory rights distinguished  49–51 open system  41, 43, 56, 85, 87, 92, 102, 142 paucity of modern property theory  313–22 protection in civil law  61–65 and publicity  15 as risk management tools  19–21 traditional  14, 16, 56, 56–60 traditional approach  38–40 transfer  105–46, 153, 156–57, 166, 181, 198 types  7, 49, 53, 56, 71–72, 86, 286 proprietary security interests  153, 313 proprietary status  3, 5–6, 13–14, 30–31, 71, 73, 254–56, 273–74 proprietary structures  12, 26, 36, 92, 105, 208, 301, 334 proprietary systems  7, 46, 48–49, 85–87, 93, 236, 238, 305–6 in equity  85–86 open  85, 87 proprietary transfer  156–57, 166, 181 proprietary usufruct  20, 242 public interest  19, 34, 42, 98–99, 103, 105, 261 public international law  297, 377 public order  31–32, 34, 43, 46, 104–5, 254, 257, 333–34 considerations  41, 318 requirements  41, 46, 91, 98, 252, 257, 310, 317–18 public policy  8, 98–99, 101–5, 255–56, 259–61, 273, 298, 334–35 bar  272 domestic  41, 261 publicity  5, 15–18, 50, 55, 75, 261, 263–64, 311 and proprietary rights  15 purchase prices  126, 138, 360

Index  443 purchasers  39, 237–38, 245–48, 261–62, 300–1, 304, 311, 332 bona fide, see bona fide purchasers of chattels  64, 107, 125–27, 139, 157, 160 of claims  155, 196 protection  66–67, 126, 128, 133–34, 136–37, 139–41, 260, 313–14 for value  79, 105, 194, 212, 230 quality  30, 47, 94, 167, 189, 322, 338, 358 risk  165 quasi-negotiable documents/instruments  339, 341, 345 rank  164, 177, 180, 183, 234–35, 249, 262, 264–65 maintenance  2, 6 original  2, 6, 31, 153, 320, 421 ranking  70–71, 96–97, 164, 174, 192–93, 201, 232–34, 263 rationality  123 re-characterisation  186, 228–30, 241, 287, 290, 330, 420 issues  185, 303 risk  228 re-hypothecation  410, 421 real estate  35–36, 47, 68, 127–28, 133, 147–48, 221, 226 real property  26, 36, 234, 334 reasonable commercial standards  173 reasonable description  33, 105, 115, 164, 204, 309 reasonableness  74, 144, 146, 420 rebalancing  269, 273 rebuttable presumptions  353 receipt  337, 339, 342, 344, 346–51, 354–55, 370–71, 373–74 receivables  121, 168–71, 174–78, 184–89, 195–98, 238–40, 248–51, 328–32 approximation  291, 329 excess  121, 184, 197 factoring  121, 185, 225–26, 238–40, 274, 362 financing  153–54, 182–83, 185, 195–98, 203–4, 225–26, 228, 238–39 future  121, 153, 156, 163, 176, 178, 203, 240 portfolios  20–21, 148, 150, 183–86, 189, 197–98, 204, 239–40 trade  114, 208, 273, 419 transfers  177, 288, 363 reclaiming  62, 82, 225, 227, 307, 338–39, 370 rights  83, 137, 338 recognition  200–2, 252–59, 262–72, 282, 284–87, 290–93, 295–97, 407–8 international  255, 265, 270 process  259, 275, 351 state  266, 424 recourse  173, 197, 225, 228, 357–59, 362–63, 365–67, 370 factoring  93, 240 financing  197–98, 330

recovery  62, 70, 80, 83, 129, 146, 150, 157 rights  96, 155, 211, 236, 267 redemption  78, 163, 226–28, 236, 416 equity of  78, 163, 226–28, 236 registered securities  382, 384 registered shares  383, 385, 393, 402 registration  148, 227, 257–58, 262–64, 269–70, 371, 383–84, 402–3 requirements  174, 185, 234 regulation  44, 46, 95, 97, 221, 255, 291, 383 financial  46, 424 reification  189, 194 reimbursement  263, 349 relationship thinking  324 relationships contractual  69, 155, 170, 179, 187 fiduciary  387 internal  151, 