Dalhuisen on Transnational Comparative, Commercial, Financial and Trade Law, Volume 2: Contract and Movable Property Law [4. ed] 9781849460606, 1849460604

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DALHUISEN ON TRANSNATIONAL COMPARATIVE, COMMERCIAL, FINANCIAL AND TRADE LAW VOLUME 2 This is the fourth edition of the leading work on transnational and comparative commercial and financial law, covering a wide range of complex topics in the modern law of international commerce, finance and trade. As a guide for students and practitioners it is unrivalled. In a significant departure from earlier editions, the work is now divided into three volumes, each of which can be used independently or as part of the complete work. Volume one covers the introductory material – historical sources, legal systems, foundations of private law, the forces of transnationalisation and the development of the modern law merchant or lex mercatoria as a largely autonomous finance-driven event. Volume two deals with international contracts, payments, and moveable tangible and intangible property. Volume three deals with financial products, financial services and financial regulation, including the fall out from the recent financial crisis, as well as the structure and function of the modern investment banking system. All three volumes may be purchased separately or as a single three volume boxed set.

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Dalhuisen on Transnational Comparative, Commercial, Financial and Trade Law Volume 2 Contract and Movable Property Law

Jan Dalhuisen Professor of Law, King’s College London Miranda Chair in Transnational Financial Law Catholic University Lisbon Visiting Professor UC Berkeley

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Published in the United Kingdom by Hart Publishing Ltd 16C Worcester Place, Oxford, OX1 2JW Telephone: +44 (0)1865 517530 Fax: +44 (0)1865 510710 E-mail: [email protected] Website: http://www.hartpub.co.uk Published in North America (US and Canada) by Hart Publishing c/o International Specialized Book Services 920 NE 58th Avenue, Suite 300 Portland, OR 97213− 3786 USA Tel: +1 503 287 3093 or toll-free: (1) 800 944 6190 Fax: +1 503 280 8832 E-mail: [email protected] Website: http://www.isbs.com  Jan Dalhuisen 2010 Jan Dalhuisen has asserted his right under the Copyright, Designs and Patents Act 1988, to be identified as the author of this work. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, without the prior permission of Hart Publishing, or as expressly permitted by law or under the terms agreed with the appropriate reprographic rights organisation. Enquiries concerning reproduction which may not be covered by the above should be addressed to Hart Publishing Ltd at the address above. British Library Cataloguing in Publication Data Data Available ISBN: 978-1-84946-060-6

Typeset by Columns Design Ltd, Reading Printed and bound in Great Britain by TJ International Ltd, Padstow, Cornwall

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Contents Table of Cases Table of Legislation and Related Documents 1

xvii xxiii

TRANSNATIONAL CONTRACT LAW

Part I General 1.1

1.2

1.3

Introduction 1.1.1 Modern Contract Law: Nature of the Parties or Type of Contract? 1.1.2 The Effect of Globalisation 1.1.3 Content and Coverage of this Chapter 1.1.4 Modern Contract Theory 1.1.5 A New Model of Contract Law? 1.1.6 Modern Contract Theory and the Normative Interpretation Technique 1.1.7 The Challenge of E-commerce Formation of Contracts in Civil and Common Law 1.2.1 The Development of Contract Law and the Role of Parties’ Intent in Civil Law. The Notion of Consensus as the Basis for Contract Validity 1.2.2. The Notions of Consideration, Exchange or Bargain in the Common Law of Contract. Meaning of Intent, Offer and Acceptance 1.2.3 The Development of the Consideration Notion in Common Law. The Modern Alternative of Detrimental Reliance 1.2.4 Contracts: Construction and Remedies in Common and Civil Law. The Parole Evidence Rule 1.2.5 The Practical Significance of the Consideration Requirement in Common Law 1.2.6 The Common Law Notion of Consideration and the Civil Law Notion of Causa Compared 1.2.7 Other Aspects of Contractual Validity: Capacity and Authority 1.2.8 Other Aspects of Contractual Validity: Formalities 1.2.9 Other Aspects of Contractual Validity: Definiteness The Normative Interpretation Technique in Practice: The Civil Law Notion of Good Faith, the Common Law Alternatives, and the Role of Other Sources of Private Law 1.3.1 The Modern Normative Approach and the Concept of Dynamic Contract Law

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CONTENTS

1.3.2

1.3.3 1.3.4 1.3.5 1.3.6

1.3.7 1.3.8 1.3.9

1.3.10 1.3.11

1.3.12

1.3.13 1.3.14

1.4

Roman Law, Ius Commune, Nineteenth-century Thinking, and the Modern Revival of Multiple Sources of Contract Law The Notion of Good Faith in Civil Law Good Faith as a Multifaceted Notion in Civil Law Institutional Aspects of the Operation of the Notion of Good Faith in Civil Law Good Faith, Legal Positivism and System Thinking in the Codification Manner. The Bridge to the Common Law and the Connect with the Transnationalisation Process of Private Law in the Professional Sphere Good Faith in Common Law. Alternatives. Equity Distinguished EU Notion of Good Faith Good Faith and Sources of Law in the CISG, UNIDROIT and European Contract Principles. The DCFR When is Good Faith a Mandatory Concept? Practical Effects of Good Faith or Normative Thinking: The Nature of Pre-contractual Information and Disclosure Duties, Meaning of Consensus, Mistake, Misrepresentation, and Gross Disparity Practical Effects of Good Faith or Normative Thinking: Pre-contractual Negotiation Duties, Co-operation Duties, and Abuse of Contractual Rights Practical Effects of Good Faith or Normative Thinking: The Status of Commercial Letters of Intent The Practical Effects of Good Faith or Normative Thinking: Force Majeure and Change of Circumstances in Professional Dealings

Performance of the Contract, Defences, Default, and Excuses, Termination 1.4.1 Performance in Kind/Specific Performance 1.4.2 Lack of Consensus or Defences to Performance: Invalidity and Rescission 1.4.3 Excuses and the Meaning of Promises, Conditions and Warranties in Connection with Performance in Common Law. Conditions, Representations/ Warranties and Covenants in Financial Contracts 1.4.4 Default or Breach and Damages 1.4.5 Force Majeure and Change of Circumstances 1.4.6 The Definition of the Concept of Force Majeure. Frustration and Economic Impossibility. Development in Civil and Common Law

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81 83 83 87

92 96 98

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CONTENTS

1.4.7 1.4.8 1.4.9 1.5

1.6

Unforeseen Circumstances and the Balance of the Contract: Hardship and Renegotiation Duties Modern Legislative Approaches to a Change in Circumstances Contractual Hardship Clauses

103 109 111

Privity of Contract 1.5.1 Privity of Contract or Third Party Rights and Duties under a Contract 1.5.2 Development of Contractual Third-Party Rights and Duties in Civil Law 1.5.3 The Situation in Common Law and the Changes in the USA and England The UNIDROIT and European Principles of Contract Law: Vienna Convention and UCC Compared. The Draft Common Frame of Reference in the EU (DCFR) 1.6.1 Unification of Contract Law. Formal and Academic Efforts. The EU Activity in this Area 1.6.2 The Unitary Approach 1.6.3 The UNIDROIT Principles for International Commercial Contracts 1.6.4 The European Principles of Contract Law (EPCL) 1.6.5 The Draft Common Frame of Reference (DCFR) 1.6.6 Interpretation and Supplementation in the Principles and the DCFR. Sources of Commercial and Financial Law, Hierarchy and Lex Mercatoria 1.6.7 Approach to Contract Formation: Consensus and Exchange Notions, Capacity, Formalities and Specificity 1.6.8 Defences and Excuses. The Question of Continued Validity of the Contract 1.6.9 Performance, Breach, and Excuses 1.6.10 Privity of Contract 1.6.11 The Nature and Impact of the Contract Principles and DCFR

Part II Contracts for the International Sale of Goods 2.1

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125 125 128 130 134 137

140

142 145 146 147 147 151

The Main Aspects of the International Sale of Goods 2.1.1 Introduction 2.1.2 The Minimum Requirements of the Sales Agreement: Special Features and Risks of International Sales 2.1.3 Legal Risk in International Sales 2.1.4 Special Arrangements to Cover the Risks of International Sales

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CONTENTS

2.1.5 2.1.6 2.1.7 2.1.8 2.1.9 2.1.10 2.1.11 2.1.12 2.2

2.3

International Sales as Contracts between Professionals: Applicable Law Currency and Payments in International Sales: Free Convertibility and Transferability of Money The Transfer of Title in International Sales Conform Delivery and the Passing of Risk in International Sales The Passing of Risk in the Sale of Goods in Civil and Common Law Proprietary Sales Price Protection in Civil and Common Law The Retention Right of the Seller Alternatives to the Reclaiming Rights in International Sales. The Letter of Credit

Ancillary Arrangements in International Sales. The Role of Intermediaries and Documents. 2.2.1 The Safe Harbour Function: Agents and Documents of Title 2.2.2 The Use of Agents: Their Position 2.2.3 The Use of Negotiable Documents of Title in International Sales: Bills of Lading and Warehouse Receipts 2.2.4 Documents of Title in Payment Schemes in International Sales: Bills of Lading 2.2.5 The Use of Negotiable Instruments in International Sales: Bills of Exchange The Uniform International Sales Laws. The CISG 2.3.1 Origin and Scope 2.3.2 The Coverage of the Vienna Convention 2.3.3 The System of the Vienna Convention: Directory or Mandatory Rules? 2.3.4 Applicability of the Vienna Convention 2.3.5 The Sales Law of the Vienna Convention. Formation 2.3.6 The Sales Law of the Vienna Convention. Substance, Default and Remedies 2.3.7 Supplementation and Interpretation of the Vienna Convention 2.3.8 The Interpretation of International Sales Contracts under the Vienna Convention: Meaning of Conduct and Custom in Terms of Contract Interpretation 2.3.9 Supplementation of the Vienna Convention: Private International Law and the Rome Convention on the Law Applicable to Contractual Obligations

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187

188 190 192 192 194 197 198 200 201 206

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CONTENTS

2.3.10 2.3.11 2.3.12 2.3.13

2.3.14

The Main Rules of the 2008 EU Regulation on the Law Applicable to Contractual Obligations The Vienna Convention and the Different Trade Terms in International Sales Incoterms, Their Status and Relation to the UCC and Vienna Convention The Vienna Convention and the ICC Model International Sales Contract. The 2004 Principles of European Law: Sales The Law Merchant Concerning International Sales

Part III Contractual Agency 3.1

3.2

2

ix

217 222 225

228 228 231

The General Notion of Agency 3.1.1 The Use of Agents: Their Position 3.1.2 The Role of the Agent: Explicit and Apparent Authority 3.1.3 The Notion of Independence, Apparent Authority and Agencies of Necessity 3.1.4 The Consequences of Agency: Conflicts of Interests, Rights and Duties of the Agent 3.1.5 Undisclosed and Indirect Agencies 3.1.6 The Civil Law Indirect Agency. The Relationship between Principal and Third Party. Customers’ Assets 3.1.7 The Economic Importance of Modern Agency International Aspects of Agency 3.2.1 Private International Law Aspects of Agency 3.2.2 Treaty Law Concerning the Law Applicable to Agency 3.2.3 The Lex Mercatoria and Agency 3.2.4 The EU Commercial Agent Directive

231 231 235 238 241 243 245 250 251 251 253 255 256

TRANSNATIONAL MOVABLE PROPERTY LAW

Part I Ownership, Possession and Limited, Future, Conditional or Temporary Proprietary Rights in Chattels and Intangible Assets 1.1

259

Introduction 1.1.1 Proprietary Laws in Common and Civil Law 1.1.2 Types of Assets. Claims 1.1.3 Types of Movable Assets and the Requirement of Economic Value and Commerciability. Notions of Identity, Specificity and Definiteness and their Inherent Constraints

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x

CONTENTS

1.1.4

1.1.5 1.1.6 1.1.7 1.2

1.3

Importance of the Law of Chattels and Intangibles in Civil and Common Law. Its Development besides Land Law The Traditional Physical and Anthropomorphic Approach to Property Rights. Modern Developments The Effect of Financial Law and the Need for New Financial Structures Comparative Law, Transnationalisation, and the DCFR

The Types of Proprietary Rights in Civil Law 1.2.1 The Difference between Proprietary and Obligatory Rights in Civil Law 1.2.2 Nature and Structure of Proprietary Rights and their Special Manner of Protection in Civil Law. The Numerus Clausus Notion 1.2.3 The Traditional Proprietary Rights in Civil Law and the Way They are Held. Common Law Compared 1.2.4 The Way Proprietary Rights are Protected in Civil Law: Constructive Possession and Holdership 1.2.5 The Acquisitive Prescription and its Importance in Civil Law. Difference with the Protection of Bona Fide Purchasers 1.2.6 Civil Law Proprietary Defences in Bankruptcy 1.2.7 The Civil Law Relativity or Priority Principle in Respect of Proprietary Rights: The Difference with the Relativity of Obligatory Rights The Types of Proprietary Rights in Common Law: The Practical Differences with Civil Law. Modern Functional Theories 1.3.1 Legal and Equitable Interests in Chattels 1.3.2 Ownership and Possession of Chattels in Common Law 1.3.3 Equitable Proprietary Interests in Chattels 1.3.4 The Common Law System of Proprietary Defences: Tort Actions Based on Better Rather Than Absolute Rights 1.3.5 Constructive Possession in Common Law. The Absence of Acquisitive Prescription. Statutes of Limitation 1.3.6 The Situation in Bankruptcy 1.3.7 Practical Differences between the Common and Civil Law Approaches to Proprietary Rights in Chattels

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CONTENTS

1.3.8

1.3.9 1.4

1.5

Approximation of the Common and Civil Law Systems of Proprietary Law in Chattels. 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 Virtues and Pitfalls of the Numerus Clausus Notion. Modern Functional Approaches

Transfer of Proprietary Rights in Chattels in Civil and Common Law 1.4.1 The Legal Requirements for the Transfer of Chattels 1.4.2 The Formalities of a Sale: Contract or Delivery (Physically or Constructively); Double Sales, the Real or Proprietary Agreement in Civil Law 1.4.3 The Importance of Identification. Effect on the Transfer. Sales of Future Assets, Bulk Transfers, and De Facto Transfers of Title 1.4.4 The Development of the Rules Concerning Delivery as a Formal Requirement of Title Transfer in Civil and Common Law 1.4.5 Legal Capacity and Disposition Right. Causes of Contractual Invalidity. Effect on the Title Transfer. Future, Conditional and Temporary Sales 1.4.6 The Transfer Agreement: The Abstract and Causal System of Ownership Transfer. The Finality Issue 1.4.7 The Origin of the Abstract and Causal Views of Title Transfer 1.4.8 Disposition Rights and their Failure: The ‘Nemo Dat’ Rule and the Protection of Bona Fide Purchasers. Its Contribution to Finality 1.4.9 On the Origin of the ‘Nemo Dat’ Rule and the Principle of Bona Fide Purchaser Protection 1.4.10 The Retention Right of the Seller in the Case of Default of the Buyer Proprietary Rights in Intangible Assets in Civil and Common Law 1.5.1 Asset Status of Intangibles. Proprietary Rights in Intangible Assets and the Possibility and Method of their Transfer 1.5.2 Assignments, Conditions and the Meaning of Notification. Bulk Assignments. The Situation in Double Assignments. Civil Law Development. 1.5.3 The Development in Common Law. Equitable Assignments and Bulk Transfers

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329 335 340 340

343

348

351

354 358 365

371 375 381 386

386

388 394

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CONTENTS

1.5.4

1.5.5

1.5.6 1.5.7 1.5.8 1.5.9

1.5.10 1.5.11 1.5.12 1.5.13 1.5.14 1.5.15 1.6

1.7

Assignment of Rights and Delegation of Duties. The Transferability of Entire Contracts. The Debtor’s Defences The Status of Closely Related Rights and Duties and the Impact of Contractual Restrictions on the Transfer. Amendment of the Underlying Contract The Assignability of Future Claims Assignment, Novation, Amendment, Subrogation and Subcontracting Different Types and Objectives of Assignments The Better Right of the Assignee. The Notion of Abstraction, Independence and Finality. Comparison with Negotiable Instruments The Notion of Abstraction or Independence and the Liberating Effect of Payment by the Debtor The Ranking between Assignees, The Nemo Dat Rule in Assignments Contractual and Proprietary Aspects of Assignments. Mandatory Rules. Applicable Law and Party Autonomy Special Assignment Issues: Warranties, Conditions and Default Bankruptcy Aspects of Assignments. Recourse and Non-Recourse Financing Uniform Rules Concerning Assignments?

Trusts, Constructive and Resulting Trusts, Tracking and Tracing. Agency. The Civil Law Response 1.6.1 Basic Features of the Common Law of Trust 1.6.2 Definitional Issues, Fiduciary Duties and Court Intervention 1.6.3 The Practical Significance of Trusts in Common Law Countries 1.6.4 Constructive Trusts, Tracing and Tracking, Resulting Trusts, Statutory Trusts and Charitable Trusts 1.6.5 Trust and Agency. Trust and Bailment 1.6.6 Related Civil Law Structures 1.6.7 Private International Treaty Law and Trust Law Principles Secured Transactions and Conditional Sales. Floating Charges 1.7.1 The Importance of Conditional Sales in Finance and the Difference with Secured Transactions 1.7.2 What are Sale-Repurchase Agreements or Finance Sales? The Characterisation Issue. Property-based and Security-based Funding

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401 406 410 413

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CONTENTS

1.7.3 1.7.4 1.7.5

1.7.6

1.7.7 1.7.8

1.7.9

1.7.10 1.8

1.9

The Evolution of Conditional and Temporary Transfers in Civil and Common Law When are Finance Sales Converted into Secured Transactions? 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? Examples of Finance Sales: Finance Leases, Repos and Factoring. Finance Sales as Executory Contracts, Cherry Picking and Netting The Outward Signs of Security Interests and Ownership-Based Funding. Possession or Filing. Attachment and Perfection of Security Interests in Movable Property under the UCC in the US. Meaning and Weakness of the Filing System 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 Uniform Security Law and Principles of Security Laws

xiii

460 463

469

472 475

482

484 486

Private International Law Aspects of Chattels 1.8.1 When Conflicts Arise 1.8.2 The Application of the Lex Situs 1.8.3 The Notions of Equivalence and Adaptation; Conditional Ownership, Security and Retention Rights 1.8.4 Trusts: The 1985 Hague Convention on the Law Applicable to Trusts and Their Recognition 1.8.5 The Details of the Trust Convention 1.8.6 Uniform Laws Concerning the Proprietary Aspects of Chattels 1.8.7 The Lex Mercatoria Concerning Chattels

487 487 490

Private International Law Aspects of Assignments 1.9.1 The Various Aspects of Assignments. Conflicts of Law Issues especially in respect of Bulk Assignments 1.9.2 Terminology and Characterisation Issues 1.9.3 Mandatory Proprietary Laws Relating to Assignments. Lex Situs Issues 1.9.4 Current Approaches to Choice of Laws Issues in Assignments: Different Approaches to the Legal Situs of Debts

506

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CONTENTS

1.9.5

1.9.6 1.10

1.11

1.12

EU Regulation and Treaty Law Approaches to the Law Applicable to Assignments: The Choice of Law Provision of Article 14 of the EU Regulation and the Uniform UNCITRAL Convention on the Assignment of Receivables in International Trade The Lex Mercatoria Concerning Bulk Assignments

The Modern Law of Chattels and Intangibles 1.10.1 Traditional and New Approaches 1.10.2 The Modern Structure of Proprietary Rights as Promoted by International Commerce and Finance. Transnationalisation 1.10.3 Paucity of Modern Property Theory

527 527

The European Draft Common Frame of Reference (DCFR). 1.11.1 Introduction 1.11.2 Chattels and their Transfer. The Problem of Physical Possession 1.11.3 Intangible Assets and their Assignment. The Problem of Asset Status 1.11.4 Security Interests. Treatment of Finance Sales and Floating Charges 1.11.5 Trusts. The Question of Systemic Integration 1.11.6 Certainty, Finality and Predictability

550 550

Uniform or Harmonised Statutory Law or Transnationalisation 1.12.1 Consumers and Professionals 1.12.2 Different Sources of Law in the Professional Sphere 1.12.3 Dynamic Movable Property Law

559 559 559 560

Part II Negotiable Documents of Title and Negotiable Instruments 2.1

523 526

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 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

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563 563 563 566

569

575 576 577 578

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CONTENTS

2.2

2.3

Part III 3.1

Negotiable Instruments 2.2.1 Bills of Exchange 2.2.2 Acceptance and Discounting of Time Drafts 2.2.3 The Persons Liable under a Bill of Exchange: Recourse 2.2.4 The Principle of Independence or Abstraction 2.2.5 The Holder in Due Course. Personal and Real Defences. Other Types of Holders 2.2.6 Cheques 2.2.7 Modern Use of Bills of Exchange and Cheques 2.2.8 Bills of Exchange and Competing Assignments of the Underlying Claim 2.2.9 Position of the Holder in Due Course of a Bill of Exchange Compared to the Bona Fide Holder of a Bill of Lading 2.2.10 Foreign Bills of Exchange: Private International Law Aspects 2.2.11 Uniform Treaty Law 2.2.12 The Lex Mercatoria Concerning Bills of Exchange 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 2.3.2 Electronic Systems and Their Importance in Replacing Transportation Documents. The CMI Rules and Bolero. Clearing and the Use of Central CounterParties? 2.3.3 The Situation with Regard to Bills of Exchange: Electronic Bank Transfers. The Facility of ‘@Global Trade’ Investment Securities

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595 595 599 600 601

601

605

609 610

The Different Types of Shares and Bonds 3.1.1 Traditional Distinctions. Negotiable Instruments and Transferable Securities. Dematerialisation 3.1.2 The Notions of Immobilisation, Bookentry Systems, Security Entitlements, and Compartmentalisation. Securities Accounts and Bank Accounts Distinguished 3.1.3 Transfer Instructions and Finality. Tiered and Chained Systems of Transfer

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CONTENTS

3.1.4

3.1.5

3.1.6 3.1.7

3.2

Negotiability and Transferability of Investment Securities under Domestic and Transnational Law. Use of Securities Entitlements to Enhance Transferability and Liquidity 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 Modern Clearing and Settlement Systems. Their Internationalisation The Evolution towards Security Entitlements. Depository Receipts and the Earlier Developments towards Dematerialisation and Immobilisation

The Internationalisation 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 3.2.2 Law Applicable to Transactions in Investment Securities of the Book-entry Type 3.2.3 The Lex Mercatoria concerning International Investment Securities Transactions 3.2.4 Uniform Law: The EU Financial Collateral Directive. The UNIDROIT Project 3.2.5 EU Activities in the Field of Clearing and Settlement

Index

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Table of Cases Australia Hospital Products Ltd v US Surgical Corpn (1984) 156 CLR 41 ................................................ 242 Shepherd v Commissioner of Taxation [1966] ALR 969 ............................................................. 408

Belgium Cour de Cass Belge, 9 Dec 1999, Pas I, 1669 (1999) .................................................................... 246

Canada Cansons Enterprises Ltd v Boughton & Co (1991) 85 DLR (4th) 129 ....................................... 242 Rodaro v Royal Bank of Canada [2000] [QL] OJ 272 ................................................................. 403

European Court of Justice Case 361/89, De Pinto [1991] ECR I-1189 ....................................................................................... 7 Case C-376/98, Germany v EU Parliament and Council [2000] ECR I-2247 ............................ 127 Case C-464/01, Gruber [2005] ECR I-439 ........................................................................................ 7 Case C-380/03, Germany v European Parliament and Council of the European Union [2006] ECR I-11543 ....................................................................................................................... 127

France Cour de Cass 13 Feb 1834, s 1.205 (1834) .................................................................................... 264 Cour de Cass 24 June 1845, [1845] D.1.309 ................................................................................. 178 Cour de Cass 19 August 1849, D.1.273 (1849) ............................................................................. 390 Cour de Cass 20 Apr 1858, D.1.154 (1858) ................................................................................... 290 Cour de Cass 9 May 1864, D.1.190 (1864) ................................................................................... 389 Cour de Cass 20 Mar 1872, [1872] D.1.140 .................................................................................. 349 Cour de Cass 10 April 1878, D.78.1.289 ........................................................................................ 587 Cour de Cass 29 June 1881, D.1.33 (1882) ................................................................................... 400 Cour de Cass 6 July 1886, [1887] D.I.25 ............................................................................... 363, 367 Cour de Cass 15 June 1892, [1892] DI 596 .................................................................................... 59 Cour de Cass 24 Jan 1899, D.1.535 (1900) ................................................................................... 290 Cour de Cass 14 Mar 1900, [1900], D.1.497 ................................................................................. 349 Cour de Cass 28 Nov 1900, [1901] D.1.65 .................................................................................... 349 Cour de Cass 18 Mar 1903, D.1.126 (1905) .................................................................................. 290 Cour de Cass 23 Mar 1903, D.1.337 (1903) .................................................................................. 290 Cour de Cass May 1914, [1918–19] s 1.41 ...................................................................................... 59 Cour de Cass 27 May 1927, D.1928.25 .......................................................................................... 163 Cour de Cass 3 May 1935, [1935] D.H.313 .................................................................................. 178 Cour de Cass 20 June 1938, D.1.26 (1939) ................................................................................... 389 Cour de Cass 24 January 1939, Gaz Pal 1.5866 .............................................................................. 93 Cour de Cass 2 December 1947, [1948] Gaz Pal I.36 .................................................................... 59 Cour de Cass 20 Oct 1959, [1959] D 537 ....................................................................................... 86 Cour de Cass 30 Oct 1962, [1962] Bull Civ I 457 ........................................................................ 173 Cour de Cass 20 March 1972, [1973] JCP 2.17542 ........................................................................ 79 Cour de Cass 10 May 1972, [1972] Bull civ III, 214 ...................................................................... 26 Cour de Cass 27 Nov 1972, [1972], Bull Civ IV.282 .................................................................... 173 Cour de Cass 17 Mar 1975, [1975] D.S.553 .................................................................................. 178 Cour de Cass 7 July 1975, [1976] D.S.70 ...................................................................................... 178 Cour de Cass 20 Nov 1979 [1980] ................................................................................................. 179 Cour de Cass 8 July 1981, [1981] Bull Civ IV 316 ....................................................................... 173 Cour de Cass 12 June 1985, Bull civ III 95 (1985) ....................................................................... 389

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Cour de Cass 15 Mar 1988, Bull civ IV, no 106 ............................................................................ 496 Cour de Cass 21 June 1988, [1988] Semaine Juridique, (ed) G, II.21125 .................................. 121 Cour de Cass 11 June 1991, Bull des Transports et de la Logistique no 2443, 591 (1991) ....... 574 Cour de Cass 1 Dec 1995, [1996] JCP 22.565 ...................................................................... 154, 202 Cour de Cass 29 June 2007, (Sté PT Putrabali Adyamulia) ............................................................. 7 Cour d’Appel Aix en Provence, 24 Oct 1980, Bull de Transports, no 186 (1980) ..................... 576 Trib Gr Inst Paris, 8 March 1985, DS Inf Rap 346 (1985) ........................................................... 520 Tribunal de Commerce de Nanterre, 31 Oct 1990, Bull des Transports et de la Logistique, 136 (1991) ........................................................................................................................... 572 Tribunal de la Seine, 18 December 1967, GP.2.108 (1968) .......................................................... 165

Germany RGH, 19 Sept 1905, RGHZ 61, 245 ............................................................................................... 422 RGH, 25 November 1911, RGHZ 77, 317 (1911) ......................................................................... 121 RGH, 23 Sept 1921, RGHZ 102, 385 ............................................................................................. 404 BAG, 7 June 1963 [1963] NJW 1843 ............................................................................................... 79 BGH, 25 Oct 1952, BGHZ 7, 365 (1952) ...................................................................................... 407 BGH, 1954 [1954] NJW 190 .......................................................................................................... 450 BGH, 22 Feb 1956, BGHZ 20, 88 (1956) ...................................................................................... 471 BGH, 9 June 1960, BGHZ 32, 367 (1960) ..................................................................................... 407 BGH, 20 March 1963, BGHZ 39, 173 (1963) ............................................................................... 497 BGH, 14 Oct 1963, BGHZ 40, 156 (1963) ............................................................................ 388, 404 BGH, 1 July 1970, 54 BGHZ 214, 218 (1970) ....................................................................... 179, 361 BGH, 9 July 1975, 64 BGHZ 395 (1975) ....................................................................................... 367

International Cases Petroleum Development (Trucial Coast) Ltd and the Sheikh of Abu Dhabi (1952) 1 Int’l & Comp LQ 247, (1951) 18 ILR 144 ........................................................................................ 6

Netherlands HR 19 Jan 1898, W 5666 ................................................................................................................ 416 HR 6 Jan 1922 [1922] NJ 265 .......................................................................................................... 41 HR 13 Nov [1937] NJ 433 ................................................................................................................ 41 HR 15 Nov 1957 [1958] NJ 67 ........................................................................................................ 79 HR 17 Apr 1964 [1965] NJ 23 ............................................................................................... 285, 517 HR 13 May 1966 [1967] NJ 3 (Alnati) .......................................................................................... 219 HR 19 May 1967 [1967] NJ 261 .................................................................................................... 109 HR 8 Dec 1972 [1973] NJ 377 ....................................................................................................... 165 HR 12 January 1979 [1979] NJ 362 ............................................................................................... 121 HR 12 Jan 1979 [1980] NJ 526 ...................................................................................................... 371 HR 24 Oct 1980 [1981] NJ 265 ..................................................................................................... 409 HR 18 June 1982 [1983] NJ 723 (Plas/Valburg) ............................................................................. 79 HR 3 Feb 1984 [1984] NJ 752 ....................................................................................................... 249 HR 1 Feb 1985, NJ 698 (Piscator, 1985) HR 25 March 1988 [1989] NJ 200 ................................................................................................. 409 HR 15 Feb 1991 [1991] NJ 493 ....................................................................................................... 79 HR 25 Sept 1992 [1992] NJ 750 HR 27 Nov 1992 [1993] NJ 287 .................................................................................................... 238 HR 11 June 1993 [1993] NJ 776 .................................................................................... 285, 514, 517 HR 26 Nov 1993 [1993] RvdW 15.108 ......................................................................................... 576 HR 18 Jan 1994 [1994] RvdW 61 .................................................................................................. 496 HR 14 Oct 1994 [1995] NJ 445 ..................................................................................................... 409 HR 14 Oct 1994, [1995] NJ 447 .................................................................................................... 392 HR 16 May 1997 [1997] RvdW 126 ...................................................................................... 285, 517

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HR 17 Jan 2003, NJ 281 (2004) ..................................................................................................... 403 HR 13 June 2003 RvdW nr 108 July 2 2003 and 6541 WPNR (2003) ....................................... 249

United Kingdom Adams v Lindsell (1818) 106 ER 250 .............................................................................................. 26 Aiolos, The [1983] 2 Lloyd’s Rep 25 .............................................................................................. 396 Amory v Delamirie [1558–1774] All ER 121 ................................................................................ 324 Arnhold Karberg & Co v Blythe, Green, Jourdain & Co [1915] 2 KB 379 ........................ 220, 223 Aspden v Seddon (1876) 1 Ex D 496 ............................................................................................ 402 Atlantic Computer Systems Plc, Re [1990] BCC 859 ................................................................... 325 Balder London, The [1980] 2 Lloyd’s Rep 489 ............................................................................. 413 Bankline v Arthur Capel [1918] AC 435 ................................................................................... 35, 67 BCCI v Ali [2001] 2 WLR 735 ................................................................................................... 20, 28 Belvoir Finance Co Ltd v Stapleton [1970] 3 All ER 664 ............................................................ 367 Borden (UK) Ltd v Scottish Timber [1979] 3 WLR 672 ............................................................. 178 Brandao v Barnett (1846) 3 QBD 519 ........................................................................................... 384 Bristol Airport Plc v Powdrill [1990] Ch 774 ............................................................................... 289 Bristol and West of England Bank v Midland Railway Company [1891] 2 QB 653 ................. 575 British Movietonews v London and District Cinema [1951] 2 All ER 617 .................................. 36 Bulmer v Bollinger [1974] Ch 401 .................................................................................................. 28 Cammell v Sewell (1860) 5 H&N, 278 .......................................................................................... 491 Car and Universal Finance Co Ltd v Caldwell [1965] 1 QB 525 ................................................ 368 Carlos Federspiel & Co SA v Charles Twigg & Co Ltd;> [1957] 1 Lloyds Rep 240 ........... 344, 573 Chandler v Webster [1904] 1 KB 493 ............................................................................................ 107 Channel Tunnel Group v Balfour Beatty Construction Ltd [1995] AC 334 .................................. 6 Charnock v Liverpool Corpn [1968] 1 WLR 1498 ....................................................................... 123 Clayton v Le Roy [1911] 2 KB 1031 ...................................................................................... 319, 324 Cooper v Chitty 1 Burr 20 KB (1756) ........................................................................................... 319 Courtney & Fairbairn Ltd v Tolaini Brothers (Hotels) Ltd [1975] 1 WLR 297 ........................... 79 Crumlin Viaduct Works Co Ltd, Re [1879] II Ch 755 ................................................................. 350 Cundy v Lindsay (1878) 3 App Cas 459 .................................................................................... 367–8 Dalrymple v Dalrymple (1811) 2 Hag Con 54 ......................................................................... 29, 33 Davis Contractors v Farnham [1956] 2 All ER 145 ............................................................... 36, 100 Dearle v Hall (1828) 3 Russ 1 ................................................................ 392–3, 395, 397, 421–2, 425 Dewar v Dewar [1975] 2 All ER 728 ............................................................................................. 368 Don King Productions v Warren [1999] 2 All ER 218 (CA) ....................................................... 403 Durham Bros v Robertson [1898] 1 QB 765 ........................................................................ 396, 413 Enichem Anic Spa and Others v Ampelos Shipping Co Ltd (the Delfini) [1990] 1 Lloyd’s Rep 252 ................................................................................................................................ 574 Esso Petroleum v Mardon [1976] 2 All ER 5 .................................................................................. 77 Evans v Marlett 1 Ld Raym 271 (1697) ........................................................................................ 570 Fibrosa v Fairburn [1943] AC 32 ................................................................................................... 107 First Energy UK Ltd v Hungarian International Bank Ltd [1993] 2 Lloyd’s Rep 194 ............... 238 Fitzroy v Cave [1905] 2 KB 364, 372 ..................................................................................... 387, 395 Foakes v Beer (1884) 9 App Cas 605 (HL) ..................................................................................... 31 Future Express, The [1992] 2 Lloyd’s Rep 79 ....................................................................... 573, 575 Glegg v Bromley [1912] 3KB 364, 372 ...................................................................................... 395–6 Glenroy, The [1945] AC 124 .......................................................................................................... 574 Goldsmith v Rodgers [1962] 2 Lloyd’s Rep 249 ........................................................................... 176 Graham v Johnson (1869) LR 8 Eq 36 .......................................................................................... 400 Hazell v Hammersmith and Fulham London Borough Council and ors [1991] 1 All ER 545 ................................................................................................................................... 43

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Henderson v Comptoir d’Escompte de Paris (1873) LR 5PC 253 .............................................. 572 Herbert Wagg & Co Ltd, Re [1956] Ch 323 ............................................................................. 521–2 Hill v Tupper [1863] 2 Hurlst 7 C 121 .......................................................................................... 264 Hindley & Co v East Indian Produce Co Ltd [1973] Lloyd’s Rep 515 ....................................... 604 Hirji Mulji v Cheong SS Co [1926] AC 497, 510 ........................................................................... 67 Holroyd v Marshall [1862] 10 HL Cas 191 ........................................................................... 350, 407 Hood v Anchor Line (Henderson Brothers) Ltd [1918] AC 837 .................................................. 36 Hughes v Pump House Hotel Co Ltd [1902] 2 KB 190 ............................................................... 408 ICS Ltd v West Bromwich BS [1998] 1 WLR 896 .......................................................................... 20 Independent Automatic Sales v Knowles and Foster [1962] 1 WLR 974 ................................... 179 Interfoto v Stiletto [1989] 1 QB 433 ............................................................................... 1, 28, 36, 66 Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 ... 28 J Spurling Ltd v Bradshaw [1956] 1 WLR 461 ............................................................................... 36 Jade International Steel Stahl und Eisen GmbH & Co KG v Robert Nicholas (Steels) Ltd [1978] QB 917 ............................................................................................................. 590 Keech v Sandford (1726) 25 ER 223. ............................................................................................. 241 Keppell v Bailey [1834] ER 1042 ................................................................................................... 264 Krell v Henry [1903] 2 KB 740 239 F 405 (1917) ........................................................................ 107 Kwok Chi Leung Karl v Commissioner of Estate Duty [1988] 1 WLR 1035 ............................. 522 Linden Gardens Trust Ltd v Lenesta Sludge Disposal Ltd and Ors; St Martins Property Corporation Ltd and Anor_ v Sir Robert McAlpine & Sons Ltd [1993] 2 All ER 417 ..................................................................................................................... 396, 402–3 Lumley v Gye (1853) 2 E&B 216 ................................................................................................... 270 McCutcheon v David MacBrayne Ltd [1964] 1 WLR 128 ............................................................. 36 Macmillan Inc v Bishopsgate Investment Trust Plc (No 3) [1995] 3 All ER 747 ...................... 649 Metropolitan Water Board v Dick [1918] AC 119 ................................................................... 35, 67 Miliangos v George Frank (Textiles) Ltd [1975] 3 All ER 801 .................................................... 165 Moorcock, The (1889) 14 PD .......................................................................................................... 67 Newson and Another v Thornton and Another 6 East 17 ........................................................... 570 North Central Wagon and Finance Co v Graham [1950] 1 All ER 780 ............................. 318, 322 Oltmann case [1976] 2 Lloyd’s Rep 708 (QB) ................................................................................ 37 Ord v White 3 Beav 357 (1884) ..................................................................................................... 400 Pacific Motor Auctions Pty Ltd v Motor Credits Ltd [1965] 2 All ER 105 ................................ 347 Paradine v Jane (1647) 82 ER 897 ................................................................................................. 100 Parker v Smith Eastern Railway Co [1877] 2 CDP 416 ................................................................. 36 Pfeiffer GmbH v Arbuthnot Factors Ltd [1988] 1 WLR 150 ...................................................... 425 Pillans v Van Mierop [1765] 97 ER 1035 [1765] 3 Burr 1663 ....................................................... 31 Pitt v PHH Asset Management Ltd [1994] 1 WLR 327 ................................................................. 79 Pye v Graham [2003] 1 AC 419 ..................................................................................................... 325 Quinn v Leathem [1901] AC 495, 510 .......................................................................................... 270 Raffeisen Zentralbank Osterreich AG v Five Star General Trading LLC [2001] 1 All ER (Comm), 961 ...................................................................................................................... 519 Raffles v Wichelhaus (1864) 2 HC 906 ........................................................................................... 91 Rann v Hughes (1778) 101 ER 1014 (KB) ...................................................................................... 31 RE Jones Ltd v Waring & Gillow Ltd [1926] AC 670 ................................................................... 590 Republica de Guatemala v Nunez [1927] 1KB 669 .............................................................. 395, 519 Rhodes v Allied Dunbar Pension Services Ltd [1987] 1 WLR 1703 ........................... 393, 422, 425 RV Ward v Bignall [1967] 1 QB 534 ............................................................................................. 368 Ryall v Rolle (1749) 26 ER 107 ...................................................................................................... 479 Sajan Singh v Sardara Ali [1960] 1 All ER 269 ............................................................................. 367 Scarfe v Morgan [1835–42] All ER 43 ........................................................................................... 367

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Scruttons Ltd v Midland Silicones Ltd [1962] AC 446 ................................................................ 122 Shamia v Yoory [1958] 1 QB 448 .................................................................................................. 394 Shanklin Pier v Detel Products Ltd [1951] 2 KB 854 .................................................................. 123 Sharpe, Re[1980] 1 All ER 198 ....................................................................................................... 178 Shell UK Ltd v Lostock Garages Ltd [1976] 1 WLR 1187 ............................................................. 67 Sir James Laing & Sons Ltd v Barclay, Curle & Co Ltd [1908], AC 35 ....................................... 349 Siu Yin Kwan v Eastern Insurance Co Ltd [1994] 2 WLR 370 .................................................... 244 Solle v Butcher [1950] 1 KB 671 ..................................................................................................... 91 Stag Line v Foscolo Mango & Co Ltd [1932] AC 328 .................................................................. 227 Stephens v Venables (1862) 30 Beav 625 ....................................................................................... 400 Sterns Ltd v Vickers Ltd [1923] 1 KB 78 ....................................................................................... 175 Sze Hai Tong Bank Ltd v Rambler Cycle Co Ltd [1959] AC 576 (PC) ....................................... 567 Tailby v Official Receiver (1888) 13 AC 523 ................................................................................. 407 Tancred v Delagoa Bay Co (1889) 23 QBD 239 ........................................................................... 396 Taylor v Caldwell (1863) 3 B&S 826, (1863) 32 LJQB 164 .................................................... 35, 100 TD Bailey Son and Co v Ross T Smyth and Co Ltd (1940) 56 TLR 825 ............................... 573–4 Teheran-Europe Co Ltd v ST Belton (Tractors) Ltd [1968] 2 QB 545 ....................................... 251 Thornton v Shoe Lane Parking Ltd [1971] 2 QB 163 .................................................................... 36 Tito v Waddell [1977] Ch 106 ....................................................................................................... 402 Total Gas Marketing Ltd v Arco British Ltd [1998] 2 Lloyd’s Rep 209 ........................................ 20 Tulk v Moxhay (1848) 2 Ph 774 .................................................................................................... 289 Twyne’s Case (1601) 76 ER 809 ..................................................................................................... 481 United States of America and Republic of France v Dolfus Mieg & Cie and Bank of England [1952] 1 All ER 572 .................................................................................................... 317, 322 Vaessen v Romalpa [1976] 1 WLR 677 ......................................................................................... 178 Walford v Miles [1992] 2 WLR 174 ...................................................................................... 66–7, 78 Walker v Bradford Old Bank (1884) 12 QBD 511 ....................................................................... 395 Webb v Webb [1994] ECR I-1717 ................................................................................................. 452 Westdeutsche Landesbank Girozentrale v Islington LBC [1992] 2 All ER 961 .......................... 368 Winch v Keeley 99 ER 1284 ........................................................................................................... 394 Winkfield, The [1900–03] All ER 346 ........................................................................................... 318 Winkworth v Christie, Manson and Woods Ltd [1980] Ch 496 ................................................. 491 Wm Brandt’s Sons & Co v Dunlop Rubber [1905] AC 454 ........................................................ 396 Worcester Works Finance Ltd v Cooden Engineering Co Ltd [1971] 3 All ER 708 .................. 347

United States Alfred Dunhill of London v Republic of Cuba 425 US 682 (1976) ............................................ 520 Allied Bank International v Banco Credito Agricola de Cartago 757 F2d 516 (1985) .............. 520 Barbin v Moore 85 NH 362 (1932) ............................................................................................... 519 Beatty v Guggenheim Exploration Co 225 NY 380, 386 (1919) ................................................. 446 Benedict v Ratner 268 US 353 (1925) ........................................................................................... 521 Branham v Fullmer 181 NW 2d 36 (1970) ................................................................................... 248 Brehany v Nordsstrom Inc 812 P 2d 49 (Utah 1991) .................................................................... 68 Centric v Morrison-Knudsen Co 731 P 2d 411 (1986) ................................................................. 92 Corn Exchange NB&T Co v Klauder 318 US 434 (1943) .................................................... 397, 425 Daniel v Bank of Hayward 425 NW rd 416 (1988) ..................................................................... 380 Department of Natural Resources v Benjamin, 40 Colo App 520, 587 P 2d 1207 (1976) ........ 447 Eustis Mining Co v Beer, Sondheimer & Co (1917) 239 F 976 ..................................................... 29 Fradey v Hyland 37 Fed 49 (1888) ................................................................................................ 248 Frech v Lewis 218 Pa 141 (1907) ................................................................................................... 369 Fugato v Carter County Bank 187 BR 221 (ED Tenn 1995) ....................................................... 422 Garcia v Chase Manhattan Bank NA 735 F2d 645 (1984) ...................................................... 520–1

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Gifford v Ford 5 Vt 532 (1833) ...................................................................................................... 369 Gorden v Hamm 74 Cal Rptr 2d 631 (1998) ............................................................................... 381 Harris v Balk 198 US 215 (1905) ................................................................................................... 519 Hayward v Andrews 106 US 672 (1883) ....................................................................................... 397 Hoffman v Red Owl Stores Inc (1965) 26 Wis 2d 683, 133 NW 2d 267 ...................................... 32 Houtz v Daniels 211 Pac 1088 (1922) ........................................................................................... 427 Johnson v Whiton 34 NE 543 (1893) ............................................................................................ 265 Kidd v Thomas A Edison 239 F 405 (1917) ................................................................................. 240 Kinetics Technology International Corp v Fourth National Bank of Tulsa 705 F 2d 396 (1983) .................................................................................................................................. 480 Lawrence v Fox 20 NY 268 (1859) ................................................................................................ 124 Lewis v Lawrence 30 Minn 244 (1883) ......................................................................................... 521 Litwiller Machine and Manufacturing, Inc v NBD Alpena Bank 457 NW 2d 163 (1990) ....... 480 Meinhard v Salmon 249 NY 458 (1928) ....................................................................................... 242 Menendez v Saks 485 F2d 1355 (1973). ........................................................................................ 520 Moore Equipment Co v Halferty 980 SW 2d 578 (1998) .................................................... 323, 369 Moore v Robertson 17 NYS, 554 (1891) ....................................................................................... 521 Mort, In the Matter of 208 F Supp 309 (1962) ............................................................................ 369 Murphy v American Home Products Corp 448 NE 2d 86 (NY 1983) ......................................... 68 Pacific Gas & Electric v GW Thomas Drayage & Rigging Co 442 P2d 641 (Cal 1968) .............. 47 Perez v Chase Manhatten Bank 61 NY 2d 460 (1984) ............................................................. 520–1 Poma Will, In re 192 NY Supp 2d 156 (1959) .............................................................................. 521 Salem Trust Co v Manufacturers’ Finance Co 264 US 182 (1924) ..................................... 397, 425 Seaver v Ransom 120 NE 639 (NY 1918) ..................................................................................... 124 SEC v Cheney Corp 318 US 80, 85 (1942) ................................................................................... 242 Shaffer v Heitner 433 US 186 (1977) ............................................................................................ 519 Sheinman and Salita Inc v Paraskevas 22 Misc 2d 436 (1959) .................................................... 383 Tanbro Fabrics Corp v Deering Milliken Inc 9 NY 2d 632, 19 UCC 385 (1976) ...................... 380 Teacher’s Ins & Annuity Assn v Butler 626 F Supp 1229 (SDNY 1986) ....................................... 68 Vishipco Line v Chase Manhattan Bank NA 660 F2d 854 (1981) .............................................. 520 Von Wedel v McGrath 180 F 2d 716 (1950) ................................................................................. 251 Wardell v Eden 2 Johns Cass. 258 (1801) ..................................................................................... 397 Wells Fargo Asia Ltd v Citibank NA 852 F2d 657 (1990) ............................................................ 520 Werner v Graham (1919) 183 P 945 ............................................................................................. 265

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Table of Legislation and Related Documents Austria Civil Code ................................................................................................................................ 295, 377 s 308 ............................................................................................................................................ 295 s 367 ............................................................................................................................................ 377

Belgium Bill of Exchange Law 1872 ............................................................................................................. 599 Art 8 ............................................................................................................................................ 587 Civil Code, Art 1690 ............................................................................................................... 161, 390 Royal Decree No 62 of 1967 .......................................................................................................... 634 Art 5 ............................................................................................................................................ 635 Art 10 .......................................................................................................................................... 649

Canada Quebec, Civil Code, Art 1261 ........................................................................................................ 452

European Union Brussels Convention on the Recognition and Enforcement of Judgments in Civil and Commercial Matters, 1968 ........................................................................... 70, 215, 220, 453 Art 16 .......................................................................................................................................... 452 Art 17 ............................................................................................................................................ 70 Brussels I see Regulation (EC) 44/2001 on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters (Brussels I) Directive 68/151/EEC (First Company law Directive) ................................................................... 43 Directive 76/207/EEC on the implementation of the principle of equal treatment for men and women as regards access to employment, vocational training and promotion, and working conditions ................................................................................................................. 8 Directive 84/450/EEC on misleading and comparative advertising ................................................ 8 Directive 85/374/EEC concerning liability for defective products .................................................. 8 Directive 85/577/EEC to protect the consumer in respect of contracts negotiated away from business premises ................................................................................................................... 8 Directive 86/653/EEC on the co-ordination of the Member States relating to self-employed commercial agents .......................................................................................................... 256–8 Directive 87/102/EEC concerning consumer credit ......................................................................... 8 Directive 88/357/EEC (Second Non-Life Directive), Art 7 .......................................................... 217 Directive 90/314/EEC on package travel, package holidays and package tours ............................. 8 Directive 90/619/EEC (Second Life Directive) Art 4 ............................................................................................................................................ 217 Art 4(1) ....................................................................................................................................... 218 Art 6 ............................................................................................................................................ 218 Directive 93/13/EEC on unfair terms in consumer contracts ............................................. 8, 69–70 Preamble ....................................................................................................................................... 69 Art 3(1) ................................................................................................................................... 69–70 Art 4(1) ......................................................................................................................................... 70

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Directive 93/22/EEC on investment services ................................................................................ 250 Art 11 .......................................................................................................................................... 242 Art 11(3) ......................................................................................................................................... 2 Directive 97/5/EC on cross-border credit transfers .......................................................................... 8 Directive 97/7/EC on the protection of consumers in respect of distance contracts .................... 8 Directive 97/9/EC on the protection of purchasers in respect of certain aspects of contracts relating to the purchase on a time share basis ..................................................................... 8 Directive 98/26/EC concerning settlement finality ...... 216, 487, 629, 631, 633, 645, 648, 654, 657 Recital 21 ..................................................................................................................................... 649 Art 9 ............................................................................................................................................ 649 Art 9(2) ........................................................................................................................... 648–9, 651 Directive 98/27/EC on injunctions for the protection of consumers’ interests ............................. 8 Directive 99/44/EC on certain aspects of the sale of consumer goods and associated guarantees ........................................................................................................................... 175 Directive 99/93/EC on a Community framework for electronic signatures ................................ 22 Directive 2000/31/EC [2000] OJ L178 on certain legal aspects of electronic commerce in the Internal Market ............................................................................................................. 8, 22–3 Art 3 .............................................................................................................................................. 23 Art 3(4) ........................................................................................................................................... 8 Art 9 ............................................................................................................................................ 608 Directive 2000/35/EC on combating late payment in commercial transactions ........................ 216 Directive 2000/78/EC establishing a general framework for equal treatment in employment and occupation .............................................................................................................................. 8 Directive 2002/47/EC on financial collateral arrangements ....... 263, 287, 467, 484, 487, 545, 629, 640, 645, 650, 654–5, 658 Directive 2002/47/EC on financial collateral arrangements Recital 3 ....................................................................................................................................... 655 Recital 5 ................................................................................................................................... 655–6 Recital 7 ....................................................................................................................................... 655 Recital 8 ....................................................................................................................................... 655 Recital 9 ....................................................................................................................................... 656 Recital 16 ..................................................................................................................................... 656 Art 2(2) ....................................................................................................................................... 656 Art 7 ............................................................................................................................................ 657 Art 8(2) ....................................................................................................................................... 657 Art 8(3) ....................................................................................................................................... 656 Art 9 .................................................................................................................................... 649, 651 Directive 2002/47/EC on financial collateral arrangements 2002/47/EC with respect to security interests in securities that are recorded in a book-entry system [2002] OJ L168/43 .... 216 Directive 2002/65/EC [2002] OJ L271 concerning the distance marketing of consumer financial services .................................................................................................................................... 8 Directive 2004/39/EC on markets in financial instruments (MiFID) ..................................... 2, 242 Directive 2005/29/EC concerning unfair business-to-consumer commercial practices in the internal market ............................................................................................................... 8, 606 Directive 2008/48/EC on credit agreements for consumers [2008] OJ L 133/66 .......................... 8 Draft Common Frame of Reference (DCFR) ... 2–3, 10–12, 14, 20, 25–6, 34, 37, 53, 57, 59, 63–4, 71–2, 75, 79, 82, 95, 101, 111, 125–30, 136–49, 152, 195, 198, 212, 228–9, 256, 258, 264, 286–7, 297, 300, 370, 386, 388, 414, 434, 444, 455, 471, 484, 487, 505, 537, 539, 544, 550–1, 553–6, 558–61 Book I .......................................................................................................................................... 552 Book IV, Pt A .............................................................................................................................. 554

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Book IX ............................................................................................................................... 552, 556 Book X ................................................................................................................................ 552, 557 Art I-1:102 .................................................................................................. 63, 74, 130, 137–8, 140 Art I-1:102(1) and (4) ................................................................................................................ 138 Art I-1:102(2) ............................................................................................................................. 560 Art I-1:102(3) ............................................................................................................................. 130 Art I-1:102(3)(b) ................................................................................................................ 130, 560 Art I-1:102(3)(c) ................................................................................................................ 141, 558 Art I-1:102(4) ............................................................................................................................... 64 Art I-1:102(b) ............................................................................................................................... 63 Art I-1:103 .............................................................................................. 3, 57, 72, 138–9, 142, 553 Art I-1:103(2) ............................................................................................................................. 553 Art I-1:104 ............................................................................................................................ 75, 138 Art I-8:101 .................................................................................................................................. 130 Art II-1:101 ................................................................................................................................... 12 Art II-1:102 ............................................................................................................. 64, 72, 137, 560 Art II-1:104 ..................................................................................... 64, 72, 130, 137, 141, 214, 560 Art II-1:106 ............................................................................................................................. 34, 37 Art II-1:107 ......................................................................................................................... 129, 144 Art II-1:110 ................................................................................................................................. 138 Art II-2:101 ................................................................................................................................. 137 Art II-3:101 ........................................................................................................................... 76, 129 Art II-3:101/2 .................................................................................................................................. 3 Art II-3:101(2) ...................................................................................................................... 76, 138 Art II-3:104(2) .............................................................................................................................. 82 Art II-3:105 ................................................................................................................................... 23 Art II-3:301 ......................................................................................................... 3, 11, 82, 129, 138 Art II-3:301(2) ................................................................................................................ 74, 79, 130 Art II-3:302 ......................................................................................................................... 129, 146 Art II-3:401 ................................................................................................................................. 146 Art II-3:502 ................................................................................................................................. 146 Art II-4:101 ............................................................................................................. 129, 139, 142–4 Art II-4:101(a) ............................................................................................................................ 129 Art II-4:102 ............................................................................................................... 34, 129, 142–3 Art II-4:103 ................................................................................................................... 34, 129, 144 Art II-4:103(1)(a) ....................................................................................................................... 144 Art II-4:104 ................................................................................................................................. 129 Art II-4:201 ........................................................................................................................... 20, 144 Art II-4:201(1)(b) ....................................................................................................................... 129 Art II-4:202 ......................................................................................................................... 129, 143 Art II-4:202(3) ............................................................................................................................ 139 Art II-4:202(3)(c) ............................................................................................................... 129, 142 Art II-4:204 ............................................................................................................. 129, 139, 142–4 Art II-4:204–6 ............................................................................................................................... 25 Art II-4:205 ............................................................................................................... 20, 129, 143–4 Art II-4:205(3) ............................................................................................................................ 137 Art II-4:206 ................................................................................................................................... 26 Art II-4:211 ................................................................................................................................. 144 Art II-6:106 ................................................................................................................................. 249 Art II-7:101 ......................................................................................................................... 129, 145 Art II-7:102 ......................................................................................................................... 142, 145

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Art II-7:201 ..................................................................................................................... 129, 145–6 Art II-7:201(1)(a)(iii) ................................................................................................................. 145 Art II-7:201(2)(b) ............................................................................................................... 54, 76–7 Art II-7:202 ......................................................................................................................... 129, 145 Art II-7:202(1) ............................................................................................................................ 145 Art II-7:203 ................................................................................................................................. 145 Art II-7:204 ................................................................................................................................. 142 Art II-7:205 ......................................................................................................................... 129, 145 Art II-7:206 ..................................................................................................................... 129, 145–6 Art II-7:207 ......................................................................................................................... 129, 145 Art II-7:211 ................................................................................................................................. 145 Art II-7:212 ......................................................................................................................... 145, 558 Art II-7:212(2) ............................................................................................................................ 146 Art II-7:214 ................................................................................................................................. 146 Art II-7:215 ................................................................................................................................. 146 Art II-7:301 ................................................................................................... 63, 130, 137, 141, 145 Art II-7:301(a) .............................................................................................................................. 63 Art II-7:303 ................................................................................................................................. 558 Art II-8:101 ......................................................................................................... 72, 76, 142–3, 145 Art II-8:101(1)(f) ....................................................................................................................... 137 Art II-8:102 ............................................................................................................... 2, 72, 139, 142 Art II-8:102(1)(e) ............................................................................................................. 2, 74, 139 Art II-8:102(1)(f) ....................................................................................................................... 130 Art II-8:102(1)(g) ....................................................................................................................... 138 Art II-8:102(g) ............................................................................................................................ 130 Art II-9:101 ......................................................................................................................... 130, 137 Art II-9:101(2)(a) ..................................................................................................................... 2, 74 Art II-9:101(2)(c) ....................................................................................................................... 138 Art II-9:102 ................................................................................................................................. 130 Art II-9:102(1) ............................................................................................................................ 129 Art II-9:301/303 .......................................................................................................................... 122 Art II-9:301 ff ............................................................................................................................. 147 Art II-9:404/5 .................................................................................................................................. 3 Art II-9:405 ................................................................................................................................. 130 Art II-44:201 ............................................................................................................................... 129 Art II-44:204 ............................................................................................................................... 129 Art II-44:205 ............................................................................................................................... 129 Art III-1:103 .............................................................................................................. 3, 11, 130, 138 Art III-1:103(1) (2) .................................................................................................................... 130 Art III-1:103(2) ............................................................................................................................. 74 Art III-1:104 ................................................................................................................................ 129 Art III-1:110 ................................................................................................. 3, 54, 82, 110, 129–30 Art III-1:110(3)(c) ........................................................................................................................ 76 Art III-3:104 ................................................................................................................................ 129 Art III-3:104(2) ....................................................................................................................... 54, 76 Art III-3:303 ................................................................................................................................ 146 Art III-5:104 ................................................................................................................................ 554 Art III-5:106 ................................................................................................................................ 554 Art III-5:108 ................................................................................................................................ 554 Art III-5:108(1) ........................................................................................................................... 556 Art III-5:108(3)(c) ...................................................................................................................... 554

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Art III-5:116 ................................................................................................................................ 555 Art III-5:121(1) ................................................................................................................... 555, 557 Art III-5:122 ................................................................................................................................ 555 Art III-5:203(3) ........................................................................................................................... 555 Art III-5:206 ................................................................................................................................ 555 Art III-5:302 ................................................................................................................................ 555 Arts III-9:401 ff .......................................................................................................................... 130 Art IVA-2:101 .............................................................................................................................. 558 Art IVA-2:101 (b) ....................................................................................................................... 553 Art IVA-3:101(b) ........................................................................................................................ 553 Art IVD-1:102(e) ........................................................................................................................ 249 Art V-4:101 ................................................................................................................................. 552 Art VII-2:101(2) ......................................................................................................................... 558 Art VII-5:101 .............................................................................................................................. 558 Art VIII-1:201 ............................................................................................................................. 552 Art VIII-1:202 ..................................................................................................................... 294, 552 Art VIII-1:204 ............................................................................................................................. 552 Art VIII-1:205 ..................................................................................................................... 297, 553 Art VIII-1:301 ............................................................................................................................. 554 Art VIII-2:101 ......................................................................................................................... 553–4 Art VIII-2:202 ............................................................................................................................. 558 Art VIII-2:203 ............................................................................................................................. 555 Art VIII-2:305 ............................................................................................................................. 553 Art VIII-2:307 ............................................................................................................................. 556 Art VIII-6:101 ............................................................................................................................. 552 Art VIII-6:102 ............................................................................................................................. 552 Art VIII-6:202 ............................................................................................................................. 297 Art VIII.2:104 .............................................................................................................................. 553 Art VIII.2:105 .............................................................................................................................. 553 Art VIII.6:201 .............................................................................................................................. 553 Art VIII:6:202(3) ........................................................................................................................ 297 Art IX-1:101(1)(b) ..................................................................................................................... 556 Art IX-1:102(4)(c) and (d) ........................................................................................................ 556 Art IX-1:103(2)(b) and (c) ........................................................................................................ 556 Art IX-1:103(3) ........................................................................................................................... 556 Art IX-1:104 ................................................................................................................................ 556 Art IX-1:104(4) ........................................................................................................................... 556 Art IX-2:102 ................................................................................................................................ 556 Art IX-2:104(2) ........................................................................................................................... 556 Art IX-2:104(3) ........................................................................................................................... 556 Art IX-2:105 ................................................................................................................................ 556 Art IX-2:108 ................................................................................................................................ 556 Art IX-2:109 ................................................................................................................................ 556 Art IX-2:301 ................................................................................................................................ 556 Art IX-2:301(2) ........................................................................................................................... 556 Art IX-2:306 ................................................................................................................................ 557 Art IX-2:307 ........................................................................................................................ 551, 557 Art IX-3:102 ................................................................................................................................ 557 Art IX-5:204 ................................................................................................................................ 557 Art IX-6:102 ................................................................................................................................ 557 Art IX-7:105(5) ........................................................................................................................... 556

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Arts IX-7:213 ff ........................................................................................................................... 557 Ann A .............................................................................................................................................. 3 EC Treaty ............................................................................................................................................. 9 Art 95 .............................................................................................................................. 9, 127, 656 EEC Treaty, Art 220 ........................................................................................................................ 215 Lugano Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters ........................................................................................................... 502 Regulation (EC) 44/2001 on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters (Brussels I) ...................................... 220, 502 Art 2 ............................................................................................................................................ 453 Art 5(1) ....................................................................................................................................... 218 Art 5(6) ....................................................................................................................................... 453 Art 15 .......................................................................................................................................... 218 Art 19 .......................................................................................................................................... 218 Art 22 .......................................................................................................................................... 452 Art 23(1) ....................................................................................................................................... 70 Art 23(4) ..................................................................................................................................... 453 Art 23(5) ..................................................................................................................................... 489 Regulation (EC) 593/2008 on the law applicable to contractual obligations (Rome I) ... 131, 158, 200, 209, 215, 217, 221, 229, 253, 531 Preamble (13) ............................................................................................................................. 219 Preamble (38) ............................................................................................................................. 515 Art 1 ............................................................................................................................................ 216 Art 1(2) ....................................................................................................................................... 216 Art 1(2)(g) .................................................................................................................................. 253 Art 1(3) ....................................................................................................................................... 217 Art 3 ............................................................................................................................ 217, 515, 524 Art 3(3) ............................................................................................................................... 217, 219 Art 4 ...................................................................................................................... 200, 216–18, 524 Art 4(1)(h) .................................................................................................................................. 531 Art 4(2) ......................................................................................................................................... 23 Art 5 ............................................................................................................................................ 217 Art 6 ............................................................................................................................................ 254 Art 6(2) ........................................................................................................................... 23, 218–19 Art 6(3) ....................................................................................................................................... 218 Art 6(4)(e) .................................................................................................................................. 531 Art 7 ............................................................................................................................................ 257 Art 8(1) ................................................................................................................................. 23, 219 Art 9 ............................................................................................................ 131, 158, 217, 219, 257 Art 9(1) ....................................................................................................................................... 219 Art 9(2) ............................................................................................................................... 216, 219 Art 9(3) ....................................................................................................................................... 219 Art 11(5) ..................................................................................................................................... 219 Art 12(1)(c) ................................................................................................................................ 217 Art 13 .......................................................................................................................................... 285 Art 14 .................................................................................................... 217, 221, 513–16, 523, 532 Art 14(1) ............................................................................................................................. 513, 516 Art 14(2) ........................................................................................................... 512–13, 516, 524–5 Art 14(3) ..................................................................................................................................... 515 Art 15 .......................................................................................................................................... 216 Art 20 .......................................................................................................................................... 221

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Art 21 .......................................................................................................................................... 219 Art 25 .......................................................................................................................................... 215 Regulation (EC) 1346/2000 on insolvency proceedings ...................................................... 489, 642 Art 2(g) ....................................................................................................................................... 521 Regulation (EC) 2027/97 on air carrier liability in the case of accidents ....................................... 8 Regulation (EEC) 295/91 establishing common rules for a denied-boarding compensation system in scheduled air transport ......................................................................................... 8 Rome Convention on the Law Applicable to Contractual Obligations, 1980 ............. 215–16, 218, 514–19, 523, 525 Art 4(2) ....................................................................................................................................... 218 Art 4(5) ....................................................................................................................................... 218 Art 12 .................................................................................................... 513–14, 516, 523, 526, 532 Art 12(1) ................................................................................................................. 513–14, 517–18 Art 12(2) ................................................................................................................. 512–14, 517–18 Art 19 .......................................................................................................................................... 218 Art 20 .......................................................................................................................................... 215 Art 21 .......................................................................................................................................... 215 Art 30 .......................................................................................................................................... 215 Art 132(1) and (2) ...................................................................................................................... 285 Rome I see European Union, Regulation (EC) 593/2008 on the law applicable to contractual obligations (Rome I) Statute of the European System of Central Banks (ESCB) and of the European Central Bank (ECB), Art 18 ...................................................................................................................... 648 Treaty on the Functioning of the European Union (TFEU), Art 114 ......................................... 127

France Bankruptcy Act 1967 Art 59 .......................................................................................................................................... 178 Art 65 .......................................................................................................................................... 178 Bankruptcy Act 1985 ...................................................................................................................... 468 Art 33 .......................................................................................................................................... 179 Art 47 .................................................................................................................................. 179, 362 Art 60 .......................................................................................................................................... 384 Art 115 ................................................................................................................................ 178, 181 Art 116 ........................................................................................................................................ 178 Art 117 ................................................................................................................................ 179, 362 Art 118 ........................................................................................................................................ 178 Art 121 ................................................................................................................................ 178, 181 Code Civil .......................................................................................... 2, 41, 59, 84, 175, 182, 391, 548 1804 ......................................................................................... 2, 121, 264, 288, 353, 377, 386, 389 Art 5 .............................................................................................................................................. 61 Art 6.2 ........................................................................................................................................... 60 Art 6.248(2) .................................................................................................................................. 60 Art 6.258 ....................................................................................................................................... 60 Art 7 .............................................................................................................................................. 61 Art 543 ........................................................................................................................................ 295 Art 544 ........................................................................................................................................ 294 Art 711 ................................................................................................................ 264, 343, 353, 571 Art 1108 .................................................................................................................................... 40–1 Art 1109 ...................................................................................................................................... 173 Art 1117 ........................................................................................................................................ 92

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Art 1118 ........................................................................................................................................ 40 Art 1121 ...................................................................................................................................... 121 Art 1129 ...................................................................................................................................... 341 Art 1130 ...................................................................................................................................... 349 Art 1130(1) ................................................................................................................................. 349 Art 1131 .................................................................................................................................... 40–1 Art 1133 .................................................................................................................................... 40–1 Art 1134 .................................................................................................................................. 52, 58 Art 1135 .................................................................................................................................. 52, 58 Art 1138 ...................................................................................... 171–2, 179, 343–4, 353, 389, 571 Art 1141 ...................................................................................................................................... 347 Art 1142 .................................................................................................................................. 84, 86 Art 1143 ........................................................................................................................................ 86 Art 1144 ........................................................................................................................................ 86 Art 1147 ...................................................................................................................................... 101 Art 1148 ...................................................................................................................................... 101 Art 1165 ...................................................................................................................................... 121 Art 1174 ...................................................................................................................................... 154 Art 1184 .......................................................................................... 93, 97, 176, 178, 180, 183, 362 Art 1184(2) ............................................................................................................................. 84, 86 Art 1247(3) ................................................................................................................................. 202 Art 1249 ...................................................................................................................................... 413 Art 1250 ...................................................................................................................................... 413 Art 1291 ...................................................................................................................................... 400 Art 1341 ........................................................................................................................ 43, 213, 343 Art 1354 .......................................................................................................................................... 6 Art 1583 ...................................................................................................... 178–9, 343–4, 353, 571 Art 1584 ...................................................................................................................................... 178 Art 1591 .............................................................................................................................. 154, 202 Art 1610 ........................................................................................................................ 84, 180, 362 Art 1612 .................................................................................................................. 182–3, 353, 382 Art 1613 .................................................................................................................. 182–3, 353, 382 Arts 1641 ff ................................................................................................................................. 173 Art 1644 .................................................................................................................................. 173–4 Art 1654 .............................................................................................................................. 180, 362 Art 1656 ...................................................................................................................................... 362 Art 1659 ...................................................................................................................................... 456 Art 1690 ...................................................................................................... 161, 353, 389, 413, 421 Art 2061 ...................................................................................................................................... 333 Art 2072 ...................................................................................................................................... 478 Art 2073 ...................................................................................................................................... 390 Art 2074 .............................................................................................................................. 389, 478 Art 2075 ...................................................................................................................................... 413 Art 2076 ...................................................................................................................................... 478 Art 2078(2) ................................................................................................................................. 416 Art 2093 ...................................................................................................................................... 307 Art 2102(4) ................................................................................................................. 178, 183, 382 Art 2114 ...................................................................................................................................... 478 Art 2119 ...................................................................................................................................... 478 Art 2123 ...................................................................................................................................... 308 Art 2279 .............................................................................................................. 301, 347, 374, 377

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Art 2282 .............................................................................................................................. 302, 306 Code de Commerce 1808 ............................................................................................................................................. 599 Art 91 .......................................................................................................................................... 478 Art 109 ........................................................................................................................................ 478 Art 121 ........................................................................................................................................ 590 Arts 131 ff ................................................................................................................................... 571 Arts 621–39 ff ............................................................................................................................. 468 Art L 110–3 ................................................................................................................................. 389 Art L 511–15 ............................................................................................................................... 587 Art L 521–1 ................................................................................................................................. 389 Arts L 621–117 and L 621–122 ................................................................................................. 178 Arts L142–1 to L142–5 ............................................................................................................... 478 Art L144 ...................................................................................................................................... 478 Code Monétaire et Financier, Arts L 313–23-L 313–35 ............................................................... 389 Decree 80–345 ................................................................................................................................. 163 Decree 81–500 ................................................................................................................................. 163 Decree 81–862 ................................................................................................................................. 389 Law 66–420 of 18 June 1966 on contracts of affreightment and maritime transport, as amended .............................................................................................................................. 571 Art 18 .......................................................................................................................................... 571 Law 81–1 of 2 January 1981 modified by the Banking Law of 24 January 1984 ...... 389, 409, 413, 421, 517 Law 94–475 of 10 June 1994, Art 59 ..................................................................................... 178, 181 Ordonnance 2006–346 of 23 March 2006 ............................................................ 333, 430, 466, 478

Germany Allgemeine Deutsche Wechselordnung, 1848 ............................................................................... 599 Banking Act (Kreditwesengesetz) .................................................................................................. 616 Bankruptcy Act 1877 s 14 .............................................................................................................................................. 478 s 26 .............................................................................................................................................. 179 s 43 ...................................................................................................................................... 179, 478 Bankruptcy Act 1999, s 91 .............................................................................................................. 356 Bills of Exchange Act 1933 s 1 ................................................................................................................................................ 190 s 7 ................................................................................................................................................ 591 Civil Code (Bürgerliches Gesetzbuch/BGB), 1900 ...... 25, 40, 42, 53, 94, 97, 110, 126, 143, 149, 173–4, 270, 288, 295–6, 347, 359, 364, 373, 386–7, 392, 417, 478, 551, 616 s 90 .............................................................................................................................................. 270 s 119 ...................................................................................................................................... 52, 174 s 121 ............................................................................................................................................ 174 s 123 ............................................................................................................................................ 361 s 123(1) ......................................................................................................................................... 92 s 130 .............................................................................................................................................. 26 s 137 .................................................................................................................................... 388, 404 s 138(2) ......................................................................................................................................... 40 s 157 ........................................................................................................................................ 52, 60 s 159 ............................................................................................................................................ 360 s 164 ............................................................................................................................................ 246 s 181 ............................................................................................................................................ 246

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s 195 ............................................................................................................................................ 174 s 226 .............................................................................................................................................. 52 s 241 ............................................................................................................................................ 121 s 241(1) ......................................................................................................................................... 86 s 241(2) ....................................................................................................................... 53, 57, 79–80 s 242 ........................................................................................................................................ 52, 60 s 244 ............................................................................................................................................ 165 s 273 ........................................................................................................................................ 382–3 s 275 .............................................................................................................................................. 94 s 280 ............................................................................................................................ 53, 57, 94, 97 s 311(2) and (3) ................................................................................................................ 53, 57, 79 s 311(3) ............................................................................................................................... 118, 121 s 311a ............................................................................................................................................. 91 s 311b ............................................................................................................................................ 44 s 313 .................................................................................................................. 53, 57, 83, 107, 109 s 320 ........................................................................................................................................ 382–3 s 322 ............................................................................................................................................ 182 s 323 ...................................................................................................................................... 94, 174 ss 323 ff ....................................................................................................................................... 174 s 323(2) ......................................................................................................................................... 94 s 323(6) ......................................................................................................................................... 94 s 326(1) ......................................................................................................................................... 94 s 328 ........................................................................................................................................ 120–1 s 333 ............................................................................................................................................ 121 s 398 .................................................................................................................................... 270, 390 s 399 ................................................................................................................................ 388, 403–4 s 403 ............................................................................................................................................ 422 s 404 ............................................................................................................................................ 400 s 405 .................................................................................................................................... 404, 417 s 406 ............................................................................................................................................ 400 s 407 .................................................................................................................................... 400, 422 s 409 ............................................................................................................................................ 422 s 410 ............................................................................................................................................ 422 s 433 ............................................................................................................................................ 168 s 434 ............................................................................................................................................ 174 s 437 ........................................................................................................................................ 173–4 ss 437 ff ....................................................................................................................................... 174 s 438(3) ....................................................................................................................................... 174 s 446 ................................................................................................................................ 171–2, 174 s 449 ............................................................................................................................................ 180 s 455 ............................................................................................................................................ 179 s 460 ............................................................................................................................................ 168 s 546(2) ....................................................................................................................................... 617 s 566 .................................................................................................................... 115, 262, 473, 475 s 611 ............................................................................................................................................ 616 s 675 ............................................................................................................................................ 616 s 688 ............................................................................................................................................ 616 s 766 .............................................................................................................................................. 44 s 817 .............................................................................................................................................. 88 s 819 .............................................................................................................................................. 52 s 854 ............................................................................................................................................ 616

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s 854(1) ....................................................................................................................................... 296 s 870 .................................................................................................................... 270, 304, 373, 471 s 872 ............................................................................................................................................ 297 ss 903 ff ....................................................................................................................................... 270 s 929 .................................................................................................................... 343, 346, 354, 366 s 929(1) ....................................................................................................................................... 347 s 930 .................................................................................................................................... 270, 345 s 931 ............................................................................................................................ 270, 298, 346 s 932 ............................................................................................................................................ 378 s 932(2) ....................................................................................................................................... 373 s 933 ............................................................................................................................................ 373 s 934 ............................................................................................................................................ 373 s 937(1) ....................................................................................................................................... 305 s 937(2) ....................................................................................................................................... 305 ss 985 ff ....................................................................................................................................... 301 s 986 ............................................................................................................................................ 382 s 1000 .......................................................................................................................................... 382 s 1205 .......................................................................................................................................... 478 s 1259 .......................................................................................................................................... 467 s 2100 .......................................................................................................................................... 436 Code of Civil Procedure ................................................................................................................... 86 s 804 ............................................................................................................................................ 308 s 867 ............................................................................................................................................ 308 s 883 .............................................................................................................................................. 86 s 887 .............................................................................................................................................. 86 s 888 .............................................................................................................................................. 86 s 890 .............................................................................................................................................. 86 s 930 ............................................................................................................................................ 308 Commercial Code (Handelsgesetzbuch/HGB) ............................................................................. 616 s 340b .......................................................................................................................................... 473 s 354a ........................................................................................................................................... 404 s 366 ............................................................................................................................................ 373 s 369 ............................................................................................................................................ 383 s 392(1) ....................................................................................................................................... 246 s 392(2) ................................................................................................................................... 246–7 Commercial Code (Handelsgesetzbuch/HGB) s 363II ................................................................. 570 Commercial Code (Handelsgesetzbuch/HGB) s 650 ................................................................... 570 Constitution, s 14(2) ....................................................................................................................... 274 Depotgesetz ............................................................................................................................. 616, 636 Insolvency Act 1999 ........................................................................................................................ 468 s 47 .............................................................................................................................................. 179 s 91 ...................................................................................................................................... 408, 485 s 103(2) ....................................................................................................................................... 179 s 104 ............................................................................................................................................ 475 Kapitalanlagegesellschaftgesetz, 1970 ............................................................................................ 450 Negotiable Instruments Act (Wertpapierhandelsgesetz) .............................................................. 616 Prussian Landrecht, 1794, Art I.2, para 136 .......................................................................... 350, 377 Wechselgesetz, s 17 .......................................................................................................................... 590

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International Benelux Uniform Private International Law Statute, Arts 17 and 21 ......................................... 517 Berne Convention on the Protection of Literary and Artistic Works ......................................... 546 Brussels Convention on the Unification of Certain Rules Relating to Maritime Liens and Mortgages, 1926 .................................................................................................................. 505 CMI Rules for Electronic Bills of Lading. ..................................................................................... 606 CMI Uniform Rules for Sea Waybills, 1990 .............................................................................. 577–8 EBRD Model Law on Secured Financing ...................................................................................... 505 EPCL see International, Principles of European Contract Law (PECL), 1998 European Convention on Human Rights, 1950, Art 6 ................................................................. 211 Geneva Convention on the International Recognition of Rights in Aircraft, 1948 ................... 505 Geneva Conventions 1930 ......................................................................................................................... 190, 586–7, 599 Art 3 ............................................................................................................................................ 598 Art 4(1) ....................................................................................................................................... 598 Art 9(2) ....................................................................................................................................... 588 1932 ............................................................................................................................................. 599 Hague Convention on the Law Applicable to Agency, 1978 .................................... 215, 253–5, 257 Art 1 ............................................................................................................................................ 253 Art 2(f) ........................................................................................................................................ 255 Art 5 ............................................................................................................................................ 255 Art 6 ........................................................................................................................................ 254–5 Art 8 ............................................................................................................................................ 254 Art 8(c) ................................................................................................................................... 254–5 Art 11 .......................................................................................................................................... 254 Art 13 .......................................................................................................................................... 254 Art 14 .......................................................................................................................................... 254 Art 16 .................................................................................................................................. 254, 257 Art 17 .......................................................................................................................................... 255 Art 18 .......................................................................................................................................... 255 Art 26 .......................................................................................................................................... 253 Hague Convention on the Law Applicable to Certain Rights in Respect of Securities held with an Intermediary, 2006 ....................................................................... 287, 651, 655 Art 2(1) ....................................................................................................................................... 651 Art 4 ............................................................................................................................................ 648 Art 4(1) ....................................................................................................................................... 650 Art 4.1 ................................................................................................................................. 285, 532 Art 5 ............................................................................................................................................ 650 Hague Convention on the Law Applicable to Trusts and on their Recognition, 1985 ..... 215, 333, 441, 451, 453–4, 488, 499–500 Preamble ..................................................................................................................................... 500 Art 2 ............................................................................................................................................ 500 Art 4 ............................................................................................................................................ 501 Art 5 .................................................................................................................................... 285, 500 Arts 5–10 ..................................................................................................................................... 502 Art 6 ........................................................................................................................................ 502–3 Arts 6–10 ..................................................................................................................................... 500 Art 7 ........................................................................................................................................ 502–3 Art 8 ............................................................................................................................................ 502 Art 11 ...................................................................................................................................... 500–3 Art 11(d) ..................................................................................................................................... 501

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Art 12 .......................................................................................................................................... 504 Art 13 .................................................................................................................................. 500, 503 Art 15 .............................................................................................................................. 500, 502–3 Art 15(d) and (e) ........................................................................................................................ 504 Art 15(f) ...................................................................................................................................... 501 Art 18 .......................................................................................................................................... 500 Art 19 .......................................................................................................................................... 500 Art 20 .......................................................................................................................................... 501 Art 21 .......................................................................................................................................... 502 Art 22 .......................................................................................................................................... 502 Hague Conventions concerning the Uniform Laws on the International Sale of Goods, 1964 ............................................................... 6, 34, 64, 71, 97–8, 125, 151, 153, 162, 192–4, 196–7, 206–7, 209, 212, 215, 225 Art 1(a) ....................................................................................................................................... 162 Art 2 ............................................................................................................................................ 206 Art 3 ............................................................................................................................................ 197 Art 9 ............................................................................................................................................ 213 Art 9(2) ....................................................................................................................................... 214 Art 9(3) ....................................................................................................................................... 226 Art 16 .......................................................................................................................................... 206 Art 17 .......................................................................................................................................... 206 Art 38(4) ..................................................................................................................................... 206 Art 89 .......................................................................................................................................... 206 Hague Private International Law Convention on International Sales 1955, Art 1(1) ..................................................................................................................... 162, 215 1986, Art 1 .......................................................................................................................... 162, 215 Hague Rules ......................................................................................................................... 580–3, 606 Rule I(b) ...................................................................................................................................... 582 (c) and (e) ................................................................................................................................... 581 Rule III(3) ................................................................................................................................... 602 Rule III(4) ................................................................................................................................... 582 Rule III(8) ................................................................................................................................... 581 Hague-Visby Rules ...................................................................................................... 227, 580–2, 605 Rule III(3) ................................................................................................................................... 583 Rule III(4) ................................................................................................................................... 582 Rule V .......................................................................................................................................... 583 Rule VI ........................................................................................................................................ 583 Rule X ...................................................................................................................................... 582–3 Hamburg Rules ....................................................................................................................... 580, 582 Art 1(7) ....................................................................................................................................... 583 Art 14 .......................................................................................................................................... 602 Art 14(3) ..................................................................................................................................... 606 ICC Incoterms ..................................................................................................................... 225–9, 576 ICC Uniform Rules of Conduct for Interchange of Trade Data by Teletransmission, 1987 ..... 607 ICSG see International, Vienna Convention on the International Sale of Goods (ICSG/CISG), 1980 International Convention on Maritime Liens and Mortgages 1993 ........................................... 505 Principles of European Contract Law (PECL), 1998 ...................... 3, 10–11, 26, 34, 59, 71, 73, 75, 82, 92, 95, 101, 110–11, 125–6, 128, 134–6, 138–48, 152, 156, 198, 202, 216, 228–9, 248, 256, 434, 554 Art 1:103 ..................................................................................................................................... 141 Art 1.101 ..................................................................................................................................... 135

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Art 1.101(3)(b) ........................................................................................................................... 148 Art 1.101(4) ................................................................................................................................ 148 Art 1.102 ..................................................................................................................................... 130 Art 1.102(2) ........................................................................................................................ 130, 135 Art 1.103 ............................................................................................................................. 130, 136 Art 1.104 ..................................................................................................................................... 130 Art 1.105 ............................................................................................................................. 130, 136 Art 1.105(2) ................................................................................................................................ 214 Art 1.106 ............................................................................................................... 71, 130, 140, 212 Art 1.106(2) ................................................................................................................................ 130 Art 1.201 ....................................................................................................................... 73, 130, 135 Art 1.201(2) .................................................................................................................................. 11 Art 1.202 ..................................................................................................................................... 129 Art 1.302 ............................................................................................................................... 74, 136 Art 1.305 ..................................................................................................................................... 136 Art 2–101 .................................................................................................................................... 143 Art 2–102 .................................................................................................................................... 142 Art 2–204(1) ............................................................................................................................... 142 Art 2.101 ..................................................................................................................................... 129 Art 2.101(1)(b) ........................................................................................................................... 129 Art 2.101(2) .......................................................................................................................... 37, 144 Art 2.102 ............................................................................................................................. 129, 143 Art 2.103 ............................................................................................................................. 129, 144 Art 2.103(1)(a) ........................................................................................................................... 144 Art 2.105 ..................................................................................................................................... 129 Art 2.201 ..................................................................................................................................... 129 Art 2.201(1)(b) ........................................................................................................................... 144 Art 2.202 ..................................................................................................................................... 129 Art 2.202(3) ................................................................................................................................ 143 Art 2.202(3)(c) ................................................................................................................... 129, 142 Art 2.204 ..................................................................................................................................... 129 Art 2.204–6 ................................................................................................................................... 25 Art 2.204(1) ................................................................................................................................ 129 Art 2.205 ..................................................................................................................................... 129 Art 2.205(1) ................................................................................................................................ 143 Art 2.301 ....................................................................................................................... 129–30, 136 Art 2.301(2) ................................................................................................................................ 136 Arts 3.301 ff ........................................................................................................................ 233, 249 Art 4.101 ..................................................................................................................... 129, 136, 145 Art 4.102 ..................................................................................................................................... 145 Art 4.103 ............................................................................................................................. 136, 145 Art 4.103(1)(a)(ii) .............................................................................................................. 129, 146 Art 4.103(1)(a)(iii) ..................................................................................................................... 145 Art 4.103(2) ................................................................................................................................ 136 Art 4.103(2)(b) ........................................................................................................................... 146 Art 4.104 ............................................................................................................................. 129, 145 Art 4.105 ..................................................................................................................................... 145 Art 4.107 ............................................................................................................................. 129, 145 Art 4.108 ......................................................................................................................... 129, 145–6 Art 4.109 ..................................................................................................................................... 145 Art 4.109(2) ................................................................................................................................ 145

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Art 4.110 ............................................................................................................................. 130, 136 Art 4.114 ..................................................................................................................................... 145 Art 4.115 ..................................................................................................................................... 146 Art 4.116 ..................................................................................................................................... 145 Art 4.117 ..................................................................................................................................... 146 Art 4.118 ..................................................................................................................................... 137 Art 4.118(2) ................................................................................................................................ 146 Art 5:101 ....................................................................................................................................... 76 Art 5:102 ....................................................................................................................................... 72 Art 5.101 ..................................................................................................................... 130, 143, 145 Art 5.101(g) ................................................................................................................................ 130 Art 5.102(f) ................................................................................................................................. 130 Art 6.1.1.1 ..................................................................................................................................... 82 Art 6.101 ..................................................................................................................................... 130 Art 6.101(1) ................................................................................................................................ 129 Art 6.102 ............................................................................................................................. 130, 140 Art 6.110 ..................................................................................................................... 122, 129, 147 Art 6.111 ....................................................................................................................... 129–30, 136 Art 8.108 ..................................................................................................................................... 129 Art 9.102 ............................................................................................................................. 129, 146 Art 9.103 ..................................................................................................................................... 146 Art 9.201 ..................................................................................................................................... 146 Art 15:101 ................................................................................................................................... 129 Art 15.101 ................................................................................................................................... 130 Principles of European Law concerning Sales, 2004 Art 5:101 ..................................................................................................................................... 169 Art 5:102 ..................................................................................................................................... 169 Art 5:201 ..................................................................................................................................... 169 Art 5:202 ..................................................................................................................................... 169 Art 5:203 ..................................................................................................................................... 169 Art 5:204 ..................................................................................................................................... 169 Art 5:205 ..................................................................................................................................... 169 Principles of European Trust Law ................................................................................................. 454 Art I ..................................................................................................................................... 441, 455 Art II ............................................................................................................................................ 455 Art III .......................................................................................................................................... 455 Art IV .......................................................................................................................................... 455 Art IV(3) ..................................................................................................................................... 455 Art IV(4) ..................................................................................................................................... 455 Art IV(5) ..................................................................................................................................... 455 Art V ............................................................................................................................................ 455 Art VI .......................................................................................................................................... 455 Art VII ......................................................................................................................................... 455 Art VIII ........................................................................................................................................ 455 Rotterdam Rules ...................................................................................................................... 580, 582 Statute of the International Court of Justice, Art 38(1) .................................................................. 5 UNCITRAL Convention on International Bills of Exchange and International Promissory Notes, 1988 .......................................................................................................................... 600 UNCITRAL Convention on the Assignment of Receivables in International Trade, 2001 ...... 212, 434, 473, 484, 487, 505, 523, 525–6 Art 8 ............................................................................................................................................ 525

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Arts 28 ff ................................................................................................................................. 525–6 UNCITRAL Convention on the Limitation Period in the International Sale of Goods, 1974 ........................................................................................................................ 195 UNCITRAL Model Law (Bankruptcy), 1997 ................................................................................ 489 UNCITRAL Model Law on Electronic Commerce, 1996 .............................................................. 22 Art 16 .......................................................................................................................................... 607 Art 17 .......................................................................................................................................... 607 UNCITRAL Model Law on International Commercial Arbitration, 1985, Art 1(3) ................. 163 UNIDROIT Convention on Agency in the International Sale of Goods, 1983 ... 10, 233, 248, 256 Art 13(2) ..................................................................................................................................... 248 UNIDROIT Convention on International Factoring, 1988 ..................... 212, 473, 486, 505, 525–6 Art 5(b) ....................................................................................................................................... 408 UNIDROIT Convention on International Financial Leasing, 1988 ................... 10, 26, 75, 82, 118, 125, 145, 212, 228, 473, 486, 505 UNIDROIT Convention on Mobile Equipment, 2002 ................................ 212, 484, 486, 505, 545 UNIDROIT Principles for International Commercial Contracts, 1995 .... 3, 10–11, 26, 34, 45, 59, 71, 73, 75, 82, 92, 95, 101, 110–11, 125, 128, 130–1, 133–6, 138, 142–3, 145–6, 156, 198, 201–2, 214, 229, 434, 454, 554 Preamble ................................................................................................................................. 130–1 Art 1.1 ..................................................................................................................................... 130–1 Art 1.2 ................................................................................................................................. 129, 144 Art 1.3 ......................................................................................................................................... 130 Art 1.4 ..................................................................................................................................... 130–1 Art 1.5 ..................................................................................................................................... 130–3 Art 1.6 ............................................................................................................. 71, 129–30, 140, 212 Art 1.6(2) .................................................................................................................................... 130 Art 1.7 ......................................................................................................................... 71, 73–4, 130 Art 1.7(2) ........................................................................................................................ 11, 73, 132 Art 1.8 ....................................................................................................................... 73, 130–1, 214 Art 1.8(2) ...................................................................................................................................... 74 Art 1.106 ..................................................................................................................................... 216 Art 2.1 ....................................................................................................................... 37, 129, 142–3 Art 2.1.4(2)(b) ............................................................................................................................ 142 Art 2.2 ................................................................................................................................. 129, 144 Art 2.3(1) .................................................................................................................................... 143 Art 2.4 ......................................................................................................................................... 129 Art 2.4(2)(b) ................................................................................................................. 73, 129, 143 Arts 2.5 and 2.6 ............................................................................................................................ 25 Art 2.6 ......................................................................................................................................... 129 Art 2.6(1) .................................................................................................................................... 142 Art 2.6(2) ............................................................................................................................ 129, 143 Art 2.14 ................................................................................................................... 130, 133–4, 144 Art 2.15 ................................................................................................................................. 129–30 Art 2.16 ......................................................................................................................................... 73 Art 2.17 ................................................................................................................................. 73, 129 Art 2.19 ................................................................................................................................. 74, 130 Art 2.20 ................................................................................................................................. 73, 133 Art 3.1 ................................................................................................................................. 129, 145 Art 3.2 ..................................................................................................................... 129, 142–3, 145 Art 3.3 ......................................................................................................................................... 145 Art 3.4 ......................................................................................................................................... 145 Arts 3.4 ff .................................................................................................................................... 142

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Art 3.5 ............................................................................................................................. 129, 145–6 Art 3.5(2) .................................................................................................................................... 136 Art 3.5(2)(b) ............................................................................................................................... 146 Art 3.6 ................................................................................................................................. 129, 145 Art 3.8 ........................................................................................................................... 73, 129, 145 Art 3.9 ....................................................................................................................... 73, 129, 145–6 Art 3.10 ................................................................................................................................. 73, 145 Art 3.12 ....................................................................................................................................... 145 Art 3.13 ....................................................................................................................................... 145 Art 3.16 ....................................................................................................................................... 145 Art 3.17 ....................................................................................................................................... 142 Art 3.18 ....................................................................................................................................... 146 Art 3.19 ..................................................................................................................... 73, 130, 132–3 Art 3.20 ....................................................................................................................................... 146 Art 4.1 ................................................................................................................................. 130, 143 Art 4.1(1) .................................................................................................................................... 134 Art 4.1(2) .................................................................................................................................... 134 Art 4.2 ................................................................................................................................. 129, 142 Art 4.2(1) .................................................................................................................................... 134 Art 4.2(2) .............................................................................................................................. 73, 134 Art 4.3(b) and (f) ....................................................................................................................... 130 Art 4.3(c) ..................................................................................................................................... 142 Art 4.6 ........................................................................................................................................... 73 Art 4.8 ............................................................................................................................... 72–4, 130 Art 5.1.2 ...................................................................................................................................... 142 Art 5.2 ........................................................................................................................... 73, 130, 140 Art 5.2(b) .................................................................................................................................... 130 Art 5.3 ......................................................................................................................... 73–4, 129–30 Art 5.4.2 ........................................................................................................................................ 73 Art 5.5 ........................................................................................................................................... 74 Art 5.6 ........................................................................................................................................... 73 Art 5.7 ........................................................................................................................................... 73 Art 5.8 ........................................................................................................................................... 73 Art 6.2 ................................................................................................................................. 130, 133 Art 6.2.1 ...................................................................................................................................... 129 Art 6.2.2 ........................................................................................................................................ 77 Art 6.2.3 ........................................................................................................................................ 74 Art 7.1.2 ........................................................................................................................................ 73 Art 7.1.3 ...................................................................................................................................... 146 Art 7.1.6 .................................................................................................................... 73–4, 130, 133 Art 7.1.7 ................................................................................................................................ 73, 129 Art 7.2.2 .............................................................................................................................. 129, 146 Art 7.2.4 ...................................................................................................................................... 146 Art 7.2.5 ...................................................................................................................................... 146 Art 7.4.13 .................................................................................................................. 73–4, 130, 133 Vienna Convention on the International Sale of Goods (ICSG/CISG), 1980 .... 4, 6, 10, 34, 44–5, 71, 77, 97–8, 101–2, 104, 125, 129, 131, 140–4, 146, 148, 151–2, 156–8, 162, 170, 192–209, 211–12, 214–16, 222, 225–9, 495–6 Art 1 ............................................................................................................................ 156, 162, 198 Art 1(1) ................................................................................................................... 130, 193, 198–9 Art 1(1)(b) .................................................................................................................. 199, 209, 216

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Art 1(2) ................................................................................................................................. 45, 199 Art 1(3) ............................................................................................................................... 193, 199 Art 2 ................................................................................................................................ 162, 193–4 Art 2(2) ....................................................................................................................................... 199 Art 2(a) ................................................................................................................................... 4, 218 Art 3 ............................................................................................................................................ 194 Art 4 .................................................. 34, 45, 92, 129–30, 145, 152, 181, 194, 200, 206–8, 212–15 Art 4(2) ............................................................................................................................... 153, 162 Art 4(a) ....................................................................................................................................... 214 Art 5 ............................................................................................................................................ 195 Art 6 .......................................................................................... 71, 130, 195, 197–8, 208, 213, 222 Art 7 .................................................................................................. 71, 130, 140, 206, 212, 228–9 Art 7(1) ................................................................................................... 71, 129, 198, 201, 207–10 Art 7(2) ......................... 34, 71, 104, 130, 170, 193, 201, 205–8, 210, 212, 214–15, 222, 226, 229 Art 8 ................................................................................................................ 37, 129, 208, 211–13 Art 9 .............................................................. 64, 71, 130, 140, 193–5, 208, 212–14, 222, 226, 229 Art 9(1) ....................................................................................................................................... 213 Art 9(2) ....................................................................................................................................... 213 Art 10 .......................................................................................................................................... 193 Art 11 .................................................................................................................................. 129, 144 Art 12 .............................................................................................................. 71, 129–30, 144, 197 Art 14 ................................................................................................ 45, 129, 143, 151, 154, 201–2 Arts 14 ff ..................................................................................................................................... 142 Art 14(1) ............................................................................................................................. 144, 200 Art 15 .......................................................................................................................................... 143 Art 16 .................................................................................................................................. 129, 200 Art 16(2) ......................................................................................................................... 26, 34, 143 Art 16(2)(b) ................................................................................................................ 129, 142, 207 Art 18 ............................................................................................................................ 34, 129, 143 Art 18(1) ....................................................................................................................... 34, 129, 142 Art 18(2) ....................................................................................................................... 26, 129, 200 Art 19(2) ..................................................................................................................................... 207 Art 19(3) ....................................................................................................... 45, 129, 144, 151, 201 Art 21(2) ..................................................................................................................................... 207 Art 23 .......................................................................................................................................... 129 Art 24 .......................................................................................................................................... 129 Art 25 .............................................................................................. 95, 98, 146, 153, 177, 202, 204 Art 26 ............................................................................................................................ 98, 202, 207 Art 28 .............................................................................................................. 87, 129–30, 146, 202 Art 29(1) ..................................................................................................................... 129, 143, 201 Art 29(2) ..................................................................................................................................... 207 Art 30 .......................................................................................................................................... 227 Art 31 ...................................................................................................... 162, 194–5, 201, 210, 227 Art 31(c) .............................................................................................................................. 156, 193 Art 32 .......................................................................................................................................... 162 Art 33 .................................................................................................................................. 195, 201 Art 34 .......................................................................................................................................... 227 Art 35 .......................................................................................................................................... 195 Art 35(1) ..................................................................................................................................... 227 Art 35(2) ............................................................................................................................. 170, 205 Art 35(2)(a) ................................................................................................................................ 167

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Art 35(2)(b) ................................................................................................................................ 167 Art 35(2)(d) ........................................................................................................................ 168, 227 Art 38(1) ..................................................................................................................................... 194 Art 39(1) ..................................................................................................................................... 207 Art 45 .......................................................................................................................................... 195 Arts 45 ff ....................................................................................................................................... 95 Art 45(2) ....................................................................................................................................... 95 Art 46 .......................................................................................................................................... 202 Art 47 .................................................................................................................................. 202, 207 Art 48 .......................................................................................................................................... 194 Art 48(2) ..................................................................................................................................... 207 Art 49 .............................................................................................................. 95, 98, 176, 202, 204 Art 49(1)(b) ................................................................................................................................ 202 Art 50 .................................................................................................................................. 194, 203 Art 55 .................................................................................................... 45, 144, 154, 194, 200, 202 Art 57 .......................................................................................................................... 156, 195, 202 Art 58 .................................................................................................................................. 156, 202 Art 60 .......................................................................................................................................... 194 Arts 60 ff ....................................................................................................................................... 95 Art 61 ...................................................................................................................................... 194–5 Art 61(2) ....................................................................................................................................... 95 Art 62 .......................................................................................................................................... 202 Arts 62 ff ..................................................................................................................................... 181 Art 63 .................................................................................................................................. 194, 202 Art 64 ...................................................................................................... 95, 98, 176, 194, 202, 204 Art 64(1)(b) ................................................................................................................................ 202 Art 64(2) ..................................................................................................................................... 194 Art 65 .......................................................................................................................................... 207 Arts 66 ff ....................................................................................................... 94, 160, 194, 205, 222 Art 67 .......................................................................................................................................... 205 Art 67(1) ..................................................................................................................................... 227 Art 67(2) ..................................................................................................................................... 227 Art 68 .................................................................................................................................. 205, 207 Art 69 .................................................................................................................................. 172, 205 Art 69(1) ............................................................................................................................. 195, 201 Art 71 .......................................................................................................................................... 194 Arts 71–73 ................................................................................................................................... 203 Art 71(2) ..................................................................................................................................... 570 Art 71(3) ..................................................................................................................................... 207 Art 72(2) ............................................................................................................................. 194, 207 Art 74 .......................................................................................................................................... 195 Arts 74–77 ................................................................................................................................... 202 Art 77 .......................................................................................................................................... 207 Art 79 ...................................................................................................... 81, 93, 101–3, 129, 203–4 Art 79(4) ..................................................................................................................................... 207 Art 79(5) ............................................................................................................................. 101, 204 Art 82 .......................................................................................................................................... 204 Art 85 .................................................................................................................................. 195, 207 Arts 85 ff ..................................................................................................................................... 163 Art 86 .................................................................................................................................. 195, 207 Art 88 .......................................................................................................................................... 207

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Art 95 .......................................................................................................................................... 198 Art 96 .......................................................................................................................................... 197 Art4(2) ........................................................................................................................................ 177 Pt II ............................................................................................................................................. 195

Italy Civil Code Art 1337 Art 1366 Art 1375 Art 1376 Art 1448 Art 1470 Art 1472

.................................................................................................................................... 52–3 ........................................................................................................................................ 52 ........................................................................................................................................ 52 .............................................................................................................................. 343, 353 ........................................................................................................................................ 40 ...................................................................................................................................... 353 ...................................................................................................................................... 349

Luxembourg Grand-Ducal Decree of 7 June 1996 ................................................................................. 649 Grand Ducal Decree of 19 July 1983 ................................................................................. 635 Grand-Ducal Decree of 1971 ......................................................................................................... 634

Netherlands Bankruptcy Act Art 35 .......................................................................................................................................... 350 Art 35(2) ............................................................................................................. 356, 408, 486, 547 Art 63a(1) ................................................................................................................................... 179 Civil Code ...................................................... 40, 44, 54, 180, 248, 295, 363, 370, 388, 436, 463, 548 1838 ............................................................................................................................................... 84 1992 ........... 44, 110, 121, 276, 283, 294, 359, 370, 387–9, 392, 437, 451, 459, 542, 548, 560, 576 Art 3.1 ................................................................................................................................. 269, 387 Art 3.11 ....................................................................................................................................... 373 Art 3.12 ......................................................................................................................................... 60 Art 3.26 ....................................................................................................................................... 504 Art 3.36 ............................................................................................................................... 404, 417 Art 3.38 ....................................................................................................................................... 180 Art 3.38(2) .......................................................................................................................... 181, 461 Art 3.40 ......................................................................................................................................... 40 Art 3.44 ......................................................................................................................................... 92 Art 3.53 ............................................................................................................................... 181, 360 Art 3.61 ....................................................................................................................................... 239 Art 3.61(2) .................................................................................................................................. 237 Art 3.62 ....................................................................................................................................... 233 Art 3.66 ....................................................................................................................................... 238 Art 3.69 ....................................................................................................................................... 240 Art 3.70 ....................................................................................................................................... 240 Art 3.81 ....................................................................................................................................... 295 Art 3.82(3) .................................................................................................................................. 388 Art 3.83(2) .................................................................................................................................. 403 Art 3.83(3) .......................................................................................................................... 388, 404 Art 3.84(1) .......................................................................................... 181, 269, 343, 354, 360, 387 Art 3.84(2) .......................................................................................................................... 409, 416

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Art 3.84(3) .................................................................................................. 437, 454, 463, 504, 518 Art 3.84(4) ...................................................................................................... 180–1, 360, 461, 463 Art 3.85 ............................................................................................................................... 436, 461 Art 3.86(3)(b) ..................................................................................................................... 568, 591 Art 3.88 ....................................................................................................................................... 363 Art 3.90(2) .................................................................................................................................. 347 Art 3.92 ....................................................................................................................................... 180 Art 3.94 ............................................................................................................................... 161, 392 Art 3.94(3) .................................................................................................................................. 422 Art 3.97 ............................................................................................................... 349, 409, 416, 548 Art 3.99 ............................................................................................................................... 305, 387 Arts 3.107 ff ................................................................................................................................ 387 Art 3.110 ..................................................................................................................................... 248 Art 3.115(3) ................................................................................................................................ 471 Art 3.118 ..................................................................................................................................... 306 Art 3.125 ..................................................................................................................................... 270 Art 3.125(2) ................................................................................................................................ 303 Art 3.17(1)(a) ............................................................................................................................. 504 Art 3.239 ..................................................................................................................... 392, 409, 416 Art 3.246 ..................................................................................................................................... 430 Art 3.246(2) ................................................................................................................................ 416 Art 3.290 ..................................................................................................................................... 382 Arts 3.290 ff ................................................................................................................................ 383 Art 3.291 ..................................................................................................................................... 384 Art 3.292 ............................................................................................................................. 182, 385 Art 4.1066 ................................................................................................................................... 436 Arts 5.1 ff .................................................................................................................................... 387 Art 5.2 ................................................................................................................................. 181, 360 Art 6.2 ..................................................................................................................................... 52, 75 Art 6.52 ................................................................................................................................... 382–3 Art 6.52(2) .................................................................................................................................. 383 Art 6.57 ....................................................................................................................................... 383 Art 6.127(2) ................................................................................................................................ 400 Art 6.145 ..................................................................................................................................... 400 Art 6.150 ..................................................................................................................................... 413 Art 6.203 ............................................................................................................................. 181, 360 Art 6.211 ....................................................................................................................................... 88 Art 6.213 ..................................................................................................................................... 121 Art 6.217(1) .................................................................................................................................. 25 Art 6.248 ............................................................................................................................... 52, 121 Art 6.253 ..................................................................................................................................... 121 Art 6.257 ..................................................................................................................................... 121 Art 6.258 ....................................................................................................................... 83, 107, 109 Art 6.261 ..................................................................................................................................... 121 Art 6.262 ..................................................................................................................................... 182 Art 6.265 ............................................................................................................. 175, 177, 180, 360 Art 6.269 ............................................................................................................................. 180, 360 Art 7.10 ........................................................................................................................... 171–2, 175 Art 7.10(3) .................................................................................................................................. 175 Art 7.17 ....................................................................................................................................... 175 Art 7.39 ....................................................................................................................................... 181

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Arts 7.39 ff .................................................................................................................................. 183 Art 7.42 ....................................................................................................................................... 181 Art 7.420 ................................................................................................................................. 247–8 Art 7.421 ................................................................................................................................. 247–8 Art 7.423 ..................................................................................................................................... 250 Art 7.424 ..................................................................................................................................... 247 Art 8.413 ................................................................................................................................. 570–1 Art 8.417 ..................................................................................................................................... 570 Art 8.441 ..................................................................................................................................... 571 Art 8.460 ..................................................................................................................................... 571 Art 584 (old) ............................................................................................................................... 295 Art 1302 (old) ............................................................................................................................. 180 Art 1374 (former) ........................................................................................................................ 59 Art 1375 (former) ........................................................................................................................ 59 Art 1449 (old) ............................................................................................................................. 411 Commercial Code 1838 ............................................................................................................................................. 599 Art 127 ........................................................................................................................................ 587 Wet Giraal Effectenverkeer ............................................................................................................. 636

Switzerland Act on Private International Law of 1989, Art 145 ...................................................................... 517 Bankruptcy Act, Art 37 ................................................................................................................... 385 Code of Obligations Art 116(2) ................................................................................................................................... 590 Art 401 ........................................................................................................................................ 246

United Kingdom Bankruptcy Act 1914, s 38 .............................................................................................................. 178 Bankruptcy Act 1986 ...................................................................................................................... 481 Bills of Exchange Act 1882 ............................................................................................................. 599 s 4 ................................................................................................................................................ 595 s 5 ................................................................................................................................................ 596 s 8(4) ........................................................................................................................................... 190 s 16 .............................................................................................................................................. 588 s 24 .............................................................................................................................................. 591 s 72 .............................................................................................................................................. 596 s 72(2) ......................................................................................................................................... 596 Bills of Lading Act 1855 ................................................................................................................. 565 Carriage of Goods by Sea Act (COGSA) 1924 ............................................................................. 581 Carriage of Goods by Sea Act (COGSA) 1971 ............................................................................. 582 Carriage of Goods by Sea Act (COGSA) 1992 ................................................................. 565, 581–2 Companies Act 1948 ....................................................................................................................... 179 Companies Act 1985, s 396 ............................................................................................................ 656 Consumer Credit Act 1974 ............................................................................................................... 36 Contracts (Rights of Third Parties) Act 1999 ............................................................................... 124 Factors Act 1889 s 2(1) ........................................................................................................................................... 379 s 8 ................................................................................................................................................ 347 Financial Services Act 1986 .................................................................................................. 2, 36, 250 Financial Services and Markets Act 2000 ............................................................................ 2, 36, 250

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s 238 ............................................................................................................................................ 618 Insolvency Act 1985 s 235(3) ....................................................................................................................................... 178 Sch 10, Pt III ............................................................................................................................... 178 Insolvency Act 1986 s 283 ............................................................................................................................................ 178 s 283(1) ....................................................................................................................................... 327 s 436 ............................................................................................................................................ 327 Judicature Act 1873, s 25(6) ........................................................................................................... 396 Land Registration Act 2002 ............................................................................................................ 325 Law of Property Act 1925 ............................................................................................................... 299 s 136 ............................................................................................................................................ 396 s 136(1) ....................................................................................................................................... 425 Limitations Act 1980 ....................................................................................................................... 325 s 4(5) ................................................................................................................................... 305, 325 Misrepresentation Act 1976 .............................................................................................................. 89 Real Property Limitation Act 1833 ................................................................................................ 325 Reform (Frustrated Contracts) Act 1943 ...................................................................................... 100 Sale of Goods Act 1893 ................................................................................................................... 343 Sale of Goods Act 1979 ................................ 9, 44, 167, 280, 299, 311, 346–7, 368, 372, 480, 527–8 s 2(1) ........................................................................................................................................... 351 s 5(2) ........................................................................................................................................... 348 s 5(3) ........................................................................................................................................... 349 ss 13–15 ................................................................................................................................... 175–6 s 16 ...................................................................................................................................... 311, 572 s 17 ...................................................................................................................... 343, 351, 392, 493 s 18 .............................................................................................................................. 343, 392, 493 s 18(1) ......................................................................................................................................... 348 s 20(1) ............................................................................................................................. 171–2, 175 s 20(2) ......................................................................................................................................... 175 s 21 .................................................................................................................................. 372, 378–9 s 23 ................................................................................................................................ 89, 368, 379 s 24 .............................................................................................................................................. 379 s 25 .............................................................................................................................................. 379 s 27 ................................................................................................................................................ 87 s 28 .............................................................................................................................................. 318 s 29 .............................................................................................................................................. 318 s 29(4) ......................................................................................................................................... 346 s 41 .............................................................................................................................. 182, 352, 382 s 47(2) ......................................................................................................................................... 572 s 48 ...................................................................................................................................... 182, 383 s 51 ................................................................................................................................................ 87 s 52 ................................................................................................................................................ 87 Statute of Frauds 1677 .......................................................................................... 21, 44, 87, 318, 343 Statute of Uses 1535 ........................................................................................................................ 314 Supply of Goods (Implied Terms) Act 1973 ................................................................................... 95 Torts (Interference with Goods) Act 1977, s 8(1) ......................................................................... 324 Unfair Contract Terms Act 1977 ................................................................................................ 66, 95

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United States 49 USCS ss 80101 ff ................................................................................................................................... 602 s 80102 ........................................................................................................................................ 573 s 80105(a)(1)(a), and (b) ........................................................................................................... 573 Bankruptcy Abuse Prevention and Consumer Protection Act, 2005 .......................................... 530 Bankruptcy Code 1978 ..................................................................................................... 177, 327, 369, 416, 460, 531 s 101(25) ..................................................................................................................................... 530 s 101(47) ..................................................................................................................................... 530 s 101(53B)(A) ............................................................................................................................. 530 s 362 .................................................................................................................... 179, 433, 468, 531 s 365(e) ................................................................................................................................ 181, 369 s 522 ............................................................................................................................................ 327 s 541(a) ........................................................................................................................................ 327 s 541(b)(2) .................................................................................................................................. 327 s 544(a)(3) .................................................................................................................................. 327 s 546(c) ................................................................................................................................ 183, 369 s 555 ............................................................................................................................................ 530 s 556 ............................................................................................................................................ 530 s 559 ................................................................................................................................ 475, 530–1 s 560 ............................................................................................................................................ 530 s 561 ............................................................................................................................................ 531 s 562 ............................................................................................................................................ 475 s 741(7) ....................................................................................................................................... 530 s 761(4) ....................................................................................................................................... 530 2005, Ch XV ....................................................................................................................... 489, 642 Carriage of Goods by Sea Act, 1936 .............................................................................................. 581 Harter Act, 1893 ...................................................................................................................... 573, 581 Negotiable Instruments Law, 1896 ................................................................................................ 599 Pomerene Act, 1916 ........................................................................................................ 573, 577, 602 Restatement (Second) of Agency ............................................................................................... 9, 238 s 208 ............................................................................................................................................ 248 Restatement (Second) of Contracts, 1981 ................................................................................. 9, 242 s 1 .................................................................................................................................................. 30 s 3 .................................................................................................................................................. 30 s 24 ................................................................................................................................................ 30 s 35 ................................................................................................................................................ 30 s 71 ................................................................................................................................................ 31 s 164 ............................................................................................................................................ 369 s 176 .............................................................................................................................................. 92 s 205 .............................................................................................................................................. 68 s 302 ............................................................................................................................................ 124 s 342 ............................................................................................................................ 393, 397, 425 Restatement (Third) of the Foreign Relations Law of the United States, 1987, ss 401 ff .......... 158 Securities Act 1933 .......................................................................................................................... 612 Securities Exchanges Act, 1934 .............................................................................................. 250, 612 Uniform Commercial Code (UCC) ............................. 9, 26, 33, 45–6, 59, 67–8, 76, 80, 97–8, 100, 127, 140, 142, 144, 167, 172, 176, 196, 200, 203, 208, 227, 242, 265, 267, 283, 318, 332, 334, 343–5, 352, 369, 380–1, 388, 397–8, 400, 402, 408, 415–16, 422–3, 425, 445, 460, 463, 472, 476, 480, 482–4, 519–20, 528, 530–1, 541, 545, 573, 600, 612, 615, 636, 651

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Art 2 ................................... 9, 33, 44–5, 129, 156, 166, 196, 225, 242, 280, 294, 352, 397–8, 480, 496, 529–30, 540, 617 Art 2A ................................................................................. 118, 284–5, 481, 483, 530–1, 540, 617 Art 3 .................................................................................................................................... 529, 599 Art 4 ............................................................................................................................................ 529 Art 4A ............................................................................................................ 284, 529–30, 540, 653 Art 5 .................................................................................................................... 184, 529, 540, 653 Art 6 ............................................................................................................................................ 349 Art 7 .................................................................................................................................... 529, 565 Art 8 .................................................... 284–5, 529–30, 540, 612, 614, 617–20, 632, 636–7, 653–4 Art 9 ........................... 44, 46, 84, 167, 180, 284–5, 294, 326, 336, 351, 380, 397–8, 408, 415–16, 426, 445, 447, 459–60, 463, 465–6, 470, 473, 479, 481, 483–5, 489, 496, 520, 529–31, 535, 538, 540, 547, 556, 653 s 1–102 ........................................................................................................................................ 130 s 1–103 .................................................................................................. 52, 130, 196, 208, 214, 352 s 1–201(19)(old) ........................................................................................................................... 67 s 1–201(20) ................................................................................................................................. 130 s 1–201(a)(20) ........................................................................................................................ 59, 67 s 1–201(a)(9) .............................................................................................................................. 380 s 1–201(a)35 ............................................................................................................................... 463 s 1–205 ........................................................................................................................................ 130 s 1–301 ........................................................................................................................................ 130 s 1–302 .................................................................................................................... 11, 74, 130, 198 s 1–302(a) ................................................................................................................................... 132 s 1–302(b) ............................................................................................................................... 64, 68 s 1–303(e) ................................................................................................................................... 130 s 1–304 ............................................................................................................................ 67, 80, 130 s 2–103(1)(b) ........................................................................................................................ 68, 130 s 2–103(1)(j) ................................................................................................................................. 68 s 2–105 ........................................................................................................................................ 530 s 2–134(2)(c) .............................................................................................................................. 167 s 2–201 ...................................................................................................... 44–5, 129, 144, 201, 397 s 2–202 .............................................................................................................. 37–8, 129, 144, 213 s 2–202(a) ................................................................................................................................... 130 s 2–204 .................................................................................................................................... 29, 33 s 2–204(1) ................................................................................................................................... 129 s 2–204(2) ............................................................................................................................. 45, 129 s 2–204(3) ................................................................................................................................... 129 s 2–205 ............................................................................................................ 26, 33, 129, 144, 200 s 2–206 .................................................................................................................................. 33, 129 s 2–206(2) ........................................................................................................................... 129, 142 s 2–208 ........................................................................................................................................ 130 s 2–209 ........................................................................................................................................ 129 s 2–210 ................................................................ 115, 269, 388, 397–8, 401–2, 418, 521, 529, 540 s 2–210(2) ................................................................................................................... 398, 402, 405 s 2–210(4) ................................................................................................................................... 402 ss 2–301 ff ................................................................................................................................... 130 s 2–302 .......................................................................................................................................... 68 s 2–303 ........................................................................................................................................ 130 s 2–311(3) ................................................................................................................................... 129 s 2–314 ........................................................................................................................................ 176

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s 2–315 ........................................................................................................................................ 176 s 2–401 ................................................................................................ 171, 189, 344, 385, 480, 573 s 2–401(2) ............................................................................... 180, 326, 346–7, 352, 362, 369, 482 s 2–401(4) ........................................................................................................................... 183, 369 s 2–403 .................................................................................................................. 89, 352, 369, 380 s 2–403(1) ................................................................................................................................... 380 s 2–403(1)(c) .............................................................................................................................. 369 s 2–403(2) ............................................................................................................................... 380–1 s 2–501 ........................................................................................................................................ 349 s 2–505 ........................................................................................................................ 180, 182, 189 s 2–507(2) ........................................................................................................................... 183, 369 s 2–509(2) ................................................................................................................................... 172 s 2–509(3) ........................................................................................................................... 171, 176 s 2–510 ........................................................................................................................................ 176 s 2–603 .......................................................................................................................................... 68 s 2–615 .......................................................................................................................... 68, 100, 103 s 2–702 ................................................................................................................ 180, 183, 345, 369 s 2–702(3) ................................................................................................................................... 369 s 2–703(a) ................................................................................................................................... 182 s 2–706 ........................................................................................................................................ 182 s 2–716(1) ............................................................................................................................. 87, 129 s 2A-309 ...................................................................................................................................... 481 s 3–103(a)(4) ................................................................................................................................ 68 s 3–103(a)(6) ................................................................................................................................ 68 s 3–302 ........................................................................................................................................ 590 s 3–305 ........................................................................................................................................ 590 s 3–404 ........................................................................................................................................ 591 s 3–414 ........................................................................................................................................ 588 s 3–415 ........................................................................................................................................ 588 s 4A-108 ...................................................................................................................................... 540 s 5–102(a)(7) ................................................................................................................................ 68 s 5–102(a)(9) .............................................................................................................................. 653 s 5–102(b)(9) .............................................................................................................................. 540 s 6–104 ........................................................................................................................................ 349 s 7–307 ........................................................................................................................................ 576 s 7–308 ........................................................................................................................................ 576 s 7–402 ........................................................................................................................................ 571 s 7–501 ........................................................................................................................................ 573 s 7–502(1) ................................................................................................................................... 573 s 7–502(2) ................................................................................................................................... 573 s 7–503 ........................................................................................................................................ 573 s 7–507(2) ................................................................................................................................... 568 s 8–102 .................................................................................................................................. 68, 614 s 8–102(a)(13) ............................................................................................................................ 613 s 8–102(a)(15) ............................................................................................................................ 612 s 8–102(a)(17) ............................................................................................................................ 617 s 8–102(a)(3) .............................................................................................................................. 613 s 8–110 ........................................................................................................................................ 653 s 8–110(b) and (e)(2) ......................................................................................................... 647, 649 s 8–110(e) ................................................................................................................... 285, 647, 651 s 8–110(e)(2) .............................................................................................................................. 532

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s 8–115 ........................................................................................................................................ 621 s 8–301(a)(1) .............................................................................................................................. 612 s 8–313 ........................................................................................................................................ 636 s 8–321(1) (old) .......................................................................................................................... 653 ss 8–501 ff ........................................................................................................................... 612, 619 s 8–501(b) and (c) ...................................................................................................................... 618 s 8–503 ........................................................................................................................................ 617 s 8–503(b) ............................................................................................................................. 618–19 s 8–504 ........................................................................................................................................ 615 s 8–505 ........................................................................................................................................ 615 s 8–506 ........................................................................................................................................ 615 s 8–507 ........................................................................................................................................ 622 s 8–508 ........................................................................................................................ 615, 617, 637 s 9–102 .................................................................................................................................... 482–3 s 9–102 (a)(43) ............................................................................................................................. 68 s 9–102(2) ................................................................................................................................... 180 s 9–102(2) (old) .......................................................................................................................... 181 s 9–102(a)(2) .............................................................................................................................. 397 s 9–102(a)(5–6) .......................................................................................................................... 415 s 9–104(1) ................................................................................................................................... 653 s 9–106 ........................................................................................................................................ 397 s 9–109(a)(3) ...................................................................................................................... 397, 415 s 9–109(a)(5) .............................................................................................................................. 369 s 9–109(a)5–6 ............................................................................................................................. 463 s 9–109(d)(13) .................................................................................................................... 540, 653 s 9–109(d)(4–7) .......................................................................................................................... 415 s 9–109(d)(5) .............................................................................................................................. 426 s 9–110 ........................................................................................................................................ 408 s 9–112 (old) ............................................................................................................................... 480 s 9–201 ........................................................................................................................ 381, 426, 482 s 9–202 ........................................................................................................................................ 180 s 9–203 ................................................................................................................................ 380, 482 s 9–203(1)(c) .............................................................................................................................. 547 s 9–203(3)(A) and (D) ................................................................................................................. 44 s 9–203(b)(2) ...................................................................................................................... 480, 482 s 9–203(b)(3)(C) ........................................................................................................................ 343 s 9–204 ........................................................................................ 350, 358, 408, 447, 482, 484, 530 s 9–301(1) ....................................................................................................................... 489, 520–1 s 9–302 ........................................................................................................................................ 463 s 9–309(2) ........................................................................................................................... 397, 426 s 9–311 ........................................................................................................................................ 180 s 9–315(a)(1) .............................................................................................................. 381, 447, 476 s 9–317 ................................................................................................................................ 482, 653 s 9–317(d) ................................................................................................................................... 397 s 9–320 ................................................................................................................................ 486, 535 s 9–320(a) ....................................................................................................... 374, 380–1, 426, 538 s 9–323 ................................................................................................................................ 380, 482 s 9–329 ........................................................................................................................................ 285 s 9–339 ........................................................................................................................................ 476 s 9–401 ................................................................................................................................ 388, 476 s 9–403 ................................................................................................................................ 397, 400

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s 9–404 ................................................................................................................................ 397, 400 ss 9–404 ff ................................................................................................................... 388, 402, 521 s 9–405 ........................................................................................................................................ 404 s 9–406 ........................................................................................................................ 285, 402, 408 s 9–406(5) ................................................................................................................................... 398 s 9–406(a) ........................................................................................................................... 397, 422 s 9–406(d) ........................................................................................................................... 397, 529 s 9–501 ........................................................................................................................................ 397 s 9–503 ........................................................................................................................................ 476 ss 9–601 ff ................................................................................................................................... 470 s 9–601(a) ................................................................................................................................... 577 ss 9–604 ff ................................................................................................................................... 398 s 9–607 ................................................................................................................ 397, 415, 430, 531 s 9–608 ................................................................................................................................ 415, 531 s 9–608(b) ................................................................................................................................... 426 s 9–609 ........................................................................................................................................ 476 ss 9–615 ff ................................................................................................................................... 476 s 9–615(e) ................................................................................................................................... 397 Visual Artists Rights Act ................................................................................................................. 546

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1 Transnational Contract Law Part I General 1.1 Introduction 1.1.1 Modern Contract Law: Nature of the Parties or Type of Contract? In this chapter on contract law the emphasis will be on: (a) the formation of the contract: (b) its binding force; (c) its interpretation and supplementation (or construction) and the (limited) grounds for correction of its terms; (d) performance and the most current defences; (e) default and excuses including force majeure; (f) remedies including specific performance (or real execution) and renegotiation in appropriate circumstances; and (g) the privity of contract and the exceptions to this principle. These aspects will be foremost discussed in the context of the nature of the relationship between the parties rather than of the type of contract they conclude. This broadly conforms to the common law approach,1 which in the application of each of these concepts takes into account the type of parties that conclude or have concluded the contract. In this approach it is possible that amongst professionals a contract is concluded, performed or excused in a manner quite different from that obtaining in similar contracts in their relationship with consumers, or between consumers amongst themselves. Closely related to this approach is the development in common law of special

1

See Bingham LJ in Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] 1 QB 433, 439, in which it was held that the English authorities looked at the nature of the transaction and the character of the parties to it, to consider what was necessary to conclude to a binding contract, and that particularly onerous or unusual conditions had to be brought to the special attention of consumers. The conventional analysis of offer and acceptance was not followed. Interestingly, in this case Lord Bingham compared the civil law to the common law situation, and saw the civil law notion of good faith as a principle of fair and open dealing, which considered whether it was fair in all the circumstances to hold a counterparty bound to a specific contractual term. He noted that English law had no such overriding principle, but sometimes used equity in striking down unconscionable bargains, or statutory law to crack down on unacceptable standard terms or exemption clauses, or case law to distinguish according to the nature of the parties. Note that, as common law is sensitive to the nature of relationships, it never proved necessary to develop a wholly separate administrative law either. Special norms for governmental behaviour are traditionally embedded within the common law of contract, tort, restitution and property itself. It is another consequence of relationship thinking.

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fiduciary duties between parties in situations of trust, dependency and confidence. This again suggests different treatment depending on the nature of the relationship.2 It should be noted that in civil law the emphasis is traditionally on types of contracts, not on types of parties.3 This is an important difference. Only under the modern concept of good faith interpretation of the parties’ contractual rights and duties and under the (related) concept of abuse of rights, one may now find greater sensitivity to relationship thinking in civil law as well, but it remains a fact and natural civil law reflex to apply special protections developed in this way, for example for consumers or workers across the board also to professional dealings of the same contractual type. This may be undesirable and shows that the sensitivity to relationship thinking has not yet been fully subsumed in civil law thinking and that the good faith concept needs here further development.4 Thus civil law remains more focused on the type of contract, such as contracts for the sale of goods, rental agreements, service contracts and the like.5 It has nevertheless 2

It should be noted, however, that there are lapses also in the UK, and the protection accorded to investors under the Financial Services Act 1986 did not at first properly distinguish between professional and consumer dealings and the protection given to small investors were also given to the larger. It was much criticised and this criticism was reflected in Art 11(3) of the 1993 EU Financial Services Directive, which specifically allowed for differentiation in protection levels amongst different classes of investors. This approach is now also found in the newer Financial Services and Markets Act 2000 in the UK and in the EU 2004 Market in Financial Instruments Directive (MiFID); see more particularly the discussions in Vol III, ch 2. 3 See J Gordley, The Philosophical Origins of Modern Contract Doctrine (Oxford, 1991) 102 for the development towards different contract types in the natural law school of Grotius; see also De Iure Belli ac Pacis, Lib II, Cap II, xii, 1–7, and subsequently in civil law. The contract types identified in that school were partly based on Roman law distinctions and partly on Aristotelian notions of fairness supplementing the contractual terms and defining the parties’ rights and duties. On the European Continent, this approach was refined and modified in the early nineteenth century with the development of overriding notion of the parties’ will and their autonomy in contract: see von Savigny, 3 System des heutigen römischen Rechts, III (1840), leading to a more refined distinction of the contractual types in the German Pandectist School of the nineteenth century, which, however, also borrowed from the French Code Civil of 1804 and from the earlier contractual distinctions of Domat and Pothier in this respect, on which the French Civil Code was built and which had in turn often also been based on Roman law distinctions as developed by the earlier medieval writers in the Ius Commune and by the writers in the natural law school since Grotius. 4 In Germany, there has been an attempt at condensing the field by sometimes introducing special duties only for persons that are in some special relationship. The sensitivity to the nature of the relationship of the parties is here beginning to find some better expression (Sonderverbindungen): see K Larenz, Lehrbuch des Schuldrechts, I Band Allgemeiner teil, 14th edn (1987) 14, but as we shall see recent codification in Germany of extra-contractual duties in the pre-contractual and the post-performance stages as well as of the possibility to adjust contractual terms in extreme circumstances does not fundamentally differentiate between the nature of the parties. 5 This is borne out in the EU by the 2008–09 Draft Common Frame of Reference (DCFR) as the most up to date (informal) civil law text, see s 1.6.5 below, which specifies and defines in its Book IV seven types of contracts: sale of goods, rental agreements, services, contractual agency, distributorships, loan agreements, and guarantees. In its interpretation paragraphs, the DCFR refers to the types of contract as a distinguishing factor, see Art II-8:102(1)(e), see also Art II-g:101(2)(a), but not to the nature of the relationship of the parties.