166–67, 188, 279 underlying  22, 134, 188, 310, 355, 357, 360–61, 367 reliance  240–41, 246, 310, 313, 327, 332, 387, 390 justified  338 remainders  37, 74–75, 145, 182, 193, 230 remedial constructive trusts  116, 267 remedies  58, 73, 131, 143, 211, 220, 240, 250 contractual  131 equitable  215 proprietary  211, 240 rescission, see rescission self-help  231–32, 234–35, 420 remote users  18, 101, 183 renegotiation  339 rental agreements  5, 20, 27, 64, 240 reorganisation  3, 11, 69, 235, 248, 255 repayment  11, 184, 197, 226, 231–32, 387, 389 replacement assets  31–33, 120–21, 153–54, 161, 174–76, 232–33, 300–1, 308–9 replacement goods  114–15, 216, 220, 228, 233–34, 238, 315, 320 repos  91, 224–28, 231–32, 240–41, 312–13, 330, 404–6, 421–22 of investment securities  225, 232, 238–39, 302 repossession  62, 68–69, 87, 137, 225, 231–32, 234–35, 263 rights  68, 236 representations  103, 105, 206 repudiation  69, 199 repurchase  186, 224–27, 241 agreements  35, 198, 221, 224, 226, 239, 419 prices  122, 224–26, 240–41 reputed ownership  115, 130, 132, 246 resale  131, 175, 319, 338 rescission  123–27, 130–33, 145, 196, 215, 260, 310 clauses  131 reservations of title  119–21, 124–27, 218–21, 225–34, 236–39, 262–63, 324–26, 329–31 residence  198, 268–69, 286, 290, 354, 366 habitual  269

444  Index residual rights  182, 190, 319 residual rules  411, 414–15, 418 resolutive conditions  197, 208, 237 restitution  21, 24, 27, 37, 48, 131, 161–62 claims  24, 27, 37, 48, 161 restrictions  132–33, 173, 178, 183, 185, 199, 201, 267–68 contractual  103, 169, 171 restrictive covenants  195 resulting trusts  60, 75, 205, 209, 211, 213–15, 217, 219 retention  70, 94, 117, 142–46, 232, 236, 329–30, 349 rights  142–46, 232, 254, 262, 264, 338 retentors  71, 116, 143–45, 264 retransfer  107, 123, 127, 184, 197, 226, 332 retrieval  59, 64–65, 68–69, 77–78, 82, 84–85, 135, 137–38 rights  64, 89, 126 retroactivity  119, 124, 178, 229, 329, 397 return  11, 68–69, 123–25, 197–99, 215, 230, 232, 239 automatic  122–24, 129–30, 132, 197 of overvalue  226, 228, 233–34, 236 of title  107, 125, 127, 130–33, 143 reversions  190, 193, 230, 234, 321 revindicatio  61–62, 64–65, 68–69, 71, 84, 326–27 revindication  57, 62, 71, 81, 119, 122, 307 rights  23 reward  186, 226, 233 structure  186, 224, 231–32 rights absolute  70–71, 80, 83, 86 closely related  152, 160, 169 competing  97, 191, 274, 276, 372 conditional ownership  45, 49, 202, 236, 238, 241–42, 307, 310 contractual  5–6, 12–14, 18, 20–21, 85, 89, 311, 320 contractual user  5, 7, 12, 16, 19, 54–55, 316, 320–21 direct  386, 388 disposition  39, 66–67, 105–8, 118–20, 126–28, 133–37, 309–11, 327–28 equitable  75, 79–80, 86–87, 212, 254, 287, 321 human  17, 84, 323, 333 of immediate repossession  83, 87, 116, 140, 314 income  3–7, 12–16, 19–22, 52–56, 85–89, 153–54, 306–7, 320–21 industrial property  25, 97, 318 intangible  21, 28, 306 legal  212, 216, 306 obligatory  12–13, 49, 51–52, 70, 73, 85, 90, 315 ownership, see ownership, rights personal  28, 50, 69, 71, 212, 221, 319 in personam  49–50, 73, 162, 169, 178, 187, 211, 220 possessory  62, 78, 83, 250 preferential  87, 236 proprietary, see proprietary rights reclaiming  83, 137, 338 recovery  96, 102, 155, 211, 236, 267 residual  182, 190, 319