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also overarching notions of contract like offer and acceptance, the notion of consensus, performance and excuses; that is then the general part of contract law. Although it is still conceivable that in this connection the type of contract, like the contract for the sale of goods, has different formation aspects or disclosure duties, again that is less likely to depend on the types of parties. Taking the rental agreement in terms of a temporary transfer of user rights in immovable or other tangible assets as a ready example, in common law its basic characteristics are considered to be foremost determined by the type of relationship—be they between: (a) professionals amongst themselves as in the renting of office and manufacturing space; (b) professionals and consumers or smaller companies as in the renting of apartments and small offices; (c) land owners and agricultural tenants; (d) local authorities and citizens as in the renting of council flats in the social sector; (e) companies and shareholders as in the renting of group facilities; and (f) parents and children in the renting of housing bought for student accommodation. And this attitude seems to be quite naturally also extended into the elaboration of the more general contract law concepts, as in the question when a contract is concluded, what kind of defences may be used, and what kind of excuses are available, again more so, it would seem, than in civil law, even in its modern, good-faith-imbued, variant. Common law traditionally showed some interest in the type of contract only in commercial law, as in the sale of goods, transportation and insurance. One may detect Where reference to good faith (and fair dealing) is made, there is, in the definition of these notions in Annex A, and in Art I-1:103, a reference to the type of parties, however, quite different from the earlier European Contract Principles and UNIDROIT Principles of International Commercial Contracts which avoided a definition. The lack of relationship thinking is still fundamentally borne out by the DCFR’s unitary approach meaning that the rules of the DCFR apply in general to any type of contract party. Art III-1:103 adopts this approach expressly by excluding any limitation of the good faith concept which is perceived as mandatory and unitary in the performance of the contract, although it is less categorical than the European and UNIDROIT Principles in this respect. At least professionals should be able to set standards amongst themselves unless becoming manifestly unreasonable. This is the UCC approach in the US (s 1–302) but not accepted in the DCFR (and earlier the UNIDROIT and European Contract Principles). Where sometimes a special reference is made to business or consumer dealings, this is the exception that confirms the basic unitary approach as the standard, see eg in the area of precontractual information duties, Art II-3:101/2, where contract types are also distinguished. Also in the area of unfair contract terms, a distinction is specifically made in this regard, see Art II 9:404/5, but it does not follow from basic concepts. Consumer protection notions otherwise freely spill over into commercial transactions. That is clear eg in the negotiation duties under Art II-3:301, but also for post-contractual renegotiation duties, where surprisingly no special rules are given for professional dealings either, see Art III-1:110, although there is a reference to risk acceptance in the latter article (sub-s (3)(c), not in the former) which may be assumed to be more likely between professionals. Both require good faith negotiations but again that does not introduce here relationship thinking. Another problem is, as we shall see below, that in determining whether the renegotiation is triggered (requiring an exceptional change of circumstances making performance so onerous that it would be manifestly unjust to demand it), the overall position of the debtor, if professional, may have to be considered rather than its position under the particular contract, which may be minor in the totality of its business, but not necessarily in that of its counterparty/claimant. It is another aspect of relationship thinking missing in the DCFR.

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here continental influence. The reason is that these contract types have their origin in the law merchant that was developed in England for trade with the Continent and showed some Roman law influence, but this is not the normal common law attitude, important as these types of contracts are, also in common law. It should be noted that originally the types of contract of this nature only operated between a particular type of parties, here merchants in the exercise of their trade. Accepting the vital importance of the nature of the relationship between the parties on their contractual rights and duties and following the discussion in the previous chapter, the emphasis in this book will be mainly on contracts in the professional sphere, therefore on contracts between professionals especially in international commerce and finance. They are entities of some size, making it their business to engage in commercial or financial dealings amongst themselves and having expertise in their operations.6 Smaller companies may form here an uneasy intermediary class. It sometimes requires a treatment more akin to that of consumers but in other aspects they may be treated or even prefer to be treated as professionals. Thus in this chapter, the general concepts of contract law will be considered particularly from the point of view of professional dealings. It may give rise to lesser refinement (eg in terms of disclosure, negotiation and renegotiation duties) and on occasion even to some rougher (and quicker) forms of justice as we shall see. Here there may be a larger degree of risk acceptance and the contract is likely to be a road map and risk management tool that may need a more literal interpretation. Good faith, if properly understood, may become here a restraining notion. In countries like France, which still have commercial courts, this may also find expression in different court proceedings, which may be quicker but also less detailed and involve the peer group as judges. As for the types of contracts, after the general part of contract, towards the end of this chapter two types will be analysed in particular. They are the sale of (movable) goods and contractual forms of agency (mandate). They will be considered as typical illustrations of relationship thinking where different rules are likely to prevail between professionals. As far as the sale of goods is concerned, attention will in this connection be focused on the international sale, which has always been a sale between professionals and is or should be structured accordingly, ie different from consumer sales, which are sales between professionals and consumers (or small companies) or between consumers amongst themselves, usually at the national level. These consumer sales may of course also be international but are not commonly considered covered by a reference to international sales in this narrower professional sense, see also Article 2(a) of the 1980 Vienna Convention on the International Sale of Goods (CISG). As far as contractual agency is concerned, especially in the financial services area, the distinction between wholesale and retail investors using agents or brokers has also become of overriding importance.7 Again, it shows the importance of relationship thinking.

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See for a discussion of the notion of the professional, Vol I, s 1.1.8. See n 2 above.

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5

The Effect of Globalisation

The significance of distinguishing not only in commerce but also in finance between professional dealings and dealings with consumers or other non-professional parties is in modern times further highlighted by the fact that professional contracts lend themselves increasingly to support by international or transnational legal principles and practices leading to the application of transnational law, often also referred to as the modern law merchant or lex mercatoria. The professional law is here perceived to operate in a new transnational commercial and financial legal order, see the discussion in Volume I, in particular section 1.5. The formation and operation of a new transnational law, including contract law in this informal manner in its own legal order is seen in this book as a natural consequence of the globalisation of the market place and the cross-border nature of much international commercial and financial business, which is indeed normally conducted through professionals and is losing its typical domestic connections, also in law. For the independent legal order that is here created, the cultural, sociological and economic forces or efficiency considerations that back it up, and the new law merchant or lex mercatoria that emerges in it, reference may be made to the discussion in Volume I.8 Indeed, in the view presented in this book, the modern lex mercatoria in the order in which its operates depends for its formation and operation on different sources of law, much as public international law does under Article 38(1) of the Statute of the International Court of Justice. It concerns here especially fundamental legal principle,9

8 See further JH Dalhuisen, ‘Legal Orders and their Manifestation: The Operation of the International Commercial and Financial legal order and Its Lex Mercatoria’ (2006) 24 Berkeley JIL 129. 9 In this respect, in recent times, the impact of human rights on private law formation has in particular been noted and is now often referred to as the constitutionalisation of private law. In commerce and finance, these rights or principles are not many and must in any event always be seen in a typically private law context, especially in commerce and finance. The term ‘constitutionalisation’ may not therefore be well chosen. See for this concept in Germany CW Canaris, Grundrechte und Privatrecht, eine Zwischenbilanz (Berlin, 1998) and in England, D Friedmann and D Barak-Erez (eds), Human Rights in Private Law (2001), and Hugh Collins, Utility and Rights in Common Law Reasoning: Rebalancing Private Law through Constitutionalization, LSE Law Dept Law and Society Working Paper Series, 2nd issue Sept 2007. The freedoms to contract and to own property are here especially important. Then there are procedural protections. It must be considered in this connection, however, to what extent the horizontal effect (sometimes) of human rights, and therefore their effect between private parties, is not in truth a revival of natural law notions or fundamental or general legal principle. Analogy presents itself. There is overlap also with the normative interpretation technique whilst public order arguments might often also be used instead.

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custom and practices,10 general principle,11 and party autonomy,12 see further the discussions in chapter 1, section 1.4 which are here only briefly summarised. In the international sale of goods, some uniform international sales law for professional dealings was created formally through the 1980 Vienna Convention on the International Sale of Goods after an earlier attempt in the Hague Conventions of 10 In its essence, custom is an expression of what is understood as normal or best practice in the group or community that it concerns and of what is in that group perceived to be the most desirable in terms of common sense and experience, also when situations change. As such, resort to custom is ingrained in all law and its application and gives rise to justified reliance notions that will then be supported by law. Normality is the true legal default rule and custom is one of its major expressions. Being immanent law, it is in business not likely to be political, censorious, or society changing; its only objective, at least in commerce and finance, is best to facilitate and support the needs of that community, given its own perceptions of reality. It concerns its routines and is as such dynamic in concept that can never be fully captured, neither can therefore the lex mercatoria or any other living law, see further JH Dalhuisen, ‘Custom and its Revival in Transnational Private Law’ (2008) 18 Duke JCIL 339. 11 Earlier, in public international law, general principle tended to be referred to as the law of civilised nations, see Lord Asquith of Bishopstone, who appears to have been the first one (in 1951) to refer in this connection to ‘the application of principles rooted in the good sense and common practice of the generality of civilised nations – a sort of “modern law of nature” ’: see Award in the Matter of an Arbitration between Petroleum Development (Trucial Coast) Ltd and the Sheikh of Abu Dhabi, reported in (1952) 1 Int’l & Comp LQ 247 and (1951) 18 ILR 144. That formula was taken up in oil concessions later. In private law, the construction contract of the Channel Tunnel provided that it was to be governed by ‘the principles common to both English law and French law, and in the absence of such common principles by such general principles of international trade law as have been applied by national and international tribunals’: Channel Tunnel Group v Balfour Beatty Constuction Ltd [1995] AC 334, 347. In the international, commercial and financial legal order as a newly emerging order, one may expect here an attitude to problem solving that is less encumbered by the past, even where concepts are borrowed from domestic law in a comparative law search for better solutions. The issue thus becomes the normativity of comparative law research in a forward-moving manner. 12 It concerns here party autonomy as an autonomous source of law and the idea that it is the single word that binds and forms the contract, to be recognised (not created) by the positive law unless public order (or a lack of a valid cause) forbade it. In France, Loysel, Institutions coutumieres (1607) observed in this connection: ‘On lie les boeufs par les cornes et les hommes par les mots’. That was the traditional French view. The text of Art 1354 French CC still reflects this: ‘Les Conventions legalement formees tiennent lieu de loi a ceux qui les ont faites’ and suggests the autonomy of the law that parties create. In modern times, this basic principle has continued to find important support, see notably Paul Scholten, Convenances vainquent loi, Report Royal Netherlands Academy of Arts and Sciences (1930) 187, 3 Assembled Works, 196, and also in England there is sometimes support for the self-binding force of the promise, see C Fried, Contract as Promise: A Theory of Contractual Obligation (Cambridge, Mass, 1981), but party autonomy is now mostly explained as government licence or as operating by permission of the sovereign as source of all law. However, as an autonomous source of law, it revived in France for international contracts. This became particularly relevant for the validity of gold clauses that were upheld in international contracts (but not in domestic French contracts) in the 1930s: see GR Delaume, Transnational Contracts (1989) 119. The long standing relative popularity of the lex mercatoria in France may be seen in the light of the development in that country of the notion of the ‘international contract’ operating under its own internationalised rules. The concept of the party autonomy as autonomous source of law at least at the transnational level was in recent French case law also dramatically underlined in that international arbitration clauses

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1964. It provides only a partial coverage of the subject whilst important trading nations like the UK, Portugal, and Brazil have not ratified it and the larger commercial practice remains sceptical and mostly excludes its application. Much of the thinking behind it dates from 1939. In other areas, formal uniform treaty law has remained even more incidental in the area of private law.13 As just mentioned, an informal but broader creation of trans-national law is now becoming apparent in the international professional sphere and is no longer centred on this uniform treaty law but rather on a variety of other (immanent) sources of law. The resulting modern lex mercatoria does not yet present here one coherent pattern of rules but a hierarchy of norms from these different sources, in which, besides fundamental legal principle, the terms of the contract itself, custom or established practices, uniform treaty law, and general principle, even national law may still figure, although the last only residually (and then as part of the transnational law),14 see more particularly Volume I, sections 1.4.13 and 3.1.2. Domestic law may then remain more particularly relevant for all non-professional dealings, therefore especially for dealings with consumers and employees, even if operating transborder, but also for dealings with smaller licensees, franchisees and distributors, even though within the EU there has been some harmonisation of the law in some of these areas as well. Most of this effort on behalf of consumers,15 and to were considered autonomous and not anchored in any domestic law, reason why an award being set aside in the country of the seat of the arbitration or origin of the award need not have an effect on recognition of the same award in France. This is a matter of French law, see Cour de Cass Civ 1, 29 June 2007 in PT Putrabali Adyamulia v Rena Holding, Cass. Civ 1, 29 June 2007, Les Cahiers d’Arbitrage no. 2007/2, Gaz Pal. 17 July 2007, p44., cited in n 1 above. Here the existence of an autonomous international arbitral order was accepted and the award was considered to be a judicial decision in that order, see also E Gaillard ‘Aspects Philosophiques du Droit de l’Arbitrage International’ (2008) 329 Receuil des Cours 49. See also Vol I, n 8, and further also P Pinsolle, ‘The Status of Vacated Awards in France: the Cour de Cassation Decision in Putrabali’ (2008) 24 Arb Intern 277. In how far party autonomy was also effective in property law was, however, less clear as third parties became involved. The distinctions in this respect were not truly understood until well into the eighteenth century and became then connected on the European Continent with the notion of the numerus clausus of proprietary rights, see ch 2, s 1.2.1 below. In this book party autonomy in proprietary matters is accepted for international commerce and finance, see ch 2, s 1.10 below, subject to the protection of the commercial flows, similar to the operation of equitable proprietary interests in common law, see for a summary Vol I, s 1.1.4. 13

See Vol I, s 1.4.18. JH Dalhuisen, ‘What could the Selection by Parties of English Law in a Civil Law Contract in Commerce and Finance Truly Mean?’ in Festschrift Tom Bingham and the Transformation of the Law (2009) 619. 15 The ECJ has defined ‘consumers’ as natural persons acting outside the range of professional activity: see Case 361/89 De Pinto [1991] ECR I-1189. Problems may arise where individuals also act professionally, raising the question whether such activities may still benefit from consumer protection. Protection is not afforded unless the professional activity was insubstantial: see Case C-464/01 Gruber [2005] ECR I-439. However, the counterparty may here rely on his good faith when an individual contracts for his business. It is also relevant whether the goods are or could be used for professional purposes, require delivery at a business address, or there is VAT registration. This suggests that the buyer may have raised wrong expectations and accordingly bears the risk, but in 14

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a lesser extent of workers,16 does not bear on cross-border activities at all and is arguably better left to local law if only as a matter of subsidiarity, although companies in their cross-border operations may benefit from uniformity of law in the consumer area but this is not then a consumer or employee protection perspective. Thus product liability issues in respect of goods with a foreign origin, long-distance selling of consumer goods, and the long-distance marketing of consumer financial services may be appropriate EU concerns from the perspective of promoting the internal market and may benefit from harmonisation of the applicable laws at the transnational level,17 but again in the EU this is foremost to protect businesses in their EU-wide trade.18 Consumer law proper is on the other hand regulatory for different public order reasons and protection of this nature remains, it is submitted, for that reason more properly the subject of domestic statutory law, if only because there is no

internet transactions it may be simply the nature of the goods and the likelihood of professional use that will determine the issue. See for the relevant Directives, notably: Council Directive 84/450/EEC of 10 September 1984 [1984] OJ L250 on misleading and comparative advertising; Council Directive 85/374/EEC of 25 July 1985 [1985] OJ L210, on the approximation of the law of the Member States concerning liability for defective products; Council Directive 85/577/EEC [1985] OJ L372 to protect the consumer in respect of contracts negotiated away from business premises; Council Directive 87/102/EEC [1987] OJ L42 later amended, for the approximation of the laws, regulations and administrative provisions of the Member States concerning consumer credit, now superseded by Directive 2008/48/EC of the European Parliament and of the Council on credit agreements for consumers [2008] OJ L 133/66; Council Directive 90/314/EEC [1990] OJ L158 on package travel, package holidays and package tours; Council Regulation 295/91 [1991] OJ L36/5 establishing common rules for a denied-boarding compensation system in scheduled air transport; Council Directive 93/13/EEC [1993] OJ L95/29 on unfair terms in consumer contracts; Council Directive 97/9/EC [1997] OJ L144/19 on the protection of purchasers in respect of certain aspects of contracts relating to the purchase on a time share basis; Council Directive 97/5EC [1997] OJ L43/25 on cross-border credit transfers; Council Directive 97/7/EC [1997] OJ L144/19 on the protection of consumers in respect of distance contracts; Council Regulation of 9 October 1997 [1997] OJ L285/1 on air carrier liability in the case of accidents; Directive 98/27/EC [1998] OJ L166/51 on injunctions for the protection of consumers’ interests; Directive 00/31/EC [2000] OJ L178 on Certain Legal Aspects of Electronic Commerce in the Internal Market; Directive 2002/65/EC [2002] OJ L271 concerning the distance marketing of consumer financial services; the E-Commerce Directive 2002/87/EC [2003] OJ L35/1 which contains in its Art 3(4) some special rules for consumer protection and allows host country measures in very narrowly defined circumstances; Unfair Commercial Practices Directive or UCP Directive 2005/ 29/EC [2005] OJ L149/22 concerning unfair business-to-consumer commercial practices in the internal market (amending Council Directive 84/450/EEC, Directives 97/7/EC, 98/27/EC and 2002/65/EC). 16 See especially Council Directive 76/207/EEC 1976 [1976] OJ L39, on the implementation of the principle of equal treatment for men and women as regards access to employment, vocational training and promotion, and working conditions; Council Directive 2000/78/EC [2000] OJ L3003/16 establishing a general framework for equal treatment in employment and occupation. 17 See for financial services also Vol. II, ch 2, ss 3.5 and 3.6. 18 An area where local laws remain particularly dominant, even between professionals, is real estate dealings, but in movable property, relevant especially when used in asset-backed finance internationally, a strong form of transnationalisation (along equitable lines in a common law sense) may be detected and then allows for some considerable party autonomy subject to the protection of the ordinary course of business, see ch 1, s 1.1.4 and ch 2, se 1.10 below.

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unanimity on the level of protection that needs to be given whilst the needs may still be very different between the various Member States.19

1.1.3

Content and Coverage of this Chapter

In this chapter, in Part 1, contract law will first be dealt with in a historical and comparative law context. As far as domestic contract law goes, it has been the subject of much comprehensive statutory intervention, on the European continent as part of national codifications, but in respect of the sale of movable property (goods) also in common law countries, like in England, where there is the Sale of Goods Act 1979 (replacing a very similar earlier statute of 1893), which is also in force in Scotland. In the USA, there is in particular Article 2 of the Uniform Commercial Code (UCC), concerning the sale of goods, first prepared in 1951, with new texts in 1958 and 1962 and several later amendments.20 It was introduced in all American states after 1964, albeit with some small variations. More broadly there is in the US also the important 1981 Restatement Second of Contract but not as a legislative or even binding legal text. In Part 2, the sale of goods will be discussed as the most common type of commercial contract. As for the other contract-type that will be more especially discussed in this chapter in Part 3, contractual agency, in civil law, the domestic laws in this area often remain rudimentary, especially in the case of indirect or undisclosed agency. That is different in common law. In the USA, there is in this connection the important Restatement Second of Agency, in the process of being replaced by a Third Restatement.

19 The latest effort is a draft maximum Directive for consumer rights, dating from 8 October 2008, COM (08) 614 final, based on the presumed needs of the internal market (Art 95 of the EC Treaty), but further supported by the desire to avoid differentiation in areas where the EU tries to operate, and finally, impliedly, by some preconceived idea of where the level of consumer protection should be pitched for all. All these bases for jurisdiction to legislate at EU level are contentions. The last two did not exist in the EC Treaty nor exist now in its Lisbon Treaty successors, as consumer protection is no ground for EU jurisdiction, whilst the first one lacks empirical support, at least in terms of movement, cost, and quality of consumer products proper. Again, the effect on producers or providers appears the better argument but still provides a weak basis that depends very much on the type of activity: more convincing in respect of product liability of manufacturers, less so for service providers who remain largely domestic. A maximum directive may recommend itself in the first instance but hardly in the last one. Relevant is here also that consumers do not normally shop far from home and also that, in the US, state law has usually been more than competent to deal with this type of protection. One reason is the high cost of uniform legislation and its implementation, but no less the relevance of other factors such as, in the EU, language, economic development, distances from markets, and the like. It was noted before that where the directive can only be based on the needs of the internal market, they must be interpreted restrictively, which means not beyond their limited objective. 20 See for the origin of the UCC, Vol I, n 70.

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Much of the following discussion will be based on an analysis of these domestic texts but attention will also be given to uniform treaty law, for the professional sale of goods in particular to the 1980 UNCITRAL Vienna Convention on the Contracts for the International Sale of Goods (CISG) already mentioned, and for contractual agency to the UNIDROIT Convention on Agency in the International Sale of Goods of 1983, although it was never sufficiently ratified to enter into force. For the more general part of contract law, there are also the 1994 UNIDROIT Principles for International Commercial Contracts, subsequently extended in 2004, and the Principles of European Contract Law first published in 1995 and substantially completed in 1998, although new chapters on special types of dealings were added later. Both sets now also include a part on agency. Importantly and as already mentioned, the 2008–09 Draft Common Frame of Reference (DCFR) provides a further updated text in Europe in these areas and also covers tort, unjust enrichment, trusts and personal property including secured transactions. It is in the nature of a full codification in the traditional statist and static intellectual civil law style, perceived as a piece of legislation imposed from above for all of the EU (real estate excluding which thus remains more in particular a domestic matter). Although important compilations, these Principles and Drafts have as yet no official status and show little progression and innovation, are basically extrapolations of past experiences, and in contract hardly aware of modern contract theory (see next section). Notably, traditional codification methodology is not reconsidered for its efficiency and effectiveness. More serious is that the UNIDROIT and European Principles are consumer law-oriented, even though the former is meant for international commercial contracts only. It is a classical example of a failure of relationship thinking in civil law and showed the danger of extending special consumer law protections also to professional dealings whilst in the civil law manner the emphasis remained on types of contracts rather than parties. The DCFR suffers from the same drawbacks. As we shall see in section 1.6.5, as a model it remains backward looking in the old civil law codification mode and has as such little to recommend itself for the future of professional dealings in Europe. The basic problem is that methodology and alternatives were never properly considered. In particular there is no clear insight in the formation of private law in the professional sphere.

1.1.4

Modern Contract Theory

As shown above, in contract law, the emphasis on the nature of (the relationship between) the parties and on the extra-contractual rights and duties that may derive from this relationship, all the more so in situations of dependency or when there are clear conflicts of interests, is traditionally an important issue in common law. It suggests in particular different rules for professional and consumer dealings. This distinction was much less fundamental in civil law, as we saw, but is now also creeping into it notably through the good faith notion, although this development is

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often not yet sufficiently identified and in any event not complete as the European and UNIDROIT Contract Principles and the DCFR clearly show. It also affects the law of movable property which, in a modern professional environment, becomes subject to a larger degree of party autonomy and therefore no less dynamic although in a different manner.21 In contract, it particularly raises the issue of how and when contractual rights and obligations emerge (including pre-contractual rights and obligations) and are extinguished or modified, but also how much risk acceptance there is in respect of unforeseen future developments when a contractual relationship is being created. Other objective requirements deriving from pressing moral, social peace, or efficiency considerations may also enter the picture and play a role at least in the interpretation and supplementation of the contract and may, in appropriate cases, even correct it. Here again the nature of the relationship of the parties is likely to play an important role whilst determining the effect of these considerations in individual cases. The nature of the relationship may, on the one hand, lead here to more rights, but, on the other, also to fewer. Especially amongst professionals there may be a lesser need for special protections and therefore also a lesser acceptance of the consequent effect on party autonomy and the risk management facilities it implies. This is the idea of the road map, already mentioned, as a risk management tool that tends to be at the centre of professional duration contracts and may lead to a more literal interpretation. The considerable danger, especially in civil law, that modern consumer law protection notions are here pervading all contract law was already noted and is an undesirable development still showing a shortage in relationship thinking and centres in civil law on the view that the good faith notion is absolutely mandatory, as expressed also in the European and UNIDROIT Principles (respectively Art 1:201(2) and Art 1.7(2)) and now in the DCFR (Art III-1:103, cf also Art II-3:301). That is a misconception, if only, as we shall see,22 because good faith stands for many things. It was already said that at least professionals should be allowed to set their own (good faith) standards unless manifestly unreasonable as indeed expressed in section 1–302 UCC in the US. It shows that for professionals good faith does not mean mandatory standards except in extreme circumstances. Modern contract theory is here greatly more flexible and more factual in that sense. Another aspect of modern contract theory is that the dominance of nineteenthcentury will theories,23 always more important in civil law than in common law,

21

See for a brief summary Vol I. s 1.1.4. See s 1.3.4 below. 23 Since von Savigny, 3 System des heutigen römischen Rechts (1840) 258 in which the romantic notion of the creative will of the parties started to take the central position in contract law, especially in its formation and interpretation, although R von Jhering, Zweck im Recht, 3rd edn (1898) continued to emphasise the purposes for which people contract and the reasons why the objective law enforces their commitments. Subsequently the role of the parties in the formation of their contract became in Germany more in particular connected with the doctrine of the juristic act, or Rechtsgeschäft, which covers all voluntary acts of individuals meant to create legal effects for them, thus also offers and acceptances, but no less, eg the transfer of personal property and the writing of wills. All these juristic acts were 22

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especially in contract formation and interpretation, see sections 1.2.1 and 1.2.2 below, is coming to an end. The ensuing and now traditional anthropomorphic attitude to contract formation in terms of the will of the parties and interpretation thereof in civil law is thus at last yielding to a more realistic modern contract approach that takes in professional dealings a corporate environment as the starting point. Common law has here also some advantage as it never accepted will notions and parties’ intent as similarly central in contract formation and interpretation (although eventually there was here also some borrowing from German thought, notably in modern offer and acceptance language, as we shall see). Indeed, in major contracts it is now often unclear who was involved at the personal level. All is team work and much may be arranged by outsiders like law firms. The question what was the intent of the parties in a psychological sense thus becomes unrealistic and is losing its traditional relevance everywhere, but it is in legal theory a slow process. Again, it may mean less protection and even literal interpretation if the contract is drafted as a road map and risk-management tool between professionals. Conduct and reliance move here to the centre in terms of contract formation whilst more objective interpretation methods and the notion of reasonableness or the reasonable man standard come in particularly for professionals at the time of the execution of their agreement.24 More traditional offer and acceptance concepts are then a subset of this conduct and reliance notion. Thus in this newer approach, reliance on reasonable expectations would be the basic issue in contract formation and its timing, whilst culpable breach of such reasonable expectations and duties would be the prime ground for actions for damages. It is clear that such actions may then be more closely related to tort than to the traditional subjective contract notions.25

deemed based on this notion of the creative will and then made subject to similar techniques of interpretation at first leading to a subjective interpretation of any declarations (Willenserklärung) made in the context of such acts. Modern civil law has often made much of this concept of Rechtsgeschäft as a more general legal category (itself again a sub-category of all legal acts, which are all acts with legal effect, whether voluntary or involuntary, or in German Rechtshandlung), but this categorisation has proved of modest value and has as such been criticised: see K Zweigert & H Kötz, An Introduction to Comparative Law, 3rd edn (Oxford, 1998) 146, and will not be further discussed here. As contracting always was the main example of a Rechtsgeschäft, it will be discussed here as such and not as part of a bigger idea. The DCFR maintains the German approach and covers in Book II ‘contracts and other juridical acts.’ The will or intent remains here the central focus, see Art II-1:101. 24 Even in the more traditional offer and acceptance approach, it became established, as we shall see in s 1.2.1 below, that a party could rely on what it reasonably thought the intent of the other party had been but this was rather seen as an exception. 25 In modern contract theory, tort liability has to some considerable extent superseded contractual liability and defective performance now often constitutes a tort with its more limited recourse, excluding in particular recovery of future gains under the contract and other consequential damages. Also pre-contractual duties might give rise to tort rather than contractual liability, as we shall see in s 1.2.4 below, perhaps for similar reasons. Situations of dependency may themselves create fiduciary duties, breach of which may in civil law give rise to tort rather than contractual liability. Perhaps it could be said that, except in the contractual core, there is a return to tort rather than contractual protection with the attendant limitation on expectancy damages.

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It means that the moment a contract is concluded may not be as clearly cast as it used to be and may show a progression. Rights and obligations appear here more gradually, depending on the stage reached in the negotiations and intent is no longer the only factor or source of contractual rights and obligations. But also in later phases of the contract, new rights and obligations may emerge all the time from other sources. As a result, there is no longer one fixed moment of contract formation at which all rights and duties crystallise, although again in the professional sphere this may be balanced by a more literal interpretation of the text of the agreement itself, as we saw. It follows that the formation phase of a contract may see an evolution when gradually parties acquire more rights and accept obligations until there is a full blown contract. This will be discussed further below in connection with negotiation duties and the status of letters of intent, see sections 1.3.12 and 13 below. More generally, it has become useful to distinguish between different contractual phases altogether as more objective considerations may play different roles in them. Thus in the pre-contractual phase, there may be special disclosure duties, although between professionals, who may have own investigation facilities, they may be fewer than in respect of weaker parties. Again, this is relationship thinking. During the performance phase, there is for professionals a strict adherence to road maps, but there may still be special co-operation duties and duties of care particularly relevant when other parties and contracts become involved in a joint project even if there is no direct contractual contact between them, as we shall also see. In what is sometimes called the post-contractual phase, there may be renegotiation duties when the situation becomes manifestly untenable in view of changed circumstances, assuming there was no risk acceptance. Again, these considerations may play out very differently between professional parties and consumers. As will be discussed further below, for professionals their overall situation may increasingly be taken into account rather than their increased burdens under one single contract of which they are likely to have many and which may be insignificant in the total. Where credit must be given to the raising of expectations and any reliance on them by others during the whole contract period, this may require and be balanced for professionals not only by a more formal interpretation of the wording of the agreement but also by at least some beginning of performance by the relying party.26 This is another objective element in the contract formation process. In this connection, it is also clear that the way one party chooses to organise itself may give rise to justified expectations but may become relevant only when the other

26 Thus proper reliance might need a response in some beginning of performance by the relying party and cannot be merely in the mind or on a piece of paper. See for this requirement PS Atiyah, ‘Contract, Promises and the Law of Obligations’ (1978) LQR 193. It may be more understandable from the common law perspective of exchange and bargain, but in the early droit coutumier in France, where the promise itself became binding, this extra requirement (besides that of a licit cause) was not unknown either, at least in the law of sales, see Esmein, Etudes sur les contrats dans les tres ancien droit francais (1883) 5, 29. The codification dropped it and may therefore be considered to have a lesser requirement for contract enforceability than the immanent transnational law may have.

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party seriously reacts.27 It highlights a particular aspect of contracting in terms of an organisation technique of which in consumer matters the consequence often is an extra duty of care for the professional seeking performance, for example under adhesion contracts, but even amongst professionals multiple contracting may suggest other standards for the professional debtor seeking relief even though the contracts are not otherwise connected in any way. One may also see here an aspect of market behaviour that gives rise to duties: in an economic sense when it concerns other professionals, efficiency notions may thus enter the determination of what may be expected from them, although they should not lightly be asked to carry extra burdens; but in a social sense when it concerns consumers, extra protection needs may be assumed.28 Again, what was once cast in terms of the will of the parties and their intent is now fashioned rather in terms of reasonable expectations in which the whole set-up or organisation of the parties may be considered in the formation process as well. It shows another important aspect of modern contract law, which is the impact of the demonstrable contractual purpose in determining the contract’s content and effect, again as some objective standard quite regardless of what the original intent of the parties may or may not have been. This is the essence of teleological interpretation. Another key insight is here that entering into a relationship of whatever nature implies acceptance of much for which one may not have bargained or may have not been aware of. A great deal may happen during the contract period, which could not have been foreseen and is difficult to allocate in advance. Yet at least for professionals this will not give a way out on the basis of lack of original intent except in extreme circumstances when the issue is unlikely to be failure of intent. This is the idea of risk acceptance and suggests yet another aspect of a dynamic modern concept of contract and contract law and of the determination of rights and 27 For example, the buying of a ticket on the bus and the purchase of groceries in a supermarket can often best be explained by reliance on the organisation that the seller of these service or of the goods has put in place and the choice and selection power that is in this manner given or left to the buyer rather than in terms of offer and acceptance or of bargain and consensus. The way the seller has organised itself in these situations does not eg allow the ticket seller or cash attendant discretion in refusing the travel service or the groceries if the correct price is offered unless there are special reasons which the ticket seller or cash attendant would then have the burden of explaining. Intent of the ticket seller or cash attendant as agent for the seller is here substantially irrelevant. 28 The DCFR in its 2009 Introduction becomes here increasingly high minded, talks about underlying and overriding fundamental principles (without, crucially, giving them any status as autonomous sources of law), but short of proper relationship thinking in a contractual environment, the DCFR appears to get lost. According to the Introduction (nos 15 and 16) overriding principles are those of human rights, promotion of solidarity and social responsibility. Underlying are the principles of freedom, security, justice and efficiency. Some of this may be relevant in the professional sphere especially when contracting becomes an organising technique and there are obvious social consequences and limitation when power is exerted in this way and perhaps also issues of efficiency and cost/benefit analysis, but the question in contract is what the consequence is for the relationship of the two parties, not for society overall which is a regulatory matter. In other words, contracts are not there to organise society although contracting may sometimes have some broader organisation aspects and social consequences in the manner as here explained.

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duties thereunder which cannot be fully fixed at the time of the acceptance of an offer.29 Here again, relationship thinking is a key concept which goes well beyond teleological interpretation. This may be taken one step further in the sense that in professional dealings contracts should not be considered in isolation when relief is being sought notably in terms of mistake, force majeure, or change of circumstances under multiple or standard agreements. There is here some need for adverse effect overall, even some hardship. It is another aspect of risk acceptance and suggests that in professional dealings the situation must become more difficult for the debtor overall in order for him to claim relief. In other words: there may well be a problem under a single contract, but if that is not, in the totality of these contracts, material for the professional debtor, relief might be withheld, especially if the other party is more dependent on the individual contract and would suffer more if it were not performed as foreseen. Hardship, often referred to as a requirement for contractual adjustment, suggests this overall approach also, although seldom so defined, but it concerns here a more general principle that operates whenever professionals seek relief or want to be excused from performance. It has already been said that, under a more objective contract law, parties may also face pressing external ethical, social and efficiency standards in the implementation of their transaction, although the impact will again depend on the situation, including the type of parties. Some of these considerations may therefore be less relevant amongst professionals than in their relationships with consumers but notions of efficiency may be more. This is important, as it may also open the way to cost/benefit analysis in respect of relief especially relevant when, for example in hardship situations, there is a demand for the adaptation of contracts, but it may be significant in all more liberal interpretation techniques, especially in professional dealings.

1.1.5

A New Model of Contract Law?

It is undeniable that, in the above ways, more objective considerations have started everywhere to play an ever greater role in modern contract law in terms of the determination of the parties’ rights and obligations, although again this need not mean more protection; especially in the professional sphere, there may be less. The need for more protection became obvious in respect of weaker parties like workers and consumers, who needed some more objective protection. This current now operates more generally in the entire law of contract, but, upon a proper analysis, very 29 It follows that there is here some considerable risk taking by both parties, although for professionals often balanced by them entering into a multitude of similar contracts, some of them cancelling out or balancing these risks. In the financial sphere, set-off and netting tools express this risk balancing more clearly, see Vol III, ch 1, ss 2.6.5–2.6.6, but the principle is a much broader one and important in all professional dealings.

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differently in relation to consumers and between professionals. In civil law, the notion of good faith started to encapsulate this trend and also moved in the area of pre- and post-contractual relationships as we have seen, although crucially still with a shortage of relationship thinking. It is possible to detect here a new framework or new model of contract altogether and to move further and put emphasis more generally on justified expectations, reasonable or detrimental reliance, a beginning of performance as manifestation of binding force, duties of care and co-operation, of disclosure, investigation and loyalty, and on what objectively may be marked as the contractual purpose. In all these aspects, relationship thinking completes the picture. Together they may be considered the essence of modern contractual rights and obligations or the general part of contract, only the details of which would then depend on the more special objectives the parties mean to achieve, unless (perhaps) they clearly want a different (more traditional) approach altogether and say so. However, especially in terms of initiative, definition of objective, and risk allocation, party autonomy remains an important factor, including the right of at least professional parties to set standards or even eliminate adjustment possibilities except in extreme cases when unforeseen results become manifestly unreasonable for one of the parties to bear. Although it is sometimes argued that contract as we knew it, may be dead, exactly because of the more modest role of the parties’ intent, this is seriously overstated.30 Also, the contract text remains important, even more so between professionals, and only if the situation gets totally out of hand will there be redress for the more professional party under objective good faith notions. This may then include termination of the agreement, although in modern contract theory this is unlikely to be an issue of lack of intent. Party autonomy acquires here a more objective character but may then also become more powerful and recover its original status as autonomous source of law at the

30 There are other reasons for this pessimism as well: see G Gilmore, The Death of Contract (Ohio State Univ Press, 1974); see also J Gordley, The Philosophical Origins of Modern Contract Doctrine (Oxford, Clarendon Press, 1991), and in England, H Collins, The Law of Contract, 4th edn (London, 2003) 1 ff It often pits a liberal nineteenth-century approach against a more social or dirigiste twentiethcentury approach supported by considerable legislative (regulatory) and judicial intervention. In this connection, the normative civil law attitude, which is often mirrored in the teleological or liberal interpretation of statutes, is sometimes thought to be the result of a more consensual and less adversarial, more egalitarian and social approach in Germany, the Scandinavian countries, the Netherlands, and Austria, particularly after the Second World War, although it also became the approach in France and Southern Europe even if less fundamentally anchored there in the concept of good faith. It was submitted, however, that it is as much the natural consequence of contract moving out of the sphere of personal private arrangements into the world of large professional dealings (or a multitude of dealings with individuals in similar positions), where through professional support or standard terms the personal element in the formation and enforcement of contracts becomes negligible and the environment in which the contract must operate much more important, although the normative approach may work out quite differently in the professional sphere, as we have seen.

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transnational level, no longer subject therefore to it being licensed as such by statute or allowed to operate by a state, although it remains subject to public policy and public order confines.31 It can only be repeated that in all this it is key to distinguish between the types of parties. Relationship thinking or thinking in context is central and may even affect notions of mistake, force majeure, and change of circumstances, as we have also seen. It also followed that professionals may have meant to be more literally bound by the terms of their contract, especially if they meant it to be a roadmap of what they planned to do, although this should no longer be seen in terms of psychological intent either, but rather in terms of risk management, including a large degree of risk acceptance of the consequence of external events. Guarantees of performance (or ‘conditions’ in common law terms, see section 1.4.3 below, or result agreements in French legal terminology, may thus soon be deemed implied. This is of special consequence if force majeure is invoked and it limits the impact of this notion, see section 1.4.5 below. A final point to make here is that the move towards objectivity and a more normative approach in both professional and consumer dealings is of a different nature and responds for each to a different need.32 What is the same for both is that the emphasis on the nature of the parties, and in that context on either professional autonomy or on consumer protection, leads for either group to the emergence of more objective rights and duties and to a more objective or normative interpretation of their rights and obligations under the relevant contractual framework, but it works out quite differently—for the one there is a more objective notion of party autonomy, which may result in lesser rights, for the other there is more public policy protection, which may result in more rights.33 Whatever the new contract model that so emerges, at least it can be said negatively that modern contract theory does not support any single contract view or any single-value theory of contract, like traditional offer and acceptance or consensus notions, the notion of will or even the notion of party autonomy unadulterated. Instead, it accepts different insights and values (that could even conflict) depending on the nature of the relationship of the parties, the type of their business, and the circumstances in which they operate. 31 As we have already seen above in n 12, that may even allow party autonomy to move also into creating proprietary structures in movable (commoditised) property more freely, especially between professionals but subject always to a better protection of the commercial flows allowing all buyers in the ordinary course of business of these assets, therefore more in particular consumers, to buy them free and clear of such interests, see more particularly ch 2, s 1.10 below. 32 It may further be noted that in civil and common law, the term ‘objective’ is in the context of interpretation sometimes used in different ways: the literal interpretation of the declarations claims objectivity. In the normative approach there is another type of objectivity in the sense that psychological meaning of declarations is no longer the aim but other more objective or reasonable considerations are taken into account. The literal and normative approaches are here both contrasted with the psychological, subjective or ‘will’ approach. Both are in that sense objective but in very different ways. 33 Modern concepts like methodological hermeneutics may here make a further contribution in demonstrating the power of the objective law, see Vol I, s 1.2.14.

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The nature of the relationship of the parties clearly makes a difference here. Professionals may rely more on party autonomy, at least in the details of their relationship and in the standards they wish to set between themselves, whilst consumers may rely more on objective law protections against overbearing counterparties. Spot or duration contracts may here also make a great deal of difference, the latter implying a measure of long term co-operation or partnership, etc. Again, party autonomy acquires here a more objective and impersonal gloss. Although in the sale of a single physical asset such as a bike between private parties, there may still be a clear personal offer and acceptance element plus traditional delivery against payment, this model provides little elucidation in major long-term manufacturing and delivery contracts for large numbers of bikes offered by a manufacturer and even less in construction or infrastructure contracts that know many parties and teams that may not speak with one voice in the contract-formation or -implementation process, both of which may be long. They may be barely aware of each other. It also follows, however, that for professionals, modern contract theory does not seek to introduce a different concept of behaviour, efficiency or value either and is not censorious, although aware of social values especially when larger parts of society become affected, for example through standard contracts, above characterised as an organisation technique, or when one particular contract through its size and impact affects a whole community in terms of employment and environmental consequences (but also in terms of the benefits it brings). Neither is modern contract theory necessarily based on pure rationality. However, whilst it does not take a psychological attitude, it does assume that the contract makes some objective sense and modern contract theory will in this connection take into account also what is normal, including how people normally react, the contractual environment, and life’s experiences. Whilst doing so, legal formalism is increasingly rejected. Even a written text is put in context and all legal reasoning concerning contract (interpretation and supplementation or even derogation) becomes substantive and a normative exercise.34 Finally, whilst modern contract theory allows for different risks and expectations to enter into the equation, even if it may favour a very strict and literal interpretation if that was in the nature of the relationship of the parties and their contract, therefore especially between professionals engaging in a risk management arrangement, it is also 34 cf also MA Eisenberg, ‘The Emergence of Dynamic Contract Law’ (2000) 88 Cal LR 1743, 1747. See earlier also S Macauley, ‘Non contractual Relationships in Business’ (1963) Am Sociol Review 55 and ‘Contract Law and Contract Techniques; Past, Present and Future’ (1967) Wisc LR 805; G Gilmore The Death of Contract (1974); P S Atiyah, The Rise and Fall of Freedom of Contract (Oxford, 1979) and Essays on Contract (Oxford, 1986); R A Hillman, ‘The Crisis in Modern Contract Theory’ (1988–89) 67 Tex LR 103 and ‘The Richness of Contract Law: an Analysis and Critique of Contemporary Theories of Contract Law’ (1999) Mich LR; J Beatson and D Friedman, ‘Introduction: From “Classical” to “Modern” Contract Law’ in J Beatson and D Friedman (eds), Good Faith and Fault in Contract Law (Oxford, 1994); S Styles, ‘Good Faith: A Principled Matter’ in ADM Forte, Good Faith in Contract and Property Law (1999) 157; R Brownsword, Contract Law: Themes for the Twenty-first Century (London, 2000); Hugh Collins, The Law of Contract, 4th edn (London, 2003); E McKendrick, Contract Law, 6th edn (Basingstoke, 2005).

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sensitive to models of statutory or case law outliving their usefulness or proving besides the point in the evolution of the factual situation under the contract. Life is not considered basically repetitive. Again there are no absolutely preconceived notions or limiting concepts, which, especially in civil law system thinking, still lead to a form of confinement or even intellectual prejudice derived from old models and worn intellectual concepts (like will theories) or rigid system thinking.35

1.1.6 Modern Contract Theory and the Normative Interpretation Technique In civil law, the normative interpretation technique is in modern times meant to cover at least some of this ground and, short of constant legislative amendments which are unrealistic to expect, to provide at least some movement through advanced interpretation techniques, although it might still be impaired by more static notions of contract. The term ‘normative’ does not mean here a high moral tone per se36 or a concern mainly with the idea of justice or (re)distribution, but may go into social peace and efficiency considerations just as much if sufficiently pressing, as we have seen. The study of this extended type of interpretation behind which modern contract theory unfolds then becomes a matter of ontological hermeneutics: see Volume I, section 1.2.14. The normative approach in its fullest sense is thus more than merely purposive or teleological interpretation, which looks for the objective of the agreement in terms of its interpretation (although also important in this context). It may mean transformation at the same time, and it may be properly asked whether interpretation is here still the right terminology, as this newer approach means substantial judicial (or arbitral) freedom. Suggesting merely interpretation is, however, especially in civil law often the only available way to achieve a measure of updating and create a responsive law. At least in international arbitrations, one may assume that parties in their arbitration clause have agreed to this more modern view or even favour it, again subject always to a narrower and even more literal interpretation when the contract is perceived as a road map or risk management tool. It has been said before that the civil law development is not at an end, especially not in terms of relationship thinking and in the reintroduction of other sources of law in contract besides the parties’ intent and statute. All the same, in the civil law of contract, the good faith notion is here the modern catalyst of the normative approach, is more factual, and may create flexibility unless the risk division by professional 35

For a summary of this discussion see Vol 1, s 1.4.2. As for the term ‘normative’ when used in this connection, it is not used as referring to any ideal type or to ethical aspirations per se, as it usually is in the positivist tradition, but rather as referring to legally or objectively binding considerations or correctives which may have an extra-legal origin in moral, social, cultural, or economic considerations but enter the law when sufficiently pressing. Normative interpretation could then also simply relate to rationality or common sense as a supporting source of contract law. 36

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parties is indeed clear and does not prove to be manifestly unreasonable. In this connection reference has also been made to changes in the practices and views of the contracting community.37 That suggests a new paradigm, which, however, in civil law has still some way to go. Indeed, in countries like Germany, Austria, Switzerland and the Netherlands, the normative interpretation technique is now closely associated with the good faith notion in the interpretation and supplementation of contracts. It may even lead to contractual adjustments on the basis of what may be considered fair and reasonable if, in objective terms, otherwise hardship would result, or on what may be required in a social sense or is morally demanded in an advanced society. In Germany in particular, that has long played a role especially in the case of profound changes of circumstances, as we shall see.38 Nevertheless, older offer and acceptance notions remain here vivid and no less the notion of the will of the parties. Also the idea that a contract has a precise starting date and needs to be interpreted accordingly continues to dominate. Here again good-faith thinking has not yet reached its full potential in civil law and is in any event not similarly handled in all civil law countries or even consistently within each country. In this vein, the DCFR starts in Article II-4:102 with some lofty language on intent, conduct and reliance, and almost puts the latter at the centre but then relapses into traditional offer and acceptance language (Arts II-4:201 ff) and looks in Article II-4:205 still for one fixed moment of contract conclusion. In common law, the normative interpretation technique in the above sense is less well developed or understood, at least in England, but it would be incorrect to say that it does not exist.39 It is strong in the US,40 see also Volume I, section 1.1.4 and further sections 1.3.6–7 below). A more objective literal contractual interpretation technique is still favoured at least in England in professional dealings (following a similar attitude to statutory interpretation), where will-theories were always less popular— contract was in any event long thought to depend on bargain and consideration, not on intent. The notion of offer and acceptance were imported from the European Continent only during the nineteenth century, but especially the related notion of consensus remains underdeveloped in common law. There are good reasons for this, at least in the professional sphere. On the other hand, there is, as we also saw, greater awareness of the impact of the nature of the relationship of the parties than in civil law, even though applied in a casuistic/incremental manner. There is also traditional sensitivity to dependency

37

R Brownsword, Law of Contract, 2nd edn (2003) 89. See ss 1.3.14 and 1.4.5 below. 39 See also Lord Hoffmann in ICS Ltd v West Bromwich BS [1998] 1 WLR 896, 912, referring to the reasonable man approach, with a preference for contextual interpretation to abstract literalism, but also in BCCI v Ali [2001] 2 WLR 735, 749 restating the principle of literal interpretation on the basis of a narrow view of the parties’ intent, at least as a starting point. Similarly, Lord Steyn in Total Gas Marketing Ltd v Arco British Ltd [1998] 2 Lloyd’s Rep 209 alluded to the contractual language, the contractual scheme, the commercial context and the reasonable expectations of the parties (but again no emphasis on intent or the will of the parties). 40 cf also MA Eisenberg, n 34 above, 1747. 38

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considerations as was also noted in the previous section even if in modern English law consumer protection is now usually defined by statute. Further, there is acceptance of the concept of reasonable expectations or reliance in contract, which are in the area of contract formation especially relevant if the reliance was detrimental. There is also considerable room for implied terms, which are on the whole also objectively construed, and may include notions of fairness or natural justice. Here there is suddenly some use of the notion of intent more basically and of consensus but as with matters of offer and acceptance, it is not the same as in civil law (exactly because it is not a matter of psychological will). Finally, other external sources of law such as custom and practice operate more freely and appear to be less curtailed in common law, at least in commerce and finance, whilst equity still cuts out excess. Together, these common law concepts and attitudes approximate the notion of good faith in civil law and may often go beyond it. It is therefore not true, as often surmised by civil law theorists, that English contract law has remained static or is even primitive, as it did not develop or adopt the notion of good faith. This is not perceptive. It needed it much less because it has long used different notions and techniques that may come very close to achieving the same results and, in relationship thinking and fiduciary duties, go well beyond the civil law. In any event, as we shall see, the notion of good faith itself is ever more clearly enunciated in contract law in the US. In this environment, the old terminology of contract law is becoming less and less satisfactory, both in civil and in common law, and modern contract theory suggests that the traditionally established contract model is out of date. These trends are important and are here only summarised. They will be discussed in greater detail below and, where possible, traced through comparative and transnational law.

1.1.7 The Challenge of E-commerce E-commerce has become a fashionable subject, but it does not in itself present great new insights into the operation of contract law. In essence it merely adds a different layer of communication besides personal eye-to-eye contact, contact through the mail, by telephone, or by fax. It is as such the extension of traditional offer and acceptance thinking and does not go beyond it. It has not crated great new insights or perceptions and should therefore not create truly new complications either, for example as to when the contract is concluded, under which law, and with what kind of consumer or other protections in terms of modern contract theory, except where documentation is habitually required. In that case, the question is whether an e-mail exchange complies with such a requirement, as an exchange of faxes may now do. In common law terms, this is a Statute of Frauds matter. As we shall see, under it, even sales contracts for small values may still require a document. The same may apply to assignments in many countries. For these contractual formalities see also section 1.2.8 below. The more formal issue then is: what is a document?

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Even in civil law, which tends to be more informal in this aspect (if parties so wish), sometimes a document remains required as for example in the case of gifts or in some countries for assignments of rights or claims (like receivables). That also raises the issue whether an e-mail or internet communication might be sufficient. There is the obvious related problem whether, when the law or parties require a document, an e-mail signature is sufficient. In this sense one must also ask whether an e-mail offer or acceptance or other instruction (like a payment instruction to a bank) may be considered to be sufficiently authentic to be recognised as legally valid. Conduct and reliance are here, however, also life issues. To aid and protect these communications, personal key systems will help but all the same there remains the issue of what e-mail communications legally mean. In e-commerce, types and recognition of signatures are an important issue generally, more so where a document is required or used. The status of documents may all the more be an issue where they are considered negotiable instruments (like bills of exchange or cheques) or documents of title (like bills of lading). This will be discussed below in chapter 2, Part II. In short, this negotiability is unlikely to attach to electronic imitations, as the physical element remains the essence of these documents or instruments. In the capital markets, (electronic) book-entry systems, often based on a centralised custody system of the underlying investment securities, proved the answer. The underlying securities do not now much exist, and are in any event represented by security entitlements so that pure electronic settlement can result. This development will be discussed also in chapter 2, see its Part III below. The subject of e-commerce may be broadened to include more generally the negotiation, confirmation and performance of commercial transactions by electronic means and then covers both the formation and implementation of the contractual relationship. The EU and international agencies like UNCITRAL have concerned themselves with these matters also. In the EU, the E-commerce Directive is a case in point. It is concerned with formalities and the legitimacy of all contracts concluded by electronic means. In this connection, e-mail and internet trading are considered synonymous. For the validation of electronic signatures themselves, there is another Directive.41 The EU E-commerce Directive puts special emphasis on the free movement in terms of the information society between the Member States and on the related services (rather than defining e-commerce itself). Indeed this is the only perspective from which the EU can broach the subject in terms of its jurisdiction to legislate in this area. The idea was to make electronic contracts workable in all Member States. In transborder transactions problems may arise especially with the applicable law, with

41 Directive 2000/13/EC on Certain Legal Aspects of Electronic Commerce in the Internal Market [2000] OJ L178. Earlier, the EU passed Directive 1999/93/EC on a Community Framework for Electronic Signatures [2000] OJ L013. The WTO issued a Declaration on Global Electronic Commerce on 20 May 1998. The OECD Council issued a Recommendation Concerning Guidelines for Consumer Protection in the Electronic Commerce in 1999. UNCITRAL concluded a Model Law on Electronic Commerce in 1996.

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regulation and regulated industries (like financial services), and with protections of certain groups like smaller investors, consumers and workers. In this connection, the E-commerce Directive concentrates on five aspects of commercial dealing: (a) the conditions of establishment of the service provider (country of origin); (b) the requirements imposed on commercial communications; (c) the acceptance of electronic contracts and the way orders are placed; (d) the liability of intermediaries; and (e) the online enforcement mechanism. They may not, however, always require special rules and the Directive did not mean to change the rules of private international law either. Rather, the EU meant to eliminate legal uncertainties that may exist with regard to the extent to which Member States may control services originating from other Member States through the co-ordination of national laws and the clarification of a number of legal concepts. There are no special consumer protection rules in this context in the Directive either, nor would there appear to be a need. As to the applicable (contract) law, under the traditional conflict-of-laws approach, normally the law of the party that performs the most characteristic obligation will apply (Art 4.2 of the EU Regulation of 2008 on the Law Applicable to Contractual Obligations (Rome I)). Any regulation of the service provider will be determined by his domestic regime (as the service is in that respect normally located at his place, see the country of origin approach in Art 3 E-Commerce Directive), whilst consumers and workers may always invoke the protection of their own laws (Arts 6(2) and 8(1) EU Regulation of 2008). The DCFR contains a special provision on contract formation by electronic means in Article II-3: 105. It requires a professional offeror or offeree to provide prior information on the technical steps it plans to take to conclude the contract, to say whether the resulting contract will be filed and made accessible, and to indicate the technical means for identifying and correcting input errors, on the language of the contract and any standard terms used. Breach of these duties results in a right of withdrawal of the other party and liability for any resulting loss.

1.2 Formation of Contracts in Civil and Common Law 1.2.1 The Development of Contract Law and the Role of Parties’ Intent in Civil Law. The Notion of Consensus as the Basis for Contract Validity In modern civil law, consent is traditionally considered the essence of all contract formation. It leaves open the question what it really is and how it is expressed, but it is the central notion. Although civil law is the successor of Roman law, it should be remembered that Roman law itself did not have a general law of contract based on consent or otherwise, although there was a class of contracts based on mere consensus (obligationes consensu contractae), of which the sale and the rental agreement were the most important. It was generally possible for two parties to commit themselves to each

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other, but if the result was not one of the contracts recognised by law (Ius Civile), including the small class of consensual agreements, there was only a moral commitment or pactum nudum which could not be legally enforced, although for some of them the Praetor later gave an action. The recognised contracts and some variations or extensions thereof are referred to in the Digests (D.2.14.7), which form part of the great Codification of the Roman Emperor Justinian in the sixth century AD in Byzantium (see Vol I, s 1.2.3), but there was no one system. Only the Ius Commune, which was the law developed on the West European Continent on the basis of this Roman law and largely prevailed in this area until the time of the great European private law codifications of the nineteenth century, as we have seen,42 managed to create a more coherent approach, culminating in the writings of the secular natural law school of Grotius and his successors on the subject. It was largely based on parties’ consent but only in the sense of an exchange of promises that were compatible and had to be kept, not yet in modern terms of consensus, and was then joined by the notion of causa, insisting not only on the rationality or meaningfulness of the contract but also on its morality as a public order requirement. This notion of causa did not indicate any particular form or formalities and was thus a corrective, not the basis of the validity of the contract itself, which was founded in the given word, therefore in the promise itself.43 This development in the direction of a more general contract law happened under the influence of commercial need (through the law merchant or lex mercatoria of those days) and ethical considerations (embodied in the church or Canon law).44 Especially in commerce, there was a growing need for parties to consider each others’ promises binding and this could not remain limited—as in Roman law—to sales and rental agreements. Indeed commercial need and Canon law (money and religion) then combined to accommodate the imperative, both practical as well as moral, to keep promises and to support the binding force of both informal and formal commercial contracts. On the West European Continent this was already achieved in the fourteenth century, at the time of the greatest jurists of those days, Bartolus and Baldus.45 Roman law was re-interpreted by them to support this development. It was later extended to all informal agreements, whether or not commercial, a development completed by the seventeenth century with the aid of local laws.46 The natural law school of Grotius and Pufendorf47 in the seventeenth–eighteenth centuries completed the theoretical structure of the law of contract based on consensus as we know it today in civil law, even though still expressed as an exchange of 42

See Vol I, s 1.2.4. See n 12 above. 44 Decretales of Pope Gregory IX of 1234 in the Liber Extra added to the Corpus Iuris Canonici, Lib I, Tit XXXV, Cap I. 45 Bartolus, Commentaria D.17.1.48.1; Baldus, Commentaria in Decretales, I De Pactis, Cap I, n 11. See for the development of the Ius Commune in Europe at that time, Vol I, s 1.2.4. 46 Seen as early as 1283 the Coutumes de Beauvais, Cap 34, Arts 998 ff. 47 See Vol I, s 1.2.6. 43

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compatible promises.48 It resulted in the general applicability of the famous maxim pacta sunt servanda, itself derived from the early Canon law heading of the relevant chapter in the Decretales of Pope Gregory IX of 1234, which had been at the beginning of this development (‘Pacta quantumque nuda servanda sunt’). Through the seventeenth-century works of the French jurist Domat,49 the consensus notion entered the French Codes in the early nineteenth century after the other great French jurist, Pothier, had formulated the notion of offer and acceptance in that context more precisely in the eighteenth century.50 The emphasis on the will of the parties in this connection came later and is nineteenth-century, as such associated in particular with von Savigny.51 It put what parties had meant and their creative powers at the centre of the contractual rights and obligations and introduced a more psychological approach into contract formation and interpretation as we saw. Offer and acceptance then acquired their present importance as well as the notion that all contractual rights and obligations crystallise at the moment of formal acceptance of the offer. From the beginning, there were problems with the concept, however. First, the requirement of acceptance remained less clear when there was only one party committing itself.52 Offer and acceptance notions did also not solve the question of how far and for how long an offer remained open and as such binding. Civil law is divided on this issue till this day. German and Dutch law maintain that any offer remains open for a reasonable time and may during that time not be withdrawn by the offeror at will unless the offer itself allows for it. French law had no such rule, but French case law increasingly accepts it: the offeror may withdraw, but if he sets a certain period for acceptance or if a reasonable period for acceptance may be inferred from the circumstances and the offer is withdrawn

48 See Grotius, De Iure Belli ac Pacis, Lib II, Cap XI, iv, 1, still emphasising the mutuality of promises rather than the consensus or even the process of offer and acceptance, but cf also Cap XI, xiv and clearer his Inleidinge or RW Lee (tr), Jurisprudence of Holland (1953) III 10, where he noted that by contract we mean a voluntary act whereby the one part promises something to the other with the intention that the other party should accept it and thereby acquire a right against the first party, cf also Pufendorf, De Iure Naturae et Gentium 1674, Lib III, Cap IV, Sec 2.7. 49 Les Lois Civiles dans leur Ordre Naturel, Livre I Introduction (Paris, 1777). The key insight was here that promises are merely conditional until acceptance. 50 Traité des Obligations, no 4. Only in the nineteenth century was this development completed and were offer and acceptance made the key elements in the formation of contracts in civil law. The role of acceptance had already been identified by Bartolus, however, in connection with the use of agents: Commentaria D.15.4.1.2. 51 See n 23 above. 52 French law still reflects this in Art 1108 of the Code Civile (CC) which only requires the party that gives an undertaking to consent. So does s 516 of the BGB for gifts in Germany. More modern Codes, like the Dutch of 1992, always require acceptance in some form (Art 6.217(1) CC). So do the UNIDROIT Principles (Arts 2.5 and 2.6), the European Principles in Art 2.204–6 being less clear, see also Art II- 4:204–6 Draft Common Frame of Reference (DCFR 2008). Under these modern rules, silence is not enough but acceptance may be by conduct. The idea seems to be that nobody should be bound or even derive benefits against its will.

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within that period, the offeror may be liable to the offeree if he had wanted to accept and suffered damage as a result of the withdrawal.53 In France,54 this liability may be based on tort rather than on contract.55 Another traditional issue is the time of the acceptance which becomes vital when all rights and obligations gel at and operate from that moment. In civil law, in the traditional offer and acceptance language, it is normally considered the moment when the acceptance is received by the offeror.56 In common law, it is normally the moment the offeree dispatches the acceptance,57 the postman being here considered the agent of the offeror, but detrimental reliance may now move the date. The 1980 Vienna Convention on the International sale of Goods requires in Article 18(2) receipt by the offeror for the acceptance to become effective, but under Article 16(2), reliance may also be sufficient. That is also the approach of the UNIDROIT and European Principles of Contract Law and of the Draft Common Frame of Reference (DCFR, Art II-4:206). In all this, it must be remembered that offer and acceptance in this specific sense would only concern the major contractual conditions which must be more specifically agreed; minor terms need not be settled at the beginning for the contract to become effective. As we have already seen, in both common and civil law, the principle of formal offer and acceptance still underlies the formation and validity of the ensuing contract and its performance, although the reliance notion or offer and acceptance through conduct is developed in both modern civil and common law. Even from this practical point of view, it may thus be doubted whether the official offer and acceptance model remains in tact. It was already questioned in section 1.1.4 above and is indeed more fundamentally challenged in modern contract theory which puts conduct and reliance at the centre and makes offer and acceptance a subcategory of it. In this approach even in terms of will theory, the other party may rely on what it reasonably thinks the first party meant. Where contracts implies consensus, built on offer and acceptance, like some common platform, it still suggests congruent or overlapping desires of the parties as expressed by them but also a meeting of the minds concerning the contractual content and each party’s contractual rights and obligations. Mere declarations or exchanges of promises in that sense are then no longer adequate. It should be realised, however, that when consensus becomes the basis of the rights and obligations of the parties in this

53

See Cour de Cass, Civ, 10 May 1972 [1972] Bull civ III, 214. Ghestin, Traité de Droit Civil, Les Obligations, Le Contrat: Formation, 2nd edn (1988) 229 ff. 55 In common law, which as we shall see in the next section, does not adhere to the consensus idea of contract but rather to the notion of bargain or consideration in the sense of an exchange of formal unilateral promises (in which some of the earlier version of consent in the Ius Commune may be recognised), the offer itself remains non-binding, although statutory law in the USA now makes an exception for merchants if they spell this out in writing, see s 2–205 UCC for the sale of goods. Reliance on an offer may, however, bring the moment of the conclusion of the contract forward. 56 See s 130 BGB. 57 Ever since Adams v Lindsell (1818) 106 ER 250. 54

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manner, as it did in civil law, it is logical to look for the parties’ shared intent in the interpretation of the contract. This suggests by itself some measure of objectivity. In any event, even after nineteenth-century notions of the will entered the picture, it became clear that for their validity contracts could not depend merely on a consensus in a psychological sense. Between natural persons it would be too easy for a later difference of view to arise, undermining any previous consensus. A more objective way of interpreting the consensus was thus always called for, short of concluding that most contracts might be void ab initio or could suffer from mistake virtually at the option of either party. That was subsequently better expressed through the reliance notion. It was already pointed out before that, in modern business dealings, it is all the clearer that the psychological approach to interpretation can hardly suffice, if only because the person who signs the agreement is unlikely to know much of its details and merely uses his authority or power of commitment, whilst no single person may have dealt with the various issues and the end drafting is often left to outside lawyers. It means that a purely subjective interpretation becomes more difficult. What some (successive) negotiators, who often operate in teams, really want is then not the decisive factor even if it could be established, but rather what reasonable expectations were raised on the other side and what that side could and did rely on and what must be considered to have made sense to both parties in the circumstances in a more objective manner. At least in professional dealings, the contract text thus resumes its function as proper guide subject to a high degree of literal interpretation especially if meant as a road map or risk-management instrument, as we have seen. In civil law, these considerations served to sideline the notion of consensus in a psychological sense at least to some extent. This allowed an easier route for interpretation to develop in cases of ambiguity or doubt and facilitates gap-filling in the contractual provisions without resort to an imaginary and often artificial parties’ intent. Again, this may now be expressed in good faith language, as may even be the resort to literal interpretation of professional contracts in terms of relationship thinking but it was also noted before that this development in civil law is by no means at an end.

1.2.2. The Notions of Consideration, Exchange or Bargain in the Common Law of Contract. Meaning of Intent, Offer and Acceptance Civil and common law traditionally give a different expression to the different facets of contracting and to the determination of the contractual rights and duties of the parties under their contract. The common law of contract is here also subject to modern pressures in respect of its basic model, but it is largely unconcerned with deeper thought or systemic thinking and was always more ad hoc and practical but also more circumspect, as we shall see.

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First, in common law, the literal approach to declarations is often still preferred, especially in England. This approach, which strictly speaking does not depend on consensus or intent, goes back to an earlier phase in civil law when the mere exchange of such declarations also formed the basis of the contract. In common law it is supported by the old parol evidence rule which eliminates in the interpretation all contemporary or earlier evidence against any writing intended by the parties as a final expression of their agreement, see also the next section, and finds a counterpart in the literal interpretation of statutory instruments,58 although it may be supplemented and sometimes even corrected by implying conditions. This is still the preferred way of dealing with construction or interpretation in common law, at least in professional dealings, which were always the true starting point. It was already said that somewhat inconsistently, through implied terms, construction swings here from the objective or literal approach to contractual declarations to the subjective or psychological approach in gap filling, although these implied terms are more objectively interpreted also, especially when reasonableness, ways of dealing or custom are invoked in this manner, which has even allowed ‘reasonable man’ considerations being implied.59 As we saw in section 1.1.6 above, it is supplemented by a regard for the differences that may result from the nature of the relationship between the parties and type of deal and by dependency and reliance notions whilst equity will still cut out clear excess. In this manner, common law may come closer to the normative interpretation of civil law than would at first appear. Especially weaker parties may be protected in this manner and the contract in respect of them may even be adjusted.60 The difference in emphasis between civil and common law with respect to consensus and the parties’ intent in the formation and interpretation of contract has itself long been noted.61 As just mentioned, in common law, there is no similar emphasis on consensus or a meeting of minds and the parties’ intent relates rather to the individual promises and declarations to the effect they make. It is the more objective doctrine of consideration, which is the notion of exchange or bargain (or sometimes the notion of sufficient reason) that still provides here the main basis for the validity of agreements and their enforcement in common law. Within it, the key is that as long as the exchanged declarations of the parties in terms of their individual promises are sufficiently compatible, there is a (bilateral or executory) contract.

58 See Lord Denning, The Discipline of the Law (London, 1979) 11 ff and his comments in Bulmer v Bollinger [1974] Ch 401 and Vol 1, s 1.3.3. 59 See Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, 913 and BCCI v Ali [2001] 2 WLR 749. The literal attitude towards statutory enactments is, however, largely in tact and remains also the starting point in contract, see s 1.1.6 above at n 39. 60 See Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd, n 1 above. 61 See early Roscoe Pound, ‘Liberty of Contract’ (1909) 18 Yale LJ 451. Note, however, also the now often forgotten emphasis on mutual promises in the context of the early development of the consensus notion in civil law in the works of Grotius: see n 48 above.

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The mutual promises must be seriously meant,62 but the emphasis remains on the exchange of compatible declarations and not on the intent of the parties individually or (even less) jointly as consensus. In fact, the importance of intent in the formation of the contract has in common law until modern times still been denied by important American writers like Williston,63 and often it is thought that there may be a contract even if there is no evidence of any positive intent of the parties at all to create a legal right and obligation, provided there is consideration and the formal prerequisites for the formation of the contract exist. In modern times, this largely comes down to a more formal ritual of offer and acceptance, which terminology itself became in common law only current in the later part of the nineteenth century. However, in common law, even the theory of offer and acceptance puts emphasis on the exchange of promises in the sense of formal declarations rather than a meeting of the minds. These declarations must be intended by the party making them but that goes for each one individually. Similarity or compatibility of mutual declarations and not of intent thus remains the true key to contract formation in common law, at least in professional dealings. It squares with the consideration idea requiring a bargain or the exchange of a promise for a benefit to the promisor (or at least a detriment to the promisee). In a bilateral or executory contract, there will be such a promise and consideration on either side. In this approach, neither intent, nor, strictly speaking, even consideration is connected with the contract itself but rather with each party’s promise, the exchange of which (in a formal sense) results in the binding force of the agreement, its coming into existence, and the parties’ commitments thereunder. At the theoretical level, the central role of consideration or rather the exchange or bargain, if only between two individual formal promises, leads to a different approach to interpretation or construction as there is not necessarily a common platform between the parties like in the notion of consensus of civil law.64 It is true that the term ‘agreement’ is sometimes used and presented as a condition for the existence and binding force of the contract, but it does not truly have the meaning of consensus as in civil law.65 As a consequence, at least in the interpretation or construction of contracts

62

See Dalrymple v Dalrymple (1811) 2 Hag Con 54, 105. Selection on Contracts (1957) s 21. The highly esteemed American Judge Learned Hand once remarked that even ‘if both parties severally declared that their meaning had been other than the natural meaning, [but] each declaration was similar, it would be irrelevant’: Eustis Mining Co v Beer, Sondheimer & Co (1917) 239 F 976. In his view it did not make the least difference whether a promisor actually intended the meaning which the law will impose on his words. 64 cf also Catherine Valcke, ‘Contractual Interpretation at Common and Civil Law: An Exercise in Comparative Legal Rethoric’ in JW Neyers, R Bronaugh and S Pitel (eds), Exploring Contract Law (Oxford, Hart Publishing, 2009) 77. 65 See for the requirement of an agreement, eg, G H Treitel, The Law of Contract, 12th edn (London, 2007) ch 2, under strong German influence. In this sense it may sometimes also be used in the USA like in s 2–204 UCC. On the other hand, in common law, a distinction is sometimes made between agreements and contracts, in the sense that agreements can be without consideration and are then not binding or exist only in equity (like in the creation of a trust), whilst contracts are either under seal or based on consideration and as such always binding at law. 63

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in the professional sphere, common law remains more wedded to a literal interpretation of each party’s declarations, although it must sometimes also use implied conditions as we saw. It is here less coherent than civil law, but often more practical. It follows that there is no coherent idea of defences to performance either in the sense of a failure of consensus, for example in the case of error, fraud, or undue influence as there is in civil law. Only in equity relief came to be given in such cases leading to the notion of rescission, as we shall see in section 1.4.2 below. It is a term of art and does not mean avoidance per se. It is factual and all depends on the circumstances of the case.

1.2.3 The Development of the Consideration Notion in Common Law. The Modern Alternative of Detrimental Reliance As was shown, in common law, the consideration notion still plays an important role in contract formation. It was historically used in particular to develop modern contract law out of the law of torts and provided by the middle of the eighteenth century a mechanism that allowed the development of the English law of contracts not under seal (sealed contracts had always been binding) from the idea of physical barter into a binding exchange of mere promises. That was done by requiring some balance in the exchange, at first even a measure of equivalence in the sense of there being some just bargain or price (iustum pretium).66 In the USA, the Restatement (Second) of Contracts of 1981 distinguishes between agreements and bargains (s 3). A bargain requires an exchange of promises or an exchange of a promise and a performance. It includes barters. An agreement, on the other hand, is only the manifestation of a mutual assent, which may, or may not, result in legal consequences and may or may not be intended. In the USA, bargain is thus considered a narrower concept in the nature of a contract proper. A contract is in this connection a promise or a set of promises for the breach of which the law gives a remedy or the performance of which the law in some way recognises as a duty (s 1). An offer is the manifestation of willingness to enter into a bargain so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it (s 24). An acceptance is a manifestation of the assent to the terms of the offer made by the offeree in a manner invited or required by the offer. The acceptance may be made by the delivery of the required performance or the making of a counter promise. Acceptance by performance may operate as a counterpromise. The offer vests the recipient of the offer with the power to complete the manifestation of mutual consent by acceptance of the offer (s 35). 66 See Wooddeson, A Systematical View of the Laws of England (1792) 415. However, Holdsworth, 8 History of English Law (1926) 17 argues that courts never attempted to adjudicate upon the adequacy of consideration. Yet, until the development of the consideration approach, the writ of indebitatus assumpsit had provided protection for a contracting party only if it had relied on someone else’s promise and had performed but was not given its just reward and suffered damage as a consequence. In this manner, the notions of promise, reliance and real loss became the essence of the action. The requirement of real loss subsequently developed into the consideration requirement that was thus considered necessary to create contractual liability of the other party and needed to be substantial if not equivalent to justify an action. Nominal loss was not sufficient.

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In this connection, it should not be forgotten that originally the English royal courts were largely concerned with land matters only or sometimes with torts endangering the peace. Only gradually did other torts become actionable, ultimately even breaches of promises, but it took much longer to develop true contract actions. As in the law of chattels, where in common law the proper proprietary defences remain in tort, see chapter 2, section 1.3.4 below, also in contract the remedies still retain in common law a close affiliation with the law of torts from which they derive.67 In this development, there was not much room for the parties’ intent as the source for the binding force of contracts, at least not at first, although in the eighteenth century the Lord Chief Justice of the time, Lord Mansfield, accepted the seriously intended promise itself as the basis for contractual liability or ‘honesty and rectitude’ being itself sufficient consideration.68 This could have opened the way for the later Continental consensus and good faith interpretation approach to the binding force of contracts, but he was soon overruled.69 Yet after the eighteenth century, at least the exchange of mere promises could provide sufficient consideration,70 in which context the notion of equivalency or a just price was abandoned and, as it seems, also the important notion of reliance used earlier.71 The development of the purely executory contract as a contract based on an exchange of (formal) promises was thus achieved in common law.72 This development of the moden contract in common law came probably somewhat later than in civil law. It may still not be fully concluded, in that it remains embedded in the consideration notion of exchange or bargain (although no longer of equivalence) rather than in that of agreement of the parties, even though, as we shall see in the next section, the practical limitations connected with the notion of consideration are largely eliminated, whilst in civil law in modern contract theory the notion of the

There was an echo of this in the development of the synallagmatic innominate contracts in civil law, which at first were thought to be actionable only by the party that had fully performed, see R Zimmermann, The Law of Obligations (Deventer, Boston 1992) 536. 67

See also n 25 above. Pillans v Van Mierop (1765) 97 ER 1035 (KB), reversed in Rann v Hughes (1778) 101 ER 1014 (KB). Ever since, the doctrine of consideration has been upheld, importantly so in Foakes v Beer (1884) 9 App Cas 605 (HL), holding that a contract between a debtor and his creditor to forgive interest on a debt was unenforceable without proper consideration being given for the release. This is still good law. 69 See Holdsworth, n 66 above at 45. See for a more recent contribution to the development of the consideration notion S Waddams, ‘Principle in Contract Law: the Doctrine of Consideration’ in JW Neyers, R Bronaugh and S Pitel (eds), Exploring Contract Law (Oxford, Hart Publishing, 2009) 50 and AS Gold, ‘Consideration and the Morality of Promising’ ibid at 115. 70 S 71 of the Restatement (Second) of Contracts of 1981 states: ‘(1) To constitute consideration, a performance or a return promise must be bargained for. (2) A performance or return promise is bargained for if it sought by the promisor in exchange for his promise and is given by the promisee in exchange for that promise’. 71 See Holdsworth, n 66 above at 2 ff. 72 Thus Storey considered the extent of the contractual obligation dependent upon the conveyance of individual desires; in the USA that was also the idea of Holmes. See Storey, A Treatise of the Law of Contract not under Seal (1844) 4, and Holmes, The Common Law, 1st edn (1881, 58th printing) 293–94. 68

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agreement and the will of the parties in that sense is increasingly de-emphasised as we have seen, which also affects its notion of consensus in a psychological sense. In common law, the more co-incidental approach to determining contractual rights and duties always prevented any abstract theory of intent or consensus from developing.73 Crucially, this left room for a re-awakening of the reliance notion in modern times, and reasonable or justifiable and in particular detrimental reliance on the declaration or acts of the other party may now replace the emphasis on the exchange of formal promises. So may conduct and it may then also allow for a more normative or objective (in that sense) approach to determining the rights and obligation of the parties, even in common law. Yet in other cases, the need for consideration by way of bargain or the exchange of formal promises subject to a more literal interpretation has by no means disappeared. The re-awakening of the equitable reliance notion or promissory estoppel in common law may be traced back to developments in the USA, where, since the 1930s, the importance of detrimental reliance on an offer (or promissory estoppel) has been stressed to create contractual rights and duties besides the exchange or bargain notion,74 and is now widely accepted, sometimes in competition, more often as a supplement to the notion of an exchange of promises or consideration. In truth, it may well have overtaken it, also in England. Thus if there is a justified or reasonable reliance on an offer, the lack of consideration proper need no longer be a problem. To start hiring people or to begin a project in justifiable reliance on a promise of a construction contract or of adequate funding may be sufficient, but the mere hiring of a lawyer, for example, may not be enough. In England, Professor Atiyah has suggested that, in order to assume the binding force of a contract, detrimental reliance and especially a beginning of performance is always the true key to the validity of the contract and necessary before any enforcement action can be based on it.75 The promise based notion of contract is here abandoned altogether. The sequel may indeed be a more normative attitude to contract formation and the determination of the contractual rights and duties. This more radical proposition, which in the common law perception is more properly tort related, could also lead to a curtailment of expectation damages in favour of restitutionary or direct damages only.76 It has not found full acceptance in common law so far, but is in a transnational context useful.77 In the previous sections, the emphasis on conduct and reliance in this manner was also proposed as the better approach in civil law. Offer and acceptance then become a sub-category. It was already

73 See eg A G Chloros, ‘Comparative Aspects of the Intention to Create Legal Relations in Contract’ (1959) 33 Tul LR 606, 611. 74 In the USA, the reliance doctrine may be traced to Fuller and Perdue, ‘The Reliance Interests in Contract Damages’ (1936) 46 Yale LJ 52, 373. The important case is Hoffman v Red Owl Stores Inc (1965) 26 Wis 2d 683, 133 NW 2d 267 allowing compensation for losses caused by reasonable reliance on the declarations made in the course of negotiations without an element of consideration or even unjust enrichment. 75 ‘Contracts, Promises and the Law of Obligations’ (1978) LQR 193. 76 See also the comment in nn 25 and 67 above and in 83 below. 77 See also n 26 above and accompanying text.

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suggested that this is a development well underway in professional dealings and therefore likely to be a main feature of transnational contract law in the professional sphere. Certainly, if there has been detrimental reliance, even more so a beginning of performance in justifiable reliance on the declarations or actions of others, it may be right to assume a contractual bond or binding legal relationship. Still the offer itself continues to play an important role, also in the reliance theory, and need as such not be eliminated, but may now be more indirect or informal, whilst formal acceptance can then also be dispensed with. As a formal model, the ritual of offer and acceptance is becoming out of date, also in common law, whilst the notion of consideration becomes less relevant as well but it takes time before this is fully realised. It was already said that a more normative approach to contractual interpretation could then follow even in common law, as it is doing for consensus in civil law. In the meantime, the UCC in the USA follows to some extent the earlier line of Lord Mansfield, at least for the contract of the sale of goods with its emphasis on agreement between the parties but also on their conduct, including the beginning of performance (see ss 2–204 and 2–206 UCC). This was achieved at the expense of the consideration requirement, the lack of which under section 2–205 UCC no longer stands in the way either of offers by merchants being binding if the offers have been stated in writing to remain open. Yet, even though Article 2 UCC in its formation provisions makes no longer reference to consideration (except indirectly in section 2–205), the notion is not abandoned, only de-emphasised. In England, the abolition of the consideration notion altogether has been advocated since 1975 by the Law Commission (Working Paper No 61).78 It is important to appreciate in this connection that it would do away with the inconveniences of the doctrine, but would not replace the notion of a formal exchange of promises or bargain with the Continental idea of a consensus or a meeting of minds leading to a more normative and comprehensive interpretation technique in that manner. As just mentioned, only the notion of conduct and reliance produce similarity in approach and result. As mentioned before, in common law, the parties’ intent continues to refer less to consensus, as it does in civil law, than to each party having been serious in its offer or acceptance.79 As intent therefore relates only to the declaration aspect of the consideration notion, which in modern times is content with a seriously intended exchange, that approach would survive the abolition of the consideration requirement also. Declarations would thus still remain the true focus of contract formation in common law other than in the USA, at least in professional dealings, although it is conceivable that also in common law conduct and reliance will become the true modern focus.

78 See also Lord Wright, ‘Ought the Doctrine of Consideration to be Abolished?’ (1936) 49 Harv LR 1225; A G Chloros, ‘The Doctrine of Consideration and the Reform of the Law of Contract’ (1968) 17 ICLQ 137; M Horwitz, ‘History of Contract Laws’ (1974) 87 Harv LR 917, and P S Atiyah, ‘Consideration: A Restatement’ in Essays on Contract (1986) 179. 79 See the early Dalrymple case, n 62 above.

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The 1980 Vienna Convention on the International Sale of Goods largely accepts the formal offer and acceptance language of common law80 but does not require consideration (or causa).81 It allows offers to be withdrawn before an acceptance is dispatched unless the offeree acted in reasonable reliance upon the offer but does not dwell on pre-contractual negotiation duties (Art 16(2)). Conduct may also signify acceptance, see Article 18(1). The English, who did not accede to the Vienna Convention, were willing to give up the notion of consideration for international sales when ratifying the 1964 Hague Sales Conventions, which were the predecessors of the Vienna Convention on the International Law of Sales, and the USA was willing to do so whilst ratifying the 1980 Vienna Convention. This is clearly the trend (although in the Vienna Convention the formal offer and acceptance ritual as model is maintained). The requirements of consideration are also absent from the UNIDROIT Principles for International Commercial Contracts, from the European Contract Principles, and from the DCFR, which put the intentions of the parties at the centre ‘to be determined from [each] party’s statements or conduct as reasonably understood by the other party.’ (Art II-4:102). There is no particular form (Art II-1:106) and the terms are deemed sufficiently determined if they are established by the parties or can objectively be established (Art II-4:103(1)). It may well be that in international transactions the requirements of consideration have already lapsed altogether. The same may apply to the notion of causa. The question of the significance of consideration in international transactions has more generally arisen where, for example, English law is made applicable through a contractual choice of law clause. It is now often believed that such a choice does not necessarily mean to introduce consideration notions any longer in international commercial contracts, at least if there are no other clear contacts with English or common law. The idea is here that, through a contractual choice of law, parties cannot have meant to enter into an agreement that was never binding for lack of consideration.82

80 It refers to the process of offer and acceptance as formation. It requires in Art 14 that there is an intention on the part of the offeror to be bound by the acceptance but has no similar language for the offeree (Art 18). Wider questions of validity do not concern it and are not covered by the Convention (Art 4). 81 It does not appear that it may be reintroduced through application of a national law pursuant to applicable conflict rules under Art 7(2) as a matter of gap-filling in the area of formation or outright as a matter not covered by the Convention at all. 82 See also O Lando, ‘The Lex Mercatoria in International Commercial Arbitration’ (1985) 34 ICLQ 747 and further JH Dalhuisen, ‘What could the Selection by the Paries of English Law in a Civil Law Contract in Commerce and Finance Truly Mean?’ in Festschrift Tom Bingham and the Transformation of the Law (2009) 619.

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1.2.4 Contracts: Construction and Remedies in Common and Civil Law. The Parole Evidence Rule As we saw, in common law, the ambivalence towards the notion of contractual intent blocked a more conceptual approach of consensus and failures of consensus and therefore of contractual validity from developing. An important consequence is that there is no clear-cut approach to interpretation or construction either and it remains more casuistic. Another consequence is that lack of disclosure, or mistake, misrepresentation, abuse of power or undue influence, and fraud at the time of the conclusion of the agreement, may all affect the validity of a contract, but this is not primarily perceived as a failure of consensus as it is in civil law. The types of relief given in these circumstances are even now more incidental and were ultimately developed separately in equity in terms of a so-called rescission remedy, as we shall see in section 1.4.2 below. They are seen as defences against a request for performance, resulting in a fractured system of remedies largely depending on factual situations, and may not even then lead to voidness with automatic restitution or title return under a failed (sales) agreement. In any event, the scope of contract seems narrower in common law than it is in civil law, and remedies sought in connection with contractual dealings soon become tort-based as we have seen, for example where there was misrepresentation or abuse in enforcement demands. So it may sometimes be in France. Fair dealing ideas, on the other hand, easily lead to notions of unjust enrichment and restitution remedies.83 As a consequence, not only the approach to validity and interpretation but also the system of common law remedies is different from civil law. As just mentioned, they are more incidental and based on practical requirements of the case at hand. As mentioned also, this leaves room for implied terms in the construction of the contract, traditionally used to make allowance in particular for notions of force majeure or sometimes even hardship in connection with changed circumstances in duration contracts.84 It was noted before that in this manner intent moves more fundamentally to the centre of contract law even in the common law of contract, but it does so only incidentally. It was also noted in section 1.1.6 above that this more modern use of implied terms of reasonableness and fairness85 may even move common law closer to what in civil

83 Similarly reliance, notions of dependency and fiduciary duties, and of fair dealing can be and have been explained as giving rise to non-contractual, tort, or restitution protections rather than to contractual remedies, therefore to remedies not strictly belonging to the contractual order, which in that view is limited to the old bargain approach or to the area of voluntary promises which may, however, also cover implied conditions. It may make a difference to the amount of damages that may be recovered, especially any lost future profits under the (anticipated) contract. Thus expectation damages may become less normal or may be more readily curtailed, see also nn 25 and 67 above. 84 See Taylor v Caldwell (1863) 3 B&S 826, (1863) 32 LJQB 164. 85 See for English law Bankline v Arthur Capel [1918] AC 435 and Metropolitan Water Board v Dick [1918] AC 119.

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law is the normative approach to the validity and interpretation of contracts.86 So do the reliance and dependency notions, which have in proper cases a similar effect. It has already been said also that common law may be more comfortable with the operation of other more autonomous sources of law, and distinguishes between types of relationships, which again may lead to a more normative approach to contract interpretation, with the consequence that professionals may be held to a more literal meaning of their contract texts than consumers or employees. In civil law much of this now hides behind the notion of good faith as we saw but it was posited earlier that English contract law may be here more advanced. Certainly in England in this manner, notions of protection of weaker parties, especially against onerous terms, gained ground early,87 although it has in recent times mostly been left to statutory intervention to protect consumers.88 Hence the Consumer Credit Act 1974, the Unfair Contract Terms Act 1977 and the Financial Services Act 1986, now superseded by the Financial Services and Markets Act 2000. In fact, consumer and investor protection has been a matter of statutory intervention in most countries, also in civil law, where the normative approach to interpretation could have dealt with it had it developed a better relationship thinking approach. This also applies to the use of standard terms in contract, except in Switzerland, where it is still felt to be satisfactorily dealt with under general legal principles, including the normative approach to interpretation. Yet, as already noted before, there is no conceptual clarity in the common law approach to contractual interpretation or construction and, on its face, common law often still relies more generally on the literal meaning of the contractual terms and does not easily extend its coverage, at least not in professional dealings, as was stated in England by Lord Reid:89 There is no need to consider what the parties thought, or how reasonable men in their shoes would have dealt with the situation if they had foreseen it. The question is whether the contract they did make is, on its true construction, wide enough to apply to [a] new situation; if it is not, then it is at an end.

It leaves open the question what true construction is. There is here some room for flexibility. Yet the old parol evidence rule underpins a restrictive attitude.90 It does not allow any contradictory contemporary or earlier evidence (and in the opinion of

86

See also the summary in n 121 below. Their impact then still depends on interpretation with the same restrictions in common law as just mentioned. Implied terms do not therefore operate as a general counterbalance or independent source of contractual rights and duties or amount to a validity test of the contract, see British Movietonews v London and District Cinema [1951] 2 All ER 617, rejecting Lord Denning’s broader approach in the Court of Appeal in this case, see [1950] 2 All ER 390, 395. 87 See Parker v Smith Eastern Railway Co [1877] 2 CDP 416 and Hood v Anchor Line (Henderson Brothers) Ltd [1918] AC 837. 88 See, however, also J Spurling Ltd v Bradshaw [1956] 1 WLR 461; McCutcheon v David MacBrayne Ltd [1964] 1 WLR 128; Thornton v Shoe Lane Parking Ltd [1971] 2 QB 163 and Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd, cited in n 1 above. 89 In Davis Contractors v Farnham [1956] 2 All ER 145. 90 It is now mostly seen as a rule of construction and not one of evidence.

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many, even later behaviour) against any writing intended by the parties as a final expression of their agreement. This attitude does not stand alone and, as already mentioned before, a similar attitude may be found in the literal interpretation of statutory instruments in England. In the US, section 2–202 UCC retained the parol evidence rule, although it allows a course of dealing or usage or the consistent use of additional terms to be pleaded regardless.91 In common law, there is also little room at the theoretical level for the introduction of more general equitable principles to balance the intent and the contractual autonomy, as the doctrine of consideration once might have done.92 It has already been pointed out before that equity itself presents in the common law system a fairly precise set of incidental rules and is certainly not a general source of supplementary law, as good faith or reasonableness and fairness increasingly are in civil law. As discussed in Volume I, section 1.3.1, equity is no general counterbalance or independent source of contractual rights and duties either and does not amount to a validity test of the contract or a facilitator of the interpretation process.93 Thus the normative approach to contract interpretation implying a balancing of intent by notions of good faith remains largely a civil law concept and finds its parallels in common law, not much in equity unless there is clear excess or abuse, but rather in the different ways here explained: the nature of the relationship of the parties, dependency, implied terms, and sometimes reliance or the acceptance of extra-contractual duties derived from other autonomous sources of law, see further section 1.1.6 above.

1.2.5 The Practical Significance of the Consideration Requirement in Common Law The typical common law consideration requirement should be considered further in its practical meaning. In common law, it is sometimes thought to highlight and to give expression to the dynamic role of contract and to the continuing ability of the

91 Some of this may in England derive from the Karen Oltmann case [1976] 2 Lloyd’s Rep 708 (QB). Art 8 of the Vienna Convention on the International Sale of Goods contains an interpretation provision and allows not only statements but also conduct to be considered in determining the meaning of the contract according to their reasonable interpretation. Due consideration is thus given to all relevant circumstances of the case including the negotiations, practices and usages and any subsequent conduct of the parties. It is clear that Art 8 does not follow the parol evidence rule, cf also Art 2.1 UNIDROIT Contract Principles and Art 2.101(2) European Contract Principles which allows a contract to be proved by any means, including witnesses, see also the DCFR, Art II-1:106(1). 92 See also text at n 99 below and accompanying text. 93 See British Movietonews v London and District Cinema [1951] 2 All ER 617, rejecting Lord Denning’s broader approach in the Court of Appeal decision in this case [1950] 2 All ER 390, 395.

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contracting parties to signal their intentions and plan their business or life without (too much) interference on the grounds of other notions, principles or imperatives.94 It may be doubted, however, whether this holds true or that this is truly the distinctive feature of the consideration notion. As everywhere else—certainly also in the civil law notion of consensus—party autonomy (and the division of risk between the parties that it implies) remains an important aspect of contracting, especially in contracts between professionals, but the initiative of the parties is not or no longer always the only source of the binding force of contracts and of their content. Nor are subsequently the parties’ rights and duties merely determined by party autonomy, see particularly the discussion in section 1.1.2 above. In any event, at least in civil law party autonomy as such is no longer an independent source of law (it is the state in codification theory that allows it to operate but only in the manner it prescribes). In common law, there survives in this connection the idea that only consideration matters.95 The key remains then the exchange of commitments or promises of the parties, which may or may not prove to have been intended as long as the declarations of the parties are sufficiently similar and congruous in a formal sense. This continues to be the fundamental importance of the consideration notion in common law and still a main conceptual difference with civil law, although practically speaking, in modern times, consideration itself is of little consequence and long since de-emphasised or to put it another way: normally it is there, why otherwise contract (even if it is true that co-operation rather than exchange may also be the objective of contracting)? An important point to repeat in this connection is that the notion of consideration, wherever still an obstacle, no longer requires equivalence between the value of the mutual promises or a fair price as we have seen. It is now entirely left to the parties to determine what is proper consideration and it can thus easily be provided. In the USA it is quite normal, for example, to enter into option contracts by paying (or promising to pay) one US dollar. Although the exchange must be serious and seriously meant, the value of the consideration given may thus be nominal (a peppercorn), but it may not be illusory or fictitious. In any event, the consideration requirement may altogether easily be circumvented by entering into a contract under seal which means no more than affixing a mark on the contract or writing on the contract that it is under seal and have it witnessed by two witnesses. The promise contained in such a contract must somehow be expressed, but the handing over of the document is normally considered sufficient in this connection. In the USA, in states like New York and California, this circumvention route was eventually blocked (see also section 2–202 UCC), though not in England. Other supplementary sources of contractual rights and obligations in terms of reliance, dependency, implied terms, nature of the relationship etc. were already

94 See C Fried, Contract as Promise: A Theory of Contractual Obligation (Cambridge, Mass, 1981). The emphasis is here on the self-binding nature of the promise (conceivably as an autonomous source of law) rather than the bargain theory of contract. The key then is intent, but of each party separately. 95 See also R Unger, ‘Intent to Create Legal Relationships’ (1956) 19 MLR 96.

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identified, even if not amounting to good faith and similar objective notions of contractual obligation in a civil law sense. They operate besides the consideration requirement although it may itself sometimes also stand for good sense. Nevertheless, in practice, the requirement of consideration and its strategic meaning can still not be fully ignored in the common law of contract. It remains particularly relevant in that offers or options without consideration are not legally binding until validly accepted. But again, detrimental reliance by the offeree may cure the problem.96 Other examples of the residual importance of consideration are in contractual amendments. Although they can now be freely entered into without giving additional consideration, that is not necessarily so if a discharge, release, rescission or novation is intended. When work is agreed to be performed against a certain price, any amendment of the price is also still likely to have no legal effect, even if an extra effort is required to complete an already agreed full project.97 Surety contracts or guarantees may also still fail for lack of consideration, so may contracts that impose only a unilateral obligation, like those that reward services after performance, or when the debtor is given the option not to perform. Contracts to perform a moral or religious duty like refraining from smoking or going to church, may also fail for lack of consideration. Past consideration is also not sufficient, for example where an annuity is promised for past services, or as a reward for a heroic act after it has been rendered. Most of this is undesirable and modern case law may distinguish on the basis of particular circumstances. Commercial agency agreements were traditionally also thought to lack consideration, although it was later found in the commercial agent promoting the business. Also an oral promise to make a gift is not enforceable even if accepted. Even a written promise is only valid if in deed form or supported by statute. This is perhaps more understandable. It is the same in most civil law countries on the basis of statutory law in order to avoid rashness, although in civil law a rash gift actually made will normally stand.

1.2.6 The Common Law Notion of Consideration and the Civil Law Notion of Causa Compared Consideration as a more objective source of law operating besides modern notions of offer and acceptance and the parties’ intent has sometimes been compared to the civil law notion of causa. It is true that both are objective notions but it may be doubted whether there is here true analogy. 96 The legal rule that an offer is already accepted upon dispatch (rather than upon receipt) of the acceptance and cannot be legally withdrawn thereafter may be seen as an earlier practical effort to limit the effect of the consideration doctrine in this area. 97 See also M Chen-Wishart, ‘Consideration: Practical Benefit and the Emperor’s New Clothes’ in Beatson and Friedmann, Good Faith and Fault in Contract Law (1995) 123.

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The civil law notion of causa has several meanings (cf Arts 1108, 1131 and 1133 of the French CC) but requires a contract essentially to make some sense, be rational, be seriously intended, and have some meaning. We already saw that originally it was foremost meant to overcome formalism but was also used to avoid contracts on the basis of impropriety and is then a public order concept. At certain times, it was even explained as requiring a reasonable quid pro quo.98 That seems to bring it close to the consideration requirement in some of its earlier forms but this was not pursued. Both concepts (consideration and causa) were sometimes also invoked as objective standards to cure contractual excess and may in that respect sometimes be similar, but there are increasingly other tools available to make adjustments, like indeed the use of the good faith concept in civil law. In civil law, the requirement of a causa was often considered obscure and has progressively been abandoned, at least in the sense of requiring the contract to make sense according to some objective standard, compare the new Dutch Civil Code and earlier in the BGB of 1900. The normative contract interpretation facility discussed above can now cover the same ground, if necessary. In civil law countries that retain the notion, like notably France, it is used mainly to avoid contracts which are clearly immoral or concern gambling. This is the public order element, although more relaxed moral attitudes and the speculative element in many modern financial structures have led to less emphasis on causa restrictions even in this narrower sense, see for example Article 3.40 of the Dutch CC. In any event, the Dutch CC no longer uses causa language but rather the notion of illegality in this connection. However, as just mentioned French law in particular maintains the notion of causa which therefore retains residual importance, possibly also because the notion of good faith is still less pervasive in balancing the contractual intent in France. In all this, it should be remembered that in civil law the causa operated next to the consensus as an occasional corrective only, whilst, in common law, the later notion of bargain and exchange within the consideration requirement became basic for the formation of all contracts (except if under seal) and could result in contracts without a clear consensus. Although the notion of the causa may well have had an early influence in England and may have contributed there to the consideration notion in its emphasis on circumstance, seriousness and reasons for a promise,99 in civil law the notion of causa never acquired anything near the central role consideration did in common law and these two concepts should therefore not be equated as they sometimes are in legal scholarship. 98 In this limited sense, the concept of causa could be traced back to Roman law. Under Justinian law, the vendor of land could require the return of the asset if it proved worth more than twice its price: D.4.44.2. This was the theory of the laesio enormis, later supported by Canon law. There is a remnant in Art 1118 French CC, but most normal contract types are no longer affected by it. Under Art 1448 Italian CC, there is also a possibility of setting certain contracts aside because of disproportionality, but there must be another element like abuse or exploitation. That is also the gist of German case law under s 138(2) BGB. 99 See AWB Simpson, A History of the Common Law of Contract: The Rise of the Action of Assumpsit (Clarendon Press, 1975) 199.

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Finally, a brief further comment on the history of these concepts of consideration and causa. It confirms amongst others that they have by no means the same significance. In England, the doctrine of consideration was first formulated within the development of the writ of indebitatus assumpsit, as we saw, and was particularly used to propel the notion of contract out of its primitive phase of barter into its modern form of an exchange of promises for the future, therefore of a bilateral or executory contract.100 The notion of causa in civil law developed in the Ius Commune which under scholastic influence looked for a cause in all legal acts. It is therefore much older than the notion of consideration and believed to have been first formulated as a general contractual requirement in the fourteenth century by Baldus.101 It was combined with his then new view on the binding effect of the promise which was itself inspired by the requirements of the commercial practice and the Canon law as discussed above.102 This notion of cause allowed the abolition of the formalities earlier thought necessary to prevent rashness. Instead, the causa required an objectively serious intention for contractual engagements to be binding, but it sometimes came also to be seen as requiring some balance in the parties’ interest, as such indeed also notable in the early consideration notion in common law. Grotius whilst developing the consensus notion retained the notion of causa, requiring a reasonable cause for a contract to be binding.103 In France of the eighteenth century, it also remained popular.104 From there it entered the French Code Civil (Arts 1108, 1131 and 1133) and continued to be strongly defended by more modern authors like Capitant.105 French law requires the valid cause to remain existent all through the life of the contract. This was unlike case-law in the Netherlands based on similar provisions (before its new Code). It required a valid cause only at the time of the conclusion of the contract.106 Again, corrections of this sort to the parties’ intent are in civil law now

100 It was virtually abandoned by Lord Mansfield in the eighteenth century in favour of a much more Continental approach, as we already saw but it did not persist: see n 68 above. 101 Commentarius Codicis ad C.4.30.13 at 22 and 23. D. 2.14.7.4 already mentioned the concept and proved a ready base for its further development. 102 See s 1.2.1 above. 103 Inleidinge tot de Hollandsche Rechts-geleerdheid [Introduction to Roman Dutch Law], II.1.53. See for the development of the will notion in Germany in this connection, J Gordley, The Philosophical Origins of Modern Contract Doctrine (Clarendon Press, 1991) 162 ff. The well known protagonist was von Savigny, 3 System des heutigen römischen Rechts (1840) 258 against R von Jhering, Zweck im Recht, 3rd edn (1898), who continued to emphasise the purposes for which people contract and the reasons the objective law enforces their commitments, see also n 23 above. L Duguit in France followed him: Les transformations générales du droit privé depuis le Code Napoléon, 2nd edn (1920) 72 and 97 and even denied the independent existence of subjective rights, including those under a contract, believing them to be entirely dependent on the social order. 104 See Pothier, Traité des Obligations, no 42, who limited it to an ‘honest cause’. 105 De la Cause des Obligations (1928). Planiol, 2 Traité Elémentaire de Droit Civil (1949) 291 proved critical of the cause concept, however. 106 See HR, 6 Jan 1922 [1922] NJ 265. The use of the causa notion in the sense of requiring a proper balance or just price was explicitly rejected in modern times by the Dutch Supreme Court in 1936: see HR, 13 November [1937] NJ 433. In the Netherlands, the cause notion was particularly

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increasingly obtained through the notions of fairness and reasonableness or good faith in the context of the objective or normative interpretation method, at least in countries like Germany and the Netherlands. Indeed, by the nineteenth century, the causa requirement was no longer considered necessary by German scholars, who increasingly depended on will theories rather than on internal contractual logic or virtue. It was not retained in the German BGB of 1900 for that reason, whilst public order concerns with the contract were expressed differently (through notions of invalidity or illegality in more specific cases). It was ultimately superseded by the good faith notion in contract which was increasingly used to re-introduce normative and moral elements at least in private (consumer) dealings. The fact that fairness notions are less accepted as correctives in common law and in some civil law countries as well may have favoured the survival of the consideration doctrine in countries of the common law and the causa notion in countries like France. In this connection, it may also be noted that the notion of a just price has not completely been abandoned either and stages regular revivals, although in the end it has always proved an impractical criterion for contract validity or adjustment.107 It is in any event no longer related to the causa or consideration requirements, but in civil law rather to general notions of good faith leading to contractual adjustment only in exceptional cases. This discussion has relevance for law formation at the transnational level in the question how party autonomy as an independent source of law may be balanced by (higher) fundamental principle, or related public order considerations, or even custom or general principle of a mandatory nature. This is not then likely to be cast any longer in terms of causa but rather of good faith which as we have seen108 now often substitutes for other, higher sources of law, or through direct references to public order requirements either of the local variety if sufficiently impacting on an international case or of the transnational variety itself.

1.2.7

Other Aspects of Contractual Validity: Capacity and Authority

Capacity to contract is truly only an issue for natural persons who may be minors or otherwise incapacitated. In the professional sphere under normal circumstances, it should no longer have relevance as legal, not natural persons normally operate there, although their legal existence itself will still have to be verified. As far as directors or criticised by the original designer of the new Civil Code: see EM Meijers, Nieuwe Bijdragen omtrent de Leer der Consideration en Causa [New Contributions to the Notions of Consideration and Causa], Verz W [Collected Works] (1955), III, 301, and does not appear in the new Civil Code, except in the context of an immoral cause: see Art 3.40 (but differently phrased). See for the causa notion also M Storme, ‘The Binding Character of Contracts, Cause and Consideration’ in A Hartkamp et al (eds), Towards a European Civil Code (1998) 239. 107 108

See eg O Schachter, ‘Just Prices in World Markets’ (1975) 69 AJIL 101. See Vol I, s 1.4.3

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managers are concerned, they may operate outside their authority or ultra vires, but it has long been accepted that this is the risk of the company rather than of a counterparty acting in good faith. There is no need therefore for counterparties to verify the powers of those who act for a company and they may depend on apparent authority if there are no obvious reasons to doubt it. Thus in the EU already in the First Company Law Harmonisation Directive (68/151) of 1968, the so-called ultra vires doctrine was abolished for companies and their dealings. It has more recently raised its head, however, in England in dealings with local authorities which are not companies. Swap contracts with them have been considered ultra vires in the sense that these authorities were not considered to be empowered to enter into speculative interest rate instruments or derivatives. These agreements were as a consequence voided and local authorities and municipalities were not required to pay under them.109 It posed, however, at the same time the question of the legality of all payments made to them. In England, this subsequently gave rise to much litigation and many restitution claims where local authorities already had collected under these swaps. The argument of ultra vires was also used in the USA by Orange County in its suit against Merrill Lynch in connection with its own disastrous derivative losses in the 1990s. The pressure on the judiciary to protect local authorities in this manner may be understandable, but the use made of the capacity argument to undermine apparent authority and justifiable reliance may be seriously questioned. In trusts, the situation is so far different that one has to look at the powers and capacity of acting trustees, not in terms of what the trust deed allows them to do, which is irrelevant in respect of third parties as trustees always act in their own name, but it is relevant in terms of their own capacity as natural or legal persons. Especially in the latter case, ultra vires arguments may no longer apply for the reasons just explained. Lack of capacity should be distinguished from lack of disposition rights or authority in that sense. The thief has legal capacity but no disposition rights in the stolen assets, in which he can therefore not transfer valid title. That goes for all non-owners of assets, although the buyer may be protected because of his bona fides if there is delivery, especially relevant in respect of chattels in civil law. That will not normally cover lack of capacity, see more particularly chapter 2, section 1.4.5 below.

1.2.8

Other Aspects of Contractual Validity: Formalities

As regards formalities, in France, Article 1341 CC requires all contracts with a value in excess of 50 French Francs to be expressed in writing. If such a record in writing does not exist, evidence of its existence by witnesses may not be given. A similar rule obtained in the Netherlands until 1923. It has a long history and may be traced back to Article 54 of the French Ordonnance de Moulins of 1566. It does not apply to 109

Hazell v Hammersmith and Fulham London Borough Council and ors [1991] 1 All ER 545.

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commercial contracts. In non-commercial contracts, its impact has been reduced in France by allowing a beginning of written evidence to be sufficient. Also tape recordings are now accepted as sufficient evidence of a contract with a value in excess of 50 French Francs. Most importantly, admission or recognition may overcome the impediment or, to put it differently, if the voidness for lack of form is not invoked, the contract stands. In common law countries, there is traditionally the Statute of Frauds requirement. The Act dates from 1677 and requires a written document in a number of cases. The most important are real estate contracts and guarantees or sureties. Only for these two does the Act remain in force in the UK. In these cases, lack of formality does not, however, void the transaction per se but makes it unenforceable at the request of either party. In the USA, under Article 2 of the UCC (s 2–201), the sale of goods must still be evidenced by a written document if in excess of US$500 in order for such a sale to be enforceable. Again, recognition or admission cures the defect in form. A similar formal requirement is not contained in the English Sale of Goods Act and it is also not a requirement under the Vienna Convention for the International Sale of Goods. The requirement of a document for a sales contract in respect of real estate is fairly common and has now also been introduced in the Netherlands through its new Code in 1992. Also in Germany, a notarised deed is necessary for the sale of land, section 311b BGB, but a buyer may, if good faith so requires, prove the agreement by other means and may demand possession even without the form being observed. On the other hand, the seller may repossess the land for lack of formality if good faith so dictates for him. It clearly depends on the circumstances. The requirement of a written document guards against light-heartedness but may also lead to abuse as it allows sellers to accept higher offers before a written contract is signed. They commonly do so in real estate transactions in England (gazumping), increasing the uncertainty and cost for the buyer. Here the German system seems to render fairer results. It is true that in common law there is the doctrine of part performance under which a vendor may be forced to perform if he knows that the buyer is acting in reliance on his oral promises, but this does not prevent gazumping in England. Other contracts that often require written form are assignments. This is so in the Netherlands and in France. Equitable assignments in England do not, and that goes for all assignments in the USA (except in the case of an assignment under Art 9 where non possessory collateral must be described unless there are other forms of control, s 9–203(3)(A) and (D)). In many countries, secured transactions in movables also require a written document. So it is in the Netherlands where they must also be registered (if not notarial). Third-party guarantees always require a document in Germany, see section 766 BGB. It poses the question what a writing is or the proper written form. It seldom goes as far as to require a written signature. In all these cases there is the further question whether, in the absence of the proper written document, the contract may still be proven. Another question is whether recognition may overcome the absence of the

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proper form and how abuse is to be countered. As we have seen, there is no single answer to these questions. The international lawyer needs, however, be aware of the different possibilities.

1.2.9

Other Aspects of Contractual Validity: Definiteness

As to the requirement of definiteness, traditionally it may be said that most contract laws require some specificity as to a contract’s object. In sales agreements that translates into clarity on quantity, quality, price and place and time of delivery. In the law of property and its transfer, it has a much more important role and translates there in the requirement (or not) of identification and specificity of the underlying asset, see the discussions in chapter 2 below. Under Article 2 UCC in the USA, a contract for the sale of goods does not fail for lack of definiteness, however, if one or more of the basic terms are left open, as long as there is a reasonably certain basis for an appropriate remedy. The UCC requires as the minimum for the validity of a sales contract only agreement on quantity. It need not even be accurately stated but recovery is limited by what is said, whilst the price, time and place of payment or delivery, the general quality of the goods or any particular warranties may all be omitted, see section 2–204(2) and also the Official Comment at section 2–201. General market conditions or common or standard terms may then take over. Similarly the Vienna Convention on the International Sale of Goods insists in Article 14 only on some clarity as to quantity and price, at least the offer must be sufficiently definite in these respects, although as far as price is concerned, Article 55 gives some further guidance. Article 19(3) of the Vienna Convention also suggests other material elements, like payment, quality, place and time of delivery, but they need not be spelled out in the contract for it to be binding and for most of them the Convention gives additional (directory) rules.110 The question of definiteness may also arise in other types of contracts. Mortgage arrangements must often be precise as to what asset is secured for what type of debt. In assignments, the assigned debts may have to be described with sufficient precision. More generally, contracts for the sale of future assets (or for the creation of security interests therein) may be undermined when they are not certain to emerge, although this may impact more on the validity of any transfers thereunder.

110 The Vienna Convention does not itself deal with the subject of validity any further, see Art 4, and therefore does not concern itself either with the effects of incapacity, mistake, misrepresentation, undue influence, fraud and illegality on the existence of the sales contract. The consensus, the importance of the parties’ intent, the subject of implied conditions, and the impact of their pre-contractual duties on the conclusion of the sales agreement are also not covered. The Convention does not deal with representation or agency powers and their proper use either; in fact it expressly removes undisclosed agency from its scope: see Art 1(2). The UNIDROIT Principles for International Commercial Contracts are more comprehensive and also cover agency relationships.

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This all goes to the notion of identification and specificity in property law and it may often still be said that although for proprietary effect they are necessary, in contract, therefore for contractual effect between the contracting parties, the requirements are not of a similarly important nature, whilst under more modern property notions classes of assets may now also be transferred and individual assets need no longer be identified, see chapter 2, sections 1.1.3 below.

1.3 The Normative Interpretation Technique in Practice: The Civil Law Notion of Good Faith, the Common Law Alternatives, and the Role of Other Sources of Private Law 1.3.1 Law

The Modern Normative Approach and the Concept of Dynamic Contract

In the above, interpretation or the notion of construction was already mentioned several times and modern contract theory was introduced in section 1.1.2, which has a considerable bearing on the subject. This may also be referred to as the normative interpretation technique, see section 1.1.6 above, in civil law now often associated with the operation of good faith in contract.111 After the modern civil and common law approaches to contract and their development were discussed in the previous sections, this important subject needs now be revisited in some greater detail. In the codification countries of the civil law, in modern times, it poses in particular the question of the relevance of other (competing) sources of law, in international transactions particularly at the transnational level, see Volume I, section 1.4.3, a subject which the modern common law cannot truly avoid either.

111 The concept of good faith in contract should be clearly distinguished from the concept of bona fides in the acquisition of assets, therefore in proprietary matters, see ch 2, s 1.4.8 below, also relevant with regard to charges in assets which a bona fide purchaser might be able to ignore upon a sale: see s 9–320 UCC. There it is a largely question of knowledge. That is also relevant for the concept of the holder in due course of bills of exchange or promissory notes. The question in that connection is also whether bona fides is of a more subjective or objective nature. In other words: may the buyer depend on his lack of knowledge or is what he should have known but did not find out also relevant? Is there a search duty and how far does it go? It is clear in this respect that where charges or liens are filed, omitting to check the relevant register may not excuse the buyer, at least not in real estate transactions. He has constructive notice, but it is notably different for chattels and intangible assets under Art 9 UCC, where there is no search duty for buyers. The modern tendency is to protect the commercial flows in all movable property especially in commoditised products including money, see ch 2, s 1.10 below. That means protection of all transactions in the ordinary course of business regardless of knowledge of adverse interests unless it amounts to abuse of right or fraud. Good faith or bona fides in this sense is in civil law also important in connection with acquisitive prescription, see ch 2, s 1.2.3 below. Here again there are important variations: German law requires the bona fides to hold during the whole prescription periods, Dutch law only at the beginning.

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All contracts need a measure of interpretation, whether they are informally or formally expressed. This is obvious in the case of informal agreements, when there is no writing and there may be no more than inferences based on conduct, but even if there are declarations or there is a text, it may be said that words are by themselves not always clear112 and in any event derive their true meaning only from their context or, in the case of contracts, from the types or nature of the parties and from the environment in which they mean to operate; in this book differently for consumer and professional transactions. In day-to-day life, the determination of the rights and duties of the parties under the contract thus becomes the prime issue and the progression of the contract until its natural termination the major concern. This is not primarily a question of litigation or dispute resolution but foremost one of practical guidance throughout the life of the contract. It may well go beyond mere interpretation and also cover supplementation or even correction of the contractual terms where appropriate. Litigation is here the exception, much to be avoided, and rather suggests a contract’s failure. It only provides the ultimate test in terms of allocation of its consequences and already earlier identified as an imperfect art. It cannot be the sole object or even prime objective of private law which is above all to make life easier and better in all of daily life.113 How much interpretational freedom judges and arbitrators have here was earlier identified as an institutional and in many countries even a constitutional issue, see further the discussion in section 1.3.5 below. It is not unlimited but has in the normative approach acquired a different dimension because of ever faster social and economic change. In practice, the text of the agreement but also the offer and acceptance that precede it and the broader notion of conduct and reliance will be foremost considered, but it must now be accepted that other more objective considerations may also enter and expand or ultimately even correct the original intent or promises. In this connection, it was already said that the parties’ autonomy, although a central building block in modern transnational law, both in contract and movable property, see also Volume I, section 1.4.4, is likely to be explained in a more independent or objective manner, at least in the corporate professional sphere where many people or teams are involved and the existence of psychological intent in terms of the parties’ consensus becomes in any event less real. It was submitted that transnationally, this more objective approach to party autonomy enhances its status. It was pointed out in this connection also that at least in civil law it is now common to distinguish between a pre-contractual, contractual and post-contractual phase of contract, in all of which special rights and duties may more objectively emerge. It 112 A notion also well known in the US, see Justice Traynor in Pacific Gas & Electric v GW Thomas Drayage & Rigging Co 442 P2d 641 (Cal 1968). 113 This is an important and contentious subject that starts distinguishing between the law in action and the law in litigation, see for this discussion Vol I, s 1.4.16. It means that law, at least if it is not absolutely mandatory as governmental command or public order requirement, is default rule (or directory law) and as such only guidance and even in litigation applied differently, therefore with greater flexibility and an eye for the circumstances and nature of the relationship of the parties and their objectives.

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means that parties must be aware that rights and obligations may independently arise and terminate during the entire contract period and are not solely determined by them or absolutely fixed at the time of acceptance of an offer. It was also said that at least in professional duration contracts, contractual rights and duties are further defined by risk acceptance in respect of developing eventualities within the scope of the contract unless this becomes manifestly unreasonable. The ascertainable objective purpose of the agreement also plays a role in this connection, originally the idea behind purposive and teleological interpretation. An altogether more modern model of contract may here be proposed, see section 1.1.5 above, that puts generally the emphasis on justified expectations, detrimental reliance, a beginning of performance, duties of care and co-operation, of disclosure, investigation and loyalty, an on what objectively can be marked as the contract’s purpose, although it should immediately be added that in professional dealings the emphasis is likely to be on road map, risk distribution and management, including a large degree of risk acceptance of subsequent external events unless becoming manifestly unreasonable for the professional debtor in his business overall, in which connection good faith may require a considerable degree of literal interpretation of the contractual text. This was earlier identified as a typical expression of relationship thinking.114 Modern contract theory supports this and maintains fundamentally a dynamic concept of contract law, which also becomes the modern test in litigation and is supported by the normative interpretation technique,115 which goes well beyond teleological interpretation, especially where it also takes into account pre- and post-contractual negotiation or renegotiation duties as well as pressing ethical, social, and efficiency considerations.116 Although the development of the good faith concept is here of great importance, the introduction of an altogether dynamic notion of contract remains contentious, especially in Europe, both in the common law of the English variety and in civil law, to which case law testifies, whilst it should be appreciated that the notion of good faith is by no means everywhere similarly adopted or the normative approach in its fullest sense everywhere accepted.

114

Of course, public policy considerations especially in terms of regulation are likely to impact also, no less therefore on international transactions, as long as it can be established that the governmental interest claimed bears a sufficient relationship to the international transaction in question and need not give way to other governmental interests that may be more closely related, see for this important subject that is strictly speaking outside private law and the reach of the modern lex mercatoria, Vol I, s 2.2.6. 115 In n 36 above, it was already noted that the term ‘normative’ is used here as legally normative or relevant, not merely in the sense of what is morally or otherwise desirable as is common in the positivist tradition. Extra-legal objectives, like urgent moral, cultural, sociological or economic considerations may thus enter into the law as legal norms (hence they become legally normative) and as such be taken into account in its interpretation. As we shall see, this does not always mean the moral high ground either and good faith interpretation can be entirely pragmatic or commonsensical. 116 They were previously discussed also in connection with statutory interpretation in Vol I, s 1.3.3.

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1.3.2 Roman Law, Ius Commune, Nineteenth-century Thinking, and the Modern Revival of Multiple Sources of Contract Law Roman law and the Ius Commune did not develop a coherent approach to contract interpretation in this (or any other) connection, although as we saw, the Ius Commune managed to develop a more general notion of contract. As far as interpretation was concerned, in the course of time, it abandoned the literal construction of the wording of the contract in favour of a more flexible interpretation, but still with a bias towards a literal attitude to the wording of the agreement if expressed in writing. Even in the natural law school of Grotius and Pufendorf, there was here no fundamental new beginning although it started to focus also on the role of the ‘aequitas’.117 This may all sound familiar to the common law lawyer. In civil law countries, this approach to contract and contract interpretation was, however, succeeded by typical nineteenth-century will theories,118 which led to interpretation in a more psychological or subjective sense, as we have seen, in which consensus of the parties and its moment moved to the centre and offer and acceptance became the key. In its focus on the creative force of the individual, it encouraged in this manner an anthropomorphic attitude to contract and all other forms of co-operation, even though the notion of consensus implied a joint will which was more objective and came, as we saw, also to include an aspect of reliance on what a party could truly believe the other’s intention was. Corporate activity changed this emphasis on the will in an anthropomorphic sense further, but more objective notions of conduct and reliance, dependency, justified

117 See for this potential supplementation of the parties’ rights and duties by notions of fairness in the Ius Commune also R Zimmermann, The Law of Obligations (Boston, Deventer, 1992) 548, 621 ff and 807. 118 See n 23 above. The subjective interpretation technique was in its consequences untenable, however, and at first still tempered by a more literal interpretation based on declarations and later by a more objective normative approach to interpretation of the contractual rights and obligations of the parties. Hence at first the psychological versus the literal interpretation of the contract, sometimes also referred to as the subjective versus the objective interpretation methods. Yet as the focus of interpretation, neither ‘will’ nor ‘declaration’ proved satisfactory. In fact, they could often hardly be distinguished as in the subjective method, the wording of express agreements, therefore the declaration, still had to be the starting point for interpretation whilst in cases of doubt or incompleteness even in the declaration or literal interpretation method, there would still be a search for the parties’ intent. Traditional common law also shows these problems clearly: declarations are greatly important and often still taken literally as we have seen, but in the case of doubt, ambiguity or contradiction or when there are gaps in the contract, the supposed intent or implied terms must often come to the rescue. It was noted before that this suggests an instant shift from the one extreme of the objective approach to the other extreme of the subjective approach. This proved clearly undesirable and was balanced by notions of reasonableness but it has never been easy to find a single more convincing approach to interpretation, where ultimately at least in common law, traditional pragmatism continued to prevail in an atmosphere of restraint and caution. See on the more objective as against subjective notion of contract also n 32 above and accompanying text.

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expectations, duties of disclosure, co-operation and re-negotiation, and the increasing emphasis on the nature of the relationship of the parties also started to operate in civil law besides party autonomy in the above sense. In labour and consumer dealings, this newer approach acquired from early on a more objective normative impulse in the protection of weaker parties regardless of the (clear) wording of the contract, which may now also find expression in investor protection notions against their brokers or other financial intermediaries, marked further by notions of dependency, even if in civil law this type of relationship thinking is by no means fully developed as we also saw and there is in particular still an inclination to extend consumer protections to all under similar types of contracts, therefore even to professional dealings.119 Nevertheless, in civil law, especially the use of the good faith notion is indicative of a normative approach to interpretation but as noted before there is no uniformity in its precise scope and extent. It is clear, however, that its key role is to allow the norm better to respond and be tailored to the facts or allow for a selection of the facts that will relate them to the appropriate norm or that will result in the application of another norm or of an adjusted norm on the basis of what is in result more practical, normal, fair or (in business) makes more sense. The drawback is that it introduces an uncertain element at the moment of contract interpretation, in particular when it comes to litigation and then relies a great deal on the insight, experience, discipline and restraint of the judiciary. This is the consequence of all legal realism in which the standard might even differ between the law in action and in litigation.120

119

See also the comment in n 4 above. Summarising the foregoing and allowing for differences between various countries, it may be said that in civil law, the normative approach to contract interpretation means to achieve, in essence, the following: (a) As to the formation of the contract, it uses the consensus notion but abstracts it from the individual desires of the parties and considers in that context not only declarations but rather reliance on the expressions, actions or conduct of the other party if such is reasonable in the circumstances. Ultimately offer and acceptance then may become a subcategory of conduct and reliance. This then forms the start of the formation process and becomes the basis of the contractual rights and obligations, always subject to more objective considerations by way of supplementation and sometimes derogation. (b) This determines the resulting rights and duties and the moment as of which parties are bound, which is no longer dependent on formal offer and acceptance notions. It distinguishes in this connection between the pre-contractual, contractual and post-contractual phase of the contract. (c) At the time of formation, in the pre-contractual phase, it may impose extra information or disclosure duties and duties to (continue to) negotiate. Thus besides the contractual terms, fundamental legal principles may be considered, justifiable reliance may be honoured, and abuse avoided. It confirms that contractual rights and duties do no merely emanate from party autonomy. (d) In the performance phase, special co-operation duties may similarly emerge besides the contract, and in the post-contractual phase special renegotiation duties. (e) In doing so, the normative approach to contract interpretation will put the contract in its context and especially in the case of doubt or ambiguity will also look at what the objectively ascertainable purpose was, what is practical and makes sense or is reasonable in the circumstances. It may in this manner further supplement the agreement. (f) In considering the broader environment in which the contract must operate, it may also consider the moral, social and economic context of the contract, if sufficiently pressing, clearly in 120

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To repeat, what happens here in reality is that other sources of law, like fundamental principle, now often human rights or public order related (in the latter case especially to combat abuse, including anti-competitive behaviour) revive behind the notion of good faith and overtake the codification text and its system thinking including extreme will notions that figured large in that context, at least in contract. That may also revive custom and industry practices, and general principle (separate therefore from the system of the relevant codes). Even party autonomy may thus regain its original independent status as source of law (no longer depending on statutory licence) although probably in a more objective manner. Thus, good faith now often stands (amongst others) for the revival of these independent sources of law, but also for the recognition of the different legal orders in which these sources of law play out (differently), like the transnational commercial and financial legal order as the order for professional dealings and domestic legal orders in which the consumer operates and is protected. Good faith may then even promote the transnationalisation of private law in professional dealings. Again, nature of the parties and the legal environment of their dealings lead to this and the good faith notion may respond. For professionals, efficiency considerations and cost benefit analysis may point in a similar direction. contracts with illicit purposes, in gaming contracts and contracts in restraint of trade, which may even protect third parties, eg in contracts in restraint of trade. (g) In extreme circumstances, it may then even correct the express language of the agreement, especially when expectations raised by the other party have been grossly deceived, when there results clear hardship or manifest unreasonableness. (h) Alternatively, the notion of abuse of rights (exceptio doli) in asking strict performance may be used but amounts to the same thing. (i) The normative approach to contract interpretation will in this connection also seek to take into account the nature of the professional or other relationship between the parties and their specific interest beyond the nature of their deal. It means a much higher degree of risk acceptance for professionals. This is an approach as yet less developed in civil law than it is in common law but may be aided by the fact that in corporate dealings an anthropomorhic idea of will and intent is hardly realistic any longer. (j) In taking into account also the nature of the relationship, good faith in respect of professionals may thus become a narrowing rather than expanding concept and lead, eg, to literal interpretation of their contract especially if expressed as road map or in terms of risk management and risk acceptance. (k) It follows that good faith does not always give more rights, it may give less and may for professionals in particular mean fewer pre-contractual disclosure and negotiation duties, contractual co-operation duties, and post-contractual renegotiation duties. (l) The normative approach may also consider the broader impact of contracting if used as an organisation technique, clear in a social sense where standard terms are used in respect of consumers, but in an economic sense also where there is multiple contracting among professionals and relief is being sought, eg, on the basis of mistake, force majeure of changed circumstances when the overall effect of the problem on the professional debtor and his finances may have to be assessed first. (m) When concerning itself with efficiency considerations, the normative approach may even go into a cost/benefit analysis whilst interpreting, supplementing or even correcting the contractual content in exceptional cases. In practice, this may be especially relevant where hardship is invoked and the contract must be refloated on different terms or otherwise be terminated. (n) Finally, the normative approach may connect third parties, especially if professional and engaged in the same project where the proper contract performance of each requires it.