retention  142–46, 232, 254, 262, 264, 338 retrieval  64, 89, 126 revindication  23 security  257, 263, 291, 331 set-off  68, 166, 187, 189, 366, 398 third-party  244 tracing  216, 269, 300 user  8, 32, 35, 57, 93, 95, 148, 183 voting  381, 389, 416, 422 rigidity  47, 406 risk  19, 96–97, 230–33, 344–45, 348–49, 362–64, 391, 394–99 acceptance  39 allocation  353 credit  19, 121, 165, 183–86, 240, 358, 421 distribution  322 legal  25, 44, 388, 401, 423 management  6–8, 15, 19–20, 43–44, 93–94, 96–100, 152–53, 300–1 better  18, 41, 45–46, 89, 93, 102, 313 tools  6, 8–9, 19, 41, 93, 231, 325, 334 political  362 quality  165 re-characterisation  228 transfer of  262, 348 road maps  8–9 Roman law  49, 73, 109–12, 114–18, 127–28, 138–40, 154–55, 242–43 classical  128 influence  73, 128 ius commune  49, 73, 127–28, 138, 174, 227–28, 236, 242 reception  36, 49, 80, 155 safe arrival  338 safe harbour function  337–38 safety  423 saisine  36, 80, 117, 137, 139 sale of goods  38, 77, 109, 112–13, 116, 140–44, 299, 345–46 international, see international sale of goods sales agreements  54, 107–8, 110, 117–19, 123–26, 129–31, 144–45, 258–60 failed  124, 126, 141 cash  110, 117, 132, 143 conditional  184–86, 198–99, 218–19, 223, 225–34, 236, 238–39, 329–30 contracts  106, 109, 116–19, 122–23, 126, 128–29, 346–47, 349 cross-border  323 double  71, 108, 110, 112, 348 execution  11, 138, 185, 226, 232, 234, 262–63, 349 finance  148–50, 185–86, 226–28, 230–32, 238, 240–41, 261–62, 419–20 prices  85, 224, 357 protection  45, 87, 238, 262–63, 303 temporary  115, 118, 120, 228–30, 324, 415, 422

Index  445 Savigny, FC von  112, 129 scale  33, 378 scholarship, see legal scholarship Scotland  49, 116, 214, 220–21; see also United Kingdom sea waybills  349–50, 353, 370, 373 search duties  6–7, 13, 16, 89, 164, 210, 287, 297 second buyers  112–13, 234 secured creditors  11, 68, 115, 142, 233, 235, 247–48 secured interests  141, 179, 227, 232, 253, 315, 330 secured lenders  246–47 secured loans  186, 224, 228 secured transactions  42, 184–85, 223–24, 227–28, 230–35, 301–3, 324–25, 329–30 securities  241–45, 247–50, 382–85, 387–89, 395–400, 402–3, 405–9, 419–24 accounts  25–26, 384–85, 390–91, 395, 399, 415–17, 419, 422 bearer  382, 390, 392–93, 411 certified  392, 396 dematerialised  393, 397, 423 entitlements  304, 389, 391, 393–94, 403, 406, 417–18, 421 fungible  198, 389, 403 holdings  383, 391, 398, 416 intermediaries  385, 413 intermediated  422 non-possessory  51, 92, 115, 227, 233, 235, 331 order  383–84 registered  382, 384 transferable  381–82 transfers  220, 384, 388, 396, 417 underlying  385, 389, 393–94, 403, 405, 409, 411–12, 418 securitisations  153–54, 157–59, 181, 183, 188–89, 197, 203–4, 302–3 security accounts  25, 385, 390, 419 security agreements  184, 241, 245–47, 249–50 security assignments  152–53, 157, 159, 173–74, 177, 185, 188, 192 security entitlements  42, 44, 318–19, 383–84, 392–93, 395, 405, 422 security for debt  1, 23, 148, 150, 201, 300 security interest holders  4, 11, 67, 96, 232, 234–35, 243–47, 331 security interests  9–12, 51–56, 141–46, 230–36, 239–49, 255–59, 261–65, 329–31 non-possessory  47, 53, 56, 233–34, 244–45, 299–300, 312, 314 in personal property  142, 246 possessory  299, 362 supporting  170, 180 security purposes  42, 177, 184, 187, 199, 290, 329 security rights  257, 263, 291, 331 security substitutes  146, 231, 329 security transfers  174, 177, 185–86, 219–20, 328, 330–31, 384–85, 417