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As a contrast, in matters of interpretation or construction, common law remains more circumspect. As we saw in section 1.1.6 above, at least for professionals it depends largely on a literal interpretation of the parties’ declarations, supported in that respect by the parol evidence rule, but it was also pointed out before that it has other tools to reach acceptable results.121 It is also relevant in this connection that common law never monopolised the sources of law altogether either.122 Also from that point of view, it needed the notion of good faith much less. These other sources of law like fundamental principle and especially custom or practices could then also reach the transnational level. It may be observed, however, that the English legal profession remains, much less impressed with legal transnationalisation currents than, for example, the French. It suggests extreme formalism and is odd because it has the tools notably in recognising international custom and practices and stands to gain greatly from a more open attitude in this respect whilst capturing the international commercial and financial business sector, where it also has the English language on its side and the fact that it was always considered more commercial and often more practical.

1.3.3

The Notion of Good Faith in Civil Law

Traditionally, references to good faith may be found in civil law codes in connection with contract interpretation, in Germany especially in sections 157 and 242 BGB (but reference may also be made in this connection to ss 119, 226, 819 BGB), in France in Articles 1134 and 1135 CC, in Italy in Articles 1337, 1366 and 1375 CC, and in the Netherlands in Articles 6.2 and 6.248 CC. As we shall see, in its modern version good 121 Together they approach a more normative interpretation technique also, which may in fact well go beyond the civil law good faith notion, see s 1.1.6 above and can be summarised as follows: (a) Take into account the nature of the relationship of the parties rather than the specific type of contract of which it only developed special types in commercial law (the sale of goods the contract of carriage and the insurance contract). (b) Accept dependency as a source of extra rights and duties and sometimes also resort to reasonable reliance notions rather than continue to insist on an exchange of formal declarations and their compatibility in the consideration doctrine. (c) Use implied conditions including those of reasonableness. (d) Refer in exceptional cases also to natural justice. (e) Use sometimes also equity in striking down unconscionable bargains, and all forms of excess and abuse, or otherwise statutory law, eg to crack down on unacceptable standard terms or exemption clauses; see also Lord Bingham cited in n 1 above, but for the limited role of equity in this connection, see also text at n 93 above. In particular, it does not bring a general influx of notions of fairness and is a much narrower facility 122 Common law also uses a more objective notion of party autonomy and, moreover, continues to allow equity to operate in the narrow areas in which it has always been active, see especially s 1–103 UCC in the US, even though, as was pointed out before, especially in England (but not in the US) the autonomous status of these sources of law, even of custom within the common law, also weakened because of the nineteenth-century English idea that all law issued from sovereigns, see Vol I, s 1.3.3, but at least for custom and industry practices less so in commerce and finance, whilst even in respect of party autonomy as independent source of law, there is no doctrinaire attitude.

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faith is very much a multi-faceted notion, not therefore at all of one kind and plays many roles, also therefore beyond these statutory references in contract and operates in principle in all interparty relationships. Yet these statutory references show that good faith was traditionally more especially important in the performance of contracts. In this connection, it acquired early on a more particular importance in relation to weaker parties as an early expression of relationship thinking later also relevant for consumers and small investor protection against brokers. It also entered the area of excuses when for example force majeure or hardship was invoked or where demanding punctual performance would become unconscionable or an abuse of right, which again may be of lesser significance in professional dealings. Good faith may then also play a role in the avoidance of the contracts for reasons of misrepresentation or mistake. Even in these cases risk acceptance may be deemed sooner implied for professionals. In the newer approach, to start with the formation of contract, reliance rather than intent suggests itself as a most important new departure. In fact, Article 1337 of the Italian CC specifically refers here to good faith. Good faith may now also lead to pre-contractual disclosure and negotiation duties, contractual co-operation duties, and post-contractual renegotiation duties.123 In many civil law countries, the good faith notion is borrowed from interpretation where it more traditionally operates. In others, the negligence concept is also used, especially in France for pre-contractual disclosure and negotiation duties. This was already discussed in greater detail above and need not be repeated, but again, these notions should have lesser force in the professional sphere where, in proper relationship thinking, exactly the notion of good faith may require a more restrictive interpretation of these duties and even a literal interpretation of the parties’ contract text as their road map and risk allocation document. This is not reflected in the new (2002) sections of the BGB nor in the 2008–09 DCFR as some academic model for an EU codification in the traditional sense, but the good faith notion in professional dealing usually means protection only against manifestly unreasonable consequences measured by the standards of these professionals themselves, or against market abuse, including anti-competitive behaviour, in terms of fundamental principle or public order requirements. Although particularly in Germany, but no less so in Switzerland, Austria and the Netherlands, all seem to accept the better protection of weaker or less informed parties and make, in this connection, also some distinction on the basis of the nature of the relationship between the parties, it confirms that relationship thinking is not yet fully developed in these countries. In non-Germanic civil law countries, in the area of contract, it may remain even less clear how far the concept of good faith goes. Indeed, French law is here traditionally more cautious than German law. In the civil law of contract, there are more special reasons for the modern pre-eminence of good faith notions and ideas. The main problem is that the old 123 In Germany since 2002, concepts of pre-contractual (ss 311(2) and (3) BGB) and other accessory duties extending to the post-contractual phase (ss 241(2) and 280 BGB) as well as the adjustment of contractual terms (s 313 BGB) have been put on a statutory basis.

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statutory contract framework, based largely on the anthropomorphic notion of a private deal between two individuals motivated by their psychological intent or will in that sense no longer suffices.124 Again, that is clear in particular in the corporate or governmental world of major contracts often negotiated in different parts by different people which may hardly be aware of each other. Second, in terms of legal texts and system thinking, situations became more generally too different or incongruent still to be covered by the same pre-conceived contract type or model of the codes as society moved ever faster and in more different ways. It may thus be said that in a formal sense, fact and norm are drifting further apart from each other all the time. A third issue is here that, when contracts are concluded with larger groups of people or multiple legal entities, they start to have a much greater impact on their environment, so that there arise special needs for larger groups of parties, from early on workers and later consumers, and now also smaller investors under financial service contracts. The binding force of standard contracts as an organisational tool of a company, is another aspect of this problem, already referred to in the context of modern contract theory in section 1.1.4 above. Finally and most importantly, more objective considerations in terms of precontractual disclosure and negotiation duties, contractual co-operation duties, and post-contractual renegotiation needs and duties as well as the impact of other pressing ethical, social peace, and efficiency standards imposed themselves independently in appropriate cases as we saw. Again, it shows that there are conceivably many contractual rights and duties that do not find their origin in party autonomy or the will or intent of the parties. In fact social values have greatly changed and continue to change all the time, also affecting contracting and its meaning and extent, even if that may be less relevant in professional dealings where nevertheless issues of efficiency, effect on larger groups or on market behaviour (especially if there is anticompetitive or abusive activity), and cost/benefit analysis in the construction of a contract may have become important issues. This should be seen against the background of much more risk acceptance to which, in the DCFR, a reference is made (merely) in connection with a change of circumstances in Art III-1:110(3)(c), mistake in Article II-7:201(2)(b), and, more indirectly, force majeur in Article III-3:104(2). As it proved impossible so far to provide for a newer coherent set of contract rules or indeed for an updated contract model altogether, the pressures appear to be the same everywhere. In civil law, especially in Northern Europe, the stress caused in the system of contract law in this manner was largely absorbed by the notion of good faith in the formation and enforcement of contracts, which allowed for what is called a liberal interpretation technique of ever older statutory texts, although often, it must be admitted, in inarticulate ways. It is clearly connected with modern contract theory and 124 The term ‘good faith’ (or Treu und Glauben) still suggests itself this personal element and is therefore no longer a good term. The key is the normative approach in which it is now increasingly subsumed. For this reason, new Dutch Civil Code avoids the term and refers to ‘reasonableness and fairness’ instead.

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the normative approach, which indeed allows considerations to be taken into account that may go far beyond the parties’ intent. The objective and demonstrable purpose of the contract and risk acceptance are notably issues to be considered, besides pre- and post contractual duties. The whole notion of offer and acceptance is in the balance and may no longer provide a proper model. Thus under the cloak of good faith, notion of dependency and reliance, special pre-contractual disclosure and negotiation duties, special performance duties in terms of co-operation and loyalty, the influx of ethical, social and efficiency concepts, the possibility even of adjustment of contractual terms in extreme cases, and postcontractual renegotiation duties developed alongside more precise abuse notions as well as (although more timidly except in respect of workers and consumers) a greater sense of differentiation according to the type of counterparty as a matter of relationship thinking. Again it poses the question of the relevance of other sources of law which may in this manner be re-introduced.

1.3.4 Good Faith as a Multifaceted Notion in Civil Law The notion of good faith in its prime function of better relating facts to the applicable norm and even in tailoring that norm to the facts (themselves being selected on the basis of their relevance in relation to the chosen norm) may not have changed fundamentally over time, but as the distance between fact and norm may now often be greater, there may be much more to bridge. That is what the normative approach with its sensitivity also to pressing ethical, social and economic considerations as well as to relationship thinking in essence does. To this end, in the northern European civil law countries, the old good faith notion has been stretched to provide the (statutory) cover, also for the re-introduction of other sources of law, see for its special importance in transnational law Volume I, section 1.4.3 and further section 1.3.6 below. It has in the process become a much more dynamic concept, in fact one of destruction, change, and regeneration of legal norms or rules, whilst on the factual side it allowed for a much more selective and discriminating approach to differing factual situations. It then also serves as the basis for more judicial discretion (see for the institutional consequences section 1.3.5 below) at least in the details and has, even in civil law, ultimately confirmed the courts in their (informal) rule formulating role. Again, as such it is at once a destructive and a regenerating or norm-renewing force, which should also liberate us from intellectual prejudice or laziness in applying outdated or deficient models or rules which excluded from consideration new fact situations and/or new contexts whilst declaring them legally irrelevant or ignoring them altogether. It has been pointed out before that this is a well-identified danger in

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all system thinking, particularly relevant therefore in civil law codification countries,125 reason perhaps why good faith is a particularly strong concept there. Earlier the irrelevance of pre-contractual behaviour was an example of system insufficiency only remedied in case law by good faith notions now often, like in Germany since 2002, incorporated in the prevailing codes through statutory amendment. Indeed, good faith has obtained a multifaceted character. It shows as it is sometimes norm, sometimes fact.126 It is sometimes judicial discretion and sometimes judicial limitation. It may be legal principle, sometimes a more precise legal rule. It is sometimes highest norm (if morally, socially or economically sufficiently pressing, and may then be mandatory), sometimes practical norm (if promoting good sense, co-operation and reasonable care). It is thus sometimes mandatory, more often directory when at least professional contract parties can set the standard. It is sometimes legal refinement and differentiation, sometimes generalisation and system building. It may be rule formulation, at other times rule application, selecting and weighing the relevant facts and defining the legal consequences (Konkretisierung). It may even be subjective, but is mostly objective. At one time it sets rules for judicial decision-making but provides at other times only judicial direction and guidance. It is sometimes structure, but mostly movement. Good faith further looks at the nature of legal relationships of the parties and their special interests and sometimes at the nature of their deal and its particular features. Dependency and reliance notions figure here large. It may even bring in third parties involved in the same project or protect whole groups, like consumers under standard agreements or even professionals when contracting is used as an organisation tool by one of them. In doing so, it looks for fairness particularly in consumer and small company cases, and for what makes sense and is practical or efficient particularly in business cases. In this connection it may even introduce cost/benefit analysis. On the fact side, it is attention for the individual case and its own distinctive features. On the norm side, it is a quest for modernisation, refinement, social and economic awareness, and practical needs which may lead to new rules. Good faith is always inter-relational but probably still more important in human relationships than in business dealings, where as pointed out before it may even impose literal interpretation and thus even confine relief. In general, it favours,

125 See Vol I, s 1.2.12. However, abuse of the normative method is not excluded and intellectual prejudice may be as rampant as in the application of the legal model good faith is meant to correct or expand, eg by referring to certain behaviour as obviously contrary to good faith, see also Jarka T Onnti, ‘Law Tradition and Interpretation’ (1998) 11 International Journal for the Semiotoics of Law 26, 36. 126 The traditional sharp Kantian distinction between fact and norm, although from a logical point of view correct and sometimes still defended, see Larenz, Methodenlehre der Rechtswissenschaft, 5th edn (1983) 128, has under Wittgensteinian influence lost its hold and it is clear that what ‘should be done’ legally may take the place of what is done when widely considered appropriate. It is also reflected in the common law maxim of equity: ‘equity considers done what should be done’.

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however, depersonification of contract law and limits the traditional anthropomorphic idea of contract.127 Altogether it is clear that the use of the good faith notions in contract law signals a quest for more objective criteria to determine the parties’ rights and duties, and presents as such a particular challenge to the nineteenth-century will theory and to the notion of each party’s psychological intent. So far, it must be said that, in this connection, the formulation of particular new rules has not always had much priority in case law or in legal scholarship in the Northern European countries of the civil law group that are most influenced by good faith notions. This is certainly the situation in Germany and the Netherlands, although in German doctrine there is an attempt at classification of good faith functions (Funktionkreisen), like interpretation, supplementation and correction of duties or adjustment in case of a profound change of circumstances, functions which are by no means new and are now expressed in specific provisions of the BGB: sections 241(2), 280, 311(2), (3) and 313.128 Within these functions, there is a further effort to distinguish classes of cases (Fallgrupen), like, in the supplementation function, the

127 Many definitions of good faith have been attempted but the multifaceted nature of good faith is seldom sufficiently recognised, reason why most definitions fail. Zimmerman and Whittaker, Good Faith in Contract Law (1999) 30–31 see good faith as: ‘a standard of conduct by which the behaviour of a party has to conform and by which it may be judged. It suggests a standard of honest, loyal and considerate behaviour, of acting with due regard to the interest of the other party and it implies and comprises the protection of reasonable reliance. Thus it is not a rule with specific requirements that have to be checked but may be called an “open norm”. Its content cannot be established in an abstract manner but takes shape only in the way in which it is applied.’ But the key is that good faith is not necessarily addressed to conduct. The DCFR also gives a definition in Art I-1:103 where it combines it with ‘fair dealing’. It is said to refer to a standard of conduct characterised by honesty, openness and consideration for the interests of the other party to the transaction in the relationship in question. It is considered particularly contrary to good faith and fair dealing for a party to act inconsistently with a prior statement or conduct when another party reasonably relied on them to his detriment. It is of interest that a high moral tone is here combined with some market criterion (fair dealing) to achieve a more effective standard. Social values are omitted, but in referring to the ‘relationship’ in question, there is the beginning of relationship thinking, although the DCFR did not break with the unitary approach: the same rules of good faith for consumers and professionals (in principle), see also n 3 above. 128 See the major commentary of Palandt/Heinrichs, Bürgerliches Gesetzbuch (2004), at s 242, nos 2 and 13. The functions of good faith are commonly the ones identified in the interpretation, supplementation or correction of the contract, in the formulation of co-operation duties in the performance and of special disclosure and negotiation duties in the pre-and post-contractual phases. In the normative approach all are rolled into one continuum. The first three functions appeared already in the Digests, there in connection with the definition of the powers of the Roman praetor in contract law (D.1.1.7 Papinianus), see also F Wieacker, Zur Rechtstheoretischen Präzisierung des sec 242, Recht und Staat in Geschichte und Gegenwart (Tübingen, 1956) 20. The Fallgrupen are created by following or distinguishing precedent. They identify so far more a method of judicial activity than clear rules. Only some clear notions developed as the abuse of rights (exceptio doli), the notion of clean hands, of own misbehaviour and of lack of co-operation. Also the loss of a right to performance became accepted if there were contrary conduct or declarations on which the other party could rely as an excuse. Another development was in the loss of rights whilst not timely invoking them (Verwirkung). All are of limited application. It is altogether not a large or even novel crop.

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development of pre-contractual and post-contractual rights and duties and of consumer or workers’ rights (not necessarily, however, along the lines of altogether clear rules or new contract types), and, in the correction function, the emphasis on estoppel, abuse of rights, own co-operation duties, and on the manner in which the rights were acquired or are invoked like in the case of standard terms. German academics often talk in this connection of the inner system (Binnensystematik) of the good faith notion, referring in particular to the reliance notion, pre-contractual duties, normative interpretation of the text, supplementation and correction techniques, the (continued) validity of the contract, the performance obligations and excuses of the parties, and, in appropriate cases, to their renegotiation duties, all originally developed on the basis of the good faith notion. It is a function of the German preference for system building, where academia tries to reintegrate disparate case-law into the existing system, judges having become here more inventive and less formal than legal scholarship (see also Vol I, s 1.2.14). For many, such an expansion of the system is then part of renewed system thinking in the sense that the system is in this manner deemed to continue to provide answers for all eventualities, earlier identified as a typical German intellectual ideal embodied in its codification approach. But it is exactly the flexibility good faith brings, its dynamism, and its access to other sources of private law, which should be treasured and is its true meaning and justification. Indeed a vague rule (or as the Germans call it a Generalklausel) left to be implemented, resulting in some greater judicial discretion, may often be better than a wrong rule or no rule at all. But it should be understood that such discretion is not freedom and is in truth tied to the scrutiny of other sources of law, which in the view here presented now often operate behind the modern good faith notion itself, see more particularly section 1.1.6 above. It must be admitted, however, that so far there is here no question of a different legal facility, as equity for example once was in common law, albeit giving relief only in individual specific cases, not as a general overarching idea of fairness. Rather the good faith notion presents an elaboration and refinement (like the notion of estoppel or abuse of rights) or a curtailment of formally existing contractual or other legal rules or concepts and their application. It has led to a greater emphasis on the facts of each case, sometimes to more relationship thinking and, in appropriate cases, to a review of the moral, social, or economic consequences of the enforcement of the contract. This is not to say that in civil law countries modern contract theory, as explained in section 1.1.2 above, and a dynamic notion of contract law are fundamentally accepted in all their aspects and a psychological approach to parties’ intent completely abandoned. Notions of offer and acceptance and a fixed moment of contract formation remain particularly vivid, certainly in Germany, and there is considerable tension. Wills theories also remain vivid and there remain problems no less with the introduction of greater relationship thinking, as we saw. It was pointed out before that in civil law not all domestic legal systems react the same way. Again, French law, more in particular, notwithstanding the generality of the formula of Articles 1134 and 1135 CC, remains more hesitant. It is true that Article 1134 CC required contracts to be performed in good faith, but already in 1808 it was made clear by the Cour de Cassation that the original intent of the parties could not

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be disregarded on the basis of good faith and that has been constantly confirmed.129 Equity (équité) is not seen here as an independent source of law, although in other contexts it may be.130 In any event, in their approach to good faith, even in the performance of the contract, French courts tend to limit the use of the concept as a corrective of the contractual terms to particular areas, like abuse of rights (abus de droit) by neighbours, by employers, by parties benefiting from rescission rights, or by parties insisting on performance upon a change of circumstances. Usually it concerns here instances of unequal bargaining power or the need to protect weaker parties or special co-operation and loyalty duties or distil sub-duties. They are all more recent developments. Increasingly, information duties are now accepted under the heading of good faith more generally.131 It is fair to say, however, that French law on the whole still prefers to rely on other more specific concepts to define or redefine the parties’ rights and duties, as indeed abus de droit but also bonnes moeurs, fraude, erreur or enrichissement sans cause or the notion of causa itself, or impossibilité économique, all rejected at the time, however, to redress the impact of changed circumstances, but often used instead of the broader good faith notion in other contexts.132 Good faith is therefore still not an overarching contract notion in France.133 Particularly the abuse notion has been progressively developed instead, although it has become more and more embedded in the good faith concept. Pre-contractual duties are often still presented in terms of negligence. An important point in this connection is also that in France, good faith is still largely considered a subjective concept, even in contract law, aiming at honesty, co-operation and loyalty in a subjective sense.134 On the face of it, there is therefore still little normative value in it, although a similar approach in the UCC in the USA (s 1–201(a)(20) UCC) has found a more objective and therefore normative direction regardless.135 The DCFR, following the EPCL and UNIDROIT Contract Principles,

129 See Conclusion Merlin (1808), s 1.183 and in more modern times Cour de Cass, 2 December 1947 [1948] Gaz Pal I.36, although especially Geny and Demogue argued otherwise, see Demogue, 6 Traité des Obligation en général (1931) 9. This author was in many respects more modern than the more recent French writers. 130 Thus the Cour de Cassation recognised the unjust enrichment action, which was not covered by the Code, on the basis of equity, see its decisions of 15 June 1892 [1892] DI 596 and particularly 12 May 1914 [1918–19] s 1.41. 131 See M Fabre-Magnan, ‘Duties of Disclosure and French Contract Law: Contribution to an Economic Analysis’ in J Beatson and D Friedmann (eds), Good Faith and Fault in Contract Law (Oxford, 1995) 99. 132 See Paniol-Ripert, 6 Traité Pratique de Droit Civil Français (1930) no 394, Demogue, 6 Traité des Obligation en général (1931) no 632, and Bonnecasse, Précis de Droit Civil (1933) no 134. 133 The lower courts in France normally still opt for literal interpretation of what is considered the parties’ intent. There is here no relationship thinking. 134 See Loussouarn, ‘Rapport de synthèse’ in Travaux de l’Association Henri Capitant, xliii, année 1992 (1994). 135 It is of interest that in the Netherlands, with a formula in their old Code (Arts 1374 and 1375 CC until 1992) directly derived from the French Civil Code, case law nevertheless started largely to follow the more liberal German attitude. It consequently adopted a more objective meaning of good faith earlier, eventually even as a corrective, not only to the contractual stipulations (of which

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refers here to ‘good faith and fair dealing’ to underline the objectivity of the notion, although it remains wholly unclear what the standard (which is always deemed to be absolutely mandatory and from which parties cannot therefore deviate) is. The French attitude needs attention because of its (on the surface) deviant attitude within the civil law tradition, which still tends to be followed in Latin civil law countries. As a consequence, even in Italy there is still uncertainty about the impact of good faith notions in contract, and much of this is reflected also in Spain, Portugal and South America. Finally, in the Netherlands in Article 3.12 of their new Code, there is a statutory indication how the good faith notion is to be construed. It is necessary to take into account generally accepted legal principles, the legal views held in the Netherlands, and the social and personal interests concerned in the case in question. Note the nationalistic tenor, although as mentioned before other sources of law, even international ones may revive behind the notion, certainly when relationship thinking becomes dominant and the special status and needs of the international professional community are recognised. In Germany, Sections 157 and 242 of the BGB refer in this connection only to commercial usage (Verkehrssitte) to which in Dutch case law reference is also often made (rechtsverkeer).

1.3.5 Institutional Aspects of the Operation of the Notion of Good Faith in Civil Law The multifaceted nature of good faith both on the fact and the norm side and its sometimes high tone, as well as the flexibility and judicial discretion it suggests, have induced some sense of unease in many, also in civil law, and a feeling that there is perhaps now too much judicial freedom to distinguish and declare cases atypical, too much attention to differing facts, too much consideration of the environment or setting of each case, and too much concern for moral, social and economic considerations, and too much judicial creativity as to pre-contractual, performance and post-contractual duties, whilst the courts are sometimes believed to arrogate to themselves too much policy initiative and too much directory or rule making power as a result of which party autonomy suffers. There is also the newer idea that there is no sufficient democratic legitimacy for such an approach. This issue was already discussed more generally in Volume I, sections 1.1.6 and 1.2.13. In France, the original attitude after the codification was that the judge was indeed no more than the mouthpiece of the law (bouche de la loi), the persons therefore who applied the texts of the code from which the solution would derive automatically. Judges were thus considered civil servants who exercised a technical function; law as adjustment in the case of a change of circumstances under Art 6.258 CC is a particular example), but (in the new Code since 1992) even to the applicable statutory law and the application of custom in contractual matters, as we saw, see Arts 6.2 and 6.248(2) CC respectively.

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technique.136 Any other attitude was considered at variance with the codification concept in which the legislature (hardly democratic in a modern sense) made the law. Thus any greater power of the judiciary was thought to go in particular against the idea of the separation of powers rather than being in violation of democratic legitimacy that came into the legislative function much later.137 Yet in practice, the courts had always had more power. This was never found exceptional or fundamentally objectionable in common law, which was largely formed by judges. In civil law, it necessarily followed from its own interpretation techniques and requirements, which meant to fill in the gaps in its codes that pretended to cover all eventualities (see Vol I, s 1.2.14). Yet in many countries, even a measure of discretion to allow for minor adjustments to smooth out minor problems, did not fit the system at the conceptual level. There is here obvious tension but practical needs make it unlikely that the modern tide can be turned and explain why good faith as a dynamic, connecting and renewing force in the formation and application of contract law in particular is tolerated and not likely to go away. Judges are in any event unlikely to restrict the room for manœuvre that in modern times is necessary for them to come to satisfactory solutions in ever more uncharacteristic situations and unusual cases (in terms of their system) and to maintain their credibility. When parliament does not speak, they are by default also the modern interpreters of moral, social and economic values. Certainly, much faith is here put in the judiciary, its strength, traditions but also its worldliness and ability at least in private law to distinguish according to the parties’ relationship and their type of deal. It may put a considerable burden especially on younger judges in lower courts, particularly in countries where being a judge is a professional career with less exposure to real life as it mostly is in continental European countries. More importantly, it may then also explain the modern preference in international commerce for arbitration. The limitations in the judiciary in terms of experience may indeed explain some of the continuing resistance to the good faith notion, also in civil law, at least at the theoretical level. It is then often clad in the more modern argument that judges lack sufficient democratic legitimacy to be so empowered, but it was pointed out in Volume I, section 1.2.13, that historically there was little democratic back-up for private law formation altogether, also in codification countries, whilst in common law, that was formed by the courts, the issue never arose or could be posed in this manner. More importantly, it was pointed out earlier that it is a misunderstanding to believe that social values can or should enter private law only through the legislature. That would be a long wait and sad day indeed.

136 In France, as a reaction against the broad powers of the old French Parlements which acted as regional courts before the French Revolution (see Vol 1, s 1.2.5), Art 5 of the French CC specifically abrogated any rule-making power of judges, whilst the law of 21 March 1804 introducing the new Code (Napoléon) in its Art 7 ruled out any other source of law, meaning especially regional custom but also equity or more fundamental legal principle. 137 Only in Switzerland, under the well known Art 1 of its Civil Code, there is judicial rule making power if the law is silent.

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More to the point is probably the lack of a proper definition of the role of the judiciary in modern society, whose powers are used to constantly expand private (and other) law on the basis of practical need in the absence of much help from often confused and insufficiently responsive legislatures. In fact, there appears in civil law countries at the practical level no longer a great objection to the more modern role of judges. Although the French judiciary in particular still maintains the fiction of pure rule application in often fairly short and tightly argued decisions, this change in perception of the judge’s role persists and is likely to be tolerated in civil law as long as judges practice restraint and are seen to do so, and can reasonably explain their actions in terms of rules, precedent or on the basis of different fact situations, whilst a measure of consistency is maintained and justice is seen to be done at affordable cost. If in business dealings parties want more worldly experience, they can choose arbitration instead.

1.3.6 Good Faith, Legal Positivism and System Thinking in the Codification Manner. The Bridge to the Common Law and the Connect with the Transnationalisation Process of Private Law in the Professional Sphere In Volume I, section 1.4.15, the concept of legal positivism and its attitude to private law formation and operation was more extensively discussed and its unsuitability in transnational law formation highlighted. In good faith terms, in contract, the more relevant truth is that this concept in civil law heralds more fundamentally a shift from norm to fact, therefore from emphasis on rules to emphasis on the circumstances of each case and the nature of the relationship between the parties in terms of professional, small company or consumer dealings. On the norm side, it reintroduces respect for other, non-statutory autonomous sources of law. If this is correct, then there are here some important areas of convergence with the more traditional common law approach, which was always more factual, developed (through case law) from situation to situation on the basis of practical need, and also respected other sources of private law. In these terms, in civil law, the real issue in modern times becomes the failure of the codification approach itself and its exclusive system thinking, which had meant to cover alone the whole field and pretended to have all answers. As noted before, common law has many other ways to achieve a flexibility and level of protection that good faith now provides in civil law. In fact, it was already posited that it may well go beyond it in certain areas, especially those of fiduciary duties, dependency and reliance. But the point that is made here is different and affects sources and methodology. The key is then the abandonment of system thinking, of its claim to exclusivity and completeness, and of the traditional emphasis on the norm side in civil claw. Facts are rediscovered. It is the end of legal positivism and formalism in that sense.

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Law is then no longer merely a system of pre-existing static and statist rules, but develops in its application. At least in professional dealings, this spells the end of the codification idea and shows the backwardness of projects like that of the DCFR, further epitomised by its unitary approach and failure of relationship thinking whilst applying to consumer and professional dealings alike. It may be recalled that common law never needed the notion of good faith in this connection, is more factual, and always developed from case to case. There can be little doubt that in the civil law of contract under pressure of factual developments, the notion of good faith has proved a great modern source of creativity, flexibility and adjustment, even if, as in all cases in which legal formalism and inflexibility ultimately yield under pressure of fundamental principle, economic and social realities or simply practical need, the result has been unstructured and legal certainty in terms of law as technique (although not necessarily legal predictability, which were fundamentally distinguished in Vol I, s 1.1.5) may have suffered. Civil law remains here often ambivalent. German and Dutch law retain their strong codification ethos but see on the other hand all legal relationships as conditioned by good faith and as acquiring their specific legal meaning only in that context, therefore ultimately in the facts covered by rules from various autonomous sources of law. In these countries, in contract law, the notion of good faith increasingly folds into the normative approach to the interpretation of the contract, as we saw, even if it is not complete in terms of relationship thinking and remains system based in the formal manner. Thus, especially in Germany, there remains the urge to find renewed system also in the use of the good faith concept.138 This is then explained as perfecting the old system that in this way is believed to remain in tact, retain its monopoly and completeness, and provide all the answers. As to the re-emergence of other autonomous sources of law, there remains a similar ambiguity in civil law—of which the DCFR is the latest demonstration—again mainly for systemic reasons. In Volume I, section 1.4, these different sources were already discussed more extensively and summarised above in section 1.1.2. It concerns here notably fundamental principle, now often human rights or public order related,139

138

See the discussion in s 1.3.4 above. See n 9 above. The DCFR pays lip service to (the horizontal effect of) human rights notions in Art I-1:102(b), but only as a matter of interpretation of the text and does not seem to be aware of other fundamental principles and of their status as autonomous source of law besides it. The text of the Introduction was re-written between 2008–09, which shows that not much serious thought had been given to the issues before and whatever thinking there now is, arrived after the text of the DCFR itself was already agreed. Coming from the positivist tradition, it is not surprising that human right principles required a special mentioning in the text for their horizontal application and only were given a meaning in interpretation. Beyond this, the draftsmen declare in Art II-7:301(a) the law of a Member State prevailing if a contract infringes a fundamental principle recognised by that state (whilst leaving the question of sufficient contact with such a state unresolved). They clearly do not reject them but do not say or explain what they may be and when they are legitimate. Whilst leaving this to Member States without further guidance, it produces a big hole in any unification effort of this kind. In the 2008 Introduction, the draftsman seemed to think that these principles had largely to do 139

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general legal principle which may go beyond those underlying the national systems,140 and then of course also custom and practices,141 and probably a more autonomous notion of party autonomy that may at the same time be more objective142 and may even operate in the creation of newer movable property structures and interests subject to a better protection of the commercial flows.143 It was pointed out before that the revival of the old sources of private law in this manner has a particular importance in connection with the process of transnationalisation of private law in the professional sphere, which was identified in Volume I as with the model of society and its economic system (no 20). But there are many other values and in private law fundamental principle concerns foremost interrelational and structural issues, whilst the model of society is primarily a regulatory one. Subsequently, the draftsmen of the DCFR confused fundamental principle with the law’s objectives (no 22), but it concerns here foremost the fundamental ideas on which all private law is based. Clearly, this does not sit easily with the DCFR‘s statist approach to law formation. In 2009, four basic underlying principles were detected: freedom, security, justice and efficiency and three overriding principles: human rights, solidarity and social responsibility. There is now a long tract on Principles before the main text but their status in law is not clear. There is an explanation only how they have found (some) expression in the text. It is, however, said (in no 11) that ‘It is clear that the DCFR does not perceive private law, and in particular contract law, as merely the balancing of private law relations between equally strong natural and legal persons. But different readers may have different interpretations of, and views on, the extent to which the DCFR suggests correction of market failures or contains elements of ‘social justice’ and protection of weaker parties.’ It may be recalled that the Hague Conference of 1951 dealing with the Hague Sales Conventions after an extensive discussion rejected the insertion of political desiderata of this nature and explicitly retained a broad sweep of party autonomy. That is correct in professional dealings where the concern is not normally lack of equal power. The DCFR draftsmen’s view is typical consumer thinking. The basic problem is thus again lack of relationship thinking, but also confusion between fundamental and general principles whilst there is no clarity on what a modern system of private law is based, how it operates, how its relates to the political system, and what transnationalisation means here. Ultimately it is a failure of insight into the place and function of modern codification and into its competition with other sources of law. Especially if there are extra-statutory mandatory principles or rules, either underlying or overriding, these issues can no longer be ignored. Or, to put it in another manner, if fundamental principle, which used to be cast in terms of natural law, is to be recognised, the entire idea of codification in this manner is at an end. That is clearly not the idea of its draftsmen and explains their ambivalence. 140

See n 11 above. Although it was said that the DFCR is based on comparative studies of Member State and Community laws (no 21 of the Introduction in the 2008 version), general principles found in such laws are notably not considered an autonomous source of law. Only those found in the DCFR itself are allowed to be taken into account in its supplementation (here distinguished from interpretation where apparently they do not count), see Art I, 1:102(4). This is the traditional codification approach. 141 See n 10 above. In the DCFR in Art II-1:104, custom is perceived as an implied contract term in language derived from the CISG (Art 9); the operation of custom outside contract is not considered but it is clear that custom is not perceived as an autonomous source of law. 142 See n 12 above. In the DCFR, in Art II-1:102, party autonomy is cast as a concession (‘parties are free to make a contract’) and it is not an autonomous source of law. It is made subject to the rules of good faith and fair dealing and any other applicable mandatory rules. It follows that good faith is here considered absolutely mandatory and even professionals cannot set standards amongst themselves, as they may under s 1–302(b) UCC, although good faith even if connected with fair dealing is not a defined concept. What kind of standard is required is therefore unclear and is likely to give rise to very different interpretations. 143 See in particular the discussion in Vol I, s 1.1.4 and in ch 2, s 1.10 below.

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the essence of the development of the modern lex mercatoria in which connection further emphasis was put on their ranking or hierarchy. It means that even at the national level under the cloak of good faith a transnationl normativity may revive, therefore even in international agreements operating under a domestic law. Good faith may thus provide an important bridge not only to the more factual approach of common law, as just suggested, but also to the transnationalisation of private law in civil law countries.

1.3.7

Good Faith in Common Law. Alternatives. Equity Distinguished

It was already pointed out several times before, initially in section 1.1.6, that common law, which started from a more literal interpretation of the declarations of the parties but always put greater objective emphasis on their relationship and would also allow for special duties in the case of dependency, needed from that perspective the notion of good faith much less, but it also had to find a way for contract interpretation to become more reflective of social needs. Also it could not avoid the process of better relating the facts to the existing norms either, but in common law, at least in England, this tailoring function is not captured in good faith terms either. In any event, common law which was always more fact oriented, never believed in systemic thinking, does not like generalities, not general principles either, did not need good faith notions to revert to facts. In this area, common law can therefore afford to take a more cautious view, which is clear particularly in England144 although it is now different in the US, but it remains typical that the common law does not use good faith as an overarching concept in the same manner as civil law does, not even in the US particularly clear for precontractual situations, as we shall see in the section 1.3.12 below. English law does not use the concept of good faith in any general manner at all but at best as an implied condition moderating intent (which is then recognised as a supplementary source of contract law) and it is in such instances often wrapped in terms of reasonableness or in what a reasonable man would do.145 144 See also R Goode, ‘The Concept of Good Faith in English Law’ in Centro di studi e ricerche di diritto comparato e straniero, Saggi, conferenze e seminariu, no 2 (Rome, 1992). See further also Musy, ‘The Good Faith Principle in Contract Law and the Precontractual Duty to Disclose: Comparativew Analysis of New Differences in Legal Cultures’ (2001) 1 Global Jurist Advances, 1, and J Stapleton, ‘Good Faith in Private Law’ in (1999) Current Legal Problems 52. Others have observed that in common law there always has to be a clear economic or social welfare consideration, see J Thomson, ‘Good Faith in Contracting: A Sceptical View’ in ADM Forte (ed), Good Faith in Contract and Property Law (Oxford, Hart Publishing, 1999) 63–64. In the US the intervention in contractual terms in this manner is sometimes seen as a constitutional issue in terms of the liberty of the parties to contract requiring indeed a clear economic and /or social justification, see Robert Post, ‘The Challenge of Globalisation to American Public Law Scholarship’ (2001) 2 Theoretical Inquiries in Law 323. 145 The concept is more independently acknowledged in insurance contracts (which are uberimae fidei). In that case, it is principally used, however, to protect the insurer and, through it, the scales are

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The English attitude towards the good faith notion was criticised by Steyn LJ in his 1991 Royal Bank of Scotland law lecture at Oxford,146 but excepting cases of ‘fraud’, which often lead to redress in tort, it is not likely that good (or bad) faith notions will soon be used as a general implementing, supplementing or correcting factor in respect of contractual terms in England except through specific legislation like in the Unfair Contract Terms Act of 1977 or in implementing EU consumer law Directives. Although the common law notion of equity is sometimes equated by outsiders with the civil law good faith notion and development, this is substantially incorrect. As we saw before,147 equity in this sense is not a general interpretative concept allowing for the influx of new ideas or even of general notions of fairness, see Volume I, section 1.3.1. Equity adjustment is used by judges only as a last resort, except in areas entirely covered by it, such as trusts, agency, company and bankruptcy law. Moreover, the notions of equity are often entirely rigid, certainly also when used in contract law (as for example in the concept of rescission and specific performance). In any event, its rules are incidental and mostly remedial. In civil law terms, equity in this sense could often do with some good faith or normative flexibility. Upon a proper analysis, the renewing forces identified in the previous section in civil law in this connection with all their contradictions and ambivalences operate equally in common law but are not called ‘equity’ and also not ‘good faith’. As such they remain in essence unidentified. As we saw, English law reflects more in particular on the nature of the relationship between the parties.148 It also accepts extra contractual duties easily, especially in situations of dependency, even if tort liability rather than contractual liability may result.149 Again, from these perspectives, there is in common law less need for the good faith notion or something equivalent to provide greater flexibility. It sometimes also uses the reliance notion as we also saw to determine the existence of the contract and the rights or duties of the parties often loaded against the insured, as under it the insurer may repudiate a policy, even on the basis of failure to disclose technically relevant but minor facts by the insured that would not have made any difference to the insurer’s underwriting decision, see Container Transport Inc v Oceanus Mutual Underwriting [1984] Lloyd’s Rep 1, 47. See for a general and fundamental rejection of the notion of good faith at least in the commercial sphere, Lord Ackner in Walford v Mile, n 150 below. For an important contribution to the discussion on the subject in England, see J Beatson and D Friedmann, ‘Introduction: From “Classical” to Modern Contract Law’ in J Beatson and D Friedmann (eds), Good Faith and Fault in Contract Law (Oxford, 1995) 3. 146

The Role of Good Faith and Fair Dealing in Contract Law: A Hair-Shirt Philosophy? See text at n 93 above 148 See Bingham LJ in Interfoto v Stiletto [1989] 1 QB 433, 439 and the comments at n 1 above. 149 It gives rise to fiduciary duties. They are products of the law of equity closely related to trust-like structures, therefore to situations where people or entities operate for others, as is also the case in agency, partnership or in directorships of companies. But they may also emerge more generally in situations of dependency or discretion affecting others. In all cases, there has to be a fiduciary relationship before the fiduciary duties can emerge and they apply therefore only in special circumstances and present a narrower concept than good faith does in civil law, but in areas where they operate, they may impose a much more formidable regime. Thus these fiduciary duties can go beyond mere fairness and honesty as is clearly shown in the relationship between the investment broker and his client where they acquire a protection function for the latter, see more particularly s 3.1.4 below. 147

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thereunder, again often leading to tort liability,150 but reliance became also a consideration substitute. Common law’s resort (sometimes) to implied terms, especially of reasonableness was already mentioned.151 mentioned was the greater receptiveness in common law to other legal sources like custom, and perhaps also the greater role of a more objective notion of party autonomy at least in the professional sphere, which may now hide in civil law behind the cloak of good faith. Again, together this may well result in relief similar to what may be obtained under the civil law of contract within the notion of good faith and may sometimes give more especially in situations of dependency. It drives the common law also into the direction of a more normative interpretation technique, but in common law countries there remains a bias in favour of more literal interpretation of contractual terms, as also demonstrated by the old parol evidence rule, see section 1.2.4 above, that avoids extraneous evidence in the determination of the content of written documents. That is so at least in the professional sphere. It seems that it is left more fundamentally to its own devices and less protected as the courts will not seek to interfere lightly in professional relationships, either in the formation or performance of the contract, especially when the contractual text is on its face clear. As far as implied terms are concerned, the technique of gap filling is an old one, however, also in England,152 although in common law exceptionally based on a presumed intent of the parties (which itself is not enough to result in contract in common law as we saw), but always construed in a more objective manner153 and sometimes subjected to the requirement of reasonableness.154 The implied terms could even concern the reasonableness and fairness of the transaction itself.155 Yet again, especially in the professional sphere, there will be caution and restraint, except in cases of excess. It may be due to another perception of risk acceptance. It is submitted that that is on the whole the correct attitude. Thus, for example, in terms of pre-contractual duties and a duty to negotiate in good faith, English law remains in the professional sphere reserved as long as no weaker party needs special protection.156 In the USA, on the other hand, in the UCC under German influence, a general reference to good faith was inserted in section 1–304. It imposes an obligation of good faith in the performance or enforcement of every contract or duty under the UCC, but strictly speaking not in the formation of the contract. Interestingly, section 1–201(b)(20) UCC defines the concept. It means ‘honesty in fact in the conduct or transactions concerned’. The ‘in fact’ language suggested a subjective approach (‘empty head, pure heart’), but has gradually acquired a more normative or objective meaning, see section 1–201(19) old, whilst section 1–201(a)(20) (new) now adds after 150 See the probably too sweeping rejection of the notion of good faith by Lord Ackner in Walford v Miles [1992] 2 WLR 174 to avoid contractual liability for loss of profit. An action in negligence was allowed, however, to recover the costs of consultants hired in reliance on a deal. 151 See Lord Hoffmann in n 39 above. 152 See The Moorcock (1889) 14 PD 64. 153 Hirji Mulji v Cheong SS Co [1926] AC 497, 510. 154 Shell UK Ltd v Lostock Garages Ltd [1976] 1 WLR 1187. 155 Bankline v Arthur Capel [1918] AC 435 and Metropolitan Waterboard v Dick [1918] AC 119. 156 See Walford v Miles, n 150 above.

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‘honesty in fact’ a reference to ‘the observance of reasonable commercial standards of fair dealing’ Indeed, for sales, section 2–103(1)(b) UCC had done so earlier, now repeated in its new version (s 2–103(1)(j); see further also section 3–103(a)(6) UCC (for negotiable instruments), section 5–102(a)(7) UCC (for letters of credit) and section 9–102 (a) (43)UCC (when used in the area of secured transactions, see for a more limited use of the concept in this area of proprietary rights, however, also Comment 10 to section 8–102 UCC for adverse claims in security entitlements). Section 1–302(b) UCC allows variation of the provisions of the UCC by contract, but not of the obligations of good faith, diligence, reasonableness and care prescribed by it, but the parties may set the standards by which the performance of these obligations is to be measured if such standards are not manifestly unreasonable. It shows that the concept is not mandatory except in extreme circumstances. There are more references to good faith in the UCC, like, for the sale of goods, in sections 2–603 and 2–615. It remains exceptional in the common law of contract, however, and is substantially statutory and even then, as in the UCC, incidental, as the many individual references to it testify. As just mentioned, at least in the UCC, good faith does not cover pre-contractual duties or strictly speaking even gap-filling but only the performance or enforcement of the contract, here joined by a general provision on the unenforceability of unconscionable clauses in contracts for the sale of goods, see section 2–302 UCC, particularly (but not only) relevant in sales to consumers.157 On the other hand, in the USA, the non-binding Restatement (Second) of Contracts of 1981, section 205, stated for the first time more generally that every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement. This was then followed in the 1990 revision of section 3–103(a)(4) of the UCC (for negotiable instruments) which, as far as the UCC is concerned, was first in accepting the idea that good faith could also means the observance of reasonable commercial standards of fair dealing, but good faith remained a matter of performance and enforcement of the contract only. As we just saw this is now the general UCC approach.158

157 See also EA Farnsworth, ‘Good Faith in Contract Performance’ in J Beatson and D Friedmann (eds), Good Faith and Fault in Contract Law (Oxford, 1995) 153. See for a case that could more readily be explained as covering a pre-contractual situation, Teacher’s Ins & Annuity Assn v Butler 626 F Supp 1229 (SDNY 1986) in which a developer refused to close a loan deal whilst objecting to a pre-payment fee in the closing documents. The court recognised a duty of good faith and fair dealing in every commercial transaction and found a breach of this duty on the basis of commercial practice which accepted pre-payment fees in loan agreements even if not normally included in a bank’s commitment letter. The court rejected therefore the borrower’s argument as a pretext for getting out of the deal taking also into account that the draft loan agreement had included the fee and that the problem had never been raised until the eve of closing. The case can, however, also be seen in the context of performance pursuant to the commitment letter. 158 In this connection it may be noted, however, that in the USA for example employees are not per se protected under employment contracts without a duration clause and courts have held them terminable at will, never mind good faith notions, see Brehany v Nordsstrom Inc, 812 P 2d 49 (Utah 1991) and earlier Murphy v American Home Products Corp 448 NE 2d 86 (NY 1983).

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It follows that in the interpretation of the contract, the normative approach is now increasingly followed in the USA. Australia and New Zealand also have abandoned the narrow common law approach in this area. More limited notions of foreseeability and reasonableness may, however, commonly still be found in most legal systems as possible correctives to the parties’ exposure in this connection when it comes to any assessment of damages even where the requirements of good faith are deemed violated in a more objective sense. The more restrictive English attitude may not be as strange as it sometimes seems, particularly to German lawyers. As already suggested, the restrictive English attitude is largely limited to the commercial and professional spheres where parties are capable of providing a clear direction in their dealings, are less dependent on each other, often willing to take more risks, and can hire expert advice better to look after their interests, whilst in that sphere, even in civil law, the good faith notions may be applied more restrictively, especially when the contract is a road map and risk allocation, which may also affect the interpretation of the wording of agreements and their adjustment, even in the case of hardship.

1.3.8

EU Notion of Good Faith

It is of interest in this connection that also at the EU level the notion of good faith has appeared. In the Council Directive (93/13/EEC of 5 April 1993) on Unfair Consumer Contract Terms, there is an important reference to it. Under Article 3(1), terms of not individually negotiated contracts are considered unfair if, in violation of the requirements of good faith, they cause a significant imbalance in the parties’ rights and obligations to the detriment of a consumer. The Preamble elaborates somewhat on the good faith notion, which under the Directive requires an overall evaluation of the interests involved, whilst, in making an assessment of good faith, particular regard must be had to the strength of the bargaining position of the parties, whether the consumer had a special inducement to agree to the terms and whether the goods or services were sold or supplied to the special order of the consumer. There is here another important aspect. EU Directives of this nature are motivated by, and the jurisdiction of the EU derives here mostly from the notion of the free movement of goods and services. This raises the issue whether concepts like good faith are further conditioned by these considerations, meaning that they play a role only to further the internal market and may be limited thereby. This is not obvious from writings on the subject but it is a constitutional (jurisdiction) issue that must not be overlooked. Whilst using terms like these, EU law at least considers them in essence separate from the meaning they may have in the domestic laws of the Member States. Comparative research may be done but is not decisive to find the Community

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meaning.159 In any event, as good faith is in most Member States undefined and varies widely in its impact, as we saw, it is of interest to see how the European Court interprets the concept. In the context of the Directive, it seems likely that it will put the emphasis on the imbalance and leave it at that. It means that, following the normative or teleological approach, maintaining a proper balance is seen as a substantive element of the good faith requirement itself and not as an additional requirement for protection under the Directive. What this bears out is the relationship-oriented approach, giving the concept of good faith here a special meaning in consumer transactions. Indeed ‘imbalance’ is of special concern and may have a special relevance mainly in contracts between professionals and consumers. This being said, the concern of the EU for consumers is probably excessive. One would have thought, as suggested before, that consumer protection is a typical concern of Member States as consumer transactions are seldom cross-border. Also in view of the notion of subsidiarity, the EU concern in this area appears substantially misplaced. The exception is undoubtedly long-distance selling of consumer goods and of financial services to the smaller and inexperienced investor in other EU countries and more recently internet dealings. In matters of products liability the free movement of goods also requires clarity for manufacturers but that is not then a matter of consumer protection either. Again, upon a proper analysis, the EU’s legislative power in this area does not go beyond these concerns and the relevant consumer Directives need therefore to be read and interpreted foremost from that perspective, including the good faith notion, but seems in practice to go well beyond it. Under EU law, the concept of good faith is also used in Articles 3(1) and 4(1) of the Directive on self-employed commercial agents. Under them, the principal and agent owe each other a duty of good faith, largely referring, one assumes, to the common law notion of fiduciary duties (although strictly speaking an agency relationship proper need not be implied). In this regard, comparative research would probably find in favour of the more extensive protection notions developed under the common law. The good faith notion also surfaced in the case law of the European Court of Justice in interpreting the original version of Article 17 of the 1968 Brussels Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters which allowed agreements on jurisdiction to be effective, but there were problems in determining when there was such an agreement. In this context, the European Court relied in its early case law on good faith notions, later more generally formulated in terms of practices and usages. Article 17 is superseded with amended language to that effect by Article 23(1) of the EU Regulation on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters, which replaced the Brussels Convention in 2002.

159 See W van Gerven, ‘The ECJ Case-law as a Means of Unification of Private Law?’ in A Hartkamp et al (eds), Towards a European Civil Code, 2nd edn (1998) 91 and 102.

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1.3.9 Good Faith and Sources of Law in the CISG, UNIDROIT and European Contract Principles. The DCFR The term ‘good faith’ figures in Article 7(1) of the 1980 Vienna Convention on the International Sale of Goods (CISG) in connection with the interpretation of the Convention, not, however, in connection with its supplementation or the interpretation and supplementation of any sales agreements concluded under it (which are not covered). The notion remains undefined but is presumably a transnationalised concept not therefore referred back for its meaning to domestic law under the supplementation section of Article 7(2), see for a more extensive discussion of Article 7, section 2.3.5 below. Other sources of law are also mentioned, but in an haphazard and unco-ordinated manner, like the reference to the CISG’s international character and the need for uniformity in matters of interpretation and, in matters of supplementation, the general principles on which the Convention is based (which are entirely unclear) and ultimately domestic law resulting under the applicable rules of private international law. This reference to private international law in the supplementation of the CISG, followed by the EPCL but not by the UNIDROIT Principles (which followed the Hague Conventions in this respect) nor by the DCFR, although not objectionable in principle as the residual rule in the transnationalisation process of private law, see Volume I, sections 1.4.13 and 3.1.2, is, however, likely to destroy any usefulness of uniform rules as all these texts lack clear definitions (especially relevant in matters of good faith and reasonable or related concepts) so that any dispute on general principles or even coverage would descend into a search for domestic laws. As interpretation can hardly be distinguished from supplementation (recognised in the case of contracts where interpretation and supplementation is no longer separated under the EPCL and DCFR), that would affect interpretation also. As for custom, it does not figure in Article 7 CISG as a source of law, but in Article 9 custom and practice are mentioned as implied contract terms in the English manner. This approach remains clumsy because it does not set the CISG in its proper relationship to other sources of law, and is critiqued also in section 2.3.6 below. In terms of party autonomy, the Convention in Article 6 is clear that it can be set aside in all of its provisions (except the one of Art 12 which goes into documentation). This even appears to apply to the good faith provision in Article 7 which would therefore appear not to be mandatory. The UNIDROIT and European Contract Principles (EPCL) also struggle with the various sources of law and present no clear views either. In this connection, the UNIDROIT Principles in Article 1.6. do not refer to good faith in its own interpretation, but the EPCL do, see Article 1:106 (where there is also the combination with fair dealing, see also Article 1.7 UNIDROIT Principles). In contract interpretation, good faith and fair dealing are mentioned in both sets of Principles besides the traditional reference to the intention of the parties, the nature and purpose of the contract, and usages (which remain here implied conditions in the CISG manner), see respectively

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Article 4.8 (but only in matters of supplementation of the contract) and Article 5:102. Neither the concepts of good faith nor fair dealing are defined in either set of Principles, and the standard of conduct to which they refer is wholly unclear. Again, in typical unitary thinking there is no reference to the nature of the relationship of the parties. The DCFR in Article I-1:102 refers to good faith and fair dealing whilst stating on its own interpretation (apparently even in respect of non-contractual issues), mentions also human rights (only by way of concession as we saw), uniformity of application, and legal certainty, but no other fundamental principle, nor general principle or custom. For supplementation, reference is made to the general principles underlying the DCFR. It is clear that the DCFR does not mean to leave room here for other sources of law but itself.160 Thus, as we have seen, party autonomy operates by government licence only (Art II-1:102 DCFR) and custom or practices are only recognised as implied contractual conditions (Art II-1:104). They are no independent sources of law. The DCFR follows here the UNIDROIT Principles and EPCL and the typical codification approach that ignores all other sources of law unless specifically recognised by it. The DCFR also reverts to codification orthodoxy in matters of interpretation of the contracts concluded under it (Art II-8:102) in terms of nature and purpose of the contract (not nature of the relationship of the parties), good faith and fair dealing, and usages (again as implied conditions only, see Art II-1:104).161 The concept of ‘good faith and fair dealing’ figures in Article I-1:103 and in the definition annex (both in the 2009 version) as ‘a standard of conduct characterised by honesty, openness and consideration for the interest of the other party to the transaction or relationship in question’. Again it is an issue of conduct only, but even then does not imply relationship thinking but only suggests respect for the created relationship. The 2008 text had referred to an ‘objective standard of conduct’, no more.162 Whether in the latest version the standard is still objective is therefore uncertain but it must be assumed mostly to be so. In neither version was there any acknowledgement of the multifaceted nature of the good faith concept, see section 1.3.4 above. In fact, what the notion, its standards, and operational meaning truly were, remain wholly unclear.

160

See for the DCFR references especially nn 135–138 above. In fact, contracts concluded under the DCFR are to be interpreted first on the basis of the common intention and the meaning a reasonable person would give it. Again, here first the anthropomorphic approach, see Art II-8:101. Only subsequently regard may be had to the negotiations, conduct, nature and purpose of the contract (not the parties), and good faith and fair dealing. There is no special paragraph for contract supplementation. 162 The differences between the 2008 and 2009 text show that the draftsmen had little idea what this vital concept of good faith really meant and how it was to operate. The term ‘good faith’ on its own meant in the 2008 version a subjective mental attitude, often characterised by an absence of knowledge of something which, if know, would adversely affect the morality of what is done. It could be asked whether that could be a legal yardstick at all. In the 2009 version it is a mental attitude characterised by honesty and an absence of knowledge that an apparent situation is not the true situation. That sounds more like bona fides in the law of property. 161

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1.3.10 When is Good Faith a Mandatory Concept? The UNIDROIT Contract Principles, which are limited to international commercial contracts, present in Article 1.7(2) a typical example of the use of consumer law or small companies’ protection in the professional sphere whilst rendering good faith generally a mandatory concept without explaining its role and meaning but making it compulsorily applicable even where it would not seem to appeal to higher overriding values, public order concepts, or special protections derived therefrom at all. This would be unacceptable to common law lawyers, and should also be to those of the civil law. It is in its generality an inexplicable provision which does not appreciate the multi-faceted nature of the concept with its many diverse functions as explained above in section 1.3.4. It is certainly not only a norm, let alone always a mandatory one. It was followed, however, in Article 1.201 of the European Principles (which also cover consumer transactions but do not make here proper distinctions), but can hardly be perceived as an established principle of commercial contract law as it pretended to be. It has no basis in nor is it supported by a proper comparative analysis of domestic laws. Again it shows an overriding consumer protection attitude. The UNIDROIT Principles seek to distinguish (mandatory) good faith from reasonableness (Art 5.2) without, however, indicating the dividing line. The terminology is here quite unstable and what must in this connection be considered mandatory under these Principles or not is unclear, see more particularly also the discussion in section 1.6.3 below.163 It begs the key question whether all of these references to reasonableness also have a mandatory flavour, either in the nature of good faith and fair dealing of Article 1.7 or in the context of the mandatory validity provision of Article 3.19. It does not seem so164 as it would make the Principles useless. When more specific rules are formulated, their relation to or origin in the mandatory good faith principle might thus have to be ignored and most of these rules should therefore be considered directory,165 except (in the context of these Principles) those on surprising (standard)

163

There are many other concepts in the UNIDROIT Principles said to be based on or derived from the principle of good faith, like those in Art 2.4(2)(b) (revocation of the offer), Art 2.16 (duty of confidentiality), Art 2.17 (written modifications clause), Art 4.2(2) (interpretation of statements and other conduct), Art 5.2 (implied obligations), Art 5.3 (co-operation between the parties), Art 5.8 (contract for an indefinite period), Art 7.1.2 (interference by the other party), and Art 7.1.7 (force majeure), see MJ Bonell, An International Restatement of Contract Law, 2nd edn (1997) 136 ff. There is also an abundance of references to reasonableness and similar requirements as well, see Art 1.8 (on usages), Art 2.20 (on surprising terms), Art 3.8 (on fraud), Art 3.9 (on threat), Art 3.10 (on gross disparity), Art 4.6 (adopting the contra preferentem rule), Art 4.8 (supplying an omitted term), Art 5.2 (adding an implied obligation), Art 7.1.6 (on exemption clauses) and Art 7.4.13 (on agreed sums for non-performance). In other Articles, a reference is made to a reasonable person (Art 5.4.2) whilst Arts 5.6 and 5.7 speak of a reasonable quality of performance and a reasonable price if neither are sufficiently determined by the contract. 164 See ibid 149. See also O Lando and H Beale (eds), The Principles of European Contract Law, prepared by the Commission on European Contract Law (1995). 165 It remains a question of interpretation when these various provisions should still be considered mandatory, see also B Kozolchyk, ‘The Unidroit Principles as a Model for the Unification

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terms that must be expressly accepted by the offeree (Art 2.19), and those that limit the parties’ freedom with respect to exemption clauses and agreements to pay fixed sums for non-performance (Arts 7.1.6 and 7.4.13). As already said, even this much is less understandable for dealings between professionals except in situations where the use of standard terms and exemption clauses borders on the manifestly unreasonable.166 The European Principles struggle similarly, and do not achieve clarity either. They define the term ‘reasonableness’ in Article 1:302, but here it becomes circular where they refer to what a person acting in good faith would consider reasonable. Nature and purpose of the contract, circumstances of the case and usages and practices of the traders or professions need also to be taken into account (but not, typically, the nature of the relationship between the parties). The DCFR moves on from here and declared in the 2008 version of its Article I1:102 on party autonomy this concept subject to the notion of good faith and fair dealing suggesting that this notion is indeed overriding and absolutely mandatory. In the 2009 version this language was deleted but party autonomy is still subject to any applicable mandatory rule whilst Article III-1:103(2) makes clear that the duty to act in good faith and fair dealing cannot be excluded or limited at least when it comes to the performance of the contract, not by professionals either who apparently cannot even set standards amongst themselves, which, again, the UCC allows in its section 1–302 unless that becomes manifestly unreasonable. In Article II-3:301(2) there is a similar mandatory provision in respect of negotiation duties. The special provision that the good faith standard cannot be limited in those two instances may suggest that it may be otherwise, for example, in the interpretation of the contract under Article II-8:102(1)(e) or in the determination of the contract, Article II-9:101(2)(a). On the other hand, it may be noted in this respect that for pre-contractual disclosure duties and post-contractual negotiation duties, the good faith notion is not used which would suggest that this was done to allow for the variation of these duties by contract.

of the Best Contractual Practice in the Americas’ (1998) 46 AJCL 151, 154, 173, who appears somewhat naïve in his references to objective standards of brotherly care. Art 5.3, setting forth the parties’ duty to co-operate’, does not expressly refer to the duty of good faith and fair dealing, but here the Comment makes the connection and it is suggested that such a duty lurks behind the requirement of co-operation. It would make the duty mandatory 166

More generally, the term ‘unreasonableness’ appears to have a meaning somewhat different from lack of ‘good faith’. It is sometimes seen as the more objective element of good faith but mostly appears to suggest a lower standard. As we saw, such a lower standard may still affect the applicable usages and practices, see Art 1.8(2), but not apparently the impact of the contract itself, although insisting on performance could be against good faith under Art 1.7. Supplementation of the contract may be done on the basis of good faith notions (Art 4.8) but co-operation duties at the performance stage are expressed in terms of reasonableness (Art 5.3). These co-operation duties, as further detailed in Art 5.5, thus appear different from those to which Art 1.7 refers and to be of a lower non-mandatory nature, although they may conceivably rise to the level of Art 1.7 if sufficiently pressing. Only in the case of hardship is there the option of adjustment of the contract (Art 6.2.3) in which connection the doubtful concept of the contractual equilibrium and its re-establishment is used rather than good faith or reasonableness adjustments, see also s 1.3.12 below.

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It also begs the question for the DCFR whether notions of reasonableness can be excluded or standards can be set for it. Article I-1:104 defines ‘reasonableness’ as a standard that is objectively to be ascertained, having regard to the nature and purpose of what is being done, to the circumstances of the case and to any relevant usages or practices. Again, the nature of the relationship of the parties does not appear to play a role here, as a consequence no clarity can be obtained. To repeat, where good faith (even in combination with fair dealings) does not appeal to fundamental principle or public order, it is not mandatory and is then perfectly capable of being overruled by custom or contractually curtailed, at least in its consequences, especially by professional parties amongst themselves. It would appear that for professionals, good faith notions are mandatory only in exceptional circumstances and must then be used with restraint. The UNIDROIT and European Principles of Contract Law as well as the DCFR (although perhaps less so) in extolling the mandatory force of the good faith notion seem to suffer from a profound misconception, again due particularly to a lack of relationship thinking in civil law, notably leading to an extension of consumer protection into all contracts of the same type regardless therefore of the nature of the relationship of the parties. So far, only in the Netherlands has the concept of good faith been elevated to a rank above custom and statutory law and it may affect and correct the application of both at least in contract law (Art 6(2) CC), also if they are themselves mandatory, it would seem. Again, if the notion appeals to a higher principle that would be understandable, but often it does not or not sufficiently. It is curious for a concept that is inherently vague and, in many of its applications, not necessarily mandatory at all. It would appear to transfer extraordinary powers to the judiciary and leaves great scope for consumer protection notions entering professional dealings. It leaves open also the question whether there is a transnational good faith concept out that could trump in international cases domestic good faith concepts of this nature.

1.3.11 Practical Effects of Good Faith or Normative Thinking: The Nature of Pre-contractual Information and Disclosure Duties, Meaning of Consensus, Mistake, Misrepresentation, and Gross Disparity Although it would seem that the normative approach to contract interpretation normally leads to more refinement in the protection of the various types of parties, be they professionals or consumers, workers or private investors, it may in fact also lead to less refinement, as was already noted several times before. That derives equally from the notion of good faith used in this connection and denotes proper relationship thinking and respect for risk acceptance. In other words, if text, context, history, nature of the parties, their capacity and their expertise, nature of the kind of contract, or even their custom or good faith and (statutory or other) rules of (black letter) law are together taken into account, it need not lead to more protection. This may explain first the normally lesser impact of

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pre-contractual information duties amongst professionals. This was also already mentioned several times before, and it is of great significance. In the common law of the English variety, this result is more obvious, and is achieved on the basis of distinguishing between the different types of parties and the notion of risk acceptance, as we saw. Also the UCC in the US does not entertain, in the pre-contractual phase, a good faith duty in terms of disclosure, and even the DCFR exceptionally refers here in business dealings to commercial practice as reference point (Art II-3:101(2), but it does not apply to pre-contractual negotiation duties). When the professionalism (or absence thereof) of the parties is properly taken into account, as well as their interests and the nature of their deal, it may also be that technical defects in the consensus or lack of clarity of the parties’ intent carry less weight under the good faith notion, even, it is posited, in civil law. It means that, upon a proper analysis, the application of fundamental structural principle like the binding force of the consensus or the effect of detrimental reliance on someone else’s action is not insensitive to commercial needs, and in any event may function differently in different relationships and transactions. Nevertheless, Article 5:101 EPCL and Article II-8:101 DCFR still stress the common intention of the parties as the point of departure for all interpretation ‘even if it differs from the literal meaning of the words’, but in professional dealings this may be less than perceptive and consensus thinking of this nature may not be conclusive. There is still a strong anthropomorphic streak here but commercial needs may require otherwise. Again, another attitude may follow from the division of tasks and risks envisaged in the contract as a matter of risk acceptance. See also the references to this concept in the DCFR in Article III-1:110(3)(c) (change of circumstances), Article II-7:201(2)(b) (mistake), and more indirectly in Article III-3:104(2) (force majeure). Furthermore, it has already been said that,) in professional dealings, especially in the context of multiple contracting, a serious impact on the overall position of the professional debtor may also be needed for it to claim relief beyond the contractual text, also in the areas of mistake, force majeure or change of circumstances. This may be another form of risk acceptance, here in a multiple contract environment, where a problem under one contract may make no difference to the debtor overall, but it may to the contract counterparty. That contract may not then be considered in isolation but rather in the context of the business the professional is in. Thus the special (commercial) nature of business relationships may curtail the notion of mistake, negligent misrepresentation or error and the possibility of avoiding the contract on that basis, see for these notions also section 1.4.2 below. Although in their expectations parties may be deceived, that may hardly be a ground for rescission amongst professionals, clearly if no expectation was raised by the counterparty beyond mere sales talk. Professionals normally have the ability and means to take some of these risks and in any event to investigate and this will be an important factor. Thus to invoke mistake or error in order to avoid contractual liability in such cases is for them often less convincing and likely to be limited to the obvious, that is extreme situations, therefore to prima facie cases. In other words, the risk is normally for the professional party making the mistake, except (perhaps) if both parties were mistaken

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or (more likely) the other party realised or should have realised that the first party was mistaken. Again, the impact may also have to be considered and relief would only be considered if performance under the circumstances would create great harm overall. In a similar vein, claiming that an unacceptable gross imbalance or unconscionability existed in the terms at the time of the conclusion of the contract (whether understood or not) is less credible between professionals. Balancing is a notion that makes sense mainly in the relationship between consumer and professional. By seeing it as a major issue in change of circumstances situations, the UNIDROIT Principles that require renogotiations in such circumstances without even requiring great harm seem profoundly mistaken (Art 6.2.2). The professional nature of the (business) relationship may also limit protest periods, affect the remedies and in this regard discourage transactions from being undone even upon default, especially in their proprietary aspects (for example, when a sales agreement fails but the goods are already delivered) although claims for damages may still be valid. Only in extreme cases like fraud would title revert, giving rise to a proprietary remedy or replevin, but again probably only if it is truly material to the deceived party. In commerce, reliance on special skills of the other party will normally be no excuse either, as it may be for consumers or weaker parties, who may depend on the advice of their professional counterparties.167 Thus for professionals, the law may want to cut down endless minor arguments concerning misbehaviour, negligent performance and even force majeure exceptions, as we shall see, to the more obvious and detrimental cases, and also limit the re-balancing of the contract when situations change, as these parties are used to risk taking and often make it their business, again excepting extreme cases. In short, for the courts (or arbitrators) to intervene in the professional sphere, things must be pretty bad. That remains notably the attitude of the English courts and it makes sense. In business, a stricter attitude in agency cases may also mean that agency might be more readily assumed than would otherwise be the case and that apparent authority amongst professionals could even be assumed upon the mere declaration of the agent himself (eg employees), certainly if the principal has clearly taken that risk. The normative interpretation technique or good faith considerations should, if properly understood and handled, lead to these conclusions, which again often come down to proper relationship thinking. The 1980 Vienna Convention on the International Sale of Goods does not go into questions of contractual validity in this sense and therefore also not into the notions of mistake and error, or into pre-contractual disclosure duties in the context of contract formation. These issues are left to local law under the normally applicable conflicts rules. As mentioned earlier, the DCFR in Article II-7:201(2)(b) accepts at least a measure of risk acceptance in the case of mistake, which may leave room for some distinction on the basis of the nature of the parties.

167

See eg Lord Denning in Esso Petroleum v Mardon [1976] 2 All ER 5, 16.

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1.3.12 Practical Effects of Good Faith or Normative Thinking: Pre-contractual Negotiation Duties, Co-operation Duties, and Abuse of Contractual Rights Although no written documents indicating the state of the negotiations may exist, there may be duties to continue contract discussions in good faith once they have started giving rise to a legal action when these duties are broken. These are therefore pre-contractual duties quite apart from information duties that may precede the conclusion of a contract, which were discussed in the previous section. Yet mere expectation of a favourable conclusion of contract negotiations does not give legal rights: see also the generally more restrictive attitude taken by Lord Ackner in the UK in Walford v Miles,168 in which at least in business a duty to negotiate in good faith was thought to be unworkable and deemed to be inherently inconsistent with the position of a negotiating party, always, it would seem, subject to there being no detrimental reliance justified by the circumstances of the case. Even if this reliance does not result in some contractual rights, it could still allow for some reclaiming of costs made in the pursuance of the contract as a matter of tort or restitution law, for example in respect of the cost of legal advice. But these would never be expectation damages. That is indeed the English position. Again the key is that the justification for protection may be less obvious in commercial or professional cases, and reliance may not so soon be justified. The normative interpretation technique or good faith considerations if properly understood should make here the proper distinctions in terms of relationship thinking. Professionals know the ups and downs in their trade, and short of being utterly misled (fraud) may not be able to complain when negotiations abort. Again, they are often engaged in many of them, some of which may go better than others. The overall position counts here also, and complaints in respect of a single contract whose negotiations failed may, from an overall point of view, be less justified. If justified reliance arises, however, in common law too the other party may be forced to negotiate the full contract, short of which there may be room for claiming damages against the party wrongfully terminating the negotiations, including a claim for lost profits. If one takes the element of professionalism into the equation, common and civil law may thus be less different here than is sometimes assumed, but again between professionals such negotiation duties depend much on the circumstances and cannot simply be assumed.169 In other situations, the tort of negligence (eg, to achieve reimbursement of immediate expenses made during negotiations in terms of fees for advisors hired in reliance on statements of the other party)170 or the construction of collateral contracts

168

[1992] 2 WLR 174; see also n 150 above. See on this subject also S van Erp, ‘The Pre-contractual Stage’ in A Hartkamp et al (eds), Towards a European Civil Code, 2nd edn (1998) 201, who signals here a diverging rather than converging tendency between civil and common law. 170 If there is a tort, it may lead to damages for misrepresentation which indeed were granted in the Walford case and need be clearly distinguished from a contractual damage claim based on detrimental reliance leading to the formation of a contract. The difference between contract 169

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(eg, an implied contract to negotiate, or justified reliance on an undertaking not to negotiate with others)171 may also result in some pre-contractual negotiation duty in English law, whilst there may sometimes also be cause for restitution, as just mentioned, but again it depends on the circumstances and these solutions are incidental. Indeed, there is no general concept of pre-contractual negotiation duties in English law and under English law the process of negotiation itself is apparently not thought to be capable of creating its own legal relationship, although the requirement of consideration may have been eased.172 This, however, removes only one barrier to the acceptance of contractual remedies in the pre-contractual phase. German and Dutch law are increasingly categorical in the imposition of precontractual negotiation duties and hold that late withdrawal from negotiations may impose heavy contractual liability, including damages for lost profits under the contract.173 That is also borme out by the DCFR which is strict in its unitary approach (for professionals and consumers alike) expressed in Article II-3:301(2), where it is made clear that the duty to negotiate in good faith cannot be excluded or limited by contract (by anyone, including professionals, unlike the situation in Article II3:101(2) for pre-contractual disclosure duties). Since there is no contract, this might not be an issue (although an initial MOU could state on the matter) but the more pertinent question is whether in the case of professional dealings, there is such a duty at all. In any event, the notion of risk acceptance is important here too, but not in the DCFR. In France, the duty to negotiate in good faith leads in essence to a negligence (tort) action until such time that the negotiations have entered a phase where there may be said to be a contract.174 The consequence appears to be a tort action requiring fault or

remedies and the incidental tort remedies available is notably that in the latter cases the lost benefit of future performance (lost opportunity) cannot be claimed. There is also Dutch case law making the distinction between the various phases of negotiation and the remedies for terminating them. In a first phase both parties may withdraw, in a second phase they may not, but there will be no more than the reimbursement of actual costs. Only in a third phase could there also be a claim for the loss of the deal, HR, 18 June 1982 [1983] NJ 723 (Plas/Valburg). The liability in the second phase is sometimes based in tort. There is as yet no case awarding damages for the lost opportunity in the Netherlands. In Germany, there is one in a labour case, BAG, 7 June 1963 [1963] NJW 1843, which was probably a case of special labour protection and not one concerning a more general principle. 171 Relying on collateral agreements in this manner may present special problems and they may not be enforceable for: (a) lack of certainty; (b) lack of consideration; or (c) failure to specify a time limit, whilst even express or implied agreements to negotiate may fail on similar grounds, see also Courtney & Fairbairn Ltd v Tolaini Brothers (Hotels) Ltd [1975] 1 WLR 297. 172 Importantly, in Pitt v PHH Asset Management Ltd [1994] 1 WLR 327, the consideration requirement was relaxed so as to accept the binding force of a promise inducing reliance during negotiations. 173 HR 15 November 1957 [1958] NJ 67 and 15 February 1991 [1991] NJ 493, and ss 311(2)(3) and 241(2) BGB (new). 174 See Cour de Cass 20 March 1972 [1973] JCP 2.17542.

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bad faith with a limitation of damages to those actually suffered, but excluding the loss of the deal.175 In the professional sphere, it is in any event believed that there is less reason for this liability.176 In the USA, there is still no general duty to negotiate in good faith or at least to continue negotiations in that manner once they have seriously started, compare Restatement (Second) of Contract, section 205. Section 1–304 UCC does not extend to pre-contractual situations either. The courts are, however, divided.177 Also in the implementation of the contract, the duties of professionals amongst themselves may be less obvious than their duties in respect of non-professional parties. This also affects the invocation of any abuse of rights. Thus also in civil law terms, the requirements of good faith implementation may be fewer and less onerous for professionals. Closer adherence to the wording of the contract may be appropriate, also under the good faith reference in section 1–304(1–203 old) UCC in the USA. But this is not to deny that there are co-operation duties that may even extend to all involved in the same project, also if they have no direct contractual ties (but each only with the originator of the project), although again the remedy may be in tort rather than in contract. A potent example is a construction project in which all must have some space to unload and deposit their materials, when efficiency considerations for all demand that there is a minimum of willingness to be constructive and to help rather than be in each other’s way. What is customary, normal, and practical and makes good sense in the circumstances will thus figure in the proper performance of each party, in which there may be implied duties of co-operation, even though in principle the contractual frameworks under which each person works may be formally unconnected. The factual circumstances dictate what is required of everyone in this respect and how the rules under which everyone is engaged will be tailored to match the situation in a reasonable or good faith manner, and will determine what in this connection will be considered acceptable conduct from everyone, in which supplementary duties may figure. In Germany, that is now at least to some extent reflected in section 241(2) BGB. It may be seen as another instance of risk acceptance.

1.3.13 Practical Effects of Good Faith or Normative Thinking: The Status of Commercial Letters of Intent The binding force of letters of intent is an area of the law closely related to negotiation duties in pre-contractual situations. 175 The Court of Appeal in Riom, 10 June 1992, PTD Civ 343 (1993) came to the much criticised conclusion that an action for missed opportunity was possible. There is no case-law from the Cour de Cassation. 176 Ghestin, La Formation du Contrat (1993) n 330. 177 See EA Farnsworth, ‘Precontractual Liability and Preliminary Agreements: Fair Dealings and Failed Negotiations’ (1987) 87 Colum L Rev 217.

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The general attitude of rougher justice which may flow from the normative approach in the professional sphere, even against more fundamental principle and the more traditional rules of contract law, in the interest of (a) the flow of commerce or (b) the greater certainties in the division of risks and distribution of tasks if desired by the parties, may also be relevant for the status of letters of intent which are normally preludes to a contract. As intent or the lack of it is not the sole determining factor in establishing a legal relationship and detrimental reliance is in any event another fundamental principle, these letters may increasingly acquire some binding force between the parties if acted upon in good faith or even reasonably, which may imply some lesser burden of proof. In the professional sphere, however, there may be less need for this, as parties are left to their own devices to a greater extent and should not so quickly rely on others. One could also say that they know what a letter of intent is and should expect no more. Thus until there is a form of detrimental reliance justified in the circumstances, often resulting in a beginning of performance of which the other party knew, it may not be bound at all.

1.3.14 The Practical Effects of Good Faith or Normative Thinking: Force Majeure and Change of Circumstances in Professional Dealings The matter of excuses or relief against performance also needs to be considered from the good faith or normative point of view. Here we commonly see more specific statutory texts which may still be varied in their interpretation depending especially on the nature of the parties. In the 1980 Vienna Convention on the International Sale of Goods, the force majeure exemption in Article 79 is widely drawn, fairly subjective and therefore generous. It does not require serious consequences if relief were not granted. The language could even be used to excuse performance in the case of a change of circumstances regardless therefore of excessive burdens.178 Beyond this, there is no special facility for adjustment or renegotiation of the contractual terms. In Article 79, there is, on the other hand, a reference to the impediment not having been taken into

178 Alternatively, unforeseeability may lead to claims of mistake with its rescission remedies, which are likely to be quite different. This could be relevant especially in respect of past and present circumstances not considered discounted in the contract if the affected party did not know of them. Again, as discussed in s 1.3.11 above, mistake or even negligent misrepresentation in common law terms potentially leading to the avoidance of the contract should not quickly be assumed in the commercial sphere and neither should the emergence of an unforeseen gross imbalance. Professional parties carry and must cater for substantial risks, which they may attempt to reallocate between themselves at the time of the conclusion of the contract. It, however, assumes some foreseeability but the lack of it is not necessarily in the nature of voiding the contract, except.in extreme cases. That is what risk acceptance means amongst professionals.

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account at the time of the conclusion of the agreement. As has been said before, this could be seen as a reference to risk acceptance, which for the professional dealings that the Convention covers would seem key. The UNIDROIT and European Principles of Contract Law and the DCFR have very similar language for force majeure. Emphasis on the impediment having been taken into account is split out in Article II-3:104(2) DCFR and may therefore have more meaning. More important is that in all three sets there are special provisions for change of circumstances. The UNIDROIT Principles ties this relief to the equilibrium of the contract and does not require an excessive burden, again hard to explain for professional dealings for which these rules were written. The European Principles are here less generous even though also applicable to consumers, see Article 6.1.1.1 which requires an excessively onerous effect whilst there is also a reference to risk acceptance. The DCFR operates similarly, see its Article III-1:110, but uses abuse of rights language whilst tying the relief to an exceptional change of circumstances making performance so onerous that it would be manifestly unreasonable to require it.179 If in the case of a change of circumstances, a duty to renegotiate is to be assumed, the situation is probably not much different from one where parties may be required to continue to negotiate in a pre-contractual situation or to continue an agreement after its expiry if there is a clause to that effect without clear instructions. The true issue then is when such a duty comes to an end, in other words what could reasonably be expected to happen. It should be noted, however, that the DCFR in its postcontractual renegotiation language in Article III-1:110 does not track the precontractual language of Article II-3:301, which is cast in much more peremptory manner, as we saw. Again, in the professional sphere, such a duty to renegotiate or a duty to continue agreements beyond their termination date must not quickly be assumed. There must therefore be some form of serious hardship, however defined,180 whilst here again emphasis should be on the overall effect on the finances of the professional debtor, see the discussion in the context of modern contract theory in section 1.1.4 above Some misery under one contract of which there may be thousands is no excuse.

179

It is curious in that it introduced new language whilst requiring the obligation to be recast to make it ‘reasonable and equitable’, which is undefined. One would have expected here ‘good faith and fair dealing’ language. The European Principles referred to ‘just and equitable’. In the DCFR there is only good faith language (without fair dealing) in requiring (only the debtor) to seek relief through renegotiations. 180 Factors likely to be taken into account to determine whether serous hardship exists, so that there is some duty for the other party to renegotiate or a right to terminate, are likely to be: (a) the relationship between the parties in terms of their professionalism, with a lesser need for protection against outside risks in transactions between professionals; (b) their special interests and reasonable expectations, naturally taking into account any risk acceptance or the division of risks agreed between them, but also the frequency of their transactions, the incidents that have arisen in them like for example poor performance generally or lack of co-operation, of credibility, and of creditworthiness so that here may be a cumulative effect; and (c) the nature of the deal as outside risks are likely to have a different effect and lead to different types of hardship and adjustments, eg in loan or supply agreements.

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Other problems may emerge: for example, in the sale of goods, market movements in the required quality or style of merchandise notably in the fashion industry may make a serious difference. This may also lead to upgrading demands, which a supplier may not reasonably be able to meet. In other situations, a buyer may not have the capability to market more sophisticated replacement lines of production so that continuation of the contract makes little sense as demand for old fashioned products fades and older product lines must be discontinued by the supplier. These are considerations that could prove decisive and determine whether hardship exists and adjustment of a contract can still be reasonably required or whether, if discussions lead nowhere, continuation of the contract or termination must follow. These discussions need not be long for them still to be considered in good faith. In this connection it is also conceivable that the newly negotiated terms are not fully market-related as far as price and quality are concerned and there could still be a discount or a phase-out or phase-in for gradual adjustment. The issues of force majeure, hardship and renegotiation will be discussed more extensively in section 1.4.5 below. Here the more particular issue was that in the normative interpretation or good faith approaches, renegotiations may sometimes be demanded if a situation of hardship arises but that this is less likely between professionals. It also means that renegotiations may sooner be discontinued and enforcement of the existing agreement demanded. Again, this can be explained as the limiting role of good faith in terms of relief in the professional sphere and then becomes another example of relationship thinking.181

1.4 Performance of the Contract, Defences, Default, and Excuses, Termination 1.4.1

Performance in Kind/Specific Performance

A contract is made with a view to enforcement of its terms. When one of the parties is not performing, the question arises what must or can be done. Court action is the natural answer in all modern societies but what may or could courts be asked to do? Even if the plaintiff ’s claim is accepted, what should the relief granted be and how could the judgment be enforced? It is simplest in money judgments: normally there

181 It may be recalled in this connection that under German case law, notions of good faith (or Treu und Glauben) were applied to rebalance the contract in the case of a change of circumstances that was so severe that it led to a collapse of the basis of the agreement (Wegfall der Geschäftsgrundlage). The concept dates from the extreme situation obtaining in Germany after WWI but the relief is now codified in s 313 BGB. Also in the Netherlands, this is now statutory law, see Art 6.258 CC. Neither reflects relationship thinking expressly (although in the German text there is a reference to risk acceptance) and may therefore represent a step back from the good faith or normative approach.

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will be a possibility of attaching the defendant’s goods and obtaining a sales order or execution sale allowing the successful plaintiff to set off his monetary claim against the proceeds of this sale. Such a money judgment is the obvious answer when the claim is for payment of goods or services delivered. However, if the claim is for the delivery of the goods or services itself, there may not be a request for a money judgment (covering damages), but rather a demand for performance. This is referred to as specific performance in common law. When is there a right to it and how is it to be enforced against the defendant? Of course, it should be noted that in this sense, money judgments always allow performance in kind in whatever legal system. In civil law, that is also mostly the case with proprietary claims. In common law, it is equally possible to claim specific assets on the basis of ownership but this facility strictly speaking only applies in land law, notably pursuant to a contract for the purchase of real estate. A variation is the foreclosure of a mortgage. In the law of chattels, the right to reclaim is, in common law, much more incidental and often limited to situations (a) where assets are obtained by fraud (in a common law sense), (b) where there is a specific right of immediate repossession (eg, on the termination of a user’s right or finance lease), (c) in the case of conditional ownership rights leading to a right to reclaim the asset upon the maturing of the condition, or (d) in the case of a so-called repossession of secured assets upon a default under (non-possessory) secured lending, sometimes (like under Art 9 UCC in the USA) backed up by statute, see more particularly chapter 2, sections 1.2.4 and 1.3.4 below. However, in common law, the term ‘specific performance’ is mostly used in connection with performance in kind of other obligations, notably contractual obligations to give or to do. Common law and civil law especially differ on the right to performance in kind or specific performance of these obligations. In common law, it has remained in principle exceptional; in civil law it is in principle the norm. In civil law, the facility of specific performance developed gradually. Pothier182 allowed specific performance very clearly, yet the French Code Civil is generally silent on the possibility and its implementation notwithstanding the text of Article 1142 CC (as against Arts 1184(2) and 1610 CC). French legal practice has always been in favour of it.183 In the Netherlands, the Civil Code of 1838, largely based on the French Civil Code which had been in force in the Netherlands until that time, abandoned the idea of specific performance against its own Roman-Dutch roots and Germanic principle, although in line with the older Roman law. The facility of specific performance was, however, reintroduced in the Netherlands by statute in 1932.184 When a judicial order for performance in kind is used, penalties of some sort are the only possibility of making it work. They may be physical, like imprisonment and appropriation of an asset through a bailiff, or monetary in the sense of fines enforced 182

Traité des Obligations, No 156. See earlier, especially Demogue, 6 Traité des obligations en général (1932) No 139. 184 See for the history also HFWD Fisher, De Geschiedenis van de Reele Executie bij Koop [History of Specific Performance in Sales] (Haarlem, 1934). 183

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like money judgments. These fines may be of an administrative nature and then accrue to the state, or they may accrue to the successful plaintiff as an extra form of compensation. Treble or punitive or exemplary damages for the plaintiff are sometimes possible in the USA but not in pure contract cases. Rather they are connected with contracts in restraint of trade or with malice in tort. More likely in common law is the remedy of contempt of court, under which courts will only subsequently set administrative fines or may even order imprisonment for an unwilling judgment debtor. The superior courts have here broad discretion as the request is in equity. In France, courts have developed the astreinte, which allows them to impose a monetary penalty on unwilling defendants. It leaves them wide discretion as to the circumstances in which this sanction will be imposed and as to the appropriate amount. The money will accrue to the plaintiff. That is also the situation in the Netherlands. In Germany, on the other hand, the penalty so imposed will be administrative and collected by the state. Specific performance is often a messy remedy and courts are not everywhere keen to get deeply involved. It is the reason why the possibility of obtaining a court order for performance in kind remains exceptional in common law countries. As just mentioned, it is only possible in equity and restrictively granted, particularly in England, and then mainly in situations where there is no reasonable alternative. Mostly there is, and granting monetary damages can often adequately deal with the situation. In any event, in practice, parties often prefer it to forcing an unwilling counterparty still to perform. Thus a monetary judgment for damages normally follows a default with its much easier execution possibilities. Because of the difficulties involved in executing performance orders, even in civil law, performance in kind, although the rule, is in practice also fairly exceptional and indeed normally equally restricted to situations where it is the best and most efficient answer. Thus, when a sales contract is for the delivery of some commodity at a certain price, the purchaser under the contract will often be happy to be released from his contract whilst claiming damages for the delay by the non-performing seller and for any higher price he may have to pay elsewhere. For him, it will normally be the cleanest and most efficient solution. Often he will already have purchased the goods elsewhere anyway because of the needs of his production facilities or to cover his trading commitments. On the other hand, if he wants a unique object, for example a manufacturing tool, his remedy will be performance in kind and if the defendant upon judgment still does not perform, a (stiff) penalty may be the answer Equally, in the case of services, if they are commonly provided and can easily be substituted albeit at a higher price, substitution is the answer and only damages for delay and higher costs will be claimed from the defaulter. If the service is more specific, for example the completion of an architectural design, performance in kind may be necessary. But if this service is highly personal or depends on other factors like good spirit or proper inspiration, as in the case of the services of a barman or portrait painter, there is a limit to what can be asked in kind and such a judgment may not work, whatever the penalty. Damages again appear the better remedy however unsatisfactory in the circumstances, although a stiff penalty may still regenerate the right spirit.

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It must also be realised that if the period of performance has lapsed, performance may no longer be valuable, and damages will again become more appropriate. In fact, depending on how long it may take to obtain a judgment for performance in kind, performance may have lost its urgency or significance and conversion of such a judgment into a monetary equivalent may then also be called for. If performance requires the help of others over whom the defendant has insufficient power, like subcontractors, again damages are the likely answer. If performance is no longer possible at all, because the portrait painter is dead, naturally there can only be a claim for monetary damages against his estate, which will probably claim force majeure. German law is clear in always allowing performance in kind (s 241(1) BGB). That confirms the civil law’s basic approach but in the elaboration in the German Code of Civil Procedure, it sets out a number of scenarios and indeed differentiates between a number of basic cases for claims other than monetary claims (ss 883 ff German CCP). Appropriation by a bailiff of a specific chattel owed under a judgement or execution title is dealt with in section 883 of the CCP. If an act or service owed by the unwilling defendant may be performed by a third party, this defendant will have to pay the cost for such a third party, see section 887 of the CCP. Sections 888 and 890 of the CCP allow for penalties if the defendant does not perform a specific act or service which cannot be performed by any third party or if he remains obstructive, whilst being ordered to refrain from doing something or to allow others to take some action. These penalties may be imprisonment or fines which, in Germany, go to the State. The result may also be the conversion of a judgment in kind into a monetary judgement. In France, the Code is older and the regime less precise. Moreover, there are contradictions. Article 1184(2) CC allows an order for performance in all bilateral contracts, but Article 1142 suggest that all contracts to do or not to do resolve upon default in damage claims apparently in order not to infringe anyone’s freedom of action so that only contracts to give appear capable of a performance order in kind. However, case law has much refined this system. In any event, under Articles 1143 and 1144 CC, the courts may give preliminary restraining orders or may order others to do the act on which the first party defaulted if the performance is sufficiently impersonal. The already mentioned astreinte backs up the system185 as a penalty developed in case law serving both as an inducement to comply and a reward for the patient but exasperated plaintiff. In common law, the combination of the contempt of court remedy and specific performance, both in equity, results in a system which in practice is not far away from the German one. Damages are the normal rule, but if harm to the plaintiff cannot be adequately expressed in monetary terms, specific performance may be the answer unless it is too inconvenient or does not hold out a realistic prospect of success,186 especially if it would require long judicial involvement. Traditionally, specific performance was thus reserved for situations where the performance was unique or for land contracts. As an equitable remedy there is always discretion, however, and it depends on the circumstances whether it will be granted with categories of cases developed 185 186

See in modern times, Cour de Cass Civ 20 Oct 1959 [1959] D 537. Ryan v Mutual Tontine Westminster Chambers Assocn [1983] 1 Ch 116.

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much in line with the more precise German categorisation. As already mentioned, the remedy can in particular not be used to enforce a personal work commitment. In the sale of goods, statutory law both in England and the USA allows more generally for specific performance in favour of the buyer, in England under section 52 of the Sale of Goods Act, provided the goods are specific and ascertained. As regards the seller’s right to recover the price or force the buyer to take delivery, the English Act provides in section 27 that the seller must deliver the goods and the buyer must accept and pay for them. Yet according to sections 51 and 52, the buyer’s normal remedies are limited to damages, although the court still has discretion to order specific performance. For the delivery of commodity goods, specific performance is normally not granted. In the USA, in sales, specific performance is liberally allowed, therefore no longer only when damages are inadequate but rather when there are no clear circumstances that dictate otherwise. For specific performance, Section 2–716(1) UCC requires the goods to be unique but also allows for ‘other proper circumstances’ in which specific performance may be obtained. It provides for the seizure of the goods by the sheriff. This remedy remains, however, in the common law (equity) tradition at the discretion of the judge, who may provide other relief as he or she may deem just. For the seller, recovery of the sale price will normally be allowed except where the seller never managed to deliver the goods, in which case he must minimise the damage and make a reasonable effort to sell the goods to others. Although common and civil law have greatly converged in the matter of performance remedies in kind, at the theoretical level, in civil law, the discretionary element is lacking whilst contempt proceedings proper do not exist and are replaced by forced executions (against a seller in a sale through the forced removal of the goods if in his possession) or by the setting of a penalty for each day of further delay. The Vienna Convention on the International Sale of Goods has a curious provision in this respect in Article 28. This refers back to the lex fori (see for the details section 2.3.4 below).

1.4.2

Lack of Consensus or Defences to Performance: Invalidity and Rescission

In common law writing of the American variety, the subject of defences against the enforcement of contracts is usually dealt with immediately after the formation of the contract. In this connection, the question of lack of formality, especially in terms of documentation (Statute of Frauds), lack of capacity, illegality, fraudulent or innocent misrepresentation, mistake, duress or undue influence, and unconscionability (in the USA) are usually mentioned. In civil law, fraud, duress or undue influence, misrepresentation (although here mostly not considered a special category) and mistake are on the other hand mostly connected with a lack of consensus and therefore result not only in some valid defence to a claim for performance but also in voidness or more likely in voidability of the contract at the option of the affected party as a natural consequence of the failure of

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consensus. Thus, in civil law, these are really formation questions rather than defences which are performance issues. In the civil law system, fraud and duress may invalidate all voluntary legal acts whilst mistake is more particularly a contractual issue. In common law, where the consensus notion is not at the heart of the contract, as we saw, there is no conceptual clarity in these matters and the courts (in equity) developed here a patchwork system of remedies centring on rescission. This is a technical term geared to defences against a demand for performance. Whatever the term may suggest, it does not necessarily mean the end of the contract, which, like most equitable relief, depends on the circumstances of the case. Thus in common law, the consequences of any of these defences are likely to be more complex and varied, although in principle all of them discharge the party concerned from its contractual duties. Specific performance, in any event never a right, is not then granted. The contract itself may have come to an end but the different situations in which this may happen and the manner in which it does, as well as the consequences, must traditionally be much more clearly distinguished than in civil law. In common law, illegality and invalidity are often interchangeable notions. In civil law they are distinguished; the invalidity is normally connected with the lack of consensus and goes to the heart of the existence of the contract and illegality with a statutory prohibition or public order constraint. In common law, illegality or invalidity usually result from moral or public order consideration and do not refer to a legal (statutory) prohibition. They result in defences against a demand for performance. In civil law, the notion of an improper causa (where still existing, see s 1.2.6 above) may be used to avoid these illicit contracts. In common law, illegality or invalidity may also result from other impediments such as anti-competitive clauses. There is another particular common law aspect not found in civil law in the same manner. Common law adheres in the case of illegality or invalidity to the old rule ex dolo malo or ex turpi causa non oritur actio, meaning that no one can derive an action pursuant to his own misbehaviour. Under an illegal or invalid contract in the common law sense, it is therefore in principle impossible for the offending party to reclaim anything done or given under the challenged contract. In particular, money advanced to achieve illegal ends or to finance crime will not be returned on the basis of the contract’s invalidity, although even then proprietary rights might still be reclaimed between the parties if they had abandoned their illegal objective. If the invalidity is based on less urgent social or policy considerations, the rule may also be relaxed. In any event, if only one party benefits, for example in a contract that was unduly restrictive of trade, the party suffering the disadvantage may be able to reclaim its outlay from the other. In civil law, any reclaiming rights in these situations may be handled under the concept of unjust enrichment or restitution, compare in Germany section 817 BGB and in the Netherlands (the more flexible) Article 6.211 CC (referring to reasonableness), and not, as in common law, as a matter of contract law. As regards misrepresentation, in common law it can be fraudulent, innocent or (in England) negligent. The situation is here also quite different from the one in civil law where indeed it goes to the heart of the consensus. First, ‘representation’ in this sense

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assumes, in common law, that certain declarations were made which are not technically part of the contract but on which there has been reliance at the time of formation. The difference is that where contractual terms are agreed, for example about quality and its specifications, any subsequent shortcoming would give rise to a breach of contract or default. The remedy for misrepresentation (unless fraudulent) is rather ‘rescission’ of the contract. To repeat: this is a technical term developed in equity and is a defence against a demand for performance. In proper cases, it may imply avoidance of the contract at the option of the harmed party and then leads in sales to voidable title. If this defence is invoked, the consequences must be further considered, however, and it cannot simply be assumed that the contract is at an end, for example a watch is being sold according to the contract. It says nothing about the type. The seller said, however, that it was a Cartier watch. He genuinely believed so. Subsequently, after the sale, it transpires that it was a fake Cartier watch, of which there are many. There is no breach of contract proper; the contract said nothing, but there was probably reliance. If so, rescission may be in order and the judge will decide in the light of the circumstances what the proper remedy is, which could be a price reduction or damages. It should be clear, however, that much of innocent misrepresentation is in the realm of sales talk and should be recognised as such so that no remedial action may be justified. It was pointed out above in section 1.3.11 that this goes especially for professional buyers and proper relationship thinking would produce that result. If misrepresentation is fraudulent, however, the matter is more serious and there may also be a tort (deceit) for which there must have been intent. If there was none, there may still be innocent misrepresentation. In England negligent misrepresentation holds some middle ground (since the Misrepresentation Act 1976) in that it puts the burden of innocent misrepresentation on the person having made the (mis)representation. Until such time, in prima facie cases, intention to deceive is assumed. In common law, in all cases, the point of departure is the position of the person who makes a representation, not of the victim, unlike in civil law where this is mostly only so in the case of clear fraud. As already mentioned, the differences are mainly in the consequences. Especially in the case of innocent misrepresentation, the possibility of rescission leading to a setting aside of the contract is limited. Even in the case of fraudulent misrepresentation, it is not automatically available and still depends on the circumstances, and a judicial order restoring the old situation will only be given if that is still possible. In typical equity fashion, the factual situation is therefore decisive for the type and meaning of the remedy. If the delivered asset is consumed or a service already rendered on the basis of false premises, the rescission order will not be given. Damages may then be the only available alternative, again only as an equitable indemnity. In equity, there is in any event always a measure of judicial discretion and no absolute right of the harmed party. Most importantly, movable property will not be restored to the damaged party if a bona fide third party buys from a person with voidable title. This party is protected; see section 23 of the Sale of Goods Act in the UK and section 2–403 of the UCC in the USA.

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In civil law, on the other hand, rescission is at the option of the harmed party and then likely to be fully effective, even in a proprietary sense. Thus property should return in principle if the damaged party so wants, still subject, however, to the protection of bona fide purchasers of chattels but not of other assets, assuming that these purchasers acquired physical possession. In abstract systems of title transfer, like the German one (see ch 2, s 1.5.7 below), an automatic return of the assets is likely, however, only in the case of fraud. In other legal systems, the return possibility upon a failed sales agreement is also becoming less favoured, especially in the case of commoditised products, an issue that will be discussed in greater detail in section 2.1.10 below in connection with the notion of finality. In common law it is exceptional and given as a matter of right only in the case of pure fraud when an automatic return of the assets may be ordered through a specific performance remedy assuming the asset still exists, see also chapter 2, section 1.4.6 below. As just mentioned, in common law the possibility of rescission is limited further if the misrepresentation is innocent, a situation in civil law usually referred to as ‘error’, which in civil law goes to the consensus and voidability of the contract. Again, in common law, the circumstances of the case are decisive as to the consequences. The court will, however, always bar a request for specific performance of the contract and may always grant an equitable indemnity by way of damages if the effects of the contract cannot be undone. The English term ‘mistake’ should in principle be clearly distinguished from innocent misrepresentation (or error in civil law), although there are borderline cases. Mistake is a narrow concept and concerns here some defect in the declarations of one of the parties at the time of the offer and acceptance rather than the making (fraudulently or innocently) of a misleading representation. The difference is subtle but important. A mistake in a declaration may follow when it is not properly understood, for example if a service is offered at a certain price, but VAT is not mentioned. Was it intended to be included or excluded? Especially in oral contracts, a mistake in this sense is easily made: for example both parties talk about ‘60’, but one party means $60 per unit, while the other meant ‘60k’ in the same currency for the whole lot and a misunderstanding may result which is nobody’s fault. This is mistake in common law. If, on the other hand, a statement is made that a gold watch is offered that proves to be only imitation gold, then there is misrepresentation which may be fraudulent, negligent or innocent as discussed above. The key in mistake is that upon an objective reading of the situation the parties are not in agreement. It should, upon an objective evaluation of the facts, be clear that parties were talking about different things (whatever their intent which, in the traditional common law view is not material in matters of formation of contract as we saw). For mistake in a common law sense proper, civil law seems not to have its own term. It is usually distinguished from error or seen as only a special instance of it. Whilst in civil law misrepresentation or fraud and error normally lead to forms of voidability at the affected party’s request, in common law, mistake leads in principle to a void contract at law and any property transferred reverts. The risk of appreciation or depreciation is in the meantime with the seller. Even if the contract still stands at law,

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equity may all the same give a rescission remedy depending on the circumstances and may in any event refuse specific performance of the contract. Certain forms of mistake are considered less fundamental, however, and lead only to voidability. It is often difficult to draw precise lines. Unilateral mistake, a mistake not involving the other party, will seldom give rise to a rescission of the contract; it may be the mistaken party’s own fault. He thought that he was offering a gold-plated watch, but in the event it was pure gold.187 American law is often simpler here than English law. So is civil law as it readily accepts lack of consensus as excuse in the case of fraud or error (fraudulent or innocent misrepresentation), and will ask which party should reasonably bear the risk in the case of a mistake. Civil law looks at consensus and the will of the parties and its defects. Common law needs the special category of defences to create protection against a claim for performance. In modern civil law, the normative interpretation technique may still find a valid contract, however, if the mistake was not attributable to the other party. As already suggested in section 1.3.11 above, professionals in particular may not have here much of a defence. In other words, their mistakes should normally be their own problem. In any event, the fact that mere expectations were disappointed is not enough. Caveat emptor is the basic rule in sales. On the other hand, if parties have been clearly talking about different things, there may not be a contract. A mistake in this sense could be tantamount to a rejection of an offer and would result in voidness of the contract or rather in no contract at all. Some forms of mistake (those as to the subject matter) may in civil law lead to the contract not having a proper object with avoidance on that basis, like in the case of a reference to the ship ‘Peerless’ of which there were two at the time, with the one party meaning the one and the other party the other.188 Also in other respects, different characterisations may lead to different results: there is mistake and voidness in common law if there is a misunderstanding about the contracting counterparty; in civil law this is error, leading only to voidability. In common law, mistake may also concern the possibility of performing the contract, which may be left to impossibility or force majeure in civil law. Yet a contract that may be objectively incapable of being performed from the beginning may also be absolutely void in civil law, or only be considered valid as the basis for claims for damages, compare section 311a BGB in Germany. This does not, however, obtain in cases where an estimate of cost is given which is subsequently overrun. The impossibility to perform for the agreed price does not discharge the debtor, even if it was foreseeable from the beginning and the creditor must have known about it. Duress and undue influence may provide further defences in common law. In a common law sense, duress is often thought of as physical. Civil law sees duress chiefly as psychological coercion or economic pressure preventing the conclusion of a valid 187

Solle v Butcher [1950] 1 KB 671, 693. Raffles v Wichelhaus (1864) 2 HC 906. See for a discussion of mistake under common law also HG Beale, Chitty on Contracts (London, 1999) 5.001 in England, and Restatement (Second) of Contracts (1979), s 379 in the USA. 188

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agreement for lack of consensus. In common law (equity), this is primarily covered by economic duress189 or undue influence, which is not limited to abuse of a position of trust or of circumstances as it often is in civil law. Whether there was unacceptable pressure exerted in the circumstances or resulting from the circumstances depends on the facts. Avoidance is the normal remedy in common law (equity), supplemented by the rescission possibility in appropriate cases. In modern civil law, avoidance is also the rule rather than voidness; see Article 1117 CC in France, Article 3.44 CC in the Netherlands and section 123(1) BGB in Germany. The Vienna Convention on the International Law of Sales excludes matters of validity in this sense from its scope (Art 4). That covers, in the context of that Convention, all matters relating to consensus and its failures. Therefore the impact of illegality, misrepresentation, mistake and duress or undue influence is not covered by the International Sales Convention. They receive on the other hand broad attention in the UNIDROIT Contract Principles, EPCL and DCFR as we shall see in section 1.6.8 below. They follow substantial civil law thinking in this area.

1.4.3 Excuses and the Meaning of Promises, Conditions and Warranties in Connection with Performance in Common Law. Conditions, Representations/ Warranties and Covenants in Financial Contracts In common law, the contract is, as we saw, in essence based on an exchange of (formal) promises in the consideration context. They must be sufficiently congruous to lead to a contract in which context declarations are of prime significance. The mutual undertakings of the parties form the terms of the contract (at least if it is bilateral). The essential terms are in England called conditions, the non-essential ones warranties. The idea behind conditions is that their non-performance automatically discharges or excuses the other party (eg, from payment) who may, however, still have a claim for damages. In respect of conditions, in common law, force majeure (unless a contractual term also) cannot normally be pleaded by the first party against a condition, certainly not to force the other party to perform. Warranties are different and non-compliance with them does not excuse the other party. The distinction between conditions and warranties is thus important, but whether a promise is a condition remains a matter of interpretation. Performance of the major contractual terms by the first party is in this manner in common law always a constructive or implied condition of performance by the other and concerns notably payment. Americans do not distinguish between conditions and 189 See Mocatta J in Northern Ocean Shipping Co Ltd v Hyundai Construction Co Ltd [1978] 3 All ER 1170. In the USA, the concept is much more readily used than in England, see also Comment to s 176 of the Restatement (Second) of Contracts (1979); see also Centric v Morrison-Knudsen Co 731 P 2d 411 (1986). In the USA there is a preference for expanding the duress notion at the expense of the notion of undue influence. Economic duress should be distinguished from unconscionability which lies in the performance of the contract, not in its formation.

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warranties but look here at conditionality of the contract or at what may condition the contract. So the difference is more one of expression. Indeed, in the American sense, failure of a basic term or promise also discharges the other party. In the USA, contractual conditions may in this sense be precedent, concurrent or subsequent. They can be express or constructive. The effect of promises, which are duties to give, to do or not to do, may thus be varied by the implied conditions attached to them. They may excuse or condition their performance. Again, whether there is a failure of condition in this sense is a matter of interpretation. Thus payment is conditional on the other party’s performance, which, in this reasoning, is a condition precedent to the payment debtor’s own performance, but it is also a matter of construction which terms are conditions precedent in this sense. An interesting example may be in the delivery of a certain quantity of goods before a certain date. Is the time element a mere promise to the buyer or did it condition the contract? If it is the former, the promisor may be discharged if he cannot deliver by the appointed date. He operated on a best effort basis only as to the date of delivery but must still deliver as soon as possible whilst the other party must still pay upon the later delivery, although not now. Normally, however, failure of the promisor to deliver leads to late delivery, especially in the case of perishable goods, and to a situation of breach of an essential contract term for which there is no excuse. In that case, the other party is excused from payment, as the main term of the contract is not timely performed. While in common law, all substantial terms are or give rise to conditions, in civil law, this translates rather into a guarantee of performance. In that case, also in civil law, there is an absence of the force majeure defence leading to the repudiation of the contract and to a discharge of the other party upon breach, whatever the reason. Payment obligations are always in that category. It means that in a common law sense, all terms in a civil law contract are warranties and not conditions unless especially reinforced by a guarantee.190 It follows that in civil law breaches are normally sanctioned only when the promisor can be blamed for non-performance.191 A situation of force majeure (or possibly of changed circumstances) is therefore usually sufficient excuse in all cases and lifts the possibility of sanctions.192

190 In civil law, default if considered sufficiently serious is, however, often also construed as a rescinding condition of the contract at the same time, cf Art 1184 of the French CC and Cour de Cass 24 January 1939, Gaz Pal 1.5866, also referred to as the lex commissoria, but the traditional common law of contract makes more of it and there is here a difference in emphasis. 191 A more objective or subjective view of force majeure may be noted here. In the objective or absolute view, force majeure equates with personal impossibility and it is then irrelevant whether a performance becomes more difficult or disadvantageous than originally thought. Only absolutely unforeseeable impossibility to perform would discharge the debtor and not even always, especially not if there was a personal reason or an alternative. In the more subjective approach, on the other hand, the debtor need only foresee or do what may reasonably be expected of him in the circumstances. It could then even excuse non-payment (of a temporary nature, but not upon a debtor’s insolvency), illness of the party that must perform, or non-performance for other personal reasons. That would appear to be the chosen approach in civil law and is as we shall see also the approach of the Vienna Convention (Art 79) although it does

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In common law, on the other hand, all main terms are guaranteed in a civil law sense unless weakened by a force majeure clause which needs in that case to be specially included in the contract. It shows that both systems come from opposite directions. The reason probably is that the common law of contract was always more geared to professional dealings where there is less room for excuses and blame therefore less of a consideration. It asks itself more readily why the other party should be stuck with the detrimental effects. Somebody has to bear the consequences, never mind the blame,193 and it is at least amongst professionals more logical that it is the party who cannot perform for whatever reason. In other words, it is not natural that the counterparty who is also not to blame should be detrimentally affected. It is true that, if in civil law the promisor is not to blame for his non-performance, the other party will not need to pay either, but he defends with an exception (not therefore an excuse in the common law sense) against any claim to perform on his part, notably payment, whilst there is no need to ask for avoidance of the contract proper. If the other party suffers harm, there may also still be a need for the defaulting party to contribute, which is more likely when the force majeure was due to personal or internal rather than external factors. Again, only when the party that must deliver has given special undertakings, such as a guarantee of quality or of conform delivery in sales, is the situation similar to that in common law. In the law of the sale of goods, there is usually a special provision to cover the risk of faulty or late delivery for no fault of any of the parties. That is the concept of transfer or passing of risk embodied also in Articles 66 ff of the Vienna Convention, see more contain a reference to risk acceptance which at least in professional dealings could put the excuse on a more objective footing, but nothing is here very clear. 192 Thus, if he debtor is to be blamed more, he is liable for damages whilst the creditor may terminate the contract (ss 280 and 323 BGB). If it was the creditor himself, for example for lack of co-operation, he bears the burden and may still have to perform. In such a case, the debtor may also consider himself liberated (at least if not claiming performance)) whilst still being able to claim avoidance of the contract and damages (ss 275, 323(6) and (2) BGB). If neither party is to blame, both are free in principle (ss 275 and 326(1) BGB) and both suffer any loss on the deal and their expenses. That may be so, eg, in the case of mutual mistake. It is so also when one of the parties is in a recognised force majeure situation and cannot perform for that reason, unless the risk was apportioned otherwise, but it may still leave some room for more objective risk allocation in which the party in force majeure may have to share, especially if he invokes personal (and not external) reasons, eg illness. Although it is true that liability in civil law must be seen foremost in the context of who is to blame, there still remains therefore the risk allocation question, that is to say the question who bears the burden (if there is any), even if neither party is at fault. This is an issue that cannot be ignored. 193 Indeed, the defences and excuses, the latter even if valid like in the case of force majeure, still leave open the question of the burden or consequences for the parties of the endangered or aborted deal. When the contract ends or may be ended by one of the parties, there may thus still be cause for damages, clear especially in the case of fraud and misrepresentation. Also where the counterparty may be excused his own performance because the first party is not performing an essential part of the contract, there may still be room on his part for a claim for expenses and the loss of the deal. However, if the performance was conditioned by an external factor like in a sale by the timely supply of the goods to the seller, there may be no cause for a damage claim by either party; the benefits of the deal are foregone by both and there may be no claim unless the buyer was forced to buy replacement goods at a higher price. The same may be the case if delivery is rendered impossible by outside events like acts of nature (or god). The chips then fall where they fall, also in common law.

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particularly section 2.1.9 below. It means that the seller who has not (physically) delivered remains liable for all that happens to the asset even if he could not help it (eg the deterioration of perishable goods). In countries like England it is in principle the buyer (caveat emptor). It is a special arrangement for the sale of goods, not common in any other type of contracts, but such contracts pose no less the question as to who bears the risk if a contract cannot be performed for no one’s fault. This remains therefore always an important issue even when there are valid excuses: who picks up the bill? The Vienna Convention in Article 25 here uses the notion of fundamental breach. It is defined as any breach that results in such detriment as substantially to deprive a party of what it was entitled to expect under the contract, unless the party in breach did not foresee and a reasonable person of the same kind in the same circumstances would not have foreseen such a result.194 But it does not strictly speaking entail a conditionality in the above sense, see also Articles 45 ff and 60 ff. A more precise set of remedies is here defined which may ultimately result in avoidance of the contract by the aggrieved party (Arts 49 and 64), who would then also be discharged (but may still have a claim for damages) (Arts (45(2) and 61(2)). That is more like the old common law approach, as we shall see. The UNIDROIT and European Contract Principles and the DCFR follow this approach, see section 1.6.8 below, but in the matter of excuses they largely accept civil law thinking, see section 1.3.14 above. In this connection, it may also be useful briefly to discuss the relationship between conditions precedent, representations and warranties, and covenants, particularly common in financial documentation governed by English or American (state) law. It concerns here a different terminology. Conditions precedent in this context normally require that certain documents are produced by a prospective borrower, like incorporation documents, board resolutions approving the deal, the consent of the competent authorities, legal opinions on the validity of the contract, etc. Other conditions may be that, on the closing date there is no evidence of default and that the representation and warranties made are all correct. In banking facilities, the impact of these conditions as essential terms has not always been clear: do they inhibit the contract or the drawing down of any loan facility thereunder? Mostly the contract is held valid, so that at least the fees payable under it can be claimed. Representations and warranties in this context concern the creditworthiness of the prospective borrower. There may here be some overlap with conditions precedent, as we saw in the case of default, whilst the representations and warranties themselves may be declared conditions precedent. Examples might be the truthfulness of financial 194 The concept of fundamental breach was earlier used in a different context in England: exoneration or exemption clauses, especially in respect of contractual liability towards consumers, were not considered effective if there was a fundamental breach by the party seeking to discharge itself through such clauses. Scepticism of the House of Lords in Suisse Atlantique v NV Rotterdamse Kolen Centrale [1967] 1 AC 361 required intervention of the legislator to protect notably consumers against standard terms and led to the Supply of Goods (Implied Terms) Act 1973 and later to the Unfair Contract Terms Act 1977.

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statements, absence of major events affecting the borrower’s credit, like major lawsuits or other contingent liabilities, or the absence of any material default up to and including the closing date. Parent and subsidiary companies may be included. Representations and warranties are in finance concerned with the past; covenants with the future. Under them, prospective borrowers promise to refrain from certain actions, maintain certain financial ratios, official consents, and provide financial or other information on a regular basis. They may not be able to take on other debt (the pari passu or negative pledge clause), nor dispose of certain assets or engage in a merger. Breach of any of the representations and warranties or covenants will allow the lender to refuse any (further) draw down and to call any outstanding loan principle plus accrued interest immediately (at its option). This is acceleration. Any further loan commitment may then equally be withdrawn. The default clause will usually spell this out in detail.

1.4.4 Default or Breach and Damages In section 1.4.1 above, the question of performance was black or white. Either one does or one does not perform, and in the latter case, unless there is a defence, the question of a performance order in kind or payment of damages presents itself where substantial differences between the common and civil law emerge in theory, although less in practice, as we saw. In section 1.4.2 above, a number of common defences were identified in this connection, which could protect against a claim for performance, like invalidity or illegality, misrepresentation and mistake. They concern the nature and binding force of the contract and suggest that there is something wrong with it. There are here also substantial differences in the details of common and civil law as we also saw. In section 1.4.3 above, the conditions of performance were discussed and excuses. As we saw in the previous section, under common law, in bilateral contracts, not meeting the basic terms may excuse the promisee and even allow him to terminate the contract and still claim damages. In common law, traditionally force majeure is not an excuse for non-performance of a contractual condition unless specifically entered into the contract. The other party is discharged from its performance duty and may still claim damages depending on the circumstances, as we saw. Thus even if the contract comes to an end in such circumstances, the question still remains who bears the risk and that will normally be the promissory, even if he was in a force majeure situation (unless the contract specifically provides otherwise). Civil law that asks first who is most to blame may here be more reluctant although it cannot avoid the question of risk either and will still allocate it to the promisor even if claiming force majeure especially if it results from internal factors, like illness or other personal circumstances. Breach as a term of art concerns itself with the determination of damages or termination or avoidance of the agreement (or both) if there were no defences or

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excuses, and with any performance in kind or specific performance which may be accompanied by penalties ordered by the courts, although in common law, breach in a technical sense, is not only concerned with indefensible or inexcusable partperformance or non-performance or with defective performance, but also covers impossibility, impracticability, frustration or force majeure and changed circumstances as excuses and their consequences. That is different in civil law. In Germany, the BGB originally considered in this connection only the situation of: (a) any late performance, in which case a specific time limit (Nachfrist) had to be set by the creditor for performance (if not considered implied) before default could give rise to breach proper and a claim for damages or termination of the agreement; or (b) impossibility to perform. Case law, however, recognised the limitations in this approach and accepted certain implied guarantees allowing for an immediate claim for breach. It was also available as an excuse if the innocent party could not reasonably be expected to continue performance itself. German law has now adopted a more universal notion of breach of contract (s 280 (new) BGB). Primarily, it covers total or partial failure to perform and late performance. In the context of typified contracts, such as a sale, the breach of specific duties may give rights to avoidance and/or a claim for damages. But also the breach of quasi-contractual duties in the pre-contractual stage, as well as the amendment of the contractual terms in extremely changed circumstances, are now covered in the BGB and may also result in damages. This is in essence also the French system for bilateral contracts (Art 1184 CC), where, however, court action is always necessary to set the contract aside. That used to be the situation in the Netherlands also, but is no longer so under its new Code. On the matter of guarantees or conditions, modern civil law converges with common law as already explained above in the previous section. In any event, German law and that of France and the common law all allow for the combination of repudiation or rescission and damages. The nature of the contract and its aims also have an impact on the remedies for breach. Even within one contract type, the set of remedies can be very different and detailed. That was traditionally so for the sale of goods under common law. The Hague Sales Conventions of 1964, which preceded the Vienna Sales Convention of 1980, showed this. In the USA, the UCC for the sale of goods simplified the structure of remedies considerably. Yet there remain the distinctions between the remedies of the buyer and the seller, although either may first ask for assurances, which, if not adequate, may give the party concerned a right to repudiate within 30 days. In the UCC, in sales, remedies are clearly subdivided, especially for the buyer, who may in the case of non-conformity with the quality requirements reject and send the goods back after notice with reasons, in which connection the seller may send specific instructions on how the goods are to be returned. The buyer may also retain the goods but claim damages for non-conformity. After the goods are accepted, under the UCC they may still be returned or damages claimed in respect of them by a revocation of the acceptance of the goods if defects that were difficult to discover emerge and/or a seller’s promised repairs are not timely executed. A buyer may also organise cover and thus replace the goods with others and

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claim his extra cost after a reasonable delay. If there is no cover, the buyer may claim the difference between the agreed price and the market price at the time he learnt of the breach. If the goods are unique, specific performance is possible. Reasonably foreseeable consequential damages and the incidental damages attached to enforcement of the contract may be claimed subject to appropriate mitigation. The seller under a failed agreement for the sale of goods may under the UCC stop manufacturing and shipment, retake or replevy the goods as a proprietary remedy (but only if the buyer becomes bankrupt within ten days of delivery), resell the goods if not yet delivered upon notice to the buyer, who will be liable for any difference in price if lower; alternatively he may claim the difference between the contract and the market price at the time and place of delivery if lower. If there is a loss of volume, although the price is the same, there may still be a claim for loss of profit. Specific performance will be granted to the seller only if the goods cannot readily be resold to anyone else, especially relevant if they were uniquely made for the buyer. The Vienna Convention also has an elaborate system of remedies, although much simplified from those of the Hague Conventions. It deals with performance and default only in its in personam consequences, that is to say, it deals neither with the transfer of title nor its return upon default. The remedies under the Convention are basically specific performance if the lex fori allows it, as we already saw, or avoidance of the contract, but only if the breach is fundamental, with the possibility always of claiming damages depending on the circumstances. Fundamental breach is a concept that is not entirely objective. It is a situation often hard to establish, reason for much criticism. It is a key notion, however as short of it the remedies are much weaker. Technically speaking, the Vienna Convention, like the UCC, abandons the English notion of (express or constructive) ‘conditions’, traditionally distinguished from warranties as a matter of interpretation. Fundamental breach allows for the possibility of avoiding or rescinding the contract, see Articles 49 and 64. As just mentioned, fundamental breach is, however, only loosely defined (Arts 25 and 26) and remains, like negligence elsewhere, a matter of determination per case in view of all the circumstances.195 See for details of the system of remedies under the Convention, section 2.3.4 below. See for the approach of the UNIDROIT and European Contract Principles and DCFR, section 1.6.8 below.

1.4.5 Force Majeure and Change of Circumstances The subject of excuses like force majeure and change of circumstances has already been briefly introduced in section 1.3.14 in the context of the normative interpretation of contracts and the renegotiation duties it may imply or impose—less likely, it was

195

See, for the concept of fundamental breach in England, n 194 above.

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suggested there, in professional dealings as a matter of relationship thinking. It was further discussed in the context of excuses under common law and the differences with civil law in section 1.4.3 above. This is a difficult subject. It concerns principally the definition and applicability of these excuses but also the consequences in terms of a temporary or permanent release of the party required to perform and the liability for the consequences even if no one is to blame. In other words, who bears the risk? In appropriate cases, it may even concern the adaptation of the contract or the reallocation of the risk, especially in the case of a significant change of circumstances imposing excessive burdens, often referred to as impracticability in the USA or frustration in England. This may go well beyond force majeure, but the terminology is not stable and there may also be references to change of circumstances, contractual imbalance, loss of the purpose of the agreement, or hardship, which then also need definition as well as their consequences, in which connection foreseeability may also remain an important issue. It was noted before that as regards the applicability of the concept of force majeure, it is the impossibility of performing due to internal or external circumstances, the latter also referred to as acts of nature or god. It may now include governmental action or actes du prince. Internal excuses remain more problematic. In any event in common law of the English variety, neither excuse the performance of contractual conditions which are considered the essential terms of the agreement, unless the contract itself says so (in a force majeure clause). It means that as a minimum the other party is excused from performing but in appropriate cases still has a claim for performance or damages. In civil law, the concept of force majeure operates much more broadly and particularly alleviates the imputation of blame which, as we saw, is at the heart of a claim for performance or damages (or both) in civil law, unless the contract introduces a guarantee of performance. In civil law, such guarantee of performance is now sometimes implied, especially for the performance of payment obligations and could also affect other fundamental terms of the contract, but this is a matter of interpretation and remains more exceptional. Upon a proper analysis, common law protects foremost the wording and objective of the contract in the way it is being expressed. The parol evidence rule is another expression of this, also the common law’s formal approach to contract formation in which intent and consensus play more modest roles. A more literal interpretation approach still follows, at least for professional dealings in England as we saw. It also follows that force majeure affecting a party’s ability to perform is here a narrower concept and not traditionally deemed implied as an excuse in the case of a condition or major obligation under the contract. This was earlier explained as a more satisfactory approach in professional dealings where the question of who bears the risk rather than the blame is often more prominent. It is true that through implied conditions, notions of reliance and co-operation, and through distinctions on the basis of the nature and experiences of the parties, greater flexibility is now also achieved in this area in common law, not unlike the flexibility now obtaining in many civil law countries under the broader notion of good faith.

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This may concern especially external circumstances that make performance impossible or very difficult, but still the situation is not the same as in modern civil law, not even in the US where the notion of good faith has acquired more substance, see section 1.3.7 above. Generally, common law remains less inclined to excuse performance on the basis of internal or personal circumstances, however much unforeseen or lets the defaulting party still carry the risk under the circumstances. In England, except for acts of god and later governmental intervention often through regulation (or actes du prince), it took longer for a force majeure concept to develop as an independent legal excuse beyond special contractual provisions and definitions, at least in the case of conditions,196 and the strict rule was watered down only by creating exceptions through implying terms of reasonableness, which are still subject to relationship thinking as we have seen, therefore likely to be less prevalent amongst professionals.197 Nevertheless, force majeure thus became to some extent a question of contractual interpretation and therefore of the parties’ implied intent not to demand performance under the circumstances, but references to the (implied) intent of the parties in this manner remain controversial and are limited.198 In the absence of a force majeure excuse, a theory of frustration developed in England for non-performing debtors. They may sometimes be discharged when there supervenes an (usually outside) event (beyond acts of god) for which the contract makes no sufficient provision. It must, however, so significantly change the nature (not merely the expense or onerousness) of the outstanding contractual rights and/or obligations from what the parties could reasonably have contemplated at the time of the execution of the contract, that it would be unjust to hold the disadvantaged party to the literal sense of the contractual stipulations in the new circumstances. In these situations, there is no adaptation facility and the contract is ended.199 In the common law tradition, even section 2–615 UCC in the USA continues to style the force majeure exception as an implied (here statutory) condition or basic assumption (of practicability) on which the contract was made and therefore as an excuse only in appropriate circumstances. Good faith compliance with governmental regulation may also lead to a valid excuse under the UCC. Again, being only excuses, neither result in an adjustment of the agreement without a particular clause to the effect in the agreement itself. 196 In England, the courts had rejected the notion of force majeure for all contractual conditions in Paradine v Jane (1647) 82 ER 897 in the absence of a contractual clause to that effect. This case also stressed the literal meaning of the terms (conditions) and disallowed any adverse testimony if the text of the contract was clear. This was the parol evidence rule: see s 1.2.4 above. It required the tenant of a house to make the agreed repairs, also of a house that had been ‘burnt by lightning or thrown down by enemies’, so that not even absolute impossibility or acts of god were considered a sufficient excuse (always short of a contractual force majeure clause). 197 See Taylor v Caldwell (1863) 3 B& S 826, LJ 32 QB 164. 198 See Lord Reid in Davis Contractors v Farnham [1956] 2 All ER 145 and for the role of intent in common law generally, s 1.2.4 above. 199 Except where there is a contractual clause or statutory law to that effect. It was not the perspective of the 1943 Law Reform (Frustrated Contracts) Act either, which envisaged a discharge and only reallocated the risk in respect of payments already made or benefits already obtained which may have to be returned (unless there is a contractual clause dealing with the matter).

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In France also, force majeure still primarily concerns the old acts of god or casus fortuitus or vis extraria, as explicitly referred to in Articles 1147 and 1148 of the French CC, including also governmental interference (fait du prince). Thus in France, the excuse of force majeure still requires an unforeseeable and irresistible event totally unconnected with the party that must perform, therefore absolute impossibility. This is the objective approach, in France now mostly thought too severe, however, and restricted to so-called result contracts. These are contracts where a certain result is the objective, like sales agreements for the timely delivery of conform goods, contracts of affreightment, rental agreements and building contracts. Clearly in modern terms there is here some guarantee deemed implied which makes a stricter approach to force majeure better understandable. The Vienna Convention on the International Sale of Goods did not follow the system of implied guarantees or contractual conditions in the English sense. Article 79 states directly that a party is not liable for a failure to perform any of its obligations if it can prove that the failure was due to an impediment beyond its control, provided that it could not reasonably have taken the impediment into account at the time of the conclusion of the contract or could have avoided or overcome it or its consequences. This is quite a flexible and generous provision, tempered by some risk acceptance language. Article 79(5) provides further that nothing in Article 79 prevents either party from exercising any rights under the Convention other than claiming damages. Rights to avoid the contract upon a fundamental breach or to ask for repairs are thus not impaired. The Convention notably does not contain, however, any special provisions allowing for an adaptation of the contractual terms in the case of changed circumstances. The DCFR, UNIDROIT Contract Principles and EPCL essentially follow the Vienna Convention.

1.4.6 The Definition of the Concept of Force Majeure. Frustration and Economic Impossibility. Development in Civil and Common Law Modern legal facilities or requirements of adaptation can best be seen as concerning the allocation of risk and may then also cover situations where there is an unforeseen change of circumstances other than force majeure or frustration proper or where, under the applicable law, they are narrowly defined and do not reach far. Again, it may still be useful to distinguish here in terms of external or internal conditions: the latter often being of a personal nature, like illness, but they are likely to play a lesser role in the professional or business sphere where the exposure is more to natural, technical, economic, and political risk and miscalculation or lack of perception, the latter being, however, still more special to the debtor. In terms of a change of circumstances, the condition is often that the readjustment relief will be granted only

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if without it an excessive burden would result for the party seeking the relief, in which connection it may again be useful to distinguish between professional and other parties. We are here entering the area of hardship but also of refloating the contract. What changed circumstances would qualify, what is excessive in this respect, what the balance of the contract is (if ascertainable) or its true purpose was, and whether the events or the consequences needed to be unforeseeable, are then matters of further consideration.200 Again, it may be useful to distinguish here between situations concerning one of the parties in terms of its own inability to perform or more objective outside events like acts of god or governmental interference, which suggests that external events more readily excuse, but the distinction between internal and external events is now often made more in common law than in civil law, as we saw. It was already said that even in traditional civil law, the force majeure excuse is more generally irrelevant in respect of payment obligations or indeed highly personal circumstances preventing performance. Thus (apart from Article 79 of the Vienna Convention) illness or lack of money may not then excuse anyone from delivering goods under a sales agreement or paying for them. The personal aspects or impediments are in that case considered the risk of the directly affected party or may be considered discounted in the contract so that they cannot serve as a valid excuse for non-performance. Particularly in the case of services depending on the debtor, personal elements like incapacity may, however, count as objective or absolute force majeure, like the portrait painter whose hand is damaged. Yet the portrait painter claiming lack of inspiration may have a harder time escaping liability. In other situations, personal circumstances may be totally irrelevant. At least in sales contracts, pure acts of god or theft are likely to create excusable barriers to delivery for a seller in terms of absolute impossibility. Even so, they may still not always be relevant as a complete excuse, for example, if it concerns a manufacturer finding his manufacturing facility substantially intact after fire or if he has ready access to a market of replacement goods, so that he can still limit the consequences. However, if under these circumstances performance becomes much more difficult, the excuse of force majeure may be allowed. It could be seen as the more subjective (or economic) rather than a more absolute use of the concept of impossibility.201 That would seem to be accepted also in the Vienna Convention. The concept of passing of risk in sales agreements is here a special arrangement, see section 2.1.9 below (already mentioned before), typical for sales agreements and connected with the handling of goods in transit to the buyer. Most legal systems accept some form of the normative or more subjective view of force majeure and for external events also less than complete impossibility—in common law the modern use of the term ‘frustration’ in England, see section 1.4.5 200 It is possible that in this respect there is also a difference between public international law and transnational private law/. This may be clear, eg, in international investment disputes in the extracting industries. 201 See also n 191 above.

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above, and ‘impracticability’ in the US (normally of an economic nature instead of absolute ‘impossibility’ in s 2–615 UCC) reflect this—but there is disagreement on how far this goes and what risks especially in terms of personal circumstances or even economic hardship as a result of changed circumstances (including force majeure) remain with the debtor. No system adheres here fully to the subjective approach or allows any change of circumstances as excuse which would make contractual performance entirely uncertain. In civil law, the notion of force majeure was further developed within the normative interpretation method,202 which tends to consider more in detail the circumstances and facts of each case and might be more lenient to the weaker than to the professional defaulter. The force majeure and good faith concepts thus become connected, see also section 1.3.14 above.203 Relationship thinking then also enters the picture, as well as the idea that the overall effect on the professional debtor needs to be considered rather than merely the effect on the particular contract.

1.4.7 Unforeseen Circumstances and the Balance of the Contract: Hardship and Renegotiation Duties It is clear that not every unforeseen or unavoidable change of circumstances can give rise to a force majeure or hardship excuse, let alone to renegotiation duties. Even in the more normative or subjective approach in civil law, this is so when force majeure concerns payment of money or becomes too personal or the type of commitment does not allow it or may limit it, for example where the debtor accepted the risk, where a guarantee of performance is given or implied or, in France, where there is a result contract. Economic hardship itself is not necessarily an excuse either, especially if it is not external or could have been reasonably foreseen or taken into account at the time of the conclusion of the contract or was merely the result of misjudgement or lack of perception of market realities and risk. If it results from undiscounted, fundamentally changed circumstances, there may, however, be some relief. The question then is first what kind of hardship is necessary to qualify and subsequently what is the type of relief. Under the Vienna Convention Article 79, this is not clear and it is at best a matter of interpretation whether Article 79 stretches this far. As a matter in principle dealt with in the Convention (as an impediment beyond the control of the party and that could not reasonably be expected to have been taken into 202 It showed amongst others that the same circumstances may create a force majeure situation in one contract but not in another even if they are closely related. The destruction of a mode of transport may not excuse the seller bound to deliver CIF and he may have to look for an alternative at his own cost. Yet under the contract of affreightment, the carrier is likely to be excused because of impossibility if the destruction of the ship was not due to his fault or negligence. 203 The sometimes close connection with mistake should also noted, especially where it concerns circumstances already existing at the time of the conclusion of the agreement and which could have been known.

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account), guidance may have to be sought from its general (underlying) principles and, as a last resort, from the domestic law most directly concerned under the applicable conflicts of laws rule, see Article 7(2). This may also apply to the consequences in terms of adjustment or termination of the contract, not covered in the Vienna Convention itself either. As the Convention does not consider adaptation, termination may, however, be considered more normal. The question what should be done is also relevant when the interests of the parties unavoidably start to diverge in the course of the life span of (longer term) contracts. Following a progressive change in circumstances, there may easily result a de facto discontinuation of the co-operation on which full performance often depends without there being a clear situation of default or force majeure or even great economic duress. Indeed in such circumstances, the normal co-operation that may be expected to make contracts work might start to falter. In this connection, reference is often made to the contractual balance becoming disturbed but this was earlier identified as a consumer notion. For professionals, it is a situation of disincentive for which the traditional excuses may not be the proper answer. It may lead to adaptation needs short of a situation of true force majeure or even economic hardship. The proper answer might not then be a discharge of either party but rather a renegotiation of the contract.204 Of course, renegotiation may also be desirable in cases of force majeure or

204 Renegotiation rights or rights to recast one’s obligation in the light of new circumstances or information may give rise to a distinction between ex ante and ex post considerations in the determination of the rights and duties of contractual parties. The approach in this book is to see renegotiation or even termination rights in duration contracts in the context of contracts evolving in terms of a kind of partnership (therefore as relational contracts) in which the exercise of rights may be subject (objectively) to good faith interpretation and adjustment or there may be countervailing obligations in the nature of fiduciary duties. The key is to create an environment, legal and otherwise, in which the co-operation between the parties can continue to operate under the contract and prosper. If they cannot, the contract must be deemed at an end although the bills still need to be settled, therefore the burdens of the termination allocated. As just mentioned, it is, possible to make here a more fundamental distinction between the ex ante and ex post specification of contractual obligations, see in the US, eg, LA Kornhauser and WB Macleod, Contingency and Control: A Theory of Contract, Paper delivered at Boalt Hall, UC Berkeley on 28 February 2005. The ex ante approach is the normal one in which parties have or are supposed to have determined ex ante, therefore at the conclusion of the contract, how and in what manner they are going to be bound. It presumes a full road map and division of risks and therefore also complete information and no intervening occurrences or surprises. Parties may, however, realise from the beginning that this is not always possible and could lead to abuses by the promisee. They may thus include force majeure, change of circumstances, hardship or renegotiation clauses in the contract itself, which give the promisor certain protections or excuses and perhaps even renegotiation or termination rights upon the occurrence of certain events. In this connection, a distinction can indeed be made between ex ante or contingency clauses or modules and ex post or control clauses or modules. These clauses may be more subtle and call for good faith implementation (if not already part of the objective law), or reduce performance obligations to best effort attempts. Here one could further distinguish between task and performance. In the first case, there may only be a need for a good faith effort, in the latter case a guarantee. In the first case, circumstances and knowledge may be all important, in the latter case they may not be and there is full risk acceptance by the promisor. Interpretation of these clauses may pose special problems and suggest greater judicial discretion in legal systems that on the whole adopt a strict or more literal interpretation approach. Indeed one

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economic hardship, but they are possibly more appropriate in the situation just mentioned and may have more success. But it complicates from a legal point of view the trigger and also what may be demanded by law in terms of renegotiation duty if the contract is not clear in this aspect. It has been said above that in modern contract theory, it is assumed that professional parties accept a lot of risk also in terms of changing circumstances, see section 1.1.4 above. This remains the underlying philosophy even if now more refined. In terms of a change of circumstances, in medieval law, there developed in this respect the notion of the clausula rebus sic stantibus or the implied condition that circumstances would not change and the undertakings of the parties were considered conditioned thereby.205 In a general way, the clausula goes back to the writings of

question is here whether this new classification in terms of task or performance is useful, may present greater clarity in contractual interpretation, and provide new insights in how these clauses should be handled. It is not unexpected in this connection to assume here problems of asymmetric information concerning the (external) circumstances surrounding the project as it evolves and also how it can best continue to be handled (internally) from a supply, engineering, management and similar points of view. They key is then to determine whether a more structured approach to unforeseen circumstances can be created either by contract or in the application of relevant default rules. It is certain that parties ex ante could never handle all eventualities and their effect on the contract, even if they could foresee them. Most of course would never occur and it would not be physically possible to elaborate on them all in contract negotiations but it will be a fact that a number of the more relevant eventualities will become clearer during the contract period. Yet this may be so not necessarily to both parties or to both in equal measure or at the same time, especially prior to realisation. It may concern external events but there could also present themselves different developments internally, in a long term sales agreement, eg on the cost of supplies of commodities for the seller of finished products or for the buyer on the value of the goods so acquired for the rest of his business. The asymmetric information could be in respect of very different aspects of the transaction and how the other party is dealing with it. In an ex ante module, parties often must act without full information (an action-first environment) and, in the absence of full disclosure about knowledge between them, might have asymmetric information. Even in ex post modules (usually in an action-last environment) their information may not at all be the same. Indeed one may expect control clauses (leading to a unilateral determination of one’s own duties or to renegotiation/ termination) especially in asymmetric action-last situations. In such situations, under the contract, the party with the least information may be given control of certain decisions in respect of future action. This needs not mean discretion and the clauses may differ widely in the control they grant. Also, the party given control in this manner will normally have its discretion curtailed. This theory may explain better the nature of hardship or renegotiation clauses, or indeed option clauses, termination clauses, and best effort or good faith clauses, why and when they are introduced in contracts and how they operate. A more important issue is whether the default rules of the objectively applicable contract law should adopt similar approaches, thus giving modification or renegotiation rights to the party with asymmetric information, when and how, and what each party’s duties are in renegotiation situations or in situations where unilateral control over the contract terms is exercised. 205 See also R Feenstra, ‘Impossibilitas and Clausula Rebus Sic Stantibus’ in Festschrift Daube Noster (1974) 81. In the Netherlands the clausula approach was never entirely accepted before 1806 and abandoned thereafter, but provided with another definition often some implied adjustment facility of the contractual terms. It then operated on the basis of what in modern law would probably be considered good faith principles

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Baldus in the fourteenth century,206 and the doctrine remained popular until the nineteenth century, when the parties’ intent became more sacrosanct in civil law.207 In such cases, at least one of the parties may strive for a solution through contractual renegotiations and amendment. The question then is whether or when there may be grounds (and which ones) to refloat the contract through forced renegotiations and judicial intervention or supervision, with or without some form of damages being awarded, either as (partial) indemnification or as penalty for lack of co-operation, if the parties themselves cannot find a solution. The judges would probably also have the option of early termination with or without awarding (some) damages. In purely professional contracts, the parties themselves must here come to a solution. A judge or arbitrators may give some guidance but it is not for them to re-write the contract. That should only be done in extremis and even then only when it is likely to work. The essence is always the readjustment of the risk of unforeseen events—not therefore to redress pure miscalculation, which is the risk of the party having made it. Redress is here meant to allow for some excusable lack of imagination at the outset or the impossibility of quantifying the risk at the time the contract was concluded, or for the impact of the turn of events, for example excessive market movements in the price of the relevant base materials. Again, this may or may not result in a true force majeure situation at the same time. Distinct from traditional force majeure notions, this might also affect the payment duty even after the other party has performed, but again in a normative approach much risk is considered discounted between professionals and their contract text cannot be ignored lightly. Although the trigger mechanism may be differently formulated, it is often geared to economic hardship, however defined, see for this definition also section 1.4.8 below, caused by a fundamental change in circumstances. In the common law operating with the implied condition of practicability, especially in the US, the concepts of force majeure and frustration in this sense may be less distinguishable, leading (in respect of contractual conditions) only to excuses of performance or in extreme cases to termination but less readily to the adaptation of the contract. In any event, judicial restraint is necessary in professional dealings everywhere. Indeed, the modern notions of hardship, economic impossibility or impracticability leading to a re-floating of the contract, are novel departures, although they were not fully unknown in the Ius Commune, as we already saw, but they became there ultimately unfashionable. In modern times, the problem has particularly arisen in times of war and emergency, usually coupled with high inflation. It has not been uncommon in such situations for relief to be provided by special statute. These laws usually left the final decision to the judge and did not give criteria or guidance for adaptation or termination. Where no special statutory law came into being—and they were all limited in scope—the question was everywhere whether

206

Commentaria ad D.12.4.8. See the Prussian Allgemeines Landrecht I, 5 s 378 (1794); Fritze, ‘Clausula Rebus Sic Stantibus’ (1900) 17 Archiv für bürgerliches Recht 20. 207

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general legal principles could provide a basis for similar contract adaptation beyond extreme political or economic circumstances. Different legal systems reacted differently, often as a result of the depth of the economic distress, with German law being more flexible but the law in other major countries remaining more rigid. The liberal German case-law approach, which emerged at the time of hyperinflation in the 1920s in Germany, was first based on a disturbance of contractual basis or purpose and seen as an implied condition; later on it developed in a more objective sense under the German notion of good faith, but the new section 313 BGB reverts to the older terminology. Under the new Dutch Code, the idea of adjustment in the case of changed circumstances is now also statutory and embodied in Article 6.258 CC. In common law, there may still be more restraint, as we saw, although in principle the theory of implied conditions, also used in the case of force majeure, can be extended to allow contractual adaptation or termination, but it is not commonly done, even though the force majeure concept itself was broadened into economic impossibility or frustration in exceptional circumstances like in the Coronation cases.208 In England, it was held in Chandler v Webster209 that the risk of changed circumstances and the resulting termination of the contract lies where it falls. This was only reversed in Fibrosa v Fairburn in respect of moneys already paid and benefits received (taking also into account costs),210 but it is still said that the doctrine of frustration has the effect of declaring on which party some unanticipated risks lie, not of altering where they lie. It remains, however, a matter of interpretation, of implied terms therefore with its limitations in common law. Proper relief would often require an adjustment of that risk and may then not be forthcoming. In England, the issue remains essentially unresolved with the English courts becoming less rather than more co-operative.211 This is indeed the more rational approach where the contract is a road map and serves as risk distribution instrument between professionals. The lesser need for these facilities in the professional sector, except in exceptional cases, has already been mentioned several times and may contribute to this reluctance. Businesses seem on the whole to be able to live with this restraint, and might on balance prefer it to the uncertainty another attitude might bring, unless hardship clauses are included in the contract itself and are then indicative of a more clear-cut attitude. In the USA, the situation seems in fact not much different. Summing up and finalising, an example may help: if one European airline company buys airliners in the US for a dollar amount during a time that the dollar depreciates, it may obtain a very great benefit, which could well result in a reduction of 30 per cent of the price in terms of its base currency (the euro). The American supplier may not

208 209 210 211

Krell v Henry [1903] 2 KB 740. [1904] 1 KB 493. [1943] AC 32, borne out by the 1943 Law Reform (Frustrated Contracts Act). See GH Treitel, The Law of Contract, 12th edn (London, 2007) 947.

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suffer greatly because its costs are in dollars and neither party may complain. It may be very different for another competing European airline company that may have bought similar airliners in Europe in euros. It may thus be incurring an enormous long term competitive disadvantage compared to the first airline company, its European competitor. Yet it cannot complain or request a renegotiation of its European supplier on the basis of a change of circumstances and hardship as mandatory good faith concepts. There is therefore no point in this airline company complaining to its European supplier about the disadvantageous deal, even if the dollar depreciation was not foreseeable and the result might be its bankruptcy. Rebalancing, notions of fairness or of good faith hardly seem to have a place here, and could in any event not provide an objective standard for readjusting or valuing these deals. Any other attitude could easily entail the bankruptcy of the European supplier. It was said above that when contracts are cast foremost in terms of a road map and risk management, there is very little room for good faith adjustments and it may even be a narrowing of concepts, requiring a more literal interpretation of the contract text. That is what risk, and risk division, is all about. If subsequently the risk shifts between parties, it normally means that they had a different perception of its future evolution, which is reflected in the price and structure of their deals. They will have to live with the consequences and cannot invoke notions of reasonableness, fairness or good faith to redress the outcome. In the above airliner case, there was a relative disadvantage resulting from two unrelated deals, but the situation is not fundamentally different when, within one deal, currency risk is transferred to the other party by, for example, choosing a different currency. If, for example, the European deal had been done in dollars, the second airline company would have retained its competitive position at the expense of the European supplier whose cost base would have been in euros and who might as a consequence be facing bankruptcy. It does not make a difference. At least in the professional sphere, there is no reason why reasonableness, fairness or good faith should redress the outcome. There is certainly nothing mandatory about it. It is submitted that there is also no identifiable social or cultural consensus that might dictate otherwise. In any event, if one party is relieved, another suffers and what is fair or reasonable in such situations and what good faith might require is often wholly unclear. Informed people are likely to differ to such an extent that no underlying norm can be identified unless the situation is truly excessive. Even then, the remedy may not at all be plain. Moreover, in terms of social consensus, in international commerce and finance, the perspective has to be that of the international commercial and financial community as a whole and not that of a national or domestic consensus which will be invariably self-serving and soon lead into nationalistic considerations (of innate social balance) that can hardly have any relevance as to how international commerce and finance develops and that may in any event only have a weak contact with the case in hand. As a minimum, it would then be necessary to show that such overriding domestic considerations or domestic governmental interests are sufficiently relevant or connected to impact on the international flows and redirect them.

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A domestic redistributive urge and protection of local interests at the expense of others may be at the heart of these considerations and not seldom also a domestic regulatory mode in which the underlying thought is that national communities need to be protected first, even if in the particular country there is no informed opinion whatever on what might be needed to balance international forces nor any demonstrable expertise in the field. Although the great commercial benefits of globalisation may only too willingly be accepted, international market forces may in such cases still be fought by what are portrayed as high-minded domestic cultural or social particularities and needs which, however, too easily represent narrow provincialism based on greed, irrational fears, and ignorance or a mercantalist mentality. The proper consequence would be to close one’s borders and stay at home. One may be poorer, but it is a choice that can be made and is perfectly respectable.

1.4.8

Modern Legislative Approaches to a Change in Circumstances

Adaptation or termination because of changed circumstances, beyond the narrow road of force majeure (or even economic duress) as contractual excuse, raise issues of judicial power and its basis in the light of party autonomy and the parties’ intent as expressed in the agreement but also their risk acceptance. The issue was in its generality already raised in section 1.3.14 above. The authority to change this intent retroactively must be found either in the contract itself or in special provisions of the applicable law or in general legal or interpretative principle. The last solution was originally adopted in Germany through case-law in the 1920s, as we saw, first by relying on implied conditions, then more fundamentally through concepts of good faith, now (since 2002) resulting in section 313 BGB which reverts to the terminology of the Wegfall [or Stoerung] der Geschaeftsgrundlage and essentially refers to a disturbance in the balance of the contract with emphasis in particular on the originally foreseen distribution of risk (assuming this can be established). Termination is foreseen when adaptation is not feasible. The statutory solution was ultimately also chosen in the new Dutch Civil Code, Article 6.258, tying the relief for unforeseen changed circumstances to the unreasonableness of the counterparty in insisting on the unchanged continuation of the contract. This is in line with older case law that enunciated, however, more particularly the principle of unconscionability.212 The new Dutch code allows the court to change the contract or to terminate it in whole or in part. It seems not to envisage renegotiation duties as such but rather a judicial decision of some sort. If the contract has lost all purpose, termination would seem to be appropriate. The reason why the objective law remains generally vague in this area is probably that academic writing has not been greatly productive in analysing what the proper adaptation technique should be and how any renegotiations should be conducted. 212

HR 19 May 1967 [1967] NJ 261.

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Again, it is clear that in essence the parties’ original intent is asked to be set aside on good faith grounds, however expressed, on the basis of undiscounted intervening events. Yet what fairness requires is unavoidably geared to individual factual situations. Rabel saw the multiplicity of obligations as the major obstacle to formulating general principles of adjustment.213 Corbin214 stated: ‘[w]e cannot lay down one simple and all controlling rule. The problem is that of allocating in the most generally satisfactory way the risks of harm and disappointment that result from supervening events.’ Meijers215 formulated some general characteristics: the change in circumstances must have been unforeseeable, must be of an exceptional nature, beyond the ordinary risk incurred in a contract, must render performance excessively onerous and the change should not be due to the fault of one of the parties. These characteristics do not go much beyond a subjective force majeure definition balanced by the emphasis on the excessive burden and do not give an indication of how any adaptation of the contract should be conducted. This emphasis on excessiveness also figures in the European and UNIDROIT Principles, but now less so in the new Dutch and German Civil Code sections. None gives the judge any guidance on his authority to terminate or adapt the agreement. The DCFR approach in Article III-1:110 was already discussed in section 1.3.14 may be generally more restrictive, with a reference also to risk acceptance, particularly relevant for professionals it would seem. On the other hand, it is equally weak in describing the renegotiation duties and talks in this connection about a reasonable and equitable adjustment. It is hard to see what the role of the judge is precisely beyond having the power to terminate the agreement and allocate the burdens. It may require a much more subtle approach in terms of interim relief and measures to guide the parties through the process if they are still serious. Where emphasis is put on an excessive burden or unconscionability, which seems appropriate at least in the professional sphere, it was already said before in sections 1.1.4 and 1.3.14 that some regard must be had to the overall financial position of the party invoking the renegotiations rather than to the contractual situation itself. Context must be considered. As such, there may be in descending order a need for (a) a dramatic economic disadvantage overall, for example a likely bankruptcy as a result of performance, (b) a loss situation for the business as a whole for some time or at least in the line of business concerned with the contract, or (c) a loss or lesser profit than expected under the particular contract. It was posited before that the latter may by itself hardly qualify as hardship, certainly not where there may be many contracts of the same type under which for some there is less profit than expected but for others perhaps more. Contractual balance or the loss of it in an individual case may in this context also not be greatly relevant and a normal risk situation.

213

Das Recht des Warenkaufs (1936) i, 157. Contracts (1951) s 1322 at 256. 215 ‘La Force Obligatoire des Contrats et ses Modifications dans les Droits Modernes’ Rapport, Actes du Congrès International de Droit Privé (Rome, 1950) I, 99 at 111, 112. 214

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Again, the principle of adaptation—less important in individual sales but potentially of great importance in long term supply and construction agreements—raises the practical issue of what a judge can do in the circumstances, as he is hardly the proper authority to rewrite the contract. It seems that the parties of necessity must be heavily involved in refloating their contract so as to provide a realistic future for it. As just mentioned, this might require interim judicial measures, for example as to whether renegotiation is called for, or even some immediate (re)payments to provide survival relief. It appears, however, that, especially in the professional sphere, the re-balancing effort must remain exceptional and, failing this (upon a bona fide effort which in the commercial sphere may be limited) normal performance or otherwise termination (with or without damages depending on the degree of force majeure or blame in a civil law sense) must be the normal remedy. See for the approach in the UNIDROIT Contract Principles, EPCL and DCFR, section 1.3.14 above.

1.4.9

Contractual Hardship Clauses

It is not uncommon to find a more specific trigger mechanism in the form of a proper hardship clause inserted in the contract itself. Such a clause is likely to set some parameters for renegotiation and its objectives. In the process, it might limit the judge’s intervention to specific questions of discord, for example on the existence of the conditions triggering the renegotiations, on damage claims up to the moment the burden became intolerable if the performance was interrupted earlier, on disagreements on the new price which could be resolved by a reference to normal market prices, on new specifications which again could be resolved with reference to the normal standard to be expected for the price charged, which otherwise might have to change, whilst duration or place of work or delivery might be changed and the reasonable normal effects on costs be taken into account. Most significantly, however, the introduction of a hardship clause itself indicates that parties did not mean to be bound under all circumstances. The force majeure excuses themselves might be expanded thereby as the more important risks of a change of circumstances were clearly not discounted in the contract. Bona fide disagreement in the renegotiations may then be considered a sign of parties not wanting to continue and may be prima facie ground for discharge and termination, which could, however, still allow for payment of (some) damages. This appears to be the fundamental difference between reliance on a contractual clause and on a statutory provision (or established case law) in this area. As suggested earlier, short of a contractual clause, statutory or specific case law, the situation is probably not much different from the one where parties are required to continue to negotiate in a pre-contractual situation or (sometimes) on the continuation of an agreement after its expiry, although the DCFR takes a very different attitude and is much stricter in pre-contractual situations as mentioned in section 1.3.14

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above. Relevant considerations are nevertheless: (a) the relationship between the parties in terms of professionality, their special interests, reasonable expectations, the frequency of their transactions and the incidents that have occurred in them, for example poor past performance or lack of co-operation, credibility and creditworthiness; (b) the nature of the deal (in the sense that a rental agreement will require different adaptations from a sales agreement); and (c) outside circumstances such as the market price or the required quality or style. Ultimately these considerations may prove decisive, and determine when continuation of the negotiations can no longer be reasonably required and termination or performance of the old agreement must follow. In any event, negotiations cannot drag on for ever although under a contractual hardship clause more may be required than under statutory change of circumstances clauses. Finally, it is also possible that in the case of hardship adjustments, the market conditions are not fully determinative and adjustment could be spaced over a longer period which may not be necessary or relevant in pre-contractual negotiations or in negotiations for a continuation of expiring agreements if the contract calls for them.

1.5 Privity of Contract 1.5.1

Privity of Contract or Third Party Rights and Duties under a Contract

The extent to which third parties may derive rights from a contract between other parties (eg as third-party beneficiaries) or may even incur duties or a liability thereunder, without themselves becoming formal parties to the contract, has greatly exercised legal minds, especially in common law, where the subject is normally referred to as ‘privity of contract’ and is often raised in the context of the notion of proper consideration. In particular, it tended to leave third party beneficiaries unprotected if they had not given any. For third-party beneficiaries, only later was it understood that the issue was not the gift but the proper performance between the two original parties to the contract out of which the benefit arose, assuming proper consideration was given for that contract. Only if the beneficiary wanted to claim directly would the issue of consideration arise as to him. In civil law, the issue is more commonly raised in the context of the discussion of in rem and in personam rights, therefore in the context of the more theoretical discussion on the nature of and distinction between proprietary and obligatory rights. The first ones have per definition third-party effect and the latter not. This is clearer for contractual transfer prohibitions in respect of some underlying assets. Yet even where such contractual provisions work against third parties, like in many countries still in a contractual assignment prohibition that may thus operate against an assignee who is unaware of it and void the assignment in respect of him,

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there is not truly a proprietary right created, rather one is being withheld, although one could still say that there was a third-party effect of the contractual prohibition. It may be said that neither the original common law approach nor civil law attitude led to great enlightenment. Naturally, the basic contractual rule everywhere is that a contract cannot confer rights or impose duties on any person other than those that are party to it (unless leading to a proprietary disposition which is then covered by the law of property and not by the contract). This has, however, become too simplistic a view and in practice there arose a number of situations in which a contract has an effect on outsiders, which may be both on the rights and obligation (or duty) side of a contract, although it is more common to be only on the former, so it is more common that a contract gives something to third parties (who then becomes a third-party beneficiary) rather than takes something away from them. Whatever the result, it does not mean that these outsiders thereby automatically become parties to the contract in whole or even in part. Indeed, one of the major issues in this area is whether or when they become subject to the contract in their relationship with (one of) the contract parties, even if this may concern only some aspects of that contract. In the case of third-party beneficiaries under a contractual clause by which parties give a benefit to an outsider, this is quite common, assuming the beneficiary becomes aware of the benefit (and assuming also that consideration is given or can be construed to have been given by him in traditional common law). Parties can create in this manner rights for others which the latter may enforce against them in the manner as discussed below. On the other hand, it is indeed much more difficult also to create duties for outsiders unless these duties are very closely related to the benefit (as, eg, a duty to arbitrate under the original contract in the case of a dispute concerning the third-party benefit when claimed by the beneficiary). Short of such a relationship under which outsiders become indirect contract parties (the precise manner in which and the extent of which still need then be considered), there could more generally be tort or proprietary actions which direct contract parties might have against outsiders in connection with or flowing from their contract. First, outsiders may have some general duties in respect of contracts that they have not concluded, but that is not then necessarily a matter under the contract itself. It concerns here especially the right of contract parties not to have the contract interfered with by others and to have any transfer of assets or rendering of services pursuant to the contract respected by all the world, at least as long as they do not interfere with the rights of others. On the other hand, if a third party is adversely affected by a contract, it may equally be able to defend itself in tort against the contract parties or invoke the illegality of their agreement and (sometimes) ask for punitive damages like in the case of contracts in restraint of trade for the effect they have on others. It is clear in this connection that generally, the existence of all contracts must be accepted as a fact and third parties are not free to meddle with them or undermine them at will in order to undo them to their own or somebody else’s advantage. So there is a negative duty on all third parties in respect of any contract as indeed there is in respect of any asset or property right. This also applies to supply agreements with

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competitors, even if concluded in defiance of a contractual obligation of the supplier vis-a-vis the complaining party not to do so. One could also say that in this respect the rights of a party under a contract are proprietary to him and must as such be respected by all. But again, it is not a duty governed by the contract itself. In a similar manner, it is also possible to argue that, if under a contract one of the parties (the reimbursing party) has agreed (or is forced) to reimburse any extra costs of the other party and any outsider increases these costs, for example whilst defaulting in his supply duties to the other party, the latter may be liable in tort to the reimbursing party whilst breaching his supply obligations to the other party. As default in one relationship may have serious consequences in another, this could more generally give rise to a direct action: if A does not deliver specialty goods to B, B may default under his resale contract with C. This does not normally give C a direct action under the contract against A. He may not have a tort action against A either, but B may still be able to seek recourse against A for any damages he must pay C under his resale contract with the latter. As a consequence, A may at least indirectly derive a liability (in tort) from the contract between B and C as a consequence of his destabilising behaviour. The key remains, however, that in these cases, the duties of third parties are not of a contractual nature, even though it is the existence of the contract between others that creates their duties, which are duties to respect these contracts, not to interfere with them, or to make their performance under them more difficult or more expensive. There are therefore no indirect contract parties created like in the case of third party beneficiaries. At the start of this section, reference was already made to proprietary rights and the way contracts change them although the change itself is unlikely to be a contractual matter. This may need further exploring. It is clear, for example, that contracts which transfer proprietary rights, like sales agreements, acquire third-party effect in their consequences, especially those under legal regimes like the French and English that do not require further acts, like delivery, for the transfer of title in chattels. This also applies to situations in which intangible assets like claims are transferred or rather assigned, when the assignee may defend his new right against all the world, often even before notification of the debtor. It means that everyone has to respect the new situation as to the ownership of the claim. This is no less a situation in which contractual results must be respected by others, but as already mentioned, it is not the contractual aspects that matter here but rather the proprietary consequences. Therefore, the contract parties do not in that case act or defend on the basis of the contractual terms, but rather on the basis of a proprietary action or in tort and the duties of the third parties vis-a-vis the new owner or assigneee are again not contractual in nature. That may be different, however, for restrictive covenants connected with the use of property, especially land. Particularly in common law, covenants if construed to run with the land may affect any subsequent third-party transferee of the property, even though the latter was never a party to it. Here, the counterparty will act or defend against the new owner on the basis of the old contract. New owners thus become

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parties to the old covenants and take over the contractual duties in their capacity of new owners, therefore even without their specific acceptance. In civil law terms, it could be said that these contracts acquire as a consequence (some) in rem or proprietary effect in the sense that the beneficiary may maintain his right under it against any succeeding owner in the property (any third party therefore in this particular capacity, even if not against all the world). In civil law, this is likely to be more difficult if the covenants are not expressed as in rem servitudes, the civil law equivalents of the common law easements. These are of a special type and limited by the relevant civil law codes. In some civil law countries, mere contractual covenants may now be entered into land registers as well, thereby acquiring (some similar) in rem or third-party effect. Even without such registration, under modern civil law, a new owner may sometimes be considered to commit a tort whilst ignoring the contractual commitments made by his predecessor in respect of the property, at least if he knew of the covenant before he bought the property. But again, this would not then be an action directly based on the contract. The already mentioned contractual assignment prohibitions are of the same nature in that they still void in most countries any assignments made in violation of the prohibition. It could be seen as a covenant that goes with the property, here the receivable, and affects any subsequent assignee. In respect of chattels such prohibitions do no longer have any proprietary effect. It concerns here the important issue of liquidity of assets. It will be noted later that in respect of trade receivables in the USA section 2–210 of the UCC no longer gives such restrictions any proprietary effect either. This is an important development particularly relevant in receivables financing. Better known in this connection in civil law is the rule that new owners have to respect at least existing leases or tenancies in the property (cf s 566 BGB), therefore also if they were not original parties to the relevant contracts. It should be remembered that a least in civil law a lease is normally not a proprietary right or estate in land but merely a contract or rental agreement. Succeeding owners thus acquire obligations under pre-existing contracts as third-party successors in the property, therefore in their capacity as (new) owners.216 Although the old contract has here effect against third parties, it is only against this special class of them (succeeding owners in their capacity as owners). The effect is that beneficiaries or tenants are given a right to the status quo in their contractual arrangements concerning property in which the owner has changed. The French often speak here of obligations propter rem; others call them qualitative obligations. As new owners voluntarily enter into the property, one could argue that 216 New house owners must usually also respect certain implied duties concerning neighbours, even if they did not know of them at the time of the sale. Here there is no contractual relationship, however, and the enforcement action of neighbours will be in tort. So it is in respect of retention rights which succeeding owners of an asset may seek to ignore. If they do, there may be a special type of recourse for the retentor which may be proprietary or in tort. It should be noted that more generally legal successors like heirs or shareholders upon dissolution of companies automatically succeed in the duties (and rights) of the heir or former company and thereby become party to all their contracts (as well as in their proprietary and other rights and duties). This is an aspect of third-party rights and duties that will not be further discussed here.

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they take that risk and implicitly accept this state of affairs and therefore enter the lease contracts as willing parties in their quality as new owners. However, they would also be bound if they knew nothing of these tenancies. An important further aspect here is that the previous owners are discharged and do therefore not even remain guarantors of the new owners obligations as lessor and this even without any consent of the lessee. Another aspect is that not only rights, but also duties under a pre-existing contract are here transferred to someone who was never a party to it nor agreed to become one. Again, in these cases of restrictive covenants and rental agreements, one may explain the situation by the need to further promote liquidity (transferability), here mostly of real estate. If the old owners were to be held to the existing covenants and rental agreements, whilst the new owners could ignore them, it would be impossible for owners to sell their rented buildings or any property in respect of which they had given some covenant before terminating all these leases and covenants as they would lose control over the proper performance of these contracts by the owner after a sale. Such termination would depend on co-operation of the beneficiaries, who would thus obtain a blocking vote. This would obviously be undesirable. The class of successor-owners presents one important and clear first cluster of situations in which the contract itself is extended to others (rather than that tort actions are engendered by it), here primarily the obligation side of these contracts (although in the case of rental agreements also the benefits), a circumstance of course discounted in the purchase price of the asset. It may also be a benefit as a good existing rental agreement may enhance an asset’s value. Sometimes, one may also acquire a benefit or right from a transaction between other parties. This presents a second cluster of situations where indirect contract parties emerge. A good example is a beneficiary under a trust arrangement in common law. There is a difference in so far as, in trust situations, there is no need for consideration on the part of the beneficiary or trustee for the benefit or right to pass and the situation is not purely contractual as far as the beneficiary is concerned. Nevertheless, in a transfer between settlor and trustee, such third-party rights commonly arise, even in a proprietary sense as the beneficiary may subsequently defend his rights against most classes of third parties in the nature of all equitable interests on the basis of the trust deed, to which he was unlikely to have been a party. It concerns here in particular the trustees, their creditors and even their successors in interest who knew of the beneficiary’s prior rights or did acquire the interest for free. To this same cluster belong situations already mentioned by way of introduction above when, also in civil law, contract parties agree to give more directly a benefit to a third-party. The term third-party beneficiary is commonly used. Consent or acceptance by the third party is often not necessary for these rights to vest and to be invoked by the beneficiary, although there could be a rejection. Consideration may be required for him to benefit as was long the case in England. The donee beneficiary thus has a problem. More normal is that one of the contract parties wants the other to pay the beneficiary in lieu of himself because he owes the beneficiary something on account of another arrangement. That is the situation of creditor beneficiaries and becomes in

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that case the justification and the consideration in cases like these. Thus economically there is likely to be a tripartite arrangement that is legally expressed in this manner (therefore under two separate agreements under one of which there is a third-party beneficiary who is connected in another relationship with the creditor under the first agreement). One may note that in these cases a form of acceptance by the beneficiary of his substitute payment in this manner may become a natural issue. Hence the facility to refuse third-party benefits. In these cases, the rights so granted to third parties are likely to remain purely contractual, which means that they can be maintained against the original parties only: in life insurance, for example the existence of third-party beneficiaries has long been accepted and once their interest vests under the terms of the policy, they can maintain it against the insurance company and the original parties can no longer change that unless the policy itself says so. In this case, there is unlikely to be a consideration requirement in common law either; practice forbids it. Similarly, bank guarantees are often arranged for the benefit of third parties, as in letters of credit, and give them a direct right against the issuing bank. If they are issued in irrevocable form, they cannot be withdrawn. Here the consideration will derive from the whole of the arrangement which, economically speaking, is also likely to be tripartite. Child maintenance clauses are common in marriage contracts and divorce settlements and may give children equally direct rights against the paying parent. Consideration is here the parental obligation. Furthermore, exemption clauses exonerating parties vis-a-vis each other from any adverse consequences of their performance under a contract or from any tort liability might be invoked by servants or subcontractors to exonerate them as well. They thus become third-party beneficiaries even without clear prior acceptance of that position and again without consideration. Subordination agreements postponing a creditor to others may in this manner also be explained as agreements under which the creditor accepts that other creditors become third-party beneficiaries in this regard and take first in the case of a default of the debtor. These are all situations where the original parties are unlikely to be able to change the benefit because they impliedly agreed not to do so, even without the beneficiary knowing of it (at first), or otherwise after him having explicitly or indirectly accepted the benefit. If the third party did know from the outset (like in tripartite arrangements), it could be argued that it became a direct, rather than indirect, party to the agreement. But in all cases, the rights of the beneficiary are preset and governed by the contract concluded by others; the terms directly relating to the benefit are applicable to him but he will not have had a say in them. He becomes a passive party (in whole or more likely in part). That could also include some closely related duties. In this connection, the duty to arbitrate in the case of conflict was already mentioned if there is such a clause under the contract but there may also be some pre-conditions to the benefit arising. Otherwise duties cannot be imposed on other persons in this manner. Only benefits can be given in this manner. These third-party rights may still be distinguished according to whether they need acceptance by the third-party beneficiary to bring them into the contract or not. This would often seem to be unnecessary, for example in the case of child support. It always

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seems possible to repudiate them, however. As already mentioned, these situations of third-party benefit might be further distinguished into those under which the grantor owed the beneficiary something and those in which there was a question of a pure gift (the donee beneficiary), again under common law a distinction closely connected with the doctrine of consideration. Also in civil law, there may be certain formalities to make such a pure gift an enforceable benefit for the third-party. A third cluster of situations in which an outsider may become an indirect party to an agreement is presented in situations where there are closely related agreements. In modern finance leases, it is normal for example to expect that the lessee has certain direct installation and repair rights against the supplier of the goods under the latter’s contract with the lessor who is often no more than the financier who ordered the goods upon the lessee’s instructions and specifications. In these situations, the lessee may also incur some direct duties under the supply agreement, for example the duty to give access to and co-operate with the supplier. This is now very much the theme of Article 2A UCC in the USA, an approach also adopted in the UNIDROIT (Ottawa) Convention on International Financial Leasing of 1988, see also Volume III, chapter 1, section 2.3. In parallel loan agreements, where there is cross lending, or in a similar grouping of contracts, default under the one loan agreement may also impact on the other, especially as parties are likely to know of the existence of both, often concluded between the same parties or their subsidiaries. The contract may of course especially provide for it, but if forgotten, it may still be so. In financial swap arrangements, similarly, the two legs of the swap are now mostly considered irretrievably connected or integrated, particularly important for the acceleration and set-off possibilities and may thus impact on each other. Swap Master Agreements go further and connect also other swaps between the same parties in terms of close out netting upon a default (or cross default) concerning one of them, see also Volume III, chapter 2, section 1.4.6. In repos, one may also find Repo Master Agreements which similarly connect repos between the same parties (see Volume III, chapter 1, section 2.2.5). But here the connections are contractually induced and may not be assumed. In this cluster may also be found co-operation duties where people work together, for example on the same building site under different contracts. They are bound together by a joint objective, and their contracts may become indirectly related in that they concern the same project. In situations like these, the practicalities will often require them to help each other, at least in minor things. One may ask whether in these cases lack of co-operation is a breach of contractual duty (and under which contract) or rather a tort. In a normative contractual interpretation it is likely to be the former in respect of the contract under which each party works as the breach of their contract derives from not helping others in the performance of their contractual duties. It could be argued that these co-operation duties were indirectly accepted in the original contracts or that sharing burdens in respect of the same project was implied. Thus in Germany, third parties may acquire quasi-contractual rights under a contract to which they are neither party nor expressly a beneficiary if they are found to be sufficiently close to the contract from its pre- to post-contractual phases, compare section 311(3) (new) BGB.

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Undisclosed or indirect agency presents a fourth cluster, where someone (here the principal) becomes a party to a contract concluded between two others. The position is more than the one of the third-party beneficiary in that the agent may drop out as party altogether. Thus in common law, upon disclosure the principal becomes the direct party (see more particularly s 3.1.5 below). A principal may in this way have to accept the contracts concluded by its agent with others, even if the agent acted outside his authority. In this cluster may also be placed a carrier, who must accept that any succeeding holder of the bill of lading may require performance under the contract of carriage even though there was never express consent by the carrier to the transfer of the bill (quite apart from the proprietary consequences of the bill of lading as a document of title). Similarly, a drawee who has accepted a bill of exchange will have to pay any succeeding holder of the bill without a direct contractual relationship. In a similar vein, any debtor will normally have to pay the assignee of his debt upon notice (if not increasing his burdens). We are concerned here with situations in which the third-party (respectively the principal, carrier, drawee and debtor) incurs (performance or co-operation) duties under a contract concluded between others. Again, the essential point is that the third-party duties so obtained or incurred are in each instance in principle governed by the contractual regime created by the parties to the particular contract to which the third party is not itself directly a party but has exposed itself to this risk. It is submitted that the situations in which third-party rights or duties may arise in connection with or under a contract (therefore the four clusters mentioned above) do not differ greatly between civil and common law countries. They are on the whole exceptional, and derive from obvious practical needs, although certain problems, like the one concerning proper consideration, are not likely to arise in civil law countries. On the other hand in the protection of covenants in land against third parties (successors), the common law is less formal than the civil law and shows greater flexibility. This is also true in the protection of mere possessory rights like bailment under which the bailee could be considered a beneficiary who may defend his physical possession against all the world, even against the bailor subject to the latter’s contractual reclaiming rights. In common law this may allow proprietary effect to flow more readily from contractual stipulations concerning property. In purely contractual matters, the problems connected with third-party rights and duties are, however, hardly different in either system. There are no general rules in either. It is clear that both the normative or reliance approach to interpretation may more readily explain the rights or even duties of third parties under a pre-existing contract between others. Modern civil law may be more inclined to it but has not produced greatly new insights or the identification of new or more precise clusters either.

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1.5.2 Development of Contractual Third-Party Rights and Duties in Civil Law As we saw, traditionally in civil law, the concern for third-party rights and duties under a contract is closely connected with the distinction between the law of property and the law of obligations. Roman law did not maintain a clear conceptual distinction between in personam and in rem rights, although it accorded different actions (in personam or in rem) from which a difference between proprietary and other rights could be deduced. Equally Roman law did not maintain a conceptual approach to third-party beneficiary rights or third-party duties under a contract. Unlike under modern civil law, see for example section 328 BGB in Germany, it was not possible for parties to a contract to make a stipulation in favour of a third party (the stipulatio alteri) giving the latter any enforceable rights under the contract or otherwise, compare Inst II.9.5. The contractual bond was too formal and too ritually created for it to cover outsiders as well, and, in the equally rigid system of Roman law actions, there was no clear form of redress. In fact, for most contracts there was no action, let alone for third parties’ rights under them. Later when formality receded and more contract types became enforceable, the rule against third party benefits and duties acquired a material law significance and was as such incorporated in the Justinian Codification (D.45.1.38.17). Through a penalty clause in the contract, at least the party agreeing to transfer a benefit to a third party could be pressurised into performance. It was also possible to make a stipulation in favour of the contract party together with a beneficiary. The latter had no independent action in these circumstances, but payment to him would absolve the party committed to giving the benefit. As formulated in C.8.54.3, the Emperors eventually started to protect gifts to third parties, which had to be passed on according to the terms of the original contract. A right of the debtor to redeem, stipulated by the pledgee in an execution sale with a third party, also became enforceable, C.13.7.13. Yet that was all the Ius Commune in its further development of the Roman law on the subject had to go by.217 The Dutch seventeenth-century writers were the first to abandon the Roman law constraints, especially in the natural law school approach of Grotius, who saw the impossibility of stipulating in favour of others as against nature.218 There was here some emphasis on the autonomy of the parties’ intent, but it became necessary for the beneficiary to accept the benefit before he could enforce the stipulation in his favour, although such an acceptance could be implied until any outright rejection. This rejection could naturally come about if the third-party beneficiary did not want to accept a replacement for whatever the contract party negotiating the benefit for him might have owed him, which would normally have been the reason to negotiate the third-party benefit in the first place. Others, notably Pothier, stuck, however, to the original maxim (alteri stipulari non potest).219

217 218 219

See also R Zimmermann, The Law of Obligations (South Africa/Deventer/Boston, 1990) 41. De Iure Belli ac Pacis, II, Cap XI, s. 18. Traité des Obligations, No 54 ff.

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The French Civil Code of 1804 in this respect followed Pothier and retained therefore a restrictive attitude to third party benefits, see Article 1165 CC, except (following late Roman law) if it concerned a condition of the performance one had negotiated for oneself or if it concerned a gift that one was making to someone else (Art 1121 CC). The benefit could not be revoked once the beneficiary had declared his intention to profit from it. However, French case law widened the first exception and assumes that there is also a benefit for the party negotiating the concession if it derives some moral profit from the transaction220 and allows the third party in that case to claim directly under the contract. German law in Sections 328 and 311(3) BGB allows third-party benefit in general, although still expressing in section 241 BGB the more general principle that contracts bind only the parties thereto. This principle is no longer generally so stated in the new Dutch Civil Code (but may still be inferred from Articles 6.213, 6.248 and 6.261 CC), and third-party benefits may be freely granted (see Article 6.253 CC).221 In the Netherlands, acceptance (not mere notice) is now necessary, however, and until such time the benefit may be withdrawn. In the case of a gift, acceptance is presumed as soon as the beneficiary has knowledge of it and does not immediately reject it. Modern Dutch law reverts here to the approach of Grotius, but the question is in how far this acceptance must be explicit and what the situation was before it. German law in section 333 BGB allows the beneficiary to reject the benefit which is retroactive to the time of the conclusion of the agreement providing for it; explicit or presumed acceptance is not necessary.222 This is now also the French approach.223 It means that the third-party right dates and is enforceable from the moment of the conclusion of the contract under which it is granted. Third-party duties result commonly for principals from the acts of unauthorised agents, for lessees under supply agreements between third parties and the lessor concerning the leased assets, for debtors upon an assignment, for drawees of bills of exchange upon their transfer to subsequent holders, and for carriers upon transfers of the bill of lading: see the previous section. More difficult are situations under exemption or exoneration clauses, not so much if used by subcontractors or employees of the one contract party as a defence against the other, see Article 6.257 Dutch CC (not accepted in France, however),224 but rather if used as defences against third parties who claim. This is allowed in Germany and the Netherlands, but only under certain circumstances. We are concerned here with situations in which the conduct of the third party or his relationship to the contract party may give rise to the defence.225

220

See J Ghestin, Traité de Droit civil, Les obligations (Paris, 1992), nos 835 ff. See further B Kortmann and D Faber, ‘Contract and Third Parties’ in Hartkamp et al (eds), Towards a European Civil Code, Ars Aequi Libri (Nijmegen/Dordrecht/Boston/London 1994) 237. 222 See further Heinrichs, Münchener Kommentar zum Bürgerlichen Gesetzbuch, Band 2, Schuldrecht, Allgemeiner teil, 2 Auflage (1985) 1003 ff. 223 See Ghestin, n 220 above, nos 843, 853. 224 See Cour de Cass, 21 June 1988 [1988] Semaine Juridique, (ed) G, II.21125. 225 See for Germany RGH, 25 November 1911, RGHZ 77, 317 (1911) and for the Netherlands HR 12 January 1979 [1979] NJ 362. 221

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Article 6.110 of the European Contract Principles contains a clause which allows a third-party beneficiary to benefit from a contract giving him a direct action, but the promisee may deprive him of it unless there has been notice to him that his right has become irrevocable or the third party has accepted the benefit. This is followed in the DCFR in more refined wording (see Art II–9:301/303). It may be noted that only the third-party beneficiary notion is here covered, not other parts of the privity conundrum.

1.5.3 The Situation in Common Law and the Changes in the USA and England In common law of the English variety, the doctrine of privity disallowing any third-party beneficiary to claim under the contract was connected with the doctrine of consideration but was in its strictest form of relatively recent origin and was formulated by Lord Haldane in Dunlop Pneumatic Tyre Co v Selfridge & Co in 1915.226 It has always remained contested, particularly by Lord Denning,227 but was reconfirmed by the House of Lords in Scruttons Ltd v Midland Silicones Ltd.228 In its most rigid form it has proved inconvenient and is not followed in the USA. Even in the UK, there are many exceptions. The negative effects are now reduced through statute. There were in England as exceptions the situations of the principal having to accept the contracts concluded by his unauthorised or undisclosed agents, see also section 3.1.5 below, and of debtors under assignments, drawees under bills of exchange and carriers under bills of lading having to accept the transfer of receivables, bills of exchange and bills of lading, and perform towards other parties unknown to them. English law also construed situations of semi-contract or ancillary or collateral contracts where third parties, notably subcontractors of the counterparty, were deemed to have entered into a contractual relationship with the other (first) contracting party, notably if they had given certain assurances of quality to the counterparty on which the first party subsequently relied. The same approach is likely to be taken where a person buys goods from a dealer who was given a guarantee by a manufacturer. This approach was also likely to prevail in hire-purchase and finance leases when finance companies were interposed between the supplier and the customer (hirepurchaser or lessee). Any undertakings of the supplier to the finance company or lessor could then still be relied upon by the customer.229 Payment by credit card could also involve a collateral agreement between shopkeeper and credit card company, leading to payment services and giving the shopkeeper a direct action against the card

226

[1915] AC 847. See Smith and Snipes Hall Farm Ltd v River Douglas Catchment Board [1949] 2 KB 500 and Drive Yourself Hire Co (London) Ltd v Strutt [1954] 1 QB 250. 228 [1962] AC 446. 229 See also G H Treitel, The Law of Contract, 12th edn (London, 2007) 617. 227

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company without a direct contractual relationship. It here concerns all cases in which third parties incur duties under a contract to which they are not (directly) a party. Collateral agreements were thus a most important tool for diluting the adverse effects of the privity doctrine in England. Consideration could, however, still be a problem, as noted before. In the cases mentioned, the consideration derived from the underlying relationship between the contracting parties. It could also imply reliance on the additional services, as in the case of a lessee who would rely on the quality undertaking of the contract between his lessor and the supplier of the leased equipment. This could be sufficient to sustain also the collateral agreement as it could be said that there was here a detriment to the party seeking to invoke the collateral agreement or a benefit to the subcontractor or supplier.230 Equally having a car repaired in a garage appointed by the insurance company could still give rise to a direct action against the garage by the car owner, even though he did not pay or arrange anything but only left his car there in reliance on proper repairs.231 Naturally, the subcontractor or supplier, therefore the defendants in these collateral cases, ought to be well aware of the relationship between the main contractors and intend to play a role therein.232 Where in a contractual relationship between A and B there were benefits (rather than duties as in the above cases) for third parties, the question of consideration played no less a role. As we already saw, if a true gift were meant, the beneficiary was unlikely to be able to claim for want of consideration. That was also true in the USA, where the beneficiary is then called a ‘donee beneficiary’. If the benefit was meant, however, for C to fulfil an obligation A has towards him, there is obviously no gift and sufficient consideration may be assumed; but in England C would still not have a contractual right to claim the benefit from B, not even if he agreed to the substitute performance. It was an important difference with the situation on the Continent and in the USA, in England only recently remedied by legislation. Naturally, the party negotiating the third-party benefit can always insist on performance, even specifically, so that the third party will receive the benefit unless refused, but this does not give the beneficiary an own right. Also the first party may claim damages if the counterparty does not perform towards the beneficiary, but only for himself and not for the beneficiary. It seems that these damages may sometimes include the beneficiary’s loss, although case law is not consistent on this point.233 If the promisor performs and gives the third party his benefit, there is, however, under English case law still a possibility that any successor to the promisee, like his bankruptcy trustee, may still consider it a benefit for the promisee to be held by the beneficiary in trust for him. Yet there are cases of some urgency in which it has been held that the promisor performs to the promisee as trustee for the beneficiary,234 who thereby obtains an enforceable action but in equity and not under the contract

230 231 232 233 234

See as the classic case Shanklin Pier v Detel Products Ltd [1951] 2 KB 854, 856. Charnock v Liverpool Corpn [1968] 1 WLR 1498. See Independent Broadcasting Authority v EMI Electronics [1980] 14 Build LR 1. See Treitel, n 229 above, 627. See Les Affrêteurs Réunis Société v Walford [1919] AC 801.

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directly. Also exemption or exoneration clauses may provide examples of situations where there may be a truly enforceable third-party benefit, also in England, either by using the notion of an implied contract or agency.235 Besides the situations where a third party may owe a duty under an assignment or other type of transfer agreement or under collateral agreements, this is all to say that even in England, like everywhere else, the doctrine of privity was less well established than it may have seemed at first, notwithstanding its appearance of perfect logic. The English Law Revision Commission as early as 1937 demanded reform and proposed a general formula much like that adopted in Germany and now also in the Netherlands making third-party benefits under a contract generally enforceable. Legislation has now been passed in England to bring this about (the Contracts (Rights of Third Parties) Act 1999), following a Law Commission Report of 1996. It gives the third-party beneficiary the same right to enforce the contract as if it were a party to it. It also means that it may rely on a contractual term excluding or limiting its liability. The new law does not concern third-party obligations except where construed as conditions for the exercise of third-party rights. The beneficiary is made explicitly subject to any arbitration clause. When the third-party right has crystallised (usually upon communication), it can no longer be revoked by the parties unless they reserve that right or any right of amendment (which may also be exercised if there is a need and the whereabouts of the beneficiary cannot be established or when the beneficiary lacks legal capacity). Established case law backs this up and remains effective in this area. The situation in the USA has long been different since the leading New York case of Lawrence v Fox,236 in an important instance of an outright third-party benefit, provided always that there was consideration to support the benefit which may exclude the donee-beneficiary or any other who does not have a kind of relationship with the promisee that makes the benefit likely in the sense that the promisee has some interest. But it is now more commonly argued that as long as there was proper consideration under the contract from which the donee benefit arises, the fact that the donee has not paid consideration is irrelevant, as his benefit is a matter of the proper performance of the original agreement. However, also in the US, we are mostly concerned with substitute performance by a debtor asking someone else to perform in his stead. This is a promise which is enforceable by the creditor-beneficiary under the contract once the benefit vests, which will normally be the case upon acceptance of the substitution by the beneficiary or even when the beneficiary hears of the benefit. But here again, the promisee may also insist on the original performance, whilst he may no less be able to sue under the contract to receive his benefit.

235

See Treitel, n 168 above, 626. 20 NY 268 (1859), see also Restatement (Second) of Contracts, s 302. See further MA Eisenberg, ‘Third Party Beneficiaries’ (1992) 92 Colum LR 1358. See for donee beneficiaries and their right to claim the benefit, Seaver v Ransom 120 NE 639 (NY 1918). 236

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1.6 The UNIDROIT and European Principles of Contract Law: Vienna Convention and UCC Compared. The Draft Common Frame of Reference in the EU (DCFR) 1.6.1 Unification of Contract Law. Formal and Academic Efforts. The EU Activity in this Area The unification of private law has been a subject that has been with us at least since 1928 and was from early on tied in particular to the international sale of goods. Early efforts in that direction were described in Volume I, section 1.4.18 and were based on treaty law. It resulted ultimately in the 1980 Vienna Convention for the International Sale of Goods (CISG) as the most important achievement. It had been preceded by the 1964 Hague Conventions in the same area. The text of the CISG is still considered important, even though several trading nations like the UK, Portugal and Brazil did not ratify it and the commercial practice commonly excludes its application. It will be more extensively discussed below in the context of the international sale of goods (see section 2.3). As from 1994 UNIDROIT issued Principles for International Commercial Contracts, therefore as general part of contract law for all commercial dealings. It is not a text that was ever presented for ratification and has therefore no official status. Separately, a private group of academics issued in 1995 the European Principles of Contract Law (EPCL) as a draft for an eventual codification of EU contract law. In the meantime, within the EU a project for the codification of all private law for the EU as a whole gained some ground. It is still largely driven by academics, who received valuable backing from the European Parliament, followed in 2003 by an EU Action Plan.237 The Draft Common Frame of Reference (DCFR) is the main result so 237 See also Vol I, s 1.4.19.The EU interest is expressed particularly by the EU Action Plan set in motion in February 2003, although its basic direction and methodology were never made clear. Many EU projects start this way in which the aims and trajectory are regularly reformulated. In this vein, the 2003 Action Plan introduced the idea of a Common Framework of Reference (CFR), following an earlier publication in 2001 and was itself succeeded by a later one in 2004 (‘The Way Forward’). Originally, texts on contract, tort, property (including security interests and trusts), unjust enrichment and benevolent intervention were considered. It virtually amounted to all the traditional areas of civil law codification. This idea was subsequently withdrawn and later there was talk rather of a toolbox or dictionary to facilitate the drafting of European private law texts or legislation. To this end, a group of researchers, headed by Professor von Bar, was instituted and was to deliver a final report in 2007. The working papers were meant to come from three existing research groups: the Study Group on a European Civil Code (von Bar Group), the Acquis group, and the Group Restatement of European Insurance Contract Law. ‘Stakeholders’ representing a diversity of legal traditions and economic interests were selected and asked to provide ‘detailed feedback and challenge to the academic researchers’, which ultimately proved not a great success. The direction remained unclear, however; the final form will be up to the EU Commission to decide but some kind of text was wanted and it was hoped that by 2009 the CFR in terms of toolbox or dictionary could be ready for adoption.

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far; the earlier PECL missed this formal incentive, even though the DCFR remains an academic project as well and is not as yet an EU supported text. Not surprisingly in view of the EU’s professed interest in consumer matters, the DCFR, as earlier the EPCL which it closely follows in the area of contract law, found inspiration mainly in consumer law as was indeed the professed interest of the Acquis group,238 one of the driving forces behind the DCFR. It is demonstrated by the strong protection, prescriptive, and public policy overtones in the text. Clear distinctions are seldom made and there is an on the whole undesirable spill-over effect of this approach into commerce and finance as the DCFR’s aim appears to be a unitary system for all private law, which is the same for all, therefore for consumer- and professional dealings alike, even though occasionally some distinctions are made in the text between consumer and other dealings. This unitary thinking was earlier identified as a lack of relationship thinking and in modern private law a serious mistake. If nevertheless efficiency or other considerations could now be formulated that require new rules to be imposed more generally in a unitary manner EU-wide, this poses the important question of EU jurisdiction but also of objective and method and of efficacy. In particular, should such a unitary approach follow civil law codification methodology and also supersede the operation and further development of the modern lex mercatoria as described above, at least in the EU for professional dealings, and why? A pertinent question is then also whether—whatever the true needs in a fastmoving environment—such an effort could ever be more than providing a common denominator based on an extrapolation of existing texts and past experiences in as far as academia has been able to study and summarise them. Another question is here whether preserving abstract system thinking, of whatever quality and kind, in the codification manner should be maintained Presumably the main purpose would be to eliminate some clearly nationalistic and historical overtones in existing codifications and reduce transaction costs, the result of which would subsequently be extended to common law jurisdictions and interstate transactions whether consumer or professional. Efficiency is sometimes used as an argument in the sense that a common legal system would promote interstate activity. This is not borne out by the example of the

In the event, in early 2008 the group of researchers produced the Draft Common Frame of Reference (DCFR) which amounted to a kind of codification, largely an update of the German BGB, even though it was expressly stated that no code was intended and lipservice continued to be paid to the toolbox idea. Areas covered were contract, assignments, tort, and unjust enrichment. Others followed in 2009, especially in the area of movable property law including acquisition and loss of ownership, secured transactions, and trusts. These will be dealt with in ch 2, s 1.11 below. 238 The Acquis Group searched more particularly for general principles in consumer law to be deduced from the EU’s Directives in this area, on which it promised a report by 2008. Texts on several topics started to be published as of 2007: www.acquis-group.org. In the meantime it joined the DCFR, see n 237 above.

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US, where private law remains state law even if sometimes helped by uniform law, the UCC being by far the most important example, but it never meant to drive out other sources of law in a general fashion. However, the major reservation must be that in the DCFR project, civil law is hardly advanced in its modern manifestation, at least in respect of professional dealings. Increased efficiency, at least for professionals, is much more likely to come from moving towards a more flexible dynamic concept of private law out of multiple legal sources than from reliance on some updated but old fashioned texts in a classical codification mode. It is significant in this respect that nobody in the professional sphere is asking for this. It also raises the question where it leaves other large trading nations like the US, Japan, China, India and Brazil that may also have an interest in this process of more formal transnationalisation or unification at least for professional dealings. Especially ignoring American legal sophistication and its experiences would be hard to explain, at least in professional dealings. Also, is treaty law or similar formalistic law formation here still a good vehicle or does it prove to be far too inflexible whilst it is hard to change239—the EU for its Members has of course the more flexible device of its Directives or even Regulations, although they presume EU jurisdiction in this area, which is generally lacking.240 It should be noted in this connection that there is no general provision in the Treaty giving the EU jurisdiction in private law formation, not even for consumer law, and the authority must therefore connect with and be based on the urgent needs of the free movement of persons, goods, services and money under Article 95 EC Treaty now, Article 114 TFEU. This is hardly obvious in connection with private law unification. Even the EU efforts in the field of company law, employment law, financial law, and consumer law have not always been considered a great success and responding to true needs.241 But there is more: if the free movement of persons, goods, services and money is the jurisdictional base for this effort at private law unification at the EU level, the result would have to be interpreted foremost from this point of view. In other words, there would be a new external interpretation principle superimposed on the operation and application of this private law and limit it. In section 1.3.8, this point was already 239 It is therefore now generally much less popular, see also J Basedow, ‘The Renascence of Uniform Law: European Contract Law and its Components’ (1998) 18 Legal Studies 121. 240 See S Vogenauer and S Weatherill (eds), The Harmonisation of European Contract Law (Oxford, Hart Publishing, 2006); G Alpa and M Andenas, Fundamenti del diritto private europeo (Milan, 2005), and J Mance, ‘Is Europe Aiming to Civilize the Common Law?’ 18 EBLR 77 (2007). 241 The ECJ is indulgent in these matters and assumes EU jurisdiction liberally but should become more mindful of its constitutional checking function and also of issues of subsidiarity if only to maintain its own credibility in the longer term. In terms of EU competence, the important decision C-376/98 Germany v EU Parliament and Council [2000] ECR I-2247 should be mentioned, holding the Tobacco Advertising Directive to be void for lack of legal basis because it did not contribute to the establishment of the internal market. But this proved to be a unique constitutional review, cf also the decision in C-380/03 Germany v European Parliament and Council of the European Union [2006] ECR I-11543, which again showed the usual indulgence of the ECJ.

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considered for the good faith concept. It is doubtful whether such a new principle of interpretation is truly suitable especially in the consumer sphere, where the free movement of goods, services, and money is not (yet) a major issue. The setting of private law formation in this limited jurisdictional context is therefore likely to be confining or even distorting and from that point of view not desirable either.

1.6.2

The Unitary Approach

As already mentioned, a key issue is whether this type of unification effort in private law should affect both consumer and professional dealings alike, therefore whether a unitary system is at all appropriate. This needs further consideration and concerns in essence the issue of relationship thinking, which has always been better understood and developed in common law,242 although the advent of the good faith concepts in civil law now opens there a window for a similar perspective. A different approach to consumer and professional law then follows. In this book, relationship thinking was proposed as a central theme in modern private law, including commercial and financial law. The continuing search for a unitary system demonstrates here lack of progress in civil law thinking. Consumer protection ideas thus soon move over into professional dealings and even professional law becomes then prescriptive in its core.243 Again, the development of the modern good faith notion in civil law is here not at an end and in the context of unification of private law further clarification would be needed. As far as relationship thinking is concerned, it was noted before that the more practical common law has here an advantage to which the civil law is only now awakening.244 In fact, it was already said also that separate treatment of professionals has always been important in international dealings, of which the international sale of goods is perhaps still the best example, even if financial dealings may well have exceeded them in importance and most certainly in intellectual depth. In this vein, the UNIDROIT Principles of Contract Law were meant only for international commercial contracts. The PECL cover both professional and consumer dealings and adhere to the unitary approach, but the fact that both sets are very similar is confirmation that also the UNIDROIT Principles adopt the consumer orientation. That is unperceptive but also the approach of the DCFR and it is suggested that it is a mistake. It means amongst others that relationship thinking is not properly pursued, that other sources of law are excluded or become subservient to a 242

See s 1.1.1 above. It is well known in this connection that in Germany, eg in business dealings, there is a practice of opting in professional dealings for Swiss law in order to escape the grip of the German law on standard conditions. 244 In s 1.3.7 above, it was already observed that the common law’s emphasis on the nature of the relationship between the parties means that it needs the notion of good faith much less than civil law. Implied terms, fiduciary duties, notions of reliance, and sometimes resort to natural justice do the rest. 243

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statutory approach, and that the result is statist, positivist (law as technique) and fixed in the past. The process of the more practice oriented, informal transnationalisation of commercial and financial law as a dynamic force in the modern lex mercatoria would be blighted, at least within the EU and for no obvious reason. The above strongly suggests the need transnationally to distinguish between professional and consumer dealings and that codification or similar law formation attempts from above are less appropriate for professionals until the business community itself asks for it. Again, it may be different in consumer law that is more public policy oriented, but it is also less international (and formal unification may here be premature for that reason). In any event, the idea of a unitary statutory transnational system for both must be abandoned unless it should clearly impose itself. The end result would in fact be an updated BGB, much like the euro was an upgraded deutschmark, but it is unlikely to work very well. In fact it shows, as so much EU activity does, a concern with fixing the past and there is no forward-looking perspective. Pushed by academia in Europe, which is isolated from the real world and from the dynamics of commerce and finance in particular, it shows its deep decline in the last generation. Below the details of the two sets of Principles and of the DCFR will be discussed in greater detail.245 A more detailed discussion of the international sale of goods and the Vienna Convention will follow in section 2. 245

For a rough comparative guide, the following references to the Vienna Convention (VC), Unidroit Principles (UP), European Principles (EP) and Art 2 UCC, as divided by subject, may be useful: Offer and acceptance (formation): Arts 14 and 18 VC; Arts 2.2, 2.1 and 2.6 UP; Arts 2.101, 2.201, 2.204, and 2.205 EP; ss 2–204(1) and 2–206 UCC; Arts II-4:101, II-44:201, II-44:204, II-44:205 DCFR Bargain, consideration and causa: Arts 14, 18, 23 and 29(1) VC; Art 3.2 UP; Art 2.101 EP; ss 2–205 and 2–209 UCC; Art II:4:101(a) DCFR Reliance or conduct: Arts 8, 16(2)(b), and 18(1) VC; Arts 2.1, 2.4(2)(b), 2.6, and 4.2 UP; Arts 2.102, 2.202(3)(c), 2.204(1), and 6.101(1) EP; s 2–206(2) UCC; Arts II: 4:102, 4:202(3)(c), 4:204, 9–102(1) DCFR Definiteness: Arts 14 and 19(3) VC; Art 2.2 UP; Arts 2.103 and 2–201(1)(b)EP; s 2–204(3) UCC; Arts II:4:103, II:4:201(1)(b) DCFR Capacity, legality and validity: Art 4 VC; Art 3.1 UP; and Arts 4.101 and 15:101 EP; Art II-7:101 DCFR Formalities, parol evidence: Arts 11, 12, and 24 VC; Arts 1.2 and 2.17 UP; Art 2.101(2), 2.105 EP; ss 2–201 and 2–202 UCC; Arts II-1:107, 4:104 DCFR Binding nature of offer: Art 16 VC; Art 2.4 UP; Art 2.202 EP; s 2–205 UCC; Art II-4:202 DCFR Time of contract: Arts 18(2) and 23 VC; Art 2.6(2) UP; Art 2.205 EP; s 2–204(2) UCC; Art II-4:205 DCFR Pre-contractual and post-contractual duties: Arts 2.15 and 6.2.1 UP; and Arts 2.301 and 6.111 EP; Arts II- 3:301 and III-1:110 DCFR Contractual co-operation duties: Art 5.3 UP, Art 1: 202 EP, s 2–311(3) UCC, Art III-1:104 DCFR Specific performance: Art 28 VC; Art 7.2.2 UP; Art 9.102 EP; s 2–716(1) UCC; Arts II-3:101, 3:302 DCFR Defences and failure of consensus: Arts 3.5, 3.6, 3.8 and 3.9 UP, 4.103(1)(a)(ii), 4.104, 4.107 and 4.108 EP, Arts II-7:201, 7: 202, 7:205, 7:206, 7:207 DCFR Excuses and force majeure: Art 79 VC; Art 7.1.7 UP and Art 8.108 EP Privity: Art 6.110 (third-party beneficiary) EP, Art III-3:104 DCFR Interpretation: Arts 7(1) (of the Convention), 8 VC (only of statements of the parties), Arts 1.6 (of

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1.6.3 The UNIDROIT Principles for International Commercial Contracts The UNIDROIT Principles for International Commercial Contracts were first issued in 1994 and completed in 2004. According to their Preamble, they set forth general rules for international commercial contracts. Neither internationality nor commerciality is defined, but the use of these notions may imply a reference to the international commercial legal order. This idea is not pursued, however, even if it finds some further support in Article 1.6 on interpretation. The same definitional problems arise here as

Principles) and 4.1 UP (of common intention), Arts 1.106 (of the Principles) and 5.101 EP (of common intention), ss 1–102 (of the Code) and 2301 ff (of sales contracts) UCC; Art I-1:102 (of DCFR), 8:101 (of common intention) DCFR. Concept of good faith: Art 7 VC (only in interpretation of Convention); Arts 1.6 (not in interpretation of Principles), 1.7 (mandatory concept), 2.15 (negotiations in bad faith), 4.8 (supplying omitted term in the contract) and Art 5.2 (implied contractual condition) UP; Arts 1.106 (only in interpretation of the Principles), 1.102 (mandatory concept), 5.101(g) (interpretation of contract) and 6.102 (implied contractual term) EP; s 1–103 (mandatory concept and contractual standards), s 1–304 (enforcement of duty or contract), s 2–302 (unconscionability only for sale of goods), s 1–201(20) (subjective definition) and s 2–103(1)(b) (between merchants in the sale of goods) UCC; Arts I-1:102(3)(b) (interpretation of DCFR, not in supplementation), III-1:103 (mandatory concept), II-8:102(g) (interpretation of contract) and II-9:101 (implied terms) DCFR Fundamental principles and mandatory rules: Art 12 VC; Arts 1.3, 1.4, 1.7, 3.19, 2.14 (probably), 2.19 (probably), 5.3 (probably) 6.2 (probably), 7.1.6 (probably), and 7.4.13 (probably) UP; Arts 1.102(2), 1.103, 1.104, 1.201, 2.301 (pre-contractual negotiation duties, probably), 4.110 (unfair contract terms, probably), 6.101 (significance of statements, probably) and 6.111 (change of circumstances, probably) EP; ss 1–103 (policies), 1–302 (for good faith) and 2–303 (rejecting mandatory rules in principle, except for unconscionability) UCC; Arts II-3:301(2) (pre-contractual negotiation duties), III-1:103(1) (2) (definition and mandatory nature), II-9:102 (pre-contractual statements, probably) III-9:401 ff (unfair contract terms, not even adjustable between professionals but different criteria in II-9:405), III-1:110 (change of circumstances, possibly although there may be variation through hardship clauses) DCFR Contracts contrary to fundamental principles, Illegality: Art 15.101EP, Arts I-1:102(3) (human rights and fundamental freedoms), II-7:301 (other fundamental principle left to member states even if transaction is not connected, no autonomous source of law) DCFR, see also Introduction DCFR nos 10 ff and Statement of (non-binding) Principles before the text Party autonomy: Art 6 VC; Arts 1.1 and 1.5 UP; Arts 1.102 (not an independent source of law) EP; ss 1–103 and 1–303(e) UCC; Art II:102 (not an independent source of law) DCFR Custom and practices: Arts 4.7.2 (not in supplementation of Convention), and 9 (custom) VC; Arts 1.6(2) (not in supplementation of Principles), 1.8 (custom and practices), 4.3(b) and (f) (interpretation of contracts), 5.2(b) (implied term) UP; Art 1.105 (custom and practices as implied contractual terms only), and 5.102(f) (only in interpretation of contracts) EP; ss 1–103 (supplementation of the Code including law merchant), 1–103 (1–102(2)(b) old), 1–205, 2–202(a) and 2–208 (custom and practices) UCC; Arts II-1:104 and 9:101 (as implied contractual term only), II-8:102(1)(f) (in contract interpretation only) DCFR. General principles: Arts 7(2) (supplementation of Convention) VC; Art 1.6 (supplementation of Principles) UP; Art 1.106(2) (supplementation of European Principles); Art I-1:102(1), (4) (supplementation of DCFR). Private international law: Arts 1.1 (sphere of application), 7.2 (supplementation of Convention), and 28 (specific performance VC; Arts 1.4 (in connection with mandatory rules) UP; Arts 1.103 (in connection with mandatory rules) and 1.106(2) (supplementation of the Principles) EP; Art 1–301 (1–105 old) (territorial application of Code) UCC; not in DCFR (not even when rules left to member states as in Art II-7:301).

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in international commercial arbitrations, see also Part 1, section 1.1.8 and more generally where the international commercial and financial legal order needs defining and principles as these need to find their place amongst other sources of law obtaining in that order. Although these principles are referred to as the UNIDROIT Principles, they derive from this no special status in law. They are no more than product of a UNIDROIT committee and as such have at best persuasive force in terms of a restatement or as soft law. Their authority is hardly in their academic pedigree and content, and their legitimacy, if any, can only derive from their reflection of international fundamental principles or from the ability of the international legal practice to recognise itself in the result and to accept their guidance. Thus short of them demonstrably reflecting fundamental legal principle or mandatory transnational public order requirements, only the market place can decide their ultimate fate. Ordinarily therefore, international trade and commerce have themselves here the last word (except again in transnational fundamental principles but also in matters of transnational public order, whilst domestic public policies if sufficiently connected to the transaction in question can also not be ignored, see Volume I, sections 2.2.6 ff). In this vein and according to the Preamble, the Principles are indeed more properly meant to apply only when parties have expressly agreed to them but also (still according to the Preamble) if their contract is to be governed by ‘general principles, the lex mercatoria or the like’. In the Preamble, it is even suggested that the Principles may also provide a solution when it is impossible to determine the relevant rule under a domestic law deemed applicable in the case. This would seem to refer to problems in the conflicts of law rules or to gaps in domestic law, but not to atavistic or parochial domestic laws being superseded per se. Again, whether there is authority in UNIDROIT so to decree is different matter. In the Preamble, it is further hoped that the Principles may serve as a model for national or international legislators. They are also seen as interpreting and supplementing uniform law instruments in which connection the Vienna Convention on the International Sale of Goods of 1980 particularly springs to mind. It is obvious, however, that there is here no clear concept of different autonomous sources of law operating and of their relationship or hierarchy amongst each other in the modern lex mercatoria approach as explored in chapter 1. Fundamental principles are not mentioned except perhaps indirectly in the reference to mandatory rules in Article 1.4. Custom and practices are implied contract terms only (Art 1.8), and party autonomy operates merely by permission of the Principles (Arts 1.1 and 1.5). When Article 1.4 mentions mandatory rules, it would indeed appear that they could only come from other sources of law like fundamental legal principle or mandatory custom; again, the Principles do not have the authority to create them. Whether of a national, international or supranational origin they apply in accordance with the rules of private international law (Art 1.4).246 246 It is apparently not considered that these mandatory rules strictly speaking are more likely to apply directly as regles d’application immediate (cf also Art 9 EU Regulation on the Law Applicable to Contractual Obligations, Rome I) and not as a matter of private international law. On the other

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According to the Principles, the most important rule that cannot be excluded is the one containing the duty to act in accordance with good faith and fair dealing in international trade (Art 1.7(2). It is considered absolutely mandatory; for another mandatory rule see Article 3.19 on validity. There is neither a definition of good faith or fair dealings nor of international trade (see also s 1.6.3 below). That is to say that we do not know whether we have here a transnationalised concept of good faith or not. Indeed, it was earlier observed that good faith is not always a mandatory concept and has many functions (see also ss 1.3.1 and 1.3.4 above). The Principles are not aware of or ignore, however, its multi-faceted nature. This creates obvious problems, also where reference is sometimes made to related notions like acting in bad faith, resorting to manifestly unreasonable behaviour, taking excessive advantage, or reasonableness. It also would seem the draftsmen of the Principles did not understand the revival of multiple autonomous sources of law behind the notion of good faith, not all of which are mandatory either. Whilst it is clear in the approach to the lex mercatoria as proposed in this book that fundamental legal principle cannot be set aside by parties to a contract, indeed because they are likely to be the expression of transnational public order, and that there is some ius cogens also in international trade, they concern mainly fundamentals like the binding force of agreements itself (pacta sunt servanda), the liability for one’s own actions and probably some other fundamental principles (like standards of care in the case of dependency) discussed in greater detail in the previous chapter of this book. They concern therefore foremost the legal infrastructure and not the contractual content. It was concluded in Volume I, section 3.1.2 that at least in the professional sphere, there are few, if any, fundamental principles concerning the contents of transactions. Even in the area of good faith professional participants can therefore set standards unless manifestly unreasonable. That is also the UCC approach (cf s 1–302(a)) as we saw. The Principles in respect of the mandatory force of the good faith concept are here unspecific and derive from consumer law thinking which is indeed more in particular concerned with content and may test it on the basis of fairness. That criterion would be far too broad and lacks that kind of normativity in professional dealings. A censorious approach of this nature—if that is meant by the reference to a mandatory notion of good faith—is in its generality largely untenable in international commercial transactions. If nothing else, it could imply judicial control of content which professional parties should always be able to limit or exclude, all the more so in international cases, except in exceptional circumstances, where (a) fundamental (international) principle is at work (which supports in particular the contractual infra structure) or (b) notions of international public order (notably when fraudulent or monopolistic or abusive tactics have been used), and perhaps also (c) when gross unfairness or unconscionability results, or where (d) contracting is used as an hand, it is considered that there are mandatory rules in the Principles which may not be excluded by the parties, although the Principles themselves (as a whole) may be (Art 1.5). This would seem incongruous.

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organisation technique affecting multiple contracts and thereby larger groups, although this is more relevant in relation to consumers under standard contract terms and less between professionals although in these Principles no proper distinction is made in this connect in Article 2.20.247 Outside the area of such behaviour or result, professional parties should be able to redistribute the burdens, risks and financial consequences of their dealings in the way they see fit. The construction of good faith as a mandatory concept is here unhelpful and generally misleading. Notably the notion of good faith does not go so far that professional parties substantially lose control of their transaction. In this connection it was pointed out from the beginning that relationship-thinking may well de-emphasise good faith notions, particularly in professional dealings, as well as concepts of capacity, mistake, misrepresentation, force majeure and frustration or hardship. Again this is not truly reflected in the UNIDROIT Principles even if they pretend to be for professional dealings only.248 The consumer-oriented nature of the UNDROIT Principles may in particular be demonstrated at the hand of its hardship provision. In the case of intervening unforeseeable, unavoidable and undiscounted circumstances, renegotiations may be sought under the Principles as soon as the contractual equilibrium is disturbed, whilst there need not even be severe financial consequences (Art 6.2). This is hard to understand for professional dealings, where questions of contractual balance are in any event difficult to establish. This is consumer thinking. One may then also wonder whether this rule is also considered good faith related and therefore mandatory. Again this could at most be so in manifest cases. In a similar vein, Articles 7.1.6 and 7.4.13 limit the parties’ freedom with respect to exemption clauses and agreements to pay fixed sums for non-performance. These rules also seem to be mandatory even amongst professionals. The question is why? Who needs protection here against what? Pointing in another direction may, however, be the absence in the Principles of pre-contractual disclosure and negotiation duties per se, which one would indeed not immediately expect in commercial contract principles, but Article 2.14 makes a party liable for damages in the case of negotiations in bad faith. Bad faith is undefined but 247

In the UNIDROIT Principles, another example of mandatory rules, are those concerning the validity of the agreement, that is those on fraud, threat and gross disparity. In view of what has just been said about exceptional situations, their mandatory nature may be less surprising, but here the approach is at least more subtle. Thus the rules on the binding force of the mere agreement, initial impossibility and mistake, may be varied by the parties (Art 3.19). In truth, these rules concerning validity are only sometimes fundamental (in as far as they refer back to the notion of pacta sunt servanda as the basis of the whole contractual structure) and otherwise structural (rather than mandatory) and it seems indeed possible at least for professional parties to make further arrangements in respect of the consequences of at least the latter. 248 By opting for another legal system altogether parties have in any event traditionally been able to circumvent them if less suitable (although this facility was never uncontested) and this will be no less the case under the UNIDROIT Principles (Art 1.5). In any event (and to repeat), in professional dealings and given proper relationship thinking, questions of innocent misrepresentation, mistake and gross disparity should not so soon arise, see also s 1.3.11 above, and it might be questioned in this connection why, eg, gross disparity (or at least its definition) may not also be left to the arrangements by or the definitions of professional parties themselves. Instead we see here again the impact of a consumer law mentality relying on mandatory protection.

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introduces a subjective element. It seems a mandatory rule as well. One instance is highlighted: one party entering into or continuing negotiations whilst intending not to make an agreement. This can happen when this party wants to prevent the counterparty dealing with competitors or seeks confidential or proprietary information. This would border on the fraudulent, for which the more proper remedy may be in tort. Concern here seems fair enough; yet more generally between professionals the negotiating behaviour must have been very bad indeed before liability of any sort can result. This is not obvious from Article 2.14, although the reference to bad faith rather than lack of good faith may suggest a higher threshold for liability. Again, one must question the authority of the draftsmen of the Principles to state on mandatory rules unless they are demonstrably reflective of fundamental principle, public order, or international commercial practice. Finally, even if these Principles were meant for business dealings only the basic attitude of the draftsmen appears to remain anthropomorphic, therefore derived from and tied to personal dealings and experiences only,. More traditional notions geared to contracts between individuals in the sense of their psychological intent (cf Articles 4.1(1) and 4.2(1), still seem to prevail throughout, only thereafter balanced by more objective notions of reasonableness, see Articles 4.1(2) and 4.2(2)). The UNIDROIT Principles cannot therefore be presumed always to reflect the international commercial practice. If they do not, they cannot have much meaning. To conclude: it cannot be avoided that the consumer-oriented attitude seriously undermines the credibility of the UNIDROIT Principles. For all their focus on commercial contracts, the risk-taking dynamics of international trade and commerce seem to have eluded the draftsmen and hardly find a reflection in these rules They present principally an academic effort on the basis of a trade-off in domestic theoretical thought concerning consumer or smaller business protection steeped in the tradition of black letter rules and a more recent ethos of governmental intervention. To repeat, for any effort of this nature to succeed, it must be conducted from the point of view of fundamental principle and practical need, internationally more in particular from the perspective of the law merchant or lex mercatoria, therefore the law that prevails in that sphere between professionals which these rules meant to cover.

1.6.4

The European Principles of Contract Law (EPCL)

The consumer-oriented attitude of the UNIDROIT Principles is also adopted by the Principles of European Contract Law (EPCL), first published in 1995 and completed in 1998. Here it is more understandable as they also apply to consumer transactions, but it means that the confusion between (international) business transactions and

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(domestic) private dealings is built into these Principles themselves which introduces a unitary approach, no less undermining their credibility. Again, it suggests a fatal lack in relationship thinking. This being the case, an academic effort looking for a unitary framework is not likely to command authority whilst ignoring in this manner the differences deriving from the nature of the relationship between the parties and in the case of professionals their special needs internationally, especially in terms of a more dynamic contract law encapsulated in modern contract theory as we saw. To repeat, at least in the professional sphere, any rules concerning international dealings find their ultimate justification in their reflection of internationalised fundamental principle, industry practices, and notions of party autonomy; the rules concerning consumer contracts on the other hand in domestic public policy. That in neither set of Principles (UNIDROIT and EPCL) the needs and requirements of commerce are fundamentally evaluated is proven by the fact that the texts are largely the same. There are, however, a number of important differences in the details. First, there is a fundamental difference in their interpretation or supplementation, as we shall see in section 1.6.6 below. Furthermore, according to Article 1.101 of the EPCL (not here in a Preamble like in the UNIDROIT Principles), they are meant to be applied as general rules of contract law in the European Communities when (a) parties have agreed to their application or when (b) they have agreed that their contract is to be governed by ‘general principles of law, the lex mercatoria or the like’, or when (c) they have not chosen any system of law to govern their contract or when the applicable law does not provide a rule.249 The EPCL maintain a system similar to the UNIDROIT Principles in respect of their exclusion by the parties and to the derogation by them from its provisions, which derogation again may not affect any mandatory rule (Art 1.102(2)). In this connection, they also track the language of the UNIDROIT Principles on good faith and fair dealing and the parties’ mandatory duties in this respect (Art 1.201). The EPCL which, as just mentioned, also cover consumer contracts, are narrower in that they do not

249 This reference in the EPCL to the European Communities in the European Principles could mean a reference to the EU legal order in which case, for the applicability of the European Principles, both parties would seem to have to be resident in the European Union in order to be subject to it (just like the UNIDROIT Principles could only apply to participants in the international commercial legal order). If so, this would appear to exclude within the EU the application of the UNIDROIT Principles (wherever different). If, on the other hand, at least one of the (commercial) parties is not from the EU, that would seem to give precedence to the UNIDROIT Principles. If, however, the European Principles were to be considered in the nature of an EU contract code, they could be relevant to outsiders also under the traditional rules of private international law or compete as transnational law with the UNIDROIT Principles (where different). The latter could, however, claim to be a truer expression of the lex mercatoria, since they are not limited in their territorial reach and were written for the international business community, even though, as noted before, in truth no less consumer oriented than the EPCL. That is what academic lawyers now usually know best.

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refer here to international trade. These Principles are not therefore set in an international context (but only an EU one) regardless, apparently, of the earlier reference to the lex mercatoria (a reference dropped from the DCFR, which has no view on the subject at all). As regards mandatory law, more generally, the EPCL also follow the UNIDROIT Principles in letting all mandatory rules of national, supranational and international law prevail pursuant to the relevant rules of private international law, again without considering the possibility of their direct applicability and more objective standards of appropriateness or justice (Art 1.103).250 As regards the impact of custom, the EPCL again follow in Article 1.105 the earlier UNIDROIT Principles relying on implied terms subject to reasonableness, although the text may be slightly more objective. A new element introduced by the European Principles (Art 1.302) was the definition of the requirement of reasonableness itself (also for other purposes) which refers to good faith and also takes into account the nature and purposes of the contract, the circumstances of the case and the usages and practices of the trade and profession involved, but notably not the nature of the relationship of the parties. It makes the test of reasonableness in the case of custom both circular and censorious and confirms that in these Principles no fundamental distinction is made between consumer and professional dealings. Although the circularity is curious, the reference to usages and practices in the definition of reasonableness in Article 1.302 may suggest a more objective source of law, therefore no longer merely implied terms, but it is probably just an oversight. Article 1.305, describing imputed knowledge of the parties, remains substantially based on personal dealings and again modern business dealings seem not to figure. In matters of capacity (Art 4.101), mistake and misrepresentation (Art 4.103), precontractual duties (Art 2.301, although cast in more objective terms), individual negotiation of unfair contract terms (Art 4.110), pre- and post-contractual renegotiation duties (Arts 2.301(2) and 6.111), the approaches of the UNIDROIT Principles are substantially followed also. Again they are as such essentially derived from non-professional dealings, except that in the EPCL absence of good faith already creates liability for broken-off negotiations whilst unconscionability of performance (‘excessively onerous’) is required for renegotiation duties to arise. The latter may be a more severe test than that of the UNIDROIT Principles which only refer to the contract equilibrium being fundamentally altered. One would have expected this stricter test to appear in the UNIDROIT Principles which only cover commercial dealings. Mistake cannot be invoked as an excuse if the mistake was inexcusable or the invoking party assumed the risks or if in the circumstances they should be borne by it (Art 4.103(2)). The UNIDROIT Principles prevent a party from invoking mistake only in the event of its own gross negligence or when it took the risk (Art 3.5(2)).

250 There is a refinement in that, when applicable law so allows, parties may set its mandatory rules aside by opting for the Principles, which would appear to go without saying.

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The EPCL are also a little more subtle in the mandatory nature of the validity provisions: only the remedies for fraud, threats, excessive benefit and the right to avoid an unfair term not individually negotiated may not be excluded; remedies for mistake and incorrect information may be except if contrary to good faith and fair dealing (Art 4.118). In the professional sphere one would have expected the possibility of exclusion also for excessive benefit and the right to avoid unfair terms not individually negotiated.

1.6.5

The Draft Common Frame of Reference (DCFR)

The DCFR was already referred to extensively throughout the text of this chapter and what was said so far may be briefly summarised as follows. First, the DCFR maintains an old fashioned civil law codification approach in which legislation retains the central place and system thinking accompanies it. Private law is here a governmental text, statist and static, to be interpreted as a system based on a set of coherent rules derived from an extrapolation of past experiences, in an EU context freed only from too much of a nationalist input; the idea of Volksgeist, the law emanating from the national spirit of a people is here at last abandoned. It follows, however, that private law remains academic, imposed and not found, and its application a technique, basically connected with logic, all entirely in the civil law positivist tradition. Other sources of law are only accepted to the extent specifically incorporated in the text.251 Fundamental principle whether of an underlying or overarching character are ignored, even though in the latest 2009 text referred to in a kind of Preamble (nn 10–22), but their overriding status is not accepted (the draftsmen only try to demonstrate how much is reflected in the positive rules of the DCFR itself), unless they are human rights related when the text allows them to be taken into account in the interpretation (Art I-1:102(2)). Article II-2:101 also contains specific wording as to discrimination in contract law. Others are left to Member States in a curious passage in the law of contract (Art II-7:301) that allows them to impose their own mandatory laws (also of a private law nature) without regard to sufficient contact with the case in situations which are cross-border (in fact the prime motive why EU law would be necessary). It was already said that conceptually this leaves a big hole in the system of law proposed by the DCFR. Custom or industry practices are merely implied contract terms (cf Arts II-1:104, II-4:205(3), and II-9:101) or appear in interpretation (Art II, 8–101(1)(f)), dealt with therefore mainly in a contractual context only, whilst party autonomy also operates only by government licence (Art II-1:102). This is the traditional codification approach that means to monopolise the scene and pretends to contain in itself the

251

See nn 9–12 and 138–141 above.

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solution for all problems. In this vein, general principles have no autonomous status either but only come in to the extent they are underlying the DCFR itself (Art I1:102(1) and (4)). It is of interest in this connection that any reference to the lex mercatoria, which figured in both the UNIDROIT Principles and EPCL, was deleted. It confirms that there is no place for other sources of law, also not in respect of professional dealings cross-border. This attitude is seriously regressive, but it must be asked whether a document of this type even if it became law in the EU would indeed have the power to exclude all other sources of law in this manner. Although good faith allows for a way out in principle, it is only defined narrowly and in moral terms (Art I-1:103), although the connection with fair dealing would appear to suggest a market element. Social considerations or values are not mentioned, which in the normative or modern dynamic contract approach are all relevant. Notably, its multifaceted character is not recognised, see section 1.3.4 above, especially so in its being considered of a mandatory nature (Art II-3:301 and Art III-1:103(2)). This follows the UNIDROIT Contract Principles and EPCL but can be true only when it refers to fundamental principle or public order requirements, see also the discussion in section 1.3.10 above, now presumably to be considered at EU level and no longer domestically. There is a separate reference to reasonableness in Article I-1:104, which apparently implies a different concept, although hardly defined. The importance would appear to be that it is not mandatory per se. Although in the reference to the ‘relationship in question’, the good faith definition may suggest a beginning of relationship thinking, the consequence of its mandatory nature is that not even professional parties can set standards, see also Articles II-3:301 (pre-contractual negotiation duties), II-8:102(1)(g) (interpretation), II-9:101(2)(c) (terms of contract). For pre-contractual disclosure duties there is, however, a reference to good commercial practices for professional dealings in Article II, 3:101(2) whilst in the context of a change of circumstances, there is a reference to what is reasonable and equitable instead (the latter term not being defined), Article III-1:110. Whatever its meaning, there is an interesting difference between pre-contractual and postcontractual negotiation duties, the former being mandatorily governed by good faith. It suggests that parties may agree otherwise at least in a post-contractual hardship clause and even exclude the adjustment. It is less clear why this could not be done also in the pre-contractual phase, at least amongst professionals in some disclaimer document. The standards of good faith which the DCFR maintains, whatever they may be, apply to consumer and business alike. They have a strong consumer flavour, as they had in the EPCL. Indeed it was observed before—even for the UNIDROIT Principles —that there is here a spill-over effect of mandatory consumer protection thinking into the professional sphere. The reason is a lack of relationship thinking, which as mentioned earlier is in civil law only in its infancy although the definition in Article I-1:103 with its reference to the ‘relationship in question’ does not exclude further development. It was identified earlier, in section 1.1.1, as a traditional flaw in codification thinking which in contract law concentrates on the type of contract, not on the type of parties.

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The DCFR maintains this approach in defining seven contract types (sale of goods, services, rental agreements, contractual agency, loan agreements, distribution agreements, guarantees), but it never refers to the nature of the relationship of the parties, notably not in matters of interpretation and supplementation either, compare also Article II-8:102(1)(e). Only in some specific instances, does it make a distinction between consumer and business dealings, but it is not fundamental. On the contrary, the unitary approach is its principle. Again, that was always typical for codification thinking but is not the way of the future. It was already pointed out several times that this has serious adverse consequences for the credibility of the whole project. The thesis of this book is that, in international dealings, the distinctions between professional and consumer dealings can no longer be ignored and is fundamental The former are subject to immanent law creation at the transnational level and codification is for them no longer an appropriate method of law formation and application and is not asked for. It may still be appropriate for consumers, but it was already questioned whether creating consumer protection of this nature at the EU level is at this moment the way forward even for them. There are here issues of different needs per country and subsidiarity The consumer approach also continues to support an anthropomorphic attitude to the law in the area of contract with continued emphasis on intent in terms of old fashioned will theories, offer and acceptance language, and protection of the individual, see Articles II-401 ff. Also here, the DCFR follows the EPCL closely. This has all become unrealistic and unsuitable in professional dealings where in modern contract theory, see s 1.1.4 above, conduct and reliance,252 risk acceptance, and the place of any particular contract in the overall business of a participants need further to be considered in terms of defences or relief against performance, particularly therefore in the area of mistake and misrepresentation, force majeure and change of circumstances, see more particularly sections 1.3.11–1.3.14 above. Where amongst professionals the text of the agreement is a road map for the parties and an expression of their risk management, it was further pointed out that a literal interpretation may often be called for and that the good faith notion, if properly applied, may itself require it. Good faith is not always more rights; it can be less. There is no recognition of this at all in the DCFR. It was noted above (in section 1.6.1) that the EU lacks broad jurisdiction in the area of private law formation unless all can be cast in terms of free movement of goods, services and money, but this is stretching the concept of the internal market to breaking point. It is too narrow a mandate for full codification and would also affect the interpretation technique and introduce a narrowing of it to overriding notions of

252 Conduct and reliance are only referred to incidentally, see Arts II-4:101, 4:204 and 8:102 (conduct) and II-4:202(3) (reliance). On the other hand, reliance might even suggest a contribution or at least a beginning of performance, cf also the reference in Art I-1:103(2) in the good faith definition.

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the free movement of the commercial flows. It was questioned in section 1.6.1 whether this is useful, but it follows inescapably from so narrow a jurisdictional base.253 It was mentioned in this connection also that unification of private law was never thought necessary or even desirable between the various States of the US, which are much more intimately connected than the Member States in the EU; and where there is uniform law, as, importantly, in the UCC, it never meant to monopolise the field and leaves all room for the common law, equity and custom. The UCC is not therefore a comparable document and is in any event much more realistic and up-to-date.

1.6.6 Interpretation and Supplementation in the Principles and the DCFR. Sources of Commercial and Financial Law, Hierarchy and Lex Mercatoria The discussion on these issues was started in section 1.3.9 above, to which reference is made. The language on the interpretation and supplementation of both sets of Contract Principles and the DCFR is heavily influenced by Article 7 of the Vienna Convention as we saw, itself, however, only applicable to sales agreements in respect of movable tangible assets. Ultimately we are here concerned with the invocation of other sources of law, which the Vienna Convention (Article 7), both sets of Contract Principles (respectively Articles 1.6 and 1:106) and the DCFR (Article I-1:102) do in that context but in an unco-ordinated way, the first three documents making reference to good faith, uniformity, international character, the general principles underlying them, and of the Vienna Convention and EPCL even to domestic laws through conflict of law rules. It was already said that custom and industry practices are here a completely different subject and party autonomy a matter of statutory licence. The Vienna Convention (Art 9) and both sets of Principles (respectively Arts 1.8 and 1.105) are unanimous in allowing the effect of custom only if parties have incorporated them in their contract or as an implied term if they are widely known and regularly observed in the trade concerned. This narrow approach denying its autonomy as a source of law was criticised before but is followed by Article 5.2 of the UNIDROIT Principles, although not similarly repeated in Article 6.102 of the EPCL, which use in Article 1.105(2) somewhat more robust language in the sense that parties are bound by any

253 An early critical article appeared in Germany, see W Ernst, ‘Der “Common Frame of Reference” aus juristischer Sicht’ Archiv fur die civilistische Praxis (2008) 248, followed by two more technically critical contributions, first of the work of the Acquis group, N Jansen and R Zimmermann, ‘Restating the Acquis Communautaire? A Critical Examination of the “Principles of the Existing EC Contract Law” ’ 71 MLR 505 (2008), and subsequently of the DFCR, H Eidenmuller, F Faust, HC Grigoleit, N. Jansen, G Wagner, R Zimmermann, ‘Der Gemeinsamen Referenzrahmen fur das Europaische Privatrecht’ (2008) 63 Juristenzeitung 529. See for a more favourable comment from a member of the Acquis group, T Pfeiffer, ‘Methodik der Privatrechtsangleichung in de EU’ (2008) 208 Archiv fur die civilistische Praxis 227.

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usage which would be considered generally applicable by persons in the same position as the parties. That is also the approach of the DCFR, Article II-1:104 and may then also extend to non-contractual issues. Both sets of Principles and the DCFR require application of custom (or rather usages and practices as they put it) not to be unreasonable. It was questioned whether that is appropriate in the professional sphere and there should be no correction of the result on the basis of reasonableness or fairness unless in extreme cases. Again a test of content is generally only appropriate in consumer dealings. There is in all of these interpretational paragraphs no order or hierarchy and probably not even a clear insight in what was meant. The recognition of various sources of law and their hierarchy was earlier identified as key in the concept of the modern lex mercatoria, which at least was still referred to in both sets of Principles but no longer in the DCFR, although it remained undefined. It has also already been said that the DCFR claims here exclusive application for itself, although it may still be questions whether, if becoming law, it has the power to exclude other competing sources of law. Following what was said about this hierarchy in Volume 1, sections 1.4.13 and 3.1.2, in defining their own place, these texts should have given precedence to fundamental principle and mandatory custom. Their own mandatory rules would then follow and subsequently mandatory general principle, party autonomy, directory custom, their own directory rules followed by directory general principle. Regulatory rules of domestic law are outside this hierarchy and separately to be considered. Article 1:103 of the European Principles expressed this in an inadequate way as we saw. No reference is retained in the DCFR, although there may still be some confusion in Article II-7:301. It refers to the application of the domestic fundamental principle but not to regulatory laws. The problem is that it sees all private law as EU internal and assumes one system of law also in regulatory matters. Whatever the shortcomings in this regard in the texts of the CISG, in both sets of Contract Principles, and in the DCFR, we also saw that the good faith notion itself may be and is often used as the vehicle to (re)introduce other sources of law, see especially section 1.3.9 above. In section 1.3.10, the use of good faith as a mandatory concept was discussed and there is clearly room for it when good faith is referring to fundamental principle or public order. In sections 1.3.11–1.3.14 the effect on information-, negotiation- and renegotiation duties and force majeure, as well as the notion of mistake, abuse of rights and other defences and excuses was further explored with the conclusion that both sets of Principles and the DCFR are here far behind, again especially because of their lack of relationship thinking and its general unawareness of modern contract theory. This also goes into the concept of certainty, which is held in high regard in the DCFR (following the EPCL), see Article I-1:102(3)(c), where it is presented as a major interpretation tool (or source of law) in the interpretation of the DCFR itself, Article I-1:102(3)(c), but this rests on a misunderstanding of what a dynamic modern private law is or can be. The accent should have been instead on predictability and the much narrower concept of finality in transactional matters including payments, see Volume I, section 1.1.5 and chapter 2, section 1.10.2 below.

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1.6.7 Approach to Contract Formation: Consensus and Exchange Notions, Capacity, Formalities and Specificity Generally in the area of formation both sets of Contract Principles, the DCFR (which follows the EPCL), the Vienna Convention, and the UCC, should be studied especially in terms of matching declarations of offer and acceptance or in terms of the consensus notion; bargain, consideration and causa; definiteness of the offer, the binding nature of the offer, dispatch and receipt of offers and acceptances; the importance of reliance and conduct in this connection, and the time of contract; formalities and parol evidence; unilateral contract and cash sales; implied conditions, disclosure, (re)negotiation and co-operation duties. Attention to the nature of the agreement and especially to the difference in the relationship between the parties are other matters to be considered. Subsequently there is the matter of interpretation and the role of good faith and custom, even in the formation of the contract. It has already been said that both sets of Principles and the DCFR remain dominated by the concepts of will and consensus,254 rather than conduct and reliance. This also directs offer and acceptance,255 being in essence still perceived as

254 Art 3.2 of the UNIDROIT Principles depends chiefly on the mere agreement of the parties, whatever may be meant by it, subject to reasonableness, established practices, good faith and fair dealing and the nature and purpose of the contract, but as implied terms only and not as more objective standards or other sources of law (Art 5.1.2). The broad and abstract notion of mistake in Arts 3.4 ff also testifies to a psychological concept of consensus (although itself not expressly used). In a similar vein, the notion of avoidance of the contract and restitution is for commerce probably too broadly formulated, Art 3.17. It is clear that intent per se, rather than risk management in a business sense and the dynamics of risk taking concerned the draftsmen, never mind that these Principles were meant for commercial contracts. See for the DCFR, The EPCL and DCFR, which also cover consumer dealings substantially follow this approach, which for consumer transactions may be more understandable, but it pleads against a unitary set of rules. Thus the DCFR, in Art II-4:101 ff makes the intent the essence of the contract as also shown by the language on mistake (Art II-7:102) and the interpretation language (in Art II-8:101). It refers to the common intent of the parties failing which there is resort to the ‘reasonable person approach’. For contracts concluded under the DCFR, Art II-8:102 substantially uses the language already developed in the UNIDROIT Principles and thus retains here also the consensus idea and the parties’ intention leading to an anthropomorphic notion of contract. Even reliance itself is not a concept much favoured, but transpires in Art 16(2)(b) CISG, Art 2.1.4(2)(b) UNIDROIT Principles for International Commercial Contracts, which cannot be done if the offer was relied on. The concept of reliance is more broadly used in the DCFR, see Art 2.202(3)(c) EPCL, although only in connection with the possibility to revoke an offer, and Art I-1:103, II-4:202(3)(c), II-7:204, II-8:101. See for the notion of conduct Art 18(1) CISG, Arts 2.1 (only added later), 2.6(1), 4.2 and 4.3 (c) UNIDROIT Principles, Arts 2–102 and 2–204(1) EPCL, and Arts II-4:102, 4:204 and 8:102 DCFR, cf also s 2–206(2) UCC. 255 The rules are derived from the CISG (Arts 14 ff), therefore from the sale of goods, but were extended to all types of contracts in the UNIDROIT Principles and (ch 2) EPCL (ch 2) and thus also introduced for duration contracts of all types, a substantially different world, see also Arts II-401 ff DCFR.

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anthropomorphic acts based on personal dealings.256 It also results in a fixed moment of contract formation, see Article II-4:205 DCFR. The notion of a gradual build-up in rights and duties and a dynamic concept of contract remains underdeveloped. All three texts closely follow each other in this respect and are clearly inspired by the compromises reached within the formation rules of Part II of the 1980 Vienna Convention on the International Sale of Goods (Arts 14 and 18) and in the earlier Hague Sales Conventions concluded more than a generation ago in language that dated already from the 1930s. This is therefore old sales language, extended by the Principles and DCFR to all types of contracts and brought into its general part. The continuing emphasis on offer and acceptance was itself already much criticised before as being at variance with modern contract theory and practical realities. No less important in this connection is that the notion of risk acceptance only transpires in the DCFR in connection with mistake and change of circumstances, although, albeit in a different language, in the force majeure clause in all four texts as well. The Vienna Convention (Arts 14 and 29(1)) and both sets of Principles (Art 3.2 UNIDROIT Principles and 2–101 European Principles) and DCFR (Art II-4:101) all reject implicitly the notion of consideration in a common law sense and also of causa in a civil law sense (more clearly Art 3.2 of the UNIDROIT Principles). Offers are, however, not binding unless they say so or are reasonably relied upon (Art 16(2) Vienna Convention and Art 2.4(2)(b) UNIDROIT Principles and Art 2.202(3) EPCL, see also Art II-4:202(3) DCFR. Note that the reliance needs not be detrimental and that it does not necessarily lead to a contract. The idea seems to be that if the offeree is incurring some cost in reasonable reliance on the offer, it cannot be withdrawn at will. It should be distinguished from acceptance by conduct.257 It shows, however, that, unlike in civil law, offers are not binding per se, not even for a reasonable period except if so stated or when there has been reasonable reliance (like

256 Both sets of Principles and the DCFR are also of interest in that, whilst avoiding consensus language as the Vienna Convention also does, Art 5.101 EPCL, Art 4.1 UNIDROIT Principles and Art II-8:101 on interpretation of the contract refer to the common intention of the parties as the interpretational base. Here arises the civil law notion of consensus as common platform of the rights and obligations of the parties under a contract, which itself injects some objectivity or even the concept of reliance. 257 As regards offer and acceptance, the Vienna Convention (Arts 14 and 18) largely assumed the common law terminology and concepts of offer and acceptance except that acceptance, if not by conduct or in the manner as indicated by established practices between the parties, is effective only upon receipt by the offeror (see Art 18(2) following s 130 BGB), even if by mail, therefore rather than upon dispatch, which is the traditional common law rule (motivated at least to some extent by the need to lock in consideration as early as possible and reduce the incidence of non-binding offers). The Contract Principles, respectively in Art 2.6(2) UNIDROIT Principles and Art 2.205(1) EPCL, and DCFR (Art II-4:205(1) follow this approach, allowing also for acceptance by other conduct reaching the offeror (Arts 2.1 UNIDROIT Principles, 2.102 EPCL, II-4:102 and 4–204 DCFR). Clearly, this conduct does not need to amount to detrimental reliance (the notion of reliance is only used in connection with the revocability of the offer and needs then only be reasonable, not detrimental, see above). The offer itself is effective when it reaches the offeree (Art 15 Vienna Convention and Art 2.3(1), a rule not found necessary to repeat in the EPCL, but, as already mentioned, the offer may be revoked until acceptance unless reasonably relied upon.

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in the case of subcontractors’ quotes enabling a main contractor to make a final offer). That is also the approach of the UCC (s 2–205). What reasonable reliance is, is not made clear. A reply that states or implies additional or different terms materially altering the terms of the offer is a rejection and counter-offer. Both sets require an offer to indicate the intention of the offeror to be bound (respectively Articles 2.2 and 2.103), followd in Article II-4:103 DCFR.258 Under the Vienna Convention, an offer must be sufficiently definite but needs to specify only the essentials of the contract needed to be agreed, which meant quantity (the goods) and price (Art 14(1), although even for price (if not expressly fixed) Article 55 gives further rules. Additional terms which did not materially change the offer did not result in a rejection or counter-offer but, if bearing on price, payments, quality, quantity, place and time of delivery, parties’ liability, or settlement of disputes, they were considered material per se and therefore in the nature of a counter-offer (Art 19(3)). This looks like a list of fundamental clauses or conditions in an English law sense, even if only the one on quantity (and price) must be specifically expressed in the contract. Article 2.14 UNIDROIT Principles and Article 2.103 EPCL, which cover not only sales contracts, do not require minimum terms. They rely on mere definiteness, see respectively Article 2.2 UNIDROIT Principles and Article 2.201(1)(b)/Article 2–103(1)(a) EPCL, see also Articles II-4:101, 4:103(1)(a) DCFR.259 Under the Contract Principles, there is no need for documentation (Art 1.2 UNIDROIT Principles and Art 2.101(2) EPCL, followed in Art II-1:107(1) DCFR). The Vienna Convention has in Article 11 a similar provision but left this matter ultimately to the Contracting States which could make a contrary declaration (Art 12) as the USA has done. There is no parol evidence rule. The UCC continues to require documentation for sales contracts in excess of $500 and has shifted the parol evidence rule (see ss 2–201 and 2–202). On capacity all are silent. Finally one might consider how the system of the Vienna Convention and especially of both sets of Principles and DCFR applies to some common formation complications, like to cash sales especially for consumers (where Art II-4:211 DCFR following the EPCL asks for the appropriate adaptations of the offer and acceptance notions rather than recognising that they are here at an end), to the nature of the contractual obligations that derive from reliance on conduct, to the meaning of a signature under an agreement, to the impact of good faith on the formation of the contract and the disclosure and investigation duties in that context, to the duties of care and subsequently to the co-operation duties of the parties in the various phases of the contract, a number of which were discussed above in sections 1.3.11–1.3.14.

258 Like the UCC in the USA for the sale of goods, the Vienna Convention dispensed for formation purposes with the traditional common law distinction between so-called unilateral and bilateral contracts, the first ones being for their effect dependent on full performance (and notice thereof instead of mere acceptance) like in offers to the public (if not an invitation to treat) and (normally) in offers for services. So do the Principles and DCFR, see Arts II- 4:101, 4:201, 4:204, and 4:205, see further also n 254 above. 259 The issues of disclosure and negotiation duties at the formation stage were dealt with in s 1.3.11 above.

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Defences. The Question of Continued Validity of the Contract

In the previous section it was established that the UNIDROIT and European Principles do not openly favour the civil law consensus notion even if in the UNIDROIT Principles there may be some reference to it in Article 3.2 and still more in the EPCL, Article 5.101 and in Article II-8:101 DCFR. The common law notions of consideration and matching individual promises are, however, not followed either. From this there flows a more conceptual approach to the defences, excuses and to remedies. Thus the common law fragmented case law and equity approach is here substantially abandoned, see for this approach section 1.4.2 above, in favour of the civil law concept of validity which concerns itself mainly with the binding force of the agreement absent failures of common intent and with the subsequent avoidance or rescission of the contract. In civil law, invalidity in this sense tends to be retroactive so that the effects of the contract will be undone. This is (mostly) not the case, however, when a contract is rescinded on the basis of non-performance (rather than invalidity). Delivered assets will then be returned only to the extent feasible. This problem of replevin will be more extensively discussed in connection with a default in international sales in section 2.1.10 below; it is covered by the rules on unjust enrichment under the DCFR (Art II-7:212(2)). The Vienna Convention, according to its Article 4, is not concerned with validity in this sense. In both sets of Principles and the DCFR260 all defences lead to voidability in the civil law manner. Avoidance (in whole or in part, see respectively Art 3.16 UNIDROIT Principles, Art 4.116 EPCL and II-7:212) is thus the normal remedy in all cases leaving therefore the initiative to the adversely affected party even in the case of fraud and threat, so that there is no voidness per se. The common law rescission notion with its broad inherent judicial discretionary element does not here operate. The affected party may always confirm the arrangement (respectively Arts 3.12 UNIDROIT Principles, 4.114 EPCL, and II-7:211 DCFR) or, in the case of mistake and gross disparity, also seek adaptation of the contract (respectively Arts 3.10 and 3.13 UNIDROIT Principles, 4.105 and 4.109(2) EPCL, and II-7:203, 7:207). Avoidance may be accompanied by a claim for restitution and damages (respectively Arts 3.17 and 260 Both sets of Principles and the DCFR exclude from consideration matters of immorality and illegality (respectively Arts 3.1 and 4.101 or invalidity in the common law sense), see also Art II7:101(2) DCFR, although in the last version of the EPCL there is a chapter (15) on illegality which ties in to fundamental principle, which has its counterpart in Art II-7:301 DCFR, referring here to the law of Member States without saying which one. As just mentioned, they explicitly concern themselves with civil law validity concepts in terms of initial impossibility (respectively Arts 3.3, 4.102 and II-7:102), mistake (respectively Arts 3.4 and 3.5, 4.103 and II-7:201), error (Art 3.6, essentially equated with mistake and covered by it in the EPCL in Art 4.104), cf Art II-7:202(1), fraud (respectively Arts 3.8, 4.107 and II-7:205), threat (respectively Arts 3.9, 4.108, II-7:206), and gross disparity (respectively Arts 3.10, 4.109, and II-7:207). The concept of fraud appears to put emphasis on what the fraudster did or intended to do Mistake is used here as a generic term. Error as a neutral term is covered in Arts 3.5 and 3.6 UNIDROIT Principles, in Art 4.103(1)(a)(iii) EPCL, and Art II-7:201(1)(a)(iii) DCFR. Inaccuracy is mentioned in Art 4.104 EPCL and Art II-7:202.

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3.18 and 4.115 and 4.117 and II-7:212(2) and II-7:214). These provisions are considered mandatory, except that as to the remedies mistake or incorrect information may be excluded unless the exclusion is contrary to good faith and fair dealing (see respectively Arts 3.20 and 4.118(2) and II-7:215).261 The common law notions of duress and undue influence may have found a place under ‘threat’ in Article 3.9 UNIDROIT Principles and Article 4.108 EPCL, see also Article II-7:206 DCFR.

1.6.9 Performance, Breach, and Excuses Both sets of Principles and the DCFR distinguish between fundamental and other breaches leading to a differentiation in remedies, derived from Article 25 CISG.262 In the DCFR the concept is expressed in Article II-3:502. For fundamental breach the key is that the creditor is substantially deprived of what he was entitled to and it leads to termination if the creditor so wants. The concept is to some extent subjective. If the breach is less than fundamental, notice fixing an additional time must be given after which the breach becomes fundamental in language also derived from the CISG. Both sets of Principles and the DCFR follow the civil law rule that specific performance is the normal remedy where there is no voluntary performance except when it imposes unreasonable burdens or the performance is of a highly personal nature (respectively Articles 7.2.2, 9.102 and II-3:302, see also section 1.4.1 above). It does not preclude damages whilst in bilateral agreements the other party may also withhold performance until the first party starts or continues to perform (respectively Arts 7.1.3 and 7.2.5, 9.103 and 9.201, and III-3:303 and II-3:401). Under the UNIDROIT Principles, penalties may be imposed for the benefit of the aggrieved party unless the mandatory law of the forum dictates otherwise (Art 7.2.4). It was noted before that the Vienna Convention refers back to the lex fori (Art 28) on this point. Besides this option of specific performance, whether or not combined with damages and/or the temporary withholding of own performance, the aggrieved party has the 261

Of particular interest are the questions of innocent misrepresentation and mistake which were earlier identified as requiring lesser concern in professional dealings, see s 1.3.11 above. The concepts are combined in both sets of Principles but the EPCL and DCFR seem to deal better with the issue of professionality. As already mentioned in s 1.6.2 above, under the EPCL, mistake cannot be invoked as an excuse if the invoking party assumed the risks or if in the circumstances they should be borne by this party (Art 4.103(2)(b)). This language also appears in Art 3.5(2)(b) UNIDROIT Principles, but the latter prevent a party from invoking mistake in the event of its own gross negligence (Art 3.5(2)(a)). The EPCL refer in this connection to inexcusable mistake in Art 4.103(1)(a)(ii). There is also a reference to good faith which may suggest a more normative approach. Art 3.5 UNIDROIT Principles refers instead to a reasonable person and reasonable commercial standards, probably a lower test which could be the consequence of its concern with business dealings only. See further also Article II-7:201 DCFR which tracks the EPCL language. 262 See also O Lando, ‘Non-performance (Breach) of Contracts’ in A Hartkamp et al (eds), Towards a European Civil Code, 2nd edn (1998) 333.

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further option of terminating the contract or, in some cases, price reduction. Naturally, if the contract requires only a best effort, these remedies will not be available (the French distinction between obligation de résultat and obligation de moyens). On the other hand, where a guarantee is given or implied, even the force majeure excuse may not excuse the debtor. Payment is as such virtually never excused either as we saw in section 1.4.6 above. The English distinction between contractual conditions and warranties, see section 1.4.3 above, is abandoned. The excuses of force majeure and change of circumstances were dealt with in sections 1.3.14 and 1.4.5 ff above.

1.6.10

Privity of Contract

As already mentioned in section 1.5.2 above in fine, Article 6.110 of the European Principles contains a clause which allows a third-party beneficiary to benefit from a contract giving him a direct action, but the promisee may deprive him of it unless there has been notice to him that his right has become irrevocable or the third party has accepted the benefit. This is followed in Article II-9:301 ff DCFR. No other instances of inroads in the privity of contract are specifically covered in this connection.

1.6.11

The Nature and Impact of the Contract Principles and DCFR

Both sets of Contract Principles and the DCFR are largely reflective of domestic laws and the result of comparative research in these laws and, where different, are in essence a trade-off between them. As such they are backward-looking and mere extrapolation of past experiences in the EU in the positivist and codification tradition. It is doubtful whether as such they can be deemed to reflect best practices and can support professional operations. The EPCL and DCFR are also meant for consumer transactions without making any distinctions. Throughout, it would have been better if a clear reference had been made to the nature of the relationship of the parties in terms of professional or other dealings, especially in the concept of good faith and all interpretation, supplementation, and adaptation provisions. At least in the pre- and post-contractual duties, the disclosure and renegotiation duties and the concepts of mistake and force majeure, one would have expected a less prescriptive approach for professional dealings. Although the term ‘principles’ was used at first, what has in fact emerged in all these documents are sets of restatements containing very precise rules. At least for professionals, it may be doubted whether this is needed at this moment. Indeed, principles rather than details would seem greatly preferable at so early a stage of the development of transnational law, at least in respect of professional dealings. They should identify the main issues and provide key clarifications. Case law or arbitral awards should then

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be given a chance to develop the notions further on the basis of practical experience and need at the transnational level. Other sources of law of substantial (transnational) law would then also re-emerge if only at first in the areas of interpretation and supplementation or adaptation Probably the most important reservations arise, however, from the fact that these texts are largely reflective of the protection needs in what became the consumer or small companies sphere domestically and that the notions developed in that context are now paraded as being reflective also of international business practice. Consumer protection notions and their prescriptive bias thus enter also in professional dealings. That is hardly appropriate. Hence also the idea that good faith is essentially mandatory. Particularly this notion of good faith and also the related notions of reasonableness and their treatment particularly in the EPCL and DCFR show a lack of proper insight in the multifaceted and true nature of these concepts and are in the minds of the draftsmen plainly confused if not wrong altogether. The meagre place allotted to custom or practices is another indication that the dynamics and needs of business were poorly understood. The concept of party autonomy then needs to be revisited also. This goes back to the sources of law of which only legislation remains the one that is favoured by the draftsmen of these texts. This is the old civil law codification approach now attempted to be extended to the common law in order for it to operate at EU level. That this is at all considered, is due to a positivist strand in English academic thinking which has also moved to a belief in private law texts and rules through legislation at the expense of fact (and common law, equity, market practices or custom), in England popular particularly in circles around the Law Commission, but the traditionally very different common law attitude would become immediately clear again in the interpretation in the courts in England, which are unlikely to give up their more pragmatic approach and tradition. It has already been said that even though in the interpretation clauses concerning the texts themselves, reference is being made to their international character, purpose and the need to promote uniformity and sometimes good faith whilst in the supplementation rules there appear references to general principles and, in the Vienna Convention and EPCL, even to private international law, see section 1.6.6 above, transnational custom and practices play a minor role as do implied terms. Through all of this the concept of mandatory laws is interjected in the guise of good faith, but there is no order263 nor an understanding of the law formation and transnationalisation process itself, nor indeed of what the residual role is of domestic laws in international dealings, nor how this process deals with mandatory domestic laws especially if regulatory in nature. Beyond an old fashioned codification approach, with its belief in an abstract system of rules that are coherent and as such complete and presumptively capable of 263 Thus where in the EPCL in supplementation private international law pointing to a domestic regime follows the application of general principles (or ‘ideas’), this order seems to be stood on its head in Arts 1.101(3)(b) and 1.101(4), under which domestic laws would seem to come first. The latter were deleted in the DCFR.

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resolving all legal issues—which is even now discredited in civil law—there results a serious lack of clarity in method and objective. It was already said that the DCFR is in essence a German project that does not go beyond an updating of the BGB and entirely misses the insights into moving private law forward. The BGB has always been criticised for its unworldliness and academic tenor. There is nothing that suggests that the EU’s future is served by such an approach. In any event, it would appear to lack the necessary legislative jurisdiction and in any event adequate support in the professional sphere. It can only be repeated that for texts of this nature to have any real effect at least in professional dealings, they must for their credibility show both direction and inspiration, be clear, concise and flexible (unless barred by public order or policy), whilst the international practice, dynamics and needs must be recognisable in them and be seen to be properly advanced unless there are clear (policy) reasons for it to be otherwise. Thus new ways must be shown, old ways discarded and above all a view of the dynamics and needs of international commerce and finance presented, see in particular the discussion in Volume I, sections 1.1.4 and 1.1.5. It is in particular this element that is so far substantially missing and this is bound to limit the impact of the effort, particularly the one in the DCFR. In other words, this German contribution is no text fit for the international market place, and hardly suitable for the rest of EU, let alone for the operation of the markets in London. To make an effort of this nature credible, first the unitary approach should be abandoned and subsequently we should ask ourselves what is necessary in terms of uniform law for the consumer whilst in the professional sphere we should wait till it asks for help unless public policy or public order suggests otherwise.

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Part II Contracts for the International Sale of Goods 2.1 The Main Aspects of the International Sale of Goods 2.1.1

Introduction

One of the most important contracts in international commerce remains undoubtedly the international sale of goods, that is to say the contract for the sale of tangible movable assets or chattels, which is the meaning of ‘goods’ in common law. A sale, whether domestic or international, is the principal means of effecting a transfer of ownership or title in chattels. The transfer itself may also be achieved in other ways, for example through an exchange (barter) or a gift. The price or monetary element is here the main distinguishing feature. In the case of the transfer of title through a sale, one party, the seller or vendor, normally promises to deliver a specific good or a specified quantity of (generic) goods to the other party, the buyer, for an agreed price. Agreement on the sold asset or on quantity in the case of commodities and on price is therefore the minimum one expects to find in a sales agreement. In international sales this approach is confirmed in Article 14 of the 1980 Vienna Convention on the International Sale of Goods (CISG) which is the leading text covering international sales, to be discussed more fully below in section 2.3 and which was already mentioned several times before.264 It is only a partial codification and limits itself mainly to the aspects of quality, quantity, price and payment, place and time of delivery, passing of risk, default, force majeure (exemption) and remedies, therefore mostly to sales aspects that are normally covered in the contract itself (see also the list in Article 19(3)). It concerns itself therefore mainly with default rules or directory law, therefore with lesser issues which are normally dealt with in the contract itself, at least if written. This written form is to be expected when the deal is of some size as will normally be the case in international sales. Given the fact further that even in this area of default rules, the Convention is only a partial codification, its importance should not be overstated. It follows that the Vienna Convention notably does not cover most aspects that cannot be so easily covered in the contract itself but that are matters of objective law or of the contractual legal infrastructure, like the binding force of the agreement and its defects or defences (in cases of mistake and the like) or other aspects of validity 264 The Vienna Convention referred to in this context is the UN Convention on Contracts for the International Sale of Goods concluded in Vienna under the auspices of the United Nations Commission on International Trade Law (UNCITRAL) on 11 April 1980, also referred to as CISG. The most authoritative commentary is by J Honnold, Uniform Law for International Sales, 2nd edn (Kluwer, Deventer, 1990), with the English text of the 1978 draft Convention and its predecessors (The Hague Conventions of 1964) attached.