segregation  6–12, 14–15, 18–20, 41–43, 152–53, 207–10, 218–20, 398 assets  19, 98–99, 102, 153, 212, 217–18, 301 seisin  36–37, 48–49, 73, 75–76, 80, 116–17, 140–41, 312 self-executing contracts  377 self-help  11, 59, 68, 143, 235 remedies  231–32, 234–35, 420 sellers  111–17, 119–22, 133–36, 140–44, 224–26, 237, 337–39, 343–49 original  224–25, 234, 237, 344, 347–48, 351 in possession  143, 348 unpaid  143 separation  152, 154, 202, 205–6, 213, 219–21, 305–6, 331–32 of monetary claims  153, 165, 204, 284, 291, 295 service contracts  165 service providers  145 servitudes  4–5, 48, 50, 53, 56–57, 101–2, 148, 183 set-off  22, 47, 85, 166, 185, 240–41, 272, 279 rights  68, 187, 189, 366, 398 settlement  302, 376, 379, 384–85, 392, 395–404, 409–10, 418–24 finality  251, 394, 397, 400, 413, 415, 418, 421 systems  399, 404, 409, 423 settlors  44, 78, 110, 205, 210–15, 220–23, 259, 268–69 seventeenth century  67, 117, 127, 129, 316 severability  165, 182, 188 shareholders  214, 381–82, 393, 402–3 shares  25–26, 371–72, 381–84, 386–87, 389, 391–93, 401–3, 417–18 registered  383, 385, 393, 402 shifting interests  87, 300, 315, 422 shifting liens  45, 310 shippers  339, 346, 352, 354, 370, 372–76 ships  36, 89, 253, 261–62, 270–71, 337, 369–70 ship’s rail  337, 346 Sicherungsübereignung  87, 219, 227–28, 231, 233–35, 239, 244–45, 263 sight drafts  355–56, 359, 362–63 signatories  221, 357–59, 361, 363, 365–67 signatures  341, 355, 357–59, 361, 365, 367–68, 371–72 simultaneity  338, 400 singularity  377 situs  253–60, 262–65, 267–68, 274, 276–78, 283–84, 290–91, 350–51 smart contracts  378 social peace  39, 53, 88 social values  105 society  15, 35, 72, 126, 227, 334 modern  72, 104, 318, 334 software  1–3, 15, 375 solvabilité apparente  126–27, 130, 225, 227, 236 sources of law  15, 211, 303, 323–24, 333–34, 369, 377 autonomous  303, 334 custom and practices  303 general principle  303 party autonomy  303

446  Index hierarchy  303, 333 independent  333–34 in professional sphere  333–34 traditional  323 transnational  333 South Africa  49, 110, 128, 214 Spain  2, 109, 123, 127, 138 special duties  102, 211, 266, 292 special interests  128, 183, 213, 265, 329 specific performance  18, 86, 88, 113, 131, 144, 311, 321 specificity  26–32, 88, 149, 158, 309, 313–14, 316 and identification  31, 37, 88, 158, 243, 313 requirements  30, 114–15, 324 split ownership  45, 90, 206, 208–9, 218, 229–30, 253, 317 stability  45–46, 332, 373, 410 standardisation  7, 15–16, 21, 93–98, 102, 117, 378 optimal  94–95 standards  423 reasonable commercial  173 transnational minimum  34, 41, 46, 105 state intervention, see intervention state of mind  38, 308, 377 status  22, 264–65, 267–68, 341–43, 349–52, 359–61, 363–65, 392 legal  6, 28, 36, 47, 273, 277, 373–74, 399 proprietary  3, 5–6, 13–14, 30–31, 71, 73, 254–56, 273–74 transnational  297, 342, 392, 408 status quo  39, 53, 88, 122, 125, 133, 306 statutes of limitation  65, 67, 83–84, 103, 107, 134, 230 statutory assignments  199, 286 statutory authorisation  145 statutory exceptions  5, 110, 135, 140–41 statutory interpretation, see interpretation statutory intervention  32, 172, 194, 208, 220, 299 statutory law  81, 83, 99, 101, 236, 239, 264, 346 statutory liens  143, 243, 264 statutory trusts  215, 267 stock exchanges  382, 390, 392, 423 storage  338, 374 straight bills of lading  349 sub-custodians  25, 384–85, 389, 403, 411–12 sub-holders  54, 58, 62–63, 65, 83 sub-holderships  52, 58, 63, 307 sub-participation  178, 181 sub-usufructs  10, 54, 65 subcontracting  178, 181 subrogation  178, 180–81, 291 contractual  181, 291 subsequent holders  346, 355, 360–61, 365 substantive law  270 substitutes, security  146, 231, 329 substitution  46, 114, 179–81, 405 assets  1, 249–50 creditor  155, 165, 178–81, 203 debtor  165, 179–81

succeeding owners  50, 86 successors  4–5, 10–11, 64, 68, 75, 79, 101, 223 sufficient identification  30, 113, 175, 250, 397 supplementation  294–95, 323, 369 suppliers  5–6, 13, 16–17, 21, 96, 209–10, 247, 261 supporting security interests  170, 180 surpluses, liquidation  381–82 suspended interests  206, 209 suspension  143 suspensive conditions  208, 225, 229, 237, 243, 325 swaps  20–21, 41, 91, 104–5, 131, 313 Switzerland  109, 125, 127, 220, 285, 360, 366–68, 415 system thinking  43, 213, 313, 326 tangible movable assets  21, 26, 35, 328, 366 tangibles  39, 51, 66, 118 tax authorities  138, 220, 243 taxes  213–14, 232, 415 TEDIS  375 temporary interests  40, 314, 394 temporary ownership  17–18, 36, 38–39, 85, 87, 206–7, 228–29, 301–2 forms  18, 89, 218, 313 rights  13, 38–39, 42, 58, 60, 207, 209, 325 temporary sales  115, 118, 120, 228–30, 324, 415, 422 temporary transfers  91, 183, 228–29, 296, 328–29, 404, 408 tenure  37, 48, 76, 80, 86, 314 termination  123, 131, 180, 223, 267–68 terminology  21–22, 50–51, 108, 182, 280, 329, 331, 381–82 civil law  3–4, 21–22, 73, 75–76, 108, 208, 225, 358 common law  299, 305 terms  52–57, 88–90, 223–24, 229–32, 254–60, 314–22, 325–27, 416–17 poly-interpretable  280–81 testamentary dispositions  206–7, 209 testamentary trusts  206, 214, 218 theft  61–62, 64, 66–67, 125, 138, 216, 342, 346 thieves  57–58, 64–66, 70–71, 81–83, 119, 134, 136–39, 215–16 third parties  18–21, 68–69, 77–83, 211–12, 216–18, 250–53, 310–11, 362–64 bona fide  60, 117, 212, 268, 344, 372 classes  3, 5, 10, 46, 52, 71, 75, 79 protection against  62, 93, 146, 311, 321 third-party beneficiaries  180 third-party custodians  396–97 third party effects  5, 7, 261, 276–77, 279–80, 282, 290–91, 293 third-party holders  267, 341, 357, 360 third-party payees  362–63 third-party rights  244 thirteenth century  138 tiered system  384–85, 387–88, 391, 396, 399, 403 time drafts  355–58, 360, 362–63, 368 time of loading  346, 353

Index  447 title  107–34, 139–46, 225–34, 236–39, 257–66, 324–31, 337–58, 369–77 appropriation of  146, 236, 264 conditional  225, 237 documents of  25, 35, 260–61, 340–43, 345–54, 369, 371, 374–75 equitable  78, 210 passing of  109, 139 reservation of  119–21, 124–27, 175, 218–21, 225–34, 236–39, 262–63, 324–26 extended  120–21, 174–75, 178, 200, 249 return of  107, 125, 127, 130–33, 143 voidable  131–32, 140–41, 215, 245, 247 title transfer  108–31, 139–40, 143–44, 258–62, 327–28, 332, 345–49, 420–21 causal system  119, 122–28, 130, 133, 197, 325, 327, 332 chattels  55–56, 84, 109–10, 112, 125, 130, 159 delivery as formal requirement of  116–18 delivery for  87, 109–14, 124, 134, 143, 258, 343, 345 origin of