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(Art 4) and any disclosure, negotiation and special performance duties. Here the UNIDROIT and European Contract Law Principles and now also the Draft Common Frame of Reference (DCFR) may acquire additional significance, the latter at least in Europe in terms of general principle or even customary law. The Vienna Convention does, however, cover offer and acceptance (referred to as ‘formation’ in Pt II), but not any proprietary consequences of the sale (Art 4). The passing of title itself, the manner in which this is done and the moment at which the buyer becomes the new owner are therefore not covered by the Convention either. Many domestic sales laws, especially in countries that require delivery for the title transfer to be complete, do not do so either. This may require some further explanation. As the object of a sales agreement is the transfer of ownership or title, it would not be illogical to expect parties to cover this aspect in the contract. It is certainly normal for them to specify the time and place of physical delivery. The title transfer itself is, however, a proprietary issue affecting third parties who will have to respect it in order to make it effective. The law is not likely to leave this aspect—therefore the questions whether, how and when the ownership transfers—to the parties to the sales agreement alone. This most important issue (as well as the protection of bona fide purchasers) will be discussed more fully in chapter 2 below, as this chapter will mainly deal with the contractual aspects of the sale of goods, but suffice it to say here that countries like Germany and the Netherlands, following Roman law in this respect, require besides a sales agreement also delivery of possession for ownership to pass, therefore in principle a certain physical form and publicity to achieve the transfer of title. Without it, ownership cannot pass in these countries, whatever the contract may state in this regard. It is not truly a matter of party autonomy. The law of other countries like France (at least for the transfer of title in goods) and notably the traditional common law, at least of England, is here less formal, does not require delivery for the transfer of chattels, and allows parties to at least determine the moment of the transfer freely. Under these laws, the timing of title transfer is as a rule the moment of the conclusion of the sales contract, but it may be deferred by common agreement. It may seem to suggest that the title transfer is a contractual matter, but this is misleading. At least in France, and in countries like Italy following its example in this respect, title transfers here only because the relevant property law so determines and there is no true party autonomy in the creation of proprietary rights in this manner. As we shall see, common law is here more flexible and also leaves the modalities of the title transfer (therefore how it is done) to the parties. Thus even in countries like France, the proprietary consequences of the sale do not strictly speaking flow from the sales contract itself and whether or not the transfer of title follows is also a matter of the objective law, no less so than in countries requiring delivery even if the moment is a different one as may be the formalities. It is sometimes also said that, even in France and in countries following its lead, title transfer is equally dependent on delivery but that it is merely constructive (constituto possessorio, see for this notion chapter 2, section 1.5.2 below). These considerable differences in the law of title transfer in the various countries were the reason the 1980 Vienna Convention explicitly excluded the proprietary

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aspects of the sale from its scope (Art 4(2)), following in this respect the example of the 1964 Hague Sales Conventions that preceded it, so that, short of transnationalisation, the domestic law resulting in international cases from the applicable private international law rules still determines this issue. These rules normally refer to the lex situs, that is the law of the location of the sold assets which may still create problems in international sales when the contract requires transportation of the goods across border. In that case, the laws of the country of origin and of the country of destination may both qualify as applicable. Internationalisation of the ownership concept in movables may well provide a new angle to this problem and impose its own transnationalised ownership concept no longer affected by domestic rules, as used to be the case with negotiable instruments. These aspects will be more fully discussed in chapter 2, section 1.8 below and be summarised in section 2.1.7 below. As far as the sales contract itself is concerned, both domestically and internationally, the quantity and price are the minimum terms one expects the parties to cover, but the agreement is also likely to cover other aspects of the sale and notably to describe the quality of the goods with or without some warranties. The contract may further specify the time and place of the passing of the risk in terms of liability for unavoidable loss or damage occurring before completion of the transfer of possession or conceivably even payment, the latter especially if there is a reservation of title. Then there are the time, place, currency and manner of the payment. Commonly, the sales contract will also detail some excuses, like force majeure, frustration or economic impossibility or hardship, the latter especially where the sale is connected with a long term supply contract as is common in the construction industry and may need adjustment in the case of unforeseen circumstances, see also section 1.4.7 above. This may acquire special features in professional dealings, which international sales normally are, as we have also seen, in sections 1.3.11 and 1.3.14 above. The contract may also include some special provisions or protections in the case of default, for example a liquidated damages clause, particularly if damages are difficult to assess, a method usually upheld if the agreed amounts do not prove disproportionate. It may also make provisions for termination of the contract upon a substantial default (or fundamental breach in the terms of Article 25 of the Vienna Convention) and in the case of non-payment by the buyer it may even attempt to provide for an automatic return of title to the seller if under applicable law it has already passed to the buyer.

2.1.2 The Minimum Requirements of the Sales Agreement: Special Features and Risks of International Sales As we saw, it is not uncommon to introduce special description and protection clauses into the sales contract, often also the moment of delivery and title transfer, sometimes even to secure a return of title (in reservation of title or rescission clauses) and consequently of the asset upon non-payment, or to define the damages in the case of

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default or reduce judicial involvement in the early termination or adjustment of the agreement in other ways. This should be seen against a background in which the minimum contractual terms necessary for the sales agreement to be binding are steadily reduced. As mentioned in the previous section, they now centre on the identification and quantity of the goods sold, the price, and the intention to transfer ownership, as confirmed for international sales in Article 14 of the Vienna Convention. Yet in modern sales agreements, at least those of the international type, even the price need no longer be fully settled, see for example Article 55 of the Vienna Convention,265 whilst the intention to transfer ownership may be considered implied. Absence of these and other obvious sales terms, like a description of quality, does not then render the contract void, and these terms may in such cases be derived from objective, often market-related, ‘normal’ or customary standards to fill in the gaps, which standards may be further elaborated in accepted practices. They are then supplementary or directory in nature and indeed apply only if the parties have made no further arrangements themselves. In international sales in terms of the lex mercatoria, fundamental and general legal principles as well as customs and practices would also enter the determination of these standards within the hierarchy of norms in which party autonomy and domestic laws also have their place in the manner explained more fully in Volume I, sections 1.4.13 and 3.1.2. These standards may also support the notion that sellers ordinarily sell from their place of business or manufacturing plant (ex works) at which point title (upon proper delivery in countries which retain this requirement for title transfer) and, more particularly the risk are likely to pass. As a consequence, at least in domestic sales, no provision on the division of labour and cost in terms of organising transportation and insurance is normally found in the law of sales, which means that the buyer usually makes his own arrangements, except perhaps in larger countries where substantial distances may have to be covered. This is likely to be different in international sales which acquire here distinctive features as transportation and insurance become substantive issues whilst additional risks, organisational problems, and payment complications may also be encountered, so that this type of sales contract can no longer be seen in isolation but must be considered part of a whole cluster of arrangements without which an international sale cannot be truly meaningful or effective. Thus in international sales, the law must respond to a different factual situation with its own risks and protection needs which makes it more difficult to consider the international sale in isolation (as is usually possible for sales domestically). In summary, these sales are likely to raise special difficulties and face special risks related

265 Even under French law according to which the price had to be determined by the parties (Art 1591 CC) and could not be left to be determined by one of the parties, which would have rendered the contract subject to a potestative condition, as such a cause for the invalidity of the contract, Art 1174 CC, an objective price standards may now be applied to the relevant party’s decision which could allow the contract still to be implemented: see Cour de Cass, 1 Dec 1995 [1996] JCP 22.565.

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to the cross-border movement of the assets to be sold, the coverage of longer distances and dealings with foreign buyers and their payment. Commonly they require therefore additional arrangements, most obviously in terms of transportation, insurance, and payment protection. There may be other complications, like the formalities to attend to at borders (and the delays they may create) and risks, like those connected with proper custody and care and the use of third parties in this connection. It all suggests a more elaborate scenario to be set out between the parties with clear instructions on what each of them will do or organise to be done by others since these details cannot habitually be left to the greater informality and co-operative spirit that may prevail in the performance phase between parties to a sale purely domestically, aided if necessary by their own (informal) domestic dispute-settlement arrangements or courts. To this may be added the likelihood of sharper conflicts in international sales because of the often greater value of the merchandise and the higher cost of handling whilst parties may be less well known to each other and at any rate likely to be in different countries. As a consequence, the international sales contract is apt not only to be encapsulated in a number of ancillary arrangements in respect of transport, insurance, and payment, but is often also more formal, precise and comprehensive and likely to be more fully documented and specific, also on dispute resolution techniques in which especially international arbitration may figure. In sum, the most important risks implicit in international sales chiefly lie with the increased difficulties in delivery (transport risk), the protection of the goods and their continuing good quality (quality risk), or payment (credit risk), but there may also be problems for the parties in the arrangement details on the spot (completion or management risk) and access to the judicial process and clarity concerning the applicable rules in the case of difficulties (legal risk) in view of the differences in jurisdiction and the greater uncertainties as to the applicable law and its meaning, especially now that application in international dealings of a national law through traditional conflicts of law rules may no longer be credible and transnational law in the form of the modern lex mercatoria alternatively figures, all the more apparent in international commercial arbitrations. Traditionally, parties could also be exposed to tariffs or other import or even export restrictions as already mentioned. They have become much less important after the various GATT liberalisation rounds. Parties remain, however, exposed to potential upheaval in the other party’s country or in those through which the goods must pass (political risk), which may leave the seller or sometimes also the buyer largely unprotected with regard to payment or proper delivery. Another kind of political risk derives from subsequent governmental interference in the deal, the most common being the refusal of foreign currency to the buyer in order to make the required payment under the contract (country risk), but there may also be legitimate health and safety concerns or more politically inspired other import restrictions. Some of these events when occurring may qualify as a force majeure excuse, but not necessarily all, it depends on the definition of this concept but that does not solve all problems, especially when the goods are already in transit. If there is a delay in payment as a consequence of these complications, there may be extra currency risk for

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the party who contracted in a foreign currency. The unforeseen delays also highlight the illiquidity attaching to goods in transit, which means that they must be financed and may tie up capital longer than anticipated (funding or liquidity risk), subjecting them at the same time to the effects of adverse price fluctuations (price risk).266 This different environment is not fully reflected in the Vienna Convention. Its definition of internationality of sales agreements is not directly related to these different needs and risks, but merely to the parties residing in different countries (Art 1). International sales are still considered sales ‘ex works’ if nothing else is intimated by the parties in the contract (Art 31(c)). It follows that payment remains in principle also required at the place of the seller upon delivery unless otherwise agreed so that sales credit and payment in the country of the buyer continue to be considered exceptional features, see Articles 57 and 58. This is all in the domestic sales law tradition. The Vienna Convention does not address these various risks and concerns and may therefore well be considered to reflect a narrower and perhaps less realistic notion or model of an international sale. As previously mentioned, it is, in any event, only a partial codification, mainly concerned with issues that professional parties will normally settle amongst themselves. Another problem is that it is not much aware of modern contract theory either as we saw, see section 1.1.4 above. This may explain its limited impact and the well-known lack of confidence amongst practitioners in what it was trying to achieve. Although ratified by many countries, but notably not by the UK, Portugal and Brazil, its application is often excluded by professional parties.

2.1.3

Legal Risk in International Sales

It follows from the foregoing that parties seeking to deal with the various needs and risks in international sales need to allocate them in the contract as best they can. For lawyers, legal risk is here of prime concern, that is to say that, especially at the time of the conclusion of the deal, there is the need and opportunity for them to provide a roadmap for performance, certainly in sales contracts of longer duration, to minimise misunderstandings between the parties on the interpretation, and to gain some insight into the types of legal issues that may arise later and in their possible solutions, either under the terms of the contract, under domestic default rules or under transnational law in terms of the modern lex mercatoria. From the outset, it highlights the concern for the capacity and authority of the parties to contract and for the validity and legality of their agreement. There will also be concern with public policy issues such as existing or even future import and export restrictions, tariffs, or public standards in respect of quality, safety and environment, the impact or likelihood of which (in terms of the effect of mandatory domestic rules on international transactions) needs to be assessed (or captured in a change of 266 See n 176 above for a quick guide to the corresponding and supplementary provisions in the UNIDROIT and European Contract Principles and in Art 2 UCC.

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circumstances clause) besides a legal preoccupation with the ancillary arrangements, especially transportation, insurance, and payment. In case parties should not be able to clear any differences or complications that may arise subsequently, it raises also the question of the eventual access to the judicial process, therefore questions of jurisdiction, available remedies, and the applicable law. Here the contract may steer the parties into the direction of certain courts or international arbitration tribunals and their procedures and elect the application of a chosen law, which could now also be the lex mercatoria, see Volume I, section 2.2.9 above. Again, this all goes well beyond the Vienna Convention and its limited ambition. Political risk may be closely connected with legal risk and then particularly derives from governmental intervention after the deal has been concluded (to be distinguished from the more obvious political risks like public disturbances and revolutions) either through legislative or administrative action when the legal status or effect thereof also remains to be determined, like new health and safety standards. The contract itself may, for example, make the continued validity of the agreement dependent on the absence of such intervention or redistribute the risks and costs. Nevertheless, the same governmental action may seek to abrogate such clauses, the effect of which measure on the international transaction then also needs to be established. Thus in an international context, the relevance of foreign or transnational private law, the level of knowledge thereof as well as the legal impact of foreign governmental action and foreign adjudicatory jurisdiction need also to be considered, especially in terms of foreign trade and payment restrictions or tax consequences and the measures that may be taken in advance to avoid or minimise any adverse effect by structuring the deal differently, for example directing it through different countries or including rebalancing or termination clauses in the agreement and guard over their continued validity. Much can be done in terms of early clarification by writing full agreements setting out as much of the deal as possible. It avoids reliance on unknown or unfamiliar directory rules of various legal systems that may otherwise become applicable. Standardisation of international contract types may help here too. In any event, long-form contracts in the common law style are normal in international commerce for these reasons. Yet they cannot foresee every complication—in fact, they often foresee and contain a list of complications that have arisen in other types of situations handled by the law firms in charge of the final documentation, sometimes without much likely relevance to the present deal. This historical burden often makes these agreements longer than they should be, over-complex and costly, whilst they still cannot cover every eventuality. Nevertheless, they are often better and less risky than the short forms which prevailed in the continental European tradition, now increasingly abandoned in international transactions. To provide clarity in the legal aspects, in these contracts a choice of a domestic law and choice of forum clause is common. In Volume I, section 1.1.5, it was already said that the certainty that may be expected from choosing some domestic law could be of

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low quality and undesirable in its consequences and may in any event be illusory as domestic law is seldom written for international transactions. First, it locks the contract into a domestic law which may be poorly suited to cover the international dynamics of the deal. Secondly, it leaves unresolved the question of how far mandatory policy rules of other countries connected with the transaction may be avoided or such rules of the chosen system prevail, even if they have no sufficient connection with the case, see Volume I, section 2.2.9. This is particularly relevant, as these policy rules usually derive from the need to police certain deals in the country formulating them but may have no relevance if executed elsewhere: see for these problems more in particular Volume I, sections 2.2.6–8 Domestic or foreign governmental action or interests when the execution of the contract is required outside its jurisdiction may have little impact, but as a matter of extraterritoriality of governmental policy this will remain a matter of appreciation by the competent court asked to rule on it as a question of comity or règles d’application immédiate, see Article 9 of the 2008 EU Regulation on the Law Applicable to Contractual Obligations and in the US sections 401 ff Restatement (Third) Foreign Relations 1986. International arbitration panels will no less be forced to balance conflicting governmental interests and are probably better able to do so neutrally than domestic courts. In any event, also where the performance is likely to be closely related to the foreign country concerned, internationally there may still be an issue concerning the retroactive effect of governmental action or its administrative legality and the proportionality of its actions. Equally the choice of a forum may result in jurisdiction in countries that have little relation with the case, may therefore not take it, and there may in any event be hardly any assets in that country so that recognition and execution of the resulting judgment elsewhere becomes necessary, leading to further proceedings and cost. It may prevent action in the most suitable forum from the point of view of a creditor. A non-exclusive jurisdiction election clause may eliminate the danger of the appointed court not taking the case but does not prevent the other problems. Applicable law and jurisdiction clauses may thus increase the risks and need to be considered with the greatest care, probably more so than is at present usually the case. Where no law is chosen by the parties, traditional private international law rules obtain in the absence of uniform law (like the 1980 Vienna Convention on International Sales of Goods), but these rules may be increasingly artificial and uncertain themselves, another subject of Volume I. They may also show great gaps. International principle and custom may in any event prevail over them. In fact, the preponderance of whatever domestic laws may prove ever more objectionable in international transactions and the proper law may more suitably be the trans-national lex mercatoria and its hierarchy of norms from different legal sources, if not already chosen by the parties. The issue whether transnational law or the new lex mercatoria itself can be chosen was more fully discussed in Volume I, section s 2.2.9 and 3.3.3 and such a choice is now increasingly accepted. As objectively applicable law, in international sales, it could even affect the title and its transfer. Legal fragmentation and globalisation of markets

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do not go together and the markets themselves may no longer accept the former and enforce change whilst creating their own legal frameworks. Indeed, it has been submitted all along that rather than looking for a particular domestic law to apply, modern parties must learn to work with the modern lex mercatoria instead with its hierarchy of norms in a globalised professional legal order and its relationship to domestic mandatory regulatory law and public order considerations. Written legal opinions are now often required by the parties from their lawyers to assess these and other legal risks at the time of the conclusion of the contract. They normally address questions of legal capacity and the authority of the parties, the proper formation, validity and legality of their contract and in this connection also make an assessment of the applicable laws. They may also pronounce on the effectiveness and risks of any choice of law, although especially the possibility of arbitrators applying the lex mercatoria as non-state law is often still neglected. They may also deal with choice of forum clauses or omission thereof and may point out the risks resulting under existing or anticipated intervening foreign governmental action under legislative and administrative processes elsewhere that may attempt to affect the deal. The closer the legal risk comes to political risk, the more the legal opinions are likely to be tentative or inconclusive. But especially lack of understanding of the international scene and a preference for domestic legal orders which are the only ones most lawyers know may make these opinions a great deal less reliable than they should be, often now all too obvious in subsequent international arbitrations.

2.1.4 Special Arrangements to Cover the Risks of International Sales As has already been said, a consequence of the additional complications and risks in international sales, some specific arrangements will normally be made at the more practical level with carriers, warehouses, insurance companies, and bankers in terms of transportation, warehousing and safekeeping before or after transportation, insurance, funding, payment or related security or guarantees (like letters of credit), whilst an easy facility to on-sell the goods may become very valuable to reduce liquidity risk, which may be created through the issue of negotiable documents, most notably a bill of lading when goods are carried by sea. The international sales contract will be concerned with all these aspects in terms of (a) who will make the necessary arrangements, (b) who bears the costs, and (c) what else can be done in the circumstances to reduce risk or how best the risks can be shared in the balance of the contractual stipulations as by their very nature not all risks (for example legal risk) can always be insured against, which would in any event become very expensive. The key in all this is to appreciate that the various risks may be separately considered and dealt with in different ways according to their nature. This is now commonly called the unbundling of risks. Each of the parties will attempt to reduce its risks through these arrangements. Market conditions or practice and otherwise

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bargaining power will normally determine the success of either party if they mean to transfer the burden and cost, for example of transportation, insurance and payment protection, onto the other. Under the contract, the risk of safe arrival and deterioration of the goods whilst in transit will normally remain with the seller until delivery (quality risk), see Articles 66 ff Vienna Convention. It means that it would be the seller’s concern and cost to insure these, although the contract may always provide otherwise. For the transportation risk, the seller may be able to put this burden also on the buyer and it depends therefore on the sales contract who must make the transport arrangements and who pays, in which connection the best known terms are CIF (cost insurance freight) or FOB (free on board), see more particularly section 2.3.9 below. The payment risk may be covered by modern bank guarantees, especially letters of credit, the cost of which are normally carried by the buyer who also makes the necessary arrangements (subject to the seller’s approval). He may, however, try to have some of these costs discounted in the sales price. In this manner, the quality and transportation risks are likely to be separated from the payment or credit risk, especially under the terms of a letter of credit, which is usually made subject to the handing over of the documents (bill of lading if issued) only, therefore only to proof that the goods were properly shipped but not to their safe and unspoiled arrival. Payment under a letter of credit thus supersedes for the time being the implied conditionality of all sales agreements under which conform delivery would be a normal condition of payment, but this payment under a letter of credit is subject to argument later and to possible litigation, which may lead to a return of the price in whole or in part. That does not, however, affect the paying bank under the letter of credit, which is reimbursed by the debtor separately. What we are concerned with here is re-payment in whole or in part to the debtor/buyer himself, see more particularly the discussion in Volume III, chapter 1, Part III. The letter of credit therefore has, in first instance, the effect of transferring the payment or credit risk of the buyer to a bank that is likely to have a much better credit standing and has no defences connected with the sale. Thus, the bank will make the payment regardless of the quality of the goods and their safe arrival. It receives a fee for doing so and will have an arrangement for reimbursement with the buyer, but the payment to the seller will not be conditional on either. The letter of credit derives its true importance from this double independence (from the contract between seller and buyer and the arrangement between buyer and bank) and further from the fact that it will normally lead to payment at the place of the seller. Yet, even under letters of credit, the buyer may be able to insist on a certificate of quality or confirm delivery upon arrival of the goods before the bank may pay on its behalf which obviously makes the letter of credit much less attractive to the seller. It is a facility much discouraged in the modern practice. On the other hand, the bank in the letter of credit could require that the buyer default before it will pay. This is equally unattractive to the seller and therefore also discouraged in modern letters of credit. As suggested above, payment or credit risk may also be safeguarded against by the seller retaining a proprietary interest in the assets, particularly through a rescission

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clause or a reservation of title, but in international sales they are likely to be less effective after the goods have sailed, first because the legal status of these clauses may be less clear elsewhere raising difficult choice of law problems and doubts over their effect whilst furthermore practical problems connected with custody and disposal and extra cost unavoidably result if title returns in goods that are in foreign lands. As regards the other risks, political risk may be insured against or divided between the parties depending on the place where the interference occurs (in the place of the seller or buyer or during transit). As with quality, it is likely to be entirely separated from payment when payment is guaranteed by a bank under a letter of credit, which means that the bank will pay on the agreed day regardless of the safe arrival under the circumstances or of whatever payment impediment is subsequently imposed on the buyer through government action. As just mentioned, the liquidity risk may be mitigated by the seller whilst negotiating the bill of lading for early payment, often part of the letter of credit arrangement under which payment may be made immediately upon loading and turnover of the bill of lading to the bank, long therefore before arrival of the goods. It will imply a discount on the purchase price. Another common method for the seller to obtain early cash is to assign the receivable to a bank (or factoring company) or to discount (upon acceptance) a bill of exchange drawn on the buyer, a technique now outdated in most countries,267 except where the assignment of the receivable is not well developed, for example in countries where prior notification is still a requirement for the validity of such assignments, as used to be the case in France and Belgium under Article 1690 CC and as became the case in the Netherlands268 under Article 3.94 CC (new), particularly inhibiting bulk assignments of future receivables, although for financial transactions alleviated in France by an amendment in 1980 and in the Netherlands in 2004, see Volume III, chapter 1, sections 1.2.1 and 1.3.5.

2.1.5 International Sales as Contracts between Professionals: Applicable Law The extra risks and complications outlined above mean that international sales are, in a technical sense, normally considered to be contracts between professional (merchant) parties only, therefore between parties who are both knowledgeable in the area of their sale and its risks, likely and able to make the special arrangements necessary in this connection and experts in doing so, and are aware of special industry practices to this end. 267

Another reason for the modern unpopularity of the bill of exchange in international transactions is that payment will often follow at the place of the drawee or buyer as only his bank will discount. It leaves the creditor/drawer with the foreign exchange and political risk if he wishes to convert the proceeds into his own currency and transfer these to his own residence. As already mentioned above, the letter of credit tends to remedy these problems as the paying bank will normally be in the country of the seller. 268 It did not mean, however, that the bill of exchange practice was reviving in the Netherlands.

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One should always look out for these practices. Also in the additional arrangements completing an international sale, as in the transportation, insurance, and payment aspects, participants and lawyers must develop extra sensitivity towards them. It is one of the theses of this book that this is true in the case of all professional dealings. Unlike in domestic sales, the subject of international sales is thus not commonly thought to cover consumer sales or even sales of goods of which an otherwise professional party does not have special knowledge. This is expressed in the Vienna Convention (Art 2) only in a negative manner in the sense that consumer sales are excluded from its scope. The international sale is further limited in that, as term of art, it is not believed to cover the sale of real estate, negotiable instruments, other documents of title, bonds and shares, or assignments of intangible property (like receivables). These types of sales may of course also be the subject of international sales contracts, as indeed consumer sales, transfers of receivables and the rendering of cross-border services may be, but they are not commonly deemed to be included in a reference to international sales, which as to subject matter are therefore limited to tangible movable assets commonly sold between professionals and therefore limited to the commercial or professional sphere. As for international sales, the feature of cross-border delivery appears to be the principal aspect of these sales as commonly understood. Yet this aspect is often still not considered directly relevant in purely contractual terms. In the Vienna Convention (Art 1), the internationality of the (sales) contract is, as already noted, in the contractual aspects normally tied to the contracting parties residing in different countries (which need not necessarily be Contracting Countries) and not to the cross-border movement of the assets269 or to the other complications that are likely to arise in an international sale. As we already have seen, the proprietary aspects are excluded from the Vienna Convention (Art 4(2)), which limits the requirement of delivery to a duty only to hand over the assets physically. It means that the Vienna Convention may apply even if there is no border crossing of the sold goods at all as long as both parties are in different countries. The Hague Conventions saw it still differently but it may be admitted that where a Convention of this nature does not concern itself with proprietary issues, the movement of the asset is itself not the main legal issue. The problem is, however, that the true nature of an international sale is then not fully captured. Delivery even in the limited physical sense of the Convention is likely, however, to include some special duties of the seller in terms of transportation and insurance, usually to an agreed loading point (if not ex works) and these aspects are covered, compare Articles 31 and 32. From this point, the buyer will arrange further shipment and insurance (usually pursuant to a FOB term), although he may in this respect also 269 Art 1 effectively refers to the place of business of each party rather than its residence. A similar criterion is usually followed in conflict conventions concerning sales, cf Art 1(1) of the Hague Private International Law Convention on International Sales of 1955 and Art 1 of its successor of 1986, but cf also Art 1(a) of both Hague Uniform Sales Conventions of 1964.

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rely on the seller (the CIF term). It depends on the contract which trade term is used in this respect. These terms may have some further effect on the time and place of the passing of the risk (but not directly of title), see more particularly section 2.3.9 below. As already mentioned before, in view of the distance, there may also result some special duty of care of the buyer to protect the goods upon arrival, should disputes arise and goods be rejected. On the other hand, the seller may have a special duty of care to preserve the assets if the buyer delays in taking delivery, even if the risk has passed to the latter (for example upon tender of delivery), compare Articles 85 ff of the Vienna Convention. It should be re-called that there are other possible approaches to internationality in international sales, even in their contractual aspect. Indeed, in France, early on, a legally relevant criterion closer to the ordinary meaning of ‘internationality’ depending on goods and payments crossing borders in opposite directions was used to preserve the validity of gold clauses, often illegal under applicable national law at the time. In the late 1920s and early 1930s, an exception was thus made for this type of clause in international sales as so defined.270 As just mentioned, the earlier Hague Uniform Sales Conventions also used this additional criterion. In arbitration laws, a similar approach to internationality may be taken, not only applying therefore a special internationalised regime when parties come from different countries but also when the subject matter is of an international nature or the arbitration takes place in an unrelated country, compare French Decrees n 80–345 and n 81–500 and also Article 1(3) of the UNCITRAL Model Arbitration Law, now accepted in several common law countries, including some states of the USA, in Scotland and in some east European countries including Russia. This may then lead to the application of some additional or different arbitration rules, especially providing for procedural flexibility in international cases and a limitation of review by the domestic courts, either when challenged or in the context of recognition. Another approach altogether is the distinction between the professional sphere on the one hand and the private or consumer sphere on the other, and the application of transnationalised concepts to the former and local concepts to the latter. In sales, it leads to the basic distinction between commercial and consumer sales, with all of the first increasingly internationalised even if the relevant sale may not have any international aspects at all, see for this approach, Volume I, section 1.1.8. There is here no need to define internationality and the unity of the system is maintained at a transnational level and any arbitrary distinctions are thus avoided as economically there is no clear justification for treating such deals differently depending on the origin of the parties. As explained in Volume I, this is the approach preferred in this book in which therefore internationality is a function of and included in commerciality or professionality. To repeat what was already said in Volume I, section 3.1.1, the consequences of a transaction being in the internationalised professional sphere is: (a) the increasing 270 See Cour de Cass, 27 May 1927, D.1928.25, followed in several other cases regardless of the applicable domestic law under the relevant conflicts rule, see also Y Loussouarn and JD Bredin, Droit du Commerce International (1969) 617.

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likelihood of the existence of trans-national legal concepts in a unifying transborder development suggesting the existence of a distinct legal order (under the new lex mercatoria); (b) the resulting impact of fundamental legal and general principle and the emergence of own practices therein; (c) the reduced impact of directory and even mandatory rules of a local nature if only marginally impacting on the internationally transaction; (d) a lesser need to rebalance the relationship on the basis of social considerations as professional parties are on the whole well able to look after themselves; and (e) a less refined application of the basic legal protections amongst professionals in terms of disclosure, time to protest, undoing of transactions and the invocation of all kinds of legal exceptions, like force majeure, hardship or even negligent behaviour of the other party. It was posited above that only in the more explicit and obvious cases is relief likely to be granted and that between professionals the contract is foremost to be seen as a road map and risk management tool that may be literally interpreted, see further also the discussion of modern contract theory in section 1.1.4 and the discussion in sections 1.3.11–14 above. This also applies to international sales. It may then even imply an own distinct ownership concept and ownership transfer regime.

2.1.6 Currency and Payments in International Sales: Free Convertibility and Transferability of Money In international sales, a price is likely to be stated in whatever (foreign) currency the parties may choose. In domestic sales, on the other hand, a foreign currency election is exceptional and used to give some problems as it was often thought that the contract in such terms should be qualified as an exchange rather than a sale, although the differences are not great in all legal systems. In international sales this is not in itself an issue but concern shifts to the agreed currency (of payment) being fully convertible and freely transferable, see also Volume III, chapter 1, section 3.3.3. The key is that payment is made in the agreed (hard) currency and then not out of accounts blocked by government action. Also the seller should be concerned that payment is not automatically converted by applicable (mandatory) law, usually that of the buyer/payor, into the latter’s (often non-transferable and weak) domestic currency. It again raises the question of the effect of such a mandatory rule on international sales contracts. The risk is that the agreed currency is not then put at the free disposal of the seller. It puts the buyer/debtor in default of proper payment, although possibly under the protection of his own law. With the general liberalisation of exchange controls (in respect of both capital movements and current payments) in most trading nations, this has become less of an issue. Modern payment methods, especially irrevocable confirmed letters of credit payable in freely convertible and transferable currency in the seller’s country, also help, and this was always an important reason for the popularity of letters of credit. Banks then take over the currency risk which they are

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often better able to handle, if only through informal clearing and set off, often in the context of special arrangements with the relevant central banks. In this connection, it is possible that the international sales contract itself uses two different currencies, one, the currency of account, usually a hard currency, to denote the real obligation of the buyer and another, the currency of payment, which is usually the softer currency of the buyer and is then to be adjusted if the exchange rate changes between both of them. This gives the seller at least some protection against devaluation.271 When it comes to judgments from the national courts, even in common law countries like England, these may now be expressed in foreign currencies.272 The modern emphasis is on what would produce better justice or on what most accurately reflects the plaintiff ’s loss under the circumstances. Recognition of foreign judgments by another domestic system may also extend to the foreign currency of the original judgment, at least if properly related to the underlying claim. However, this point is not universally settled, and conversion sometimes still takes place.273 Any devaluation loss may be claimable if the debtor is unwilling to pay and causes delays during which devaluations take place.274 In Germany, it appears that the currency is respected, even in proceedings for recognition of foreign judgments, but may in the course of enforcement be converted into the local currency at the option of the debtor: Section 244 BGB. The exchange rate prevailing in the place of payment as at the original payment date is then controlling, foreign exchange losses resulting from pending enforcement being in principle for the account of the creditor.275

2.1.7 The Transfer of Title in International Sales Transfer of title as a proprietary concept will be more properly the subject of chapter 2, section 1.4 below. It is often still considered a typical issue of national law. As such there is strictly speaking no distinct concept of transfer of title in international sales except where the transnational law merchant has come to fruition as might be said for international documents of title and negotiable instruments and may also be said in respect of eurobonds, see Volume I, section 3.2.2. The European Human Rights Court in Strasbourg also developed a distinct internationalised ownership concept, see Vol. I,

271 See also CM Schmitthoff, Export Trade: The Law and Practice of International Trade, 9th edn (1990) 224. One of the most authoritative treatises on the subject is by FA Mann, The Legal Aspects of Money, 4th edn (Clarendon Press, Oxford, 1982). 272 cf for the UK, Miliangos v George Frank (Textiles) Ltd [1975] 3 All ER 801, reversing earlier English case-law in the matter. 273 cf in France Tribunal de la Seine, 18 December 1967, GP.2.108 (1968). 274 cf for the Netherlands, HR, 8 December 1972 [1973] NJ 377. 275 cf OLG Cologne, 2 February 1971 (1971) 47 NJW 2128, although for equitable reasons some adjustments may follow if actual damage can be proven: see Oertman, Kommentar zum BGB, s 244, Anm 3.

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section 1.5.8. This transnationalisation even of ownership notions is of the greatest interest, now in particular also in international finance in respect of new forms of asset backed funding. Normally, however, the applicable domestic law continues to be considered to determine the issue of how and whether title has been transferred. In international sales, this law is in principle the lex situs of the asset as we have seen. It is the general proprietary conflicts rule, but in international sales under which goods are likely to move from one country to another, the applicable law could under that rule still be the law of either the country of origin or that of the country of destination. This issue will be explained in greater detail in chapter 2, section 1.8 below, where the different domestic attitudes to the transfer of title and its formalities will also be discussed. As far as private international law is concerned, a sale and transfer completed in the country in which the asset is situated at that time will most likely be accepted in the country the asset moves to as a matter of acquired right. If pursuant to the original law further formalities are to be performed in the country of destination necessary to make title pass, the situation will be reviewed upon the arrival of the goods in the new country. This requires some further explanation. In section 2.1.1 above it was already mentioned that there are in essence two types of systems for title transfer. In the first, the title in goods passes immediately upon the conclusion of the sales contract. That is the French and English system. In other countries there is the necessity of delivery as an additional requirement for title transfer. This is the German and Dutch system and also the one adopted in the USA under Article 2 UCC (unless parties have made other arrangements). Conceptual problems arise when goods are sold in France for delivery to a German buyer in Germany. In France (the country of origin), the sale is complete, in Germany (the country of destination), it is not. The most favoured approach is that if the goods are with the seller in France, the French lex situs (of origin) applies and the goods will be deemed to have left the estate of the seller and belong to the buyer immediately upon the conclusion of the sales contract. This will also be accepted in Germany. So when the goods arrive there, they will be considered to belong already to the German buyer even short of delivery. In a bankruptcy of both buyer and seller, the goods will rightfully belong to the German estate. If, on the other hand, the sale is between a German seller and a French buyer whilst the goods are with the German seller at the time of the sales contract, no title passes until delivery to the buyer in France and the goods continue to belong to the German estate until such time. French law could still consider title in the goods to have passed under French law immediately upon their arrival in France, so technically speaking even before delivery to the French buyer there, but this is not normally considered to be the case. Other problems may arise in connection with the reservation of title in goods thus sold, especially between countries that have a different attitude towards this sales protection device, as indeed Germany and France did before 1980 when a reservation of title was not valid in a French bankruptcy, whilst France even now adopts a more restricted concept of a reservation of title, especially in the extension of the protection

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into replacement goods and proceeds and in the entitlement to overvalue, see more particularly Volume III, chapter 1.5, sections 1.3.5 and 1.4.1. Here again the rule applies in principle that if the reservation of title is properly established in the country of origin of the goods, the country of destiny will respect it. If the original country does not, the reservation of title could still attach upon arrival of the asset in the latter country if it accepts the device. On the other hand, even if properly created, the proprietary interest may still be transformed upon arrival in the country of destiny, for example into a more limited proprietary right or into a security interest as the nearest equivalent, as is the case when a good moves between Germany and France or indeed between Germany and the USA where the reservation of title is a security interest and may in capital goods fail altogether for lack of registration if a finance statement is not filed under Article 9 UCC in the USA. It follows that goods subject to such an interest moving from the USA to Germany may benefit from an upgrade and become a full blown proprietary interest in Germany subject to appropriation by an unpaid seller and to his right to retain any overvalue which would have been denied him in the USA. For further detail, again, reference may be made to chapter 2 section 1.8 below.

2.1.8 Conform Delivery and the Passing of Risk in International Sales Another subject that needs some particular attention in sales of the domestic as well as international type is the non-conform delivery, the liability for deterioration or loss of the goods in transit, and the passing of risk. In consumer (domestic) sales there may be more refined features in this connection than in professional (international) sales. As regards the required quality standard, parties are likely to be specific, but, if not, the common law rule is along the lines of merchantability, the essence of which is that the asset must be fit for the purposes for which it is ordinarily used and as such safe, compare also Sections 31–15 of the UK Sales of Goods Act 1979 and section 2–134(2)(c) UCC. It may be seen as a matter of reasonable expectation. This is also the rule of the Vienna Convention (Art 35(2)(a)), a more general warranty having been thought to be incompatible with the international commercial practice. Civil law on the other hand still looks here more at the intrinsic qualities of an asset, which must be good in that sense. It rather thinks in terms of guarantees and is traditionally based on the notion of speciality assets rather than commodities, but at least for commodities it moved (at first in case law) also to a more extrinsic merchantability standard. This is important as more and more goods are of the commodity type. Even then, the seller is also responsible for the goods’ fitness for any particular purpose if the buyer relies on the seller’s skill and judgment in this respect, provided this is known to the latter. Naturally, the goods must also be fit for any particular purpose expressly or impliedly made known to the seller at the time of the conclusion of the contract, see Article 35(2)(b) Vienna Convention, compare also section 2–315 UCC. As part of the conform delivery, they must also be properly packaged in the

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manner usual for such goods which may mean having regard to their disclosed destination and known mode of transport, Article 35(2)(d) Vienna Convention. The seller is thus responsible for these standards or any other agreed by the parties, except where he cannot deliver them for reasons of force majeure, always assuming there was no express or implied guarantee of delivery. Thus, even if the seller is in a force majeure situation, in that case he may still be responsible for the consequences of non-conform delivery (except probably for consequential damages). As discussed in section 1.4.3 above, this is quite normal for common law and a guarantee of fitness is deemed implied if the quality standard may be seen as a condition of the sales agreement. This is then a matter of interpretation, although any such implied guarantee could still be counter-balanced by a more explicit force majeure clause in the contract, as we saw. For sales, this is further affected by the notion of the passing of risk discussed below and in the next section. As we have also seen, in civil law the position is in principle rather the reverse. Normally, the force majeure defence, even if not included in the contract, is perfectly good against non-conform delivery, except where a guarantee is given which could, however, be implied and is, as just mentioned, normal civil law thinking in respect of specialty goods. In civil law, in the normative approach it is indeed becoming a matter of interpretation whether there may be such an implicit guarantee. Differences are here likely to emerge between professional and consumer sales, in the sense that these guarantees are now sooner deemed to exist for consumers even in commodity sales. In Germany, fitness for the agreed purpose upon delivery is a primary duty under the contract (Hauptleistungspflicht, cf s 433 BGB), although not necessarily an implied guarantee. Only in the case of guarantees, see also section 460 BGB, it must normally be assumed that the seller means to remain liable during the guarantee period as well whether or not the non-conformity was due to his fault or negligence. This normally implies a facility for the buyer also to claim consequential damages and to relax his prompt inspection duties. Yet, even if there are special quality undertakings, other factors, like the buyer’s non-compliance with his own investigation duties, any waiver of inspection or acceptance by him, might still shorten the risk period for the seller and could thus affect the recovery possibility. Impossibility of inspection and hidden defects that could not be discovered in time may on the other hand extend this period. Defences based on mistake or misrepresentation at the outset may also become relevant for the buyer in this connection. Much depends on the factual situation and it is often difficult to draw clear lines in advance. This touches on the moment at which risk passes. In sales, this is a term of art and concerns in essence the risk of the deterioration of the goods between the time of the sale and the delivery of the asset, assuming that this deterioration is not caused by either party. Thus the question becomes exactly when the risk in this sense passes from seller to buyer in the case of force majeure in respect of the conform delivery duty. It means that in sales during this particular period (sometimes extended as we shall see) force majeure of the seller may not be a sufficient excuse as long as the risk in this sense has not passed. To put it differently: who has the risk of force majeure (in terms of deterioration in particular) and when?

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Under modern law, this risk now normally passes at the moment the physical possession passes regardless of whether title has already passed before or passes later. It means that before such moment, the seller is still liable for conform delivery regardless of force majeure as he is still considered to have the risk. Never mind therefore whether title has already passed upon the conclusion of the sales agreement which would amount to substantial performance, thus requiring the buyer to pay, which even now remains the English system, where the risk in this sense remains for the buyer (periculum est emptoris).276 Where the risk in the case of a sale is now more commonly connected with physical possession, even after the transfer of physical possession, this moment may be delayed if the seller has given special undertakings or guarantees or if the buyer could not reasonably exercise his inspection rights. If hidden defects are discovered later, of which the buyer could not have been or become reasonably aware upon delivery, there may still be default on the part of the seller so that the passing of risk issue loses its relevance retrospectively. Parties may always agree another moment for the passing of the risk between them or divide these risks in another manner. The passing of the risk, although normally associated with the deterioration over time of the assets, also covers extraneous events, such as theft or acts of god (casus fortuitus), like fire, flood or earthquake affecting the goods before physical delivery, or indeed the unavoidable reduction in the value of goods, most often seen in perishable products like foods and vegetables whilst still in

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The Principles of European Law concerning Sales (as compiled at Utrecht University in 2004) contains in its ch 5 the following language: ‘s 12: General Provisions Art 5: 101: Risk Loss of, or damage to, the goods after the risk has passed to the buyer does not discharge the buyer from the obligation to pay the price, unless the loss or damage is due to an act or omission of the seller. Art 102: Time when risk passes Unless otherwise provided in s 2, the risk passes: (a) when the buyer takes over, in accordance with the contract, the goods or the document representing them, or (b) in any case where the buyer is not bound to take over the goods or the documents representing them, at the time the buyer becomes owner of the goods. Section 2: Exceptions Art 5:201:Identification of the goods The risk does not pass to the buyer until the goods are clearly identified to the contract, whether by markings on the goods, by shipping documents, by notice given to the buyer or otherwise. Art 5:202: Goods placed at buyer’s disposal (1) If the goods are placed at the buyer’s disposal but the buyer does not take them over in due time because of non-performance by the buyer of an obligation under the contract, the risk passes to the buyer from the time when the goods should have been taken over. (2) If the goods are placed at the buyer’s disposal and the buyer is bound to take them over at a place other than the place of business of the seller, the risk passes when delivery is due and the buyer is aware of the fact that the goods are placed at the buyer’s disposal at that place. Art 5:203: Carriage of goods Art 5:204: Goods sold in transit Art 5:205: Carriage of goods in a consumer sale

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the hands of the seller. It introduces another layer of risks in which connection physical possession is in modern law normally also the determining factor as to which party bears these risks. Although generally the passing of risk has no relevance if the losses are attributable to one of the parties when that party will be liable for the consequences vis-a-vis the other, it always assumes that that party could reasonably prevent it and the risk was not discounted in the contract. Importantly, reliance on force majeure in this connection still raises the question of its definition in terms of vis maior or the more subjective theories, including impracticability or economic impossibility, see section 1.4.6 above. It means that the seller remains liable for all such events pending physical delivery. The passing of the risk in this sense does not play a role if the situation gives rise to other types of redress as in the case of mistake or innocent misrepresentation, for example if there was no sufficient disclosure at the outset, with or even without the seller being directly to blame, although in the first case there may be further redress beyond the voidness or avoidance of the agreement. Actions based on illegality, avoidability or nullity of the contract after its execution are not affected by the risk allocation either and render it also irrelevant, even though for professionals the effect of these defences may under modern contract theory be reduced, see section 1.3.11 above. There are therefore other important concepts that may play a role in this context, even if closely related to non-conformity, especially if there was some misunderstanding about the quality requirements in the first place. In international sales under the Vienna Convention, the concept of non-conformity might itself include the concept of mistake as to the qualities of a sold good (Art 35(2)), so that the non-conformity remedies of the Convention apply, including the rule concerning the passing of risk throughout, rather than domestic notions of mistake or misrepresentation, which, in the absence of the coverage of these subjects in the Convention, might otherwise supplement it under applicable rules of private international law (Art 7(2) Vienna Convention). Physical possession would not appear to make here any difference but again one may ask how this affects the risk for outside events, like acts of god and the like. May these risks then also be shifted back retroactively to the seller, regardless who was holding the property at the time of these events? Where default (retroactively) dissolves the contract, like is still the situation in France, this could be easily accepted. Where the rescission of the agreement is only ex nunc like under present German and Dutch law, it could be thought to be different. The question appears to be whether the onus shifts here back from the possessor/new owner to the seller/old owner. It would not seem unreasonable if the latter was the cause of the failed sale, even regardless of whether he was to blame.

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2.1.9 The Passing of Risk in the Sale of Goods in Civil and Common Law Traditionally, the law, in the absence of a contractual provision dealing with the passing of risk, tended to let the ‘chips fall where they fell’. Thus the actual owner, whether old or new, in possession or not, was the most likely party to have to accept the consequences of whatever was happening to the goods as long as no-one else could be blamed (‘res perit domino’). It was therefore the owner who bore the risk of force majeure in the sale of the goods to or handling of them by another as long as title was not transferred. It meant that in sales the passing of risk depended on the moment of title transfer under applicable law. This is still in essence the situation in France and England, at least for specialty or identified goods. It means that the buyer must pay if something happened to the goods after title had passed regardless of whether he physically received the goods (again assuming there was no fault in the seller) It is therefore implied under both traditional French and English law (where title transfers immediately at the moment of the conclusion of the sales contract), that the new owner (the buyer) had the risk regardless of possession pending delivery (periculum emptoris), which is also expressed in the maxim ‘caveat emptor’, see in France Article 1138 CC and in England section 20(1) of the Sale of Goods Act 1979. It meant in Germany (which traditionally require delivery for title transfer), that until (legal) delivery, the old owner (the seller) had the risk (periculum venditoris). However, in Germany and the Netherlands, it is now in principle the physical delivery that determines the transfer of the risk regardless of whether the transfer of title follows (which it normally does): see in Germany section 446 BGB and in the Netherlands Article 7.10 CC, see also section 2–509(3) UCC in the USA, which abandoned the common law approach and now accepts the German approach in the absence of breach and, according to the Official Comment, intentionally shifted away from the earlier property approach in this connection.277 Thus the modern variation on this theme is to attach the consequences of unavoidable loss or damages to actual (not legal or constructive) possession (or tender of delivery in this sense) rather than to ownership itself. It follows from the realisation that the physical holder of the goods is in the best position to know what is happening to them, look after them, and insure them. In a commodity environment, the necessary setting aside may in any event not take place sooner than the moment of physical delivery, and the completion of the (conform) performance usually follows at the same time. Thus the modern trend is that the seller in physical possession retains the risk pending delivery, even if title has already passed (as is normal under French and English law, although in these countries that has not yet affected their approach to the passing of risk as we saw; the UCC favours the older common law approach of passing of title upon physical delivery at least if there is no contrary stipulation in the contract, see section 2–401 277 Only Dutch law under its old Code had a system where the risk was for the buyer whilst title would only pass to him upon delivery of the good. This approach was considered justified on the theory that the seller should be able and keen to deliver immediately and, if he did not do so, the buyer was believed to have had some interest in the delay.

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UCC). It also proved the logical approach in the Vienna Convention in the absence of a uniform provision on the passing of title in international sales (Art 69). The buyer without physical possession is thus becoming better protected against the early passing of risk everywhere even if acquiring ownership at the time of the sales agreement (wherever such a system obtains), but as mentioned in the previous section, there are further refinements, and the buyer may even be longer protected, especially when there are implied guarantees whilst in the case of hidden defects the transfer of the risk may be postponed or lifted as there may be a situation of default. The buyer has here information and inspection duties, balanced, however, by the duties of the seller in this regard and his own information duties. Here again it follows that professional sellers are more vulnerable in consumer sales than in sales to other professionals. In respect of consumers, it could even be said that a situation of force majeure of the seller in respect of the required quality of commodity goods is increasingly unlikely to arise because of his own technological capabilities and investigation facilities. This may still be different in the sale of specialty capital goods, either manufactured for or resold to other professionals. Yet upon physical delivery, the buyer must promptly inspect and protest as he accepts full responsibility thereafter assuming the seller has met his own (disclosure and other) duties at the time of the conclusion of the agreement and still barring undiscoverable hidden defects, again particularly in consumer cases, and certain safety defects under product liability statutes, or if the buyer has a guarantee. Again, it presupposes that the contract is not voidable or void for other reasons, like mistake as to the quality of the goods or misrepresentation upon a lack of full disclosure when, as mentioned before, the passing of risk has no relevance but the question of restitution and damages may still present problems. In the foregoing, some references were already made to domestic laws concerning the passing of risk in the sale of goods, see more particularly Article 1138 CC in France, section 446 BGB in Germany, Article 7.10 CC in the Netherlands, section 20(1) of the Sale of Goods Act in the UK and section 2–509(2) UCC in the USA. Although all use the concept of the passing of risk in the case of a sale of goods, they often select, as we saw, different moments and may also maintain different definitions of force majeure and different approaches to the subject of non-conform delivery and to its consequences in terms of the various actions that may be used, often for historical reasons. The approaches of common law based on developing case law are the most flexible, with their emphasis (within their concept of conform delivery) on merchantability, common standards and investigation and disclosure duties, but still restrained by the early transfer of risk (immediately upon the conclusion of the sales agreement, now abandoned under the UCC in the USA), and tempered by a case by case approach which allows for little conceptualisation and drawing of lines. French codified law is on the other hand still based on intrinsic qualities of specialty assets. It assumes the risk for these goods to transfer with the title immediately upon the conclusion of the sales agreement, but it had to make considerable adjustment through case law to allow for a more modern attitude towards the later passing of risk in commoditised products especially if sold to consumers. Also in Germany, under its

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Code of 1900, the emphasis remained on specialty assets with their own intrinsic quality expectations, even though the risk was allowed to pass later. The emphasis was thus less on common standards of the sort or on contractual definition or exclusion and on information rights and duties or on disclosure to determine whether there was a breach in the first place. The Roman law concerning the sale of goods and the passing of the risk in them had been fairly simple. It assumed that virtually all sales concerned specialty goods, in which the risk passed immediately upon the agreed sale, thus ‘periculum emptoris’ (D.18.6.8pr.). However, this was not the case if the price had not yet been fixed or if the goods were not yet identified, if the sale was conditional or suspended, if there remained a choice between various performance duties, or if the buyer had to approve the goods: see Inst 3.23.3, D.18.6.8 pr, D.6.19.1.13.12 or D.47.2.14 pr. In those cases, the risk could not pass, therefore notably not before the final price was determined (pretium certum) which was seen as a substantive protection for the buyer and assumed at the same time a sufficient individualisation upon counting, weighing or measuring. To redress this instant transfer of risk, at first, knowledge of hidden defects was necessary which was considered to come close to a situation of fraud (for which there was an actio empti), but ultimately the knowledge of the seller (and his disclosure obligations) became irrelevant (his knowledge was presumed) and the recourse for the buyer in the case of hidden defects was then the rescission of the sales agreement with a return of goods or a reduction in price (actio redhibitoria of D.21.1.38pr. or the actio quanti minoris of D.44.2.25.1), limited in their effect, however, by a short statute of limitations. These actions derived at first from the special jurisdiction of the aediles curules who regulated the market functions and were in charge of the street police. They were later on integrated in de actio empti but not abandoned. This presents essentially still the system of the French CC (Art 1644), which at least in professional sales assumes that the seller always has knowledge of the defects until proving otherwise.278 Except for the timing of the risk transfer, it is also the system of the BGB (s 437).279 In France, the law in this area traditionally centres on ordinary default, hidden defects (vices cachées, Articles 1641 ff CC), and mistake (erreur, Article 1109 CC), each with a different set of consequences, redress, statutes of limitations and actions.280 For commodities, the Cour de Cassation increasingly shifts the transfer of the risk, as we saw, to the moment of identification which is likely to be the moment of delivery.281, 282

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See Cour de Cass 30 Oct 1962 [1962] Bull Civ I 457 and 27 Nov 1972 [1972], Bull Civ IV.282. See further Windscheid/Kipp, 2 Lehrbuch des Pandektenrechts (Frankfurt am Main, 1906) 660; M Kaser, Römisches Privatrecht, 14th edn (1986) 193; F de Zulueta, The Roman Law of Sale (Oxford, 1945) 31; and R Zimmermann, The Law of Obligations (Cape Town, Deventer, Boston, 1990) 281. 280 See J Ghestin, Conformité et garanties dans la vente (Produits mobiliers) (Paris, 1983). 281 See Cour de Cass 8 July 1981 [1981] Bull Civ IV 316. 282 Particularly for identified goods, the early transfer of the risk left little room for an action by the buyer for deterioration or loss of the asset but the risk transfer may in modern French law be postponed, amended or restricted by investigation, information and custody duties of the seller in possession on the basis of which a default action may still be brought by the buyer also in the case of 279

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In Germany, the starting point was also the individual asset with its own intrinsic qualities, but the development has equally been in the direction of commodity-type assets that have at best a standard quality of the sort which is normally further described in the contract so that the contractual quality clause and the seller’s disclosure and buyer’s investigation duties are often determining the (non-) conform delivery issues.283 German law does no longer distinguish between a default action (ss 323 ff BGB) and an action for defects as a matter of principle, but the former is not available upon force majeure even if the seller still has the risk, which is the case in Germany until the physical delivery of the asset, section 446 BGB. Under section 437 BGB the consequences may vary and are based on the old actiones redhibitoria and quanti minoris, but not apparently in a limitative way: replacement, repair, price reduction, damages or even a return of asset and price may all be possible. An action for mistake voiding the sales agreement altogether may also be available if there is an erroneous declaration of the seller (Irrtum of s 119 BGB). There is not only an important difference (voidness) in the consequences, but also a different statute of limitations: for mistake it is 10 years, see section 121 BGB, but for a default action under section 323 BGB it is three years (s 195 BGB) and for the action pursuant to sections 437 ff BGB it is only two years after delivery except again in the case of fraud, see section 438(3) BGB, when it is three years (s 195 BGB). In the Netherlands under its old law, the situation developed in such a way that for commodities the general default provisions were applicable even if the seller had the excuse of force majeure as long as he had the risk, which passed, however, immediately at the time of the sales agreement (even though title only passed upon delivery unless

specialty goods rendering the passing of risk rule irrelevant. There may be no force majeure proper, so that the early transfer of risk to the buyer has no meaning. It allows for a wide range of remedies, including specific performance, replacement and repair, rescission, damages or price reduction or combinations. The hidden defects action arises commonly after the passing of risk and upon delivery. Although it presumes that the seller is to blame for the state of goods, the redress is (also in France) still limited to the actio redhibitoria or actio quanti minoris, see Art 1644 CC and there is also a much shorter prescription period which starts running, however, only from the moment of discovery. Mistake leads, on the other hand, to voidness of the agreement when the transfer of risk does not play a role. Which course of action is best taken depends on the circumstances and probably on the type of information that became or was available at the beginning of the transaction and there is not necessarily a free choice for the buyer. Misinformation or lack of detail may even lead to the remedy of mistake and then affects the existence of the agreement itself, especially if the seller was not volunteering the information and the buyer was not in a position to ask for it because it fell outside a normal enquiry, yet proved to be wholly relevant. The burden of proof remains, however, on the buyer and under modern case law he will in this context have to explain what conformity meant, relying in this respect on intrinsic qualities, qualities of the sort or the contractually agreed quality, and what he did himself in terms of making his own enquiries or conducting his own inspection at the time of the sale and especially at the time of delivery. Only then will it transpire whether there was mistake, default or a relevant hidden defect. 283

See s 434 BGB.

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the goods were not properly set aside, when the title and risk only passed upon that event). The more limited rules for hidden defects derived from the French CC were latterly applied only to specialty goods. The new Code postpones the transfer of risk until the physical delivery, Article 7.10 CC, and gives the normal rescission facility to the non-defaulting party—particularly relevant if there is non-conform delivery—in all cases in which the seller still has the risk, regardless of any excuse of force majeure, see Articles 6.265 and 7.17 CC. It is an action for the buyer and allows him not to pay the price or insist on a reduction. Alternatively the buyer may insist on full performance through replacement or repair.284 English law, on the other hand, depends traditionally on the contractual terms and their definition of quality and the (implied) designation thereof by the parties as condition or warranty which determines in the first instance the effects of default in terms of repairs and damages only or in terms of a rescission also. This being said, the Sale of Goods Act also contains statutory provisions concerning quality with implied terms of merchantability and fitness, as we saw, see sections 13–15, whilst the objective law provisions concerning mistake or innocent misrepresentation may provide an additional remedy. In the case of non-conform delivery, the passing of the risk plays as elsewhere a role and according to section 20(1) takes place at the moment when ownership passes which is normally at the moment of the sale agreement, hence ‘caveat emptor’, even though the concept of force majeure is not a common law excuse and must be seen as limited to certain acts of god, like fire, floods, etc, and for the rest depends on whether the quality term must be viewed as a condition or warranty. In the first case there is in principle no force majeure excuse as we saw in section 1.4.3 above, although this may be balanced by an express force majeure clause or sometimes even implied conditions. If the goods have not yet been set aside to fulfil the contract, the passing of risk is always postponed, however, except where the buyer was dilatory or unco-operative in this process (see section 20(2)).285 Also the insurance duty or possibility increasingly plays a role and, since the shopkeepers or custodians are usually in the best position to insure, it may mean that the risk in undelivered specific goods may still remain with them.

284

The new Dutch Code does no longer refers especially to hidden defects and considers them only in the context of the general conformity requirement, which allows the buyer always to invoke his right to rescission of the sales agreement or replacement of the asset upon non-conform delivery or a later discovery of defects which could not be detected before and not apparent upon inspection following delivery (assuming the buyer did not waive all his rights by failing to inspect), see Art 7.10(3) CC. This may be particularly relevant in the case of hidden defects and additional guarantees, but they do not give rise to a special regime. If there is a fault on the seller’s behalf, the allocation of risk to the buyer after delivery is irrelevant and damages may be claimable by the buyer as well as the rescission which will discharge him from his own payment duty. In the meantime it could be argued that the EU Consumer Sales Directive 1999/44/EC concerning certain aspect of and guarantees for consumer goods has reintroduced for them a special regime for hidden defects which again refers to what are effectively the actiones redhibitoria and quanti minoris, although in somewhat different ways. 285 Sterns Ltd v Vickers Ltd [1923] 1 KB 78.

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The preliminary question whether there was non-conform delivery depends on its definition. It will normally relate back to the contract but, failing this, sections 13–15 of the Sale of Goods Act 1979 give alternative rules implying normal or merchantable quality and fitness for the intended purposes which in fact also redress the ‘caveat emptor’ rule by holding a seller liable to these standards whatever happened to the asset. In the nature of a condition, he will not be performing fully without meeting them for whatever reason. Yet it does not discharge the buyer from making proper inquiries at the time of the conclusion of the sale agreement and properly inspect the goods at his earliest convenience and certainly upon delivery. If the breach is substantial and indeed concerns a condition, the buyer will be able to repudiate the agreement or reject the goods, if not already accepted after full inspection barring hidden defects; there is also the possibility of rescission for innocent misrepresentation or mistake.286 If there is fault, an action for damages may follow. In the USA sections 2–314–2–315 UCC deal with implied warranties of merchantability and fitness and section 2–509(3) with the passing of risk. Section 2–510 makes clear that, where there is a breach, the transfer of the risk is postponed until the breach is cured. It also allows for any revocation of acceptance. The system in the USA has thus clearly moved on from the British notion of ‘caveat emptor’ and accepts that the risk now passes only upon physical delivery. The old common law distinction between conditions and warranties is no longer fundamental in the UCC either. It has its own system of actions and concept of force majeure. If the risk has passed to the buyer, he is not likely to be able to do a great deal if he has accepted the goods, except where there are hidden defects which could not be discovered upon acceptance or if there are guarantees outstanding.

2.1.10 Proprietary Sales Price Protection in Civil and Common Law Sales price protection is an important issue in sales, whether of the domestic or international type and is particularly connected with a buyer’s failure to pay the price. The issue then quickly becomes what rights the seller still has in the goods even upon delivery to the buyer. Where a sales contract attempts to state the manner of termination upon default, it is likely to include a rescission of the agreement with a discharge of the non-defaulting party without resort to the courts. It is otherwise still required in some countries such as France (Art 1184 CC), where as a consequence the rescission of the sales agreement and the discharge of the non-defaulting party may remain dependent upon court approval. The modern trend is, however, to accept rescission (or avoidance) upon mere notice of default by the non-defaulting party. It is confirmed for international sales law in Articles 49 and 64 of the Vienna Convention, provided the default was 286 See Goldsmith v Rodgers [1962] 2 Lloyd’s Rep 249 and for the various remedies further also PS Atiyah and J Adams, Sale of Goods, 9th edn (1995) 185.

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significant or ‘fundamental’ in the terms of Article 25, compare also Article 6.265 of the new Dutch CC. It makes the sale itself conditional upon full performance by the buyer. The precise meaning and effect of this rescission (or avoidance in Vienna Convention terms) upon default is, however, often not immediately clear, even under domestic law, especially not the effect on the title of the delivered goods and the (possible) retroactivity of the rescission and its significance. This is also true for the Vienna Convention, which does not cover these aspects, as it does not deal with the proprietary issues of the sale (Art 4(2)). Indeed, the question is whether rescission may have proprietary consequences or is merely a contractual issue. A specific clause in the contract may attempt to clarify the matter, but, like the title transfer itself, it depends on the applicable domestic law (which in international sales commonly still results from the applicable private international law rules) or from the objective transnational law (for lex mercatoria supporters), whether these are matters that may be left to the will of the parties or whether mandatory rules must be applied in this connection superseding such a clause. A most important question in all sales is therefore whether any contractual clause trying to clarify and further develop these aspects can have any (proprietary) effect amplifying the applicable (domestic) law (or setting out the lex mercatoria position) if not itself providing such redress. The reservation of title clause is the most important example. The issue of the automatic return of title (or not) and the so-called proprietary or in rem effect of the rescission of the sales contract is an issue that arises in all domestic sales laws and is particularly important in a bankruptcy of the defaulting buyer, as it may give the seller revindication rights allowing him to ignore the common creditors. Even if the applicable lex situs allows this result in principle, it is still possible that the applicable bankruptcy law may not accept it, like section 365(e) of the US Bankruptcy Code of 1978 as amended, or maintains exceptions, like traditionally in France under the theory of apparent solvency. It should be considered in this connection that bankruptcy law could be different from the lex situs as it will normally be the bankruptcy law of the bankruptcy forum itself which under applicable jurisdiction rules may be in another country. This could mean that, if appearance of credit worthiness is created by a creditor/ seller leaving the debtor in possession of his assets, other creditors who relied in good faith on the appearance of solvency (so created) may be protected and may as a consequence be able to ignore the seller’s proprietary claims. It is in fact an instance of the protection of bona fide creditors against hidden property interests, as such the equivalent of the bona fide purchaser protection in the case of movables. Yet where it may be said that the bona fide purchaser protection is constantly extended, it seems that the protection of the bona fide creditor in this manner is in decline, see also Volume III, chapter 1, section 1.1.10. An example is in France the acceptance of the reservation of title in bankruptcy since 1980287 and in England the elimination of the 287 For unpaid sellers in a bankruptcy of the buyer, the inhibiting factor for the actual return of the asset is not the impossibility of the seller to retransfer title itself, which is likely to be automatic in

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comparable doctrine of reputed ownership in the Insolvency Acts of 1985 and 1986.288 In Germany particularly, there is the problem of the power of the bankrupt to retransfer the asset, as in that country all transfers require a special act of (re)delivery. As a consequence, a return of title cannot be automatic (see for its so-called abstract system of title transfer also ch 2, s 1.4.6 below). This is again particularly important in

the French system, where title transfer does not depend on delivery (always assuming the goods are not converted or comingled in the meantime). This results in that country logically from its system which does not require delivery for title transfer but only the conclusion of the sales agreement (Art 1583 CC) or its rescission which can be reinforced by a specific rescission clause (clause résolutoire) in the contract under Art 1584 CC avoiding at the same time any need for judicial intervention and a supporting judgment under Art 1184 CC. Rather, the problem is the possession of the goods by the bankrupt debtor as this is likely to inhibit their physical return (delivery), see also Cour de Cass, 17 Mar 1975 [1975] D.S.553. This practical impediment is then used to support their inclusion in the buyer’s bankrupt estate as a way to support any reliance on the appearance of enhanced creditworthiness (solvabilité apparente) of the buyer by other creditors except if the seller has a published security right (nantissement), which will, however, usually require an execution sale and not allow automatic repossession. This approach is only taken in bankruptcy of the buyer and not in individual executions against him, see Cour de Cass, 24 June 1845 [1845] D.1.309. It means on the other hand that in France, even in bankruptcy, goods not in the actual possession of the debtor are returnable, especially those still in transit. They are returnable also if the rescission of the contract took place or the action to this effect was initiated before the bankruptcy or at least if the demand for the return of the assets had been manifested before the adjudication, cf Cour de Cassation, 3 May 1935 [1935] D.H.313 and 7 July 1975 [1976] D.S.70. Similar restrictions apply to the statutory reclaiming rights under Art 2102(4) CC: see also Arts 115, 116 and 118 French Bankruptcy Act 1985 and Volume III, Chapter 1, section 1.1.9. A more general exception is now made in France, if these rights were supported by a reservation of title since the 1980 amendment of the French Bankruptcy Act of 1967 in force at the time (Arts 59 and 65), superseded by Arts 115 and 121 of the French Bankruptcy Act 1985: see also Ripert-Roblot, 2 Droit Commercial, 16th edn (2000), nos. 3142, 3148 ff. The reservation of title was further reinforced by the 1994 amendments to the French Bankruptcy Act (Art 59 of Law 94–475 of 10 June), meaning to preserve and extend the seller’s protection if the assets in which title was reserved are subsequently converted or comingled by the buyer. It allows a revindication for the seller provided the goods are not irreparably damaged thereby. See also ss L 621–117 and L 621–122 CdeCom. 288 England (but not the USA) had the similar notion of reputed ownership in personal bankruptcy, especially in respect of commercial property held with the consent of the true owners by a debtor being a natural person who carried on business, see s 38 of the UK Bankruptcy Act 1914: see also Re Sharpe [1980] 1 All ER 198. The notion was abandoned in the Insolvency Act of 1986 (s 283), earlier implicitly by s 235(3) and Sch 10, Pt III of the Insolvency Act 1985, but may continue to be relevant in other common law countries except in the USA where it was never relevant. It could be rebutted only by notoriety and defeated any proprietary claim derived from a situation of default and rescission of a sales contract (for breach of a condition) with or without reservation of title, except possibly in the case of fraud or if the reservation of title was registered as a bill of sale, which is often treated as a security instrument, although leading to a form of appropriation in the manner of a conditional sale. See for the effect on the reservation of title also, I Fletcher, The Law of Insolvency, 2nd edn (1996) 217. In England, the notion of reputed ownership did not have an application in corporate insolvency, cf for the reservation of title, Vaessen v Romalpa [1976] 1 WLR 677, also not if the goods were converted into others, provided the charge was specifically meant to cover these goods, cf Borden (UK) Ltd v Scottish Timber [1979] 3 WLR 672. For its continued validity, it had to be

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the bankruptcy of the buyer who is then no longer capable of executing such a retransfer, even if he would want to co-operate, the exception in Germany being the reservation of title.289 Reorganisation-oriented bankruptcy laws may on the other hand postpone any unilateral action of the seller in this regard, see for France Articles 33 and 47 of the Bankruptcy Act 1985 and further section 362 of the US Bankruptcy Code. The Dutch Bankruptcy Act, even though not so oriented, allows now a two months delay of all individual execution action upon bankruptcy (Art 63a(1)). The conditionality of the title transfer upon full compliance by the buyer (as distinguished from the implied conditionality of the sales contract itself) does not always depend on a relevant clause in the contract (lex commissoria expressa),290 but may sometimes be implicit in the applicable law and then results upon a default under registered under the Companies Act 1948 for the case of shifting into replacement goods or if intended to attach to a multitude of unspecified goods so that a floating charge could result or when the reservation of title was meant to also protect other debt, cf Independent Automatic Sales v Knowles and Foster [1962] 1 WLR 974 and for more details Vol III, ch 1, s 1.5.2. The strong position of the holder of chattels in common law should also be noted in this connection and the lack of proprietary protection for the owner which still has an effect in the bankruptcy of the holder (bailee) and may thus still affect the effectiveness of the reservation of title in England: see further ch 2, s 1.3.2 below. The return of chattels under these circumstances is in the discretion of the courts. Damages remain the more normal remedy, which is of little use in a bankruptcy of the defaulting party. 289

In countries like Germany, upon non-payment, even the reservation of title could thus fail to lead to an automatic return of title as it requires, strictly speaking, still a form of retransfer of possession and there remained as a consequence a risk that the asset could not be returned in an insolvency of the buyer, as the defaulting buyer could be considered to have lost the facility or capacity to do so because of his intervening bankruptcy, see further Vol III, ch 1, s 1.4.1. Also in Germany, contractual rescission clauses requiring the return of the goods are indeed denied validity in bankruptcy, see s 26 of the Bankruptcy Act (Konkursordnung 1877) replaced by s 103(2) of the Insolvency Act 1999, introduced at the time as a uniform rule for all of Germany before the new Civil Code in 1900. Reservation of title is, however, exceptionally assumed to be valid in a German bankruptcy and may lead to a revindication against the bankrupt estate on the basis of s 455 BGB and s 43 of the Bankruptcy Act 1877 now s 47 of the Insolvency Act 1999, see also BGH, 1 July 1970, 54 BGHZ 214, 218 (1970). 290 Even in France and in countries following its lead, there is still a problem in bankruptcy not only with rescission as just mentioned, but more generally with the in rem effect of conditions, although in principle accepted, an acceptance which in bankruptcy may now well be limited to failed sales agreements, however, as under Art 117 of the French Bankruptcy Act 1985 conditions could generally no longer mature after bankruptcy, see also Ripert-Roblot, 2 Droit Commercial, 16th edn (1992) no 3158. Yet the lex commissoria tacita still leads in France to the automatic return of title to the goods upon default, certainly if for its effect no co-operation of the bankrupt is required, although in the case of solvabilité apparente, the reclaiming possibility will be impaired. Another way of looking at contractual conditions of this nature under French law is that the title transfer pursuant to it, rather than being rescinded upon default, is postponed in derogation from the principle of Art 1583 CC which states the basic French rule that title passes immediately upon the conclusion of the sales contract but pursuant to Art 1138 CC, which suggest that a delay can be agreed. This at least appears to be the way the French often look at the reservation of title, see also Vol III, ch 1, s 1.3.4, leaving the seller with the risk of the loss of the goods in the meantime but probably with a stronger position over all, especially valuable in a bankruptcy of the buyer in possession, see Ghestin/Desche, Traité des Contrats, la Vente (1990) No 600 and Cour de Cass, 20 Nov 1979 [1980]

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the sales agreement from the operation of that law itself (lex commissoria tacita), as is still the case in France (Arts 1184, 1610 and 1654 CC) and as used to be the case under the former Dutch Civil Code (Art 1302 CC old, but cf Art 6.269 CC new).291 Even then the true meaning of the proprietary effect of the rescission of the sales agreement (which could also result from other causes like illegality, mistake, misrepresentation or fraud or from the fulfilment of specific contractual conditions to the effect) could still be in doubt upon a subsequent bankruptcy of the transferee when delivery had already taken place, in France again particularly because of notion of the enhanced appearance of creditworthiness or reputed ownership of the buyer. Dutch law traditionally went furthest in the protection of the seller under these circumstances, as it rendered the title return automatic without any restrictions derived from notions of apparent ownership, but this automaticity following a rescission of the sales agreement upon default even in a bankruptcy of the buyer in possession is now superseded by the new Dutch Civil Code (Art 6.269 CC) unless there is a specific contractual clause agreed and inserted to the effect in the sales agreement, see Articles 3.38 and 3.84(4) CC. Only in that case does it now lead to a revindication right of the asset allowing the seller to disregard the interests of other creditors even in a bankruptcy of the buyer.292 33 Revue Trim de Droit Commercial 43, Note Breitenstein. In other words, payment is then a condition precedent for the title transfer rather than that non-payment is a condition subsequent under which the title transfer is undone. 291 In a technical legal sense, there are good reasons to consider all contractual rights to an automatic return of title upon a default by the buyer under a sales agreement as an expression or extension of the lex commissoria of D.41.4.2.3 (later on forbidden in Roman law, see C.8.34.3 pr, at least if leading to appropriation under a secured transaction) and therefore as an indication of the conditionality of the sale. This is the approach obtaining in many countries, also for a reservation of title, as confirmed by Arts 3.84(4) and 3.92 of the new Dutch CC, cf also s 449 BGB in Germany, although in England and according to some authority in France, the reservation of title is considered a delayed rather than a conditional sale. Under the Uniform Commercial Code (Art 9) in the USA, the reservation of title is now entirely equated with a security (ss 9–102(2) and 9–202), like all conditional sales of movable assets in that country, as is the contractual retention right, see ss 2–401(2) and 2–505 UCC, but not the statutory reclaiming right of s 2–702 UCC. The difference is that if a reservation of title is viewed as a security interest in this manner, there is no longer a right for the seller to reclaim the asset and an execution sale followed by a turnover of any excess value to the buyer must follow upon default (s 9–311). For the reservation of title, French case law seems to go into the same direction, see Vol III, ch 1, s 1.3.4. Wherever the reservation of title is considered a security right, any in rem conditionality of the title transfer has disappeared. See for the differences between conditional sales and secured transactions more generally Vol III, ch 1, s 2.1. 292 An important aspect of the automatic return is the question whether it completely obliterates the transaction and is therefore retroactive or whether the return, even if automatic, only operates for the future. New Dutch law accepts that the lex commissoria tacita, therefore the statutory rescission of the sales agreement upon a significant default is no longer retroactive, see Arts 6.265 and 6.269 CC, from which it is concluded that it has therefore no proprietary effect either, although as a consequence of the rescission the parties must still reimburse each other for the adverse effects of the contract whilst existing in as far as possible. The express conditionality inserted in a sales agreement has, as mentioned before, still in rem or proprietary effect under Dutch law, leading to a revindication right even in a bankruptcy of the seller

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As we have seen, conditionality with an automatic return of title and revindication right of the asset upon default, even in bankruptcy, may in many countries be more specifically achieved through a contractual reservation of title clause, especially in countries like Germany that do not otherwise accept any automatic return under the lex commissoria, even if specifically inserted in the sales agreement. There is no automatic re-transfer of title upon a major default in England either, where the reservation of title also overcomes this difficulty for the seller who has lost possession, although in that country the reservation of title is mostly seen as a delayed, rather than a conditional title, transfer. In France, where the automatic title return upon rescission of the sale agreement because of default may be in doubt in the bankruptcy of a buyer in possession if the creditor has created the appearance of greater creditworthiness in the debtor, the status of the reservation of title was clarified in this respect in an important amendment to the French Bankruptcy Act in 1980, maintained in the new French bankruptcy Act of 1985 (Arts 115 and 121) and reinforced in 1994 (Art 59 of the Law of 10 June). In the USA, where contractual clauses to the effect are unlikely to be effective in bankruptcy, see section 365(e) of the US Bankruptcy Code, the reservation of title is known but no longer treated as a special condition reinforcing the automatic return of full title in the case of default. Like any contractual retention right, it is automatically converted into a security right requiring an execution sale and the return of any excess value to the buyer, thus excluding any automatic return of title or appropriation right (see s 9–102(2) (old) UCC). In conclusion, the more specialised default remedies either of a statutory or contractual nature aiming at in rem or proprietary protection whilst leaving the unpaid seller with, and especially without, possession with some power in the sold assets even if title is already transferred, present a number of well known problems and may not always result in an automatic return of the asset, especially not upon a bankruptcy of the buyer/debtor in possession when it matters most. As has already been mentioned, in international sales, the Vienna Convention does not deal with the proprietary recourse actions of the seller (Arts 62 ff) as a consequence of its lack of coverage of proprietary issues (Art 4). (lex commissoria expressa of Art 3.84(4) CC), although not retroactive either and neither is the title return under a reservation of title upon non-payment by the buyer, see Art 3.38(2) CC. It means that, although title automatically retransfers, the effects of the earlier transfer cannot be fully negated. A good example is the retransfer of shares on which the conditional owner exercised his voting rights. The automatic retransfer does not then affect the earlier decisions taken but dividends received will have to be reimbursed as parties must put each other in a position as if the transfer had never taken place. The reclaiming right of Art 7.39 of the Dutch CC is also in rem but not retroactive either. It does not mean, however, that the acquirer of the goods from the interim owner is fully protected and his bona fides are required for the transfer to stand. It suggests that the acquirer should not reasonably have expected that a reclaiming right could be exercised, see Art 7.42 CC. Only a void agreement, eg for lack of consensus or a defective consensus in the case of fraud or misrepresentation, will lead to a return of title with full retroactivity, see Arts 3.53, 6.203, 3.84(1) and 5.2 CC. See further also the discussion in Vol III, ch 1, s 1.2.3.

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2.1.11

The Retention Right of the Seller

The seller may have or create other remedies, especially if still in possession, and may, for example, be able to rely on a statutory lien as retentor, particularly in countries where the transfer of title normally occurs at the time of the conclusion of the sales contract. This is the situation in common law where as a consequence the title normally transfers before delivery but the unpaid seller in possession remains protected by a retention right (unless otherwise agreed), see section 41 of the Sale of Goods Act 1979 for the situation in England, compare also section 2–703(a) UCC in the USA. In France, where title in tangible movable assets also transfers upon the conclusion of the sales agreement, the unpaid seller still in possession has similar rights and cannot be forced to hand over his assets before payment either, unless otherwise agreed, see Articles 1612 and 1613 CC. This statutory retention right is often seen in France as an expression of the exceptio non adimpleti contractus, therefore of the right to withhold performance under a reciprocal agreement if the other party is not performing even though not formulated as a general principle in the French Civil Code, as it is in Germany (s 322 BGB) and now also in the Netherlands (Art 6.262 CC). In these latter two countries, where in any event delivery is required for title transfer, the unpaid seller still in possession may try to rely on his continuing title in the goods or on this exception connected with his continuing holdership of the asset if title has already passed through a constructive delivery, then called the delivery constituto possessorio, also in a bankruptcy of the buyer if the bankruptcy trustee does not offer full payment. The retention right may sometimes go further in its impact than a mere exception to the performance duty of the seller as under modern law it may give priority status in any execution proceeds of the asset, as under Article 3.292 of the new Dutch CC. The seller’s lien or retention right in the UK does not strictly speaking give a similar right and does not imply a power of sale but upon notice to the buyer there is a right to resell the goods to others free and clear under section 48 of the Sale of Goods Act in the UK. In the USA, section 2–706 UCC equally allows the resale to a bona fide third party and also makes clear that the defaulting seller is not entitled to any overvalue. The retention right is not otherwise in the nature of re-transferring title, certainly not to the seller, not even in countries where title passes immediately upon the mere conclusion of the sales agreement or in countries where delivery is required but this has taken place by the seller (exceptionally) providing constructive delivery only leaving the seller as the physical holder or custodian of the asset. Even in countries where there is no automatic retention right for the unpaid seller in possession of the goods, it may still be possible to agree in the sales contract to such a retention right. Yet the status of these contractual retention rights must remain in doubt in these countries especially as to their proprietary and preferential status. It is in any event no foregone conclusion that the rules concerning the statutory retention right automatically apply to any contractual retention right so created as well. In the USA they convert automatically into security interests, for example where the bill of lading is retained by the seller (see section 2–505 UCC). Elsewhere they may

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also be considered possessory pledges subject to the formalities applicable to the creation of these rights, especially if an execution facility or power of sale is foreseen. Also in the case of the (contractual) retention right, there is therefore the question whether it could facilitate the (automatic) return of title upon default and how (as a form of appropriation or otherwise), especially relevant in countries where title re-transfer does not automatically result from the rescission of the failed sales agreement or even from an express contractual clause to the effect. As mentioned above, the statutory retention right is unlikely to imply a re-transfer of title, and any contractual clause to the effect would be unlikely to create an automatic title return in countries which do not allow this pursuant to a contractual term. In the USA, there is, however, a statutory reclaiming or appropriation right for 10 days after receipt of the goods if bought on credit whilst the buyer was insolvent, section 2–702 UCC, a right since 1978 also recognised in bankruptcy, section 546(c) of the US Bankruptcy Code. Another example of a statutory reclaiming right is in section 2–401(4) UCC, under which title re-vests (automatically) in the seller upon a rejection or other refusal by the buyer to receive or retain the goods, whether or not justified, or upon a justified revocation of an acceptance. In the USA cash sales give in any event an implicit lien recognised under section 2– 507(2) UCC, which lien is, according to the Official Comment, in the nature of a reclaiming right and not a security. In fact, a special statutory reclaiming right operative during a limited period after title transfer also exists in France under Article 2102(4) CC, although interpreted there not as a revindication right but as a return of the legal retention right of the seller under Articles 1612 and 1613 CC. Unlike the French statutory rescission right (Art 1184 CC), this French statutory reclaiming right may exceptionally be exercised upon mere notice, and is especially important if the goods are still in transit, although title remains strictly speaking with the buyer until the official rescission of the sales agreement. In the Netherlands, on the other hand, the brief statutory reclaiming right upon default during six weeks upon the due date, referred to in Articles 7.39 ff CC, is in the nature of a true revindication right and implies a return of title if this right is invoked. The retention right of the seller is more fully discussed in chapter 2, section 1.4.10 below in the context of the discussion of proprietary rights.

2.1.12 Alternatives to the Reclaiming Rights in International Sales. The Letter of Credit Because of the (bankruptcy) complications in the case of reclaiming title upon a default in a sales agreement, personal security in the form of letters of credit may be more certain in result than rescission (clauses) or even a reservation of title or statutory reclaiming rights, especially upon shipment of the goods to a new situs. This may in any event change the availability and status of these remedies, which also applies to other types of security interests that may have been created by the seller in the sold assets, see also section 2.1.7 above. From a practical point of view, the

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resulting need for the seller in international sales to retrieve the assets or sell them to alternative buyers in foreign or distant places of destination or conduct an execution sale there create their own problems, costs and risks. Retention rights, be they statutory or merely contractual, by their very nature restrain any subsequent commercial activity in the goods. Certainly in international sales, letters of credit may therefore be more effective, whilst they leave the benefits of the transaction intact and avoid the problems associated with the actual retrieval, custody and return of the goods after transportation to the buyer in another country. The international sales contract thus often requires some form of bank guarantee instead. Domestic sales contracts may also do so, but as it is more costly, the reservation of title where accepted is more normal domestically, as it is much cheaper and simpler to arrange, there being no third party such as a bank involved. The most common type of these bank guarantees is the modern letter of credit. Through the Uniform Customs and Practice for Documentary Credits formulated by the International Chamber of Commerce in Paris, it is receiving uniform use and application worldwide, also reflected in Article 5 UCC which can still not be said of the proprietary rights, see further Vol. II, chapter 1, section 3.3.16. From the point of view of increasing their effectiveness, creating greater uniformity internationally in the return of title upon rescission because of default or in in rem securities supporting payment may well be desirable and a justified objective of the modern lex mercatoria, but even full harmonisation would not relieve the practical problems and inconveniences associated with the retrieval or execution, especially in foreign destinations.

2.2 Ancillary Arrangements in International Sales. The Role of Intermediaries and Documents. 2.2.1

The Safe Harbour Function: Agents and Documents of Title

The fact that international sales take some time and often involve intermediaries unavoidably creates special complications, dangers, and costs but clearly also opportunities. As it often requires the goods to be shipped and handled by third parties as agents who have no other interest than to be compensated for their services, this results by itself in some safe harbour for the goods whilst in transit and in particular provides some safeguard against manipulation by either party during the period between the conclusion of the sale and the ultimate delivery of the goods. It may also introduce flexibility in the resale possibilities and payment arrangements, as we have already seen. Particularly bills of lading or warehouse receipts traditionally allow for an easy transfer possibility of the rights in the underlying goods with reasonable certainty that delivery would not be complicated by retention or other

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rights of the original seller because he has lost physical possession. The bill of lading itself and its proprietary function will be discussed more extensively in chapter 2, part II below. Bills of lading also allowed for an early, simple and safe payment facility tied to the mere presentation of these documents by the seller, certifying the handing over of the goods to a carrier as an independent agent. It gives the buyer reasonable certainty that he will receive the goods without complication upon presentation of the bill to the carrier which will give him the confidence to pay when the bill is presented to him. Any disputes on quality and safe arrival are then separately and independently argued out. Indeed ‘pay first, argue later’ is rightly the underlying maxim of all effective payment schemes based on presentation of shipping documents long before the development of the letter of credit which, as we shall see in Volume III, chapter 1, section 3.3.12 also operates on this basis. This framework of basic and practical protections still remains in place today and banks may further facilitate the process by providing so-called collection facilities under which they receive the documents for the buyer whilst making at the same time the payment to the seller: see for these arrangements further Volume III, chapter 1, section 3.3.7. Especially through documentary letters of credit tied to the bill of lading where transportation by ship takes place, the payment risk may be further reduced for the seller not in possession. Under it, an intermediary bank will accept the payment obligation and make payment usually in the country of the seller upon presentation of the documents, that is normally upon proof of loading. In this manner, the credit, quality and political risk may all be mitigated for the seller, who may be assured of the sale price, whatever occurs during transportation to the country of the buyer and whatever payment restrictions may be imposed on the latter, as long as the seller has properly delivered the goods at the loading point and handed over the documents. As a consequence, the risk of safe arrival and the political risk will in the first instance be for the buyer, but this is always subject to any later recovery by him on the basis of the contractual remedies (like those for non-conform delivery subject, however, to pleas of force majeure or hardship). If, on the other hand, a buyer has been able to insert a condition into the payment arrangement to the effect that he or his bank need not pay until a proper certificate of arrival and quality has been presented, the seller will in the first instance remain liable for the quality and political risk affecting any arrival of the goods. The payment protection will then be much less effective and valuable to him. Whatever arrangement is chosen in this connection, the key is that it will be free from the complications of actual or physical possession of the goods by either party and any possibility of manipulation of the goods on the basis of such possession, for example by a seller who may want to hide the poor original quality of his goods or by a buyer who upon a change in market price would prefer not to receive the goods and might wish to take advantage of any political or other outside interference with the assets or the payment arrangements to that effect. It must be assumed that in the meantime the intermediary will independently do whatever he can to protect and save the assets in his possession from whatever risk may occur and not use these risks and their management to the advantage of either

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party to the sale and handle, protect and deliver the goods as best as he can in accordance with the prearranged instructions. Under letters of credit, banks will equally have an interest in making proper payment regardless of the circumstances concerning the buyer. There is thus a measure of neutrality and simultaneity in performance (delivery against payment) inserted in the handling of the assets and the payment in this manner on which parties often depend. In this way, liquidity risk may also be reduced as through negotiating the bill of lading, the goods may pass safely through further sales without the possibility of the seller or buyer holding the goods back for reasons of their own, as the matter is in first instance between the carrier or the warehouse and the last holder of the bill. This provides liquidity for whoever has the documents including seller or buyer: the seller in possession of the documents in order to obtain early payment upon presentation, the buyer upon gaining possession of them to resell or pledge the documents and receive payment or an advance in this manner. This flexibility makes the parties at the same time less vulnerable to price- and currency changes during transportation and may reduce their funding costs.

2.2.2 The Use of Agents: Their Position The basic pattern of international sales just described based on extensive use of intermediaries, although expensive, has served international commerce for a long time and still provides the basic framework. The position of these intermediaries is in the first instance determined by the contractual arrangements under which they operate, for example a warehousing or transportation agreement or a letter of credit. However, these contracts may imply further powers: the warehousing or transportation agreement may give the warehouse or the carrier the right to hand over the goods to a third-party/buyer upon presentation of the warehouse receipt or bill of lading, thus at the same time completing the delivery duty of the seller which, in systems requiring delivery for the transfer of title, may pass full ownership. Alternatively the warehouse or carrier may be seen as the agent of the buyer so that the delivery and title transfer are completed when the goods are handed over to them. Under a letter of credit, the payment by the bank will discharge the buyer’s payment obligation under the sale agreement at the same time. What happens here is that intermediaries effect legal acts or obtain discharges for either seller or buyer as the case may be (under the contract between them to which the intermediary is not itself a party) to complete a sale without achieving any benefit or incurring any duties of their own. This is the essence of agency and is supplemental to and needs to be well distinguished from the underlying contract obligations between the seller and the buyer (in which the intermediary, although not a party, may play a role as representative of either of them). Here operates the principle of independence or abstraction as the effects of the agency are determined by principles of the objective law rather than by the underlying sales contract or even the contract between principal and agent. Although this latter

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contract sets the agency in motion, the effect on others may be different from what this contract envisages or prescribes. There is here a risk for the party making use of an agent as others may rely on it and need not check the underlying arrangements and may not be affected by them. Thus a warehouse owner may not be empowered to hand over the goods to the buyer before payment, but, if he does, the buyer may retain possession, certainly if he did not know of the condition (assuming no warehouse receipts were involved). It is clear that not every intermediary is an agent in this sense, although the term ‘agent’ is often so used. In a legal sense, the key is that the agent initiates or completes a legal act or obtains a discharge for others. There is here an internal and external relationship, a relationship between principal and agent therefore and between the agent and a third party, see more particularly section 3.1.3 below. The contract of carriage between the seller and the carrier is purely limited to the relationship between both of them and is therefore internal. Yet it may have an external effect, in that the carrier operating for the seller may effect a legal act with the buyer on behalf of the seller under the original sales agreement between both of them, for example the act of delivery achieving at the same time the title transfer. That is the external aspect. If there was a bill of lading or a warehouse receipt, however, the buyer in acquiring the bill or receipt may already have this title as the delivery of the bill of lading or receipt to him under applicable law may substitute for the delivery of the goods. In that case the carrier or warehouse is unlikely to operate as agent in the transfer of title. They will only provide the buyer with the physical possession of the goods which may not itself be considered a legal act. Yet by delivering the goods in this sense, he still discharges a contractual duty for the seller, effects a discharge for him and may in this aspect still be considered an agent. Agency relationships may also allow intermediaries to choose a counterparty and contract with it on its principal’s behalf. In this way, selling or buying agents may be appointed to find buyers or sellers. In shipping, a shipping agent may thus be asked to make the necessary shipping arrangements with whomever and on the terms he thinks best. The del credere agent may have a function in the arrangement whilst accepting for himself the credit or payment risk in connection with the counterparties he so chooses. The agency agreements and the roles of the various parties affected will be more extensively discussed in Part III of this chapter.

2.2.3 The Use of Negotiable Documents of Title in International Sales: Bills of Lading and Warehouse Receipts As there are likely to be intermediaries in the shipping and warehousing arrangements concerning international sales, some document may emerge, if only as receipts, like the bill of lading or warehouse receipt originally were, when a seller physically delivered his goods at the appointed place, like the ship’s rail or the warehouse, and

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receives these documents in return. These documents may develop into so-called documents of title, incorporating the goods into the document. It allows full use to be made of the intermediaries’ safe harbour function and these documents may subsequently provide great flexibility in any resale and payment arrangements if they become negotiable. This is done by expressing them to bearer or order. Regardless of the whereabouts of the goods and their ultimate arrival in the place of destination, the issue of this type of document thus creates a simple method of handing over the (rights to the) goods to third parties who may claim these assets as owners upon their arrival against presentations of the documents. It promotes liquidity in international sales. See for the details of bills of lading and their development as negotiable documents of title, chapter 2, section 2.1 below. It also allows them to be handed over to the buyer against payment as we saw. This re-establishes a simultaneity in the performance of both parties (allowing payment to be made against delivery of the document) which is otherwise lost when the goods are shipped for delivery (seller’s performance) whilst payment is in principle only upon arrival (buyer’s performance). It provides protection for either party in a sale: upon tendering the documents the seller receives (immediate or early) payment and the buyer, now in possession of the bill of lading (either directly or through his bank) will collect the goods upon arrival and is no longer dependent on the co-operation of the buyer in this aspect. They can argue over the details, especially the safe arrival, quality and its effect on the price later. It was said before that ‘pay first, argue later’ is the underlying principle of most effective payment schemes. Technically it puts the buyer in the weaker position as he does not know whether the goods will arrive in good condition, but at least he can be sure that the goods are in independent professional hands and are not likely to be manipulated or held back as they are already with independent third parties. Intermediary banks may here provide further services, either in a collection arrangement in which they receive the documents and pay the seller on the buyer’s behalf or, like in letters of credit, by accepting a payment obligation of their own in this respect, often in the country of the seller.

2.2.4 Documents of Title in Payment Schemes in International Sales: Bills of Lading On the payment side, the intervention of intermediaries holding the goods against the issue of documents of title like bills of lading, may thus give the seller additional security as he is unlikely to hand the documents issued by these intermediaries over to the buyer or his agent before proper payment arrangements are made. This is so even under FOB or CIF terms, which will be discussed below in section 2.3.9 below, in the first case because, even though the buyer arranges the transportation, the seller when receiving the bill of lading upon loading is here at best his agent in possession of the

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bill; in the second case it is because the CIF term itself requires the documents to be handed over to the seller as part of the transaction, the seller being in charge of the transportation. Especially in legal systems requiring a form of delivery for title to pass, title in the assets may thus effectively be reserved in an indirect manner293 by a seller retaining the bill of lading as the goods cannot be handed over by the carrier to the buyer without the relevant documents being produced by him. Even if delivery is not required for title transfer which in such systems usually follows immediately when the sale is agreed, a contractual requirement that a bill of lading be issued is usually explained as meaning to postpone the title transfer until that moment, see further chapter 2, sections 2.1.2 ff below. In the USA, the UCC explicitly recognises that the seller retains a proprietary interest in the goods if he retains the bill for payment (s 2–401). In this system, if payment against documents is agreed, the bill of lading issued to the seller gives him a security right in the underlying assets. The issue of the document nevertheless allows the sale itself to go forward and the goods to sail (and even title itself to be transferred when the bill of lading is given to the seller as agent for the buyer) regardless of these seller protection aspects and the use that is made of the bill in this connection. The existence of the bill of lading also allows for variation in the sense that it may be placed in the hands of further intermediaries, notably banks, especially in collection schemes under which banks achieve as agents the direct exchange of the bill against the purchase money which they will collect, see more particularly Volume III, chapter 1, section 3.3.7. Under these schemes, the banks may also assume an autonomous function and guarantee payment upon presentation to them of the documents by the seller (therefore regardless of the creditworthiness of the buyer and always independent from the safe arrival and proper quality of the goods). This is the essence of the documentary letter of credit, already mentioned too, see for the details also Volume III, chapter 1, section 3.3.8ff. Upon such payment, the paying bank may itself acquire vis-a-vis the buyer a retention or security right in the bill of lading to achieve reimbursement by the buyer if no other arrangements are in place (for example, the buyer may have put the bank in funds or his current account may be debited or if necessary may be allowed to operate with a deficit for the time being). The bank may thus be considered a bona fide holder of the bill of lading in its own right, and the bill then acquires the status of a negotiated document of title under which the bank is the presumed owner or pledgee of the goods. Retaining the bill of lading under these circumstances has a significance in the possessory aspect as delivery of the goods to the buyer cannot take place before he has received the bill of lading from his bank.

293

Explicitly so s 2–505 UCC in the USA.

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2.2.5 The Use of Negotiable Instruments in International Sales: Bills of Exchange Documents of title in the payment circuit may not only concern the security aspect, but the payment itself may also be incorporated in a document of title. When concerning money, they are usually called instruments, which, like bills of lading, may also become negotiable by adding the words ‘to order’ to the beneficiary/payee294 or by making the instrument payable to bearer fence the term: ‘negotiable instruments’. They are mostly of two types: they may contain an instruction from the creditor to the debtor, as in the case of a bill of exchange, to pay to a named person (payee) or his order or to bearer, or they may contain a payment promise by the debtor himself, as in the case of a promissory note, in which the debtor promises to pay to someone named in the note or his order or to bearer, see for bills of exchange more particularly chapter 3. Promissory notes therefore circulate at the initiative of the debtor, bills of exchange at the initiative of the creditor. Although both types of instrument are in principle to order or bearer, bearer bills of exchange are uncommon on the European continent, see for example, section 1 of the German Bills of Exchange Act 1933 (Wechselgesetz), and are even declared void under the Geneva Convention of 1930. Order paper may, however, be converted into bearer paper by an endorsement in blank by the holder.295 Conversely, bearer paper can be made into order paper through endorsement to an identified person by the holder. We will be concerned here only with bills of exchange, often also called drafts, which are the more important in international trade; promissory notes remain particularly common within the USA. They are discussed more extensively in chapter 2, section 2.2 below. Under bills of exchange, the creditor or drawer giving the payment instruction to a third-party beneficiary or payee is likely also to incur a liability towards him. The beneficiary/payee is likely to be a third party to whom the creditor owes something, and issuing a bill of exchange and handing it to the payee then becomes another way of paying this party and amounts to a form of assignment of the claim. The payee may, however, also be the seller’s own bank which then collects in this manner as agent for the drawer. The payee may even be the seller/drawer himself. When negotiated to bona fide third parties, these instruments acquire, like bills of lading, a status independent of the underlying claim and its validity and in fact render (unlike bills of lading) all signatories including endorsers liable for payment to the holder in the manner of the guarantor’s note marked to himself as beneficiary/payee, by discounting the bill of exchange or selling the promissory note to a bank, which will normally be the buyer’s bank, which is the only one familiar with the latter’s credit, unless the bill of exchange is avalised, that is (in civil law terms) guaranteed by another bank.

294 In the UK under the Bills of Exchange Act 1882, even if the words ‘to order’ are missing, the bill is so interpreted, see s 8(4), but not so in the USA or on the European continent. 295 This used not to be possible in France before the law of 8 February 1922.

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Discounting (time) bills of exchange is a traditional way of obtaining early cash regardless of the arrival of the goods or their quality upon arrival and the agreed sales credit period. It means in fact that the drawer, if himself marked as the payee/ beneficiary on the bill of exchange and after having obtained acceptance of the bill by the drawee, sells it to a bank who then becomes the holder and will present the bill of exchange to the drawee on the due date. It will apply a discount for the loss of interest until the due date, taking into account also the creditworthiness of the drawee/debtor. It may also charge an additional fee for the service. The drawback of this substitute form of payment in international commerce is that since normally only a bank which knows the drawee/debtor under a bill of exchange will discount it, the discounting normally leads to payment in the country of the buyer upon the presentation of the bill of exchange to him (except if it specifies payment in the country of the seller which is exceptional or if it is avalised by a bank in the country of the seller). The letter of credit on the other hand normally achieves payment upon presentation of the documents by the seller to a paying bank in his own country. It has as a consequence become more common. It may be combined, however, with a bill of exchange and then allows the beneficiary of the letter of credit to draw a bill of exchange on the bank liable to pay under the letter of credit and, in the acceptance credit, even demand acceptance of the bill in order to create an early discount facility if the letter of credit is not immediately payable upon presentation of the documents. The bill of lading and the bill of exchange may also be connected more directly, in the sense that the bill of lading may be surrendered by the seller to the buyer against the latter’s acceptance of a bill of exchange drawn on him which may subsequently be discounted by the seller. This is the documentary bill of exchange, see further also Volume III, chapter 1, section 3.3.6. In collection arrangements a bank collecting for the seller may also be required to draw (as agent for the seller) a bill of exchange on the buyer and obtain acceptance by the latter before the documents are released, see further Volume III, chapter 1, section 3.3.7. The importance of bills of exchange has declined in modern times, largely because of the direct involvement of guaranteeing and collecting banks in the payment circuit. These banks effectively make the payment directly to the seller through the banking system. As an assignment substitute, instructing the drawee to pay a third party payee, bills of exchange have been eclipsed by the modern assignment facilitated in most modern countries by the abolition of the notice requirement to the debtor for the assignment to be effective. This facilitates at the same time more flexible forms of receivable financing (see Volume III, chapter 1, section 2.3) and has rendered the discounting of bills of exchange to raise financing less efficient.

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2.3 2.3.1

The Uniform International Sales Laws. The CISG

Origin and Scope

International sales have been the subject of uniform treaty law, first in the Hague Conventions of 1964, which separated the formation of the contract from the more substantive parts of the law of sales, and subsequently in the already much mentioned Vienna Convention on Contracts for the International Sale of Goods (CISG) of 1980. It is practically speaking the successor to the Hague Conventions and combines both areas in one document. It may be helpful at this stage to relate some of the history of the Vienna Convention. It was prepared by UNCITRAL, the UN Commission on International Trade Law established on 17 December 1966 and operating from Vienna since 1969, see also Volume I, section 1.4.18. But the idea of a uniform sales law originally emerged in UNIDROIT (Institute International pour l’Unification du Droit Privé or The International Institute for the Unification of Private Law) set up in Rome in 1926 under the authority of the League of Nations. In 1928 Professor Ernst Rabel from Berlin, later at the University of Michigan in Ann Arbor, proposed a project on international sales which led to a first draft in 1935 whilst his own book, Das Recht des Warenkaufs, first appeared in 1936. The project met considerable opposition, especially in the field of offer and acceptance (where common law maintained a much more formal structure). Since 1939, there were as a consequence two projects, one on formation: Loi Uniforme sur la Formation des Contrats de Vente Internationale des Objets Mobiliers Corporels (LUF) or the Uniform Law on the Formation of Contracts for the International Sale of Goods (ULFIS) and another on the international sale itself: Loi Uniforme sur la Vente Internationale des Objets Mobiliers Corporels (LUVI) or the Uniform Law on the International Sale of Goods (ULIS). They were agreed at the Hague Diplomatic Conferences of 1951 and 1964 which, however, was attended by only a small number of countries, and they were only ratified by a few states, often with reservations (the UK, for example, required that the parties themselves made the Conventions applicable to their contract, which was never done). Because of their limited support, the Hague Conventions were increasingly seen as not fully representative of the views of the world community at large and especially not of the need of less developed countries. Once UNCITRAL adopted the project, it moved quickly and on a much broader front of participants. It presented a first draft on international sales in 1978, which tracked much of the language of the Hague Conventions, and was able to conclude the matter at a Diplomatic Conference in Vienna in 1980 attended by 62 states, which approved the final text after five weeks of deliberations.296 296 The International Sales of Goods Convention had been UNIDROIT’s major project. In Vol I, s 1.4.18, the tribulations of UNIDROIT after World War II were already mentioned. Although created under the League of Nations, it is not now a UN body but rather a private think-tank. When

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In the Hague Conventions of 1964, there was no definition of what an international sale was. They limited themselves, however, to the sale of goods as tangible, movable objects. The Vienna Convention does not contain a definition either but notably does not apply to the sale of consumer goods, auctions, execution sales, sales of investment securities and other negotiable instruments or money market transactions, sales of ships or aircraft and sales of electricity (Art 2). The civil or commercial nature of the sale is otherwise not considered (Art 1(3)). It has already been mentioned in section 2.1.5 above, that the international setting itself and the additional services an international sale often requires in terms of transportation, insurance, handling, and payment are not considered in this definitional context. For the Convention to apply, parties must merely have their place of business in different Contracting States or the applicable private international law should point to the law of a Contracting State for the Convention to apply (Art 1(1)), always assuming that both parties come from different States which in that case need not be Contracting States. If a party has more than one place of business, for example, if it operates through branches in different countries, the place of business with the closest relationship to the contract and its performance counts. If a party has no place of business, the habitual residence will be taken as relevant, Article 10. The inference is that only cross-border sales between professionals are considered. The Hague Conventions indeed required cross-border movement of goods, but this criterion is now abandoned. It may be more appropriate where proprietary aspects are also considered, which has not so far been the case in the sales conventions. The Vienna Convention is as a consequence applicable even if no assets cross borders. This is in line with its purely contractual scope. One thus sees a number of elements of international sales implied, compare more particularly section 2.1.2 above, without (for purposes of the uniform law) any single determining factor, although the emphasis is (for contractual purposes) on the different location of the parties, whilst as to substance, the emphasis is on the sale of movable tangible assets between professionals, which assets or parties need not themselves move cross-border. The system of the Vienna Convention is still based on delivery ‘ex works’, compare Article 31(c), so that again from a proprietary point of view, there may not be any international (cross-border) aspect or movement at all. The other main differences between the Hague and Vienna Conventions are in a narrower concept of uniform law under the Vienna Convention. It notably allows the application of conflict rules where the Convention itself is silent (but only after applying its general principles, Art 7(2)), see also section 2.3.7 below. Here the internationalist approach of the Hague Conventions is abandoned (see more particularly section 2.3.5 below). The Vienna Convention in its Article 9 is also more restrictive in its recognition of custom as source of law, apparently in order better to protect the unwary (professional!) in international trade. it was re-established, the sales project was in the hands of an independent Hague Diplomatic Conference which completed the project after conferences in 1951 and 1964. From there it moved to UNCITRAL which, as a UN agency, was thought to be the more proper forum likely to obtain the most ratifications. After UNIDROIT was restarted, it diversified into other areas: see Vol I s 1.4.18.

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The Vienna Convention generally appears to protect the buyer better as compared to the Hague Conventions and therefore never accepts automatic termination upon breach, even if fundamental (Arts 61 and 64), gives the defaulter some possibilities to remedy his failure of performance even after delivery (Art 48), especially if the price is paid (Arts 63 and 64(2)), only accepts suspension (and no avoidance) of the contract if there are good reasons for fearing that the buyer will not pay (Art 71), allows avoidance in the case of anticipatory breach only upon notice of the intention to invoke this remedy (Art 72(2)), enhances the buyer’s rights unilaterally to reduce the price upon (alleged) non-conform delivery (Art 50, often seen as an excessive right), allows inspection by the buyer within a short period after delivery rather than promptly (Art 38(1)), refers in the absence of a price to the market conditions rather than to prices generally charged by the seller (Art 55), and restricts implied usages to those agreed or established between the parties (Art 9), as they were otherwise considered to favour the strong. The notice periods are generally more flexible than in the Hague Conventions and the Vienna Convention never requires prompt answers. Finally, there are a number of important simplifications, especially in the remedies. The Hague Sales Conventions had distinguished between five categories of performance, each with its own type of remedy in the case of default. It resulted in artificial distinctions and unnecessary complications. Also the concept of delivery was simplified and reduced to its physical aspects and to a number of obligations of buyer and seller in this respect (Arts 31 and 60), whilst the passing of risk was no longer immediately tied to it (Arts 66 ff), although the principle that the risk passes upon physical delivery remains unchanged.

2.3.2

The Coverage of the Vienna Convention

As already mentioned above, the Vienna Convention does not apply to consumer sales, the supply of services, auctions, the sale of securities and ships or aircraft (Arts 2 and 3). Even then, the Vienna Convention contains only a partial codification of the law of sales as it relates to the formation of the sale contract and the rights and obligations of parties thereunder, Article 4 (although this is a very broad formula), but notably not to questions of validity of the contract (therefore in questions of sufficient consensus and the defects therein) and custom, and to the property aspect of sold goods, including the title transfer. In fact, from the subjects covered it is clear that the scope is even more limited as it avoids all general contractual aspects except for offer and acceptance or formation (in Pt II). Areas notably not covered by the Vienna Convention (and earlier the Hague Conventions) are notably: (a) consent or lack thereof or the usual defences against binding force in the case of fraud, coercion or duress, abuse of power or undue influence at the time of formation, mistake or misrepresentation, and its consequences, in civil law often referred to as matters of validity, which then also cover questions of avoidance and nullity for other reasons like illegal purposes; (b) capacity and proper authority, including agency, or the consequences of lack thereof; (c)

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pre-contractual rights and duties; (d) enforcement or abuse of rights obtained under the contract including any renegotiation duties in the case of hardship or gross imbalances; (e) the transfer of title, its manner and time and the property rights created thereby; and (f) prescription (the UNCITRAL Convention of 1974 on the Limitation Period in the International Sale of Goods suggests a period of four years). By special provision (Art 5), the Vienna Convention, does not apply to seller’s liability for death or personal injury caused by his goods either. It has already been said that the areas not covered by the Convention largely relate to the general part of the law of contract (except for formation) or to property aspects, especially the transfer of title pursuant to the contract. What is excluded is the typical contractual infrastructure, such as questions of capacity, binding force or consensus and the interpretation of the contract, defences and excuses, pre- and post-contractual duties, and the proprietary consequences of a sale, aspects not likely to be covered in the contract itself either, certainly not if not themselves of a contractual nature, like the transfer and ownership aspects. Because these aspects cannot or are not normally covered in the contract itself, a Convention also covering these areas would have been much more important. For the contractual infrastructure, the UNIDROIT and EU Contract Principles are attempting to cover some of this, see section 1.6 above, and may, whatever their strengths or weaknesses, from that point of view become more important, although they are not meant as a binding set of rules. The 2008–09 Draft Common Frame of Reference (DCFR) which is an academic effort in Europe to come to a full codification of private law within the EU, has both a general part of contract and a special chapter on sales. It also deals with title transfer, see chapter 2, section 1.11 below In fact, the Vienna Convention (with the important exception of its provisions on formation relating largely to offer and acceptance) covers particularly those aspects of international sales which parties are themselves likely to cover in the contract, such as: (a) quality, quantity, price, place and time of delivery; (b) default; and (c) the in personam remedies including the concept of force majeure and the passing of risk. In fact, the Convention only concentrates on some aspects of offer and acceptance (Pt II), on the time and place of delivery (Arts 31 and 33), conform (physical) delivery (Art 35), transfer of risk (Art 69(1)), payment (Art 57), default (Arts 45 and 61), damages (Art 74), force majeure (Art 79) and a duty of care for seller or buyer if something goes wrong in the implementation of the contract in order to protect the goods (Arts 85 and 86). Parties may certainly also continue to cover these aspects in the contract itself (Art 6). The Vienna Convention is as a consequence of modest help and primarily meant to provide solutions when the contract, standard terms or industry usages (see Art 9) do not provide sufficient guidance themselves, which is usually only the case in oral contracts. They must be considered rare in international dealings. This all obviously reduces the importance of the Convention. Because of unfamiliarity with its operations or effects and some peculiarities as the probably excessive power of the buyer unilaterally to adjust the purchase price under Article 50, many standard industry contacts exclude the application of the Convention altogether.

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The USA and most EU countries, with the notable exception of the UK and Portugal, have ratified the Vienna Convention. Neither has Brazil. The UK was represented on the UNCITRAL working group at the time but remains one of the most important commercial nations that have not so far accepted the Convention, although it ratified the earlier Hague Sales Conventions (but with the reservation that parties had to make a reference to it in their contract). The principal reason for the UK’s abstention so far may be the one stated by the Law Society of England and Wales concerned about the diminishing role that might result for English law within the international trade arena.297 This argument is an odd one. It could be argued with equal force that transnationalisation of English commercial law would enhance its status and attraction, although accepting the full force of the various sources of law in the modern lex mercatoria would in the view of this book be even more effective and place England at the centre of this development of which its practitioners would profit more than most others, see also the discussion on this point in Volume I, section 1.1.1 in fine. The present English sales law for goods or movable tangible assets remains basically the one of 1893 updated in 1979 and may be doubted ever to have set a pattern in international sales, except within the British Commonwealth. Article 2 of the UCC is now more influential and emerged in draft very much at the same time as the Hague Conventions. The Vienna Convention is still different in a number of important aspects, notably in the absence of the concept of consideration and in the acceptance of good faith notions in the interpretation and of general principles in the supplementation of the Convention itself, which may suggest a more normative interpretation of the legal text as we shall see in section 2.3.7 below. These would certainly be new features in countries like the UK, although less so in commercial law in the USA (see section 1–103 UCC, which in any event allows a liberal interpretation of the statutory text). In sum, in the more flexible approach to interpretation and in its detail, the USA in Article 2 of the UCC is closer to the Convention and the USA has therefore not shown a similar resistance and ratified. Unification makes some sense as a system of different domestic sales laws increases cost in terms of legal advice, creates some risks on its own, and may well slow down transactions. Moreover, there may result considerable uncertainties and undesirable consequences from the applicable choice of law rules or even from a contractual choice of a domestic law, see further Volume I, section 2.2.9. Most importantly, domestic laws tend to ignore the character and dynamics of international sales, see more particularly Volume I, section 1.1.4 and section 1.4 for the development of a transnational legal order and lex mercatoria and its dynamics to accommodate modern needs. In any event, application of the Vienna Convention alone will not guarantee uniformity as it covers the subject of international sales only partially and notably not 297 See the Law Society of England and Wales, Law Reform Committee of the Council, 1980, Convention on Contracts for the International Sale of Goods (1981). The Department of Trade and Industry, United Nations Convention on Contracts for the International Sale of Goods: A Consultative Document (June 1989) was more neutral and did not express a clear preference.

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the aspect of the transfer of ownership which is the true objective of all sales contracts. In any event, there will remain diversity in its interpretation and certainly in its supplementation where, for the one, reference may be made to widely varying good faith notion and, for the other, even to private international law rules, see more particularly sections 2.3.6 and 2.3.7 below. In section 2.3.7, it will be argued that uniform treaty law can only flourish and its true meaning only become apparent within the context of the hierarchy of norms of the whole lex mercatoria, see for this hierarchy Volume I, sections 1.4.13 and 3.1.2.

2.3.3

The System of the Vienna Convention: Directory or Mandatory Rules?

The question was raised at the time whether provisions of the Hague Sales Conventions could or should be of a mandatory instead of a directory nature, especially important as to whether they could in whole or in part be set aside by the parties. Article 6 of the Vienna Convention, following Article 3 of the Hague Sales Convention, is unambiguous on the subject and allows parties to deviate from any of its terms (except where the domestic law of a party with its place of business in a Contracting State requires a written form for the contract of sale, its modification or termination, provided that the relevant Contracting State has insisted on maintaining this principle in international sales upon a special declaration to the effect, Arts 12 and 96, as the USA has done). Earlier, an argument developed at the Hague Diplomatic Conference of 1951 to the effect that international trade required some basic mandatory rules on the structure of the international sales agreement, notably to avoid improper practices. This never became the accepted view which remains based on the classical notion of contracts in essence party autonomy in formation, coverage and interpretation. Corrections could, however, be conceivable on the basis of fundamental legal principles or mandatory custom and public order notions. They may then be identified as overriding in the context of the lex mercatoria, see Volume I, sections 1.4.13 and 3.1.2, but this idea found expression neither in the Hague nor Vienna Conventions which did not cover this ground. In international sales, any overriding principles of this nature should be of an international character unless of a domestic regulatory nature, see Volume I, sections 2.2.6 ff, assuming there was sufficient contact with the case. Domestic considerations should otherwise not enter into them—they could at most be a bar to enforcement of any decisions based thereon in domestic recognition and execution proceedings. These overriding principles may sometimes be covered by the concept of good faith or abuse of rights. Domestically this is known especially in legal systems like the German and Dutch where in pressing cases they may equally amend the contract and its implementation (see more particularly section 1.3.1 above). Again, in international transactions, the likely reason is the appeal to fundamental legal notions or public order requirements of a transnational nature.

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In the end, the liberal attitude of the Hague and Vienna Conventions towards party autonomy was made uncontroversial, probably helped by its limited scope. In the Convention, good faith is only referred to in connection with the interpretation of the Convention itself, see Article 7(1). It is not clear how mandatory it is; under Article 6 it can be eliminated. The UNIDROIT and European Contract Principles which cover contract law more generally seem to adopt here a fundamentally different attitude, therefore not limited to acceptance of overriding international fundamental principles and public order requirements alone. Good faith, although in essence undefined, becomes here absolutely mandatory and introduces a generally censorious attitude to contract and party autonomy, even in the professional sphere. So it is in the DCFR. It contrasts with section 1–302 UCC, which allows professionals to set good faith and reasonableness standards between themselves unless resulting as manifestly unreasonable. The new approach in both sets of Principles and DCFR was identified earlier as largely the result of a personal dealing and consumer-oriented approach, even where these Principles (especially the UNIDROIT ones) or DCFR mean to operate also in the international business sphere. It is bound seriously to undermine the credibility of these various sets of rules in international trade.

2.3.4

Applicability of the Vienna Convention

The Vienna Convention only applies to the sale of goods or chattels as tangible movable assets between parties whose places of business are in different States. According to Article 1(1), for the Convention to apply, the further requirement is that either the parties must have their places of business in Contracting States or the applicable private international law must point to the law of a contracting State, although contracting States may opt out of this latter provision (Art 95), as the USA has done. For the Convention to apply it is thus not necessary at least for courts in Contracting States first to determine which law is applicable in order subsequently to determine whether that law has incorporated the Convention for sales of the types covered by it. This is the approach only in the courts of non-contracting States. Courts in Contracting States must apply the Convention as lex fori if the conditions of Article 1 are fulfilled, that is particularly when the parties come from two Contracting States. The appropriateness of applying the international sales law is then automatically assumed, see further also Volume I, section 2.3.1. Thus only if the parties are not both from Contracting States is there a more traditional conflicts rule inserted and the Convention then only applies if the forum’s conflicts rules lead to the applicability of the law of a Contracting State (although under Art 95 Contracting States may opt out of this provision, as the US did). In finding that the law of a Contracting State is applicable, courts would only subsequently apply the other applicability tests of the Convention, that is that parties came

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at least from different states (which need not then be Contracting States) and that in essence only non-consumer sales are covered (unless these conditions are waived by the parties). It follows that the Convention may under its applicability rules affect residents from non-contracting States in respect of whom the law of a Contracting State must be considered applicable provided always that the parties come from different States even if not contracting States (which is logical as there is no reason to apply an international sales law in domestic situations). A contractual choice of law referring to the law of a Contracting State may in this way also achieve applicability of the Convention as a matter of the conflict laws of the forum in or outside Contracting States. It may be safer in such a case, however, to refer to the Convention explicitly, certainly if the law of the country chosen has itself opted to exclude Article 1(1)(b), as the USA has done. Article 6, on the other hand, allows the parties expressly to exclude application of the Convention even if they both come from a Contracting State or risk the applicability of the Convention under the prevailing conflict rules. A choice of law in favour of a country that has not ratified the Convention must mean its exclusion. On the other hand, a contractual choice of law making reference to the Convention would mean its applicability even if the parties came from the same State. In that case the diversity requirement of Article 1(1) must be deemed waived. This may make sense if the goods are to be shipped from other countries and the parties, although from the same country, wish the provisions of the Convention concerning quality, quantity, price, allocation of risk and default still to apply. As has already been mentioned, total exclusion of the Convention is still quite common between commercial parties because of some of the vagaries and eccentricities of the Convention or general unfamiliarity with it. The result of the application provisions of the Convention is that a German and a Dutch resident, both coming from Contracting States, but the latter being on a visit to Germany, would be selling to and buying from each other under the Vienna Convention, except if the goods were bought for personal, family or household use (unless the seller did not realise that this was the case: see Art 2(2)). According to Article 1(2), this is also not so if the fact that the parties have their places of business in different countries does not appear from the contract or from any dealings between them. This could be more particularly the case if there was an undisclosed foreign principal represented by an agent resident or with his place of residence in the same country as the other party. In any event, the buying of a loaf of bread by the Dutchman whilst on holiday in Germany would, as a consumer transaction, not be covered by the Vienna Convention, although according to Article 1(3) neither the nationality of the parties nor the civil or commercial nature of the contract is relevant in this connection. The buying of a combi-car thus probably would. If, on the other hand, the buyer were an Englishman (therefore someone from a Non-contracting State) on a visit in Germany, the Convention would still be applied by the German courts if called upon to decide any litigation arising from the sale (assuming they had jurisdiction) as the parties would have their habitual residences in different States (although not Contracting States) whilst under Article 1.1(b) the Convention would apply as a matter of German law, this being the law of the seller

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who, under Article 4 of the 2008 EU Regulation on the Law Applicable to Contractual Obligations, performs the most characteristic obligation. Should a case arise in England, then the Vienna Convention might still apply if German law were considered applicable to the transaction by the English courts, which would be likely in the circumstances as the UK is covered by the Regulation and would therefore be likely to apply German contract law. In that case the English courts would not apply the Convention as part of their lex fori but only as a matter of German law under the applicable conflicts rule. In this system, the location of the asset or any requirement of delivery in another country is irrelevant. This is a consequence of the property aspects and the transfer of title itself not being covered by the Convention (see Art 4). As we saw, the earlier Hague Conventions still required this cross-border movement of the asset even though it did not cover proprietary aspects either, but this approach is now abandoned.

2.3.5

The Sales Law of the Vienna Convention. Formation

As already mentioned several times before, the Vienna Convention contains only a partial codification of the international sales law which is always subject to party autonomy. In the following, its major topics, most of which were already highlighted before, will be briefly revisited. As regards formation, this focuses on offer and acceptance. Here the Convention largely adopts common law terminology, concepts and practices, except that the acceptance (if not by conduct or in the manner as indicated by established practice between the parties) is effective upon receipt only, even if by mail, rather than upon dispatch, as is the normal common law rule (Art 18(2)). Like the UCC in the USA, the Convention further dispenses with the common law distinction between unilateral and bilateral contracts, the first being under traditional common law for their effect dependent on full performance (and notice thereof to the other party, instead of mere acceptance), as in offers to the public (if not an invitation to treat) and normally in offers for services, not here relevant. On the other hand, unlike the situation in civil law, offers are not binding per se, even for a reasonable time (Art 16). Here traditional common law continues to prevail, except where the offer states otherwise (which was not even then binding under common law without consideration, but between merchants now also possible under the UCC in the USA (s 2–205)), or has been reasonably relied upon (like subcontractors’ quotations enabling a main contractor to make a final offer). Common law requires detrimental reliance, which may be a stricter requirement. Offers must be sufficiently definite, but they are considered to be so if they fix or make provision for the determination of quantity and price, see Article 14(1), although strictly speaking even that much is not necessary if the offer is otherwise sufficiently definite. Article 55 makes further provisions for price so that in fact quantity is the only term parties must at least generally agree on.

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This is also the approach of the UCC in the USA, which requires as the minimum for validity of a sales contract the agreement on quantity. It need not even be accurately stated either, but recovery is limited by what is said, whilst the price, time and place of payment or delivery, the general quality of the goods or any particular warranties may all be omitted (see Official Comment at s 2–201). Under the Convention, additional terms, which do not materially change the offer, do not result in a rejection or counter offer, but if bearing on price, payments, quality, quantity, place and time of delivery, party’s liability or settlement of disputes, they are considered material per se (Art 19(3)). The Convention does away both with the requirement of consideration and causa (cf Articles 14 and 29(1)) in the formation, see also section 1.2.3 above. In this respect it also follows the earlier Hague Sales Conventions. Thus under the Vienna Convention, there is no search for a more objective criterion to make promises legally binding besides the mere intention of the parties. In the continental European tradition, any excesses are curbed by notions of good faith or public policy, but these notions remain underdeveloped in the Vienna Convention. The good faith notion is only mentioned in Article 7(1) in the context of the interpretation of the Convention itself, as we already saw, and has here supposedly a different meaning and may more properly stand for normative interpretation, see further the discussion in section 2.3.7 below. The absence of the requirement of consideration or causa in the Convention (and also in the UNIDROIT Principles for International Commercial Contracts) does not appear to mean that it may itself be reintroduced through application of a national law pursuant to applicable conflicts rules under Article 7(2) as a matter of gap-filling in the area of formation or outright as a matter not covered by the Convention at all. It may well be that in international transactions these requirements (of consideration or causa) have lapsed altogether, see also section 1.2.6 above.

2.3.6 The Sales Law of the Vienna Convention. Substance, Default and Remedies Articles 31 and 33 deal with the time and place of the delivery. The normal delivery place remains ‘ex works’, that is, at the seller’s place of business, except where the sales contract involves a carriage of goods, therefore a transportation arrangement, when the seller must hand over the goods to the first carrier. If the goods are known to be in a warehouse or particular place of manufacture, they must be put at the buyer’s disposal at that place. The time is a reasonable time after conclusion of the contract, which means in fact that the ground rule is immediate delivery at the option of the buyer to be reasonably exercised. The Convention thus concerns itself only with delivery in a physical and not a legal sense. As just mentioned, in essence goods are still put at the disposal of the buyer ‘ex works’. The transfer of risk occurs at the same time, although strictly speaking it is at the moment the buyer takes over the goods (Art 69(1)), which could be later. In trade terms, like FOB and CIF, parties often agree, however, to a different regime altogether,

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see section 2.3.9 below. As proprietary aspects are not dealt with in the Convention, delivery must not be considered here in terms of transferring legal or constructive possession as a precondition for the passing of title in countries which require delivery for title transfer. They may in any event sometimes require mere legal or constructive delivery and therefore use a somewhat different concept of possession in this connection, see more particularly chapter 4. As regards price and payment, although Article 14 of the Vienna Convention requires the price to be sufficiently definite, according to Article 55, the price if not established in the contract is the price generally charged at the time of the conclusion of the contract for such goods sold under comparable circumstances. Payment must take place at the place of seller (Art 57), unlike notably under French law (insisting on the place of the debtor, Art 1247(3) CC) and the time is upon delivery (Art 58), all unless agreed otherwise.298 The European and UNIDROIT Principles also require payment at the place of the creditor. In Articles 28, 46 and 62, the Vienna Convention deals with specific performance, see also section 1.4.1 above. Subject to the provisions of the lex fori in this manner, the Convention in Article 46 allows the buyer specific performance unless it has resorted to another remedy. In the case of non-conform delivery, substitute goods may only be claimed if there has been a fundamental breach, otherwise the normal remedy is repair. Article 62 gives the seller a more unrestrained right to request payment or force the buyer to take delivery or perform his other duties unless he has chosen another remedy. As regards other remedies, under the Vienna Convention, Article 47 gives the buyer the facility to set extra time (Nachfrist) for performance by the seller and Article 63 gives a similar facility to the seller to solicit performance by the buyer. The importance of this facility is in its consequences: if the defaulting party does not use the facility, the other party has a right to avoid the contract and thereby terminate his own performance duty, whether or not the breach was itself fundamental. It is then treated as such: see Articles 49(1)(b) and 64(1)(b). As regards the default remedies of rescission and damages, the key is that, under Articles 49 and 64, a party can ask for a rescission of the contract upon default by the other party, but in the case of fundamental breach only (see for the definition Arts 25 and 26) or if he has set an additional time for performance and the other party has not taken advantage of it. It does not require judicial intervention and discharges the creditor (either seller or buyer as the case may be) from his own obligations and does not rule out any claim for damages under Articles 74–77. These may include a loss of profit, incidental (for example, enforcement cost) and often consequential damages, 298 It is clear that the Vienna Convention does not adhere to the principle of a price certain for the validity of the contract, as Roman law had required (the pretium certum, also of importance for the transfer of risk) and as French law in its wake still does, see Art 1591Cc, but the Cour de Cassation in a decision of 1 December 1995 [1996] JCP 22.565, allowed the price to be unilaterally established if subject to objective criteria, like for telephone companies a generally applicable telephone charging scale. Art 1591Cc is now merely seen as a protection against abuse by the seller. German and new Dutch law do not retain the idea of a fixed price and, like the Vienna Convention, allow the determination of the price later with reference to objective, often market-related standards.

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but they cannot exceed the loss foreseeable by the defaulting party at the time of the conclusion of the contract. This is the common law approach, which maintains here a more difficult criterion than civil law which ties the foreseeability commonly to the moment the default occurs. Article 50 contains a special and much criticised remedy in the case of non-conform delivery and allows the buyer unilaterally to reduce the price with the reduction in value of the asset. It does not require judicial intervention to establish whether the delivery was indeed non-conform and what the appropriate reduction is. Article 50 is a combination of the actio quanti minoris and the exceptio non adimpleti contractus except that there is neither an action nor an exception but rather an independent right on the part of the buyer unilaterally to reduce the price upon his allegation of non-conform delivery. It shifts the burden of litigation to the seller. This has given rise to considerable unease but was asked for by developing countries which felt that their buyers were better protected in this manner. It is an important reason, however, why the application of the Vienna Convention is often excluded by contract. Where the non-conform delivery was due to force majeure whilst the seller was still at risk, he will, however, be excused from paying damages (see Art 79). As to default, under the Convention, parties may also act in anticipation of a breach to preserve their positions (the anticipatory breach of Arts 71–73) and it is possible to suspend their own performance by giving notice thereof to the other party, provided the deficiency in the ability to perform or in the creditworthiness of the other party is serious or is in preparation for performance or in the performance itself. If it results in adequate reassurances of performance, the party giving the notice must continue his own performance. The Vienna Convention deals with performance and default only in their in personam consequences, that is to say it deals neither with the transfer of title nor its return upon default or upon rescission or avoidance: see for the various options under domestic laws in this latter respect and for retention rights, sections 2.1.10 and 2.1.11 above. The remedies under the Convention are basically specific performance or avoidance of the contract (if the breach is fundamental) with the possibility of claiming damages depending on the circumstances. As we saw, by way of preventive remedies, the Convention also allows preventive action if a breach is expected (anticipatory breach). It may also mean not performing any further oneself. This is particularly relevant in bilateral contracts (the exceptio non adimpleti contractus) of which the sales contract is a prime example. Technically speaking, the Vienna Convention, like the UCC, abandons the common law notion of (express or constructive) ‘conditions’, traditionally distinguished from warranties as a matter of interpretation. The express conditions could be related to the occurrence of an outside event or be a specific term of the deal, for example the specified quality or delivery date. Constructive conditions were those implied, for example a substantial default by the one party, which would condition the performance of the other and release him. As explained in section 1.4.3 above, in common law, technically conditions were considered so material that when remaining unsatisfied, the contractual obligation of the other party did not ripen unless there was a failure to co-operate or a

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waiver. In this way common law created a method of releasing the non-defaulting party without rescinding the agreement, which it found difficult to do. Conditions thus automatically discharged a promisor without resort to the notion of breach proper and any right to cure, whilst there could still be a right to damages. Warranties did not have the same status, although they naturally could also be breached. The Vienna Convention adopts instead the concept of fundamental breach and speaks of the possibility to avoid or rescind the contract in that case (only): see Articles 49 and 64. Fundamental breach is only loosely defined (Art 25) and remains, like negligence, a matter of determination per case in view of all the circumstances. The subject of force majeure is always a difficult one and concerns first the definition of force majeure but also its consequences in terms of a temporary or permanent release of the party required to perform, adaptation of the contract or allocation of the risk: see also section 1.4.5 above. The Vienna Convention in Article 79 states that a party is not liable for a failure to perform any of his obligations if he proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences. This is a broad definition, but Article 79(5) further says that nothing in Article 79 prevents either party from exercising any rights under the Convention other than claiming damages. Rights to avoid the contract as a result of fundamental breach or to ask for repairs are thus not impaired whilst avoidance may lead to restitution, but only if that is still possible (if not, avoidance may no longer be possible but other remedies are retained, Art 82). It means the return of all that has been supplied under the contract, but not as proprietary remedy with which the Convention does not deal. The Convention does not contain any special provisions allowing for an adaptation of the contractual terms in the case of hardship due to change of circumstances or otherwise. As regards the passing of risk of deteriorating or lost goods and its relationship to the concept of force majeure, above in sections 2.1.8 and 2.1.9 the basic rules were explained.299 Under the modern law of sales, unless the contract states otherwise, the

299 In summary these were the following: (a) In a sale, it is the legal owner or, more recently, the physical holder of the goods who must accept whatever happens to the goods in his possession after the conclusion of the sales agreement and before delivery if damage or loss is not caused by anyone in particular. If he is the seller, he is not therefore discharged from his conform delivery duty by force majeure (but he might from other ancillary obligations like servicing the goods). (b) On the other hand, the seller, if no longer the holder, is no longer liable for any damage subsequently affecting the goods without his fault and is entitled to full payment. He is also excused from any remaining duties in respect of the goods, like a service obligation, in the case of force majeure on his part but might not be able to request payment for the performance of these duties either. This is only different if guarantees of performance have been given. (c) The seller’s own knowledge of dangers or investigation duties in the quality especially of goods which he did not himself manufacture may undermine his claims to force majeure concerning the

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risk in this sense normally passes between seller and buyer when the buyer takes over the goods, or if he does not do so in good time, from the moment the goods were put at his disposal. This is also the approach of the Vienna Convention, compare Article 69. If intermediaries are used, for example in a FOB or CIF sale, the risk usually passes on loading to the first carrier: see also Article 67 Vienna Convention. For goods in transit, the risk passes upon conclusion of the contract (Art 68). Carrier and transit risk is thus now normally for the buyer. The Convention does not, however, deal directly with the other subtleties of the passing of risk, as just summarised, nor with its fluid character, but many of the exceptions and refinements may result under its other provisions. As the Convention does not consider the question of the passing of title and whether or when it has passed, the passing of risk (Arts 66 ff) acquires for goods a more particular significance. As the ownership question often takes care of itself (resulting under the applicable domestic laws either from the contract or from any subsequent delivery which will in any event be required as a matter of contract performance) and is mostly settled under the applicable law and not by contract, the passing of the risk is often of more immediate concern to the parties (as is its physical delivery) and can always be determined by contract. As already mentioned in section 2.1.8 above, in international sales under the Vienna Convention, the concept of non-conformity might itself include the concept of mistake (not itself covered by the Convention) as to the qualities of a sold good (Art 35(2)), so that the non-conformity remedies of the Convention apply throughout, including the rule concerning the passing of risk, rather than domestic notions of mistake or misrepresentation, which, in the absence of the coverage of these subjects in the Convention, might otherwise supplement it under applicable rules of private international law (therefore without regard to Art 7(2)).

state of the goods and therefore his reliance on the passing of the risk upon delivery. Defences of the buyer based on mistake or misrepresentation may then also be valid. (d) The buyer upon delivery may still be protected even if the seller is not to blame for the deterioration in quality, if the buyer did not have a chance to inspect the goods properly, if there were hidden defects, or if he benefited from an express or implied guarantee (which may also imply a lesser investigation duty upon receipt) so that the risk is still not for him and has therefore not passed. (e) If goods (as well as the payments made) may be returned upon non-conformity, not discoverable at the time of delivery (even if due to force majeure but also for other reasons like mistake, illegality, etc), the seller may have to accept the goods in the state in which they then are (except if grossly mishandled by the buyer) and still may have the duty to provide new ones at his own expense, repair the old ones to their specified quality, reduce the price or abandon a claim for payment altogether and return all payments already made. So his risk may be increased by the ordinary wear and tear or any (complete) loss of the goods in the meantime (for reasons of force majeure affecting the buyer in possession). (f) The seller, whilst having the risk but not being able to perform the quality requirements due to force majeure and therefore still being liable for repair or replacement or the loss of the sale price or for a price reduction, does not need to reimburse the buyer for the loss of the bargain or consequential damages except if he did not disclose known dangers whilst not insuring them properly either.

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Supplementation and Interpretation of the Vienna Convention

The Vienna Convention (CISG) goes into the interpretation and supplementation of its own text but not of the sales contracts concluded under it. The relevant language is as follows: (1)

In the interpretation of this Convention, regard is to be had to its international character and to the need to promote uniformity in its application and the observance of good faith in international trade.

(2)

Questions concerning matters governed by this Convention which are not expressly settled in it are to be settled in conformity with the general principles on which it is based or, in the absence of such principles, in conformity with the law applicable by virtue of the rules or private international law.

It may be argued first that a provision on interpretation and supplementation of the Convention (rather than of contracts concluded thereunder) is less usual or even inconvenient and in any event not absolutely dispositive. The Vienna Convention on Treaty Law of 1961 deals with treaty interpretation in a more general way. Moreover, the effect and impact of other sources of law is not regulated by the CISG; strictly speaking, it cannot decide its own place vis-a-vis other sources of law and Article 4 would appear to recognise that, even though Article 7 is here confused as we shall see. Also, the separation of interpretation and supplementation itself may be subject to serious criticism. In a more normative approach this would not seem to be necessary or even proper. Also in the traditional attitude to code interpretation in civil law, the distinction was uncommon. Applying greatly differing criteria is in any event puzzling. To start with supplementation, questions concerning matters governed by the Convention which are not expressly settled in it must be settled in conformity with the general principles on which the Convention is based and only in the absence thereof pursuant to the national law resulting from the applicable private international law rules. At least so says Article 7(2). These matters, in essence, all concern the rights and obligations arising from the sales agreement, compare also Article 4, including the in personam remedies and excuses, but notably not matters of validity of the contract or of any usage and the proprietary and enforcement aspects of the sales agreement. The reference to private international law as the last resort was notably absent from the Hague Conventions, compare Article 2 of the Hague Sales Convention, which only accepted conflict references in specific cases, Articles 16, 38(4) and 89. The Hague Conventions did also not distinguish between interpretation and supplementation and Article 17 of the Sales Convention required all matters in principle covered by the Convention to be generally decided in conformity with the general principles on which it was based, thus the first part of the Vienna formula for both supplementation and interpretation. This is in accordance with the general civil law approach to codification which assumes completeness in the areas of the law it covers. Gap filling or supplementation then becomes a matter of interpretation of its system. In the area of uniform law, there was the added argument that this approach allowed for a liberal interpretation of that

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law and of its scope. This approach is in essence uniform law friendly and internationalist. All the same it was not specific as to the validity and applicability of other sources of law, like fundamental or general principle and customs or practices, which, however, could be assumed to have remained unaffected. In areas not covered by the Hague Sales Conventions at all, conflicts of law notions remained naturally applicable, but it was often felt that even in areas that the Conventions did cover this was unavoidable when its general principles were not sufficiently developed and this became also the view of the Vienna Convention, at least in the case of supplementation or gap-filling of the Convention. It undermines the reference to general principles itself, which in a codification sense do not strictly need to be identified. There was here an important shift in the nature of the argument and in the Vienna Convention the uniform law friendly attitude of the Hague Conventions seems abandoned. The general principles to which reference is made in Article 7(2) are now probably only the general principles on which the Convention is based in a narrower, more literal sense. As regards these general principles, in this narrower, non-interpretational or nonjudicial sense, it is generally unclear what they are and any party invoking them must then prove them on the basis of its own analysis.300 They are in that case notably not the fundamental principles of the law, customary practices or the general principles common to most commercial legal systems discussed earlier in chapter 1 as part of the hierarchy of the modern lex mercatoria. Any impact of the fundamental or more general principles of the lex mercatoria is not excluded thereby, however. Their effect depends on the applicability of other sources of the law which the Vienna Convention (and earlier the Hague Conventions) could not regulate or control, as was more fully explained in Volume 1, section 1.4. It is nevertheless of interest that Article 7(2) of the Convention does not even make a reference to (international) custom or usage in this connection as one would have expected. This is reserved for the supplementation of the parties’ agreement (and not of the Convention itself) in Article 9, and then only in a limited manner, see the next

300

These principles must be distilled from the underlying approach of the Convention in its material provisions, which is not easy. Honnold, above n 264, 129 ff. sees a general principle of reliance (on conduct), e.g on oral representations made after the contract was concluded (Arts 16(2)(b), 29(2) and 47), disclosure (Arts 19(2), 21(2), 26, 39(1), 48(2), 65, 68, 71(3), 72(2), 79(4) and 88), and of mitigation of damages (Arts 77, 85 and 86). He suggest nevertheless caution and restraint in invoking these general principles now that the reference to private international law has been added and that matters of pure interpretation have been separated out in Art 7(1). Case law so far collected by UNCITRAL and regularly published in their Case Law on UNCITRAL Texts has not shed a great deal of light on these general principles either. Another issue is what the matters governed by the Convention are. Although in general the excluded areas are clear from Art 4, and the coverage as a partial codification is quite limited, see s 2.1.1 above, it must be assumed that in cases of amplification of the Convention, eg in the area of the passing of risk, underlying principles of liability must still be distilled first and expanded to cover any gap pursuant to Art 7(2) before a domestic law can be invoked. But it leaves great areas of doubt as to coverage of the Convention proper.

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section.301 Even so, the validity of custom or usages is not ultimately governed by the Convention itself either as recognised in its Article 4. It is in any event more normal to talk about supplementation (and interpretation) in the context of the sales agreement itself, with which the Convention does not generally deal. This contractual interpretation and supplementation is only more indirectly covered by the Convention as the reference to the rights and duties of the parties in Article 4 makes clear. Articles 8 and 9, limited to the meaning of statements, conduct and usages, are only relevant in that context (see more particularly section 2.3.6 below). There is here an element of confusion in the Convention between convention and contract interpretation, as there was in the distinction between interpretation and supplementation more generally. It is clear that a convention of this sort aims at a more general and objective legal regime whilst the sales contract itself is based in principle on party autonomy. This may suggest some differences in interpretation and supplementation techniques but the Convention is not clear on what its aims and policies are in this regard. Again, whatever Article 7(2) of the Convention tries to do in terms of its own supplementation, the norms applicable to international sales and their hierarchy cannot be solely determined by the Vienna Convention itself, even in the areas covered by it. Thus the failure in Article 7(2) of the Convention to refer (before the rules of private international law) to its own international character (and in that manner perhaps implicitly also to international custom or usage) and to the need for uniformity, as it does in Article 7(1) in the context of interpretation—where therefore (correctly, it is submitted) a distinct legal order is suggested—has no ultimate relevance in this regard as these considerations may intervene anyway, also in Article 7(2). It suggests indeed the relevance of sources of law extraneous to the Convention itself to which the Convention may still be subordinated (both in supplementation and interpretation). In fact, it is submitted that these sources (as well as the Convention) can only be given their proper place within the hierarchy of norms of the lex mercatoria, as explained in Volume I, section 1.4.13, in which therefore the uniform sales laws must also find their place. In this hierarchy, even party autonomy figures above the Convention to the extent the latter is only directory (default) law, as indirectly recognised in its Article 6. The omission of a reference to these other norms or legal sources in the Convention leaves it substantially incomplete. Again, it may be noted in this respect that section 1–103 UCC in the US is much clearer. It demands a liberal interpretation so as to leave as much room as possible for the common law, equity and custom (except where the UCC is mandatory) and even the law merchant, therefore for fact-based law. The

301 For contract interpretation, the text is as follows: Art 8: ‘(1) For the purposes of the Convention statements made by and other conduct of a party are to be interpreted according to his intent where the other party knew or could not have been unaware what that intent was.’ Art 9 states: ‘(1) The parties are bound by any usage to which they have agreed and by any practices they have established between themselves.’ See further the comment in the next section.

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attitudes of the Vienna Convention might only be understood from the point of view of a general wariness of codification and general principle in common law, of custom in civil law, and more generally by an unclear view of the transnational law merchant and its operation among the drafters of the Convention. When it comes to supplementation or gap filling, in the internationalist lex mercatoria approach, transnationalised notions of good faith may also play a role in the supplementation, even if in the Convention only mentioned in Article 7(1) in connection with its interpretation. This is so certainly where good faith appeals to fundamental principle but also if appealing only to more common or general legal principle. In a lex mercatoria approach based on a hierarchy of norms, this would be clear. In any event, in respect of the Convention more narrowly, the reference to good faith in Article 7(1) is still likely to have a distinct meaning overall and may refer to teleological or normative interpretation (and supplementation) of the text. Thus the literal approach to statutes, treaties and contractual terms normally adopted by the UK and towards which there may also be a bias in the Vienna Convention (certainly more so than in the Hague Sales Conventions), may be somewhat relaxed, also, it would appear, in respect of supplementation. In the context of supplementation of the Convention, the reference to private international law after the reference to the general principles on which the Convention is based is, as already suggested above, careless even though there is nothing wrong in principle with it remaining the residual rule. But in giving it also a place in supplementation of the terms of the Convention itself, therefore even in the areas covered by it, it easily destroys what little progress is made through the Convention in terms of international uniformity. It narrows in any event the scope of the uniform law. In particular it may apply to the terminology used in the Convention which on the whole lacks definitional clarity.302 Again, the reference to private international law and therefore to domestic law to supplement the Convention can only be properly understood in the context of the hierarchy of norms within the law merchant or modern lex mercatoria concerning international sales, where it has the lowest rank and its application a discretionary element (see Vol I, s 1.4.13). The key is that domestic law so applied then functions in the international law merchant, becomes transnationalised, and is adjusted and reinterpreted in order to make sense in that order. In a proper transnationalist approach, the appropriate reference for supplementation and interpretation of the Convention, if it needs to be covered, should have been to the text of the Convention itself, its international character, its general principles, and to the need for uniformity in its application. At the same time, it should have been made much clearer that other sources of law remain unimpeded so that fundamental principle, customs as they develop as well as other general principles remain unaffected (besides party autonomy which is clearly respected in the Convention and 302 Where the Convention relies on the rules of private international law, as it does also in determining its scope in Art 1.1(b), for international sales cases pending in EU courts this now means the rules of the 2008 EU Regulation on the Law Applicable to Contractual Obligations, see s 2.3.7 below.

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supersedes it, see Art 6, although it would still be subject to public order considerations albeit probably of an international nature). The observance of good faith could be added303 but is in international trade more an issue of interpretation (and supplementation) of the contracts concluded under the Convention therefore a question of party autonomy and its meaning304 unless, as suggested above, it refers more generally to a normative interpretation method or indeed to fundamental legal principle.305 Private international law would only come in if no objective legal regime could otherwise be found in the hierarchy of norms here presented. 303 The reference to good faith interpretation of international conventions is somewhat of a strange compromise but may well have its origin in the Vienna Convention on the Law of Treaties of 1969, Art 31, but it concerns here the regime of agreements between states (and not their interpretation in respect of private parties), in which connection the reference to good faith seems much more traditional. 304 Whatever we make of the use of the notion of good faith in this connection, because of the vagaries of the notion, its true significance under the Convention could, technically speaking, ultimately still remain a question of determination under a national law pursuant to Art 7(2), notwithstanding the reference to the requirement of uniformity in the application of the Convention under Art 7(1) and the reference to ‘international trade’, which indeed suggest a distinct set of norms. Wildly different good faith notions from domestic law could in this manner still be introduced through the conflict rules. This route should not be chosen and good faith should indeed be seen here as a distinct internationalised concept, in the context of the interpretation (and supplementation) of the Convention itself referring probably to a teleological and then perhaps also a normative interpretation method or otherwise to fundamental or general principle, even if in civil litigation domestic interpretations are still likely to impact because of the general outlook and attitudes of judges groomed in their national systems of law. 305 In Vol I, s 3.1.2 fundamental principles were (without limitation) summarised as follows (and may in contract indeed often be cast in terms of good faith): (a) pacta sunt servanda as the essence of contract law and party autonomy; (b) the recognition, transferability and substantial protection of the notion of ownership as the essence of all property law, to be respected by all; (c) the liability for own action, especially (i) if wrongful (certainly if the wrong is of a major nature) as the essence of tort law, (ii) if leading to detrimental reliance on such action by others as another fundamental source of contract law, (iii) if creating the appearance of authority in others as an essential of the law of (indirect) agency, or (iv) if resulting in owners creating an appearance of ownership in others as an additional fundamental principal in the law of property and at the heart of the protection of the bona fide purchaser (setting aside the more traditional nemo dat principle). There are other fundamental principles in terms of: (d) apparent authority and fiduciary principles in contract and in agency leading to special protections of counterparties, notably if weaker or in a position of dependence (including consumers against wholesalers, workers against employers, individuals against the state, smaller investors against brokers), and to duties of disclosure and faithful implementation of one’s contractual and other obligations; (e) notions of unjust enrichment; (f) respect for acquired or similar rights, traditionally particularly relevant to outlaw retroactive government intervention, but also used to support owners of proprietary rights in assets that move to other countries; (g) equality of treatment between creditors, shareholders and other classes of interested parties with similar rights unless they have postponed themselves.

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The issue of public policy under state law and its prevalence in international transactions is here another issue which cannot be settled by traditional private international law either and is also outside the reach of the modern transnational law merchant (see Volume I, section 2.2.6). It is more properly a matter of competence and competition between the international commercial and financial legal order and domestic legal orders to be determined upon an assessment of the legitimacy of a domestic governmental regulatory interest in a particular international transaction which often amounts to a factual assessment of the nature of the parties’ action in terms of conduct and effect on the territory of the relevant state. This was earlier marked and characterised as an issue of international public order. The references to internationality and uniformity, albeit only in the context of interpretation, suggest at least that the Convention operates in a distinct legal order and that its provisions are autonomous, although this does not prevent consultation of domestic legislation, case law and doctrine by way of guidance. Guidance may of course also be obtained from the history of the Hague and Vienna Conventions and their application and now perhaps also from the EU and UNIDROIT Contract Principles and DCFR. It follows that whilst it is likely that the Vienna Convention itself in its approach to interpretation and supplementation, certainly also of the sales agreements concluded thereunder, maintains much respect for literal meanings and probably even a psychological attitude to contractual intent, borne out in the interpretation provision of Article 8 in respect of statements by the parties, this is not necessarily the end of the story.306 It might reflect the prevailing attitudes during the formative period of the Convention, which was largely in the first half of the twentieth century, and also some common law input. In this respect, the Vienna Convention in its reference to good faith, may show greater balance, even if it moved in a confusing way with a confusing terminology and is not to ignore that it took a step backwards when reducing the impact of general principles and relying on private international law, be it only within its (undefined) concept of supplementation. Again, putting the uniform law in its place in the lex mercatoria hierarchy of norms is here the proper answer.

Then there are the: (h) fundamental procedural protections in terms of impartiality, proper jurisdiction, proper hearings and the possibility to mount an adequate defence, now often related to the more recent (and also internationalised) standards of human rights and basic protections (see Art 6 of the 1950 ECHR); (i) fundamental protections against fraud, abuse, sharp practices, excessive power, cartels, bribery and insider dealings or other forms of manipulation in market-related assets (also in their civil and commercial aspects) and against money laundering; (j) Issues of finality, and finally (k) there are also fundamental principles of environmental protection developing. As these are public order or even human rights related, they are as such not less mandatory. 306 See for the English literal and purposive approaches to statutory interpretation, Vol I, s 1.3.3. It can only be repeated that the use of anthropomorphic civil law will theories in Art.8 of the Vienna Convention goes aginst modern contract theory, see also section 1..4.4 above for a summary.

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The formula of Article 7 of the Vienna Convention may (unfortunately) now be found in all UNCITRAL Conventions. It may also be found in the European Contract Principles (Art 1.106). It is even in the UNIDROIT Leasing and Factoring Conventions of 1988 and in the 2001 UNIDROIT Mobile Equipment Convention and in the UNCITRAL Assignment of Receivables in International Trade Convention of the same year, where the reference to good faith may be entirely inappropriate as they also cover proprietary matters. It is not, however, the approach of the UNIDROIT Contract Principles (Art 1.6), which revert here to the approach of the Hague Sales Conventions and seem therefore more favourably disposed towards internationalisation. Both sets of Contract Principles also contain elaborate sections on the interpretation of contracts, see section 1.6.3 above, followed in this regard by the DCFR.

2.3.8 The Interpretation of International Sales Contracts under the Vienna Convention: Meaning of Conduct and Custom in Terms of Contract Interpretation In the previous section it was explained that the Vienna Convention does not deal in any general manner with the interpretation (and supplementation) of the sales contracts governed by it. In Article 7 it only deals with interpretation and supplementation of the Convention itself. The contractual interpretation and supplementation is an issue that in principle seems to be covered by the Convention, however, in view of the reference in Article 4 to the rights and obligations of the parties arising from the sales contracts. The coverage of these rights and obligations by the Convention must imply interpretation and supplementation, if at all distinguishable. This is supported by the fact that in Articles 8 and 9 there follow some more precise interpretation rules, albeit only limited to parties’ statements and conduct and to the impact of usages, as was shown in the previous section. Surprisingly, there is in this context no reference to good faith and the contract interpretation rules must therefore largely still be found through the supplementation rule of Article 7(2) with its reference to the general principles on which the Convention is based, which are few in this connection, and otherwise only to the law applicable by virtue of private international law. It is likely to introduce major variations in national notions and within that context also in the good faith notion and in any relationship thinking this might introduce. With respect to the interpretation and supplementation of the Convention itself this problem might be alleviated, as discussed in the previous section, by virtue of its place within the lex mercatoria hierarchy of norms or on the basis even of its own provisions. However, there could be more doubt with respect to the contractual interpretation and supplementation where party autonomy and intent is a key issue, although the lex mercatoria and its hierarchy should equally apply to them in terms of objective law.

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Article 8307 contains a distinct contract interpretation provision of some sort. Under it, the parties’ statements and conduct are to be interpreted according to their true intent, at least to the extent that the other party knew or could not have been unaware of what it was. Again, this is old fashioned anthropomorphic contract law language of the civil law variety. It ties interpretation principally to psychological intent and the parties’ will, but if it cannot be determined whether the other party knew or could have known of the true intent, it allows a reasonable understanding. In determining intent or reasonable understanding in this context, due consideration must be given to all relevant circumstances of the case including the negotiations, practices and usages and any subsequent conduct of the parties, taking into account perhaps also the internationality and commerciality of the transaction and the professionality of the parties’ relationship thinking might thus be introduced but is likely to look very different in different Contracting States. It is clear, however, that Article 8 does do away with the common law parol evidence rule, which did not allow any contradictory contemporary or earlier evidence against any writing intended by the parties as a final expression of their agreement, compare also section 2–202 UCC and section 1.2.4 above. A similar rule also existed in France for non-commercial contracts in excess of 50 francs: see Article 1341 CC. Any express statement, however, that earlier evidence is not to be used would naturally be upheld under Article 6. Article 9 on the other hand deals more in particular with usages in terms of contract interpretation. It has been mentioned before that the Convention remains ambivalent on the issue of custom, more so than Article 9 of the earlier Hague Sales Convention, as implicitly accepted in its Article 4. Sensitivity to accepted practices and custom was earlier identified as being particularly important in international trade, see also Volume I, section 1.4.7. The smooth operation of international trade depends on routines and much international trade law developed on the basis of them. As such, it is a major cornerstone of the notion and operation of the lex mercatoria although by no means the only one. Strictly speaking, the Vienna Convention avoids any reference to custom and uses the terms ‘usages’ and ‘practices’ instead (Arts 4, 8 and 9). This is in the civil law tradition of suspicion of custom as an independent source of law at least to some extent shared in England although for very different reasons as we have seen.. Thus, according to Article 9(1), the parties are bound by any usage to which they have agreed and by any practices which they have established between themselves. This is simply an extension of the contract and intent principles at the expense of custom as an own source of law. It implies a subjective approach to custom. Article 9(2) tries to soften some of the impact by accepting as an implied condition all usages of which the parties knew or ought to have known and which in international trade are widely known or regularly observed (but not merely widely operative) between the parties to contracts of the type involved in the particular trade concerned.

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See the previous section for the texts of Arts 8 and 9.

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The UNIDROIT Principles maintain only the latter requirement (Art 1.8) and do not therefore require that the usages were known or should have been known by the parties concerned, as long as they are widely known and regularly observed. This is closer to the earlier Article 9(2) of the Hague Sales Convention. The UNIDROIT Principles are thus somewhat less restrictive (although they introduce a reasonableness test). Article 1.105(2) of the European Principles may even go a little further in stating that parties are bound by any usage which would be considered generally applicable by persons in the same position as the parties (also subject to a reasonableness test), cf for the DCFR its Article II-1:104. Article 9 of the Vienna Convention was meant to protect unsuspecting parties, although the need for it appears less obvious in the professional sphere in which international sales as defined in the Convention usually operate. Yet as already submitted several times before, it is not strictly speaking possible for the Convention to be entirely conclusive in this matter as the force of international usages and practices may derive from other sources or from custom itself. This was in fact recognised in Article 4(a), which excludes the matter of validity of any usage from the scope of the Convention. The exclusion of usages in Article 4 has been explained as leaving the determination of this issue (as one not covered by the Convention and therefore not subject to its Article 7(2) on supplementation) to applicable domestic law including the validity of these usages itself. It follows that all usages or custom would be seen as essentially a domestic law phenomenon and that considerations of domestic public policy (or good faith, like in the Netherlands) may prevail over them. This would be a strange and undesirable result in international sales law. Nevertheless to the extent custom is viewed as a contractual term, as it essentially is in the Vienna Convention, rather than objective law, local public order considerations could all the more be able to override it. Where, however, it is agreed that the force of usage cannot be fully determined by the Convention itself, nor indeed the impact of the lex mercatoria more generally, it is likely that there is not only custom outside Article 9 but also that this custom could be international. This could be so especially where within the context of the lex mercatoria, it impacts on international sales. It would as such only be subject to public order imperatives operating in the international legal order in which there are few and which, if they exist, are more likely to be expressed in fundamental (mandatory) international legal principle or transnational public order requirements. It may be repeated in this respect that in the US under section 1–103 UCC international custom is in pertinent cases generally accepted as binding in commercial matters. This is not to deny that domestic policy considerations (governmental interests) may also find recognition in the international legal order but then subject to a balancing test, see more particularly Volume I, sections 2.2.6 ff. As was said earlier, these domestic public policy considerations are strictly speaking not part of the new law merchant but compete with it, the outcome depending on a determination in terms of international public order or comity considerations.

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2.3.9 Supplementation of the Vienna Convention: Private International Law and the Rome Convention on the Law Applicable to Contractual Obligations As mentioned before, in international sales, the 2008 EU Regulation on the Law Applicable to Contractual Obligations replacing the earlier 1980 EU Rome Convention on the same subject308 must, now the Vienna Convention is widely accepted (although not in the UK, Portugal, and Brazil), increasingly be seen as a sequel to it within the EU in areas the law of the sale of goods the Vienna Convention does not cover (Art 4) or as a matter of supplementation or gap-filling even in those aspects that it does cover, but in that case only after the general principles on which the Convention is based have been considered (Art 7(2)). It should be realised of course that the scope of the Regulation is much wider than sales and embraces all situations

308 The earlier Rome Convention, which dated from 1980, coincidentally from the same year as the Vienna Convention, was ratified by all older EU Member States but operated for a period of ten years only, although it was renewed tacitly for five year periods thereafter if there had been no denunciation (Art 30). Although often viewed as an EU Convention, this was strictly speaking not the case as it was not based on the EEC founding treaty. Even though concluded between Member States, only a limited number needed to ratify for the Convention to become effective. New EU Members needed not accede to the Convention, although in 1980 the view was expressed in a Joint Declaration that they should be encouraged to do so. This situation was very different from the (unrelated) Brussels Convention of 1968 on Jurisdiction and Enforcement of Judgments in Civil and Commercial Matters, now replaced by the Regulation of 2002 on the same subject, which was based on Art 220 of the EEC Treaty and was in force between all Members for an unlimited duration and had to be accepted by any new Member State. The further consequence of the Rome Convention not being based on the EEC Treaty was that conflicts rules more directly based on the Treaty prevailed (Art 20). So far, they particularly existed in the area of insurance under the Insurance Directives, but there was no conflict here as the Rome Convention did not apply in insurance matters when the insured risk was in the EU. At one stage, EU private international law rules were also contemplated in the area of employment which could have caused a more acute conflict. Another consequence of the Rome Convention not being an EU Convention was that matters of interpretation were not referable to the European Court of Justice in Luxembourg (in fact even the Brussels Convention only made this possible by a special Protocol of 1971). Although two Protocols to the Rome Convention were signed in 1988 to allow an appeal from the highest courts in each Member State to the European Court in order to obtain the necessary prejudicial decisions in interpretation matters (without a duty as there is in the 1971 Protocol), ratification by all parties seemed unlikely as some, like the UK, did not see interpretation of the Convention as a European Court matter. The 2008 Regulation does do away with most of these problems and differences of opinion. Only Denmark made use of its option to opt out. The Rome Convention according to Art 21 did also not prejudice any other conflicts conventions to which Contracting States were already or may become a party. In the latter case consultation with the other Contracting States was necessary however (Art 24). This is maintained in the Regulation (Art 25). The most important examples are the Hague Private International Law Conventions like those on the Law Applicable to the International Sale of Goods of 1955 and its successor of 1986 (not to be confused with the Hague Uniform Sales laws of 1964). One could also think of the Hague Conventions on the Law Applicable to Agency of 1978 and on the Law Applicable to Trusts and their Recognition of 1985. However, the Rome Convention and the 2008 Regulation themselves excluded the coverage of agency and trusts.

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where judges in the EU are confronted with a choice between the contractual obligations laws of different countries, whichever (also if non-EU). The Regulation may also play a preliminary function in the context of the Vienna Convention in that under Article 1(1)(b) of the latter, its applicability may result from choice of law rules pointing to the law of a Contracting State. Under the European Principles, but not the UNIDROIT Principles, it also may play a role in the supplementation of these Principles (Art 1.106). However, as posited all along, it should always be borne in mind that the application of both the Vienna Convention and the Regulation must be seen in the context of the application of the lex mercatoria as a whole with its own hierarchy of norms in which fundamental principle, international custom, uniform law, and common legal notions are likely to precede the search for a domestic law through conflicts rules (see for a summary s 2.3.14 below).309 The applicability of the Regulation is dependent on a forum in a Contracting State being faced with a choice between the laws of different countries which need not be EU States (Art 1), although the Convention does not spell out when this may legitimately be the case. It is left to the forum seised to decide. The Convention may apply even within one country with different legal systems like the UK. It is important to realise from the way the Regulation (and earlier the Rome Convention) is structured that it does not apply by virtue of the law of a Member State being made applicable to the underlying contract. For example, if English law is made applicable to a contract between two Swiss parties, the conflicts rules of the Regulation do not automatically apply (as Article 15, which excludes renvoi, confirms). Its application depends on a case being brought in a Member State. It is also doubtful whether the Regulation would apply in an international arbitration with its seat in a Member State as an international arbitration is now mostly thought subject to its own conflicts rules which are not necessarily derived from the place of the tribunal. That would not prevent the application of the rules of the Convention as a model or as general principles of conflicts laws which may be thought to apply in international cases but that would not then be a consequence of the applicability of the Convention itself. The Regulation does not apply in status matters, family matters (relationship and property aspects), negotiable instruments, typical company matters (like creation, capacity, organisation and winding-up), arbitration, agency and trust matters and in matters of evidence and procedure (Art 1(2)). Again, the lex fori seems to determine the true meaning of these exceptions. Proprietary matters are not covered either, even if they follow from a contractual disposition as in the case of sales. This would also

309 Others (Art 9(2)) have appeared in the 1998 Settlement Finality Directive 98/26/EC [1998] OJ L166/45 and the 2002 Financial Collateral Directive 2002/47/EC with respect to security interests in securities that are recorded in a book-entry system [2002] OJ L168/43, and (Art 4) in the 2000 Directive 2000/35/EC combating late payment in commercial transactions [2000] OJ L200) with respect to reservations of title. All are, however, in the proprietary area and therefore beyond the scope of the Rome Convention proper.

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appear to apply to assignments, although Article 14, especially in its second paragraph, still leaves some considerable doubt in the matter, see more particularly chapter 2, section 1.9.3 below.310 There is a special rule for insurance in that Regulation does apply to reinsurance but not to ordinary insurance policies if the risk covered is located in a Member State.311 If the risk is outside the EU the policy may indicate the applicable law subject always to an appreciation of the foreign mandatory rules (if any) under Article 9, especially in consumer cases when there is the added protection of Article 5.312

2.3.10 The Main Rules of the 2008 EU Regulation on the Law Applicable to Contractual Obligations There are two basic rules in the EU 2008 Regulation. First, there is the law chosen by the parties, for the whole or part of the contract (Art 3). This choice must be expressed or appear with reasonable certainty from the terms of the contract or the circumstances and can thus not be purely implied as is possible under German conflicts law. The Regulation does not specifically limit this contractual choice of law to situations at the free disposition of the parties but provides only that if all the elements relevant to the situation at the time of choice are connected with one country, the contractual choice of law may not prejudice the application of the mandatory rules of that country (Art 3(3)). What is to be considered mandatory in this regard remains undefined. There may be considerable differences of view (even within the country concerned) on this point and on the true relevance of such rules in international cases. The second rule is that in the absence of a contractual choice of law clause, the law of the country with the closest connection to the contract applies. Article 4 allows in 310

Also Art 12(1)(c) suggests that the consequences of any breach are covered by the law resulting as applicable under the Regulation but, in the case of a sale or exchange, that would be unlikely in the proprietary effects of an avoidance of the contract or in any enforcement aspects. 311 Each judge must use his own internal law to determine where the insured risk is located: Art 1(3). The Second EU Non-Life Directive of 1988 (Art 7) and the Second Life Directive of 1990 (Art 4), maintain distinct systems when the risk is within the EU. They are inspired by respect for the mandatory contract rules of the Member States where the risk is situated for (mass) non-life policies and of the Member States of the commitment for life policies. These rules were explicitly not harmonised so as to protect the beneficiaries of mass non-life and life policies under their own law. The importance of the conflicts rules of the Insurance Directives is that the insurance policy may set aside these rules only if the applicable law allows it, which for this purpose is itself tied to the habitual residence of the beneficiary. If there is no chosen law in the policy, it is this law which is in any event presumed to apply. It means that only insurance products allowed in the country of the beneficiary may be sold into that country and are to be structured in accordance with that law. From this point of view there is no free circulation of insurance products even though the rendering of insurance services has been liberated in the EU. 312 If there is no such choice of law, the Regulation relies, under its general rule of the characteristic obligations, on the law of the place of the insurer rather than of the place of the risk, which is the more traditional approach. There is no rule for a situation in which the policy covers risks in and outside the EU at the same time, eg in the case of a fire insurance in respect of premises of a single party insured in the USA and the UK.

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this respect different applicable laws for severable parts of the contract. In the Rome Convention, there was a rebuttable presumption that the law with the closest connection was the law of the place of the residence of the party313 which had to perform the most characteristic obligation under the contract (or, if severable, under the part of the contract in question), provided that this characteristic obligation could be determined (Art 4(2) and (5)). This is now more precisely expressed and the rebuttable presumption is deleted. Clearly, the reference to the characteristic obligation itself introduces an aspect of considerable uncertainty and it is for this reason that the new Article 4(1) contains some more specific rules, especially also for the sale of goods where the applicable law is the law of the habitual residence of the seller. For services, it is the law of the service provider; for a franchise the law of the franchisee. In real estate matters, it is the law of the property is located. For the carriage of goods it is the law of the country of the carrier, at least if this is also the country of the place of loading or discharge or of the principal place of business of the consignor (shipper), Article 5. Special rules also apply to consumer contracts (Art 6), which are contracts regarding the supply of goods or products to a person outside his trade or profession, compare also Article 2(a) of the Vienna Convention and Article 15 of the 2002 EU Regulation on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters. The consumer will retain the protection of the mandatory rules of the country of his habitual residence in the case of cold calling by the (foreign) seller in that country or when the latter induces the consumer to travel to his own for the purpose of making him buy. It means that if a consumer knowingly concludes a contract outside his own country without any special inducement by the seller, he loses the protection of his own mandatory rules. A contractual choice of law is not effective against these principles, nor is the general rule referring to the law of the closest connection (Art 6(2) and (3)). For individual employment contracts, the law of the country in which the employee habitually carries out his work is believed to be the proper one and a contractual choice of law cannot be effective against the mandatory rules of the country protecting him either (Art 8). It will normally lead to applicability of the law of the place of residence of the employee or alternatively to that of the place where he was engaged if he does not habitually carry out his work in any one country, compare also Articles 5(1) and 19 in fine of the EU Regulation of 2002, just mentioned, for the assumption of jurisdiction in employment matters.314 One may thus see that through a contractual choice of law clause, through the references to the circumstances as a whole in determining the applicable law under Article 4, and through the special protections for consumers and employees, the

313 The residence in this sense was the habitual one for individuals and the place of the central administration for bodies corporate, except if the contract was entered into in the course of that party’s trade or profession, when residence for this purpose was connected to the principal place of business of the party performing the characteristic obligation (Arts 4(2) and 19). 314 See for a comment also CGJ Morse, ‘Consumer Contracts, Employment Contracts and the Rome Convention’ (1992) 41 ICLQ 1.

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traditional conflicts approach of hard and fast rules determining the applicability of a legal system regardless of effect and consequence is in a number of aspects amended, see also Volume 1, section 2.2.1, although the traditional basic concepts largely remain intact and national law is still assumed to provide an answer to all internationalised contract problems (although a non statist law may now also be chosen, see Preamble 13), always subject to the general escape of the public order of the forum, provided there is manifest incompatibility with the law resulting under the Regulation, compare Article 21. It still introduces a subjective element however. There are a number of specific references to mandatory rules in the Regulation: see Articles 3(3), 6(2), 8(1) and 11(5). Article 9(3) contains a special rule on the treatment of a specific type of mandatory rule which could be defined as governmental intervention in the law formation process which cannot be displaced by parties subject to this intervention, even by choosing another law. Art 9(1) refers here to political, social and economic issues, normally therefore regulation, see for the discussion of Article 9, more in particular also Volume I, section 2.2.6. When application of the law of one country results under the Regulation, effect may be given (this is thus discretionary) to this type of mandatory rule of another with which the situation has a close connection in so far as these rules must be applied to the contract under the laws of this latter country (rendering performance of the contract therein unlawful). This does not prevent there being varying views in that country itself on the mandatory nature of these laws. The appropriateness of applying them in international situations is here a different matter altogether and may depend also on proportionality and legitimacy seen from an international perspective. Article 9(3) only states that regard must be had to the nature and purpose of these rules and to the consequences of their application or non-application. Note that even under Article 9(3) as now drafted, the interests of other parties and countries are not necessarily considered, nor is the question whether the foreign rule, internationally speaking, might be exorbitant in the light of more general basic principles. The Regulation remains here purely rule-oriented. There is no balancing of different governmental interests when conflicting. These matters are also not considered under Article 9(2), which allows the forum always to apply its own mandatory rules and in all circumstances apparently no matter whether the case in hand has any connection with them. The language of Article 3(3) that all elements of the case must be connected with the country of the forum is not repeated. No special interest of the forum state is apparently required at all for the application of its rules. As mentioned above, the application of the rules of any other country may always be refused on the basis of public policy (Art 21) if there is manifest incompatibility. In fact, it is rare for courts to give precedence to foreign mandatory rules. This facility was in modern times particularly formulated in the Netherlands.315 It suggested a 315 See the Alnati case, HR, 13 May 1966 [1967] NJ 3 in which it was said that ‘in respect of a contract . . . it is possible that a foreign state has such an interest in the application of its own mandatory rules . . . that Dutch courts must consider this interest and may have to give precedence to such rules and ignore the law chosen by the parties in their contract’.

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bilateralism which even in the Netherlands in practice did not result in much precedence being given to foreign mandatory rules.316 There is apparently a clear bias for a system not to be unduly disrupted by foreign political imperatives and for mandatory rules of the forum always to prevail. It underlines the importance of the rules of jurisdiction and of any obligatory recognition and enforcement of the ensuing judgment elsewhere, as under the EU Brussels Convention of 1968, now superseded by the EU Regulation of 2002 (Brussels I). In this connection, the wider problems associated with a contractual choice of law must also be considered. First, in some countries like France there is still a need for some contact between the law chosen and the contract, a concern on the whole more common in the case of a contractual choice of jurisdiction. In any event, the legal aspect concerned must be at the free disposition of the parties, and thus be purely directory. Indeed, the facility to choose the applicable law is traditionally marred by the operation of mandatory rules, either of the law one attempts to opt out of or of the law one opts into (see chapter 1, sections 2.2.6, 2.2.7 and 2.2.8). Under a contractual choice of law clause, there is bound to remain uncertainty on both accounts, and it is often unclear what the choice of law intends or can achieve in this respect and what its true effect may be, the more so as the definition and intended impact of national mandatory rules may themselves be uncertain and vary from situation to situation. Within one country ‘ordre public’ rules, regulatory provisions are normally considered absolutely mandatory, but this is less clear, for example, in property and conveyancing law, status, capacity and other family law matters, company law, bankruptcy and attachments, prescription or procedural laws and concepts. Consequently, it is not always clear which, if any, of these are at the free disposition of the parties and when they may be discarded or opted out of by consent. The opting-in equally presents uncertainties. It is, nevertheless, common to establish the contractual legal framework through a choice of law clause, notably with regard to formation (offer and acceptance) and validity (consensus and its defects), all matters that cannot be covered in the contract itself and are therefore in that sense not at the free disposition of the parties either, and the contractual choice of law, may in these areas thus also be ineffective. There remain in fact large areas of doubt. Thus foreigners opting for the application of English law to their contract may not mean to opt for the English rules of consideration or exemption (exoneration) clauses or other instances of investors or consumer protection or generally into any rule deeming the contract itself void or against public policy and health, safety or environmental demands unless there are other contacts with the UK, as application of such rules may never have been in the contemplation of the professional parties as between them.317 It was already mooted above that in international contracts, the restrictions flowing from the consideration 316

See also Arnhold Karberg & Co v Blythe, Green, Jourdain & Co [1915] 2 KB 379, 388. See Vol I, s 2.2.9 and JH Dalhuisen, ‘What could the Selection by Parties of English Law in a Civil Law Contract in Commerce and Finance Truly Mean?’ in Festschrift Tom Bingham and the Transformation of the Law (2009) 619. 317

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requirement may have lapsed altogether. Under the circumstances, a contractual election of English law may also not include the parol evidence rule. One could argue in this connection that the consideration and parol evidence rules have no mandatory impact as part of a chosen contract law, at least if the case itself has no other major contacts with the law so chosen. In particular it should be considered that a contractual choice of law normally does not have an effect on the proprietary objectives or consequences of a contract either. Thus in a sales contract, it is unlikely to determine the law under which the title will transfer. Here the lex situs of the asset acquires mandatory overtones. Yet especially where assets more generally between countries or in financial instruments like eurobonds, the choice of law by issuers made and reflected on the document is sometimes thought also to govern this aspect, the mode of transfer of ownership, protection of bona fide purchasers, and the types of security interests that can be created in them and the formalities to be observed in this connection, although the final word is here more likely to be with international custom or market practices, therefore with transnationalistion (see also Volume I, section 3.2.1).318 Although in the absence of a contractual choice of law rule, the 2008 EU Regulation is unlikely to apply in the proprietary aspects of international transactions as it only seeks out the law applicable to contractual obligations, especially in the case of assignments (Art 14), there is much different opinion, see chapter 2, section 1.9 below and here again contractual freedom to appoint the relevant property law is often advocated (see also Volume III, chapter 1, section 2.3.5). The contractual choice of law is also not normally meant to include the private international law rules of the law of the country so chosen, compare also Article 20. It was already said that international arbitrations have no lex fori per se and are not normally thought to be bound by any particular conflicts rule, no matter what law is chosen by the parties to cover the contract or in which country the panel sits. As mentioned in the previous section this also applies to the rules of the Regulation which may, however, still serve as a model for international arbitrators in terms of general principle. The ultimate danger is of course that the selection of a domestic law may be entirely unsuitable or does not lead to any solution at all, not only in proprietary matters if at variance with the lex situs. In terms of the lex mercatoria, the domestic law so chosen would, however, like any other domestic law resulting from conflicts rules, come low in the hierarchy of norms, see Volume I, section 1.4.13, so that its possible harm would be limited. Where in international cases the lex mercatoria concept and its hierarchy of 318 It is also true that the lack of clarity as to the precise whereabouts of these instruments may make the lex situs notion unworkable (as it may be in the case of transient assets like ships and airplanes). The consequence is then rather the application of trans-national concepts instead of those of a chosen domestic legal system. Because of their third party impact, proprietary rights seem to need an objective basis in law, which is unlikely to be provided by the choice of parties to a sales contract or of issuers of securities. Modern custodial systems creating security entitlements, may deem the situs for these purposes to be at the place of the entitlements or rather relevant custodian or intermediary (see also ch 2, s 3.2.2 below).

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norms from different legal sources may increasingly be relied upon, at least in international commercial arbitrations a good case may be made for not making any domestic law applicable at all. It could easily be a confusing and disturbing factor, see also Volume I, section 2.2.9. Another traditional complication of a contractual choice of law is the treatment of any changes in the law so chosen. If such changes signify the normal progression in that law, they may apply, but if there is a clear deviation of the chosen pattern, the changes in the directory rules of the legal system made applicable might not.

2.3.11 The Vienna Convention and the Different Trade Terms in International Sales As mentioned before, important derogation from the Vienna Convention (or even its total exclusion) and also from national sales law where applicable (leaving aside the problem of the application of national mandatory rules, for example in currency and money transfer matters or in trade restrictions), may result from contract or established trade practices (Arts 6 and 9). They may also supplement the regime of the Vienna Convention and any other applicable sales law. Wherever such terms derogate or supplement, it is posited that the Convention and its supplementation provision of Article 7(2) no longer apply, for example under trade terms in the area of the passing of risk (Arts 66 ff). There are in particular some established trade terms in this respect. Of these, the FOB (free on board port of shipment or loading), F&S (free alongside), CIF (cost insurance freight port of destination or unloading) and C&F (cost and freight) are the most important. What they all have in common is that they divide the responsibilities for the handling of the goods and allocate certain costs and risks between seller and buyer, differently according to the means of transportation used and according to the stage of the transfer process. Thus, at one end of the spectrum is the term ‘ex works’, under which the only responsibility of the seller is to hand over the goods to the buyer or his agent at his own place of business, whilst all risks and expenses connected with the goods and their handling are thereafter for the account of the buyer who must get himself properly organised. At the other end is the term ‘free delivered’, under which the seller must make and pay for all arrangements necessary to get the goods to the buyer and has all the risks connected with the goods and their transportation in the meantime. The FOB (free on board) term dates from the early eighteenth century and the CIF (cost, insurance, freight) term from the late eighteenth century, each the product of their own situation: the FOB term was logical when the buyer or his agent sailed with the ship or sent his own and concluded sales contracts on the way and supervised the loading of the goods. Even now FOB means that the buyer nominates the ship and makes all necessary arrangements for transportation and insurance. The CIF condition on the other hand resulted when regular shipping lines were established and the buyer either depended on the seller to make the necessary

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transportation arrangement or, more likely, the seller availed himself of the opportunity to ship his own goods before any sale and received a bill of lading which he could negotiate later once a proper buyer was found. This gave him a great advantage as he could thus sell his goods CIF, whilst they were already sailing or even upon their arrival, directly in the international markets, thus eliminating his dependence on the visiting buyer and his ship. CIF is now by far the most important trade term. Even where goods are already sold, the CIF term means that the seller is still in charge of the transportation and insurance arrangements. It is often thought that the FOB term is appropriate both in purely domestic and international sales and does not produce a bill of lading, whilst the CIF term always denotes an export transaction with carriage to an overseas destination and always produces a bill of lading. But there may also be a bill of lading under FOB terms. The difference is that under the FOB term the seller will collect it upon loading as receipt on behalf of the buyer, who is in charge of the transportation arrangements. He must as soon as possible send it to the buyer and is here subject to the latter’s instruction. Under the CIF term, on the other hand, the seller collects the bill for himself and is under a duty to tender the documents to the buyer only as part of the sale. This buyer may in any event emerge later. In either case, the handing over of the documents may be affected and delayed as part of the payment arrangements (see more particularly section 2.2.4 above) which is likely also to affect the transfer of title in the underlying goods especially relevant in countries like France and England, where in a sale of goods title normally passes upon the conclusion of the sales agreement. In these countries, use of FOB or CIF terms may itself indicate postponement and make the transfer dependent on the handing over of the bill of lading. There is a modern variant of the FOB term under which the seller undertakes to arrange the shipment on the buyer’s behalf and at his cost. In fact, this variant is so widely used that it is sometimes thought to be the more normal FOB arrangement. Under it, it remains in essence the buyer’s duty, however, to nominate the vessel, but the seller may be given full powers to do so as an agent acting for the buyer whilst providing additional services to the buyer in terms of collecting the shipping documents and putting these at the buyer’s disposal. As he will not pay for the freight, the bill of lading will reflect this and state ‘freight collect’ (instead of the more usual ‘freight paid’ under CIF). The sales contract will specify these services as it is clear that they will not result from the use of the FOB trade term itself. This type of FOB deal is particularly common in established relationships, where it is often standard practice, but less prudent in incidental arrangements as the seller/debtor remains in possession of the shipping documents and remains therefore in a very strong position vis-a-vis his buyer, especially if a bearer bill of lading is issued which is a negotiable document of title. A CIF sale is sometimes considered a sale of documents rather than a sale of the underlying goods.319 Tendering documents is then the essential duty of the seller. If so

319

Arnhold Karberg & Co v Blythe, Green, Jourdain & Co [1915] 2 KB 379, 388.

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tendered (together with the insurance policy and invoice), the buyer must pay (if it was agreed to take place upon tendering), regardless of the situation concerning the underlying goods. They may even be lost or may never have been properly loaded. For the payment obligation to mature upon the tender of the bill of lading, the bill of lading itself should therefore be an on-board bill of lading (see also chapter 2, section 2.1.1 below). It means that the goods must have passed the ship’s rail and mere delivery of the goods by the seller at a dock warehouse of the carrier or even at its rail is not sufficient for this type of bill of lading to be issued. However, even with an on-board bill, the goods if shipped in bulk may not yet have been appropriated to the contract, so that title in them cannot strictly speaking pass despite the existence of a negotiable bill of lading. This may give rise to all kind of complications and actions but it does not excuse the buyer from payment upon the tendering of the documents. In this arrangement, the documents may be rejected upon tendering for payment if inaccurate on their face (especially relevant under letters of credit). This right must be clearly distinguished from the right to reject the goods, which is unconnected and can only be exercised after landing, claiming and examining them when they are found not to be in conformity with the contract. If the bill is used to obtain early payment, for example upon tendering of the documents, any rejection of the goods later may of course still give rise to an adjustment of the sales price and reimbursements but does not affect the original payment and its validity itself. In this connection, the situation concerning the transfer of title, although not covered by the trade terms themselves, is of interest especially in systems which require delivery for title transfer. The reason for the trade terms not traditionally covering the title and its transfer is the considerable differences in the various laws on when title may pass and the mandatory rules in this respect in many legal systems. In systems passing title upon the mere conclusion of the sales agreement (unless postponed), like the English and French, title passes immediately as we saw. In systems that require delivery for title transfer, like the German and Dutch, the seller must as a minimum put the goods at the disposal of the carrier, see for these different systems and the consequences, chapter 2, section 2.1.3 below. Under a FOB clause, it is common to view the carrier as the agent for the buyer who nominated the vessel and the title passes in systems requiring delivery therefore normally at the ship’s rail. If a bill of lading is also issued, title may only pass upon the handing over off the bill, relevant especially if used in the context of a letter of credit. Under a CIF clause, it is also conceivable to view the carrier as an agent for the buyer, even though the buyer strictly speaking does not nominate the vessel and may not yet exist. In this approach, the delivery to the buyer may also be considered to have taken place at the ship’s rail, which may complete the title transfer at the same time, provided always that the goods are identifiable (the more likely civil law approach) or have been properly appropriated to the contract (the more likely common law approach). It is, however, more likely that under a CIF sale, title is considered passed only if the documents have been tendered to the buyer and, upon any negotiation of the bill, title will only be considered to have passed further when the bill is handed over (plus endorsement if to order). Intent acquires here a special meaning.

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Indeed, in systems in which title transfers upon the mere conclusion of the sales agreement, the bill of lading only has significance if the title transfer is deemed to be postponed until tendering or delivering the bill of lading and this then depends entirely on the intent of the original parties. Under FOB and CIF terms, this intent may, however, be deemed implied, at least if the bill of lading is intended also to play a role in payment protection schemes. Otherwise, especially under FOB terms, the title is usually considered passed when the goods pass the ship’s rail, as we have seen. This may even be the case in France under the CIF term, although in England the tendering of the documents seems to be the moment, see chapter 2, section 2.1.4 below. Further delay will result, however, if the underlying goods have not yet been identified or set aside to the contract or if title in them has been reserved pending payment, no matter the tendering, delivering or negotiating of the bill of lading. If the goods have not yet been sold, but are simply shipped by the owner with a view to a later sale, the seller/shipper naturally remains the owner and also has the bill of lading. That sale may still be CIF (and this is normal for shipped goods) even though the loading has already taken place (on a ship nominated and paid for by the seller as in an ordinary CIF sale). It is also common to on-sell goods CIF even though in that case shipped by a previous seller who paid for the transportation. As regards the passing of risk, the trade terms tend to be specific on the subject and especially in FOB and CIF terms the passing of the risk always takes place at the moment the goods pass the ship’s rail and is thus entirely independent from the transfer of title or of legal possession. Thus the physical act terminating the seller’s control of the goods constitutes at the same time the moment the risk in the goods passes: see for the concept of the passing of risk further section 2.1.9 above. If under a CIF contract the sale happens after the goods are already afloat, the passing of risk will be retroactive to the moment of loading.

2.3.12 Incoterms, Their Status and Relation to the UCC and Vienna Convention The most important trade terms like the FOB and CIF terms have been compiled and restated by the International Chamber of Commerce since 1936, in the so-called Incoterms, the last edition being of 1 January 2000. They also cover a considerable number of other trade terms like ‘ex works’, ‘free on rail’, ‘free on truck’, ‘arrival or ex ship’, ‘ex quay’, ‘delivered at frontier’ or ‘delivered duty paid’ (DDP), etc. The Incoterms are sometimes still thought not by themselves to have the force of law. They may, however, have acquired the status of industry custom but not necessarily in all circumstances and detail, as may be seen shortly. At an early stage it was proposed to add them to the Hague Sales Conventions but this idea was not pursued. In the USA, the FOB, FAS, CIF, C&F and ‘Free Delivery, Ex Ship’ terms have been codified under domestic law in Article 2 UCC, but not the others. The trade terms are seldom codified in other domestic laws.

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One has to be aware of some differences between the USA and European practices in this field, especially relevant for the FOB term which in the USA allows reference to a destination rather than to a port of loading, a practice now also seen in Europe, for example where pipelines are used, and then implies free delivery to the designated destination point, although the risk may pass sooner. As already mentioned, in essence these terms all aim at a certain division of labour and costs in terms of physical delivery, transportation and insurance. They also bear on the place of the transfer of risk (normally at the port of loading) and insist on notice (including procurement of the invoice), require the parties to keep each other properly advised on what is happening and, under the CIF terms, demand tender of a transportation document (bill of lading) and insurance policy to the buyer. It is not uncommon in this connection to refer to ‘C’ terms, ‘F’ terms and ‘D’ terms: in ‘C’ or ‘F’ terms, risk passes at loading, in ‘D’ terms (like DDP) upon unloading, whilst the difference between ‘C’ and ‘F’ terms is in the liability for the cost of transport and insurance. Also under the Incoterms, the proprietary consequences remain an area for the applicable national law, if not of some advanced notion of the lex mercatoria, under which one must normally assume that after delivery to the ship’s rail, the buyer is owner, the carrier his agent and the possession of the bill of lading the proof. It acquires then the status of transnational paper operating under its own rules, just as negotiable instruments of title largely do. Whenever specifically referred to in a contract, the Incoterms are automatically incorporated and may then derogate from the Vienna Convention or from national law where otherwise applicable. But it is still necessary in this respect to determine their precise meaning where they lack detail. This may be decided on the basis of general principles or may itself entail references to a national law under the private international law reference of Article 7(2) of the Vienna Convention. Under the Hague Sales Convention Article 9(3) the interpretation of terms was to conform to their usual meaning in the trade concerned. This is now less clear as this particular sub-section was not retained in the Vienna Convention. This is all the more problematic where the Incoterms have not been made explicitly applicable to the contract. The question has arisen whether in this context the Incoterms, if not expressly made applicable to FOB and CIF references, at least in Europe, may be deemed to apply customarily. The Incoterms themselves (cf their 1990 Foreword) suggest that they must be included in the contract to apply, but this cannot be decisive as to their status as custom or usage. As already discussed in section 2.3.8 above, the Vienna Convention in Article 9 requires that a usage is, or ought to have been, known to the parties and must also be widely known in the trade concerned. Even though this can also not be ultimately decisive as to the true impact of international custom, it may well apply to the Incoterms in the commodity trade in Europe. In any event, one may expect the courts and commercial arbitrators to look to the Incoterms for lack of any better guide when the relevant sales terms are used in a contract without definition or reference to the Incoterms, even if they are not considered customary. As a minimum, the Incoterms may thus have some explanatory, supporting or persuasive effect and serve as guide, especially when there is no substantial statutory or

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case law explaining these trade terms in the jurisdiction identified by the conflicts rules as providing the applicable national law. In the UK in particular, such a body of case law exists but that remains exceptional.320 Even then, it is likely that the (English) courts will have regard to the need for uniformity in the interpretation of these terms and domestic precedent should not determine all issues, which in the UK is also the approach taken to the interpretation of the Hague-Visby Rules.321 Where the law of a state of the USA would be applicable under the pertinent conflicts rules, the UCC would be applied instead, at least to the extent that it covers the relevant terms, even though only written for domestic transactions. Again, the interpretation elsewhere cannot even then be fully ignored and international practice remains relevant, all the more so for the terms not defined in the UCC, in which connection the Incoterms may be of prime importance also in the USA. It, finally, leaves the question whether conflicts may arise between the meaning of the established trade terms, whether or not supported by the Incoterms, and the Vienna Convention, in which case the trade terms prevail, assuming their meaning is clear. In this connection, the Incoterms figure either if explicitly made applicable or as custom. Yet conflict will be rare. As a start, the need to deliver the goods to the carrier under both FOB and CIF terms is fully compatible with the provisions of Articles 30 and 31 of the Vienna Convention. Article 34 requires documents to be tendered at the time and place and in the form as required by the contract. The trade terms will be specific in these aspects and then supplement this provision. As regards the passing of risk, the Vienna Convention (Art 67(1)) again accepts the established trade term practice of the risk passing when the goods are handed over to the carrier (except in ‘D’ terms). Where the trade terms (indirectly) bear on or refer to other aspects of substantive law, they should prevail as contractual terms but will be amplified by the Vienna Convention, unless clearly meant to operate otherwise. An example may exist in Article 67(2) requiring for the passing of risk the clear identification of the goods, which may not strictly be necessary under the trade terms which would then prevail. There may also be some doubts: for example the FOB terms do not involve a carriage of goods proper so that the references to the handing-over point and the passing of risk in Articles 31 and 67 of the Convention may not, strictly speaking, apply. Even so, the Incoterms themselves clarify these aspects as if there was a carriage of goods. Earlier, the packaging duty under FOB terms to which Article 35(1) of the Vienna Convention makes a reference, existed probably only until the place of loading was reached in derogation from Article 35(2)(d), but a further duty now appears implied under the FOB terms (as restated at the time in the 1990 Incoterms version, Comment 9).

320 321

See C Schmitthoff, The Law and Practice of International Trade, 10th edn (2000) 7 ff. See Stag Line v Foscolo Mango & Co Ltd [1932] AC 328.

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2.3.13 The Vienna Convention and the ICC Model International Sales Contract. The 2004 Principles of European Law: Sales As has been pointed out many times above, the Vienna Convention is only a partial codification of the international sales law. As we have seen, it has its own rules of supplementation in the areas it covers. They are all best explained in the context of the lex mercatoria with its hierarchy of norms, see sections 2.3.7 and 2.3.8 above. Also the UNIDROIT and European Principles and now perhaps even the DCFR may supplement them within that context as some general principle. Within the ICC, an effort has further been made to produce a Model International Sale Contract which is divided into two parts: (a) specific conditions setting out terms that are special to particular contracts of sale; and (b) general conditions setting out standard terms common to all contracts incorporating the ICC General Conditions of Sale. Both the special and general conditions concern manufactured goods intended for resale when the purchaser is not a consumer and the contract is an independent transaction rather than part of a long-term supply arrangement. The model contract is subject to the Vienna Convention (if not excluded) but its general conditions serve in practice as an amplification of rules of the Vienna Convention. The specific conditions on the other hand contain an easy checklist of the basic deal terms. The trade terms used are as defined in the Incoterms (except as otherwise agreed). There are also ‘Principles of European Law: Sales’, assembled at the University of Utrecht as part of the larger European Civil Law project aiming at Restatements in various areas.

2.3.14

The Law Merchant Concerning International Sales

As explained more fully in chapter 1, section 1.4.10 and in sections 2.3.7 and 2.3.8 above, within the international law merchant or modern lex mercatoria and its hierarchy of norms, the Vienna Convention has its own place as written uniform law, always subject to its own applicability rules.322 In this hierarchy of norms affecting international sales, the Convention and the general principles on which it is based are themselves not of the highest order and may be eclipsed by fundamental international mandatory principle as ius cogens323 and even by customary law, certainly if mandatory, which in sales must be rare, but also if directory if it maintains itself regardless of the impact of the Convention, which itself may of course be overridden by the contractual terms in terms of party autonomy. This all has a place especially in the context of the Convention’s interpretation or supplementation regardless of the more muddled Article 7 of the Convention itself 322 It was pointed out in ch 1, s 1.4.10 that the operation of uniform treaty law in the transnational lex mercatoria is to some extent incongruous as, in the opinion of most, it remains national and territorial law upon ratification. 323 See for a collection of these principles n 305 above.

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and is more particularly relevant in eventually determining the rights and duties of the parties under their sales agreement, see more particularly section 2.2.8 above. Thus the terms of the relevant contract itself will precede the terms of the Convention, but the Convention will itself precede the application of common legal principles (not of a fundamental nature) which may, however, still supplement it even if not directly underlying the Convention itself. Where the Convention under its own terms does not apply, it may still figure as a model as part of general principles. These general principles may also increasingly be found in international sets of Principles like the UNIDROIT and the European Contract Principles in so far as they are properly focused on professional dealings, and now perhaps in the DCFR. The same may go for the ICC Model and the Principles of European Law: Sales, referred to in the previous section. It has been pointed out that in the Transnational legal order, the conflict of law rules and the ensuing application of a domestic law come as the lowest set of rules which only apply when under all higher norms no solution is found, regardless therefore of what Article 7(2) of the Vienna Convention says. Even then, the conflict rules may be so subsidiary that judges have at least some discretion as to the fitting in of the domestic laws so becoming applicable. They figure then in any event as transnational law in the international commercial and financial legal order. There is also a form of discretion in balancing conflicting mandatory domestic rules and in determining especially the impact of domestic regulation on international sales contracts (règles d’application immédiate, see further Volume I, sections 2.2.6, 2.2.7 and 2.2.8). In this approach, the contract itself, its interpretation and supplementation and the determination of the rights and duties thereunder are thus subject to a range of norms with their own hierarchy: fundamental principle as ius cogens, mandatory custom (if existing), mandatory treaty law (if existing), the terms of the contract, directory custom, directory treaty law, general legal principles, and finally domestic laws appointed under the prevailing conflict rules. Regardless of the precise wording of its Articles 7 and 9, see sections 2.3.7–8 above, in this hierarchy (which in terms of sources of law cannot be predetermined by the Convention), the Vienna Convention, the Incoterms, the UNIDROIT, European Principles and others, and EU Regulation on the Law Applicable to Contractual Obligations (Rome I) will each play a role in their allotted places as written norms. They will each be subject to their own applicability rules and their own rules concerning their interpretation and implementation, regardless of which, however, the norms from other layers of the law merchant override their effect if higher. Except for the ius cogens or fundamental principle or public order requirements, the other rules cannot say much about their own ranking in this connection. All are a source of law in their own right whose relationship is given by the dictates of the ius cogens as a matter of international public order as translated through international practices (unless they should postpone themselves explicitly, eg by making themselves subject to party autonomy). In this connection, a reference to good faith and usage in the contractual interpretation of international (sales) agreements might often means a reference to these other extra-contractual norms which besides the internal contractual elements like the wording of the agreement, the intent of the parties, their

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conduct, nature and purpose of their contract, and the nature of their relationship, co-determine the contractual rights and duties under which they operate vis-a-vis each other. The details of this approach were explained in Volume I and need not be here repeated. The key is the diversity in the sources of the applicable law and their hierarchy, perceived in this book as the essence of the modern lex mercatoria.

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Part III Contractual Agency 3.1 3.1.1

The General Notion of Agency

The Use of Agents: Their Position

The basic pattern of international sales, as explained in the previous part of this chapter, is based on an extensive use of intermediaries. Although expensive, this has served international commerce well for a long time and still provides the basic framework for international sales. In fact, it was shown that the use of third parties handling the goods and payments as independent and professional intermediaries is a key element in making international sales possible on any kind of scale. It was shown also that these intermediaries may act as mere service providers but also as true agents, which means that in the exercise of their function as intermediary they fulfil legal acts for others, in this case for the contract parties. This is the meaning of agency and has a long history in international sales where it is very common. The position of intermediaries is foremost determined by the contractual arrangements under which they operate, for example different in a warehousing or transportation agreement concerned with the handling of goods by third parties or in a letter of credit concerned with the handling of payments by banks. These contracts might imply special powers which may lead to agency: the warehousing or transportation agreement may give the warehouse or the carrier the right to hand over the goods to a buyer, which may complete the delivery duty of the seller at the same time in systems requiring delivery for the transfer of title to pass full ownership. Here the warehouse may become an agent for the seller in that it accomplishes the legal acts for him. Alternatively, the warehouse or carrier may operate as the agent of the buyer so that the delivery and title transfer are completed when the goods are handed over by the seller to them. If a warehouse receipt or bill of lading is issued, the transfer of the warehouse receipt or bill of lading to the buyer may itself pass title and the warehouse or carrier do not then fulfil this intermediary role in the delivery process and will not be agents in that aspect. Under a letter of credit, the bank has an independent payment obligation but the payment by the bank will also discharge the buyer’s payment obligation under the sales agreement at the same time and the seller will have no further claim for payment on the buyer. Here again, there is an intermediary who completes performance for someone else, in this case the buyer who will have arranged this facility as part of his performance under the original sales agreement requiring the letter of credit. Again the paying bank may be seen as the agent for the buyer in fulfilling and extinguishing his payment obligation to the seller. What happens in these cases is therefore that intermediaries effect legal acts or obtain discharges for either seller or buyer as the case may be to complete the sale without achieving any benefit themselves (except a right to be paid for their services)

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or incurring any duties of their own. Again, this is the essence of agency and is often supplementary to and needs to be clearly distinguished from the underlying contractual obligations of the intermediary vis-a-vis his client or customer. An agent relates to a third party whilst committing, benefiting or releasing his client (or principal) vis-a-vis that party. It may thus be obvious that often agency functions are embedded in or result from other relationships as in carrier agreements or in letters of credit, as we just saw, or in service agreements but they may of course also be more direct and figure as the main objective of a contractual relationship. This is likely to happen when a power of attorney is given which could even be unilaterally arranged so that there may not be an underlying contractual relationship proper, and therefore no duty but only a right transferred to someone to act as agent. If the attorney acts, however, there are likely also to be duties and there may then be an implied acceptance of the task. In brokerage, on the other hand, there is a clear contractual agency: the broker is required to buy or sell assets, especially commodities or investment securities, on behalf of its client, often on specified conditions in terms of volume, quality, time and price. Again, agency is here only the result of the brokerage arrangement, which may also produce other rights and duties, but unlike in the embedded cases of agency, it is more at the centre of it and may be surrounded by special duties often referred to as fiduciary duties which may become especially elaborated for that type of agency. In all cases, agency is to be distinguished from the underlying contract. This is the notion of independence. An important theoretical issue in this connection is whether agency must always be considered unilateral or may then still be considered bilateral. Between agent and principal this is important as to the special duties that the agent may owe the principal and that may not all derive from the underlying contract alone. This is clear for the fiduciary duties under common law which will be discussed shortly. The agency is more likely to be truly unilateral in as far as the third party is concerned when the appearance of agency may imply more rights than the internal relationship between principal and agent would suggest. Instead of the term ‘agent’ or ‘agency’, under civil law the term ‘representative’ with ‘power of representation’ or ‘authority’ is often used. These types of agents, operating as pure middlemen earning a commission but not incurring an own liability or taking any risk, must in turn be clearly distinguished from those who are sometimes also called agents but in fact deal for their own account, like sole distributors, some franchising agents and licensees. Securities brokers if dealing from their own inventories are no longer pure agents for their clients either. Neither are central counterparties (CCPs) in clearing systems. It is thus clear that not every intermediary is an agent in the sense of achieving legal acts or obtaining a discharge for someone else, although the term ‘agent’ is often used for all intermediaries. Legally this is not appropriate and proper distinctions should be made. Agency relationships often allow intermediaries to choose a counterparty. In this way, selling or buying agents may be appointed to find buyers or sellers and contract with them on their principal’s behalf. In shipping, a shipping agent may be asked to make the necessary shipping arrangements with whomever and on the terms he thinks

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best. Investment securities brokers are usually given similar facilities whilst in discretionary accounts they may also decide on the investment transactions and price. In commercial trade, it is even possible for a less sophisticated or infrequent international seller or buyer to leave the selling or buying of his goods and all supplementary arrangements to agents. These agents may (for an additional fee) even take all the risks and become legal owners of the goods for the time being (in common law perhaps in the nature of constructive trustees only). It is the traditional function of a so-called confirming house. There are also so-called del credere agents who accept at least the credit or payment risk in their transactions, incurring thereby their own liability under the agency, usually in respect of customers they themselves choose. In this way, businesses may also appoint general agents or representatives to conduct their entire business in other countries even by way of establishments. They may appear to act in their own name but may still do so only for the account and risk of the principal. Their role is usually perfectly understood by the general public. The contract or applicable law may curtail these general agencies or powers, however, to acts of general management only and exclude from them any powers to dispose of the principal’s assets except in the ordinary course of the business considering the purpose for which the powers were given, compare also Article 3.62 of the Dutch CC, unless of course specifically provided otherwise. Dutch law is used here as being to some extent representative of the modern civil law thinking on agency, since it is the most recent statutory expression of agency law on the European continent, although not necessarily the most enlightened. In its earlier drafts it had an influence on the UNIDROIT Agency Convention of 1983 and through it also on the European Contract Principles which now have a special paragraph on agency (Arts 3.301 ff). As we shall see, these texts tend to prolong the possibility of misuse that is inherent in the civil law concept of indirect or undisclosed agency where the agent acts in his own name even though for the risk of his principal. In civil law, it tends to give the agent too much of an independent position, not sufficiently balanced by fiduciary duties towards his principal and by tracing powers of the latter. It may still be the cause of serious abuse. As said before, in a legal sense, the key to agency is always that an agent initiates or completes a legal act or obtains a discharge for others and does not (normally) incur liabilities or acquire rights of his own (unless there is an indirect or undisclosed agency as we shall see). Generally, there are three relationships which require attention in this connection: (a) the one between principal and agent which is at the origin of the ensuing transaction or legal act (like delivery) with a third-party; this is the internal relationship; (b) the relationship between the agent and the third-party which achieves the transaction or other legal act; this relationship is likely to have no independent meaning, at least in disclosed agencies as the agent has no own position or rights and duties and will fall out of the transaction; and (c) the relationship between the principal and the third party which results from the transaction or other legal act, the external relationship, and which in a fully disclosed agency is likely to be the same as the one between the agent and the third party. The following may serve as an example of the internal and external relationship: the contract of carriage between the seller and the carrier is purely limited to the

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relationship between both of them and is therefore internal. Yet it may have an external effect in that the carrier operating for the seller may effect a legal act with the buyer for the seller, like the act of delivery achieving the title transfer under laws which require delivery as a condition. That is the external aspect leading in the end to a direct delivery between the seller (principal) and the buyer (third party). In brokerage functions, the contract between the broker and his client is the internal relationship. The relationship which the broker creates between his client and the counterparty is the external relationship. The broker does not create his own contractual relationship with that counterparty unless, in civil law, he acts in his own name or, in common law, he does not disclose the agency. At least in common law, disclosure will create the external relationship automatically. In that case, the broker is in principle discharged but may, as we shall see, still function as guarantor if the third party relied on his creditworthiness whilst entering the transaction unbeknown of the principal’s interest. In the external relationship, the party who is at the origin of the agency (here the seller) is commonly called the ‘principal’ and the other the ‘third party’ (here the buyer), whilst the intermediary is the ‘agent’. In all these cases, there operates the already mentioned principle of independence or abstraction as the effects of the agency, especially on third parties (therefore the external relationship) are foremost determined by principles of the objective law rather than of the underlying contract between the principal and his agent (or the limitations of internal relationship), although this underlying contract usually sets the agency in motion. Especially the third-party effect may thus be different from what the contract (the internal relationship) envisaged or prescribed. There is thus a risk for the party making use of an agent (the principal) as others (‘third parties’) may rely on this agency and need not check the underlying arrangements (the internal relationship) and are not necessarily affected by them. In other words, in modern agency, the third party may assume apparent authority. The principal takes that risk although there is an element of good faith in the sense of reasonable reliance in as far as the third party is concerned. As may be seen, the issue of independence is directly related to that of the authority of the agent and its possible extension under the notion of apparent authority. Not all legal systems take here the same approach and especially in Germany it is more common to distinguish depending on how much the third-party could know of the agency. It is indeed useful in this connection to consider that the independence relates to the principal and the appearance of authority to the third-party’s perception, but it may also be said that the one (apparent authority) presupposes the other (independence). As just mentioned, the situation may be somewhat different if the agent acts in his own name (in civil law: indirect agency) or when the agency is not disclosed at all (in common law: undisclosed agency). In that case, the third party may not know of the agency and sees the undisclosed agent as his true counterparty with fullest authority. In such cases the agent may acquire an own liability for performance and may even become jointly and severally liable with his principal vis-a-vis the third party upon disclosure of the agency, as will be discussed more extensively in section 3.1.5 below.

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Another issue is what rights the undisclosed or indirect principal obtains in the assets which the agent may so acquire and what the effect is of a later disclosure of the agency on these (proprietary) rights. Particularly in this area (as in the area of fiduciary duties) there may be important conceptual differences between civil and common law.

3.1.2

The Role of the Agent: Explicit and Apparent Authority

The position of the agent and his contractual or other rights and duties, including his fiduciary duties vis-a-vis his principal or client under common law, need to be considered in more detail. Whilst dealing with third parties on his client’s behalf, in common law the agent must particularly avoid conflicts of interest between him and his client (see more particularly section 3.1.4 below). Also the contractual rights and duties of the principal and of any third party with whom the principal deals through agents must be considered. Finally, the proprietary rights created through an agent need further investigation, especially if he is undisclosed or deals in his own name. The law in this respect is better developed in common law than it is in civil law, especially so in the fiduciary duties of the agent and the protection of his client against him and in the contractual and proprietary aspects (see section 3.1.6). This is a particular contribution of the law of ‘equity’ in common law legal systems. As may already be clear from what was said in the previous section, the first observation to make is that the term ‘agent’ is often very loosely used. In commercial terms, it may be no more than a person who renders certain services for someone else. In a legal sense, the term has a specific meaning and assumes that this person acquires and exercises power or authority or obtains sufficient control to represent and if necessary to bind his principal vis-a-vis third parties and vice versa in the arrangements he makes on the principal’s behalf. In these arrangements, he may have been given greater or lesser powers and freedom by his principal or client (in the internal relationship). Particularly in the choice of the third party and sometimes even in the types of deals to be concluded with him, the agent may be allowed (and may have been particularly chosen) to exercise a certain discretion depending on his expertise for which he will be rewarded accordingly. An investment securities broker will indeed normally have freedom to choose the counterparty in a traditional investment securities transaction. He is unlikely to ever disclose him as there is no need. Whilst acting through a broker of the counterparty, he may not even know who it is. He may even have been given the right to initiate these deals in a discretionary account, so that he is free to engage in continuous transactions which he finds of benefit for his principal. As expert he may, on the other hand, also acquire a position as protector of the principal whom he may have to guide through complicated transactions and must warn against the consequences of what he (the agent) may be doing.

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Whatever the amount of discretion, the essence of agency may be summarised as follows: (a) The agent creates direct legal relationships between the principal and the third party whilst not normally incurring any liability himself (although doing so jointly with the principal or even severally does not need to distract from the existence of an agency). In fact, in common law the separate liability of the agent may be a question of the internal relationship between principal and agent and the arrangements they have made between themselves in this connection, therefore of mere intent. On the other hand, the agent’s liability vis-a-vis the third party may also arise from the circumstances, particularly in the operation of an undisclosed agent on whom the third-party relied as counterparty. (b) The second aspect is that the rights the agent obtains, duties he performs or liabilities he incurs for his principal may be of any nature: they can be contractual or pre-contractual (if he negotiates only) but may also involve the transfer of title or the creation of other proprietary rights. Even tortious behaviour of an agent may so be attributed to a principal. (c) The third aspect is that under the notion of abstraction or independence, the agent’s powers are not necessarily limited by the terms of his arrangements with the principal (the internal relationship) but the third party may be able to rely on the appearance of authority or on apparent authority and need not check into the underlying relationship and any restrictions in it on the agency. As we already saw, that is the risk of the principal who uses agents. (d) The fourth aspect is that, although the principal has this risk, special protections are developed to avoid conflicts of interest between the agent and his principal, particularly relevant in undisclosed or indirect agencies. They may easily arise when the agent also operates for his own account in the same goods and only a limited number of them are available at a lower price. Here enters the idea of postponement of the agent, a notion particularly alive in common law and part of the fiduciary duties developed under that law. Thus, although the principal sets the agency in motion and controls it to that extent, he must accept what the third party makes of it but relies in this respect on the agent’s loyalty and care. There may be other such duties. In common law, they are well developed and imply very substantial safeguards, also for investors who use brokers. The broad facility to use intermediaries as agents in this way was developed in medieval law but faced problems as late as the nineteenth century, even in England. Roman law had disallowed the concept in contractual matters as it generally considered contractual ties highly personal and not capable of being created through agents, certainly if counterparties were chosen by the agent at will,324 a notion only abandoned by the natural law school of Grotius and his followers.325

324

D.45.1.38.17 and D.45.1.26.2. De Iure Belli ac Pacis, Lib II, Cap XI, s 18. Grotius depersonalised the contractual bond except where clearly highly personal. 325

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Under Roman law it was, however, possible to use intermediaries to acquire property.326 It suggests that the underlying contract could also be concluded by the agent, who was, however, thought in that case only to render a service (mandatum) and was not allowed any discretion. More problematic was the position of the undisclosed agent acquiring property in D.41.1.59, under which the decisive point was considered to be the animus domini (intent) or lack thereof in the agent, of which there had to be some manifestation. The result was that in case of doubt, the agent would acquire the property for himself. This at least was the interpretation of Bartolus.327 Agency or the power of representation or authority to bind a principal can now derive from or be implicit or embedded in many types of contracts, as we have already seen. It can also derive from the mere operation of the law as in corporate, matrimonial and parental matters and in the vicarious liability under tort law, although common law does not operate a generalised agency concept as civil law is more apt to do in its notion of representation. Thus parents are not automatically the representatives of their children under common law. The most obvious contract giving rise to agency is the pure (commercial) agency agreement or mandate agreement in civil law. But it may no less result from an employment or service contract or from any other contract meant to transfer this kind of facility or authority. In international sales it may, as we saw, be implicit in a transportation agreement pursuant to which the carrier is allowed to hand the goods over to a buyer thus completing the delivery, and in the arrangements concerning the documentary letter of credit under which a bank operates as an independent payor but also as agent for both parties liberating them under the contract by receiving the shipping document (for the buyer) in exchange for payment (to the seller). To repeat, the internal relationship is not decisive for the extent of the agency. For a direct agency to operate, the perception of the third party is the essence and there need be no more than the appearance of an agency through declarations or conduct of the principal allowing third parties reasonably to rely on the power of representation or agency and claim a contract with the principal, see for example Article 3.61(2) of the Dutch CC (called agency by estoppel, or apparent or ostensible agency or authority in common law). The third party has no investigation duty in this respect beyond the obvious. The agent who clearly exceeds his authority is naturally liable to his principal but it has no further effect on the innocent third-party dealing with the principal through the latter’s agent. It is often less clear whether the principal may similarly invoke the third party’s reliance to invoke a binding contract himself in those circumstances. This notion of reliance is closely connected with: (a) the principle of publicity, which underlies the normal form of agency under which the principal is disclosed by

326

See D.41.1.13 pr. Commentarii in Primam Digesti Novi Partem ad D.39.5.13. The Dutch Supreme Court in a decision of 1624 went further and accepted that the principal acquired the property (possession and ownership) directly on the basis of his agreement with the agent whether or not the agency was disclosed: see J Coren, In Supremo Senatu Hollandiae, XXV (Amsterdam, 1661). 327

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the agent in the transactions he concludes on the former’s behalf, compare also Article 3.66 of the Dutch CC; and (b) the normative theory of contract on the other, see for this latter point also section 8 of the Comment, Restatement Second Agency in the USA and what was said about the normative approach to contract in section 1.1.6. above. It is important to appreciate that the normative approach acts here in the first instance in the relationship between the principal and agent (the internal relationship) upon which the third party subsequently relies in terms of the agent’s authority. In the normative approach, reliance on the declarations and conduct of the principal is reduced to what is normal for the third party to assume and expect under the circumstances, for example in respect of employees of a corporation, in which connection the conduct and declarations of the agent himself rather than those of the principal may even become controlling.328 It thus depends on the setting and circumstances. There is here a strong analogy with the vicarious liability of the employer. Use of a company’s signals like titles, letterheads, visiting cards and premises, lack of proper supervision and an unclear organisational structure may all lead to a situation in which a third-party may assume the agency and need not make further inquiries, although this may still remain exceptional.329 Where modern agencies continue to operate in commerce, they are normally de-personalised by large commercial entities which make agency their professional business, like shipping agents and investment banks as securities brokers and investment managers. It tends further to support the notion of independence: the thirdparty relies on the agent and his arrangements and need not fear the effects of any principal disowning the agent if he justly relied on the agency. Commercial practice also requires it. It is possible that the seniority and standing of the agent in relation to the principal also play a role. As a consequence, the professional agent may sooner have apparent authority vis-a-vis third parties in some matters than in others. It is difficult to generalise and the facts will be decisive.

3.1.3 The Notion of Independence, Apparent Authority and Agencies of Necessity Whatever the (contractual or other) source of the authority to bind the principal and third party may be, we saw that this authority is subsequently likely to acquire an existence of its own and is in any event exercised according to its own rules not necessarily derived from the internal relationship between principal and agent, be it a contract or the appearance thereof or a unilateral act like the granting of a power of attorney, but rather from general legal principles. Creating power or authority in this sense is therefore often seen as a separate unilateral act of the principal addressed to a 328

See in the Netherlands HR, 27 November 1992 [1993] NJ 287. See also the English case of First Energy UK Ltd v Hungarian International Bank Ltd [1993] 2 Lloyd’s Rep 194. 329

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third party (even though this party is not necessarily identified by the principal but might be chosen by the agent. It should be considered that, as far as the agent is concerned, it is likely to still be bilateral in respect of the principal but to entail special duties which may not be derived from the underlying contract but rather from the agency concept itself. Any underlying contract or the appearance thereof or a truly unilateral power of attorney (which gives a right but cannot impose a duty to act as agent until accepted and cannot therefore limit the attorney’s own freedom to compete) is in this view only a way to bring the power of the agent into being which itself, at least in respect of the third party results independently under the operation of the law. It is an approach borne out by the new Dutch Civil Code, Article 3.61. It also supports the notion, in as far as the third party is concerned, that apparent authority is always the key (although the independence is its base, even if it relates primarily to the principal and the appearance of authority to the third party) while the agreement between principal and agent is not truly decisive for the third party. Again legally relevant is only what the principal (or sometimes even the agent) either directly or indirectly (unilaterally) intimates (by conduct) to the third party, not what the internal arrangements between principal and agent are. This principle of apparent authority combined with the principle of abstraction or independence leads to the distinction between the internal and external aspect of the authority or power, a distinction first formulated in Germany by P Laband.330 In common law, a similar approach was taken by Corbin.331 There is therefore congruity between common and civil law in this most important aspect and there is clearly a common core in common and civil law inspired by similar practical needs even if the law of agency remains better developed in common law as far as the fiduciary duties are concerned, whilst there also remain important differences in the undisclosed or indirect agency concept, as we have already seen.332 That there is such a common core is in itself not surprising, as it is often said that the notion of agency came into English law through continental commercial practices. The differences in fiduciary duties and in the consequences of undisclosed agency are probably connected with subsequent developments in common law in which agency became closely related to the trust, whilst in equity agency and trustee duties became comparable, although they are by no means the same, as we shall also see.

330 ‘Die Stellvertreter bei dem Abschluß von Rechtsgeschäften nach dem allgemeinen Handelsgesetzbuch’ (1866) 10 Zeitschrift für das gesammte Handelsrecht 183 ff. 331 ‘Comment’ (1925) 34 Yale Law Journal 788, 794. 332 See for comparative analyses especially the works of W Müller-Freienfels in Germany, Stellvertretungsregelungen in Einheit und Vielfalt, Rechtsvergleichende Studien zur Stellvertretung (Frankfurt, 1982), and also K Zweigert and H Kötz, 2 Einführung in die Rechtsvergleichung, 3rd edn (Tübingen, 1996), translated into English by T Weir, Introduction to Comparative Law, 3rd edn (Oxford, 1998) 431. See for English law the treatise of FMB Reynolds, Bowstead on Agency, 16th edn (London, 1995), and for US law, Restatement (Second) of Agency and DA DeMott, Fiduciary Obligation, Agency and Partnership: Duties in Ongoing Business Relationships (1991). See further Fridman’s Law of Agency, 7th edn (Toronto, 1996).

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To repeat, the principles of abstraction or independence and of reliance on apparent authority allow for a more extensive role of the agent when the need arises, therefore regardless of any contractual stipulations about authority between principal and agent, if at all explicit and however confining. There may also be an agency of necessity in common law terms or a negotiorum gestio in civil law terms supplementing the consensual agency and taking over. One could even consider the principle of independence implicit or supplemental to all agency relationships, in this connection sometimes also referred to as inherent authority, provided of course, that the agent acts reasonably. In fact, one purpose of delegated authority may be to avoid constant recourse by third parties to the principal.333 On the other hand, once a principal gets an agency going, he must realise and accept that it may create its own momentum and he cannot hide behind the internal relationship and the limitations he may have set therein on the agent’s activity. Again, the operations of the agent are for its risk whatever comes of it assuming that the third party acts reasonably in his reliance whilst the agent, at least in common law, must comply with his fiduciary duties vis-a-vis the principal and support him as best he can, postponing his own interests, even if not doing so does not affect the third-party. Not all legal systems go equally far in the aspect of independence. Particularly the idea of Laband that the third-party may depend on the authority even ignoring the restrictions agreed between the principal and agent or the defects in their contractual relationship of which it knew is often not accepted in modern legal systems like the Dutch and German. It follows that, where the agent holds himself out in that capacity but acts without proper authority whilst no apparent authority can be deduced from the circumstances and an agency of necessity does not exist either, there is no agency and the so-called agent is personally and exclusively liable to the third-party, certainly if the principal disowns the arrangements the agent made, even if there was no negligence on the latter’s part, compare also Article 3.70 of the new Dutch CC. The modern idea is that, besides the power bestowed by the principal as signalled to the third party and whatever necessity will subsequently require, the agent independently warrants his authority as well, a concept in common law long known in the context of undisclosed agency. This may mean that if the principal cannot perform that part of the transaction that went beyond the authority given in the internal relationship, the misguided agent might still be liable to the third-party for the excess. Of course, even if there was no apparent authority or agency of necessity, the principal may always ratify the acts of the unauthorised agent and thus potentially discharge him. This ratification is commonly considered retroactive, see Article 3.69 of the Dutch CC.

333

See Learned Hand J in the American case of Kidd v Thomas A Edison 239 F 405 (1917).

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3.1.4 The Consequences of Agency: Conflicts of Interests, Rights and Duties of the Agent To repeat, the notion of independence suggests that lack of consent in and defences derived from the internal relationship between the principal and the agent normally have no consequence in the external relationship between the principal and the third-party, at least if the latter did not know of them at the time he contracted. The notion of independence is also likely to lead to special rules in the area of set-off, excluding the direct or disclosed agent (and his own rights and obligations vis-a-vis the third party) from the process. Also in matters of retention rights of the third-party/seller vis-a-vis the principal/ buyer, the relationship with the disclosed principal/buyer, and not with the agent, is likely to determine their extent. In the aspect of good faith when acquiring personal property from an unauthorised third party, even the good faith of the disclosed agent may be imputed to the principal. The normal consequence of the agency is that the direct or disclosed principal is directly bound towards the third party (and vice versa) under any contract that the agent concludes or receives and acquires cq cedes directly any proprietary right that may accrue or be divested through his agent, whilst the agent himself does not normally acquire any rights or incurs any duties in this respect. He is entitled to a fee from the principal for his services and must perform his duties as well as he can. In common law these are of a contractual but additionally also of a fiduciary nature. Especially in investment brokerage, they may be reinforced by statutory law. The fiduciary duties in common law are of an equitable nature and require the agent to protect his principal’s interest, avoid any conflicts with his own by postponing these, and observe the necessary discretion, often summarised as the duties of care, loyalty and confidentiality. They are of particular interest when the agent acts as a broker for several principals, and more so if he also deals for his own account at the same time. They are all the more important in undisclosed or indirect agencies where the agent is given some discretion as is usually the case whilst making investments in securities. Civil law is notably less well developed in this area of potential conflicts and often continues to allow the agent, when he acts in his own name whilst the agency remains undisclosed, to possibly benefit from the transaction under circumstances which remain generally undefined, a situation which must be considered unsatisfactory. The common law fiduciary duties are particularly important in trusts,334 therefore in the relationship between the trustees and the beneficiaries who largely depend on their trustees and are vulnerable to abuse. They are not contractual in nature but may supplement certain types of contracts where there is a dependency relationship.335 The 334

See for the beginning of this development Keech v Sandford (1726) 25 ER 223. Not any situation of dependency or confidence gives rise to fiduciary duties, however, and the key is that the fiduciary undertakes to act in the interest of another person who is entitled to expect that the beneficiary will only act in his interest. Acting merely for the account of someone else is notably not sufficient. 335

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common law technique of literal interpretation of contracts and its reluctance to imply terms or accept good faith notions presented problems. Thus early on fiduciary duties were introduced into the relationship between principals and agents, but also between solicitors and clients, companies and directors, probably employers and employees.336 They also could be added in the relationship between guardians and wards, executors and legatees, and each partner in its relationship to a partnership as a whole. The key is that these fiduciary duties may impose duties of care which are higher than normal and may require the fiduciary (here the agent) to act with greater care than he would use in his own dealings.337 These fiduciary duties are gradually being introduced also in civil law, at least in investment securities brokerage, first through Article 11 of the EU Investment Services Directive effective in all EU countries as of the end of 1993, now superseded by MiFID which is more demanding (see Vol. III, chapter 2, sections 3.5.5ff). They cannot be captured entirely by the good faith notion, although the elaboration of the information and performance duties in contract may be developed in the same direction and will probably be used as the context in which the fiduciary duties will be received into civil law. Using good faith notions would limit them to application in contractual situations only, might not cover the concept of independence, might not so quickly highlight the extra effort that is required, and they may be hindered by the fact that they could then be given relevance in all contractual situations and as such be diluted, unless the typical nature of the relationship between contractual parties is better understood, as was advocated for civil law in section 1.1.6 above. This type of relationship thinking is implicit in common law. Certainly, also in common law some fiduciary relationships are more intense than others. The facts are very important.338 Fiduciary duties co-exist with contractual duties but seem to be always overriding. Compared to the American notion of good faith in sales contracts under the UCC or in the Restatement Second Contracts (see section 1.3.7 above), the fiduciary duties are always objective requirements, whilst the fiduciary can never act in his own interest (without full disclosure assuming even then that there is a ready alternative for the principal) which contract parties naturally may do. Good faith in this sense usually requires parties to take into account only each other’s justified interests and it seeks a balance after the contract has been concluded. Under fiduciary duties, on the other hand, the interest of the beneficiary always prevails over that of the fiduciary.339 Under them, even pre-contractual disclosure duties (eg, of conflicting interests) may arise in the formation of the internal relationship, which under concepts of good faith might still be less pronounced, as is likely to be the case in common law in particular, even where the good faith notion is accepted in the performance, as under Article 2 UCC in the USA. Another point is 336

See the Australian case of Hospital Products Ltd v US Surgical Corpn (1984) 156 CLR 41, 96–7. See Cardozo J in the US case of Meinhard v Salmon 249 NY 458 (1928); see also Restatement (Second) of Agency, s 387 and Comment. 338 See Frankfurter J in the American Supreme Court case of SEC v Cheney Corp 318 US 80, 85 (1942). 339 See also the Canadian Supreme Court case of Cansons Enterprises Ltd v Boughton & Co (1991) 85 DLR (4th) 129, 154. 337

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that, because of the overriding nature of fiduciary duties, they are not easily excluded, diminished or varied by contractual stipulation, although parties in the internal relation may define some standards. The liability they give rise to may as such be more comparable to the one in tort.

3.1.5

Undisclosed and Indirect Agencies

There may be some form of agency even if it is not disclosed at all, whilst no indication is given or conduct established by the principal either leading to reliance by the third party on apparent authority of an agent. In fact these forms are very common. Certain agents, like brokers or commission agents (‘commissionairs’ in civil law) who buy or sell goods for a principal may thus act in their own name upon the undisclosed instructions of others who give them possession of their goods or access to their accounts. Particularly in civil law, this often gives rise to difficult questions about the relationship (if any) between the third-party and the principal. The question then arises whether there was any agency at all. In common law, a form of privity is clearly assumed between the undisclosed principal and the third party, thus establishing an agency relationship. The justification of agency in these cases is that consideration moved from the principal and not from the agent who is therefore not a proper party to the agreement. One sees here a particular example of common law laying stress on the exchange or bargain principle rather than on the parties’ intent or ‘will’ (see section 1.2.4 above).340 However, even in common law, it is considered an exception to the traditionally strict rule of privity (see s 1.5.3 above) and the relationship between the undisclosed principal and the third party is therefore sometimes viewed as arising only through the operation of the law, all the less therefore a contractual construction. A condition may be that the third party does not have any reasonable interest in the identity or nature of his counterparty, just like the debtor in the case of assignments. He normally will have such an interest, however, if the undisclosed agent has performance duties towards him. In common law, the undisclosed agent must have had the intention to act for the principal in each instance and the contract between principal and agent should not have excluded that possibility.341 The main difference with the normal (disclosed) agency is that, at least until disclosure, the agent will be liable together with the principal towards the third party as a natural protection for the latter (even though

340 341

See also W Müller-Freienfels, ‘The Undisclosed Principal’ (1953) 16 MLR 299. See also Bowstead-Reynolds, n 332 above, 414 ff.

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the agent did not provide any consideration) and does not even automatically drop out after disclosure if the third party has a continuing interest in him being so bound.342 Through disclosure of the agency, the principal becomes, however, directly entitled to the benefits of the agency in common law and also becomes directly liable to the third-party, but such a disclosure does not automatically put the principal fully in the shoes of the agent. At least as far as the liabilities of the agent towards him are concerned, the third-party may be able to object to any transfer, not only because he may not want to release the agent because he does not trust the credit of the principal but also when it is inconvenient for him to deal directly with certain types of principals like private clients in investment securities transactions, for example because they are not connected to settlement systems necessary to make and complete share transfers in a safe and efficient manner. In the meantime, it remains somewhat unclear, even under common law (because it never distinguishes sharply between contractual and proprietary aspects), whether title to any goods obtained under the undisclosed agency automatically passes through to the principal; it would seem logical, certainly upon disclosure of the agency (as a way to directly claim the benefit). There will in any event be a recovery possibility for the principal against the undisclosed agent in the internal relationship. It will also cover moneys received by the undisclosed agent from the third-party, at least if sufficiently set aside. Claims of the agent on the third party (eg for the delivery of shares or sales proceeds) will also belong to the principal who may pursue them in his own name upon disclosure unless again the third party has an interest in the agent exclusively pursuing them. This will be rare. In common law (depending on the perceived intention of the parties), the construction of a trust may alternatively allow the benefits to accrue to the principal as beneficiary. The principal in that case does not become the counterparty, however, nor does he incur liability directly (and has no action against the third party, nor the third party against him). The exceptions to the ‘nemo dat’ rule are also different when the agent acts as (constructive) trustee in this manner, in which capacity he may legally transfer title in the assets to bona fide purchaser for adequate consideration, thus defeating the principal’s interest, see for these exceptions also chapter 2 section 1.4.4 below. In fact, in common law it is entirely possible to appoint a trustee instead of an undisclosed agent to handle, sell or buy some goods, and it may indeed not always be clear whether an intermediary is appointed an agent or a trustee, although in the securities brokerage industry, the trust characterisation is uncommon and not easily presumed to have been intended, even in discretionary portfolios, although there may still be a constructive trust for tracing purposes. The differences are material in the sense as just mentioned. Even if there is a mere agency, the connection with the trust remains close, however, as particularly expressed 342 See for a leading case (Privy Council) in this area, Siu Yin Kwan v Eastern Insurance Co Ltd [1994] 2 WLR 370.

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in the fiduciary duties which also affect the undisclosed agent and in the direct interests of the undisclosed principal, even if stronger in the agency than in the trust construction, where he has only the rights of a beneficiary. This is all much less clear in civil law where reference is often made to indirect agency or indirect representation in this connection rather than to undisclosed agency at least when an agent acts in his own name. There is an important difference. Indeed, the indirect agency of civil law lays particular stress on the agent having acted in his own name rather than on the lack of disclosure. This type of agency may therefore also exist if the third party knows that there must be a principal or if the principal is even known to him, although this will normally not be the case. In civil law, the agency idea remains much more embryonic in these circumstances. The problem is that the concept of the will or intent of the parties, developed in the nineteenth century, did not easily allow for the formation of a contract between two parties unaware of each other. Common law puts, as we saw, the emphasis here rather on the concept of the ‘bargain’ (and the movement of consideration). As a consequence, the agent acting in his own name is as such in civil law considered primarily responsible for the deal, and the principal may not be given a direct interest, the corollary being that he has no direct liability to the third party either. In fact, the trust construction in common law comes closer to this civil law idea of indirect agency than the undisclosed agency with the important difference, however, that the common law undisclosed principal has in such cases still the rights and protections of a trust beneficiary and the advantage of the benefits being separated from the person of his trustee, whilst in civil law he has (in principle) only a personal claim on his agent for the benefits which are not then considered separated.

3.1.6 The Civil Law Indirect Agency. The Relationship between Principal and Third Party. Customers’ Assets Although acting in one’s own name even though as undisclosed agent does not in civil law create on its face a direct relationship between the principal and the third party, this has never been satisfactory and, under practical pressures, some direct tie between the principal and the third party is often assumed, especially in Germany and Switzerland, at least if the third party has no special interest in the identity and nature of the principal, when, unlike in common law, the agent may even be considered discharged. This is the case for cash purchases of little value. But also where a person acts as an agent without disclosing the particular principal (open agency in Germany), a direct relationship between the principal and the third party may still be established if the identity of the former does not matter to the latter. This is very much the normal situation in investment securities brokerage, when the third party knows that there is an agency and therefore a principal, even if undisclosed. Again there is the analogy with the debtor under an assignment and with the depersonalisation of contracts generally which is at the heart of the notion of agency

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ever since Grotius insisted on it.343 Another reason for this approach may be the realisation that the indirect agent acts only upon the initiative and is always subject to the control of the principal, even if the third party may not know this but could suspect it. The consequence is that the principal may usually claim the title to goods obtained for him by the agent assuming it has passed from the third party and is sufficiently identified. Yet in Germany the situation is again more complicated, at least in the proprietary aspects of agency as under German law the acquisition of title depends not only on a contract and delivery (of legal possession) but also on the agreement to deliver (Einigung) (see chapter 2 section 1.5.6 below) the agent playing a role under all three. As delivery of physical possession is considered a factual matter in Germany, there is a special problem here in cases where it is required as agency under German law is limited to legal acts (Rechtsgeschäfte). Also the Einigung suggest a transfer to the undisclosed agent personally (s 164 BGB). In Germany, it is possible and common, however, to include in the contract between principal and agent, therefore in the internal relationship, a clause under which the agent commits to acquire legal title and to accompany this with an anticipated intent to transfer the asset to the principal, even though neither is declared at the moment of the actual acquisition of property by the agent to the third party. Here we see indeed some emphasis on the internal relationship itself and the question of control. If the transfer remains defective from the principal’s point of view, it may still be perfected later to what the agency contract originally required, see section 181 BGB.344 Another aspect may be that the third party must have some awareness of the agency, even though he does not need to know the principal. In security brokerage this requirement will normally be in place as end-investors using brokers are aware of the fact they usually do not operate for their own account (although in modern securities dealings large brokers often deal from own inventory or book-entry entitlements at best market prices, when in truth they have stopped being agents and the issue of title passing through them to the principal no longer arises). In France, the situation is also less clear but in the case of use of commission agents the third-party upon disclosure may be able to hold both principal and agent liable whilst at least any property rights accrue directly to the principal.345 In the 343 See further for Germany KH Schramm, Münchener Kommentar zum Bürgerlichen Gesetzbuch 1 Allgemeiner Teil, 3rd edn (1993) Fünfter Titel, s 164, nos 42 ff, and s 392(2) of the German Commercial Code. It does not extend to the obligatory rights: see s 392(1) HGB. See for Switzerland, Art 401 of the Code of Obligations. 344 See also German Supreme Court, 11 June 1920, 99 RGZ, 208 (1920). 345 See in this vein Jurisclasseur Commercial Facs 7A (No. 76), 360 (No 120) and 365 (No 20). See in France for an early plea for a direct link upon disclosure between principal and third party (in both the proprietary and obligatory aspects) B Starck, ‘Les rappports du commettant et du commissionairs avec les tiers’ in Hamel (ed), Le contrat de commission (Paris, 1949) 163, but this approach was not followed, see Ripert/Roblot, 2 Traite de Droit Commercial (2000) 682. In Belgium there was support from W van Gerven, Algemeen Deel (1969) 494–497 and L Somont, ‘Le Probleme de representation dans le contrat de commission sur marchandises’ (1956) JCB 129. Belgian case law accepts the proprietary link but not the obligatory link: see also Cour de Cass Belge, 9 Dec 1999, Pas I, 1669 (1999); see for a criticism, E Dirix, Festscchrift Jacques Herbots (2002) 97.

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Netherlands, on the other hand, there is still no direct tie admitted between principal and third party in indirect agencies. However, property rights accrue to the principal if passed to the agent, but merely on the basis of the internal relationship, Article 3.110 CC, provided the agent holds the assets in question for the principal, the internal relationship is specific on this point, and the acquisition is the direct result thereof. Because of the apparent lack of an external relationship proper, it remains less clear in this connection whether the third-party may equally receive title directly from the undisclosed principal assuming the property has passed to the agent. There are also still problems with moneys held for clients in one’s own name. However that may be, the principal appears at least protected in his proprietary rights against his agent if the latter has executed the transaction with the third party but not yet with his principal, at least as far as any tangible assets the agent has so acquired are concerned. This is particularly relevant in the agent’s bankruptcy. As just mentioned, it may not, however, apply to money the agent received (for which Dutch case law may, however, give some protection if sufficiently separated out in a client account, as we shall see). Importantly, it does not extend to any contractual rights which the agent still has against the third party, particularly for delivery or payment in a transaction which is not yet in the stage of performance. In Germany creditors of the undisclosed agent have full recourse to all assets acquired by the undisclosed agent. Only if the undisclosed agent acted as Kommissionar any contractual obligation of the third party against the agent will not be available for attachment by the agent’s creditors, Section 392(2) HGB, but some protection of the principal may be achieved by the concept of an anticipated transfer from the agent to himself, as we saw. Title may as a rule not shoot through, however, but will remain with the agent as shortly as possible. It must be remembered that this only applies to truly undisclosed agency and not to open agency when a direct link between principal and third party is established. Similarly, in the case of default or bankruptcy of the undisclosed agent, under new Dutch law, the principal may appropriate these contractual rights (if not highly personal), including the right to any damages or repairs, see Articles 7.420 and 421 CC (in the context of the contract of mandate but also applicable outside it, see Article 7.424 CC). He may do so by the mere declaration of his interest to both the agent and the third-party. The third party left in limbo by the agent but discovering the agency has similar rights against the principal in the case of a default or bankruptcy of the agent. This facility is often interpreted as a statutory assignment. However, this leaves important questions of set-off, retention rights and bona fides protections unresolved. The consequence seems to be that the principal’s rights may still be curtailed by counterclaims the third party may have had against the bankrupt agent. Equally, it could be asked whether any other defences (or retention rights) the third party had against the agent continue against the principal. Another point is whether any good faith status of the indirect agent may also accrue to the principal in these circumstances. The complication of the transaction still being in a clearing process in which outsiders cannot normally intervene is also not considered. Another problem may be presented here if securities are held for clients with a custodian in a custody account in

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the broker’s name, or through a book-entry system to the extent it is characterised as creating only contractual rights against a custodian (even though that is now increasingly uncommon, see chapter 2, Pt III below). Does the principal enter into these rights directly upon a bankruptcy of the broker as well? It would have been more logical to extend the principle of Article 3.110 of the Dutch CC (that title to physical assets already received by the agent always shoots through to the principal) also to any contractual claims the agent has received for the principal against a third party, and vice versa. It is a typical civil law problem not to characterise claims as assets but it would have substantially approximated the common and civil law notions of undisclosed and indirect agency and would have been better than the statutory assignment construction and yield a more modern result. This being said, common law too is not without sensitivity either as to the defences of the third party in an undisclosed agency346 that becomes disclosed after the agent has acted. As we saw, in general, the possibility that the agent drops out of the transaction is restricted when the third party relied on him personally or on the defences like set-offs, assuming they were contemplated and discounted in the deal he struck with the undisclosed agent, but not those arising fortuitously or from later transactions. This is especially relevant in investment brokerage transactions, when the third-party knows that normally there is an agency and a principal involved and does therefore not have these defences.347 Yet, as in disclosed agencies, there is an exception when there is a regular current account relationship between agent and third party or when the agent deals for several clients (principals) and possibly also for himself at the same time short of immediate allocation (pooling). The text of Articles 7.420 and 7.421 of the Dutch CC was largely derived from the UNIDROIT Agency Convention of 1983 (not yet in force because the necessary ten ratifications are still missing, the Netherlands being one of the ratifying powers so far), itself the product of Dutch input at the time. In its Article 13(2) it proposes this system348 as a compromise between common and civil law. It gives the Dutch 346

In a disclosed agency, there is no set-off unless the principal agrees, or when there is a regular relationship between agent and third party and a current account relationship between them, all the more so where individual principals are not disclosed as is common in investment securities brokerage, see also P Wood, English and International Set-off (1989) 996. 347 Especially in the USA the cases are unanimous in holding that there can be no set-off where the third party should know or suspect that there is a principal: Branham v Fullmer 181 NW 2d 36 (1970). The third party is also not discharged from payment if he pays the agent in such circumstances unless in good faith: see Fradey v Hyland 37 Fed 49 (1888), although the Restatement (Second) of Agency (s 208) follows the English rule which does not even accept good faith payments, criticised by Bowsted-Reynolds, n 238 above, 439 and not in accordance with business practice in investment securities brokerage. Upon disclosure, payment to the agent is the risk of the principal who could, however, instruct the third party not to pay to the agent, although in the security brokerage business the loss of the option may be deemed implied, at least in retail business. 348 See [1983] Uniform Law Review 164 ff and for a defence of the compromise (and its implicit disadvantages), AS Hartkamp, ‘Indirect Representation According to the Principles of European Contract Law, the Unidroit Agency Convention and the Dutch Civil Code’ in Festschrift Drobnig (1998) 45. This approach has been fundamentally challenged by LD van Setten, De Commissionair in Effecten [The Investment Securities Broker], (Dissertation Utrecht, 1998), in favour of a pure agency construction which he sees in any event as the underlying idea of Arts 7.420 and 7.421 of the Dutch

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implementation some wider importance. This approach has also appeared in Articles 3.301 ff of the European Contract Principles but was not retained in the DCFR, see the few references to indirect agency in Articles II- 6:106 IVD-1:102(e). Because this approach leaves major issues unresolved, it seems unsuitable, particularly for the commodity and investment securities brokerage business when, whilst dealing with brokers, the existence of an agency must in any event be assumed. In the meantime, the notion of segregation of clients’ accounts and customers’ moneys (or other pooled client assets), although still in the name of the indirect agent, is a broader civil law problem but increasingly respected, but also by no means completely. This is particularly important as to any moneys a bankrupt agent acting in his own name has received for his client(s). Dutch case law appeared at first favourably disposed but now less so, short of statutory backing. The situation under Belgian and French law as to segregated (pooled) assets including money still in the name of the agent appears not much clearer.349 The particular problems arising in connection with indirect agency in the investment services industry are discussed more fully in Vol. III, chapter 2 section 1.3.10. Another problem that arises in particular in this industry derives from the fact that undisclosed agencies are unlikely ever to create a direct relationship between a principal and a third party. But also open agency may be problematic if the principal is not even known to the agent or as yet non-existent. Thus, where brokers act upon instructions of investor advisors who do not disclose their own principals to the agent, no direct relationship between them and the third-party may come into existence, in CC. Indeed, the better view is that this limited Dutch statutory system through which the principal may receive direct rights against the third party in an indirect agency is in truth based on and derived from the agency notion itself and the assignment characterisation and its limitations are then illogical. Indirect agency should therefore be interpreted as a form of agency like the undisclosed agency is in common law. Especially the set-off complication would then be reduced to more normal proportions. In Dutch legal scholarship from before the introduction of the new Civil Code, a far-reaching automatic recognition of the undisclosed principal’s position had already been suggested by P van Schilfgaarde, Toerekening van Rechtshandelingen [Attribution of Legal Acts] (Dissertation Groningen 1969), as long as the agent meant to operate for the principal and the third party had no particular interest in the agent as his counterparty, whilst the principal was sufficiently solvent. In this view, the agent upon disclosure became a mere guarantor of contractual obligations entered into by him much along common law lines, whilst the property acquired by the agency was always directly obtained by the principal. Van Setten follows this reasoning but takes a more radical position, which would unite common and civil law concepts also in this area of agency. 349 See HR 3 Feb 1984 [1984] NJ 752 but new Dutch case law is more restrictive, and limits segregation to situations of statutory separation, HR June 13 2003 RvdW nr 108 July 2 2003 and 6541 WPNR (2003). There remained, in any event important problems also in this area: see E Dirix and RD Vriesendorp (eds), Inzake Kwaliteit [The Client Account] (1998). In Continental legal writing, the difference between agency and trust is little understood and in as far as client money and assets are concerned, the preference seems to be for trust structures, even though they have hardly any basis in civil law. In the meantime, the (indirect) agency concept which is much better known and much more suitable to be further developed in the sense of pure agency (see previous note) remains in this sense neglected and underdeveloped. It would give the principal a legal position vis-a-vis the third party however, which he does not have in a trust construction where he is a mere beneficiary subject to the rules in this connection.

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fact not under common law either. When intermediaries act for principals in a pooled manner leaving allocations of sales and purchases to them until later, it does not seem that an agency can operate either, at least not before the allocation, and the agency is then dependent on the agent’s expressed intention about who will get what.

3.1.7

The Economic Importance of Modern Agency

The major differences between the common law of agency and the civil law of representation are thus likely to be in the areas of the undisclosed agent and of the conflicts of interests. The undisclosed agent, like any other acting in his own name, has in civil law greater independence vis-a-vis his principal, and is traditionally more likely to be allowed to compete with him, although in modern securities’ and investors’ protection laws, duties and restraints similar to those long known in the common law of agency are gradually being introduced following the EU Investment Services Directive, (see Vol. III, ch 2, ss 1.3.10, 1.3.11 and 3.5.5ff). Civil law countries have, however, had considerable difficulty in faithfully adopting the Directive in this regard. It would in truth have required a rewriting of the law of agency for investment transactions. In common law, these fiduciary duties tend to be reinforced in the investment area under modern statutes like the UK Financial Services Act, 1986, replaced by the Financial Services and Markets Act, 2000, and in the US much earlier under the Securities Exchange Act 1934 and its many amendments in the USA. Agents of these various kinds are frequent in commercial business because of the distances or different specialities involved. Modern communications have often made it possible to dispense, however, with their services, thereby reducing cost, also in international sales, all depending on the sophistication and staff of the principal. As a consequence, by far the most important manifestation of agency is now in the area of investment services or commodity dealings through brokers, therefore in the area of undisclosed and open agencies where there are at the same time the greatest differences between common and civil law. But the implied or embedded agencies in transportation and payment arrangements remain important also. Another area where agency remains common is in the factoring of receivables for collection purposes only. New Dutch law makes clear that the creditor may give the collector exclusive rights in this respect, which does not, however, prevent debtors unaware of this exclusivity to pay the original creditor and receive a discharge, compare Article 7.423 CC. The true factor collects, however, in his own name and for his own account and is not an agent, see more particularly Vol. III, chapter 2, sections 2.3.1 ff.

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International Aspects of Agency

Private International Law Aspects of Agency

Finally, it may be of interest to mention briefly the private international law issues in agency. Early on, there had been an English rule making the disclosed agent in England liable for the obligations of a foreign principal, who in turn could not be sued or sue in England himself. This defeated much of the purpose of a disclosed agency and made it unattractive in international dealings. Being foreign is now only one factor in determining whether the parties had meant the principal to be directly and exclusively liable by contract between them.350 In the USA there had always been an unwillingness to recognise foreign general powers to the discharge of local agents.351 Beyond these simple and incidental rules, there has never been much consensus about the treatment of agency internationally. As was pointed out above, in agency there are in essence three relationships which require attention: (a) the one between principal and agent which is at the origin of the ensuing transaction or other legal act (like delivery) with the third party (or the internal relationship), (b) the relationship between the agent and the third party which achieves the transaction or other legal act (which relationship is likely to have no independent meaning in disclosed agencies), and (c) the relationship between the principal and the third party which results from the transaction or other legal act (the external relationship). All three may conceivably be covered by different laws. Another aspect to consider is whether the granting of the authority itself as a legal act separate from, although initiated by, the underlying contract between agent and principal but based on the latter’s declarations or conduct, is not itself also subject to a distinct set of legal rules. That appears to be the better view and is a natural consequence of the notion of independence. If one sees the declarations or conduct of the principal as the main factor in the creation of the agency to the extent disclosed, then his law would, from a private international law point of view, be of primary importance, at least in the creation of the authority. It is also possible, however, to refer in this respect to the law of the third party who relies on these declarations or this conduct, although it may leave the principal at the mercy of (the law of) any third party the agent may choose (if given that discretion). This may be his risk. Whatever law may thus apply to the creation of the agency, the agency is then likely to depend for its effect on the law of the country where it is invoked. What we are concerned with here is primarily the recognition of the authority conferred and the binding force of the obligations between principal and third party (and the elimination of the agent as a party), including any proprietary effect that may result. The law of the place where the effect is invoked will normally be the law of the 350 351

Teheran-Europe Co Ltd v ST Belton (Tractors) Ltd [1968] 2 QB 545. See Von Wedel v McGrath 180 F 2d 716 (1950).

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country of either principal or third party, at least as to them being bound under the relationship created by the agent (if the principal makes the allegation it is therefore normally the law of the third party and vice versa), including possibly their conflicts laws, but it is likely to be the law of the situs of the assets if it concerns the proprietary effects of the agency. The question of the discharge of the agent and the implementation of its (fiduciary) duties would more properly be a question of the law of the country of the agent. This is a particular manifestation of the lex loci actus which is normally associated with the place where the agent acts, intended to act or has his business. Set-offs and retention rights or other defences would not apply to the agent if he properly drops out of the arrangement under his own law as is likely in a disclosed agency. If he does not, his law may have to be considered in these areas also. Bona fide acquisition of chattels by the agent for his principal, likely to be possible in civil law countries may as to the determination of the bona fides also be a matter of the law of the place of the agent or otherwise of the location of the relevant chattels. These seem the most common sense and expedient solutions. It would appear to remove this aspect of (undisclosed or indirect) agency from the contractual choice of law by the principal and agent, logical if the authority and its operation are seen as a question of the objective law as it affects third parties. It would also concern the nature of the fiduciary duties and the liability or discharge of the agent both vis-a-vis the principal and particularly the third party. Another approach altogether would be to consider the agency internationalised when principal and third party are in different countries and view the legal nature of the agency and its independence, at least in international commerce and finance between professionals, as transnationalised concepts in that case under the notion of the lex mercatoria subject principally to its own principles and logic. According to the pre-eminent author in this field, Ernst Rabel,352 virtually every type of conflict solution had even then (by 1929) been proposed, including applicability of: (a) the law of the underlying agency contract or internal relationship, particularly in legal systems not accepting the notion of independence; (b) the law of the place of the agent, easy to verify and particularly relevant if agents act as general representatives or as establishments of the principal in other countries and are subject to local customs, but it presents problems where both parties use agents from different countries; and (c) the law of the main contract or relationship created between principal and third party itself. It achieves unity in the applicable legal regime, including the duties of disclosure in the pre-contractual phase, but is also problematic as the main contract is established only after the agency is already in being and the law applicable to it may itself remain uncertain. This latter point is also an argument against applying the law of the internal relationship, which, if ascertainable, may moreover be entirely extraneous to the third party. The great diversity of approaches continues to this day.353 352

Vertretungsmacht für obligatorische Rechtsgeschäfte (1929) 3 RabelsZ 807. See for the various alternatives and their supporters, HLE Verhagen, Agency in International Law (The Hague, TMC Asser Institute, 1995) 66 ff. 353

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In fact, tripartite arrangements are particularly difficult structures in private international law and can very seldom be covered by reference to one domestic law. The multitude of domestic laws that may become applicable to the various aspects of such arrangements often present a picture of considerable complication and arbitrariness.

3.2.2

Treaty Law Concerning the Law Applicable to Agency

It is to be noted in this connection that Article 1(2)(g) of the 2008 EU Regulation on the Law Applicable to Contractual Obligations (Rome I) excludes from its scope the question whether an agent is able to bind a principal. Technically, this does not mean that the purely internal relationship between principal and agent and the contract between principal and third party are also excluded. The Hague Convention on the Law Applicable to Agency of 14 March 1978 on the other hand more in particular concerns itself with the role of the agent vis-a-vis the third party and his authority to bind the principal (and the third party to each other). It entered into force in 1992 between France, Argentina and Portugal, joined later in the same year by the Netherlands. It is valid for a period of five years and is automatically renewed for States that have not denounced it (Art 26). It refers to international agencies, which term itself remains undefined (Art 1). One must assume that the Convention is to be applied by any forum in a Contracting State confronted with a serious conflict of laws problem in this area. Agency itself is not properly defined either and problems of characterisation are likely to arise especially in the area of undisclosed or indirect agencies and alternative trusts: Article 1 considers anyone an agent who has the authority to act, acts or purports to act on behalf of a third person (the principal) in dealing with a third party. The fact that formally the agent acts in his own name is not apparently in itself material for the (dis)application of the Convention. Indirect agency in a civil law sense may thus be covered, although it is a very different thing, at least in civil law. The characterisation may itself well be based on transnational or internationally common notions of agency. However this may be, it leaves considerable uncertainty as to what kind of agencies are covered. The serious lack of clarity of the Convention on its own scope suggests that the concept of agency and the issues arising in an international context were insufficiently mapped out and studied for a comprehensive consensus on the applicable law to arise, even if one accepts that Conventions of this type are unavoidably based on compromise between domestic concepts and insights as long as transnational law notions have not superseded the conflict of law approach in this area. Particularly agencies operating in the family, corporate and perhaps also in the banking and securities (the securities broker or ‘commissionair’) areas do not seem to fit. Proprietary aspects like the direct acquisition of tangible assets by the third party if the agent, even if undisclosed or indirect, acquires them and the good faith acquisition of movables by an agent, the consequences of set-off and retention rights are not

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considered. According to the official Report, the exclusion of proprietary matters is self-evident, but it is somewhat surprising that the Convention itself does not make that plain as it is a most important issue. One must thus assume that the Convention concentrates on the contractual aspects of the more current forms of consensual agency only. This being the case, it would have been normal to include a measure of flexibility in the applicable law if the formulae of the Convention proved inadequate in the great variety of factual situations, types of agency, and agency issues that may present themselves from time to time along the lines of Article 4(3) of the EU Regulation, an idea expressly rejected, however, by the Hague Conference at the time in the interest of quickly and easily ascertaining the applicable law. Yet this cannot be the only objective of treaty law of this kind, it also needs to make some sense. As a consequence of this approach, Article 11 introduces the principle of the lex locus actus as a hard and fast conflicts rule making the law of the state of the business establishment of the agent (at the time of acting) applicable to his role, except that the law of the state in which the agent acted (if a country other than his own) applies if the principal or third party has its business establishment there or if the agent has acted at an exchange or auction or has no business establishment at all (which suggest that he is not a professional). There is no distinction made here between creation and effect, compare also Article 6 for the internal effects (although the existence and effect of the authority referred to in Article 8 hardly seem an internal matter). The system of the Convention is unitary in principle and the agency is thus supposed always to operate under the law of the (professional) agent. This is therefore the law of the one party (the agent), who legally is meant to drop out of the transaction altogether, whilst the acts of the principal and of the third party relying on the agency are at least as important as the acts of the agent himself. Unavoidably, the agent will often act either at the place of business of the principal or third party, when under the Convention exceptionally their law applies (except when it is through telephone, fax or mail, see Art 13). The Convention further accepts a contractual choice of law by agent and principal to be binding, certainly less appropriate in the proprietary, set-off and retention aspects which, as just mentioned, are, however, not believed covered by the Convention. In any event, this choice is effective on the third party only with his consent (Art 14). Whatever the merits of this overall approach may be, the applicability of the law of the agent would normally appear appropriate as to his direct liability towards the third party under the agency (if any), because this is likely to be the law of the most characteristic obligation. It may also be appropriate as to his liability towards the principal under his (fiduciary) duties in the exercise of his functions, compare also Article 8(c). A more difficult problem is presented in this respect by the undisclosed agency, especially in the securities area, when the principal as a private investor may need protection against the agent under his own mandatory law. Upon the analogy of Article 6 of the EU Regulation, these protections might then prevail, or otherwise perhaps the most favourable rule for a consumer investor. Article 16 leaves greater

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discretion relying on a significant connection. The public policy bar may further be used to curb the undesirable effects of the choice of law rules (Art 17). A good argument can be made that undisclosed agencies are not covered by the Hague Agency Convention at all if under the law of their creation they only have an internal relationship, which could still include, however, automatic in rem transfers to the principal of any tangible assets the agent acquires for him, if acceptable to the lex situs, and any reimbursements of his cost by the principal. Naturally the internal relationship should then be covered by its own law, rather than by the rules of the Convention which for the internal effect of true agencies (where a direct relationship between the principal and the third party is created) in Articles 5 and 6 refers to the law chosen by the principal and his agent and otherwise imposes the law of the agent. The Hague Agency Convention should then apply only where the undisclosed agency has some automatic external effect, as under common law or in countries like Germany and Switzerland when the third party has no reasonable adverse interest. Proprietary aspects would in any event not be covered.354 It would probably have been better if undisclosed or indirect agencies, especially those in the securities area, had been expressly excluded from the scope of the Hague Agency Convention which does not seem to concern itself greatly with fiduciary duties (only in Art 8(c)), investors’ protection and proprietary aspects either, all issues of particular importance in this area. The Convention allows Contracting States not to apply the Convention to banking transactions (Art 18), but this appears not to cover the securities business, except, according to the Official Report, the underwriting activities in the (primary) international markets. The banking exemption appears to exclude, however, agencies in connection with documentary letters of credit and bank guarantees. An exemption may also be made for insurance and the exercise of public functions, but no other (Art 18). Portugal has invoked all exemptions, the Netherlands only the insurance exemption, France and Argentina none at all. The Convention itself excludes the shipmaster’s agency (Art 2(f)), which is often thought to be covered by the law of the flag.

3.2.3

The Lex Mercatoria and Agency

Instead of attempting to develop internationally acceptable private international law principles pointing to the application of a domestic law of agency whenever an agency operates across borders, it may be more useful and efficient to look at agency in an international and professional context as a distinct structure dominated by its own intrinsic purpose and logic and further develop common principles which may be found in this connection in domestic laws in order to interpret and supplement the

354 See, however, also Verhagen, n 353, 152, 161, above, insisting on the general inclusion of the undisclosed agency in the scope of the Convention, but presumably not for the proprietary aspects.

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agency structure and always subject to fundamental legal notions which in the case of agency may have a particular meaning where a principal creates the appearance of authority in others and in respect of fiduciary duties of the agent (see also Vol I, section 3.1.1). In this approach a domestic law selected on the basis of the prevailing conflict of law rules would only be applicable as a last resort. In the area of agency, the principles so developed would largely build on the common law notion of agency which is further advanced in the development of fiduciary duties, the notion of tracing also in undisclosed agencies, and in the limitation of defences of the third party if the agency is not disclosed but if this party must realise that there normally is one, as in securities brokerage. The proposals contained in the European Principles of Contract Law and DCFR do not appear adequate here and sufficiently mindful of the practical requirements either, at least when intermediaries are used in the securities and commodity trades, see more particularly section 3.1.6 above, also for the UNIDROIT Agency Convention of 1983, so far not sufficiently ratified. The civil law concept of indirect representation when an agent operates in his own name albeit for the risk and account of someone else, is an unsuitable concept and has shown to leave far too much power to the intermediary not properly balanced by fiduciary duties and tracing powers for the principal, even if modern civil law tries to improve the situation and find some compromise with the common law (undisclosed) agency notions. The result is rather more confusion.