abstract and causal views  128–34 tort  21–24, 48, 62–65, 72–73, 78–81, 88–89, 150–51, 311–12 actions  26, 64, 68, 70, 80–81, 83, 113, 150 claims  24, 27, 37, 48, 161, 195 tracing  45, 47, 199–200, 216, 219–21, 249–50, 268–69, 309 facilities  120, 221, 268 powers  268 rights  216, 269, 300 tracking  75, 90, 205, 215–16, 218 trade receivables  114, 208, 273, 419 traders  354, 400, 405 traditio  117, 156–57 traditional sources of law  323 transaction costs  6, 15, 98, 100 transactional finality  14–15, 18, 103, 105–6, 192, 194, 331–32, 335 transactions  136, 230–31, 233–35, 251–53, 300–3, 399–402, 414–17, 419–20 commercial  379 consumer  313 cross-border  323, 335, 379, 420 financial  40, 55, 297, 301, 317, 324, 414, 419–20 international  44–45, 48, 105, 251–52, 362, 369, 413–14, 417 secured  42, 184–85, 223–24, 227–28, 230–35, 301–3, 324–25, 329–30 transfer agreements  55, 120, 122–28, 156, 182, 309 transfer formalities  106, 157, 182, 201 transfer instructions  374, 383, 390, 417–18 transferability  19–20, 28, 204–5, 279, 318, 391–93, 401–2, 409 transferees  5, 13–14, 20–21, 86, 106–7, 307–8, 310–11, 338–39 bona fide  86, 92, 157, 194, 311, 317 subsequent  106, 172

transferors  20–21, 31, 102–3, 105–6, 181, 250, 298–99, 329–30 transfers automatic  160, 166, 170–71, 201, 250 bulk  39, 113–14, 157–58, 249, 254, 256–57, 285, 300–1 of chattels  105–46, 156, 166, 198, 310, 328, 332 of claims  154, 189, 202, 274, 291, 296, 314, 328 conditional  87, 90, 184–85, 196, 198, 218, 226, 229 credit  91, 390–91, 417 electronic  343, 369, 378, 402 fiduciary  228, 233 of ownership  35–36, 55–56, 64, 105–9, 111–13, 119–20, 122, 237–38 of physical possession  39, 64, 116–18, 129, 143 of possession  39, 64, 106, 108, 117–18, 143, 155, 233 preferential  421 of proprietary rights  105–46, 153, 156–57, 166, 181, 198 of receivables  177, 288, 363 of risk  262, 348 security  174, 177, 185–86, 219–20, 328, 330–31, 384–85, 417 temporary  91, 183, 228–29, 296, 328–29, 404, 408 transformation  1–4, 15, 30–31, 33, 39, 103–4, 254, 309 assets in  2, 4, 9, 30–31, 257, 309 constant  8, 152 transnational commercial and financial legal order, see international commercial and financial legal order transnational minimum standards  34, 41, 46, 105 transnational practices  152, 404–6, 409 transnational status  297, 342, 392, 408 transnationalisation  40–41, 45, 47, 103–4, 302–3, 377, 393–94, 404–24 concept  91, 407 process  7, 34, 41, 91 transparency  31, 373, 423 enhanced  377 transportation  170–71, 338–40, 346–47, 350, 352–54, 371, 373–75, 377 treaty law  203, 205, 220–21, 271, 352, 367, 369, 376–77 uniform  251, 352, 367, 422 trust assets  44, 205, 211–12, 219–21, 223, 265–70 trust construction  269 trust funds  211–13, 217, 223, 227 trust law  74, 206, 211, 221–22, 265 trust property  216, 219, 267–69 trust structures  9, 13, 19, 38, 45, 221–22, 313, 317–18 trustees  18, 197–99, 205–6, 208–14, 216–23, 234–36, 265–69, 386–88 bankruptcy  67, 69–70, 80–81, 197–98, 200, 235–36, 247, 250 constructive  215–17, 226 trusts  17–19, 44–45, 60, 73–76, 205–23, 265–70, 325–26, 331 charitable  210, 215, 217, 219