3.2.4

The EU Commercial Agent Directive

On 18 December 1986, the EU issued a Council Directive on the co-ordination of the laws of the Member States relating to self-employed commercial agents355 now incorporated in the law of all Member States. It applies only to intermediaries in the purchase and sale of tangible movable assets and contains a set of harmonised, largely mandatory rules covering in those situations the relationship between principal and agent only. The essence is the latter’s protection against the former. It is, strictly speaking, not concerned with the legal consequences of agency at all and particularly not its third party aspect or even the fiduciary duties of the agent towards his principal. As such, it does not truly have a place in the present discussion but may play a role in international sales in terms of the contractual relationship between commercial agents and the entity appointing them. It concerns here in essence the service aspect of agency. The Directive is limited to those acting in the name and for the account of others in disclosed agencies. It aims at the protection of the agent against the principal and covers basically the duties of the principal towards the agent, the agent’s rewards, the

355

[1986] OJ L382/17.

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extent of the agent’s own liability under the transaction, the termination of the agency agreement, the compensation regime and limits on a non-competition provision after termination. The harmonisation effort in the EU largely eliminates conflicts of laws for agencies operating in the EU in the areas covered by the Directive, except where protection is given under national laws in excess of those of the Directive. If there are non-EU elements in the agency, the law applicable to the agent’s protection will still have to be established in accordance with the normal conflict of laws rules of the forum (including those of the Hague Agency Convention in France, Portugal and the Netherlands, if the case is brought in those countries, which normally refers to the applicability of the law of the agent). The mandatory nature of the minimum rules of the Directive mean that these rules cannot easily be set aside by the law thus considered applicable to the agency if not respecting these rules, even if the agency contract is concluded between a non-EU based principal and agent, as long as the agent is operating or the agency has an effect in the EU. Particularly a choice of law by the principal and agent to opt out of these protections by selecting a law which does not incorporate them, might not be effective under the circumstances. This is the likely result under Article 16 of the Hague Agency Convention in those EU Member States having ratified it. For those EU members who did not ratify this Convention, in a more general fashion the same result would appear to follow under Article 9 of the 2008 EU Regulation (Rome I). The key is therefore the contact between the agency and an EU country and the competence of courts in the EU. The analogy with employment contracts presents itself, commonly disallowing a contractual choice of law, compare for cases brought within the EU also Article 7 of the EU Regulation. In this connection an argument can be made, however, that the EU mandatory rules do not apply if a professional agent expressly agreed to another, for him less favourable regime whilst it is to be noted that most agents in the international sphere must be considered professionals. Where the agency operates outside the EU, the situation may be less clear, even if both, principal and agent are based in the EU. The courts, certainly if outside the EU, are then likely to exercise their own discretion depending on the extent of the remaining contacts with the EU or the protection under their own lex fori if the agency operates in their jurisdiction. Finally, the distinction between an agent and sole distributor who operates in his own name and for his own account is often blurred. Sometimes the seller sets the price and takes back any unsold goods so that the risk for the sole distributor is much reduced. In other cases of agency, the (del credere) agent may take at least the credit risk of the third-party so that he has a substantial exposure under the agency and does not drop out completely even if the agency is disclosed. Regardless of the distribution of risks and the name in which the agent formally acts (either in the negotiation or conclusion of deals and the EU Directive rightly does not make a distinction between these two activities), for proper agency, the key is always whether direct ties are created between principal and third parties or not, which may also be the result of mere negotiation as pre-contractual activity, and not whether the agent has fully dropped out. If there is no privity created, there is no agency proper. It

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does not mean that the protection of the agent as envisaged by the Directive cannot be extended to sole distributors and similar operators. Often that will be fair as they tend to fulfil a similar role in the promotion of the seller’s business and implementation legislation in the various EU countries might take that into account. This goes well beyond the scope of the EU Directive and its limited notion of agency as a service. Finally, it may be noted that the DCFR has a special chapter on commercial agency, franchise and distributorship as one of the contract types it defines, see Book IV, Part E. It substantially follows the EU Directive

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Transnational Movable Property Law

Part I Ownership, Possession and Limited, Future, Conditional or Temporary Proprietary Rights in Chattels and Intangible Assets 1.1 1.1.1

Introduction

Proprietary Laws in Common and Civil Law

Property law is best understood in terms of the various legal structures under which assets are held, used and protected. This requires first some notion of what assets are and how they may become the object of property law in this sense. Land and chattels are the most obvious examples but it also concerns monetary and other claims having economic value (even though in law their asset-status has long been questioned). Subsequently we should acquire some idea of what legal structures we are speaking, therefore of the types of user, enjoyment and income rights in respect of these assets that may be exerted and claimed by the beneficiaries or interest holders as proprietary. Property rights in this sense are rights that are maintainable against everyone. All must therefore respect these interests and leave them alone. Indeed it is the facility to enforce these rights against the whole world that is normally considered the essence of proprietary rights. Here the right of ownership as the most complete right to exploit and dispose of one’s assets (in civil law terminology) first springs to mind. But there are also more limited user, enjoyment or income rights that may be created in these assets and no less may have to be respected by all, thus becoming proprietary, like life interests or usufructs, forms of leases, and security interests (of which mortgages are prime examples in land). All these more limited proprietary interests involve rights in other people’s assets (and are therefore in civil law terminology iura in re aliena). There may also be rights-of-way created over other people’s land to provide ready access to one’s own. These are easements or, in civil law, servitudes. Although in this book the discussion of proprietary rights is primarily concerned with the creation, operation, transfer and protection of all rights in (legally qualifying) assets in terms of user, enjoyment and income rights, proprietary rights proper are thus a more limited class: the more narrowly defined legal structures like ownership, usufructs, servitudes, security interest, etc. Others are merely contractual, therefore maintainable only against the counterparty, usually the one who transferred these rights. However – given a more dynamic notion of proprietary rights, as already proposed in Volume I, section 1.1.4 for professionals amongst themselves—other user,

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enjoyment and income rights, although in principle merely contractual may sometimes also acquire some similar proprietary status. When and why this happens is a key theme in this book, and the reason why the discussion is not confined to the more traditional narrow class of proprietary rights but all types of user, enjoyment and income rights are here in principle considered for their potential proprietary effect and for the nature and extent of that effect should it arise. It is posited that the proprietary system is here not set in concrete but, at least amongst professionals, more fluid than mostly assumed. This finds even now particular expression in equity in common law countries, as we shall see As just mentioned, the importance of proprietary rights is that they can be maintained against the whole world, therefore in principle against any intruder. This means that such rights may also be claimed against junior interest holders including, in a bankruptcy, all more junior secured creditors and the common creditors of the bankrupt. Junior means here in essence any proprietary interest in the asset that was created later. It leaves wide open the question, however, whether and when other user, enjoyment or income rights that are normally created by contract may also become proprietary, therefore what the material criterion is for them acquiring third-party effect. As far as the nature of proprietary rights is concerned, there is foremost an element of setting aside or segregation, although this does not fully define the interest. It means that if my car is in my friend’s garage, I can simply take it away even upon his bankruptcy, relying on my right of ownership. It also means that if my friend gave me a security interest in his bicycle to protect the return of any money I may have lent him, I may take the bicycle if the money is not returned in time (thus taking physical possession or ‘repossess’ the bike unless there was a more senior security interests of others) and execute my security, meaning selling the bike in principle quite separate from the bankruptcy, whilst only returning to the bankrupt estate of my friend the overvalue for more junior security interest holders or common creditors. In civil law, this is also 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 also follows that if proprietary interest holders, like owners, subsequently sell their interest, any more limited proprietary right in or to the asset can be maintained against any successor who will be a junior proprietary interest holder in relation to me, even if he acquires the fuller ownership interest or title. So if my friend had sold his bicycle in the meantime or given 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 physical possession of the asset, which would not change the basic rule but provide an excuse against it). In civil law, that is called the right to pursue the interest in the asset or the droit de suite regardless therefore of who owns or controls it.1 1 If in the meantime my friend had given only a contractual user right in the asset to someone else, I could ignore it altogether even if I had known of its creation (unless I had been party to the contract also, but the issue would not then be proprietary but only one of contract enforcement). I could contractually also postpone my interest, but that would only be of interest for the contractual

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These two rights: the droit de preference and droit de suite are often believed to be the clearest benefits and expressions of proprietary rights and to demonstrate best their nature. Even though it is a typical civil law analysis, it is sometimes borrowed and used also in common law to demonstrate the point. To repeat, any user and enjoyment or income rights that may be created in (other people’s) assets but cannot be defined in terms of these narrower proprietary structures are in principle contractual or obligatory.2 They are not then commonly deemed protected against the whole world, therefore against any and all intruders or in a bankruptcy of the owner, but are only enforceable against the contractual counterparty or counterparties, usually the transferor. There are here no senior or junior rights, only competing interest holders or common creditors. They all have equal rank, the lowest in a bankruptcy. Borrowing a bicycle may serve as ready example. It does not give me any preferential 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 they are only a competing claim in the bankruptcy. We see here the fundamental difference between proprietary and contractual user, enjoyment and income rights, in fact between proprietary and obligatory rights altogether. This distinction remains fundamental in civil law, see section 1.2.1 below, and clarified private law and its operation in a major way, although the difference was only gradually understood and the types of user, enjoyment and income rights that functioned as proprietary only empirically identified in eighteenth-century legal scholarship in Germany as we shall see. Roman law had played with these ideas, but (surprisingly) had not been able to provide clarity in this regard. Neither did the the common law manage to do so and even today its concept of proprietary and obligatory rights is much more hazy. It follows nevertheless from the above that specially if the underlying assets are sold or the counterparty goes bankrupt, the characterisation of my right as proprietary or as merely obligatory may make an important difference, also in common law. Thus I may have a servitude over someone’s land. It is a proprietary right which means that if the owner sells the land or goes bankrupt, I remain protected and continue to benefit from my right in the manner just explained. Had my right to pass only been of a contractual nature, any buyer of the land would not (in principle) be obliged to respect it, not being a party to the original contract giving me the passage right, although it may leave the former owner with the problem of how to perform the contract now that he has lost control of the land. In a bankruptcy of the owner of the land, equally I would not be protected as a senior interest holder but only as a creditor. That right could still be assessed for its economic value but I would at best be a counterparty in any rights he may have against my friend in respect of the relevant assets but not affect my status in respect of the rest of the world, therefore any other. 2 In civil 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 into a duty for the neighbour not to obstruct or to build on the land. How far contractual expansions of proprietary rights are possible remains a matter of discussion, especially in civil law.

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competing creditor for damages in the bankruptcy.3 As we shall see in common law, in equity—given its less clear (but also more practical) thinking in this regard – that may be less obvious in respect of all those who always knew of the interest. In fact, as we shall also see, in a modern world these contractual passage rights may become increasingly enforceable against all who knew of them before they acquired an interest in the property, therefore also in civil law. In such cases, these contractual rights may thus acquire proprietary effect. This may in civil law still be limited to rights of passage, but prior knowledge of other people’s rights may here become a more extended or fundamental concept. This is the essence of equitable proprietary interests in common law and it is seen in this book as a modern way forward also in civil law and an important aspect of transnationalisation of the law of movable property, which allows therefore a degree of party autonomy in the creation of proprietary rights. Hence again the idea in this chapter that we should first look at all user, enjoyment and income rights and only subsequently determine how they progress or to what extent they have progressed to proprietary status in the circumstances. There are here not necessarily fixed notions and there is increasingly flexibility at least in professional dealings, therefore particularly in international finance. In will be argued that in transnational law we are increasingly likely to see here a class of rights in between proprietary and contractual rights. The question remains nevertheless which user, enjoyment and income rights qualify outright as proprietary and which ones remain merely obligatory. So far, there appears to be no underlying scheme or grand idea why certain of these rights became proprietary and others not. It is hard to explain and looks more like historical accident. It must have reflected pressing needs and general perceptions,4 not in essence much different in common and civil law even if they came out quite differently in the details and are very differently expressed.

3 The same is found in principle in rental agreements, although in real estate there is generally an exception. Again, it does not change the basic rule, yet under most modern civil law codes the succeeding owner must respect a rental agreement, even though purely contractual in civil law, see eg s 566 BGB. It was identified earlier as an inroad into the privity of contract, see ch 1, s 1.5.1 above. This is simply a utilitarian issue, not a fundamental change in the notion of proprietary and contractual user rights. If the rental was not so protected, no owner would ever be able to sell rented property as the new owner need not respect contractual rights in the property so that rental beneficiaries may lose their rights and start suing the former owner for performance or damages under the contract, or to put it differently, rental beneficiaries would have to be bought out first. To say the least, this is inconvenient for everyone and would dramatically affect the liquidity of real estate (hence the protection of the rental). Thus the positive law commonly provides otherwise and thereby gives these types of rental agreements some proprietary status so that they can be maintained against succeeding owners (only). It goes even as far as to discharge the erstwhile owner completely whilst his successor automatically succeeds in the rental agreement. It is to be noted in this connection that rental agreements are likely to be estates in land in common law and therefore survive as such any sale of the freehold as proprietary rights. Their status is therefore proprietary unlike normally in civil law. Even in common law, short lets may not qualify as such either. 4 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 on the basis of my

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In more modern times, publicity has often been construed as the reason why some rights can be exerted against the whole world and not others. That is in its generality a doubtful proposition. Rather, publicity sustains proprietary effect but is not the cause of it. It is one thing that those who know of a right in assets must respect it. This is also the underlying idea in equitable proprietary interests and an important further theme in this book as just mentioned, but in the view that publicity underpins all proprietary rights, that knowledge is then imputed to all 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 replaced by a formal concept that lacks any intrinsic value. 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 everywhere, whilst the physical holding of the asset can be misleading as to its ownership—there may be mere holdership or detention.5 It may be recalled in this connection also that before the nineteenth century, there used not to be any publicity in respect of land holdings either but property rights in land clearly 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 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 (actual) knowledge of the interest, is increasingly important in a modern system of protection, this does not suggest publicity itself as the source of proprietary interests, but rather (more negatively) only the protection of all bona fide purchasers who have no actual knowledge of prior contractual interests which they otherwise would have to respect. It can only be repeated that this is indeed an important supporting idea in common law countries in respect of equitable proprietary rights and, it is posited, also an important way forward in civil law, but is not an issue of publicity, rather of actual knowledge or the absence thereof (unless self-induced).

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 a personal one, just like in contract or tort, although in civil law the nature and conditions of the action are still likely to be different. 5 Only in respect of (some non-possessory) security interests in movable assets, there may be some exceptions in view of filing requirements, but 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. Filing of an interest of this nature is generally only a facility that enables other lenders or suppliers extending credit better to know who are ahead of them. Indeed, there is usually no search duties for purchasers of the underlying assets, especially if commodities sold to the public at large. At least within the EU, the Collateral Directive even dispenses with any publicity requirements in respect of the use of investment securities as collateral.

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To repeat, there appears to be no clear underlying concept from which proprietary rights would appear to emerge at least in civil law, and there are therefore in civil law at the formal level traditionally no other proprietary rights than the few just mentioned, even though there is pressure on this system in the manner as just indicated. It is the well-known civil law notion of the numerus clausus of proprietary rights, which, as we shall see, extends in civil law also to the forms in which these rights can be held and exerted: ownership, possession, or detention.6 Rather, property or ownership is an instinctive concept in terms of ‘mine and thine’ easily understood by all, but that basic concept, now often believed to have even a human rights connotation, always created considerable difficulties in the way it was legally expressed. In section 1.3.8 below, some of the more modern functional approaches closely connected with the school of ‘law and economics’ in the US will be discussed in this connection but it is doubtful whether they present a fundamental new insight. In section 1.10, a summary of where we are and may be going will be attempted. In section 1.11, finally, it will be considered what the Draft Common Frame of Reference (DCFR), since 2009 informally proposed as a model for an EU wide codification, makes of modern property law in movable assets, including intangible claims. It is not a forward moving picture. In common law, the distinctions in this respect are less clear cut as already noted. In equity there developed here a middle class between proprietary and contractual user, enjoyment or income rights, which at the same time led to an important degree of party autonomy in proprietary rights’ creation. To repeat, in essence it allowed contractual user, enjoyment and income rights to be maintained against third parties to the extent the latter knew of them when acquiring an interest in the underlying assets (or when acquiring the interest for free). It should, however, be realised that in common law this is not a general intellectual concept or principle either, but in practice there developed in common law countries so-called equitable proprietary rights of this nature in certain areas, especially in trusts and trust-like structures, in the operation of conditional and temporary ownership rights, in the floating charges as modern non-possessory security interests in chattels and intangible assets, and in assignments and modern set-off and netting structures as we shall see. It is less clear whether from here they can be expanded.7 Bona fide 6 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 Feb 1834, s 1.205 (1834), but see for the modern attitude, J Ghestin and B Desche, Traité des Contrats, La Vente (1991) no 612, which makes clear that the transfer of ownership follows from the operation of the law and not of the contract. 7 As already mentioned in ch 1, s 1.3.1, 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 heriditament cannot be created at the will and pleasure of an

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purchasers (payees or other types of participants) are in essence protected, therefore regardless of the nature of the asset class, not as an exception (as they are at law) but as the very essence of the equitable proprietary interest. It means that the ordinary commercial flows are free from such interests, but it is also an issue of finality. These are key elements in this very different approach which will be discussed more fully below in section 1.3.1. At least in these instances, there followed specific performance and bankruptcy protection, a right therefore to pursue these contractual rights in the property against all third party owners who knew of the interest before they acquired the property— the normal attributes of proprietary rights but here effective only against a limited class of third parties (those in the know or sometimes even constructively in the know, the latter in practice mostly limited to professional operators like other banks or suppliers who have ways to enquire).8 It should be repeated in this respect that although some registers may exist for rights so created in these assets, for example floating charges,9 there is usually no search duty for those who deal in the ordinary course of business in the underlying assets and therefore no imputed knowledge in them either. Bona fides remains protected. This is very different, for example, from the operation of land registers, which should therefore be well distinguished. This progression into bankruptcy protection against all insolvents and their (secured) creditors who knew of these user, enjoyment or income rights before they acquired the relevant assets or interests is the real test and makes these rights truly proprietary (creating bankruptcy resistency at the same time). There is not always full clarity in this aspect, however, not even in common law bankruptcy statutes (see s 1.3.6 below), but it must be assumed that at least in formal trusts, conditional and temporary ownership forms, and floating charges there is no doubt. The consequence is that there results a proper duality of ownership and the beneficiaries are thus 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 III, ch 1, s 1.5.2. 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) and Werner v Graham 183 P 945, 947 (1919). Indeed there is a traditional resistance in the US to recognise 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 Harv LR 945 and ‘The Music Goes Round and Round: Equitable Servitudes and Chattels’ (1956) 69 Harv LR 1250. 8 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. Bona fides is then 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. 9 See also n 5 above.

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proprietarily protected against their rights being squandered by trustees or formal owners of the assets, therefore against all who acquired from them full well knowing of the arrangements. The operation of these equitable proprietary rights in this manner has given the common law great flexibility and sophistication, especially valuable in modern finance without creating any great uncertainty. It was already posited that this presents a way forward also in terms of the new lex mercatoria as transnational law in international professional dealings and even in civil law more generally, see Volume I, section 1.1.4. Even now when in modern civil law we sometimes refer to economic ownership, we are likely to refer to contractual user, enjoyment or income rights of this type.10 The foregoing should give us some idea of what is at stake here. It means that in the following we have to consider first the type of assets that may be the object of proprietary or contractual user, enjoyment or income rights. We shall be concerned here mainly with movable property like chattels and intangible claims. Subsequently we shall consider how these rights, especially if proprietary, operate both in civil and common law, the latter including the law of equity. But we shall also increasingly have to consider when these rights, even if merely contractual, may still be enforced against third parties that knew or could be supposed to know of them so that these rights become semi-proprietary or proprietary in certain circumstances. It may be clear from the foregoing that it is in particular the comparative study of the law of equity in common law countries that shows us how the differences between proprietary and contractual user, enjoyment and income rights in assets may narrow. The notion of knowledge in the third party of any of these rights when acquiring the underlying assets but also the requirements of the ordinary course of business, meaning the protection of the commercial and financial flows against these interests, may prove here to be key elements in the further development especially of modern financial law in respect of asset-based funding also in civil law. Indeed, it will be argued that at the intellectual level we may find here the key to approximation between the common and civil law of property at least for movable assets and also a true platform for a transnational approach in international transactions of this nature. In the following, we shall start with a description of the civil law of property as, ever since Roman times, it presents the more intellectual and in that sense the more 10 This has a special importance in finance, see also s 1.1.6 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 of it whilst acquiring the property from the lessor. This then also implies a segregation right against the lessor and all his 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, it suggests that even when the assets are sold by the repo-purchaser, the reclaiming right remains alive in any replacement goods whilst a later bankruptcy may be ignored by the repo-seller. Similarly, in a reservation of title, 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: see in particular the discussion in Vol III, ch 1, Part II.

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conceptual and sophisticated legal approach. The manner in which this chapter 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 an intellectual framework that is not dependent on that of any particular civil law country and allows the law of the different civil law countries to be critiqued and contrasted with this model. 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 systems. It also allows a ready contrast with the common law approach, which has always been more practical and diverse. The civil law of property is in principle unitary and means to cover all types of assets under one proprietary system, which is upon a proper analysis not physical but rights-based and concentrates on abstract or purely legal notions of ownership, possession and holdership of the various recognised proprietary rights (largely ownership, usufructs, certain long leases, security interests, and servitudes), therefore mostly regardless of the type of underlying asset (either immovable or movable property including claims), which are the objects of these rights, although especially in respect of intangible claims, German and now also new Dutch law started to deviate and become again more physical, thus excluding them from the general proprietary regime. This is regressive as we shall see. 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, therefore physical possession (or seisin) of the asset but is incidental in the elaboration of the details. Traditionally, intangibles fit uneasily in this common law approach 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 whilst their transfer is then considered part of respectively 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. It will not be here extensively discussed, but see also section 1.1.4. 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. It is supplemented by an alternative system of proprietary rights in equity in the manner already indicated. Here, but only in its practices, the common law shows the greater sophistication, but it also became product-based and thus allows for quite different attitudes depending on the different use rather than merely the different nature of assets, either in a commercial or a financial setting, clear for example as between trusts and conditional ownership rights (although they are often believed to operate behind a trust as floating charges may also do). This is also borne out in the different Articles of the UCC in the US as will be discussed in much greater detail below. The first Part of this chapter will deal mainly with these issues in both civil and common law. The law concerning these movable assets 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 of this

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chapter 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 III, chapter 1 will deal more extensively with various assets when used in the context of financing or funding and will be product oriented.

1.1.2

Types of Assets. Claims

Chattels are tangible movable assets, like cars, machinery, other equipment, clothes, foodstuffs or utensils, in common law often 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. 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 USA sometimes simply an ‘account’. There are others. Thus a bank has monetary claims on its borrowers for the return of principle and payment of interest. Depositors have monetary claims on their banks. There are of course many more 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.11 Monetary claims and their asset status need here some further attention as there is here 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. That is, however, only the internal aspect, and 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 and as such it can be the object of an ownership right if sufficiently specific. As such, it can then also be defended against the whole world, therefore against all intruders, in principle through the same proprietary or in rem actions (although in many countries protected only in tort). That is the external aspect. All personal or obligatory claims have therefore a proprietary aspect also and may as such be owned, defended and transferred or given as security. 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 a debtor to 11 In most civil law countries, a claim may also be proprietary (or real), like a revindication of property 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 abstract concept. When invoked, these proprietary claims are directed against specific persons or entities also and thus become personal in that sense (like claims for reinstatement or damages for infringement but remain distinct and give more power: they are as we saw 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, however, and are not then claims in the more ordinary sense.

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redirect the interest payments and the ultimate repayment of principal amounting to a similar act of appropriation. Again a personal claim on a debtor is at the same time a piece of property of the creditor who can as such dispose of it (through an assignment) and defend his (property) rights in it against all others in the manner of any other proprietary right. This is a simple insight still giving trouble in many legal systems, however, as we shall see. It may also be pointed out in this connection that modern receivables in order to promote their liquidity are increasingly acquiring an independent status that separates them from the legal relationship out of which they arise and may in this way be obtaining a status that is not then so far removed from the old negotiable instruments. Section 2–210 UCC in the US enshrines this important development, which will be discussed later in section 1.5.3 below and also affects the status and (third-party) effect of any contractual assignment restrictions. The nature of this asset may still mean, however, that the disposal is effected in a different way (through assignment) and may be subject to different formalities, perhaps notification to the debtor and some individualised documentation. It depends on the applicable law of assignment. Also the defence of the proprietary rights in claims may be organised differently, and there are unlikely to be revindication rights or possessory actions as we have in civil law in respect of chattels. Rather, as just mentioned, the normal defence may 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 is, if properly analysed, not physical, can be entirely constructive, and is directed towards control, as we shall see. The fact that in civil law there are normally no possessory proprietary 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, even in civil law, and may still not be complete. It will be more extensively discussed in section 1.5 below. It must be admitted, however, that not all assets are similarly treated in the details of their transfer and protection, even in civil law, although it altogether strives for a unitary proprietary regime for all types of assets, therefore for one unitary regime 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. But there is still a fundamental problem. Although the modern approach is indeed to appreciate the proprietary aspect of claims (in fact of all rights) and thus to see them as assets like any other, it may still be observed, for example, that even newly codified Dutch law presents here only some half-way house and would appear to be confused.12

12 Dutch law in its new Code of 1992 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

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It was clearly influenced by German Pandectist thinking and codified law, which since 1900 in Sections 90 and 903 ff BGB only deals with the idea of ownership in respect of physical assets. It was thought to be closer to the everyday use of the ownership concept and also re-introduced a more physical concept of possession.13 Again, this is regressive as possession, if properly understood, is not a physical concept in civil law. All is a matter of abstract rights and obligations. French law, following the teaching of Gaius, never made that distinction, neither did earlier Dutch law in which things could be tangible (corporeal) or intangible (incorporeal).14 That was also the view of Grotius.15 In civil law, modern legal doctrine is divided on the subject, however,16 it would seem unnecessarily so. It has already been said that traditionally, intangibles also fit uneasily in the common law approach (although for very different reasons) and tend to have their own proprietary regime in which contractual, tort and restitution claims may be further distinguished whilst their transfer is then considered part of respectively the law of contract, tort, or restitution. It is further indication that the notion of an asset as such never received a great deal of attention in common law and in any event does there not substantially figure as an intellectual concept.17 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 in tort only (cf Art 3.125 CC). There is then no bona fide purchaser protection either. 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 abandonment, see Vol III, ch 1, s 1.2.1. 13 See H Dernburg, System des Römischen Rechts, 8th edn (1911) I, 319 (Sokolowski) and Windscheid, Lehrbuch des Pandektenrechts, 9th edn (1906) I, 856 (Kipp). 14 See Gaius, Institutes 2, 12–14, repeated in the Justinian Institutes 2, 2.1–3, but 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. 15 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 L R, Regstydskrif 176. 16 In German law there is, however, a possibility of substituting the delivery requirement by an assignment of the retrieval claim in chattels leading to a transfer of ownership which in Germany does not require notification to or co-operation of the holder: see s 398 BGB. Thus 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). 17 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, however: 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’.

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Intellectual and industrial property rights, like copyrights and patents, also fall into the category of intangible assets. They are also not primarily personal, but rather proprietary, which means that they are protected and transferred like property rights, now often under special statutory laws. Important as they are, we shall not here be greatly concerned with them, although some further attention will be given to them whilst discussing the modern notion of assets more abstractly in section 1.10.2. below. Claims may sometimes be incorporated in documents and are then often treated as chattels. This is so with claims for the retrieval of goods when incorporated in documents of title, like bills of lading or warehouse receipts, which, if issued to bearer or order, are negotiable. Monetary claims or claims for payment may also be incorporated in documents, such as bills of exchange or promissory notes. If issued to bearer or order they are also negotiable and are then usually referred to as negotiable instruments. They are therefore documents of title concerning monetary claims and are then also treated more like chattels. These documents and instruments will be discussed more extensively in Part II of this chapter. A key feature of all of them is that the claims contained in them (to underlying assets or payments) are 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 whilst the protection of bona fide purchasers enhances at the same time the finality of their transfer. 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 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. 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.

1.1.3 Types of Movable Assets and the Requirement of Economic Value and Commerciability. Notions of Identity, Specificity and Definiteness and their Inherent Constraints Chattels or goods and intangibles or claims are in common law together 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

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goods) are also called choses in possession, and intangibles choses in action.18 Both are distinguished from real property or immovable property or realty, which is land and the buildings on it. There may here be some confusion as in common law (like in civil law) there is some movable property that is considered realty, like 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 was already noted, this is fundamentally different in civil law where real actions are proprietary and personal actions are obligatory.19 In common law, chattels real can only be defended in ‘personal actions’ as the proprietary right in them (the seisin) is still considered to be with the owner or lessor. Leases are therefore considered personal property. These are finer points, however, that should not blur the general picture. In both civil and common law, the normal distinction is between land, movable tangible assets, and intangible assets. The difference is that civil law strives towards one unitary proprietary regime for all types of assets, as we saw (even though still having some difficulties with claims), whilst 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 the latter, a further difference may still be maintained in respect of contract, tort and restitution claims.

18

W Blackstone, 2 Commentaries on the Laws of England (1773) 384, 389. 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 Bracton, Woodbine, Yale (eds), De Legibus et Consuetudinibus Regni Angliae (1922) f 102 and Twiss, (ed) (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 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 (Variorum, 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 entirely different emphasis on the type of asset to be defended: land was defended by actions in rem and became as a consequence 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 remained only possible in land law. It highlights an essential point in the common law of chattels 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 it 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. 19

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In order for assets to be the object of proprietary rights in a private law sense, everywhere they must have a certain economical value and, at least in civil law since the nineteenth century, some specificity in the sense that they are at least identifiable. 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.20 The love one feels for someone, even if of the highest value to the lover, cannot legally be owned. It is often said that, in this sense, the most important things in life are free, although in another context one may still defend, for example, one’s honour or good name even if of no direct commercial value. It concerns here highly personal rights. It follows all the same that, whilst claiming damages, purely sentimental values are unlikely to be greatly taken into account. Similarly, the air one breathes is free and cannot as such be owned unless it is captured and set aside. Here one sees the relationship between value and specificity or physical identification. But the latter are in other contexts narrowing notions. They limit bulk transfers and also the transferability of future assets. As such, they are nineteenth-century civil law embellishments that did not in a similar (restrictive) way enter the common law, especially the law of equity. The consequence was the limitation or elimination of non-possessory and especially floating charges in the nineteenth-century civil law. The common law remained here more pragmatic, at least in equity. In modern times, there are also 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 were always subject to proprietary rights. Commerciability 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, these assets do not strictly speaking depend for their recognition, operation and transfer on a statute alone, although it may make it much easier (and clearer). On the other hand, the extent to which these assets should remain freely available is an important and much debated economic (and social) issue.21

20 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. 21 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 in further experimentation and innovation. See for this tension, L Lessig, The Future of Ideas (2001). In modern American 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 Colum LR 257, based on some important earlier economic writings, see the classic contribution of RH Coase, ‘The Problem of Social Costs’ (1960) 3 JL & Econ 1, 2–6 and of H Demsetz, ‘Towards a Theory of Property Rights’ (1967) 57 Am Econ Rev 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 J Legal Stud 331; S Banner, ‘Transitions between Property Regimes’ (2002) 31 J Legal Stud 359; S Levmore ‘Two Stories about the Evolution of Property Rights’ (2002) 31 J Legal Stud 421; HE Smith, ‘Property and Property Rules’ (2004) 79 NYUL Rev 1719; and BM Frischmann, ‘An Economic Theory of Infrastructure and Commons Management’ (2005) 89 Minn L Rev 917.

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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. It is of course quite true that in this connection the extent of the property right and its modalities are also socially co-determined and are not an absolute given in themselves. Crucial as that insight is, it is not here the key element.22 Identification and specificity are important in the sense that they enable us to speak of owning a certain car and not cars generally, even though, as we shall see, legally we refer here to our ownership right in the car as from a legal point of view that is all we have. This right is asserted vis-a-vis others, and not in fact in the car itself although it is exerted in respect of the car. Especially for civil law, it has already been shown that the physical aspects are (in law) traditionally less important except in this aspect of specificity but this was more in particular 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 also saw, although even they can be properly described and identified, often with reference to the debtor.

Demsetz accepted the simple proposition defended in this book that all that has economic value creates and is subject to property rights, especially clear when these economic values increase as they tend to do in modern times in intellectual discoveries and their application, as a fact and as an unavoidable social phenomenon. 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. This happens as a matter of efficient allocation if the benefits of internalisation in 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. It may be noted that in this book, which 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, therefore foremost in terms of the balance between preferred and common creditors but also 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. 22 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 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 any further as they are not essential to the basic concepts here explained. 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, Hart Publishing, 2002), JW Harris, Property and Justice (Oxford, OUP, 1996), earlier (with strong civil law background) AM Honoré, ‘Ownership’ in AG Guest (ed), Oxford Essays in Jurisprudence (Oxford, OUP, 1961) 161, and further J Waldron, The Right to Private Property (Oxford, OUP, 1987). See earlier in the US, WN Hohfeld, Fundamental Legal Conceptions as Applied in Judicial Reasoning (New Haven, Yale UP, 1919), which remains significant, and more recently JE Penner, ‘The Bundle of Rights’ Picture of Property’ (1996) 43 UCLA L Rev 711, and The Idea of Property in Law (Oxford, OUP, 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, OUP, 2002). Much of this common law discussion will be familiar ground for civilian lawyers, who are used to theoretical thought in their more intellectual approach to property rights.

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Indeed, here again, it is not the physicality of the asset but rather the reasonable description possibility that is the key in a modern rights-based system of proprietary rights that is not or no longer constrained by physical notions. Since the nineteenth century, civil law has here nevertheless a problem in that its modern specificity requirements curtailed bulk transfers in respect of both categories of assets (chattels and intangible claims). There is, especially in civil law, also a problem with future chattels or intangibles and the (prospective) ownership in them and its transfer.23 Another observation to make here 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 specificity or at least identification would appear to be some precondition. At least these concepts became connected. This preoccupation with the disposition right in this physical sense is also a typical nineteenth-century concern and is then a problem again often associated with the transfer or disposition of future assets. Even 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), but for a true transfer, it is mostly assumed, they must be sufficiently set aside or identified whilst a transferor must have sufficient rights in them to transfer title or other interests. This still allows, however, for considerable variation in the details. These problems are traditionally clearer in legal systems that still require delivery of the asset for title transfer, like Germany and the Netherlands, though even in these countries this delivery need not be strictly physical either, and can be constructive, but they also emerge in systems that do not require delivery for ownership transfer, like France, Italy and England, where under present 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-based system of proprietary law including disposition notions that could conceivably also be prospective and concern expectancies. As we shall see, these are 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 or limit the rights of other creditors too drastically. It is clear that in the circumstances, 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 23 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 or otherwise transact in respect of them. Although this distinction is common, it may well be asked whether it should truly be material in respect of ownership and transfer of future assets. This line of thinking is not greatly favoured in this book

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after his bankruptcy. We shall see that in security transfers, especially in modern floating charges to back up and secure some indebtedness (where accepted in law, which 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 replacement assets. It means that the lien or charge is allowed validly (and automatically) to shift into these replacements whenever they appear, even after the bankruptcy of the debtor. That was an early achievement of the common law of equity in its tracing and shifting facility, by no means generally followed in civil law countries, where this type of facility (except in Germany) is often thought to need statutory intervention (like now in France, as we shall see in Volume III, chapter 1, section 1.3.1), exactly because remaining physical notions of identification and disposition rights do not easily allow this development under existing general principles of the civil law system whilst there may also be public order constraints. As also already mentioned, closely related is here the possibility of a transfer of assets in bulk, like libraries, inventories, portfolios of receivables and the like. In these cases also, the true issue is whether these assets can be transferred, or better whether they are sufficiently specific to have any owner-, possessor- or user-rights in them transferred in bulk, and how. Must there still be individual delivery? An alternative is to attach at least lists with all individual items, still a clumsy way of proceeding. In the case of (existing) bulk assets, 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 true issue is here 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. 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 operate and be transferred, especially when the assets are not physical, 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, whilst 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.24

24 Thus in the most recent codified system, which is in Europe the Dutch one under its new 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 eg SCJJ Kortmann and NED Faber,

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For the transfer or assignment of future movable assets or bulk transfers or assignments, great differences may thus continue to exist. 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.25

1.1.4 Importance of the Law of Chattels and Intangibles in Civil and Common Law. Its Development besides Land Law As mentioned before, we are concerned in this part of the book 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. It is true that at least in common law, the emphasis in so far as proprietary rights are concerned has traditionally always been on the law of real estate 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 are not major assets. Documents of title and negotiable instruments were mostly commercial law specialties, whilst investment securities were few in number and not widely held. ‘Bepaaldheidsvereiste by cessie en verpanding’ [Specificity requirement for assignments and security transfers of claims] (1998) WPNR 6324, and ‘Een streng bepaaldheidsvereiste: geldend recht of “Wishful Thinking” ’ [A strict specificity requirement: positive law or ‘wishful thinking’] (1999) WPNR 6374. Thus a sufficiently described claim on a certain debtor (even if only future) may probably be the object of ownership and may then 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. 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. 25 In the case of assignments, new Dutch law introduced a notification requirement for their validity. In practice, this ruled out any bulk assignment, although 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 also n 12 above. 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 III, ch 1, ss 1.3.6 and 2.2.4. English and German law were always more flexible, also in this area, as we shall see.

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However, with the enormous increase of wealth in private hands and with the development of the consumer society and credit in which large corporations became active, the total value of tangible movable assets and intangible claims, especially receivables and consumer debt, and of investment securities, has increased many fold. 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. Consequently, the law of property concerning chattels and intangibles has become of much greater importance, including the law of modern financial instruments or legal structures based on these assets. Investment securities, for example, are now most important investment instruments, widely held. One need think further only of the modern non-possessory security interests like floating charges in manufacturing equipment, inventory and receivables, purchase money protection through reservation of title of goods, and of modern financing structures like finance leases, repurchase agreements and factoring that all take chattels or receivables as their base. The law of personal property remains nevertheless little studied in common law and is largely nineteenth-century in its thinking in civil law, a situation that requires urgent reversal. In fact, it is undeniable that in a modern legal environment land law is of relatively little interest, probably even less in international commerce and finance. From an international business law perspective, conflicts of law do not habitually arise in connection with it either, as immovable assets are unlikely to have a great impact outside their own country. 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 some problems arise, mainly concerning the manner, formalities, and moment of transfer of ownership or perfection of the security interests. The lex situs (and not the lex contractus) is generally deemed controlling in these proprietary aspects and cannot (in the common view) be varied by the parties, exactly because of the effect on third parties. It is what it is. 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 of the civil law, comparative analysis is not greatly valuable in the law of immovable assets. In this book, the law of real property is referred to only where it was 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 the future or conditional and temporary ownership interests, which, as we shall see, appear as equitable interests in chattels. The law of chattels and also of intangibles was in common law neglected and mainly developed as part of the commercial law, more particularly in connection with sales of goods and the transfer of ownership in them. In common law countries, this commercial law is in itself, however, no longer a different type of law, as we saw in Volume I, section 1.1.2. Yet it has probably retained a more separate character than in

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civil law. It also covers a broader field, including title and possessory (bailment) notions and related proprietary structures. As noted before, that is uncommon in civil law. Although land law was at one time also feudal on the European Continent, the law of chattels and intangibles was not affected. In fact, the feudal features of land law 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 as further developed even though with some additional rules per type of asset, especially intangible assets as we saw. It became the system of the modern civil law codifications. New elements were the modern land registration facilities, which made for a number of important changes in the area of transfer of ownership and the creation of other rights especially mortgages in immovables. For personal property there followed increased emphasis on identification and specificity impeding transfers in bulk and especially transfers of future assets as also noted before. For chattels there followed on the other hand also the extensive protection of bona fide purchasers, whilst the modern law of assignments was a new addition for intangibles. In common law, the situation is still very different. It was already said that there are different proprietary regimes for each type of assets, different therefore for land, chattels and intangibles, whilst intangible claims for this purpose may be further divided 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 was already abolished in 1660, earlier therefore than in most other parts of Europe. Thus, in England, the feudal concepts continued in land law as a historical accident and land law is as a consequence still based 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. Much earlier, the notion of seisin or physical possession had allowed private rights in land to develop based, however, on its occupation and use. 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 (like the fee simple, the life interests, and the estate for years or leasehold) and the conditional or future interests, like the reversionary interests and remainders (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 again the notion of seisin became the starting point, but it allowed a proper ownership notion to develop in chattels, although ownership remained in many

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respects the weaker right as we shall see.26 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 the ownership concept. It is supplemented in equity by conditional and temporary ownership rights as well as trust structures all borrowed from land law as we saw. For intangibles, there was no such basic notion 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 became equitable and therefore subject to the protection of the bona fide purchaser of the legal interests, just as they now are for chattels. The old law still applies under state law in the USA (except in Louisiana). It is of some amusement that ancient European feudal land concepts of land law, not even existing any longer in England, may still be and are sometimes litigated in the US. 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 USA, 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 USA. It is a further indication of the absence of any unitary law of property in these countries.

1.1.5 The Traditional Physical and Anthropomorphic Approach to Property Rights. Modern Developments Whatever the progress in the modern law of property may have been, it has everywhere retained important physical and anthropomorphic aspects, depending therefore on features human beings can see and physically handle. This is not now a

26 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. It apparently came to England via the Low Countries in the sixth and seventh centuries, when the earlier Roman law completely disappeared. It also prevailed in France (‘saisine’), even for chattels, at least until the later reintroduction of Roman ideas through the reception of Roman law. See also FW Maitland, ‘The Seisin of Chattels’ (1885) 1 LQR 324 and ‘The Mystery of the Seisin’ (1886) 2 LQR 481.

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good perspective as we shall see over again (cf also section 1.2.3 below) and has retarded the development of a more modern property law, but it is not unnatural.27 The physical flavour of property law is particularly clear in common law, at law, for our purposes thus particularly in the law of chattels, where physical possession or bailment remains the dominant title. Our continuing difficulties with assignments of claims and the transfer of future assets are a particular reminder of this more primitive state of affairs, which has not escaped modern civil law either. Although in civil law the notion of possession is not truly physical, the consequences of a physical approach are nevertheless still apparent in: (a) a strict specificity and identification requirements for assets to be capable of being owned and transferred which impedes notably the bulk transfer or assignment, (b) the requirement of sufficient disposition rights in assets, which is then (often) related to (a form of) personal capacity believed incapable of irrevocable surrender in respect of assets that are future, (c) the concept of delivery as mainly a physical act (again which the ensuing difficulties in the transfer of future assets and intangibles). Even though civil law allowed legal (constructive) notions of possession and delivery to develop, they remain a constant source of confusion and debate, (d) the problems connected with the proprietary notions in respect of intangible assets, and (e) the types of proprietary rights that are commonly accepted and the problems especially with beneficial, conditional and temporary ownership rights. This is the result of anthropomorphic thinking. 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, and (b) in the protection of the bona fide purchaser or the purchaser in the ordinary course of business.28 In common law countries, at least in equity in terms of future and temporary interests and beneficial ownership rights, the law of property, including the law relating to

27 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 individuals (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-a-vis others. It easily leads to an absolute notion of ownership. Again in such an environment, there is also little room for monetary or other claims as economic valuables or of property as a more abstract concept like ownership of future assets or entitlements. 28 It was already noted that in equity in common law jurisdictions, this protection is not necessarily based on physical possession, see further ss 1.2.2 and 1.4.8–1.4.9 below, but then follows rather from the very structure of the equitable rights which are only protected if the sucessor of the legal interest had no prior knowledge of the equitable interests.

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chattels and intangible assets, became on the other hand increasingly less physical or anthropomorphic and as a consequence more flexible as reflected in the equitable proprietary rights. Also the law of assignments was able to develop further 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 of an agent acting in his 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 civil law by, civil law is especially deficient in these areas. Yet in other areas like in the notions of seisin and strong protection of physical possession (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 (except again in equity to protect against unknown equitable interests), 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. Modern companies as major legal (unphysical) actors and dealings amongst professionals as legal entities especially in modern financial dealings and products, underline the need and possibility of a more practical legal approach even if clothed in a more intellectual (but also more radical) framework or model that is meant to help and support and that finds in this manner the ways to do so. This will be explored further, particularly in section 1.10 at the level of transnationalisation.

1.1.6

The Effect of Financial Law and the Need for New Financial Structures

The requirements of modern financial law are now making further demands on the system of property rights concerning movable assets, especially in civil law (see also Volume I, section 3.2.2). Structures long developed in common law through equity can hardly be dispensed with on the European Continent. It is the thesis of this book that this is becoming particularly clear in the professional dealings of a financial nature at the international level, which are becoming the centre of modern commercial law or the new lex mercatoria that must be perceived as an expression of a new transnational legal order, therefore separate from the traditional domestic laws in this regards. This process of transnationalisation was substantially the subject of Volume I. This new transnational law thus functions as a particular potent conduit for these newer proprietary rights and structures, which derive from international practice. As such, it was submitted, their status is to be respected also in domestic laws, even in domestic bankruptcies as a matter of transnational customary law or practice or more appropriately as the application of the modern lex mercatoria in international professional dealings.

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Property law becomes here an important risk management tool and moves to the heart of financial structuring, especially in asset-backed financing of all kinds. It depends on 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 to bona fide purchaser and payee protection and finality in the ordinary course of business. This is 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 III, chapter 1 and follows substantially the law of equity in common law terms. The notion of a dynamic law of movable property is here at the heart of new developments and transnationalisation of private law in the professional sphere, see for a summary also Volume I, section 1.1.4. Because of these modern demands and pressures everywhere, the modern law of property may start lacking simplicity in its intellectual base. This is particularly relevant for the civil law which was always more intellectual and unitary. At this juncture, it may no longer be capable of retaining a unitary approach, at least not in finance amongst professionals, not even domestically. It has already been noted in this connection that, whilst on the one hand asset classes are less distinguished (monetary claims in particular being increasingly included), 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. To maintain the semblance of a unitary approach may even now create considerable stress particularly in civil law countries, as the new Dutch Civil Code has shown which is particularly weak in its approach to security interests (notably floating charges), newer interests as conditional and temporary ownership rights, bulk transfers, and assignments and substitution possibilities involving future assets and agency notions. In the USA, on the other hand, the UCC does not aspire to a systematic approach and maintains quite different proprietary systems for sales, equipment leases, payments, investment securities and secured transactions, as we shall see. It would seem that modern property law in respect of chattels and intangible assets is on the one hand up against the haphazard way in which especially in common law it was put together 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. It appears difficult to cut through this by devising a coherent new intellectual framework or model. 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 properly understood and explained. Because of a lack of insight in this state of affairs over the last fifty years, the general or formal law of property has not moved a great deal in either common or civil law. Unnecessarily so, it would appear, and there hangs a veil of intellectual impotence and practical foreboding over proprietary law in both the civil and common law, especially in respect of movable property, even if more so in the former. This is the reason why property law is now often ignored at the academic level and few students show any mastery in the subject, which nevertheless remains of the greatest importance. Even if there are ups and downs in the modern international financial industry, it is now so

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crucial for all, that it is bound to expand further and will continue to find new ways which the law will have to support, proprietarily especially in ever newer forms of asset-backed funding. In this situation, in the US under the UCC the practical response has been simply to ignore property law as a general structure and reach for ad hoc solutions. This is clear from Article 2A on equipment leases, Article 4A on payment transfers, Article 8 on security entitlements, and Article 9 on secured transactions.29 In the meantime, in civil law, in the law of contract, the infusion of good faith and reliance principles has removed to some extent a subjective anthropomorphic attitude in business transactions and replaced it with a more objective a-physical/apsychological normative approach at least in modern contract theory—it was the subject of chapter 1, above—leading at the same time potentially to a much more dynamic concept of contracting, but a similar development has not so far been discerned in property law. This is not to suggest that good faith notions should be introduced in property law in a similar manner, although they have at least a function in the way property rights are exercised and in the protection of bona fide purchasers. Yet greater flexibility and imagination in the further development of proprietary rights will be necessary, in which connection it was posited above 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, is likely to show greater promise and a better way forward. This was discussed and summarised earlier inVolume I, section 1.1.4. as being at the heart of a dynamic modern lex mercatoria, modern contract theory serving a similar purpose in modern contract law, see also chapter 1, section 1.1.4 above. Indeed, a more normative approach would appear necessary also in property law in order to facilitate its further development in response to modern needs.30 In finance, further dynamism arises in this connection from the nature of the financial 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 assets and the types of these assets themselves which to a large extent are immaterial.31 As just mentioned,

29

cf JH Sommer, ‘A Law of Financial Accounts: Modern Payment and Securities Transfer Law’ (1998) 53 The Business Lawyer 1181. 30 Putting emphasis on the nature of the particular proprietary right as intangible right and on how it is exercised certainly 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 makes it perhaps also 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. 31 That is not to say that the type of asset should fully lose its importance. The nature of assets remains important, eg in floating charges in respect of equipment, inventory and receivables. It remains also 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.

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particular illustrations of this trend may be found in the US in the creation of security entitlements in Article 8 (see section 8–503 and the Official Comment) and equipment lease interests of lessor and lessee in Article 2A UCC (see ss 2A-301 and 307). It was said in Volume I, section 1.1.1, that in not responding properly, civil law is marginalising itself in international finance because it leaves too much legal risk on the table. No less important is in this connection the increasing impact of party autonomy on property law and its indirect redistributive effect. In recent times, that impact has become unexpectedly apparent in private international law where the transfer regime concerning assignments and book-entry entitlements for securities is now often left to the parties’ contractual choice of law. In this respect, reference may be made to the interpretation of Article 13 of the 2008 EU Regulation on the Law Applicable to Contractual Obligations, see also section 1.9.3 below,32 and to Article 4.1 of the 2002 Hague Convention on the Law Applicable to Certain Rights in Respect of Securities held with an Intermediary, see 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. 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. In modern finance, we see the resulting developments of the finance sales notion (with its conditional or temporary transfer) in leases, repos and in some forms of recourse receivable financing. Trust structures or constructive trusts play also an ever larger role as in floating charges do the notion of tracing and shifting liens in replacement goods. Duality of ownership, split ownership rights, and rights in bulk or in future assets are all around us.

These are trends that have indeed 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 system should be protected regardless of the type of asset, be they chattels or claims (and not only in equity). 32 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 132(1) and (2) of the 1980 Rome Convention on the Law Applicable to Contractual Obligations), now Art 13 of the 2008 EU Regulation in 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 below.

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Comparative Law, Transnationalisation, and the DCFR

It has already been said that immovable property is mostly not of great interest in comparative law. In the area of updating movable property law, comparative law analysis is also not determining, even if the common law approach to equitable proprietary rights may be of help, see further section 1.3.7 below. This updating was identified earlier as a question rather of legally capturing the requirements of a dynamic forward moving process of financial innovation. Social and cultural differences are here not of great importance either, although they may 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. 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 knowledge of prior interests before assets are acquired and subject to a better bona fide purchaser protection, has on its face the disadvantage of greater instability, but it must be asked whether the stability the old regime suggests is not dysfunctional and therefore the greater risk management liability. Any danger in terms of finality or certainty in that sense would in any event be assuaged by bona fide purchaser protection or protection of the ordinary course of business rather replacing an outright and outdated limitation of the proprietary rights in the more traditional civil law sense. Another more sophisticated form of stability would thus be created and has long worked in common law. It is posited that this insight allows in fact for a quite simple extension of the traditional notion of proprietary rights and is even now the underlying idea in equity. It would suggest that although a modern proprietary system may become more product specific, it is not without some underlying coherent ideas in terms of: (a) the expanded reach of contractual user, enjoyment and income rights based on prior knowledge in those who acquire an interest in the underlying assets, (b) the resulting increasing role of party autonomy in the creation of such more diverse rights that originate in contract but acquire proprietary protection in this manner, and (c) the protection of the ordinary course of business or the commercial and financial flows, which also enhances transactional finality. It has already been repeatedly suggested in this book that stability in a modern sense, therefore in a dynamic legal environment, whether in contract or movable property, must at least in professional dealings foremost come from the participants, their discipline, and the way they commonly handle risk and structure their deals. It must therefore foremost come from the structures they create themselves and from the manner in which they use them and want the ordinary course of business to be protected, subject to proper financial regulation or other public order requirements if necessary, assuming that financial regulators have here the proper insights. In this area, there is no normativity beyond it. The law ultimately is there to serve the interests of the participants in this process unless there are clear public order

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reasons why it should be otherwise. 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. In Volume I, section 3.2.2, it was shown that these modern international financial developments and insights may indeed lead to the development of transnational proprietary rights in the modern lex mercatoria, supported by progressing transnational custom and industry practice. It may be spotted in the development of the modern eurobond and the trading, clearing and settlement practices in this type of financial product and the manner in which it is now held (as security entitlement in a dematerialised manner). 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 in which context notions of physical possession or control may even be reinforced. Ownership of drilling rigs on the high sea, and similar installations off-shore served as example. It may also be noted in the development of the eurobond as transnational negotiable instrument. Further sophistication may require a more intellectual elaboration, which could conceivably come from treaty law.33 This has the great disadvantage, however, of territorial confinement to Contracting States and of bureaucratic compromise and rigidity for the future. In the meantime, true refinement may continue to depend more on financial structuring and academic thought and writing showing the future trends and better ways at the transnational level. What is in fact needed is a development that suggest a flexibility in proprietary matters, again not unlike the one in equity in common law that came quite naturally out of daily practice and need. In our example, it may allow, for example, for non-possessory security interests in off-shore rigs or eurobonds or similar assets maintainable against all who know of it, can easily find out, or have been warned, especially other banks. It may then also allow for future interests and trust-like structures, rights in future assets that shift into replacements, tracing notions etc. In the EU, some of this is already now supported by the Collateral Directive, see section 3.2.4 below, even if the implemetation in domestic civil law and their systems has created great problems for obvious reasons. Again, section 1.10 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 discussed in section 1.11, but it is first necessary to engage in a more profound comparative study in both civil and common law attitudes 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 sites has left us.

33 The 2002 Hague Convention on the Law Applicable to Certain Rights in respect of Securities held with and Intermediary may spring to mind but it is only a conflict of laws convention

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1.2 1.2.1

The Types of Proprietary Rights in Civil Law

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 much more recent. This 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. This occurred after an initial period in which, on the European Continent, property law often accepted for land feudal notions (like in England) and notions of seisin or gewere (physical holding) for persons in possession, which notions were then also used for chattels. The 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. But as already mentioned before, on the European Continent, this approach was gradually abandoned in favour of the reception of Roman law, eventually even for land, and 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, codifications had already been enacted 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 this approach somewhat, especially in the perception of the concept of possession, (illogically returning to a more physical notion, as we shall see). There developed at the same time a more fundamental understanding of the difference between proprietary and obligatory right, also called rights in rem and rights in personam, to which some reference was already made in section 1.1.3 above. This terminology had also much earlier affected the common law as we saw, but not in its fundamental meaning. The 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) like the rights derived from contract to receive an asset or payment or some other performance in terms of user, enjoyment or income rights in respect of certain assets, or damage claims derived from the commission of a tort, or unjust enrichment claims.34 They can only be enforced against the counterparty, grantor, transferor or debtor (that is their internal aspect), 34 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 R Feenstra, n 19 above and G Pugliese, ‘Diritti Reali’ in Enciclopedia del Diritto (Milan, 1964) XIV, 755 ff. The distinction was only articulated in the later ius commune: see the work of Hahn in Germany in the seventeenth century, see n 42 below, particularly following the natural law school of Grotius and adopted in the German nineteenth-century Pandectist school. Grotius in De Iure Belli ac Pacis, II, 3,19, 2 clearly started to distinguish dominium and creditum. In his Inleidinge (Introduction to

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although, as we already saw also, in terms of them being an asset of the creditor, and therefore an object of value, these rights can also be defended against all the world and transferred in a manner to be respected by all. As such they are property, 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 which was already 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 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. It is freely transferable with the land that it serves or can be given as security or in usufruct with it. 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 withdrawn 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, but in view of the attached obligations probably not without consent of the owner of the land over which the right of way is organised. However, even now, in more modern civil law as we already saw, one may see on occasion some important albeit incidental approximation and it may be 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 right at the time of their purchase. This was earlier identified as a key development which tracks that in 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 saw in section 1.1.1 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 open up the system of proprietary rights to some extent in certain circumstances like here in respect of (contractual) rights of way. In common law, this is all easier.35 More importantly, in the law of equity, as noted, knowledge of beneficial rights in designated assets under specific legal structures, like 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 amongst the real or proprietary rights the limited proprietary rights or iura in re aliena. 35 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 (like licences to pass), see in England, Tulk v Moxhay (1848) 2 Ph 774 and its aftermath, and those that run with goods (like leases in aircraft): see Bristol Airport Plc v Powdrill [1990] Ch 774, see also S Gleeson, Personal Property Law (1997) 21. It is clear that such covenants when known to a buyer cannot be ignored, certainly if

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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.36 We shall come across other instances below where, due to practical considerations, the civil law proprietary system allows other proprietary rights to appear. This is particularly so in the area of security interests where new non-possessory securities were created in Germany through contract and case law. As already mentioned before, it is also true in the area of conditional sales and proprietary rights used in financing (finance sales or reservation of title), where there arise, however, at the theoretical level still considerable problems in civil law and it remains often unclear how the duality in ownership which thus follows needs to be handled. 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 he 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 their Special Manner of Protection in Civil Law. The Numerus Clausus Notion 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 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 their object. 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 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 plan and are meant, eg to maintain the residential nature of the development, when there may also be deemed to be constructive notice. They are especially enforced as such in the USA. Even in chattels, covenants that restrict their resale have long been upheld in France, see Cour de Cass, 20 Apr 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 Jan 1899, D.1.535 (1900); 23 Mar 1903, D.1.337 (1903); and 18 Mar 1903, D.1.126 (1905). The defendant need not have had knowledge of the original covenant, but in the case of chattels his bona fides means that he is considered full owner and need not return the asset. 36 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 but 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 ch 1, s 1.5.1 above on privity of contract.

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more limited proprietary rights in tangible assets. Thus we say that we have a usufruct or a security interest in a car, the added reason being that these are rights in the property of others (iura in re aliena). All the same, proprietary rights are often thought to be rights in things as opposed to obligatory rights which are then thought to be rights against persons even though these obligatory rights could also be rights to (acquire) a thing (iura ad rem). Hence also the confusion that we own a car but not a claim. It was already 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). They therefore imply rights that must be respected other than by the person from whom the relevant assets were obtained, therefore even without there being any special legal relationship with the parties in question (until someone violates the proprietary right). Obligatory rights in respect of assets like contractual user, enjoyment and income rights can on the other hand only be maintained against a specific counterparty usually the transferor (unless in a more modern system we allow them to operate also against all successors who knew or ought to have known of them, reminding us of the equitable proprietary rights in common law countries, as we have already seen). Again, to speak of rights in an asset is in this connection legally meaningless and confusing. It always concerns rights against others in respect of assets as object of those rights. Ordinary speech is here better left to one side. Legally, we should always think of having rights against other legal or natural persons, either against a specific one, against specific classes of them (as in ‘equity’ in common law countries), or against all of them, whether or not these rights concern assets, and whether or not in the case of assets they concern tangibles or intangible assets like monetary claims. Thus 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 concepts are equally intangible, a question of legal ordering. That applies also to possession which, at least in civil law terms, is not tangible per se either. It may be often wholly constructive. For intangibles, like receivables, the connection of the ownership right with the object is in any event less obvious. This should not disturb us either as it should now be clear that this connection is, at least in civil law if properly considered, legally largely irrelevant. What is more important is that the intangible nature of the underlying asset seems to make the protection of the rights in or to them more complicated in the minds of some as there are no clear indices or obvious manifestations of ownership or possession in these assets. This problem was already traced above in German and Dutch law.37 Yet again, in civil law, ownership (as the expression of the relevant proprietary right to an asset as we shall see), possession (as the expression of the will or intent to hold the relevant proprietary right for oneself), 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

37

See text at nn 12 and 13 above.

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element, although as was demonstrated in section 1.1.5 above, there remain also strong remnants of a more physical approach in civil law, but the protections or defences given in connection with each of these notions do not 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 the protection of bona fide purchasers in possession, as we have also seen in section 1.1.5 above). 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 one may have in an asset (like ownership, usufruct or security interest, etc), rather than the physical element itself. This is in general terms different in common law as we shall see. Again, the civil law approach is here fundamentally more intellectual and abstract. 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, like ownership, usufruct, servitudes, some long leases, security interests etc, and subsequently in terms of ownership, possession or holdership 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. It was already said that more modern non-possessory security interests crept in, especially in Germany and in the Netherlands, but the civil law of property still largely ignores in this connection especially conditional or temporary property rights. They could and are indeed opening up the whole system, even in civil law, particularly in terms of finance sales and reservation of title in respect of movable property. They may therefore be increasingly maintained against professional insiders, now also in civil law, subject always to the protection of the ordinary commercial and financial flows in respect of outsiders who may thus still acquire the assets free and clear off such interests (if bona fide or buying them in the ordinary course of business, at least for chattels, but it remains problematic for intangibles). This was earlier identified as the modern direction and trend even in civil law. The essence is nevertheless to appreciate that in the traditional civil law system there are only certain underlying proprietary rights and equally only certain forms of expression and protection of these rights. In this matrix, we have the ownership right as the most absolute right to an asset whether tangible or intangible but also the ownership expression of it (or the assertion of the right itself), as we have for other proprietary rights, like usufructs, servitudes and security interests. In civil law, these proprietary rights may, however, also be expressed through possession (defined here as the will to hold the right for oneself as if one were the owner) or holdership (defined here as the will to hold for another, subject to own user right), giving rise to different protections or actions in each case. It should be obvious by now that we should not be thrown off by the fact that the underlying assets may be intangible. It should be clear that in this system, the holdership of a proprietary right itself may be the consequence of the transfer of a mere contractual user, enjoyment or income

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right in the underlying assets, for example in an intangible share portfolio. Thus the owner of a usufruct may by contract transfer some income right thereunder to another. As a consequence, the beneficiary becomes the holder of the usufruct for that purpose. It allows him a contractual action against the grantor but the key is here that there is also proprietary protection against any other, even if in many civil law countries that holdership protection would still have to be invoked by the possessor rather than by the holder (but not in Germany, as we shall see). It was already said 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 right. In this sense, one can be the owner of an ownership right as long as it is understood that we use here two different notions: the 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 here of the ownership of a usufruct right or security interest. Instead of the ownership right we may here also refer to ‘title’. So we own, possess or hold (for another) title. In civil law, the legal transfer is often through or completed by delivery of possession, which in this system 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 through the physical handing over of the asset but the delivery of possession may in this sense also be purely constructive (non-physical) when a declaration may suffice, for example when assets are and remain under third parties (the traditio longa manu). In some countries, like 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 shall see. Even holdership can in this system be non-physical, as there may be subholders. All is thus expressed as a question of rights (and obligations) and not in physical terms. That is the key. In civil law, it is therefore correct to view ownership of an asset in terms of ownership of a right, in fact of the fullest right in respect of the asset. In this approach, it is not at all impossible to view ownership in property as a bundle of intangible proprietary rights that may be subdivided in the limited proprietary rights like 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. But in traditional civil law, the composition of this bundle of rights is pre-ordained and parties may (in principle) not split off proprietary rights at random. Nor can they manifest these rights in any other than the three manners indicated except by making them merely contractual. To repeat, in this approach, 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 that the object 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.

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Thus in civil law, the transfer of the intangible ownership rights in chattels is not through assignment as it is in the case of intangible assets.38 There may also still be some delivery requirement but they are not necessarily physical either and could be wholly constructive even for chattels as we saw. Delivery may, for intangible assets, be completed with the assignment itself, although it is not uncommon to find that there is a further formal requirement being 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 also suggests a form of publicity which, however, mere notification to a debtor hardly is in practice. In any event, it was already said in section 1.1.1 above that publicity itself does not create proprietary rights. As to other differences, bona fide purchasers of (proprietary rights) in chattels are (mostly) considered the full owners, but a similar rule does not (as yet) exist for intangible assets even if commoditised (and also not for land where land registers 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 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 would be through the conclusion of the transfer agreement only. This is now Belgian law.39

1.2.3 The Traditional Proprietary Rights in Civil Law and the Way They are Held. 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. Derived therefrom are a 38

See for Germany, however, also n 16 above. As we shall see, 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, whilst 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. 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 USA 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 section 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. 39

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number of limited proprietary rights like usufructs, in some countries certain forms of long leases, easements or servitudes like rights of way—the latter two being normally only in real estate—and security interests, like mortgages in land and pledges or more modern non-possessory security interests in chattels and intangibles. These derivative rights automatically reintegrate into the ownership right upon the end of their term, which ownership right thus becomes full again whilst the (then) owner reacquires his full rights without any additional transfer requirements.40 In this system, the younger (proprietary) interest holders naturally take subject to the older (who can defend against the whole world including any juniors). 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. In this way, it is possible to have an ownership right, a usufruct and a security interest in the usufruct, all in the same asset at the same time but for different interest holders.41 In this system, which was as we saw first empirically identified in the Ius Commune,42 it remains, however, a debated issue in 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) of these assets may also be considered proprietary rights.43 Unlike the approach of the old Austrian and former Dutch Civil Codes in the case of possession,44 it is 40

This is often 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 existence. Again, they operate independently besides the ownership right in that sense and vis-a-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 may also follow 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 like France and Italy 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 further required, even though this delivery (of possession in the civil law abstract sense) may only be constructive, see s 1.4.2 below. 41 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 is possible, also of a security interest if the underlying claim it ensures is subject to the usufruct. 42 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 R Feenstra, nn 18 and 34 above. 43 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 in its system. 44 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

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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) may manifest themselves and are protected. As already mentioned above in section 1.2.2 above, it is in this connection necessary also 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 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 this ownership’s notion’s appearance or shadow (the intention to hold an asset for oneself as owner). Ownership and legal possession of a proprietary right in this sense usually go together and are normally not distinct, but may still give rise two different options of defending the proprietary right of which they are the expression or manifestation, either therefore through ownership (revindication) or possessory actions as we shall see. Thus 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 whilst in civil law there can only be one owner of a right, there can be more possessors. 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). However, he can only become a possessor besides the true owner of the ownership right, who remains possessor also. Even if the (involuntary) loss of control in the owner technically weakens his possession, it does not do so in a legal sense and he will also keep his possessory remedies. It is a prime example of possession not needing to be physical at all. Holdership on the other hand presents a split. The holder does not mean to hold for himself but rather for someone else (the owner/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. It is true that German law at the theoretical level presents here now 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 Jhering45 and quite contrary to the Roman law tradition, Section 854(1) BGB was 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. 45 Der Besitzwille (Jena, 1889) 212. See for a resonance in the Netherlands, n 57 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 needs also protection.

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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.46 Possession is here cast in terms of control (corpus),47 still seen, however, as something physical. Again, this was a backwards step and does not clarify. Yet the concept of legal possession was not abandoned: see section 872 BGB.48

In typical nineteenth-century fashion, the protection of possession had earlier been tied (in Germany) to the mere will to possess (Besitzwille or animus possedendi, see also text at n 55 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 ch 1, n 23 above. It is an important issue and relies on the prima facie state of affairs connected with a purely physical idea of possession but does 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 one self, this is not necessarily always a concession to nineteenth-century will theories. It may in truth be a more objective concept, but it should also be considered that when modern German law and the DCFR refer to control instead, this appears a more objective wording but is in fact not different because this control is then still perceived to depend on the state of mind of the possessor, all the more so when the terms ‘direct’ and ‘indirect’ are also used in this context. 46 It speaks in Art 8–1:205 of possession as being directly or indirectly physical. This 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 1.1.5 above, in the sense that the physical possessor is primarily protected until someone pretends a better right. The DCFR uses here the term ‘mere possession’ which is truly the factual physical possession, Art VIII-6:202., and allows even a form of self-help on the basis of physical appearances, although even then confusion enters when the self-help is also given to protect against a detentor, see Art VIII:6:202(3). 47 The Roman corpus requirement was never meant to be considered purely literally and thus physically. 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 and old Germanic position—hence the beginning of the confusion. But in Gaius 4.153 the position was already clarified, and this was followed by the Justinian Institutes 4.15.5. The possibility to exercise control was indeed always the key 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 control) than the ownership right itself which was likely to be more abstract and dependent on showing acquisitive prescription.Another aspect of the protection of possession was the fact, already mentioned, 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. 48 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

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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 on abstract concepts.49 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. 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 retrieval right is created in the buyer (the constitutum possessorium of section 930), or where the asset is in the hand 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 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 as we shall see. The 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. In equity, on the other hand, the types of proprietary interest that may be created, at least in chattels and intangible assets, are limitless. It may well be that the main structures themselves like 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,50 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. Rather than limiting the number of proprietary rights, equity instead limits here 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 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, like respectively in the case of usufructs and rental agreements. 49

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, OUP, 2006) 64. Here the owner is thought to be free to do with the property as pleases him 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), be it that the holder usually benefits from a contractual user right and has the position of holder only during an agreed period. 50 As already mentioned in s 1.1.1 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 7 above, but together these three structures may cover virtually every contractual configuration.

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created freely by contract (in equity), but the corollary is better protection for bona fide purchasers, even in respect of assets other than chattels. It may go as far as the protection of the ordinary course of business and of finality in that context, in that case regardless therefore of any bona fides. It was already said before 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).51 Although the notion of ownership is universal and even considered a human right, it must be accepted that at least at the more theoretical level, common and civil law still present great differences in the manner proprietary rights are handled and expressed. Even where the terms are the same, like 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 and which hardly allows of multiple possessors of the same asset (as civil law is used to). 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 still that of the common law (although notably not in equity). A middle course seems hardly possible as the faint-hearted German approach demonstrated earlier, even though the DFCR clearly opts for this German system without questioning it. It is hardly conceivable that it could ever be introduced in England. The role and meaning of possession also reappears at the transnational level, at least in the initial phase of transnationalisation of the law in this area.52 51 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. 52 See also s 1.1.7 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. In this connection Vol I, s 1.1.1 may also be recalled, where it was stated that ‘Indeed, a more diverse and fractured system of proprietary rights, well known in the law of equity in common law countries, is evolving at domestic as well as international levels everywhere, therefore with different proprietary notions for different areas of the law or for different (financial) products. This may concern the transfer of title in goods or investment securities, modern forms of (electronic) payment, securities entitlements and their transfer, the treatment of conditional and temporary ownership rights, of finance leases and repurchase agreements, the (bulk) assignment of payment obligations especially in the context of floating charges, receivable financing and securitisations, the development of security interests in the form of non-possessory floating charges, the notion of agency, the evolution of fiduciary duties, and the important principle of segregation of assets in formal or resulting or constructive trusts and the facility of tracing. Indeed, one recognises here the pull of the law of equity in a common law sense where, because civil law did not have this facility, in private law the greatest differences between common and civil law resulted.’

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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.

1.2.4 The Way Proprietary Rights are Protected in Civil Law: Constructive Possession and Holdership As we saw 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 to hold the proprietary right in an asset for oneself as if one were the owner. This is also the position of the thief but one can also hold a right of another for one self in a bona fide manner, for example pursuant to a void sales agreement. Then there is the holdership by third parties: the will to hold the proprietary right for someone else subject to one’s own user right. This is the situation in rental agreements, but holdership may also result from the limited proprietary rights, like a usufruct or pledge. The beneficiary holds these limited rights for himself (therefore as owner and possessor of those rights) but in relation to the residual title owner, the beneficiary is a holder of the latter’s residual proprietary right. In the case of a usufruct, the owner remains the legal owner and possessor of the (ownership right in the) asset, but again only in respect of his residual ownership rights till the end of the usufruct. All proprietary rights (in respect of the relevant asset), including full ownership or title, thus appear in civil law in three ways: the assertion of the proprietary right itself, also called the assertion of the ownership of that right. Then there are the possession and holdership of that 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 at least for the assertion of the ownership right. That is the revindicatio of Roman law and is tied to acquisitive prescription providing the proof of ownership, see for this concept, section 1.2.5 below. Possession means the assertion of control (or corpus in that sense) of the relevant proprietary right in the asset as we saw53 with the intent to hold it as owner (the animus domini)54 or, better perhaps, asserting the underlying proprietary right in the asset as if one were the owner of that right. In the case of the usufruct, long lease, 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, 53

See n 47 above. It is the combination of corpus and animus in this sense that held the key, see D.41.2.3.1 (Paulus), see for the view of Von Jhering with his emphasis on corpus, n 45 above. 54

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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.55 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, which rights are assets of the creditor, therefore the object of 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, whilst these rights are then only protected in tort. Naturally, possession is here never physical, as legally it never needs to be in civil law, as we saw. It is all to repeat that, in a proprietary sense, obligatory rights are assets and therefore always have a proprietary aspect (and protection) at the same time. Proprietary rights are in that sense not assets themselves although they can be transferred. This is somewhat counter-intuitive but it could be said that proprietary rights derive their value here exactly from the fact that they present the only manner in which, for example, ownership in assets (of whatever sort, including claims) can be changed. From this perspective, asset status only arises legally when claims are formulated under them, for example in respect of damages claimed for infringement or in claims for repossession. It is to be noted in this connection that such claims are not then any longer proprietary but (in civil law terms) in personam,56 except that they still give a reclaiming right against a bankrupt defendant, allowing the claimant to operate (in principle) quite separate from the bankruptcy. 55 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: s 1.2.5 at n 59 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 in the nature of tort actions. In later times, it became the possessor as 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 good, 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 much greater emphasis on the proprietary action or revindicatio: see ss 985 ff BGB. The advantage is that it awards permanent protection as opposed to the temporary protection of the possessory action based on the 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 right to it. When ownership and possession in this sense are not in the same hand (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, as possession is always subject to the better right of the lawful owner and/or older possessor. 56

See also what was said on this subject in n 11 above.

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In civil law, at least in the case of tangible property, proprietary rights can be factually transferred to others temporarily. They are the holders or detentors, who normally will be handed the asset (mostly physically, although there may also be sub-holders). But this is so only according to a special relationship with the possessor, who does thereby not lose his legal possession. This is the situation in the case of a warehouse or custody arrangement or a borrowing or hire-purchase agreement with the owner. It may be clearer to say, however, that the holder then holds the proprietary right to the asset subject to own user rights, which are not themselves proprietary even though they may as valuable assets still be transferable (as contractual rights through assignment) and protected in a proprietary manner against third parties (but in contract against the grantors). Another aspect is that where there is, for example, a usufruct, the beneficiary has the asset as owner/possessor of the usufruct, but is holder at the same time for the owner/possessor in respect of the ownership right. As this holdership need not be physical either, it could also exist in respect of intangible 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 the asset 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 an own position vis-a-vis third parties that they may be able to defend. They do not normally do so through an own type of action, but only in tort, yet in countries like Germany in the case of chattels they may defend themselves in a possessory manner, subject always to the better rights of the owner and legal possessor and borrow in this sense the possessory action. 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.57 This makes a great deal of sense. 57

In the Netherlands, especially by HCF Schoordijk, ‘Enige opmerkingen over de bescherming van bezitters en houders [Some observations on the protection of possessors and holders] 1984’ in Assembled Works (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) Tijdschrift voor Privaatrecht, Notariaat en Fiscaalrecht III, 161. The only protection he proposed was that of the better right, much in the English tradition: see later also JC van Oven, De bezitsbescherming en hare functies [The protection of possession and its functions] (Diss, Amsterdam, 1905) 199 ff. 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 protection. 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 also on possession or user rights. Its protection was considered a basic natural right, although in De Iure Belli ac Pacis II.2 and 3, Grotius emphasised the common nature of

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Holdership in this sense can only be disturbed if the holder subsequently manifests the desire to hold as owner (or as beneficiary of a limited proprietary right) for himself, thereby acquiring the animus possedendi. The result is two legal possessors, of which the older has the stronger right.58 Again, in this system there can only be one real owner, but there could be more than one possessor and even more than one holder of the same right to an asset if one also keeps the possibility of sub-letting 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 proprietary right. It means first that they are not founded in the law of obligations (tort), but in the law of property itself and should be clearly distinguished, although at the practical level in most civil law countries the holder/detentor (except in Germany) and the owner of a claim normally only 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 the 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 he acquired from a thief (or his successor). It does also not affect any beneficiary of acquisitive prescription. Again, 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) to be so defended, its absolute nature must be established. This is done through reliance on acquisitive prescription in which the notion of legal possession plays a crucial role, see further the next section. The legal possessor, on the other hand, only asserts his better right, compare 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, either directly as a requirement of the transfer of title through delivery of (legal) possession of the asset, or indirectly, as in the case of chattels, in countries like France and Italy, through the conclusion of the sales agreement, see more particularly section 1.4.2 below. In civil law, the transfer of property and 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). 58 It could be argued, however, that the first possessor having only constructive possession thus loses it and therefore also his position as a possessor even though he will retain 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.

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ownership may of course also result from bona fide purchases in the case of chattels or from acquisitive prescription for all types of assets. 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, possession itself not having been transferred. It may also result from invalid transfer agreements when ownership proper is not passed. Interestingly, in Germany, legal possession of chattels not in the physical possession of the owner may pass through assignment of the retrieval right (s 870 BGB). It might suggest that in Germany possession itself is in truth a proprietary right. Transfer of holdership on the other hand results from contracts meaning to establish it, like rental agreements, but the protection subsequently against third parties remains a proprietary issue. The consequence of this civil law system is, as we saw, 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 to the possessor. The legal holder is in most civil law countries not protected in a similar manner, has mostly only a tort action and in the meantime depends on the owner or legal possessor of the underlying proprietary right if the asset has reached third parties, whom the legal holder could not reach in tort. Again it is important to appreciate that the holder, whilst losing the asset involuntarily, thereby does not lose his status as legal holder or its connected protections. 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 physical holder 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; whilst (b) any acquisitive prescription running in favour of the legal possessor is not interrupted either unless legal possession is voluntarily surrendered. Again, in Germany, similar protection exists for the holder in respect of subholders, thieves or finders and their holders, but there is no acquisitive prescription for the holder or Fremdbesitzer either, unless he changes his position to legal possessor or Eigenbesitzer. This is just like in other civil law countries.

1.2.5 The Acquisitive Prescription and its Importance in Civil Law. Difference with the Protection of Bona Fide Purchasers In civil law, the acquisitive prescription is of prime importance as it allows any owner to prove his proprietary right in an absolute, exclusive or ownership manner, which is the basis of his protection as owner of the right, as such the pivot of the entire system. This protection is afforded through the revindicatio. Ultimately it relies therefore on this acquisitive prescription to mark the owner out as the sole title holder. In that

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sense, ownership of each proprietary right is exclusive and there can only be one owner of a proprietary right. It results from bona fide legal possession, which in this context acquires a central place and may as such still be entirely constructive. The acquisitive prescription function, connected with legal possession, derives in civil law from the notion that in the end the law will always follow the appearance of the right. This applies to all proprietary rights but still assumes that 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 for oneself whilst 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 much sooner). That may 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 did openly demonstrate 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 at least openly deny the right of the original owner and underscore the desire to hold for himself. To keep the asset hidden might not then be enough.59 We already saw in the previous section that ownership, usufructs, easements or servitudes, and security interests may all be defended on the basis of legal possession of these rights (on showing the better claim in this regard), but also 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. 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 must be assumed that there is also a possibility of acquisitive prescription if this possession 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. In the case of tangible movable assets, the acquisitive prescription is now mostly attached to three years of bona fide possession in the civil law sense and 30 years for intangibles and immovables (10 years for all bona fide acquisitions of other assets under the new Dutch CC, Art 3.99). In Germany it is 10 years under section 937(1) BGB, which only applies, however, to chattels. In principle, under civil law acquisitive prescription 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, again, made all the easier as this bona fides is usually presumed,60 and (d) has fulfilled the required number of years. The bona fide transferee does not need to have 59 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 also n 93 below. 60 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

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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, again as long as he is not aware of any such defects in his purchase. Again, here is clearly no need for physical possession in this system. The bona fide possessio 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 or any lack of disposition rights in him. That is the general rule. It is true that under modern civil law, in most countries, in the case of chattels (only), the bona fide acquisition is now immediate—this is the province of the bona fide purchaser—but it is different. It commonly requires physical possession and mostly only applies in the case of an unknown lack of disposition rights in the seller, see also section 1.4.8 below. Thus the contract of transfer itself needs to have been valid as should be the act of delivery. What concern us then are any defects earlier in the chain of ownership of which the buyer is not aware, provided he himself has at least a valid contract (which assumes capacity and legality), paid good value and (in most countries) obtained physical possession. In countries like Germany, invalidity of the contract itself does not inhibit the transfer per se, which is seen as a separate legal act (dingliche Einigung) so that the bona fide purchaser protection may play here a lesser role as we shall also see below in section 1.4.7. In France, on the other hand, the acquisition 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.61 This immediate acquisition notwithstanding, it is often expressed as an acquisitive prescription of nil years. Because of its more limited scope, in Germany and in the Netherlands under modern law, this bona fide purchaser protection is rather seen as another way in which property is instantly acquired. As we shall see, the immediate protection of bona fide acquisition of chattels in this manner came in order to protect the ordinary flow of goods and derived from the practices in the commercial centres of Italy and the Netherlands, but 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, as an alternative to acquisitive prescription (which, unlike in France for chattels, was mostly not instantaneous) but only in the case of the acquisition of chattels assuming further that there was physical possession.62 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. 61 Normally, if advertised (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. 62 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, but was otherwise difficult to invoke.

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It may be of interest to note here that acquisitive prescription in this sense is no common law facility, which limits itself to statutes of limitation and some bona fide purchaser protection, notably in the sale of goods, see further section 1.3.5 below.

1.2.6

Civil Law Proprietary Defences in Bankruptcy

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, but the situation may be more varied. In bankruptcy, the general concept in civil law is that the debtor is liable with his entire estate for all his debts (see Art 2093 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 was always about ranking, not about equality, not in civil law either. This is often still advocated but has always been a misconception, see more particularly Volume III, chapter 1, section 1.1.1. An important distinction need to be made here. Proprietary rights in principle allow the creditor to claim his proprietary right in whatever asset 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. In principle, he 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. There is no ownership, see also D41.3.33 (last sentence). These were at the same time impediments of the possessory action, the actio Publiciana: see D.6.2.7.16–17. In most cases, the acquisitive prescription t 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, however, 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 not against his successors in interest. The owner would also have the actio furti which was a tort action later 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 on its function became 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 remains still important in civil law as we saw when an absolute rather than a better right has to be proven in ownership claims.

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will then share equally with all other creditors in his 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 USA 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, therefore, to older proprietary interests, so that judgment liens have a low rank. Judgment liens of this nature remain exceptional, however. 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. In civil law, only in Germany do mere attachments yield priority giving rise to attachment liens in the attached assets (see ss 804, 867 and 930 of the German CCP 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. The preference for the attaching creditor, which cannot be created after a bankruptcy has been initiated, is, however, also low as it must yield to older proprietary interests including security interests. This attachment lien is also accepted in many states of the USA. 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 or liens. 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. This 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 whilst extending credit to him. However, this notion of apparent ownership, which may give mere creditors preferential rights, is being substantially weakened in modern law, see especially Volume III, chapter 1, 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.

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Repossession is an important protection and expression of a proprietary right. It suggests that the bankrupt has no proprietary rights in the assets. However, the third party might have no more than a security interest. In that case he may have to wait under applicable law till a default or bankruptcy before he can repossess. Even then he might find that there are older security interest holders who take priority. The reason for a proprietary interest might be entirely different. The owner might have given the bankrupt earlier a particular limited proprietary right, like a usufruct or servitude. 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. The bankrupt may also have been given a contractual user right by the owner making him a holder for the owner (eg, I lent my bicycle to my friend for him to use). Although not being a proprietary right proper, this contractual right may also still have value for the estate. The estate as holder may then continue to use it till the end of the term (subject to repudiation rights of contracts by the bankruptcy trustee, important when the estate must pay for the use which may no longer be valuable). As we shall see, common law distinguishes here less clearly. Not only does it not have a limitation of (equitable) proprietary rights, their definition and impact are also less clear. This may make a difference 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, and the owner’s position is thus weak, also in a bankruptcy of the bailee, unless he may construe a right to immediate repossession which may derive from the contract itself that might reserve this facility explicitly should a bankruptcy intervene.63 Under civil law, in such cases, the owner will in principle use his proprietary action (revindicatio) to retrieve the asset subject to any proprietary or contractual user rights 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 (but always subject to the owner’s ultimate right). If there were personal rights of the bankrupt in the property, like 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. This may give rise to damages claims for lost revenue even upon a return of the asset, which are, however, only competing non-secured claims.. In the meantime the bankruptcy trustee can hold on to his holdership. In common law on the other hand, 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 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 63 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.

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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.64 Perhaps the interest of the seller in the sold but unpaid asset may be characterised here as a constructive trust and as such give an extra recovery right.

1.2.7 The Civil Law Relativity or Priority Principle in Respect of Proprietary Rights: The Difference with 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 or title and the others (like usufructs, some long leases, servitudes and security interests) operate as derivative or limited proprietary rights in the assets of others. 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,65 are relative vis-a-vis each other. This follows exactly 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 absolute 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 always 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 physical possession may still be a protection in the case of chattels, whilst acquisitive prescription will ultimately extinguish any defects). There are two consequences: first the owner of a proprietary right, who did not voluntarily cede it, can normally pursue this right in the asset wherever it is against whomever else pretends to be the owner of that right, or however the latter acquired it. Second, there is the just-mentioned principle of relativity or priority, in that in principle the older owner of proprietary right of whatever type is always the better, as it can be maintained against any younger proprietary pretences of whatever nature in the same asset, therefore including a younger ownership claim (if not backed up by bona fide acquisition in the case of chattels or in respect of all assets by acquisitive prescription). In the case of security interests this results in a priority or preference in an execution for the owner of the older security right. The terms droit de suite and droit de préférence were used in this connection above in section 1.1.1 to explain the typical consequences of property rights. 64

See n 94 below. See for the modern social orientations and impact in the exercise of proprietary rights, n 22 above. Important as they are, they are not here further considered. 65

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In this connection the maxim ‘prior tempore potior iure’ (‘first in time first in right’) is often used, very clear 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.66 It is sometimes said67 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 important here to establish the ownership vis-a-vis third parties. It suggests one ownership type between the original parties and a different one vis-a-vis others, so that there results a duality or relativity of the ownership concept. This view is now 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, whilst before this moment the first buyer has everything and the second buyer nothing. We will revert to this in the context of the discussion of double sales in section 1.4.2 below. The UK Sale of Goods Act 1979 has here as a heading above section 16 referring to the ‘[t]ransfer of property between seller and buyer’. This is meaningless as between two parties such rights are always contractual. Proprietary status only arises in connection with third parties, here primarily the creditors of sellers and buyers in the question to whose estate the asset sold 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,

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In civil law, the older possessory right may be defeated in favour of a younger with physical possession if it can 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 possession may 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, 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. 67 See eg still U Drobnig, ‘Transfer of Property’ in A Hartkamp et al (eds), Towards a European Civil Code (1994) 353.

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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 the whole world and the personal rights are relative as they work only against the debtor.

1.3

1.3.1

The Types of Proprietary Rights in Common Law: The Practical Differences with Civil Law. Modern Functional Theories

Legal and Equitable Interests in Chattels

We must now contrast the common law of personal property, first of chattels, with the civil law approach, as explained above, and then decide what differences there are in practice and evaluate any approximation which there is, or may be, between the two systems. Here equitable proprietary interests were earlier identified as holding the middle ground. That may have its effect especially in any transnationalisation of proprietary notions within the modern lex mercatoria: see for this also Volume I, sections 1.1.4 and 3.2.2 and section 1.1.7 above. For the rest, for movable property, especially chattels, the main difference was already found to be in the notion of possession. In section 1.1.4 above it was said 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 looses its value promptly, and turns over quickly is another reason why traditionally in common law it has not inspired much comprehensive legal thought. In any event, common law, being practitioners’ law, is interested in solutions rather than in concepts, and has never looked for a coherent system of legal rules for chattels and intangibles. 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, of consumer holdings and investment securities, is very considerable as already noted in section 1.1.4 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, not in common law either. It has also already been said that, 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. 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). Even then,

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this 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 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. Thus in common law there is for chattels and intangibles no 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. Common law differentiates here according to the nature of the asset. There are as a consequence very substantial differences between the proprietary aspects of real estate, chattels and intangibles and within chattels between different products or structures like 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 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. Although modern common law writers use the distinction between rights in re which are proprietary and rights ad re or in personam which are obligatory as a useful tool to express concepts which in one form or another must also exist in common law,68 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 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. As we saw earlier,69 Roman law had here also 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 based 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 a system, the distinction between proprietary rights and obligatory rights can develop and even become fundamental. That did not happen in common law.70

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What was on the other hand a typical common law feature was the emergence of equity as an 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 like 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 made beneficiaries with some proprietary protection, but only in equity, which offered less than full proprietary status. Yet it protected against custodians 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 this protection, ways were nevertheless found to strengthen them under the new name of ‘trusts’. Both, the trust and other rights like future interests as developed at law in land law, were later introduced into the law of chattels also. They were then all considered equitable even if they did not operate behind a trust. Ultimately, as was shown above, floating charges provided a third area where equity law became of great facilitating importance in the area of property law.71 Equity in this sense, although based on the King’s conscience (through his Chancellor in the Court of Chancery, in England, now the Chancery Division of the High Court) at first offered only incidental protection. It subsequently developed a limited set of rules in certain areas, like 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. But as explained in Volume I , section 1.3.1, equity is not a system that allows for 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.72 That is certainly also reflected in equity. 71 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 truly the accepted underlying general principle and the law of equity is here more static and limits itself to specific situations, see more particularly n 7 and accompanying text above. 72 Nevertheless in the protection of equitable interests in chattels and intangibles, the common law generally protects bona fide purchasers of assets held in trust or subject to hidden adverse equitable interests (like equitable charges or conditional or temporary ownership rights). 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 was already observed before that where bona fide purchaser protection is exceptional at law (as it is in civil 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.

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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). Unlike in civil law, possession of chattels is in common law a proprietary right governed by the law of bailment (which is sometimes seen, however, as a particular form of possession of a temporary and voluntary nature only). It is often stronger than the ownership right itself, at least when the owner has voluntarily parted with physical possession. It means that at law there are no limited proprietary rights at all in chattels. Thus even though these assets can be pledged, 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. 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 right. Security interests are here proprietary because they are possessory, not separate proprietary rights. It follows that there is no place for non-possessory security interests or charges which depended for their evolution on equity (hence the equitable floating charge). Thus equity developed equitable interests in chattels, which in civil law terminology could be more properly considered examples of limited proprietary interests. Indeed, in a trust, common law allows the power over the asset to be legally separated from the economic interests, but equitable rights need not operate behind a trust only. In equity, different interests in time may operate side by side, like equitable interests for years and 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 all concern user, enjoyment or income rights, therefore economic interests in these assets. It is true, as mentioned before, that equity concentrates here largely on three clusters: trust and trust-like structures including tracing, conditional and temporary ownership rights, and floating charges, but 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 the importance of the contractual aspect or party autonomy in proprietary matters in common law 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—another fundamental difference with civil law. The 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, notably against successors in the legal interests who had knowledge of the equitable ones or did not acquire the assets for value. These beneficial interests may therefore not be defended against the whole world, but only

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against certain successors in interest (and the trustees themselves). Nevertheless there is here clearly third-party effect and only bona fide purchasers (for value) are protected against them. The result is in civil law terms a largely open system of proprietary rights in equity. In fact, proprietary rights similar to those in land were in equity explicitly allowed to operate also in chattels, like the trust and future estates and, in a later development, also the floating charge. In intangible assets, on the other hand, like 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, however. The concept of trusts and future interests in chattels will be discussed in section 1.6 below and floating charges in Volume III, chapter 1, section 1.5.2. Here we are first concerned with the main outline of the law of chattels in common law.

1.3.2

Ownership and Possession of Chattels in Common Law

It was pointed out in the previous section that whilst 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, whilst technically it never developed for private parties in land under the feudal system of land holdings (which only knows tenure or estates)73 and had (at law) no meaning for intangible assets at all. For chattels, the common law emphasis is on possession in a physical sense, 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 one self as owner (the animus domini or possedendi). As we saw, it assumes some form of control of the underlying asset (the corpus) but not necessarily physical holding. Indeed, possession in this civil law sense will often be constructive and is, as we saw, in essence the manifestation of all proprietary rights and as such an important basis for their protection, and leads (if in good faith) also to acquisitive prescription, in turn the easiest way to prove and defend full ownership (of proprietary rights) as absolute right. As a consequence, it is usually combined with ownership of the relevant proprietary right, whilst the asset itself may be with a mere holder (of that right). The civil law notion of possession is thus in essence conceptual, the normal sequel and shadow of ownership (of the relevant proprietary right) and in truth quite ingenious 73 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 19 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 saw in s 1.2.3 above.

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but not easy to capture in its relationship to ownership, which is close. In common law, on the other hand, ownership and possession are simpler concepts and must be seen as quite separate proprietary rights, at least when physical possession is separated from ownership, as it is in the case of bailment. Thus possession is here not the mere manifestation of an underlying proprietary right but is itself 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. They are indeed the most common forms of bailment or possession in this sense, although there are forms of custody that are sometimes not considered bailment, for example when representatives, employees or servants handle the owner’s goods. In those cases, a form of constructive possession (for the owner) emerges even in common law.74 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. Bailment thus results from a voluntary split between ownership and possession on the part of the owner and has therefore normally 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 should be realised 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 a valid contract (for example, in the case of custody without consideration). Bailment may be usefully compared to a delivery of assets in trust: see also section 1.6.4 below. From this analogy, there may derive some special (fiduciary) duties of the bailee which are more clearly formulated in common law than those of a holder vis-a-vis the owner/possessor in civil law. Nevertheless, in all cases where under a contract possession in this sense is transferred, the contractual rights so created for the beneficiary acquire in civil law terminology proprietary effect and protection under bailment, which in common law terms suggests an opening up of the proprietary system, even at law, although as we shall see shortly, 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 has often 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 property right in replevin)75 which may therefore lead to another form of constructive possession in common law, but is probably better characterised as a mere retrieval right. 74 In civil law there would be no possession in this case at all as the possession would be imputed to the principal. 75 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 or if 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

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Normally the bailee has therefore the better defence position and will also act against third parties, even if he is not liable to the bailor for the loss of or damage to the asset within his duties of care.76 The bailor can only act in respect of third parties at the end of the bailment or when he acquires a right to immediate repossession. It is true, however, that the position of the owner in modern common law is here gradually reinforced. There is in England also a concept of ‘constructive delivery’ in cases in which possession must be delivered. That is no longer important for the sale of goods in England, which is now the subject of statutory law that does no longer insist on delivery, but it remains necessary for gifts and bailments, including the creation of a pledge. Delivery of constructive possession is in those cases relevant 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.77 In the previous section it was already explained 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 derives here its status solely from being physical. As just mentioned, it has no contractual basis either, even if a contract is at the origin of the bailment. When in common law it is further stated 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 the other the possessory title, which is often as good if not better, although other authors use the term ‘title’ only in connection with ownership.78

the nature of a tort action, true revindication rights in England existing merely in connection with real estate, whilst 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 III, ch 1, n 254. for the situation in conditional sales before the UCC. 76

See Sir Richard Henn Collins in The Winkfield [1900–03] All ER 346 in 1902, confirming much older law: ‘[a]s between the bailee and a stranger, possession gives title—and that is not a limited interest, but absolute and complete ownership’. 77 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 III, ch 1, s 1.5.2. 78 The common law terminology is not stable in this connection. R Goode, Commercial Law, 3rd edn, (2004) 42, gives both the owner and possessor a title. S Gleeson, Personal Property Law (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 Mr Gleeson, distinguish between the two.

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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 equally a mere retrieval right (in tort) which may also exist against third parties unaware of the original dispossession and who obtained the assets lawfully.79 Even if defended on the basis of a better possessory right, it should always be borne in mind 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 side on equitable title, it is possible to be brief. As we saw, in the common law of personal property, limited or derivative 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 indivisible as we saw. 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. Other examples are future interests like (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).80 These equitable interests are interests freely created by the parties (or unilaterally by a settlor in trust)81 and protected 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. They can therefore only be maintained in respect of some classes of third parties, especially those who knew of the arrangement or acquired the underlying asset for free. It was already said above that this is a trade off

79 See Clayton v Le Roy [1911] 2 KB 1031, and earlier Lord Mansfield in Cooper v Chitty 1 Burr 20 KB (1756). 80 See also S Worthington, Proprietary Interests in Commercial Transactions (1996). 81 Earlier it was explained that they mainly surface in the area of trusts (including constructive and resulting trusts and tracing), conditional and temporary ownership rights, and in floating charges. It is unclear whether new ones may be created all the time, see n 7 above, although the floating charge was created more recently in case law, see Vol II, ch 1, 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.

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and allows the common law system to accept an unlimited number of equitable proprietary rights whilst limiting their effect to those third parties that know of them. No delivery of possession is necessary for this protection of the bona fide purchaser.82 Even if it remains with the beneficiary, the bona fide purchaser has good ownership title, although the bailment could have warned him, thus affecting his bona fides in the first place. 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. It is a general principle of equitable protection, all the more interesting as at law there is only exceptionally such a bona fide purchaser protection and is then mainly derived from statute, as in the already mentioned case of the sale of goods: see also 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 be said that, strictly speaking, in common law, the protection of equitable interests in this manner is itself not proprietary, but rather based on the bad faith of the buyer of the legal interests and on the beneficiary’s (tort) action to protect his interest. 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 in particular Volume III, chapter 1, section 1.5.2. Where it is believed that the equitable interest is in truth nothing more than the splitting off of an economic interest in the asset, which interest became in this manner protected, it may increasingly 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 is possible to assume in such cases that in the intervening bankruptcy of the seller, the buyer is protected in a proprietary manner. This would 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 before. We have also seen above in section 1.1.1 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 82 Importantly, under equitable proprietary rights possessory rights need not be transferred at all. If they are, they may at the same time superimpose a bailment. The example given before was when a beneficiary obtains the use and enjoyment of certain physical assets put in trust. This will give the beneficiaries additional protection.

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servitude. Again this is very similar to equitable protection of such a right (in common law terms) and makes 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. 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. 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 1.1.1 that that is in the nature of a proprietary right 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 will substantially depend on the situation. The prior situation may be restored especially 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 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 contractual. This is bankruptcy resistency, in civil law indeed considered a key proprietary issue. As far as these equitable interests go, it is therefore best to consider the relationship between both parties (the legal and equitable owners), and therefore also between their creditors, as fixed and 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 system, already briefly mentioned above, 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 of the civil law (but not of the Roman law) approach 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 old Germanic or Saxon approach 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 saw. Even in land, they became almost as strong as ownership rights, which in the feudal system in land remained, strictly speaking, vested in the Crown. In the common law of personal

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property, where the ownership notion could have developed independently and did, it continued to emphasise, however, the overriding importance of physical possession and its protection at the expense of a more abstract ownership notion. In common law, this possessory protection is traditionally obtained through the old actions in trespass, detinue, conversion, trover or replevin. Although these actions are tort actions, they are quite 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 the 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 at law either. As such there are no revindicatory actions; they exist only in land law. Moreover, 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 here discretion 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 and may even be stronger in equity. To repeat, in this system, anyone who has voluntarily surrendered possession of chattels, including the owner, is in a weak position. Thus an owner who allows possession to slip in his asset by surrendering it to a custodian, hire-purchaser or a pledgee as security—all forms of bailment—will no longer have proprietary protection against them as the owner has lost possession and cannot rely on his ownership for a similar protection instead. He has in principle only an action under his contract with the bailee and hardly any other possibility of reaching the transferee/bailee or anyone who obtains possession voluntarily or steals from the latter. Although it is a generic term, the concept of bailment does not necessarily operate here in a completely identical fashion in the various situations in which it arises. Nevertheless, it leaves in all instances the owner or bailor in a weak position. Thus in the bankruptcy of the bailee, the bailor cannot simply rely on his ownership right and retrieve the asset (subject to any payments for shortened use, as would most likely be the civil law approach), but the bailment must be unwound first in the bankruptcy. 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. Only at the end of the bailment when the bailor obtains a right to immediate repossession,83 which he may also acquire during the bailment when its essential terms 83 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.

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are violated by the bailee, may the bailor have the possibility of defending his rights against third parties directly himself. Here the underlying contract may exceptionally cut the bailment short, which operates otherwise 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 or his transferees. Constructive trust notions might still help him here too but his 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 whilst 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 possession (which problem may be further aggravated for any lack of segregation). Again, for chattels, the emphasis in common law is in first instance on physical possession, more than in civil law, which looks in the first place at ownership or otherwise at possession in the more theoretical civil law sense of control. Whilst 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.84 There is therefore no absolute or fullest right and ownership itself is easily undermined through bailments. In civil law physical possession by third parties may also lead to strong rights but this requires good faith as to the existence of the true owner. That is the difference. One may also say that whilst in civil law there is only one owner whilst there may be many possessors, in common law there may be many owners who rank according to the strength of their ownership rights but there is likely to be only one possessor. To repeat, this may 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 he has the more effective protection.85 It has, however, also a weak feature in that once the physical holding of the asset is lost, it is at an end, although, if involuntarily so, 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 needs not be the will to

See for the right to immediate repossession upon the voidness of the transfer in a sale contract induced by fraud in the USA, Moore Equipment Co v Halferty 980 SW 2d 578 (1998). See for the traditional lack of protection of bona fide purchasers in that case n 167 below, now corrected by statutory intervention. 84 See R Goode, Commercial Law, 3rd edn (2004) 31 ff and AP Bell, Modern Law of Personal Property (1989) ch 4. 85 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 (1961) 69 and further Bell, n 84 above, ch 3.

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hold for oneself as if one were the owner, therefore it needs not be the animus domini or possedendi in a civil law sense. It is purely physical. Consequently, the following picture results. 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. Being the best, it is indefeasible, which means that it can survive someone else taking physical possession; P’s title is possession or bailment.86 It is subordinate to that of O, whose right during the time of the bailment is, however, protected only in contract, 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, whilst both must accept that O has the best right, even if he cannot reclaim his asset from P or any other possessor except on contractual grounds. Being indefeasible, O’s right acquires, in civil law terms, some absolute features, however, but without possession (if voluntarily surrendered) it is difficult to defend against third parties including the bailee or his thief. In this system, the thief T of P is possessor (but not a bailee proper, 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.87 That is also the position of the happy finder F of an asset of which it is clear and admitted that 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 (older) possessory rights. Only, under modern statutory law in England,88 any possessors following T or F may 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, therefore do not invoke their ownership. In civil law, it would always be possible and indeed normal for any defendant to invoke the owner’s right as a defence against anyone else claiming such ownership.89 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 in common law there is here now some approximation.90

86 See also n 75 above, although the proprietary protection of the bailor was subsequently enhanced at least when he has a right to immediate repossession: see n 83 above and accompanying text. 87 Already since 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. 88 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 66 above). 89 See s 1.2.7 above. 90 On the other hand, modern civil law is not always insensitive to the relativity concept, so much part of common law, either, as we already saw in s 1.2.7 above.

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1.3.5 Constructive Possession in Common Law. The Absence of Acquisitive Prescription. Statutes of Limitation We already saw 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 an action for recovery. It was already said that, in these cases, it may be better not to use the term ‘constructive possession’ at all as it concerns here only the ability to sue for the recovery of possession. There are some other cases. Thus under UK insolvency law, the lessee remains the possessor vis-a-vis the lessor even if the assets have been transferred to a sublessee, at least for purposes of any stay of proceedings, which thus also affects a head lessee without actual possession.91 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. 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 prescribe like anywhere else (tort actions mostly in six years and others after 30 years), but that is different from the concept of acquisitive prescription by a bona fide acquirer.92 In civil law, it 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).

91

Re Atlantic Computer Systems Plc [1990] BCC 859. 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) now 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 Limitations Act 1980, at least in land law the right of the original owner 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 considered a factual matter. It means a form of control that need not always be physical but usually will 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 ECHR in Strasbourg in decision of 15 November 2005, (app no 44302/02), found, however, that this system of adverse possession leads to a form of expropriation rendering the UK government 92

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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, but it is still the rule in the USA, subject to the parties’ right to agree otherwise. Delivery is still relevant for gifts or bailment, and then always means physical possession (see section 2–401(2) UCC) whilst 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 also 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 or equitable interest holders vis-a-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. 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 as 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 even though he is not paid.93 liable for compensation. The adverse possession facility was thought 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 extinction of title in that context was not so far contentious. 93 G Lightman and G Moss, The Law of Receivers of Companies (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. R Goode, Commercial Law, 3rd edn (2004) 390 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 American view. Yet when there are no clear security interests or charges proper, the retrieval possibility upon bankruptcy of the physical possessor may be in doubt. In any event, in the USA, under Art 9 UCC, reservations of title are now treated as

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As for bailment being part of a bankrupt estate, Section 436 of the UK Insolvency Act 1986, whilst defining the bankrupt’s property, does not mention his possessory interests. Neither are 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 respected94 also in a bankruptcy of the legal owner or bailee.95 Thus it may have to be considered not only how ownership but also equitable interests impact on a bailment in a bankruptcy of the bailee. It was already noted before in this connection that 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,96 but nevertheless where they operate, their status in bankurptcy of a counterparty must be considered. It is only to demonstrate that, as common law itself does not present a clear-cut system of proprietary and contractual rights, in bankruptcy the situation is likely to be less transparent than in civil law, until in civil law contractual user and enjoyment rights also become more widely protected, at least against successors in the title who knew of them. Indeed, in common law, it is a consequence of the openness of the proprietary system in equity. But 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 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). 94 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 (1996) 187 ff, 206 and 217. S 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 USA, 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 seems to cover possession 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. The position of the trustee in bankruptcy is reinforced in the USA 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 USA also ch 1, s 2.1.10 above, and n 166 below. 95 In the USA, the position of the trustee under modern bankruptcy law has been reinforced, as he has been given the position and status of a bona fide purchaser (s 544 (a)(3) but only in respect of real estate), so that he is protected against equitable interests and retrieval rights in his (possessory) title of which he could not know. 96 See n 7 above.

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rights to the user, enjoyment and income 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 thus be seen that common law is generally more generous in the proprietary protection of rights of beneficiaries, either through the equitable ownership notions or through bailment. It creates conflicts as between various interest holders and limits at the same time 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 remains on the whole less clear.

1.3.7 Practical Differences between the Common and Civil Law Approaches to Proprietary Rights in Chattels What are the practical differences that results 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 out of proprietary rights. When the latter, their defence is more complete and also manifests itself in the position of succeeding owners and in the bankruptcy of counterparties. That is the right to pursue or droit de suite and the right of preference or droit de préférence, proprietary notions or consequences both known in civil and common law, although more fundamental in the former. If emerging out of proprietary rights these so protected user, enjoyment and income rights are limited in number in civil law, exactly because of these benefits. That is different in common law, at least in its equity variant, which, instead of limiting the proprietary rights, cuts off their effect at the level of the bona fide purchaser, but there are other differences between the civil and common law in the approach to proprietary rights. Altogether they may be summarised in: (a) the emphasis at first on physical possession in common law that led to tenure or the estates in land, but also the development of bailment at the expense of ownership rights in chattels, whilst at law proprietary rights in intangible assets could hardly develop at all; (b) the open nature of the proprietary system in common law made possible by the proprietary protection of the equitable interests that may virtually be freely created subject to the protection of bona fide transferees or the ordinary commercial and financial flows;

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(c) the defence of proprietary rights in common law through tort actions (rather than proprietary actions) based on the relative strength of the proprietary, possessory or equitable rights rather than on absolute rights; and (d) the lack of specific performance in common law: even 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. Finally, (e) there are different approaches to the transfer of proprietary rights and bona fide purchaser protection, see more particularly section 1.4 below, which also affects assignments, see section 1.5 below. The most immediate practical difference is in the relatively weak position of the owner in the common law of chattels when he loses his possession voluntarily. It leaves him with limited powers to recover the asset, the bailee being henceforth in the driver’s seat. The main consequences may be seen in situations where: (a) 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. The first effect 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 straight forward, which also 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 practices 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 here clearer but introduction into civil law of similar equitable rights leading to an opening of the proprietary system will undoubtedly create similar problems to overcome in civil law bankruptcies.

1.3.8 Approximation of the Common and Civil Law Systems of Proprietary Law in Chattels. 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 concerning chattels, and it may be of interests to see whether at least at the theoretical level there is some approximation.

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Foremost it could be said that civil law is opening up its proprietary system which was traditionally firmly closed by: (a) introducing 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 in 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, and also, especially in Germany, the Sicherungsuebereignung, 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 III, chapter 1, section 1.4.2. It could (in Germany) even be broadened and take the form of a floating charge. Under (b) it becomes 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, as for example under the German approach possessory protection extends 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. Covenants running with the land may also be protected, now even in civil law, especially where they can be known by succeeding owners.97 Differences deriving from the stronger protection of physical possession in common law are here 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 as an issue of social peace but it is never more than a starting point and not dispositive.98 Other areas where physical possession may still matter in civil law were 97

See n 35 above and accompanying text. 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). 98

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also pointed out in section 1.1.5 above and especially concerns 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 some convergence. An important point in this connection is further 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 saw in section 1.1.3 above. In common law, specificity and identification are also important issues at law, but 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 saw. Also in this area, the civil law in its nineteenth-century shape has stayed behind. It is all the same 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 underlying proprietary right or contract on the basis of which the asset was obtained or is managed, whilst subsequently its significance must more in particular be determined in terms of its defence, which touches on its further characterisation in terms of 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 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 III, chapter 1, section 2. 1. If the protection of economic interests that are known to subsequent owners of the underlying assets is a major way forward as suggested in this book, it would appear that, since their defence will be in tort, this triptych and the specific performance that it implied may lose much of its relevance. In fact, it could also be said that the same applies even now to the defence of intangible assets, in civil law, notably monetary claims. It would increasingly concern all modern financial interests that become bankruptcy resistant in manners that will be further discussed in Volume III, chapter 1, 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 and it is as such not conceivable that ownership in movable assets is in practice very different wherever these assets go (particularly important for ships, airplanes and cars or lories). Yet 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) may still differ considerably.

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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. Therefore, to make progress, we should think here in legal, not in physical terms, thus in terms of a rights-based not a physical system. We should also not continue to confuse model and physical realities in what would remain an anthropomorphic approach to movable property, see the earlier discussion in section 1.1.5 above. If one thus shifts the emphasis from physical possession to user, enjoyment and income rights in pools of underlying assets, one may see a move in the direction of stronger proprietary status of these economic interests everywhere. It allows for greater 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) or to the needs to protect the ordinary course of business as a matter of the uninterrupted continuation of the commercial and financial flows and to achieve finality. Whilst shifting the emphasis in this manner, a more modern system of proprietary rights can develop at least amongst professionals. It allows a large degree of party autonomy in the creation of proprietary rights in respect of all kind of user, enjoyment and income rights, but also puts the emphasis on the notion of the bona fide purchaser and the protection of the ordinary course of business as cut off points for third-party effect. There are many varieties possible here in terms of more subjective or objective or even constructive knowledge as we have in publication systems that assume a search duty, like in the case of land but often not in the case of filing systems of security interest in movable assets, at least not under the UCC in the US where the bona fide purchaser and even the buyer in the ordinary course of business who may well know of the interest are always protected. 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 also abated. Again one thinks here especially 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. Indeed, there is here in common law definitely greater and useful flexibility in the creation of proprietary rights, if only in equity. For civil law, modern contractual rights of passage and retrieval rights when assets remain unpaid were mentioned. The introduction in civil law of proprietary protection for both parties in a conditional transfer, like in the reservation of title, will be discussed more fully in section 1.7.3 below99 as another important example of approximation notably in connection with finance leasing, repo financing and factoring, opening up the proprietary system of 99 See for arguments in favour of a much 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], Preadvies Vereeninging’ Handelsrecht (2003). cf 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 Vermogensrechtren’ (2005) Tijdschrift voor Proivaatrecht 983.

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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.100 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 around. 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 like 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.101 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 in the position of the owner or even equitable interest holders without physical possession being complicated 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, may in practice not always be as clear in result as one might wish. Typical for equity law, 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 is still not fully stabilised in common law and remains incidental and remedial in equity. This is certainly also the case in respect of 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 these are

100 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] AcP 190, 131 ff. and his reference to the ‘‘Obligatorisierung der dingliche 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. 101 See H Coing, Die Treuhand kraft privaten Rechtsgeschäfts (Beck, Munich, 1973) and section 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), that ultimately resulted in statutory law in 2007, see more particularly Vol III, ch 1, s 1.3.7. Floating charges were introduced by Ordonnance 2006–346 of 23 March 2006, see Vol III, ch 1, 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.

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mere abstract approximations that depend for their usefulness on constant verification and testing, even if embodied in the positive law. In section 1.1.6 above, reference was already made to the new needs and developments which derive from the dynamic requirements of modern financial law. In section 1.1.7, 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 lex mercatoria serves here as a conduit whilst modern 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 individually determined. In this connection the different proprietary approaches under the different Articles of the UCC in the US were already highlighted. This approach is not therefore asset-specific but much rather product-specific. Indeed risk and risk management is now substantially at the heart of these new proprietary concepts, particularly relevant in the context of professional financial dealings. It is not therefore surprising that they receive an ever greater attention in that context, that they may operate in a special manner per financial structure, and that approximation between civil and common law is most relevant and urgent in this area. Transnational law and its acceptance and recognition of general principles and custom or industry practices is likely to further it 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 at the heart of the transnationalisation process in the professional sphere besides an equally dynamic and important concept of modern contract law, discussed extensively in chapter 1 above, see also the discussion on both in Volume I, section 1.1.4. 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, all kind of forms of factoring and securitisations, should be accepted foremost as international structures that operate under their own transnational law or modern lex mercatoria and that leave domestic laws well behind. It is for us to articulate this trend, draw lines and formulate the applicable rules on the basis of the internationally established or developing 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 is it in truth 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. Ultimately this will come down to the recognition and acceptance of these newer transnational proprietary structures in domestic bankruptcies as internationally

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accepted practice or custom. That is the true test of their significance and full demonstration of their proprietary nature.

1.3.9 Virtues and Pitfalls of the Numerus Clausus Notion. Modern Functional Approaches It has already been said in section 1.1.7 above that in modern academic writing, the proprietary concepts and laws have been neglected both in civil and common law. However, in the more modern functional approaches in the US, especially in ‘law and economics’, there has recently been a particular interest in the civil law concept of the numerus clausus of proprietary rights. Some renewed civil law interest102 in this concept is also apparent but largely pragmatic and focuses on its constraints and artificiality. It was shown above that new proprietary rights developed all the time, first in the law of secured transactions, for example in non-possessory securities and floating charges, and now also in the law concerning finance sales. It was said before 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 third-party effect. No doubt this was supported by needs but it did not go as far as easily to recognise new ones on the basis of new needs. A material reason why some of these rights became proprietary and not others proved otherwise hard to give. Notably publicity was not one of them, as we saw in section 1.1.1. above. In civil law, the pressure is nevertheless on, especially coming from the financial practice in respect of movable property, but, even beyond it, 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. That suggests by itself 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 but at the level of the bona fide purchaser or the ordinary course of business as we saw. In common law, especially in the US, the concept of limitation of proprietary rights has caught the attention of academics in a different manner.103 It is sometimes thought that the limitation to some pre-packaged alternatives is efficient and should as such be promoted from this perspective.

102

See nn 99 and 100 above. TM Merrill and HE Smith, ‘Optimal Standardization in the Law of Property: The Numerus Clausus Principle, (2000) 110 Yale LJ, 1. See also 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. See for common law writers on the subject of the numerus clausus earlier B Rudden, ‘Economic 103

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The first observation to make here is that this discussion is 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. Thus limitation is here understood to be the fundamental common law’s approach, although this notion and analysis was typical 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 personal rights, which became never fully clear in common law, probably because of the operation of the equitable proprietary rights. More important is that the operation of equitable proprietary rights and the openness they achieved in the proprietary system in common law jurisdictions are here not spotted and their significance especially in terms of risk management barely understood. It confirms a widespread criticism of the American functional approaches to the effect that they have no clear understanding how the positive law works and what it is achieving. Thus the limitation of proprietary rights is here assumed not only without much understanding of the context in which it arose but it is also little understood that the common law system in equity in respect of chattels and intangible assets is itself hardly closed and that, even at law, estates in land could be split and layered through future and temporary interests. Also 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. These may all be examples of a contractualisation of proprietary rights, to which the common law with its lack of clear lines was always more prone. 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 Art 9) and forms of recourse factoring. It is certainly wrong to conclude that in common law countries the proprietary system is now in practice closed. This was already shown in the further development of floating charges in many common law countries. 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, albeit (quite understandably and necessarily) subject to the protection of the ordinary course of business or the commercial and financial flows. 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 (therefore often without

Theory v Property Law: The Numerus Clausus Problem’ in Oxford Essays in Jurisprudence, 3d Series, 239 (1987). See also A Fusaro, ‘The Numerus Clausus of Property Rights’ in E Cooke (ed), Modern Studies in Property Law, Vol 1 Property 2000 (2001) 307. See for the idea of contractualisation of proprietary rights in common law, JH Langbein, ‘The Contractarian Basis of the Law of Trusts’ (1995) 105 Yale LJ 624. See further n 14 above for modern property theories, especially in the US.

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effective third-party effect). This gives the common law great flexibility and important risk management tools and is the true significance of the positive law in this area in common law. One of the arguments used in this connection in the US in support of a closed system of proprietary rights centres on the benefits of limitation and standardisation which is assumed to reduce information cost. This is also called the optimal standardisation theory. It sees standardisation as supporting routine trading whilst emphasis is then put on the communication function being facilitated by a set of pre-existing structures and rules.104 It comes down to information costs, the limitation of which is then preferred as explanation for the numerus clausus over alternative views which are more legally normative like those based on network effective notice or publication/knowledge theories which in fact may open up the system as we saw. Note that nothing much is said here about the quality of the labelling and of the information or communication itself, or about the reasons why some rights result or are labelled as proprietary and others not. History is assumed here to have been efficient. The risk management and dynamic aspect of a modern proprietary system is clearly not understood and neither is the function of the cut off, not in number but at the level of the bona fide purchasers or buyers in the ordinary course of business for whom there is normally no search duty and extra cost at least in respect of commoditised products. The main point is that information processing costs are thought to be automatically reduced (in a mandatory fashion) in a closed system of proprietary rights. As such the effect of proprietary rights are seen as externalities constrained by the numerus clausus idea. Yet, so are the advantages of choice, risk management, including bankruptcy protection, 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, although the formulation of new proprietary rights is believed to be best left to a legislator. In any event, it is not clear where the optimum standardisation point is. 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 if there is enough use of any new proprietary right reducing the communication cost at the same time. It 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. In the meantime, it may well be asked why a similar approach should not be favoured also for contractual rights. They can weigh very heavily on an asset like assignment restrictions for receivables. Indeed, here the notion of modularity or standardisation may also steps in,105 which assumes that many legal structures 104

See Merrill and Smith, above n 103 and also Rudden above ibid, at 253. The advantages of contractual boilerplate are thus sometimes also stressed, see H Smith, ‘Modularity in Contract: The Role of Boilerplate’ Law and Economics Workshop UC Berkeley Jan 105

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(proprietary as well as contractual) can indeed be usefully pre-packaged, also in contract. That would suggest, however, 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 in independent standard ‘building blocks’ that can be used in all types of agreements. Dispute resolution and applicable law clauses spring here first to mind. It is a formalist approach that would not, however, appear to correspond with modern needs and structuring trends. But more importantly, it cannot explain why users, especially professionals, should not be the judge themselves of the benefit of particular structures and create others when they see a need. Why should this all be pre-set, the basic attitude of freedom in contract impeded, and what little there is of it in property law in terms of party autonomy eliminated? An approach that moves on from the optimal standardisation theory, is the verification theory.106 The idea that the numerus clausus limits externalities is here accepted, but not the optimum standardisation concept, which is not considered typical for proprietary rights. Nor are communication and information cost considered problematic. It insists rather that parties having rights in the same assets must be enabled to understand their relative position. This is identified as a ‘co-ordination problem’, 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 narrow down to an awareness of enforcement consequences, therefore to preferences or priorities. The argument then is that to simplify the system, a numerus clausus of proprietary rights may help. In this view, new such 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 afterwards and depend on the very use of the new right (or new financial product) which, if widespread, again would itself reduce these costs. It confirms, however, that new proprietary rights can still establish themselves over time, also therefore that the system is in fact open. The verification theory assumes 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 with proprietary rights per se or a numerus clausus of them) and enough business understanding of what this means. This may all 2006, but their elective character is obvious and there is nothing mandatory about them. The choice of law clause is then often seen as an example of modularity, but whether such a choice of a domestic law still makes sense in international transactions and is effective or efficient depends on many factors. As for the applicable property law, a contractual choice of law clause is mostly ineffective and in the traditional conflicts of law approach usually overruled by the mandatory lex situs. 106

See Hansmann and Kraakman, above n 103.

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have some significance, especially between various security interest holders in enforcement. It may also promote some broader co-ordination between transacting parties. Clearly contractual organisation becomes here also important and contract law can then be seen as solving at least some co-ordination and enforcement problems. The numerus clausus notion appears to work here as an admission of the insufficiency of publication systems. But in truth the protection does not and cannot come here from this limitation, at least not in respect of chattels, but rather from the bona fide purchaser 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 ignore all these interests. Indeed, it was pointed out before that the protection under modern objective proprietary law aims at restricting, not the number, but the reach of proprietary rights whatever they are. Again, this is done in the first instance through the bona fide purchaser principle, therefore in respect of proprietary rights of which purchasers do not know and in the last instance through lack of privity in respect of contractual arrangements of which non-contracting parties did not happen to know either. To put it another way, regardless of the type of proprietary right, the verification cost is here put on the user or organiser who must advise non-users (third parties) of any adverse interests. They would otherwise be protected because of their bona fides. Especially in respect of chattels, the numerus clausus notion does not appear to make here any difference and neither therefore the regulation of proprietary rights. Yet another justification of the numerus clausus principle is highlighted in the anticommons theory.107 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 whilst 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 anticommons’. It is the mirror image of property held in common, which may become overused and depleted, giving rise to a ‘tragedy of commons’, which could suggest forms of regulation.108 A numerus clausus of proprietary rights is then seen as a matter of simplification and limitation of the anticommons. In this vein, ranking of rights is recognised as an important efficiency tool whilst contractual user, enjoyment or income rights would 107 M Heller, ‘The Tragedy of Anticommons: Property in the Transition from Marx to Markets’ (1998) 111 Harv LR, 621. 108 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 would 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 the monitoring, provided entitlements were clear, individuals had a discernable 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 connected with the emergence of custom and practices, which may indeed favour different property rights besides private or public ownership.

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only concern certain clearly identified counterparties and may thus be ignored by others. It is recognised that in a modern proprietary system, the bona fide physical possessor is likely ultimately to take all, but that would leave open the situation notably in respect of intangible assets. It may also help that transacting parties are able to limit in their contract the exercise as between themselves of restrictions in respect of the use and transfer of the underlying assets and may thus allocate as between themselves the asset’s use and enjoyment regardless of their respective proprietary rights and their fragmentation. Again, this theory seems to be somewhat remote from modern developments which require and practice 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 is truly no sign, except perhaps in any overprotection of intellectual and industrial property rights at the expense of further experimentation and innovation by others.109 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 bothered by the anticommons risks. It may be concluded that these newer theories first do not understand very well how the present system works, especially in common law countries from which they hail, and, second, do not provide a clear new insight in the reasons why some rights are proprietary and others remain contractual and why a limitation as to type is sustainable and how it can readily be explained (let alone how such proprietary rights operate in the different legal systems and why there are these differences). These issues will be revisited and summarised in section 1.10 below.

1.4 1.4.1

Transfer of Proprietary Rights in Chattels in Civil and Common Law The Legal Requirements for the Transfer of Chattels

Ever since the Roman jurist Gaius (Institutes 2.20), it is 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), (b) a valid cause (normally 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. Even in common law one may note these essentials. 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

109

See also the discussion in n 21 above.

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identification of the asset to be transferred.110 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. In civil law, the requirements of identification and existence became closely associated with or even integrated in the disposition right itself, but it is clearer and better to keep them separate. Another important issue is here what effect the transfer is meant to achieve, therefore what proprietary right is meant to be created or transferred. This goes to the numerus clausus of proprietary rights and raises the further issue whether for the creation or transfer of different proprietary rights there are different requirements in terms of disposition rights, contractual requirements, and especially transfer requirements or formalities. Civil law strives on the whole for a unitary system, as we have seen, but there may still be differences especially in the creation of security interests and in the possibility of conditional and temporary ownership forms, see particularly section 1.7 below. It was said before that this systematic approach may not be necessary and sustainable in modern financial products. Civil law also 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 in respect of intangible assets, especially for the assignment of monetary claims, there may be further differences and refinements as we shall see in section 1.5. Hence, the idea that the above requirements foremost apply to chattels, but these issues also arise as we shall see in the assignment of intangible assets, especially receivables. As for chattels, it is efficient first to explain the formalities, especially the requirement of delivery in some countries. Thereafter we will turn first to the requirement of identification and existence, then to capacity, then to the contract, and finally to the disposition right. 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 in countries requiring it as a condition for the transfer of ownership). The disposition right is a different requirement 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. Even though capacity and disposition right must be clearly distinguished, 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 the issues that follows 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 the physical possession of the asset, more particularly relevant if a chattel. May he keep it, or must he return it and, in the latter

110 R Goode, Commercial Law, 3rd edn (2004) 50. 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 J Ghestin and B Desche, Traité des Contrats, La Vente (1990) No 544, see also Art 1129 CC. Note in Goode the civil law requirements in this respect transposed into the common law.

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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. Here the importance of bona fide purchasers and acquisitive prescription also comes in. In civil law, the bona fide purchaser of chattels is mostly protected against the defects earlier in the chain but not normally against invalidity of his own purchase agreement or delivery (wherever required) for whatever reason. Only acquisitive prescription (which in the case of chattels could, however, be immediate) may achieve this. If the purchaser was not bona fide as to the causes of the failure of his own purchase contract, statutes of limitation could still help him also, but they are procedural devices that do not traditionally transfer ownership (although it does in common law excepting criminal behaviour and now also in many civil law countries) and are certainly not immediate. 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. Transfer of ownership is the prime objective of 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, or increasingly even those in the ordinary course of business for commoditised products. Whether title has effectively passed is for the applicable law to decide. 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). 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 here in different ways. In civil law, title is in this connection mostly considered the underlying sales contract whilst 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.111 In the present context, transfer of title means transfer of ownership. It should finally be recalled that in civil law terminology, strictly speaking the transfer of ownership is the transfer of ownership of the underlying proprietary right (in the asset and never strictly speaking the asset itself), see section 1.2.1 above. Delivery should then be perceived as the transfer of possession (therefore transfer of the will to hold for one self) of the underlying proprietary right. This possession is then in essence perceived as entirely abstract or constructive (as is the delivery itself) in the nature of will to control. In the following, this terminology will be respected but not belaboured so as to avoid a pedantic vocabulary. It should be added though that intent (contract), capacity and disposition rights are here also perceived as purely legal notions. Any remaining anthropomorphic approach to property is thus abandoned, all the more proper, it is posited, in professional dealings in which legal rather than natural persons are involved.