448  Index common law  205–11, 219, 266 constructive  42, 45, 79, 81, 210–11, 213–21, 267, 325 foreign  220–22, 252, 266–67, 269–70 formal  18, 85, 209–10, 213–15, 271, 326 Hague Convention on the Law Applicable to Trusts and Their Recognition  265–70 law of  74, 205, 211, 265, 267–68, 270, 300, 367 offshore  265–66 practical significance in common law countries  213–14 and private international treaty law  220–23 related civil law structures  218–20 resulting  60, 75, 205, 209, 211, 213–15, 217, 219 statutory  215, 267 testamentary  206, 214, 218 twelfth century  36, 49 UCP  373 ultimate debtors  175, 356, 359 UNCITRAL (United Nations Commission on International Trade Law)  203, 205, 239, 248, 294–95, 353–54, 374, 376 underlying agreements  119, 123–27, 129–31, 170, 199–200, 202–3, 309–10, 360–61 underlying assets  4–7, 9–13, 18–21, 52–56, 306–7, 311–15, 340–45, 350–52 underlying claims  189, 193, 200, 202, 205, 285–86, 363–64, 367 underlying contracts  122–23, 125, 172–73, 285–86, 292–93, 299, 301, 365 underlying goods  340–42, 346–47, 349–50, 364 underlying investment securities  384, 388, 398, 404–5, 410–11 underlying proprietary rights  57, 61, 63–65, 76, 108 underlying relationships  22, 134, 188, 310, 355, 357, 360–61, 367 underlying securities  385, 389, 393–94, 403, 405, 409, 411–12, 418 undervalue  226, 228, 232–33, 236 undisclosed agencies  134, 209, 213 undisclosed agency  134, 209, 213 UNIDROIT  203, 239, 251, 270, 298, 415, 419, 422 Principles  223, 323; see also Table of Legislation and Related Documents uniform law  203, 239, 296, 352, 407, 419, 422 uniform security law  251 uniform treaty law  251, 352, 418, 422 mandatory  418 and negotiable instruments  367–68 uniqueness  377–78 unitary approach  8, 42, 72, 106, 161, 312, 324, 333 unitary proprietary regime  23, 27, 48, 299 unitary system  36, 73, 106, 306, 310, 313, 317

United Kingdom  77–81, 116–18, 140–42, 227–30, 258–60, 339–41, 345–48, 359–67 case law  159–60 law  130–31, 140, 176, 178, 258–60, 358, 360, 365 United States  140–43, 183–85, 212–16, 226–28, 230–33, 244–49, 260–64, 402–3 unity  200, 202, 252, 273–74, 283–85, 290–91, 295–96, 298 universal natural law, see natural law unjust enrichment  21–22, 73, 79, 119, 122, 215, 220, 331–32 unpaid sellers  143 in possession  143 unsatisfied assignors  189, 191 unsecured creditors, see non-secured creditors updating  45 USA, see United States usage  73, 145, 358, 406 users  1, 3–10, 12–15, 20–21, 51–56, 61–63, 86–89, 306–7 remote  18, 101, 183 rights  8, 32, 35, 57, 93, 95, 148, 183 usufruct  9–10, 21–22, 50–57, 61–63, 65–67, 69–70, 206–7, 306–7 proprietary  20, 242 valid contracts  66, 71, 76, 127, 136–38, 160, 162, 194 validity  159–60, 189–91, 200–2, 204, 267–68, 279–82, 286–87, 365 value(s)  8–9, 27–29, 33–35, 104–5, 212–14, 216–18, 224, 358–61 economic  1, 9, 22–23, 26–29, 33, 314, 318, 320 good  135, 193, 196, 212, 257, 341, 346 nominal  181, 183 social  105 verification costs  95–96, 105 Vienna Convention  261–62, 294, 344, 377; see also Table of Legislation and Related Dcouments voidable title  131–32, 140–41, 215, 245, 247 voidness  124, 126, 132 von Jhering, R, see Jhering, R von von Savigny, FC, see Savigny, FC von voting rights  381, 389, 416, 422 warehouse receipts  25, 337–38, 340–41 warehouses/warehousing  62, 111, 113, 337, 369 warranties  196–97 waybills, sea  349–50, 353, 370, 373 weaker parties  45 wind farms  47 Windscheid, B  129 working capital  2–3, 148, 153, 274 WTO (World Trade Organisation)  261