111 Title may sometimes also mean the document giving rise to enforcement action, not here immediately relevant.

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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 where a deed is required when there is no consideration, an unlikely event in a sale).112 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 four possibilities. 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 (s 929, first sentence, BGB), Switzerland, Austria, the Nordic countries, the Netherlands (Art 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 a legal and not a physical act. This largely follows Roman law, which, however, in sales also required payment, as we shall see shortly.113 England (Sections 17 and 18 of the Sale of Goods Act 1979), France (Arts 711, 1138 and 1583 CC),114 Belgium, Luxembourg, Italy (Art 1376 CC), and Poland are in the second category and do not require an act of delivery. 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 aspect 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 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 USA 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 112 See for the Statute of Frauds requirements and its remnants in common law and for the requirements of Art 1341 CC in France, more in particular ch 1, s 1.2.10 above. See for the remnants in the creation of security interests in the USA, s 9–203(b)(3)(C) (9–203(1)(a) old) UCC. 113 Inst 2.1.41, see also R Feenstra, Reclame en Revindicatie [Reclaiming Right and Revindication] (Dissertation, Amsterdam, 1949) 11 ff, and more recently R Zimmermann, The Law of Obligations (South Africa/Deventer/Boston, 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. 114 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’.

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otherwise (s 2–401).115 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 American 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 American law they can agree to delete it. Only 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 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 USA. 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 (Arts 1138 and 1583) determines 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 the moment of delivery or of the payment of the price, as common in a reservation of title. This is a statutory exception, however, and there is a mandatory regime of title transfer in all civil law countries, whether they require delivery for title transfer or not. As a consequence of this mandatory statutory legal regime, one finds in sales agreements under civil law normally little said on title transfer. In common law, on the other hand, title transfer figures as an important part of a sales agreement and will be elaborated by the parties. Common law is here in essence directory. The consequence is therefore that in the approach which 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.116 The latter is freer.117 It also affects the

115 The UCC states, however, expressly in its Comment 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 cannot be completely ignored, especially 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. 116 U Drobnig, ‘Transfer of Property’ above n 67, 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. 117 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.

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types of proprietary interests that can be created, which, although in common law restricted at law by a numerus clausus (allowing only ownership and possession to operate), is de facto open in equity but then subject to a much better bona fide purchaser protection, as was already discussed in section 1.3.1 above. How equitable interests (in terms of user, enjoyment and income rights) are created is here in principle also entirely left to contract although trust deeds form a different category of instrument as we shall see in section 1.6 below and do, for example, not need consideration. They are usually unilateral declarations of the settlor. This makes in fact for 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, is intuitive in most people, whilst a similar result is obtained 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 their contract. In the USA, 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 (s 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 proceeds and the transfer must wait till the assets are properly set aside. That is also the English system. In both countries, there is also a stronger right for the buyer to obtain 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 from Roman law. Delivery becomes here 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, 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 (s 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 also the French system is based on the notion of delivery, see also section 1.4.4 below, although it is not immediately clear what is gained by this insight.

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 as regards the time, method, nature and extent of the title transfer.

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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 traditio longa manu under which an asset that is under the control of a third party, for example in a warehouse, is transferred (s 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, whilst 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 but it may also be said—and this is probably a better approach—that there is constructive delivery of possession only. Of course also in systems that do not require delivery, these situations may arise, but they do not then solicit special attention because title will have passed upon the conclusion of the agreement anyway, unless delayed by agreement.118 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.119 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. There is here 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 seen in its attitude to holdership, 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 referred to as the dingliche Einigung, earlier

118 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 arises in those few instances where delivery matters, as in the case of making a gift or creating bailment. Yet in other cases where delivery is necessary, it 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 USA: see s 2–401(2) UCC (again, unless parties agree otherwise). 119 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, Bracton, Woodbine (ed), De Legibus et Consuetudinibus Regni Angliae, f 38 b (Yale, 1922) ii, and (ed Twiss, (with English translation 1878), i, 305). This line 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.

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called the dinglicher Vertrag by von Savigny, who first formulated the concept.120 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 before, where delivery is not required to complete the transfer, it is merely a matter of contract implementation and a physical act. It shows that physically is not irrelevant. Indeed it is for the buyer ultimately likely to be of extreme importance, but the legal and physical aspects should not be confused, as they commonly 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 of the French CC (limited to chattels) states clearly that if an asset is sold twice, the second buyer will prevail 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 suggests 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 delivery121 but again only if he was without notice of the first sale, which means here actual knowledge.122 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 he effects a delivery under the second sale, the second buyer becomes the owner even if 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 (s 929(1) BGB) and Dutch (Art 3.90(2) CC) systems that require delivery for title transfer, on the other. It was already Roman law, which in any event did not know of the bona fide purchaser exception (C.3.32.15 pr). Ownership of the second buyer follows here

120

3 System des heutigen römischen Rechts (Berlin, 1840), Par 140, p. 313 and 2 Obligationenrecht (Berlin 1853) 256 ff. One may well ask whether in a system like 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 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 concept is not an immediate common law concern and its meaning is not normally further considered. 121 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. 122 See also ibid (Lord Denning).

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simply from the fact that the seller retains the disposition rights 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 the asset. However, in modern law, the first buyer may have a tort action against the second buyer if the latter took advantage to push the original buyer out of his deal. In countries like France, there may even be specific performance 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 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 Importance of Identification. Effect on the Transfer. Sales of Future Assets, Bulk Transfers, and De Facto Transfers of Title Nowhere can title transfer if the goods sold are not yet sufficiently identified or set aside to the contract—not even in countries like England and France, countries that do not require delivery for title transfers in chattels. In countries that require delivery, this act itself suggests it, but in civil law countries such a delivery may then be merely constructive and not physical, as we have seen. As in countries that do not normally require this delivery, there may, in such cases, still be a problem with the title transfer in unidentified goods. 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 very differently interpreted. This problem arises more in particular when future assets are sold, see section 18(1) of the Sale of Goods Act 1979 in the UK.123 They may physically exist but not yet in the ownership of the seller although eventually they may enter his ownership, like 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.124 When goods do not yet exist, this can only happen when they emerge. These are absolutely future. Both conditions can go together, but not all absolutely future goods are also relatively future, for example when future goods automatically accrue to a seller, like next year’s harvest. 123

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. 124 See also n 23 above.

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In most 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 (cf s 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, not even in countries 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 or, where in systems that do require it, it is constructive.125 The remaining question is whether such a transfer is retroactive or is ineffective against a seller who has gone bankrupt before the asset emerged.126 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 still be problematic and normally requires some special form of identification, often 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. Where certain assets in a multitude are sold, again a sufficient setting aside or identification is mostly deemed necessary before ownership can transfer. Often weighing and measuring may achieve it, but the mere surrendering of control may be sufficient as it already was in Roman law (D.41.1.9.5/6). There may be further problems, however, if future or unspecific goods are included whilst a bulk transfer never provides a vehicle to circumvent the specificity requirements entirely (they may be recast and widened). They may thus still present an important hurdle even in countries that do not normally require delivery for title transfer.127 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 125

See also s 2–501 UCC in the USA and Art 1472 of the Italian CC and for France in similar vein, J Ghestin and B Desche, Traité des Obligations I: Vente (Paris, 1990) 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 allows the transfer of future tangible assets, also as security: see Art 1130 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 there is older French case law to the contrary still requiring delivery in that case, see Cour de Cass, 28 Nov 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) CC and Cour de Cass 20 Mar 1872 [1872] D.1.140 and 14 Mar 1900 [1900], D.1.497 with the problem of determining when it takes place. In any event, there is here a physical element to perfecting the title, no different from countries requiring delivery, cf also Art 3.97 of the Dutch Civil of the Code, although delivery itself is, strictly speaking, not necessary but it would be indicative of the emergence of the asset as a prelude to the title transfer. 126 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. 127 In the USA, Art 6 UCC provides a special regime concerning bulk transfers. Its aim is 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 is has been repealed.

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help and facilitate their transfers whilst they may also include a concept of substitution or 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 and 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. Under applicable law, it may be easier in respect of relatively future goods and the situation may again be different for receivables, see also sections 1.4.5 and 1.5.4 below. An intervening bankruptcy may still upset the arrangement, however, as modern Dutch law shows (Art 35 Dutch Bankruptcy Act, as amended in 1992).128 Again, where delivery is required, the problem of what can be transferred surfaces more acutely. Where there is constructive delivery 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 will then still be necessary for the transfer of title. That would seem to exclude the sale and delivery of future goods, but, as will be discussed shortly in section 1.4.5, it is technically conceivable to assume a delivery under an anticipated constitutum possessorium of (future) goods that therefore remain under the seller. Here a physical and anthropomorphic concept of delivery can be 128

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 III, ch 1, s 1.4.1. See for new French law in this connection, Ordinance no 2006–346 of 23 March 2006 and Vol III, ch 1, s 1.3.1. 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) were therefore allowed and were 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, first in 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. It could not last and, at first through forms of conditional sales, the situation was redressed for chattels at least in as far as the element of possession was concerned, but the use of future assets remains even now in civil law problematic. In such an atmosphere, floating charges in particular have difficulty in developing: see also Vol III, ch 1, s 1.1.4, Germany being here somewhat of an exception. Notions of reputed ownership are closely related: see Vol III, ch 1, s 1.1.10. The common law did not similarly suffer. 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 III, ch 1, s 1.5.2. A reasonable description becomes here the criterion. See, for the US s 9–204 UCC, and Vol III, ch 1, s 1.6.2. Theories of reputed ownership in the transferor or assignor, which could still affect such transfers, are since 1986 abolished in 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 III, ch 1. s 1.1.10.

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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 then becomes possible to operate with a reasonable description to effect the transfer. That presents, however, an enormous step forward in many legal systems. It is the direction nevertheless that needs to be taken in order to make, for example, modern floating charges fully effective.129 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. It may then 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 to the conclusion of the contract or to delivery, some ownership change is also bound to arise de facto—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 may have to be shared so that a co-ownership structure or forms of beneficial ownership emerge as a result of physically handing over of the goods, whatever the more formal title transfer regime may be. That happens with client accounts of brokers who trade investment securities for their clients and may retain such accounts in their own name. The applicable law will 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.

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 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 thus 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, in England, (physical) possession does therefore no longer play a role in the context of title transfer in goods: see also section 2(1) of the Sale of Goods 129

See for the liberal American statutory approach in Art 9 UCC, n 128 above.

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Act 1979 (except in instances, discussed in the previous section), which also applies in Scotland. If the seller remains in possession, in this system he becomes a retentor (see s 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 his seller. Upon payment, this personal right can convert into a proprietary right if the seller/bailee defaults (when an immediate right to repossession results), therefore 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 about this alternative section 1.4.3 above. In the USA, 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 2–403.130 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 section 1.1.4 above.131 In this system the transfer of physical possession was also necessary for a transfer of ownership. Eventually, the Roman law approach prevailed for movables,132 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.

130 It abolished in this connection the consequences of the distinction between credit and cash sales for bona fide purchasers. 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 possession has been transferred (or a retention right, if it had not been). The common law in the USA was and is here 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 received some early support in England: see W Blackstone, Commentaries 247 (who also wanted delivery); see also Williston, 3 Sales (1948), s 342. The UCC does not change the law but protects bona fide third parties against the consequences of this confusion. 131 This development dates already 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). 132 See also J Brissaud, A History of French Private Law (Boston, Mass, 1912) 300.

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However, in 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 whilst the seller remained the holder for the time being subject to immediate demand by the buyer.133 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.134 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 saw, 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.135 In France, this view was in the late seventeenth century followed by Domat,136 who believed that the clause de desaisine was always implied. From there the principle entered the French Civil Code of 1804, compare Articles 711, 1138 and 1583, although it was not without opposition,137 whilst Article 1138 still uses 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 (Arts 1376 and 1470 CC). It would still imply a separate legal act, although simultaneous with the conclusion of the contract. This approach does not extend in France to the creation of other proprietary rights in tangibles, like a pledge, where delivery remains necessary. It also does not extend to the assignment of receivables, which still requires notice (Art 1690 CC: see for the 1981 amendment for finance transactions, Volume III, chapter 1, 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, like 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 in France, 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. 133

See Art 278 Coûtumes d’ Orléans, in Bourdot (ed), Nouveau Coûtumier Général (Paris, 1724)

III.2. 134 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 97 above, no 695. 135 See De Iure ac Pacis Lib II, CapVI, s 2 ff. 136 Les Lois Civils dans leur Ordre Naturel, Livre I, Titre 2, No 8 (Paris, 1777). 137 Among others from Pothier, Oeuvres Complètes (Paris, 1821) Vol 3, s 1, and Oeuvres de Pothier, Vol IX 299, Traité du Droit de Propriété (Paris, 1823) No 245.

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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 farther removed from Roman law, especially in its attitude to holdership, see section 1.2.3 above.

1.4.5 Legal Capacity and Disposition Right. Causes of Contractual Invalidity. Effect on the Title Transfer. Future, Conditional and Temporary Sales In sales, the issue of legal capacity arises in two ways. Everywhere it is required for the validity of a sales agreement, 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 will only do when there is a clear benefit. Equally in civil law countries requiring delivery for the title transfer, lack of legal capacity appears to invalidate the delivery as a legal act except if ratified later. In this connection, the issue arises whether lack of legal capacity in the sales contract, therefore invalidity of the resulting sales agreement, itself undermines the delivery as legal act if already made, even if in the meantime the incapacity was lifted, an issue which will be discussed more in 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 from the underlying sales agreement in as far as its effect on the transfer of title is concerned. As far as the delivery goes, once it is 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 damages 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 must be brought aiming at the (ex nunc) return of the asset. This is never automatic in an abstract system. In the causal system, 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. Not merely 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 may be avoided for reasons of default. Especially in

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that case, the question of the abstract versus the causal system is important. In a pure causal system, the seller of a bankrupt buyer would be able to reclaim the sold property even in a bankruptcy of the buyer, 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. Legal capacity issues should 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. It is therefore not a general requirement for legal acts but arises in connection with the transfer of ownership (or other more limited proprietary rights in the asset) only. In principle, only the owner of rights can make such a transfer or anyone authorised by him. Neither the possessor non-owner in a civil law sense (eg, 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, neither has a bailee in common law. They can at best transfer their own more limited possession right, but never more than they have. Naturally, by contract they may sell 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. As of necessity 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 saw, in most civil law countries and under statutory law also in some common law countries, the exception is the bona fide purchaser in the case of chattels. Even if he acquires from someone without sufficient disposition rights, he may become full owner of the relevant right if he did not know: 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 predecessor or to the lack or invalidity of an agreement with him for other reasons. Lack of capacity or of a valid agreement for other reasons earlier in the chain of transfers would, however, result in the lack of disposition right in the seller, which would then not, in the case of chattels, affect the bona fide buyer. 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 also 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).

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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. 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; an intangible claim sufficiently exists for these purposes if at least the relationship out of which the future claim arises has been created when it is also considered identifiable. It is then indeed normally considered assignable in itself but its existence in this manner would also suggest that it can be assigned by a prospective creditor. In legal systems like the German, which require delivery for the transfer of chattels (but not of intangibles, as we shall see in section 1.5.6 below), the disposition right may then be deemed sufficiently to exist 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, the delivery is complete with the assignment and there is no anticipated delivery in this sense 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 exist. In fact, 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. In Germany, as part of a floating charge or an extended reservation of title absolutely future chattels may also be covered if they are replacement assets, see further section 1.7.8 below. Some tracing facility would therefore be deemed to be implied. Otherwise they would not be transferable for lack of a sufficient disposition right. In both cases (relatively or absolutely future chattels or intangibles, if they are replacement assets), an intervening bankruptcy of the seller should not therefore affect the transfer. As soon as the asset emerges in the property of the seller or assignor, it 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,138 although it could be argued that the distinction between absolutely and relatively future goods is artificial and 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.

138 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.

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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 1.7.8 below, which may thus be cut down in bankruptcy for assets that emerge only after the bankruptcy of the transferor. This may also be relevant in the extended reservation of title, which is a reservation of title that shifts into replacement goods. 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 the case of chattels the 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, like legal assignments in England, non-financial assignments in France and the Netherlands (unlike assignments in Germany and equitable assignments in common law), it may 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 (sometimes 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 sharply 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 saw. In the case of existing assets, the conditionality is subjective or foremost contractual and not related to the state of the asset. It raises the question of the nature of these interests especially in civil law with its closed system of proprietary rights. It is a different issue. But 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 may be conditionally or temporarily included in the transfer (depending, eg, on them 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 directly. At most, the bankrupt or his trustee act here as (undisclosed) agent for the financier in the title transfer whilst 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

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likely to be an excess of receivables in the assignment. If the financier has fully recovered, any remaining excess receivables will then also automatically revert to the bankrupt estate. Similarly, if the sale of future asset to a financier was conditional upon him releasing full ownership to the debtor upon the latter timely tendering the repurchase price, 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 present or future nature of the asset might not then 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 also that in the UK the floating charge has a low rank, which derives only from the date of its crystallisation which normally is the date of default of the debtor. That is not 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.

1.4.6 The Transfer Agreement: 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 in 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 is often said that obligatory rights mean change and proprietary rights mean continuity or achieve a new status quo meant to endure. The abstract theory of title transfer, which was already mentioned in the previous section and which obtains especially in Germany, supports this basic truth and de-emphasises the legal consequences of an invalid contract and therefore of an insufficient cause for the title transfer once delivery has taken place. It may be seen as

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an issue of finality and protection of the new status quo.139 As we saw, 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. Everywhere, the underlying cause of the transfer of title, therefore normally a sales contract, should be valid for title to pass definitely, although the consequences of it not being or remaining valid may differ. 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 also clear 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 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 often equated with consideration in common law, although technically speaking not requiring any quid pro quo and going more into the rationality of the arrangement: see chapter 1, section 1.2.6 above. It is not necessary to elaborate on these contractual complications as this was done in chapter 1 above. The only aspect that is significant is that a contract may fail and we will 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? Although the many reasons for a contract’s failure need not be here further considered, one special reason for the failure of the underlying sales agreement may be 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 first defined in 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 that 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 co-operate 139 Bona fide purchaser protection notions and the notion of reliance also contribute. So does de-emphasing 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 III, ch 1, ss 2.6.1 and 2.7.2.

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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.140 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 which has no proprietary effect and will therefore not be good in the bankruptcy of the buyer. Parties may, however, still achieve the proprietary effect if they insert a special clause to the effect 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 s 159 BGB). Thus lack of retroactivity does not necessarily exclude 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 here often drawn between countries where delivery itself (even if only constructive) is a requirement for the transfer, therefore a legal act in itself, and those in which it is not. It is in this context often concluded 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 more true, 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, like England and France, but it explains why the issue of automatic return (or not) is there not discussed 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 co-terminous. One could even maintain the delivery perspective if a delivery constituto possessorio (therefore a constructive delivery) were to be always implied in countries 140 This state of affairs is in the Netherlands indeed deduced from the rescission being now ex nunc and there being no longer 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.

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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 meaning.141 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, one uses in these countries the concept of voidable or void title in this connection, rather than the concept of transfer or real agreement, and determines when voidness may lead to an automatic return of title. Clearly, the German system is considered the prime example of an abstract system, which is in that country indeed largely tied to the delivery requirement or real agreement itself. In legal systems of this type, the title does not automatically return upon a void or rescinded sale 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)142 leads by itself to the conclusion that the failure of the underlying sale agreement will not automatically affect the delivery. That would only be so if it could be argued that this Einigung was void at the same time, which, as just mentioned, is often considered the case in a situation of fraud which it is then thought to pervade the dingliche Einigung also (s 123 BGB). Under German law, in the case of a reservation of title, it really needs to 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.143 In fact, in Germany it is possible to introduce the reservation of title only at the dingliche Einigung stage, assuming it can be established that that was what 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. 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 whilst assuming that the legal act of delivery is invalidated at the same time as the underlying sale agreement. It shows indeed that the delivery perspective need not lead to an abstract system per se and the characterisation of delivery as a separate legal act can co-exist with a causal system. In countries like England and the USA, there is largely an abstract approach even though never 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, even in the USA where delivery is 141 142 143

See also s 1.4.2 above. See also n 120 above. See for reservation of title in Germany, BGH, 1 July 1970, 54 BGHZ, 214, 218 (1970).

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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 his bankruptcy trustee and in equity the discretionary implementation of the rescission remedy. There is for personal property in any event no revindication remedy proper in common law. 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. 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 saw, 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 must have been requested before the bankruptcy occurred.144 More generally, there is a difficulty in France 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 III, chapter 1, 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 his 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 III, chapter 1, section 1.3.4, but it still demonstrates that France does not have a full causal system.

144 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 Ripert-Roblot, 2 Droit Commercial, 16th edn (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 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, 1610 and 1654 CC and for the lex commissoria expressa Art 1656 CC.

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In fact, on the basis of French case law, the buyer may also hold on to his asset regardless of the invalidity of the underlying sales agreement provided he is bona fide and the cause of the voidness of the agreement does not lie with him.145 He is not therefore protected in the case of his own default, but 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 normally 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, does it also cover the case of a failed sales agreement for reasons concerning the seller and as regards which the buyer is bona fide. 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 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 himself. Here the French system is different and not strictly speaking causal. The abstract system, which protects the transfer even if the underlying sales contract fails, is the more common. It sustains the ordinary flow of goods and promotes finality especially important for commoditised products. Roman law in the Justinian compilation was contradictory but the Ius Commune adhered to the abstract system, as we shall see in the next section. It is logical in a legal environment in which bona fide purchasers of chattels are not yet protected. Conversely, one may say that the causal system can only operate when bona fide purchases from the buyer without a valid contract with the original seller are safe. It is therefore even now less suitable for transactions in real estate and in intangible assets. In the case of chattels, only in Spain do we see a causal approach without the full protection of bona fide purchasers, 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 work),146 although in all these countries there have also been other views. That is logical where these countries require 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.

145

Cour de Cass (civ), 6 July 1886 [1887] D.I.25. 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. 146

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In fact, most countries now adhere to a more pragmatic approach and the German dogmatic distinction between abstract and causal may look increasingly dated, although it shows up a fundamental legal problem that appears in all legal systems, whether or not so identified. But in practice, there was never a consistent application of a choice in favour of either system. 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, more causal, 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 retransfer under those circumstances and there turn of title is not then deemed automatic. There are signs of this in France. Moreover, French law adheres in bankruptcy, when it truly matters, to the notion of the solvabilité apparente protecting unsuspecting creditors of the bankrupt, as we also already saw, whilst 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 saw in Germany, whilst the situation in England for reservation of title is still not fully clear.147 Nevertheless, in Germany we see the fullest abstract approach. For chattels, this is combined with the protection of the bona fide purchaser. In a sense, this is a double protection, even though it follows that the bona fide purchaser protection in Germany covers only situations when the abstract system fails to sustain the transfer. The connection between the two was never fully considered in Germany when the BGB was enacted. It is, however, in line with the later Ius Commune, and therefore pre-codification law, under which the abstract approach prevailed, whilst 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: see section 1.4.9 below. 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 III, chapter 1, 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,148 narrows the situations in which there is a lack of disposition rights and therefore also 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.

147

See s 1.3.6 above and for England also n 163 below. 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 WPNR 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 WPNR 301. The nature of the asset and the way it is traded seem to suggest it. 148

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1.4.7 The Origin of the Abstract and Causal Views 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 system still obtains, the issue has been of special interest, also because of the common law influence on the law.149 Both the Ius Commune and the South African system that follows it are abstract, the later Ius Commune (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.150 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) 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 a 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,151 but a simulated contract was not good enough as in that case there was no will to transfer at all. The same was more generally true when the parties were not ad idem, that is to say that they never intended any transfer. 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.152 In practice, when the asset was

149

See JE Scholtens, ‘Justa Causa Traditionis and Contracts Induced by Fraud’ (1957) 74 South African Law Journal 280 ff. 150 But cf R Zimmermann, The Law of Obligations (1992) 271, who accepts without reservation the causal system for the Roman traditio in classical Roman times. 151 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 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. 152 See J Voet, Commentarius ad Pandectas, 4.3.3 and for further sources and comments, Scholtens, n 149 above, at 284 ff.

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handed over, it was normally assumed that there had been sufficient intent to transfer it, as it was unlikely that there had been no reason at all for doing so.153 The result was that the abstract will to transfer title 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 saw.154 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 legal and not merely a physical act (dinglicher Vertrag),155 in a legal system that continued to require delivery even if only 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.156 It thus entered into the BGB (s 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). Yet even in this approach, incapacity, illegality or fraud may invalidate the will 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 saw, it does not, strictly speaking, require the physical transfer (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.157 It may be difficult to prove but there is, as we also saw, some presumption under German law that the real agreement (dingliche Einigung) is in the same terms as the underlying sales agreement and a reservation may be deemed

153

See Vinnius, Commentarius ad Inst 2.1.40.10. See also Drobnig, n 67 above, at 355. 155 See n 120 above and accompanying text. 156 See Windscheid/Kipp, 1 Lehrbuch des Pandektenrechts (Frankfurt am Main, 1900), paras 171(5) and 172(16a). 157 See n 120 above and accompanying text. 154

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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 sales agreement.158 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.159 In modern French legal writing, the subject is 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 already 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 (Art 2279 CC), extended here also to operate between two parties to a sale confronted with the invalidity of their contract.160 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 always fully effective and rescission of the sale agreement thereunder does not automatically produce a return of title if the claim does not predate the bankruptcy.161 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 also saw, 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.162 However, case law seems to bear it out,163 also (very clearly) for

158

See BGH, 9 July 1975, 64 BGHZ 395 (1975). See Pothier, Traité du Droit de Propriété (Paris, 1823) no 228. 160 The classical case is Cour de Cass (civ), 6 July 1886 [1887] D.I.25. 161 See n 144 above. 162 Except in the context of Roman law discussions, see for the UK, F Schulz, Classical Roman Law (Oxford, Clarendon Press, 1951) 350 and F de Zulueta, The Roman Law of Sale (Oxford, Clarendon Press, 1945) 56. 163 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. Less clear became the situation 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 159

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assignments of intangible claims.164 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, whilst 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 appear to revert automatically and retroactively, at least if the fraud went to the heart of the title transfer.165 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

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 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 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 (2004) 391 ff 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 revests 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 revesting 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 ch 1, 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 also 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). 164

See n 215 below and also s 1.5.7 below. See Car and Universal Finance Co Ltd v Caldwell [1965] 1 QB 525 and Cundy v Lindsay cited in n 129 above. Third parties who were bona fide purchasers of the asset whilst 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 which itself suggests a greater need for an abstract approach to title transfer. 165

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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 clear exception, confirmed in section 2–401(4) UCC in the USA, 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, American 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.166 It can be seen as another confirmation of the basic approach, which, in German terms, is the abstract one.167 In common law countries there may here 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 less clear in the USA when there is invalidity, illegality or fraud voiding the contract rather than a rescission upon mere default or for other reasons. In the USA, early case law suggested a return of title in these cases,168 but state 166

Confirmed in s 365(e) of its Bankruptcy Code. See also G Gilmore, Security Interests in Personal Property (1965) 63. It is indeed established case law in the USA 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 USA 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 results only if the buyer does not pay when requested. This right is in the nature of a lien and protected in as 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 USA 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 2–403 UCC. 168 Gifford v Ford 5 Vt 532 (1833). 167

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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 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 if also 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 (like 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.169 The subject remains of importance especially between seller and buyer in the bankruptcy of the latter and generally 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.170 The causal system seems more normal and is in modern comparative legal writing sometimes preferred,171 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 natural, is understandable as it creates uncertainty in the title. It may be more objectionable if the avoidance or rescission derives from later acts of the parties, notably from the default of the buyer in possession. This is particularly 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

169 Whilst 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 B W [The General Part of the Law of Property and Obligations according to Book 3 of the New Dutch Civil Code] (Deventer 1986) 254 ff, it does not lead to an abstract system, as the law negates its effects by generally rendering it void together with the underlying sale 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 in which excessive pressure is exerted to achieve performance of an existing agreement. 170 See n 146 above. 171 See Drobnig, above n 67, 359; see also F Ferrari, ‘Vom Abstraktionsprinzip und Konsensualprinzip zum Traditionsprinzip’ [1993] Zeitschrift für Europäisches Privatrecht 52.

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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 sale 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.172 The principle of abstraction in title transfers is in the meantime well established and is 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, whilst the commitments under a bank guarantee or letter of credit are 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 may also be seen operating in the context of finality of payments and of investment securities transfers. It seems that the principle of abstraction 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 his capacity but his ability to transfer rights in the assets he tries to sell. It is therefore 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 that title cannot be legally transferred in them if the seller is not the owner. Similarly he cannot sell any other interest in the asset if he is not the beneficiary or ‘owner’ of the interest. Lack of disposition rights may also occur 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.

172

See in the Netherlands HR 12 Jan 1979 [1980] NJ 526.

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Unlike capacity, the ability to dispose of an asset may be considered a more factual than legal issue, but this is misleading and has lead 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. 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. For the present discussion, the key is that failure of the disposition right 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 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). Therefore 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 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, as is not the case 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 therefore 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. 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 concepts 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. Rather than the protection of the ordinary course of business, the more traditional justification given for this protection of the bona fide purchaser is 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. Naturally the seller is here at fault but the question is 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 increasingly towards the new owner. In this approach, a sale by an unauthorised person to whom the original owner voluntarily handed his goods is considered the latter’s risk. This is the entrusting concept. It is also possible to see this as a variation on the agency principle, but the true and more modern perception is the protection of the ordinary course of business and therefore the finality of commercial and financial

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transactions which are not or no longer to be undermined by sophisticated legal reasoning. When this is the objective, bona fides might not even be any longer the material issue, as we shall see. Although in the interest of finality modern law may thus go well beyond the protection of the bona fide purchaser, the latter, at least of chattels, is in any event now mostly protected provided he obtained the physical possession of the goods. This physical aspect may well be a remnant of older thinking and the requirement is in any event less clear under the statutory exceptions in common law and also in German law in the case of a sale of goods under a holder (longa manu) or custodian when in Germany the real issue appears to be whether the seller lost all 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 Besitzmitlungsverhältnis, see also s 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).173 The bona fide buyer must also have paid good value, although this value need not be commensurate whilst the requirement is altogether absent in the German system. The other normal requirement is of course that the bona fide purchaser must be unaware of the disposition impediment of his 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 Art 3.11 CC, even implying an investigation duty) and the German BGB on the other (subjective: see s 932(2) BGB). Dutch law refers in this connection specifically to the disposition rights, German law only to the ownership question, although in s 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 sees in civil law the connection with the acquisitive prescription based on bona fide legal possession as the manifestation of any proprietary right. More generally, 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 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 173 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 whilst 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.

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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 and the English buyer in possession has a strong position, even if his underlying contract is invalid, as we have seen in section 1.3.2, 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. On the other hand, in common law, the applicable statute will 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 USA under section 9–320(a) UCC. Again, it is a question of protection of business flows. It is posited that this is truly the way forward in respect of all commoditised products including receivables and even now the basic rule, certainly also in terms of finality. Indeed, the key remains 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 chattels in the ordinary course of business. It may be clear from the discussion in sections 1.4.6 and 1.4.7 above that the abstract system provides protection for a purchaser 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. It limits the instances in which subsequently a lack of disposition rights in the seller could occur. There is no bona fides requirement. It fundamentally limits 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. 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 himself 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 purchasers protection in respect of chattels, not therefore for real estate (which has also to do with constructive knowledge where land registers exist, as we saw) and intangible assets acquisition (if not embodied in negotiable instruments). Where the bona fide purchaser protection is still not commonly available, like in the case of intangible assets (except for bona fide collection in the law of equity in common law countries as we

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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 Above in section 1.2.3, 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, 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 whilst in the meantime the latter as bailee has all actions against third parties. 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 of a holder 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’ as noted in the previous section. This left any rightful owner with only a personal action against a holder of his assets if he voluntarily surrendered them. This is the saisine. 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 later 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.174 In this approach, acquisition from a thief (therefore upon involuntary surrender) would also lead to full ownership (or lack of a retrieval action) 174 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”

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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. Like in England this often did not even require good faith (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 only was 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 his 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.175 One of the keys to understanding the Roman system is that the mere holder (as distinguished from the legal possessor) who sold the asset became a thief and acquisition from him could therefore never result in ownership since it rendered the asset a res furtiva.176 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 saw, 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. Countries like Spain and Portugal balance this by having very short acquisitive prescription periods. Although the physical holder may often 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 and a valid contract with the des Tiers Acquéreurs,’ in 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. 175

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. 176 See for this concept and its consequences, n 62 above.

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seller/holder. Some city laws in Italy and the Netherlands had in the meantime adopted similar approaches in the interest of continuing trade, often without great clarity on the aspect of good faith acquisition.177 One sees here the difference in the reasoning: if the ordinary course of business needs protection, bona fides in the acquirer becomes less relevant, or to put it another way, bona fide purchaser protection is a narrower concept. It supplemented any protection that derived for the transferee from the abstract system of title transfer. 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 superseded by the requirement of bona fide possession under the maxim ‘en fait de meubles possession vaut titre’. Also in France, the requirements of trade and of the ordinary course of business contributed to this development,178 but the Roman law of acquisitive prescription, which required bona fides, seems to have been the model. Although the newer maxim was originally only an evidence rule (fonction probatoire), it was gradually seen as an acquisition rule (fonction acquisitive).179 Again, unlike under Roman law, no iusta causa was required for this acquisition in France. As a consequence, bona fide acquisition with physical possession from a mere holder always 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.180 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 (s 367) of 1811

177

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 Fisher and EM Meijers, 2nd edn (1965) 50–55. In II.3.5 Grotius adhered, however, to the general rule that protected the owner against bona fide possessors even if they acquired the chattels for value. This largely commercial development was later also noted in Northern Germany by Mevius, Commentarii in Ius Lubecense Libri Quinque (Frankfurt 1700). 178 In the eighteenth century, the ‘sureté du commerce’ was invoked as argument for the extension of the protection in this manner by Bourjon, 6 Le Droit Commun de la France et la Coûtume de Paris, Réduits en Principes, Titre 8, ch 3, s 4(18). 179 Again this development was in particular reflected in the writings of Bourjon in the eighteenth century, Paris (ed), 3 Le Droit Commun de la France et la Coûtume de Paris, Réduits en Principes (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 also 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). 180 The French approach insists on bona fides at the time of acquisition and requires actual 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.

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clearly introduced the notion of the protection of the bona fide purchaser of chattels from a non-owner 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 (s 932 BGB), the protection is cast neither in these terms, nor as an acquisitive prescription as in France, but rather in terms of an independent 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 physical possession in that context either and also allows constructive possession for the operation of the bona fide purchaser protection but only in the case of the traditio longa manu.181 In England, the law of chattels, although still largely based on the Germanic principle of seisin, unexpectedly 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 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 him virtually the title holder (as possessor) against all the world. Even the true owner has then only a weak personal claim against him, as we have seen, whilst 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-a-vis the bailee), regardless of their good faith. The English developments must be seen against this background, which may explain why bona fide purchaser protection might not have been so necessary and remains even now 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 a number of important statutory exceptions, which take it (for the sale of goods only) close to the dominant civil law approach. The oldest exception was the purchase in markets overt (s 22 old), which were certain market places 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, rather absence of bad faith. It was an exception never introduced in the USA, however, and, because of its antiquated formulation, now also abolished in the UK (since 1995). It should be taken into account in this connection that the system of title transfer is abstract in

181 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 whilst it requires the acquirer to disclose his predecessor in order to benefit: see Art 3.88 new Dutch CC.

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common law (see section 1.4.6 above) and therefore already underpins the notion of finality. 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 shall see shortly. 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 (s 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 is in England 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 (s 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 23.182 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).183 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, whilst 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 USA, the principle of bona fide purchaser protection also remains exceptional at law. However, like 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 particularly applies to security interests in those goods. 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.

182 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 the buyer must be bona fide as to the causes of the invalidity, very much like the situation in France. 183 It produces a so-called agreement to sell rather than a sale agreement, only the latter of which immediately transfers ownership. The reservation of title is the prime example.

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In this connection section 2–403(2) UCC elaborates on the entrusting notion in sales but only to a merchant who deals in the goods of that kind, probably without 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 not conditional on any entrusting notion184 and therefore not on bona fides either.185 Special protections apply to good faith purchasers in the case of failed sales agreement because of default.186 In the USA, 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. It is less clear whether there has to be actual possession by the third party purchaser of the assets in order for him to be protected. Section 2–403(2) UCC does not require it in the case of a purchase in the ordinary course of business , whilst for the protection against secured interests under section 9–320 the possession of the bona fide purchaser is not relevant at all.187 Only the seller with a voidable 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). 184 See for the classic study on the subject, G Gilmore, ‘The Commercial Doctrine of Good Faith Purchase’ (1954) 63 Yale LJ 1057 showing that the requirement of good faith itself became less and less demanding. In the USA, it may mean no more than an absence of mala fides whilst 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, 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 167 above. 185 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 (1995) 881. 186 See n 167 above. 187 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 rd 416 (1988). It may raise 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. S 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 USA, 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 base

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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 USA, 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 saw before, this general principle of protection in equity against unknown equitable proprietary interests is of upper most 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 whilst 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 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 was an issue already briefly discussed in the law of sales, see chapter 1, section 2.1.10 above. 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, which do not require delivery of possessions 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, like the German and Dutch systems, the seller remains in any event the owner before

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 164 above, at ss 33–16, and Gorden v Hamm 74 Cal Rptr 2d 631 (1998).

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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 retention) 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, in civil law, a lien or retention right does not automatically result from the mere possession by any creditor but normally depends on statute or the operation of the law, see for example sections 273, 986 and 1000 BGB and Article 3.290 of the Dutch CC. It provides as such a strictly limited remedy and guards against proprietary action or self help of the owner. It may also be agreed in the contract but does not then automatically follow the rules of the statutory liens. The contractual retention right may under applicable law equate to a possessory charge subject to the rules concerning the creation of such charges. That is at least the position in the USA. 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 chapter 1, section 1.4.2 above. 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 and may then also allow a seller in possession to retain the asset until payment. In that case, it implies yet another kind of retention right (besides the statutory and contractual ones). Reference to that kind of retention right is in Germany made in sections 273 and 320 BGB. In that case it protects against personal contract claims rather than proprietary actions. 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 Code,188 although the consequences are often very different. The retention right, even if resulting under the exceptio non adimpleti contractus, may have some proprietary and 188 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 Ghestin/B Desche, Traité des Contrats, La Vente, no 695 (1990).

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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 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 he is unlikely to be able to appropriate title in the asset under it.189 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.190 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 was 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, like those for specific performance, may not be backed up by a retention right in the asset, but it may be possible to set off mutual claims for the same sorts of assets (likes stocks and shares).

189

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 (‘commissionair’) 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, like for a private carrier, a warehouse, a bailee, a trustee, a lawyer, arbitrator and any general or special agent, see in the US, Sheinman and Salita Inc v Paraskevas 22 Misc 2d 436 (1959). 190 See OLG Düsseldorf 27 October 1977 [1978] NJW 703.

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It is increasingly accepted that the true owner need not be the contract party of the retentor who therefore even prevails over an owner or over the beneficiary of an older proprietary right, compare 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).191 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 in the USA 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.192 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, whilst 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 whilst 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

191 See F Derrida, Encyclopédie Dalloz (Paris, 1987) Rétention No 30. In a French bankruptcy of the debtor, the bankruptcy trustee may, however, 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. 192 See in England Brandao v Barnett (1846) 3 QBD 519.

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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 new Dutch Civil Code in favour of an execution right with the highest priority, assuming the conditions of a pledge or charge are inapplicable (Art 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 lead all the same to a preference for the selling retentor or line. There remains in this connection the 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 title if not automatically returned to them upon a rescission of the sale agreement. It appears that where such a rescission is subject to 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 USA: 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.

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1.5

Proprietary Rights in Intangible Assets in Civil and Common Law

1.5.1 Asset Status of Intangibles. Proprietary Rights in Intangible Assets and the Possibility and Method of their Transfer In section 1.1.3 above, the proprietary aspects of claims were already identified193 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 (creditor)’s rights in them. It follows that they also serve as a basis for recovery of the creditor’s own creditors, are in principle transferable, and can be given as security.194 Yet, because of the dual nature of these assets in terms of the internal (obligatory) and external (proprietary) aspects, it took a long time for the law to create a system for the transfer of these rights without the consent of the debtor and to devise a means of proprietary protection for claims, even in civil law.195 In fact, in French law, assignments remained part of the law of contract under the Code Civil of 1804. In the German BGB of 1900, the assignment still figures in the General Part of the Law of Obligations (Book 2) although the transfer of intangible claims became more properly a matter of property law. That is still the approach of the DCFR, which also in this aspect follows German law uncritically. For a better understanding, it is essential that the internal (obligatory) relationship between creditor and debtor should not be confused with the external (proprietary) one, that is the relationship between the creditor and the entire world. The internal relationship is covered by the law of contract, tort or unjust enrichment, depending on

193 It has been noted above that all rights are intangible, including all proprietary rights. 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 a significant effect on the way the proprietary (and other) rights in it are transferred and it would be incorrect to apply the present rules of assignment to all transfers of rights. 194 See for this development in common law SA Riesenfeld, Creditors’ Remedies and Debtors’ Protection, 3rd edn (1979) 215. For an important 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). 195 Under Roman law, for intangibles the problem seems to have arisen primarily 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, see also s 1.1.3 above, whilst in Roman law possession was not merely physical, see Gaius 4.153 and further n 47 above. Nevertheless, any assignment was considered a contractual matter only, when there was the further problem 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 and n 212 below. It may be noted that notably German law has not progressed much from here.

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the nature of the underlying claim, and is therefore obligatory or (in civil law terms) in personam, but the external one is a matter of the law of property and is proprietary or (in civil law terms) in rem. Assets are thus not only real estate and chattels but also intangible claims and they are all subject to similar laws of property or proprietary interests. In civil law, this was duly recognised as it strove from early on for one ownership concept in respect of all assets,196 but there are still important differences especially in the proprietary rights that can be created in intangible assets and in the manner of their transfer (through assignment) and protection. Civil law does not show here one single picture as we shall see. First, in civil law terms, real estate may be subject to all recognised limited proprietary rights of which the usufruct, the secured interests, servitudes and some long-term leases are, as we saw, the most common. For the creation and transfer of these rights and also the right of ownership itself, there are likely to be special publication rules now that most countries maintain a land register. For chattels, most limited proprietary rights are also available, although servitudes and long-term leases in respect of them may be less common. Assuming sufficient disposition rights or power in the transferor and a valid contract (or cause), the transfer is either through contract itself at least for chattels (in the French system except for pledges) or upon subsequent delivery of possession (in the German system) as previously explained: see more particularly section 1.4.1 above. For intangible claims, the proprietary rights that may be created in them (besides full ownership) may be limited to the usufruct and the security interests only, as is now the Dutch system. In fact, this system does not speak of ownership of claims either and does also not refer to the most complete right in them. It refers only to disposition rights (Art 3.84(1) CC). This approach is new in modern Dutch law and derived from the German example: see sections 1.1.5 and 1.2.3 above.197 It is mere semantics, however, because there is no doubt that the new Dutch Civil Code and the German BGB treat claims as assets, even though only implicitly. As we have seen, the new Dutch Code allows in this connection expressly for (legal) possession, which in civil law normally stands for ownership, and also acquisitive prescription (Art 3.99 CC). This is not so in German law. Presumably, there is also holdership like under a collection arrangement. Nevertheless, there is no

196 Even in England, where the assignment of contractual claims is considered a contractual matter and of tort claims a tort matter, intangible assets are not always only considered 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, see for the English developments further, s 1.5.2 below. 197 New Dutch law appears here to take a retrograde step by splitting out the intangible assets (Art 3.1 CC) and formally restricting the concept of ownership (but not of possession and holdership) to tangible assets only: see Arts 5.1 ff in conjunction with Arts 3.107 ff CC and further n 12 above.

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proprietary or possessory defence and the intangible claim as an asset can be defended only in tort against third parties that infringe the creditor’s rights (Art 3.123 Dutch CC). This is the general way of protection of claims in civil law and brings it in line with common law in which all proprietary protection in personal property can only be achieved through tort actions, see section 1.3.4 above.198

1.5.2 Assignments, Conditions and the Meaning of Notification. Bulk Assignments. The Situation in Double Assignments. Civil Law Development. As for the transfer of claims, this is done everywhere in a particular way, through assignment, although the specifics may still vary greatly, even in civil law. Earlier, in section 1.4.1, it was explained that ever since Roman law for a valid voluntary asset transfer, there needs to be power (or a disposition right, usually ownership of the claim) in the transferor, intent or a valid cause (mostly a transfer agreement), and formalities (mostly an act of transfer). It is in principle not different for the modern assignment as the DCFR also confirms, see section 1.11.3.below. In an abstract or rights-based system, the act of transfer—for chattels mostly (constructive) delivery, meaning a form of transfer of (constructive) possession—should not be problematic for intangible assets either. It causes still problems in an anthropomorphic approach, however, but, as we have seen, notions of (constructive) possession are in modern legal systems perfectly compatible with intangible assets and therefore also their transfer. It may require some special act or be implicit in the assignment agreement (for chattels the French and English system, in the sales agreement, as noted earlier). It is implicit in the German approach to assignments as we shall see, even though German law maintains a delivery requirement for the transfer of chattels. Mostly there are no special formalities in this respect or they are reduced to notice to the debtor, which may then be a constitutive requirement for the validity of the assignment, therefore in the nature of a legal act. In some civil law countries, this notification may still be equated with transfer of possession as an act of publicity. It must be doubted whether that is a correct view. It is the old French approach and caused considerable confusion in the new Dutch Civil 198 Everywhere there remain differences with the law of chattels, as 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 210 below. The contractual prohibition of an assignment tends to be valid in the case of claims and then has third-party or proprietary effect 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, whilst it has most certainly no such in rem or third-party effect in the case of chattels: see s 137 BGB, Art 3.83(3) Dutch CC and s 9–401 UCC. Statutory law in the USA is much more reluctant to give these contractual assignment prohibitions third-party effect: see ss 2–210 and 9–404 ff UCC and s 1.5.3 below. It is nevertheless true that everywhere the assignment is still seen as a technique somewhat different from the title transfer of tangible assets in terms of formalities and notification to the debtor. This may also affect the creation of any security or conditional ownership rights in claims.

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Code of 1992, as we shall see, but is increasingly abandoned. It was already said that notifying a debtor is hardly an act of publicity. The only similarity is the additional requirement of a legal act. Sometimes there is also a need for a document for each individual assignment. Notice and document suggest specificity and identification, again an anthropomorphic attitude, an important issue nevertheless which handicaps bulk assignments and the assignment of future claims, as we already saw. These requirements may, like in the case of chattels, even go to the disposition right and then curtail it. Thus assignments may or may not require notification to the debtor under the claim in order to be perfected, but they now never require the debtor’s consent, which demonstrates by itself the proprietary nature of the right in the claim. The same now goes for the creation of limited proprietary rights in claims like a usufruct or secured interest. As regards the notification requirement of the debtor (but never his consent), this was traditionally a formal constitutive requirement in French law, as just mentioned, which also required a formal document.199 The consequence is that, traditionally, some outward manifestation was still required for the transfer of claims in France. It is somewhat curious as a manifestation of physical transfer or delivery was abandoned in France for the transfer of chattels in the Civil Code of 1804, under which delivery of possession was no longer necessary: see Article 1138 CC and section 1.4.2 above. To facilitate bulk transfers or assignments of receivables for financing purposes, these formal requirements (of documentation and notice) have now been abandoned in France since the amendments introduced in 1981 by the Loi Dailly, at least in the context of financial dealings.200

199

But recognition of the assignment by the debtor is a substitute: see Art 1690 CC. It must be done through a notarial deed unless there is actual payment by the debtor to the assignee. French law remains closest to the Roman system of C.8.41.3 as elaborated in the Ius Commune requiring notification for the effect of the assignment on third parties, especially on the debtor, or the latter’s recognition: see Art 1690 CC. It did so under the influence of one of the leading French commentators at the time: see 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 was abandoned in favour of the natural school approach which allowed title in chattels to pass through the mere sales agreement, see again s 1.4.4 above. The notification of Art 1690 CC was originally of a very formal nature and needed to be given by an official judicial officer, whilst the alternative of recognition of the assignment by the debtor still requires an official (notarial) deed (acte authentique). In the case of a transfer for security purposes only, a public deed or at least the registration of an informal document was necessary except in the commercial sphere under which 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 Comm. 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 needed not to be similarly formal: see Cour de Cass, 9 May 1864, D.1.190 (1864). But France kept in principle the old Ius Commune approach built around official notification or formal recognition as repeatedly confirmed by the Cour de Cassation: see the decisions of 20 June 1938, D.1.26 (1939) and 12 June 1985, Bull civ III 95 (1985), notwithstanding serious criticism. 200 See Law 81–1 of 2 January 1981 modified by the Banking Law of 24 January 1984 (Arts 61 ff) 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

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In Germany, they never existed, see section 398 BGB following in this respect late nineteenth-century German case law. It abandoned the traditional Ius Commune approach and adopted later Ius Commune thinking,201 which had started to deviate from its earlier development202 requiring notice (or recognition or the start of a lawsuit by the assignee for recovery from the debtor).203 This was the origin of the

structures involving portfolios of receivables: see also Ripert/Roblot, 2 Droit Commercial, 16th edn (2000), nos 2428 ff. It 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. The 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 has been favoured in France since the Cour de Cassation allowed it on 19 August 1849, D.1.273 (1849): see also Vol III, ch 1, s 1.3.5. It 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. 201 See s 398 BGB, although the older Ius Commune (see n 202 below) continued to be applied in this area in Germany during much of the nineteenth century: see Windscheid/Kipp, 2 Lehrbuch des Pandektenrechts (1900) No 331, until the decision of the RGH, 8 March 1881, RGHZ 4, 111 (1881). It allowed in a bankruptcy of the assignor the assignment to be operative as at its date and not as at the notification. This modern German approach still requires a special act of transfer or Einigung (which in the case of intangibles signifies at the same time the transfer of legal possession: see for the transfer of chattels more in particular s 1.4.2 above) to complete the assignment, but is normally considered coterminous and implicit in the assignment agreement, although in a abstract system of title transfer, like the German one, well to be distinguished. This fits in with the approach of Voet, see n 203 below which is at the root of the modern German system. The notification was never equated in Germany with giving notice as a matter of publicity. 202 In Roman law, because of the view that all contractual relationships were highly personal, see n 195 above, creditor substitution could be achieved only through a novation which means through a new agreement requiring the debtor’s consent: see Inst Gaius 2, 38 and 39. Commercially, this proved 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 Kaser, Römisches Privatrecht [Roman Private Law], 14th edn (1986) 246. The actio utilis became subsequently 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 deceaseds’ estates in their entirety: see D.2.14.16 pr and further C.4.10.2 and C.6.37.18. Eventually the actio utilis became available to all purchasers of claims even before a procuratio was

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approach of the CC in France. Modern German law requires neither a document nor notification as a condition for the validity of the assignment, but it 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.204 It is not therefore common in Germany to distinguish between the

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 whilst 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. 203

The Ius Commune used the actio utilis of C.8.41.3, see n 202 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. The consequence was that the assignee giving notice first and to whom the debtor paid obtained an advantage even if his assignment had been later and that until such time (or recognition or the start of a lawsuit by the assignee) the claim still belonged to the assignor whose creditors could garnish the debtor for payment to them. Some authors suggested therefore 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) whilst believing that the mere assignment should be sufficient to transfer the claim to the estate of the assignee. 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 was the influential approach of the late seventeenth-century Dutch writer Voet, Commentarius ad Pandectas, 18.4.15 ff, who invoked the customary law of his time. In this system upon a double assignment, the first assignee would ultimately prevail whilst the asset would be part of this assignee’s estate as at the moment of the assignment and not as at the moment of notification, although, until notice, the debtor, if bona fide, could still validly pay to the former creditor/assignor, and upon notice by any assignee, he could safely pay the latter. In this manner the second assignee could prevail at first but would owe any collections made to the first assignee. Where notice is a constructive requirement of the assignment, the debtor may also pay the second assignee but the difference is that his knowledge of an earlier assignment attempt without notification is then irrelevant as it would not have led to the desired transfer, although new Dutch law, which now requires the notification for the validity of the assignment, may well have left some doubt in this aspect: see Art 6.34 CC. 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 Wolff, Institutiones Juris Naturae et Gentium (Halle 1734), Par 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 s 1.4.4 above. There was, however, a difference with the approach of Voet who had still wanted a formal 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 document. 204 See n 203 above.

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agreement to assign, which is the sale of the claim, and the assignment agreement which is considered to complete the assignment as transfer. In the Netherlands, the requirement of a document was inherited from French law but it needed not be notarial and the French notification requirement was abandoned under the old code.205 The requirement of a document remains in force under new law, but surprisingly notification was reintroduced as a constitutive requirement of the assignment in the new Dutch Civil Code of 1992. It was rightly criticised as regressive and made bulk assignments in principle impossible. Although for a security transfer this notification is not necessary—there is in that case a registration requirement with notaries. It created similar problems for bulk security transfers as the formalities still apply in respect of each transferred claim.206 Proposals to lift the notification requirement suggested the route of the notarial registration requirement for all financial assignments, borrowed from security assignments. It led to an amendment in 2004 allowing for this alternative. It remains much criticised and a return to the old system would have made more sense. There is no public register and the only advantage of registration is that it certifies the date of the assignment.207 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:208 see the famous case of Dearle v Hall of 1828,209 although English case law never went as far as to require it for the validity of the assignment itself. It only gave the assignee giving notice first priority in the collection by considering his assignment to be properly completed or perfected (whilst further requiring the debtor to be in good faith whilst

205

As in Germany under the BGB of 1900 and following Voet, see n 203 above, in the Netherlands under the old Code (until 1992) delivery of possession remained necessary for the transfer of chattels but not notification for the assignment. 206 See Art 3.239 CC, which still raises the question whether the registration must be done for each receivable individually. In order to facilitate this registration possibility at least to some extent, the Dutch Supreme Court now allows computer lists of the assignor to be used to which reference may be made by identifying the first and the last assigned claim on the list, see HR, 14 October 1994, [1995] NJ 447. 207 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, like delivery is for chattels, and manifestation of the proprietary right (rather than an expression of the real agreement) which is assumed to depend on it. Yet for chattels, delivery can be entirely constructive as we saw in s 1.2.2 above, whilst notification of an assignment to the debtor is not publicity in respect of anybody else. It was already said that the only similarity is here the requirement of an additional legal act. In any event, it is doubtful whether publicity is indeed the heart of the proprietary right, as was discussed at some length before: see s 1.1.1 above. At least in chattels, most of these rights are normally hidden. The only practical advantage of the notification requirement is that it simplifies the situation if there has been a double assignment as we shall see shortly. 208 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 also s 1.4.4 above. 209 (1828) 3 Russ 1.

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paying, but not strictly speaking the assignee whilst giving notice). It did not amount to making the notification an absolute condition of the validity of the transfer but it gave it crucial importance by preferring any assignment followed by notification, even if there had been earlier ones without it. 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. 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 like 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 liberate himself in so doing. In this system, if the debtor pays a second assignee upon notification without knowledge of an earlier assignment, he is equally liberated and the only question that then results is whether the second assignee (whether or not aware of the first assignment) must surrender his collections to the first assignee who did not notify. It follows in systems that require notification for the validity of the assignment that only the notifying assignee is the true assignee. Even so, there could be several notifications before actual payment when only the first notifying assignee appears to have the right to the claim unless (perhaps) later ones manage to collect in good faith (when the debtor is likely to have been at fault in paying and may have to pay again). This concerns the question whether a collecting bona fide (second) assignee of a claim without notice is protected and may keep the proceeds: see also section 1.5.9 below. The question is more likely to arise in systems which do not require notification for the validity of an assignment when the first assignee has the right but later assignees may give notice to the debtor first and may do so unaware of the earlier assignment. Protection of bona fide assignees is normally not part of civil law that generally protects only bona fide purchasers of chattels (on the basis of the outward manifestation of ownership of the transferor), but it may be different in common law and there are states in the USA, notably New York, that accept that bona fide collectors may retain their collections:210 see also section 342 of the Restatement (Second) Contracts (1981). English case law at least protects the bona fide debtor who pays in good faith to a second assignee. 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, not even if himself also unaware of the earlier assignment, although in modern case law that is now accepted.211 Other assignment problems arise where claims are highly personal, where according to the underlying contract they are not transferable, or when they are future claims or claims that are insufficiently specific, conditional or contingent. Another important question is whether claims, especially receivables, can be transferred separately from

210 211

See also n 218 below. Rhodes v Allied Dunbar Pension Services Ltd [1987] 1 WLR 1703.

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the legal relationship out of which they arise, and if so whether and which closely related rights and especially duties are automatically transferred with them. It is the issue of severability. Another important assignment issue is what happens to an assignee if the assignor and debtor change their contract affecting assigned (future) claims thereunder. Then there is the status of the defences, which the debtor may have had against the assignor and their continuing efficacy when payment is requested by an assignee. This includes also the right of set-off which the debtor may have had against the assignor and the status of contractual assignment restrictions. These aspects will be discussed in greater detail below.

1.5.3 The Development in Common Law. Equitable Assignments and Bulk Transfers Before going into greater detail, the common law of assignment justifies a closer look. At law, the common law system, especially in England, struggled with the concept of assignment longer than the Continental legal systems did. In common law, the situation remained therefore more complicated, although not when compared to Roman law, which was very similar. Like under Roman law, claims were in common law 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 (the Roman procuratio in rem suam and 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. This type of arrangement also required documentation.212 It was further already noted above, that there was never a unitary system 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. Here also arose the issue whether these intangible rights were merely obligatory or were also assets and as such protected as property against third party interference, which at least in equity became 212

The creditor would give a written power of attorney to a third party to collect and an instruction or assignatio (hence the later term ‘assignment’) 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 lawsuits merely for one’s own benefit without any other concern: see W Holdsworth, 7 History of English Law (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 (since 1787): see Winch v Keeley 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.

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accepted,213 whilst it was subsequently also held that it was wrong to consider this proprietary effect of the assignment to be 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, see also section 1.4 6 above.214 This remained, however, a difficult concept in common law too, where even for chattels the concept of ownership was often overtaken by that of physical possession: see s 1.3.2 above, which had no equivalent in the case of intangibles. As far as the property is concerned, in common law the emphasis is still on the integration of the proprietary regime of real estate and chattels and any fundamental difference in the type of proprietary protection between tangible and intangible assets remains largely undiscussed. Thus the line between the assignment as a purely contractual matter and a transfer of title in claims remains blurred, not helped by the general lack of a clear distinction in common law between in rem and in personam rights in personal property. There is no doubt, on the other hand, that claims are classified as personal property and that this status endures within the limits of the law especially in terms of transferability without the debtor’s consent. Equity in particular became willing to accept that claims were ordinary assets. It was therefore better able to do away with these traditional constrains. The equitable assignment thus became the normal way to transfer claims, but this was at first possible only if the assigned claims were themselves equitable (like restitution, corporate or tax claims).215 Although (in England) by statute the legal assignment was subsequently expanded, it still requires notification and documentation. Thus the equitable assignment continued to be used and, as a consequence of the merger of law and equity, it became also available for claims at law (like those in contract and tort, although notionally in

213

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. 214 Republica de Guatemala v Nunez [1927] 1 KB 669, 697. 215 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 n 213 above. It did not then require a document and notification as conditions for the validity of the assignment either: see also Dearle v Hall (1828) 3 Russ 1, 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 nn 196 and 211 above and s 1.4.6 above for the case of a sale of chattels, and further Republica de Guatemala v Nunez see n 214 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.

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these cases the name of the original creditor is still used in litigation).216 Since no notification or documentation is required, it also favours bulk assignments and facilitates assignments of future claims. This is the current situation in England, under which neither notification nor documentation is a formal or constitutive requirement for the (equitable) assignment of legal or equitable claims. Yet common law continues with a fractured system, under which, moreover, the requirement for assignments may differ, depending on the nature of the underlying claim being in contract, tort or restitution. In this connection, the assignability of tort claims may still present the most problems because of their often personal and punitive nature.217 But even the assignability of contractual claims may present special issues, especially in the case of contractual assignment restrictions. In the USA, the legal assignment seems to be entirely abandoned, but in other aspects218 the law amongst the various states remains divided, especially in the 216 This was the consequence of the Judicature Act 1873, which merged law and equity, although even then not fully. S 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 an absolute assignment, 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 can pass full equitable claim. This technicality is probably of little importance in the USA 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, like 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. 217 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 Martins Property Corporation Ltd and Anor v Sir Robert McAlpine & Sons Ltd [1993] 2 All ER 417. 218 In the USA the law of assignment developed on the basis of the equitable assignment and did not inherit the old common law impediments: see also Cook, ‘The Alienability of Choses in Action’ (1916) 29 Harv LR 818, but even in the USA the subject remained riddled with controversy primarily centring on the question whether the assignor’s right has been fully extinguished or whether the assignee has 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 here a role too; equity in the USA would accept that

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meaning of notification.219 Some states adhere here to the English equitable approach protecting the assignee first giving notice; others give the first assignee the best right regardless of notification, whilst in New York traditionally the first assignee has the better right but any bona fide later assignee may retain his collections. All seem to be agreed, however, that notification is no requirement for the validity of the assignment itself. The Restatement (Second) Contracts in section 342 gives the bona fide assignee the better right before notice. More important is the special assignment provision of section 2–210 UCC for the assignment of sales receivables and of section 9–406(d) UCC for security assignments of all claims that may be assigned as security under Article 9 UCC. For assignments of monetary claims (which are presumed to be made for funding purposes), Article 9 UCC has a special regime which allows in principle assignment without filing or notification unless it concerns substantial portfolios of receivables. In this connection, bulk assignments do no longer present problems, neither do assignments of future claims, all depending for their effect on a reasonable description only. Thus, every bulk assignment of receivables is now treated similarly under state law in the USA and requires filing (of a finance statement) for perfection unless it is done for collection purposes only.220 In the USA, Section 9–406(a) UCC authorises the 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), whilst in the USA the courts sitting in equity have largely renounced the 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. 219 Some states follow the English approach of Dearle v Hall, see n 215 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 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, 4 Contracts (1951) s 902. Notification is, however, nowhere an absolute requirement for the validity of the assignment itself. 220 S 2–210 UCC provides for a special regime for assignments of sales receivables (although Art 2 does not generally deal with the sale and transfer of claims but only of goods: see s 2–201 UCC). Except where the assignment materially changes the duties or increases materially the burden or risk of the other party (the debtor), the assignment is allowed. The method of assignment of claims is not covered by s 2–210 UCC and has its own regime under Art 9 UCC, even if not especially transferred for security purposes (unless transferred for collection alone), see ss 9–102(a)(2), 9–109(a)(3), 9–309(2), 9–317(d), 9–403, 9–404 ff, 9–501, 9–607, 9–615(e) UCC. These assignments under Art 9 do not only cover sales receivables, but may also cover others, like those for services, and even rights to damages under a contract, or whole loan portfolios in securitisations, but they may not cover individual tort claims: see s 9–106. The latter are not customarily used as commercial security, although it is conceivable that an insurance company assigns all claims in which it is or may be subrogated as security for an advance.

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debtor to pay the assignor until notice. Thereafter, he must pay the assignee. The suggestion is that he pay the first one, there is no search duty. As to the ranking between assignees, the filing of the finance statement determines the rank under Article 9. See further also sections 1.5.7 and 1.5.8 below.

1.5.4 Assignment of Rights and Delegation of Duties. The Transferability of Entire Contracts. The Debtor’s Defences As regards the transfer of intangibles, the modern rule is that only the asset or active side of a contractual arrangement may be assigned to third parties without the consent of the debtor and it may then be separated out, in particular the payment rights, provided that no material extra burdens are created for the debtor and the contract is not fundamentally changed thereby. This easy transfer possibility involving creditor substitution does normally not apply to any transfer or delegation of contractual (or other) duties, thus not to debtor substitution, or to the liability or passive side of the contract. The reason is obvious: except in the case of personal services, it is often immaterial for a debtor whether he performs to an assignor or assignee, especially clear in the case of a payment, but it is normally very relevant to a creditor who the person is who must perform (or pay) to him. That is a matter of credit risk. 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, which means that debtors cannot normally substitute themselves for others without the consent of the creditor. In the US, the special importance of section 2–210 UCC is in this regard that it 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 of the original promisor whilst the transferor is not released without the consent of the original counterparty, but like this counterparty the transferor may insist that the transferee performs (first). It is an

Under the last Revision of Art 9 effective in 2001, the assignment of commercial tort claims is covered. Additional rules are to be found in s 9–604 ff UCC. There are differences in approach between s 2–210(2) and s 9–406(5) UCC which go beyond the fact that in Art 2 only the transfer of sales contracts rights and duties is considered, whilst Art 9 UCC concerns the (security) assignment of all kinds of monetary claim. S 2–210 UCC is willing to accept the transfer of duties with the rights except where this materially increases the burdens on the debtor or changes the duties. S 9–406(5) seems even less disposed to accept assignment restrictions on receivables when assigned for security purposes. In any event, in the USA 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 G Gilmore, Security Interests in Personal Property (1965) 1077 ff.

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important statement, as it allows each party in principle to transfer its entire position under a sales agreement and is as such an important pointer to a new trend. As far as rights only go, it should be realised, however, that in as far as personal services are concerned, even creditor substitution is difficult as a personal service provider, like a servant, cannot normally be asked to provide his service to anyone whom the creditor might identify, except where that was part of the 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. The modern trend is to facilitate the splitting off and assignability of the asset side, particularly of a monetary claim like a receivable, and one may conclude that monetary claims are now ordinarily assignable everywhere, but it is obvious that even for monetary claims, those that are highly personal remain unassignable, like claims for alimony or child support. Life insurance policies, future 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 be the classic example. Their assignability will be discussed in the next section.221 Yet even then it remains to be seen how far the lack of assignability avoids the transfer altogether or only allows the debtor to ignore the assignment. All in all, there is no doubt that the transfer of intangible claims remains generally more complicated than the transfer of chattels. First, the assignment of claims involves a third party, the debtor, at least to the extent that his performance must be redirected towards the assignee. To this end, notification must be given. In some countries, this notification became a prerequisite or formal requirement for a valid assignment as we have seen in the previous section. 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 intention, but 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. Another important aspect of the involvement of the debtor is that, if substantial extra burdens result for him, he may also be able to ignore the assignment, even upon notification, and refuse to pay the assignee. It means that in such cases an effective assignment would need his consent. One could think of a situation in which different places or countries of payment result upon an assignment or higher payment costs. There are also the more specific defences against the claim the debtor may derive from his relationship with the assignor, particularly his set-off rights.

221 In Germany, rights of a company to payment by its shareholders of the unpaid part of the issue price of subscribed shares were also considered inherently unassignable: see n 230 below.

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The most important defence against payment is often, however, non-conform delivery in sales contracts222 and as long as the quality of the delivered goods is not the agreed standard, there is likely to be a right not to pay or at least to set-off repair costs or damages.223 Under present law, such defences 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.224 Otherwise, the internal relationship continues to have an external effect and in the case of valid (and material) defences, the assignor is unlikely to be released without the debtor’s consent. If there is an extra burden or detriment, the first question is whether it is in truth sufficiently burdensome to be taken into account as defence. The more modern approach is that a debtor is bound to co-operate if the burden on him is not substantial. That is the underlying idea in all assignments, which can now normally be achieved without debtor consent, as we saw. If it is burdensome, the next question is what is the effect on the assignment? (a) does it undo the assignment, or may it be ignored by the debtor?; (b) does it impose extra duties on the assignee to minimise the effects, or can the defences be maintained against him without necessarily discharging the assignor? It is clear that these consequences may vary depending on the applicable law.

222 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), 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 USA for security assignments. See for England Ord v White, 3 Beav 357 (1884). See for the Netherlands, Art 6.145 CC, under which all defences accruing until the notification can be maintained. It will be argued below, however, that these defences need in a modern setting curtailment and that receivables should be considered much more like promissory notes in respect of which these defences do not obtain. 223 The retention of the set-off facility upon an assignment against the assignee is commonly agreed: 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 USA 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 does not appear 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. See for the set-off more generally, Vol III, ch 1, s 3.2. 224 In the USA, s 9–403 UCC especially upholds these contractual limitations for security transfers of claims.

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1.5.5 The Status of Closely Related Rights and Duties and the Impact of Contractual Restrictions on the Transfer. Amendment of the Underlying Contract There further arises in assignments the question whether ancillary or accessory rights and closely related duties automatically transfer with the assigned claim. To put it another way, how far can a right be separated from its context and separately assigned? As we saw, the receivable normally may be severed from the underlying agreement out of which it arises. So may claims for damages. Stepping back for the moment, the most obvious example of an intangible asset that may be assigned is the 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). In modern law, all these rights can be transferred through assignment, although receivables are the most common and likely assets to be so transferred because of their liquidity and easy separation possibility. In bilateral contracts, as in sales and exchanges, rights are often balanced, however, by contractual liabilities or duties, resulting in an interwoven contractual relationship in which these rights and benefits may not stand sufficiently alone to be individually assigned. Thus, a buyer will be entitled to receive the goods on the appointed date but that right, which is in principle assignable, may be subject to his duties in terms of collection ex works or transportation, insurance and payment. These related duties are unlikely to be automatically transferred with the right to delivery, but they may make it more difficult to make an effective assignment without some consent of the seller who may not want to be confronted by an unknown or unreliable new counterparty, whilst the transfer of the entire contractual position is in any event likely to require such consent, because it is normally include duties which would otherwise give rise to legitimate defences against such a transfer, even if facilitated under section 2–210 UCC in the US, as we have seen. Although a receivable may be easiest to assign separately for a seller, even in that case the assignee is only entitled to receive the price subject to the defences of the buyer (against the seller) in terms of credit period and set-off rights or counterclaims in respect of the quality of the goods delivered, as we have also seen. The assignee cannot normally avoid these. As far as he is concerned, uncertainty about exposure may impede the assignment for him, but the more urgent question for the debtor is whether he may ignore the assignment under the circumstances or may at least continue to hold the assignor also liable. Even the payment may still be subject to special procedures on the part of the creditor/assignor or to an arbitration clause binding on him in the case of disputes. Generally, close relationships of this nature between the transferred right and supporting duties suggest a transfer of the duties together with the right. Also closely connected rights (like security interests)225 will transfer at the same time, as they may be considered integral parts of the assigned right. Closely connected duties are 225

See for the accessory nature of the security interests more in particular, Vol III, ch 1, n 22.

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especially those that represent a precondition for the enjoyment of the right itself, for example the duty to make an advance payment before a right may be enjoyed.226 The assignee will have to accept these preconditions, but that may still not be good enough for the debtor who may have reason to distrust an assignee whom he did not choose or approve of. This may still impede the whole assignment as far as the debtor is concerned who may as a consequence be able to ignore it or at least to hold the assignor still responsible for any default of the assignee under these related duties. Thus special burdens or exposure, defences and transfer of related duties may become practical impediments to the assignment of the receivable to protect a debtor with a justified interest or they may impact on any release of the assignor, whilst the assignee becomes additionally liable. They may no longer impact on the assignability itself but they may still give rise to extra protections. This is the more likely modern approach. It means that the right to additional deliveries under a purchase contract may be freely assignable, but only together with the duty to pay for them and without a full release in this regard of the assignor. Arbitration duties will similarly transfer. The absence of a release in these cases is the consequence of the lack of consent of the debtor, even though the transfer of duties in this way, like the transfer of the payment obligation and of any related arbitration obligation, may also be in the interest of the debtor. In the case of a dispute, the absence of a release of the assignor may not amount to much if the debtor does not want to arbitrate, but at least the assignee is held to the clause, as it is automatically transferred, and the same may then be argued in respect of the debtor. It may also be expressed as a burden the debtor must reasonably accept, as it is in fact no extra impediment for him at all. It remains a question of interpretation which rights and especially duties are so closely related as to be automatically transferred with an assigned right, and there is here often an element of uncertainty. To avoid complications in this respect, parties may have excluded in their contract the assignment possibility altogether, but, in modern law there may be a question how far these clauses are still enforceable and against whom: see in particular Sections 2–210 and 9–404 ff UCC in the USA.227 The

226 The rights to mineral extraction subject to payments of royalties have, however, been found assignable without consent whilst imposing the royalty duty on the assignee: see the English line of cases on the subject starting with Aspden v Seddon (1876) 1 Ex D 496, see also Tito v Waddell [1977] Ch 106, 302. It raises the issue whether the assignor is fully discharged in the process. It is likely that the debtor retains residual recourse against his original creditor unless explicitly released. 227 In the USA 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. S 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). S 9–406 UCC is even more liberal when receivables are assigned for security purposes, cf also n 220 above. In England, an assignment prohibition in respect of the ‘contract’ as a whole is 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

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idea is in the latter case that any credit extended needs financing that may require the 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 third-party effect. Again, that is the modern trend. Even if still enforceable in principle, again the precise consequence of a contractual assignment prohibition will have to be ascertained. It may merely be a damage action for the debtor against the assignor whilst the assignment itself is increasingly likely to be enforceable by the assignee. The courts in the USA have been particularly impatient with contractual assignment restrictions.228 However, German law in section 399 BGB and Dutch law, even in its new Article 3.83(2) CC, still defend the older attitude.229 Contractual limitations on the transfer have in these countries still in rem effect and assignees cannot even invoke their bona fides in order for the assignment to be valid except in situations in which the assignee could not have been aware of the restriction or was misled by the debtor

Trust Ltd v Lenesta Sludge Disposal Ltd and Ors; St Martins 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. 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 reflective of modern needs and perceptions. 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 cannot directly claim from the account debtor, see Rodaro v Royal Bank of Canada [2000] [QL] OJ 272. 228

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 (a) be a complication if the debtor under a contractual assignment prohibition still pays the assignee. It seems to validate the assignment and perfect the transfer of the claim from assignor to assignee. Any further assignment by the assignee (or assignor) is then also free of the assignment restriction if the debtor has no demonstrable further interest in the limitation. Would it make a difference whether the transfer limitation were an outright prohibition of an assignment or required 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 (b) 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 be asked whether the assignment is still meaningful. These issues remain little discussed but see earlier GC Grismore, ‘Effect of a Restriction on Assignment in a Contract’ (1933) 31 Mich LR 299. Under English law it is clear that if a contract is not assignable under its own terms, that means that individual claims under it are not assignable either: see Linden Garden Trust Ltd v Lenesta Sludge Disposal Ltd and Ors; St Martins Property Corporation Ltd and Anor v Sir Robert McAlpine & Sons Ltd: see also n 227 above. 229 Confirmed in HR, 17 Jan 2003, NJ 281 (2004).

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because the restriction was for example not contained by the parties in the documentation on which the assignee relied: see Article 3.36 CC and for Germany section 405 BGB.230 Another question is whether the debtor and assignor may change the underlying agreement after an assignment so as to deprive the assignee of a benefit. In the case of a security assignment in the USA, 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, but if harmed he may still have recourse against the assignor under the assignment agreement. This is a radical approach, particularly relevant in the case 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, whilst the assignor must continue to perform the rest of the contract. It may not have any wider application outside the area of security transfers, although again it is indicative of modern thinking in this area.231 230 In 1998, German law relented to some extent and denies proprietary effect to assignment restriction clauses between merchants except in respect of consumer debtors and bank loans, see s 354a HGB. The restriction may also be inherent in the nature of the claim or be negotiated (s 399 BGB). There may well be a difference in treatment if the restriction is inherent in the type of claim rather than negotiated by the parties. An example of the former is a claim of a company against its unpaid-up shareholders. In that case, the abstract nature of a transfer of title in Germany, see s 1.4.6 above, may 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 Sept 1921, RGHZ 102, 385. The third party impact is thus lost upon assignment. It was never meant to protect the debtor in the first place and could thus hardly be invoked by him. In the case of a contractual restriction (to which he was a party), the debtor may 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 Oct 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. One might also say that the breach gives the debtor a defence, which he may be able to maintain against the assignee. As a consequence, this limitation is likely to work against third parties, therefore in rem. It is nevertheless exceptional that a contractual clause can have such effect against third parties. Even if contractual assignment restrictions may be opposed 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-a-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? It is only to be repeated in this connection that contractual restrictions on the transfer of chattels are never considered to have in rem effect and cannot be opposed to buyers who did not know of them, but see also for a curious interpretation in France, n 35 above. In this aspect s 137 BGB in Germany and Art 3.83(3) of the new Dutch CC are clear. 231 This was nevertheless held sheer madness by Professor G Gilmore, Security Interests in Personal Property (1965) 1085. A comparison could be made with the position of a third-party beneficiary under a contract upon notice of his benefit, which benefit cannot normally be withdrawn after it has been signified to the

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The reason for the increasingly liberal attitude to the transfer of intangible rights, notably of receivables, is economic necessity as these assignments are often necessary to raise the funding that makes the extension of credit under the receivables possible in the first place. To repeat, the justification as far as the debtor is concerned is that the latter often has no reasonable interest in the identity of his creditor, although to summarise there may still be certain factors affecting and limiting the transfer possibility without debtor’s consent, such as: (a) the close connection with (some of) the duties of the assignor under the contract, such as a duty to pay in the case of the transfer of delivery rights; (b) any defences the debtor may have against payment in terms of poor quality of the delivered goods and any set-off of counterclaims; (c) any contractual limitations on the assignment (although under modern law no longer giving rise to an ineffective assignment); and (d) generally, any resulting material extra burdens or risks on the debtor. It was already said before that within reason, the debtor will have increasingly to accept the inconvenience of assignments of rights others have against him as the ordinary flow of business requires it and his participation therein assumes here a certain flexibility which may even result in a co-operation duty. Only if unreasonable burdens or risks result may the modern debtor be able to ignore the assignment (and an implicit transfer of related duties) or depend on the continuing liability of the assignor.232 Although the modern tendency is to favour the separation of the receivable or other monetary claims from their context (contract or other) in order to make them freely assignable, there may thus remain inherent limitations derived from the in personam nature of each claim or the internal relationship, even if assignability is now often beneficiary and even less so if he has accepted it 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’s interest as it was a term of the original contract. On the other hand, the beneficiary may not have an absolute veto over any amendments in the underlying agreement. Reasonable co-operation may be expected as long as there is no clear detriment. Also acquiescence may count as consent. More difficult may be the situation when further benefits are given but also duties imposed. A similar situation may arise when in an assignment there is some assignee involvement or acquiescence which may be explained as an amendment of the original agreement: see also the discussion in s 1.5.7 below. Short of a novation, the assignee is then properly speaking the third-party beneficiary of such an amendment, which should not affect his benefit unless there was some form of consent or acquiescence. If he now must also accept changes dictated by reasonable commercial standards, it would suggest that a lender receiving security and 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. 232 Assignor and assignee could make special arrangements amongst themselves to ensure that no extra burdens arise for the debtor who under applicable law might otherwise be able to ignore the assignment even upon notification. As we saw in n 228 above, s 2–210(2) UCC in the USA requires the extra burdens, extra risks of performance, or changes in the debtor’s duties to be material in order for the debtor to ignore the assignment.

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encouraged by modern legislation and by the courts, in the context of which contractual limitations of the transfer are increasingly unlikely to lead to nullity of the assignment. Thus, their in rem effect is increasingly denied. Although contractual monetary claims, especially receivables, are the most likely objects of assignments, there are other types of rights, such as tort claims or other claims such as those for restitution, which usually stand more on their own and may then be more readily separated from the legal relationship out of which they arise, leading to their assignability, although especially for tort claims it was long held that they were so highly personal by their very nature that they were not transferable, even as a mere claim for monetary damages. Especially in common law, there were other impediments, often of a procedural nature, whilst earlier, even in the case of contracts, the penalties that could be extracted by a dissatisfied creditor or victim could be such that the debtor could not be thought to be insensitive to the person of his creditor, which would serve as an impediment to assignment. For the rest of the discussion, the emphasis will be on contractual claims, especially monetary, and on their status, transfer and protection as ordinary assets of the creditors which increasingly de-emphasises their personal origin and nature for the purpose of facilitating their transfer without the debtor’s consent.

1.5.6

The Assignability of Future Claims

The issue of inherent or statutory lack of assignability arises in particular in respect of future claims where English and German law are the more liberal and French and even new Dutch law the more restrictive. Future claims are here defined as those not yet existing, rather than claims that do exist but have a future maturity date. The assignment of the latter should not be a problem (although under the English writ system they had no present value which presented further complications besides all other impediments attached to assignments in those early days). The issue of the assignability of future claims was already raised in section 1.4.5 above in connection with future chattels and will be briefly revisited in section 1.7.7 below in connection with floating charges. In fact, Roman law had been liberal (in those limited instances where an assignment was possible), see C.8.53.3, probably ever since a whole inheritance could be assigned, although there remained much controversy on this point in the Ius Commune. Eventually, the discussion became connected with the need to give notification to the debtor which was increasingly accepted as a constitutive requirement of an assignment,233 unavoidably creating further problems for future claims when the debtor might not even be known. German law, in abandoning the requirement of notification in the nineteenth century,234 freed itself from this constraint and the only modern German requirement 233 234

See n 203 above. See n 201 above.

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is in this connection that the claim be identifiable235 at the time of the real agreement 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, as we have seen. The most normal situation in which this type of assignment of future claims arises is under an extended reservation of title or in a floating charge.236 In a(n 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.237 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 and sufficient legal reason or Rechtsgrund for the transfer or assignment which are immediately complete,238 although in the first case technically subject to an anticipated transfer constituto posssesorio, see section 1.4.5 above. In a floating charge, it means that all future goods and receivables may automatically be included in the charge as replacement property. Otherwise, claims should at least 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 emergence (upon the resale of the underlying goods), does not, in that case, take precedence. It may thus be seen that German law is here liberal, more than in the case of chattels, where it struggles harder with them being relatively future, see again section 1.4.5 above. The English approach under equitable assignments, which do not require notification as a constitutive requirement, is very similar, yet the date of transfer may be different.239 English law 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 and the assignment is perfectly valid and effective as at the assignment date, but in England 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. English law tends to distinguish here between assignments and agreements to assign.

235

See also BGH, 9 June 1960, BGHZ 32, 367 (1960). See ch Vol III, ch 1, n 143. 237 See BGH, 25 Oct 1952, BGHZ 7, 365 (1952). 238 See also K Lahrenz, Schuldrecht, Allgemeiner Teil, 14th edn (1987), para 34 III. 239 See the leading 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. 236

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Money payable in the future under an existing contract is not considered future property, however, and can be assigned. It is only a question of maturity, as just mentioned. 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 either.240 If there is no control, it is still possible to assign a right to future income from a specific source.241 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 but the transfer under it only takes place as of the day the claim arises or control is established. This would present problems, especially in an intervening bankruptcy of the assignor. However, equity, which regards as done that which ought to be done will in such cases still imply such a transfer (as an equitable assignment) without further formalities. It is automatic and an intervening bankruptcy of the assignor will therefore have no impeding effect on the transfer.242 That would also appear to be the German result even under section 91 of its 1999 Insolvency Act. It is notably different in the Netherlands under Article 35(2) of its Bankruptcy Act, see also section 1.4.5 above.243 The situation in the USA is not everywhere the same, 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 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 9–110 UCC. The ethos of the Code (s 9–204 UCC) is that for security transfers all future assets can be given for all future debt subject to a form of publication (in the case of claims only if they account for a substantial part of the assignor’s portfolio of claims) through the filing of a finance statement and one must therefore assume a liberal interpretation of any requirement of ‘existence’ of the debt. As regards the notification requirement, which is no constitutive requirement under the UCC, it must reasonably identify the rights assigned: see section 9–406 UCC, again without saying what this identification requires. The same applies to any security filings. As already pointed out before, in the USA 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. On the other hand, French and Dutch law are more restrictive and require on the whole that the legal relationship out of which the claim arises must exist in order to 240

Hughes v Pump House Hotel Co Ltd [1902] 2 KB 190. See Shepherd v Commission of Taxation [1966] ALR 969. 242 cf Chitty on Contracts, nos 20–028/20–032. The assignee’s interest is therefore more than a mere matter of contract, even before the claim comes into existence. 243 cf also Art 5(b) of the UNIDROIT Factoring Convention that also assumes the existence of the receivables before the transfer can be effective (see Vol III, ch 1, s 2.4.7) but it is explicitly stated that there is no need for any new act of transfer. It may still depend, however, on the applicable lex concursus what the effect is in the case of an intervening bankruptcy of the assignor. 241

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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 (Art 3.97 CC) but not in the case of an assignment for the purposes of security only (Art 3.239 CC).244 It may be noted in this connection that new Dutch law rules out the extended reservation of title and does not favour floating charges either. 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 to prevent his bankruptcy. These rights fell in his bankrupt estate regardless of the assignment for want of a debtor, that means for want of a contract out of which any benefit could arise.245 Conversely, this 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 transfer their future income if contracts with the playwrights or publishers were already in existence. It was not considered material in this connection that the benefit might not materialise. It follows that the restriction on assignability is material only for writers who cannot assign the income if they have not yet got a contract for performance of their (future) plays or for the publishing of their (future) books.246 In France, where notification is traditionally required for the assignment to be valid (except under modern law in financing schemes with banks), as we have seen,247 this approach stands to reason and is then very much connected with the debtor being known, even if the benefit that is being transferred could still be nil (for example if the plays or books were not produced). That is in itself not the determining factor. The

244 Under pre-1992 law, this was a general requirement for all assignments, HR, 24 Oct 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 all 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, but the requirement that the legal relationship out of which the claims arise is already in existence need not then be fulfilled and the debtor remains here a potential debtor only, which in cases where the contract out of which the claims arise is not yet in existence, seems not to impede the notification possibility itself. The regime is likely to be stricter for security transfers, which impedes also the notification requirement. In that case, exceptionally, registration of the contract is possible as an alternative to notification but may also present identification problems. According to case law, this registration may be done by providing lists identifying the various claims arising which may be computer lists showing only the first and last entry: see HR, 14 Oct 1994 [1995] NJ 445. Yet it continues to require identification in principle of each and any claim. As already mentioned, the Dutch new Code was amended in 2004 allowing alternatively a system of (ordinary) assignment without notification but still requiring registration: see also Vol III, ch 1, s 1.2.1, from which derives the priority. 245 See Court of Appeal Paris, 31 Jan 1854, D.2.179 (1855). 246 See also Court of Appeal Paris, 27 Nov 1854, D.2.253 (1856). 247 See for the Loi Dailly and its aftermath n 200 above.

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difference in Germany is that the debtor need not be known at all, whilst the identity of the goods from the sale of which the claims may emerge or the identity of the source of the income will be sufficient. An author can therefore sell his future copyrights in Germany, as long as they can be sufficiently described. It may be seen that ultimately the question of the assignability of future claims mainly concerns the question into whose estate they fall if the assignor goes bankrupt in the meantime, first as between him and the assignee, but then also as between various assignees. 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 require it for the validity of the assignment which is likely to depend on the debtor being known at the time of the assignment. Countries with such notification requirements like France and the Netherlands have here a further impediment for the assignment of absolutely future claims.

1.5.7

Assignment, Novation, Amendment, Subrogation and Subcontracting

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 the debtor’s consent. The result is that the contractual relationship (or part of it) 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, whilst the former creditor or assignor remains normally responsible and involved only for any duties he must still perform under the contract, perhaps even for those that are so closely related to the assigned rights that under modern law they transfer automatically with them, even if the assignor might then be able to insist that the assignee perform first. In that case the assignor becomes merely a guarantor or surety. If the claim is secured by the debtor (on the latter’s or somebody else’s assets), this arrangement is also 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 assignment. 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 or tort provisions), but can all the same be achieved without involvement of the debtor, in the example of a receivable therefore without consent of the buyer/payor of the price. It is the consequence of rights being treated as ordinary assets. As no consent is involved, this substitution is not normally perceived as an amendment of the contract either. On the other hand, in unilateral debtor substitution and in those cases where unilateral creditor substitution may be more difficult because: (a) the debtor retains an

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interest in the person of his creditor (especially likely in the case of him supplying personal services); (b) there result material extra burdens or risks for the debtor as a consequence of the assignment; or (c) the whole contract is being transferred, the way of transferring the position of either party is likely to involve a degree of consent or acquiescence of the other party to the underlying agreement. The effect of this consent or acquiescence is itself troublesome. Does it mean the conclusion of a tripartite agreement introducing a new party and releasing the old one? That would be a novation. A novation is a more circumstantial transaction as it terminates the earlier agreement and puts a new agreement with the new party (either as debtor or sometimes as creditor) in its place. It requires involvement of the counter-party and its actual co-operation and consent. The old contract and its supporting secured interests would lapse, as well as all defencses 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. Novation is unattractive in these circumstances and has therefore become uncommon in civil law. New Dutch law no longer specifically deals with it (but see Articles 1449 ff old CC, which may retain here residual importance). This novation may mean no more than a 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 will be performed (now at the place of the new creditor or assignee). Thus it seems that creditor or even debtor substitution with consent need not always be novation but can lead to simple amendment of the contract between the original parties to which the assignee becomes a third-party beneficiary for the rights and third-party debtor for the connected obligations upon his acceptance.248 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 implicit waivers—whether consent of the counterparty leads to: (a) a mere creditor or debtor substitution; (b) a more fundamental change 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; or (c) a novation (when the old defences and supporting rights are all lost). An important question in this connection is also whether the debtor’s consent to creditor substitution may be achieved through mere acknowledgement, and, if so, how this affects his defences and supporting rights. It may at least in some legal systems substitute for a notification to the debtor,249 whilst this alternative for notification may 248 249

See also the discussion in n 231 above. See for this common law approach in England, n 212 above.

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also result from recognition in France or possibly from mere payment or performance of any other duty of the debtor, the benefit of which was transferred by his obligee/creditor.250 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 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 acknowledgement is a great advantage for the assignee whilst costs will be saved. 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 whilst the risks will be discounted in the price paid for the receivable. 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 lead to the requirement that adequate consideration is paid for this release to be effective and could then still mean an amendment or novation involving the debtor. It may be the reason why 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. However, even in civil law, novation remains often the only way out where a party wants to transfer all his duties at the same time and obtain a release, even if these duties are fairly closely related to assigned rights and may automatically transfer with them, or where a party wants to assign its entire relationship under a contract, at least when it also entails duties, which will normally be the case. 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 else’s debt. The creditor is thereby satisfied whilst the payor steps into the position of the creditor 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 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 does so with subsequent creditor’s substitution. In

250

See n 199 above.

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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 Art 6.150 of the new Dutch CC). In France, contractual subrogation has a much 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 Arts 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,251 a useful substitute for assignments in France. It often still is to avoid 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 of the latter’s consent or notification. The debtor’s defences remain intact. So do the security interests supporting the debt. Subcontracting may be a form of debtor substitution, which can usually not be achieved without the creditor’s consent and cannot therefore by itself result in full substitution as the original debtor/contract party is not discharged, but it may not require full novation so that the original contract continues. It is better seen as an amendment, which may involve at the same time minor contractual adjustments 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.

1.5.8

Different Types and Objectives of Assignments

The question of proprietary status of intangible assets will surface not only in determining whether and how intangible assets can be transferred but also in how the interests in intangible asset may be split up, often with different transfer formalities (for example when creating security interests). The possibilities are similar to those in chattels and entail the possibilities252 of: (a) assigning 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 in

251

See n 200 above and accompanying text. See for English law Durham Bros v Robertson [1898] 1 QB 765 and more recently The Balder London [1980] 2 Lloyd’s Rep 489. 252

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usufruct or temporary ownership; or (e) assigning the residual rights or reverters and remainders of the assignor when previously less than a full transfer of ownership was made. The terminology as it developed is somewhat different from the situation in respect of chattels where we tend to think in terms of power (disposition rights), intent (or transfer agreement) and formalities (if any, such as delivery or documentation, see section 1.4.1 above). For assignments, these elements are equally valid, see for the DCFR, section 1.11.3 below, but there arise here commonly issues of formation, assignability and validity, as it happens especially in private international law: see also section 1.9.1 below. There is further the complication of the inherent limitations in civil law countries on 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. As the assignment is in common law largely a matter of equity, it is right to think here in common law countries mainly in terms of equitable proprietary rights which, as we saw, are practically unlimited but cut off by the rights of bona fide purchasers or even all purchasers in the ordinary course of business, a concept therefore that applies in equity even to the acquisition of intangible assets by an assignee. Indeed, although the common law in equity was never averse to the splitting-off of user, enjoyment or income rights with proprietary effect (see more particularly section 1.3.1 above), it followed that at least in England the statutory (legal) assignment did not allow for the creation of charges or conditional rights in this manner,253 and English law resorted here to equitable assignments. In this approach, an imperfect legal assignment (of claims at law) may still be an equitable assignment at the same time, although equitable assignments concerning claims at law still could involve the assignor in legal proceedings. Most civil law systems may have here particular difficulties with conditional assignments or fiduciary transfers of receivables and with floating charges. Where assignments concern monetary claims and create junior interests or charges, all in the end concerns the question who may exercise the collection right, so that the order as between the various interests so created needs to be particularly considered in this context. 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. Particularly for bulk assignments, it is useful to distinguish from the outset between the various types of assignment. It may be of special interest in receivable financing or factoring, see also Volume III, chapter 1, section 2.3. The outright assignment of a portfolio of receivables against a certain price is not uncommon. It leaves the assignee with the collection risk in exchange for which the assignor will normally give a discount on the nominal value of the portfolio and a further one for interest if not all claims are mature. The assignor may give yet another discount for the collection cost.

253 See also n 216 above. See for the possible development of an unbridled creation of equitable proprietary rights n 7 above.

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Under such a scheme, all collections are for the assignee and he will have the autonomous right to pursue the debtors in the way he deems fit. It may, however, also be that the portfolio is transferred only so as to allow the assignee to take all 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 will then also determine what action the collector should take against defaulting debtors and is likely to bear the cost of such action. This is more properly called a collection arrangement and is also common. Although the ownership is transferred for collection purposes only whilst the assignee may technically become the owner of the claims, he acts here in fact as a collection agent. The collection transfer could then more properly be seen as a temporary or conditional transfer. It is a question of characterisation and definition of the assignor’s rights, especially in a bankruptcy of the collecting agent. 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 be returned to the original assignor. More likely is that the creditor will simply be allowed to collect whilst returning any overvalue. In English law this is also referred to as a collateral assignment. The portfolio may also be transferred conditionally, meaning that any receivables remaining after a certain amount is collected will automatically be retransferred to the assignor, as may be any extra collections. The exact terms will be left here to party autonomy, however, and the bank may take the full credit risk whilst retaining any overvalue. It is possible that there is here some revolving credit as 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 whilst 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 manner. The essence is the use of receivables in one structure or another; they are likely to be more liquid than inventory and thus often preferred to back-up funding, either through a secured transaction or conditional sale. These are two different structures, in which the cash flow that receivables produce are 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 likeley to be weighed against the credit risk the funding party assumes in the receivable portfolio. In the USA, sales of receivables are always considered covered by Article 9 UCC as we have seen and therefore treated in the nature of a security interest, see section 9– 109(a)(3) and any conditional transfer is then converted in a security agreement also. It is the unitary functional approach in line with Article 9’s suspicion of sales being used for financing purposes, see section 9–102(a)(5–6) UCC. The exception is the sale of receivables for collection only: see section 9–109(d)(4–7) UCC). All the same, Article 9 allows some distinctions between other sales of receivables and a security assignment. Especially the disposition is not obligatory in the first case and the seller (debtor) is entitled to any overvalue, but only if the sales agreement so provides (see ss 9–607and 9–608) UCC). On the other hand, the arrangement may

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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. 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. 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 his funding. This is the area of receivable financing and factoring: see more particularly Volume III, chapter 1, section 2.3. However, apart from the specific American unitary functional approach in Article 9 UCC, a proper conditional sale of receivables is likely to cover an arrangement with different or additional conditions concerning the risk in the portfolio and greater latitude as to the entitlement to overvalue and the reward structure. 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 as we just saw which creates problems in finance sales as will be revisited in section 1.7 below. This is the re-characterisation issue, in the US cured or at least reduced in modern amendments to the federal Bankruptcy Code to facilitate the operation a number of financial products: see Volume III, chapter 1, Part II.254 The greatest material difference between the conditional sale and the security transfer of a portfolio of receivables is that (a) the former may leave the assignee with (part of) the overvalue depending on the nature and terms of the arrangement whilst in the case of a security arrangement, the collection must stop once the debt it secures (plus interest) is paid off. Another most 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.255 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 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: new Dutch law requires for a (conditional) sale that the claims are identifiable and for future claims it may now be sufficient to refer to all claims on a certain debtor (Art 3.84(2)), as we saw, 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 Arts 3.97 and 3.239 CC). 254

See also S Vasser, ‘Derivatives in Bankruptcy’ (2005) 60 The Business Lawyer 1507. 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. 255

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A further difference may be (e) in the right to invoke any security interests supporting the receivable itself, therefore in the accessory rights: 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 patterns and risk management strategy, section 1.7.3. below. 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 differences than in the case of chattels. Nevertheless the conditional sale allows for greater flexibility and parties’ input. They may for example distribute the overvalue in the assigned portfolio very differently in exchange for other benefits like the allocation of the credit risk to the assignee in whole or in part. The reward structure is as a consequence also 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 likely to be quite different and subject to other competitive pressures (it is a different market). However, if a portfolio of receivables is transferred as part of the arrangement for a price and there is a specific interest rate agreed and deducted from the value of the portfolio as reward rather than some other fee, a secured loan structure is likely to be assumed and any excess collections over and above the received sum and the interests must then be returned to the entity requiring the funding. This is the important issue of re-characterisation, see more particularly Volume III, chapter 1, section 2.1. In other words, if interest is the reward, 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 only.

1.5.9 The Better Right of the Assignee. The Notion of Abstraction, Independence and Finality. Comparison 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-a-vis the debtor than the assignor had. It is a question of ignoring, in so far as the assignee is concerned, some of the rights and defences the debtor may have had against the assignor. It is clear that the assignee is receiving increasingly better treatment, especially 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 co-operation in not amending the contractual text properly when alterations were agreed. A similar provision already existed in the German BGB of 1900 (s 405 BGB) and was also introduced in new Dutch law (Art 3.36 CC).

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There are therefore situations in which the (bona fide) assignee is in a better position vis-a-vis the debtor than the assignor. As yet it may not go so far as to allow the assignee to ignore assignment restrictions in the original contract and especially set-off rights or other defences of which the debtor was not or could not have been aware at the time of the assignment (and the lifting of any investigation duty in this respect). In the case of a transfer restriction, modern law, especially in the US, reduces as we saw the debtor’s right to a personal claim against the assignor for breach of contract only, rather than affect the validity of the assignment itself. Also, in the USA, clauses in the underlying agreement not allowing the debtor to raise any defences against an assignee are common and favoured, at least in the context of creating security interests in receivables in the professional sphere. Especially in the modern bulk transfer of receivables to obtain financing (to render possible the credit extended to the debtors in the first place), the assignee may be increasingly protected against the effects of limitations on assignments in the underlying agreements out of which the receivable arises. Again, the assignee has to that extent a better position than the assignor. However, even in the USA, set-off rights of debtors under the agreement between them and the assignor are likely still to be upheld against the assignee. Thus transferability may still suffer and defences accepted because of material extra burdens, but it may increasingly depend on how large they are, again especially important in bulk assignments, and a reasonable co-operation duty of the debtor may be implied. This was discussed above in section 1.5.5. Where an assignment mostly aims at transferring the active or asset side of an in personam legal relationship only (primarily a contractual relationship and then more in particular 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 another risk for the debtor. Allowing a delegation of (connected) duties without the debtor’s consent is, however, also a feature of the modern American approach as now legislated for rights and duties arising under sales agreements in section 2–210 UCC, see section 1.5.5 above. As we saw, the trade–off is that it does not relieve the transferor (which raises the issue whether the assignor remains a primary obligor or has only a secondary obligation in the nature of a surety) and it is not allowed as long as the debtor had a substantial interest in having his original promisor perform. There remains thus the crucial question how far the assignor is liberated, which becomes here a question of interpretation. 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 reduce the assignee’s rights. As we saw in section 1.5.5, in this aspect also, modern law in the USA may increasingly 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. The essence is, however, that because of modern economic and especially financial requirements, which need increased assignment facilities without too many impediments, the extra burdens or risks resulting for the debtor may no longer give the latter

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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 whilst 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 claims being considered ordinary assets. There is here an increasing element of abstraction or independence under which the assignee may ignore unknown circumstances concerning an assigned monetary claim. As a consequence, payment obligations will increasingly be allowed to be lifted out of existing contracts and assigned separately, at least if they are assigned in bulk. In that case, there is less consideration for their context and the assignor’s obligations under the underlying contract (unless closely related, when they will transfer with the claim), or for the debtor’s set-off rights and defences, except where material to him, and all without the debtor’s consent. In this atmosphere, it is also likely that the assignee will be allowed increasingly to ignore a prohibition of the assignment under the original contract in respect of such monetary claims, at least if he was not made aware of it and an investigation duty may no longer be imputed in this respect. Especially in bulk assignments such an investigation duty would be unconscionable. Naturally, the debtor would retain damage actions against the assignor in the internal relationship but neither would the assignment itself be affected nor would the duty of the debtor to pay the full amount of the assigned claims to the assignee. In the commercial and professional sphere, this may increasingly be seen as an ordinary risk of the debtor participating in business and requesting credit therein. It becomes an ordinary benefit for the professional assignor and a protection for the professional assignee. It in turn would enable the assignor to find more readily the financing he requires. It could even apply to assignees aware of the debtor’s position if the receivable arises out of normal commercial or financial transactions. This appears to be the modern trend, and is of great significance. It would end with the full commoditisation of receivables altogether. In this connection it may also be considered that if the debtor had issued a promissory note, the unimpeded transferability of the claim would have followed anyway. The modern trend is that a negotiable document is no longer necessary to achieve the free assignability of a receivable regardless of the relationship out of which it arose, at least not if assigned for security purposes. It may be seen 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.256 The end result is that monetary claims become more like negotiable 256 Negotiable instruments such as bills of exchange and promissory notes are normally treated as incorporating a claim fully, and to separate it from the underlying legal relationship out of which it arises. The treatment of the claim is then largely like a chattel, therefore like a movable tangible asset and 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, like the French and English, that 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, bona fide purchasers for value of this type of paper are protected against the claims of any senior

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instruments (promissory notes). It implies also that bona fide assignees would be protected as such. Only the set-off rights would be retained by the debtor but may no longer encompass counterclaims in respect of poor quality under a sales agreemwent, see the discussion in section 1.5.4 above.257

1.5.10 The Notion of Abstraction or Independence and the Liberating Effect of Payment by the Debtor In the previous section we discussed any better right of the (bona fide) assignee against the debtor, as compared to the right of the assignor, and the notion of abstraction or independence. On the other hand, upon an assignment, properly notified, the debtor also has some special protections and may be able to pay any assignee and may not need to go behind the notice to look for those with better rights. Again, good faith could play a role in this protection, but, here too, this requirement may be weakened and it is conceivable that any notification that is on its face properly made would now protect a debtor. This is a further example of abstraction, here affecting the notification and release of the debtor. For debtors all resolves into the single question who has (as far as the debtor is concerned) the collection right and whom he or she should pay (assuming the assignments concern monetary claims). Potential claimants 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 the assignor for any reversions. Assignees may thus be in a position in which they are faced with the proprietary pretences of others and with the question how far they may ignore these, first by transferees or other third parties as they may be the creditors of the transferors. They are then more properly called holders in due course. In common law a similar approach resulted under the law merchant. A further consequence of this system is that the debtor who accepts a bill of exchange drawn on him or the debtor who issues a promissory note is considered to have surrendered all his defences against any subsequent buyer of the paper, at least if the latter was bona fide, that is unaware of these defences. The abstraction principle just mentioned separates the receivable from the underlying legal relationship out of which it arises. It is likely increasingly to limit the debtor in his defences, as we have seen, and gives the assignee a better position as against him, although it is as yet unlikely to give the bona fide collecting assignee better rights vis-a-vis any senior assignee or protect him against any defective assignments earlier in a chain of assignments, although this is becoming the American approach as we shall see in the next section. 257

It is on the other hand also conceivable that 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 prevails.

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giving notice and requesting the debtor to pay them and subsequently retaining any collections made. As we saw, English law has traditionally resolved this issue by considering only the assignment completed or perfected upon notification to and payment by a bona fide debtor,258 which may introduce considerable uncertainty as it all depends on the knowledge of the debtor and his investigation duties under the circumstances whom he should pay. In any event, it still could leave open the question of the ultimate entitlement to the collection proceeds.259 In theory there are various possibilities. It is clear that as long as there is no notification, the debtor may still pay the assignor, probably even if he knows of the assignment. However, even then, his bona fides could be an issue. If notification is a prerequisite for the validity of the assignment, and an assignee tries to collect, the debtor should know that only the first notification transfers the claim in a double assignment and he should therefore pay only the first notifying assignee. If before he makes payment, he receives several notifications claiming assignments by the original creditor/assignor, he still has a duty to pay the first notifying assignee. Here, his bona fides is irrelevant and if he pays another, thinking that the latter has a better right (eg because his assignment contract was earlier), he will not be protected. If the notification was not a requirement for a valid transfer, the first notifying assignee might not be the rightful assignee, but the debtor would in such a system hardly have an investigation duty and could safely pay, unless he truly knows of a better right of another (older) assignee. If in the meantime he received several notifications he would probably still be protected if he paid the first one and would in any event not have an investigation duty, but his good faith could be questioned if he had subjective knowledge of an earlier assignment or made payment to a later notifying assignee. Problems derive here further 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.260

258

This is the famous rule in Dearle v Hall, see n 209 above. It can also be criticised on the grounds that it undermines the equity assignment approach, which does in principle not rely on notification. 260 The form itself of the notification 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 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 whilst an assignment document was also required. Since the Loi Dailly of 1981, notification is no longer required as a constitutive element in bulk transfers supporting financing in the professional sphere, see n 200 above, 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 had become a constitutive 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, 259

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Any emphasis on the bona fides of the debtor whilst paying an assignee may put him in a difficult position if faced with several notices, and 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. 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 has not taken place. It does not seem necessary for him to go into any suspicion of other assignments.261 It thus appears that the first assignee who produces the assignment document to the debtor normally prevails although other assignees 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 ss 409 and 410 BGB). He need then not worry about the various competing rights, and must pay the first notifying assignee. Other assignees should require satisfaction either from the assignor or from the assignee knowing of their better rights. In the USA, section 9–406(a) UCC authorises the debtor to pay the assignor until notice. Thereafter he must pay the assignee. If requested by the debtor, the assignee must furnish reasonable proof of his rights and unless he has done so the debtor may still pay the assignor. The suggestion is that the debtor will pay the first notifying assignee. There is no search duty and the various assignees will have to establish amongst themselves who will ultimately be entitled to the collection. In England, the situation under Dearle v Hall was already discussed, with its emphasis on the bona fides of the debtor whilst 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 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 we saw, some states in the US allow him, if bona fide, to retain them (superseded by the UCC for assignments covered by it). That is now also the English case law approach.262 A simpler system may be to 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 however, that the assignor provides 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. It is similar to the one applying to assignments for security purposes: see also Vol III, ch 1, s 1.2.1. 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 the German Code. In the USA, 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 BR 221 (ED Tenn 1995). Knowledge by the debtor was considered sufficient, see further s 1.5.3 above in fine. 261

RGH, 19 Sept 1905, RGHZ 61, 245. See Rhodes v Allied Dunbar Pension Services Ltd [1987] 1 WLR 1703, see also n 211 above and accompanying text and further s 1.5.11 below. It would seem to be in line with the bona fide purchaser protection that more generally obtains in the case of equitable proprietary rights. 262

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whilst producing the authorisation document or the assignment document itself. That would most likely reduce multiple notifications. A system like the American (under the UCC) that requires the debtor always to pay the first notifying assignee if his 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. Any senior assignees or assignees alleging better rights would then have to sort the matter out with the collecting assignee or with the assignor, either through tracing of the proceeds or recourse against the assignor if guilty of wrongful assignment. In this way, the debtor faces no extra burdens connected with his payment duty and the notification becomes an abstract payment instruction. If regular on its face, the debtor would never be required to go behind it. Again, it would not be unlike paying an endorsee of a negotiable instrument like a bill of exchange or promissory note. For assignees, it would become a pure race situation, as in fact it already largely is where competition must be feared. The abstract nature of the first notification, which would instruct and protect the debtor in this manner, would mirror the abstract nature of the assignment, which sometimes gives the assignee better rights against the debtor as discussed in the previous section. Both types of abstractions (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. Again it follows that monetary claims are increasingly treated as negotiable instruments or semi-tangible assets. This was indeed identified in section 1.5.9 as the modern trend.

1.5.11

The Ranking between Assignees, The Nemo Dat Rule in Assignments

In the previous sections we saw that, in the absence of a clear proprietary concept of claims, it took the law everywhere a long time to formulate a workable approach to the proprietary protections, that is to the protection of the assignee against third parties, especially against other assignees claiming better rights. This issue is 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 different ways. 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 that the debtor may still enforce against an assignee who is unaware of them. The protection of the debtor making a payment to an assignee may equally depend on his good faith, although that may ultimately not be satisfactory, as we have seen.

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The protection amongst various assignees is of a different and more traditional nature, and raises 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. This is an aspect of the nemo dat rule and of bona fide purchaser protection, related to the inability (in principle) of the assignor to transfer his claim more than once and is therefore a typical problem of double assignments.263 However, although conceivably fraudulent, a second assignment of the same claim by the assignor does not need to be sinister in any way: the assignor may assign his claims first in a security transfer or in usufruct for some time and thereupon the remainder to another assignee. He may also make a conditional sale and assign the reverter to a junior assignee so that a ranking may result. Normally this situation will be disclosed but in a bulk assignment of claims any remainders and reverters 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. Better rights of others may not have been apparent to the assignee and the question then arises how far he is protected upon giving notice and collecting, assuming he gave good value for the assignment. The law in most countries does not allow bona fide purchaser protection to operate here, as its justification is normally based on the predecessor of the pretending owner having left him voluntarily with indices or the appearance of ownership, typical in the case of chattels left with a bailee or holder. It is the entrusting concept: see section 1.4 8 above. At least under civil law, the voluntary parting with the goods in these circumstances mostly disallows the real owner to invoke 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 assignee is more difficult to maintain because of the lack of a physical manifestation of control on which the assignee might have relied and which may be imputed to the assignor’s predecessor. The exception to the nemo dat rule resulting in the protection of the bona fide assignees is therefore uncommon in the case of intangibles under civil law. Yet there is often a possibility under civil law of acquisitive prescription (but seemingly not in Germany) 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.

263 It may in this connection be asked whether for this protection the collecting assignee needs at least a valid agreement, much as in the case of the sale of chattels: see also s 1.4.6 above. If there is no valid contract, the protection of the collecting assignee may result from an abstract system of title transfer (in the German manner) when his bona fides is not relevant. This may be especially relevant in the case of intangibles where generally the bona fide purchaser protection does not obtain, even in systems that normally accept it for chattels as modern civil law does. See for indications of an abstract system in this respect in England n 215 above. In a causal system the collecting assignee is then unprotected, as is the Dutch system.

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Common law, which is on the whole less generous with bona fide purchaser protection even in the case of chattels, allows it under its general rule protecting such purchasers against earlier equitable proprietary rights, but otherwise only by statute. It has already been pointed out that another and more modern justification for the protection of bona fide purchasers may simply be the protection of the orderly flows of business (rather than the entrusting notion). Thus the requirement of bona fides may even be dropped and all purchasers in the ordinary course of business may then be protected at least in respect of the acquisition of commoditised assets. If that is truly the rule, as here suggested, it would put the position of the bona fide collecting assignee also in a different light, even in civil law. Whether there is an exception in common law in the case of a double assignement ofin intangibles seemed to remain unresolved in English law until quite recently. As mentioned before, the case of Dearle v Hall gave the first notifying assignee the right to collect and the debtor may pay him if unaware of better rights, but it does not say who has the ultimate right to the collection. 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.264 American law remains divided, as we saw. 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.265 That is also the approach of the Restatement (Second) Contracts (s 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.

264

See for Dearle v Hall, nn 209 and 247 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 [1987] 1 WLR 1703. There is no investigation duty 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 assignee whose notice would then always be later, but what if the earlier assignment had already been notified (without collection) unknown to a later legal assignee? In that case, the priority of a bona fide legal assignee could follow from the general principle that earlier equitable interests of which the later legal purchaser is unaware may be ignored. Strictly speaking Dearle v Hall was not an expression of that principle as it concerned two equitable assignments. English courts prefer here, however, the rule in Dearle v Hall, upholding the right of the first bona fide collecting assignee in all cases: see Pfeiffer GmbH v Arbuthnot Factors Ltd [1988] 1 WLR 150 in which it was decided that for priority purposes the legal assignment is 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 (1991) 155 ff challenging (with regret) this interpretation. 265 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 also n 219 above and accompanying text.

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Filings prevent junior assignees from retaining their collections. In this system, in the absence of the necessary filing, knowledge of earlier assignments is irrelevant for a collecting junior assignee. Under the UCC, there is another aspect, already mentioned several times, in that all assignments of claims (only accounts in the sense of Article 9) are covered by it, therefore also ordinary (outright) sales of accounts (which exclude notably tort claims and bank deposits). 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. There is automatic perfection, however, for assignments of less than a substantial part of a debtor’s receivables portfolio (s 9–309(2) UCC). It is a somewhat curious departure in Article 9, more understandable in the case of chattel paper that was specially created as a collateral category to promote financing: see also Volume III, chapter 1, section 1.6.2. The implication is here that all sales of accounts are for financing purposes (pure collections are exempted under section 9– 109(d)(5)) UCC). The filing or automatic perfection here takes the place of notice to the debtor as a perfection method in respect of third parties. For the mere attachment of the assignee’s interest, section 9–201 UCC suggests that it takes place regardless of notice, therefore even in states that outside Article 9 require it for the validity of an assignment. It greatly facilitates bulk assignments. Disposition and a return of overvalue are here at the discretion of the parties (s 9–608(b)). The effect on the ranking of assignees is that subsequent assignees, even if they collect in good faith, do so subject to the older interest (if filed) and there is here no protection of bona fide assignees under section 9–320(a)). Only good faith buyers of chattels subject to a security interest are protected (if buying in the ordinary course of interest from a merchant seller). It does not apply to the assignees of accounts. 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 some protection against the nemo dat rule in the case of assignments of claims; (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 as distinct from outright transfers. The subject is of great importance in receivable financing upon assignment of portfolios of claims and bona fide collections thereunder, when the question truly arises who may consider itself the owner of the collection right under the circumstances and therefore entitled to the proceeds upon payment by the debtor. The issue is also important for the creditors of the various assignees who may seek to recover 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

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regardless of notice in countries that require it for the validity of the assignment must, however, remain doubtful.266 In fact, they can hardly have better rights than their debtor (assignee of the garnished claim).

1.5.12 Contractual and Proprietary Aspects of Assignments. Mandatory Rules. Applicable Law and Party Autonomy The various complications of assignments especially of monetary claims identified in the previous sections and which still distinguish them from the transfer of chattels, generally revolve around: (a) the contractual requirements of the assignment and especially the formalities of documentation and notice in terms of validity; (b) the assignability of the claims, the possibility to separate them from the underlying contract out of which they arise and the possibility of assignment especially in the case of future claims and contractual assignment prohibitions; (c) the question of the debtor’s defences, especially the set-off facility, and any extra burdens and his ability to ignore the assignment in certain cases; the impact of multiple assignments, especially on the debtor in terms of his ability to make a liberating payment; (d) the ranking between the various assignees and the entitlement to collect or to collections already made by any of them; (e) the enforcement against the debtor and the rights to accessory securities, especially if the assignment was less than a full assignment and transferred a lesser interest in the claim, (f) the kind of (limited, conditional or security) proprietary interests that may be assigned in claims (and any additional formalities that may be required in the case of security interests in terms of registration or publication); (g) the effect on the underlying agreement out of which the claim arises in terms of amendment or novation when some form of debtor involvement is necessary and the connected question of the preservation of any supporting securities; and (h) the possibility for the original parties still to amend the underlying agreement. These distinguishing features of the transfers of claims remain important and are also of special interest in a private international law context, when the characterisation of these issues, along these lines is of particular importance as it may affect the law deemed applicable in these various aspects: see more particularly section 1.9 below. It is clear that some of these issues are purely contractual, such as the assignment agreement itself and the question of amendment or novation, but most have a proprietary flavour, like the question of assignability, including any prohibition clause, 266

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

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and its effect on the validity of the assignment and transfer. The same is true for the notification where it is a condition for the validity of an assignment. The type of proprietary right that can be created through an assignment (eg 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 claim by the same assignor vis-a-vis the debtor and amongst themselves. Even the question whether changes in the underlying contract between an assignor and a debtor could affect the assignee raises a third-party issue. An assignment is naturally an agreement, which has, however, proprietary effect like any ordinary, conditional, or security transfer of assets. The contractual and property aspects of an assignment should never be confused. Neither should the law applying to the underlying relationship with the debtor out of which the claim arose alone determine the contractual or a fortiori the proprietary aspects of the assignment nor necessarily the debtor’s position, rights, duties and protections upon the assignment. These proprietary and protection aspects are in any event non-contractual matters and a contractual choice of law might not cover them. This may also go for the formalities of the assignment in terms of documentation and notification or registration or publication, certainly in the case of security transfers. More properly what is at stake here is the issue of validity, which is not truly a matter of party autonomy either. 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 solely be determined by the law they might have chosen (a) to cover the assignment, or (b) to cover the underlying claim being assigned. Thus proprietary effect, formation, assignability and validity issues are more likely to be determined by objective or even mandatory rules. This is also likely to be the case with 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. Mandatory rules are all the more likely to apply to the enforcement aspects, thus to the decision on what types of proprietary interests can be pursued, to the protection and ranking of various assignees inter se, and 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. Again the comparison with chattels is illuminating here and there is no clear reason or necessity to view the situation very differently. Again, it is unlikely that in these aspects the law covering the claim, which, if contractual, might have been chosen by the parties, can determine these issues. These are not issues of party autonomy. Even though, for example, it is often accepted that the parties to a contract can agree that claims under it cannot be assigned, that does not necessarily apply to all monetary claims arising out of it, at least no longer in the USA as we have seen. It must be doubtful whether parties choosing another law to apply to the assignment can opt out of these provisions, at least if both parties are within the same jurisdiction. In civil law, where the in rem effect of these restrictions is often upheld, the notion of abstraction is likely increasingly to limit their impact.

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If objective or mandatory rules are applicable here, the question arises which law is applicable in situations which have contacts with more than one country, an issue that will be discussed more fully in section 1.9 below.

1.5.13

Special Assignment Issues: Warranties, Conditions and Default

Whilst discussing warranties and conditions in this context, it should be noted that the terminology is different from that used in connection with contractual defences, see chapter 1, section 1.4.3 above. As regards warranties in the context of assigments, they concern principally the question of the existence and ownership of the claim or receivable. There may be problems with either if the claim is future or conditional. It may more properly be seen as a question of the reinforcement of the disposition right. Future claims under existing contracts may be considered existing in some legal systems, notably in England but also in others if at least the debtor is known, and any implicit or explicit warranty of existence would then appear honoured. Other legal systems might look here for further assurances or require that the claim has arisen. Conditions may make the claim future, except in England if the fulfillment 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 arising against a certain debtor are present or future remains here too a question of definition under the applicable law closely related to the question of assignability. Also existing unconditional claims may not properly 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 therefore belong to assignees with better rights. Of course any warranty of ownership will not then protect the title but will give the assignee only a personal action against the assignor for breach. A warranty may not put him in a much better position. In bulk assignments the breach of a warranty in this regard could give the assignee the right to collect other receivables until the total number of permitted collections is reached. A breach of the warranty may also lead to a rescission of the assignment or trigger other protections like a guarantee. In the case of a rescission on grounds other than lack of ownership of the assignor (when nothing will have passed to the assignee), the receivable may return to the assignor. More likely to trigger a return is any condition or warranty of solvency or payment on the part of the debtor. This is never an implicit condition but common in recourse financing (factoring). It will affect not the whole assignment but only the individual claims involving defaulting debtors. Default under the assignment agreement itself could 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

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abstract system it would have to be established that parties did mean to annul the transfer under a resolutive condition. This should be considered the more likely rule. In this connection, any automatic return upon a default of the collecting assignee caused by his bankruptcy and its effect on the debtor having been given earlier notice of the assignment should also be considered, as well as his right or duty still to pay the assignee, the status of his 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.

1.5.14 Bankruptcy Aspects of Assignments. Recourse and Non-Recourse Financing It may finally be useful briefly to consider the effects 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, also called factoring or receivable financing: see for more details Volume III, chapter 1, section 2.3. As we have already seen, factoring may be a mere collection arrangement under which a factor collects for a creditor who lacks the skills or organisation to do so. It may also be a financing arrangement under which the factor buys the receivables outright, as a security or conditionally. In the latter case, the condition is likely to be that, when the collections have reached the sales price or any other agreed level, any excess receivables would automatically be returned to the assignor. The agreed total might allow part of the benefit of excess collections to be retained by the assignee as a reward for his activity and the risks he took, especially the credit risk of the portfolio. If he takes the full credit risk, the assignment or factoring is ‘non-recourse’. If there is ‘recourse’ financing this is likely to mean that the credit risk remains (substantially) with the assignor. This may be achieved by the assignor giving the assignee or factor a guarantee. More likely is that the arrangement allows the receivables concerning a defaulting debtor automatically to revert to the assignor so that the assignor deals with any collection difficulties whilst the assignee collects more of the claims left in the portfolio (if any). The arrangement may also be structured as a secured transaction under which the assignment backs up a loan or advance plus agreed interest which is meant to be amortised by the collections. The documentation and formalities are likely to be different from those in a conditional or recourse sale but in the case of receivables the difference between a conditional sale and a secured transaction is otherwise often small. This is certainly so in countries which allow collection and amortisation also under an assignment for security purposes which is now mostly accepted everywhere: see specifically Article 3.246 at the Dutch CC, compare also section 9–607 UCC in the USA (although in France there remains some doubt on this point but no longer in the Ordonnance of March 2005, allowing floating charges). There is an important

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difference in the entitlement to excess receivables and the collections thereunder, which in conditional sales may be left to the factor in whole or in part. Whatever the precise arrangement in this regard, 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 (some of) the debtors, in large receivable financings there are always likely to be some and it does not usually disturb the arrangement a great deal. In non-recourse financing, the assignee will pursue the collection in the bankruptcy of the relevant debtor. In recourse financing, nonpayment is likely to have a consequence in the relationship between the assignor and assignee as the relevant receivable may automatically be returned to the assignor. The effect of an intervening bankruptcy of the assignor or assignee must be considered in this connection, and one sees the situation best if both are bankrupt at the same time when it remains to be determined who gets what. Especially seen from the bankruptcy of the assignee, there are here a number of obvious questions: (a) does the factoring agreement continue in force and may the trustee of the assignee continue to collect?; (b) do new receivables included in the original transfer as future claims still pass to the assignee’s estate when they arise?; (c) upon full amortisation, do the remaining receivables automatically retransfer to the estate of the assignor regardless of the assignee’s bankruptcy?; (d) in a recourse financing, 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) are any collections by the estate of the assignor still for 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 acts relevant here?; and (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? There are undoubtedly other issues that may arise in bankruptcy, and in any event the solution will depend on the applicable bankruptcy law, usually the one at the residence or habitual place of business of the bankrupt, which, if both assignor and assignee are bankrupt whilst 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 above-mentioned 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. It may be recalled that an executory contract is a bilateral contract that is not yet fully

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executed by either party. In this case, the assignor has received his money whilst the assignee is collecting the receivables 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, even if it should not be 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. 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. The situation may be somewhat different as regards receivables, which are committed to be transferred to the assignee but were future claims at the time of the assignment. Under applicable law, they may transfer only upon materialising. In this aspect, the assignment may still be considered executory, although there may be a technical problem in some countries in varying the qualification between old and new receivables. Drawing the line will in any event not always be easy and becomes a matter of the applicable law in international assignments. More particularly, when these receivables result from the on-going business of the assignor after bankruptcy, transfer seems unlikely and 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 unlikely to be of great benefit. The conditional nature of the transfer suggests that if collections reach the agreed amount, the remaining receivables are automatically retransferred to the assignor’s estate regardless of the assignee’s bankruptcy. This would clearly be the case if the receivables were transferred as a 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 seem to revert to the assignor even after the bankruptcy of the assignee if that was the parties’ intent. 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 be able to trace the proceeds at least in common law countries under equitable assignments, thus when that notification is not a constitutive requirement of the assignment itself. In civil law countries this tracing is much more difficult as a concept. Alternatively, the trustee of the assignee could attempt to give the notice and direct the collections to himself. One must assume that he is able to do so under a valid assignment. 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) 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.

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If under applicable law the assignor need not co-operate in such notification, and always assuming that the underlying assignment agreement is valid and 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 part of the collections must be turned over to the assignor. If the default is material it may void the assignment and the question again arises whether the receivable(s) automatically return(s) to the assignor. This may be more readily the case where such a return would not require any acts of co-operation of the assignee’s trustee and thus be fully automatic. In abstract systems of title transfer, there would be no automaticity in the transfer, except where clearly so intended. If there is automaticity, the further question arises whether the assignor may vary or withdraw any notification is 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 USA and now also France until the restrictions are lifted by the courts or by 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 his bankruptcy and possible default under the assignment, are not relevant in this respect. Finally, other assignees with better rights may assert them against the debtors. As discussed above, it seems, however, 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, except where on its face this notification was clearly 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.

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1.5.15

Uniform Rules Concerning Assignments?

Important attempts to create some uniformity of rules for international assignments have been made by Unidroit in its Factoring Convention of 1988 and much more so by Uncitral in 2001 Convention on the Assignment of Receivables in International Trade. Particular attention is given to these Conventions and their uniform rules in Volume III, chapter 1, sections 2.3.5 ff. There are also rules on aassignment in the UNIDROIT Principles of Contract Law and in the European Principles of European Contract (EPCL Law. They will be discussed together with the DCFR in section 1.11 below. The true importance of uniform law of this nature often shows itself in bankruptcy, here of the main performing parties, initially the assignor who must deliver the receivables and subsequently the debtor(s) who must pay the assignee(s). Bankruptcy is an important test of the usefulness of conventions of this nature, certainly if they are meant to protect modern financial practices. Mostly it can only be seen in bankruptcy whether one has got something better 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 may add their own views to those of the convention and sometimes override non-bankruptcy law. This may also affect receivable financing. For example, in a bankruptcy of the assignor, the true question is whether the receivables have left his estate and when, which is relevant especially for future receivables. Whether the bulk assignment may have been considered valid in bankruptcy 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 whilst 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 a debtor. 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 which is here more likely to have a distinct position. The lex concursus is moreover 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 is 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 towards a (bulk) assignee. This is probably the crucial point, certainly in bulk assignments. A treaty or similar instrument in this area should have the following minimum aims:

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At least in contract, it should separate the monetary claims from the underlying relationship out of which they arise: (a) even outside a bankruptcy situation, it should back the validity of a bulk assignment through one document or act of transfer based on a reasonable description of the assets; (b) treaty law should at the same time do away with any notification requirement as a precondition for the validity of the assignment for each individual claim; (c) it should accept the inclusion of future claims as least to the extent they are replacement assets; (d) it should force all debtors to pay the assignee upon notice, specifying their duties and protections in this respect; (e) it should 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 co-operation may therefore be demanded; (f) it should do away with the third-party effect of contractual assignment restriction; (g) it should define what type of interests can be created and promote receivable financing as conditional ownership structures and floating charges as security interests; (h) it should establish the order inter se amongst competing assignees, but protect the bona fide collecting assignee.

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. In a trust in its simplest form, there 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, although it is conceivable that they have some user rights and it is frequent 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 and this is is the principal difference with what in civil law is often called economic ownership or interests: They are not proprietarily protected in civil law 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

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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 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 (in this sense the civil law usufruct is perhaps most closely related). 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 common law of trust with its legal and equitable owners, is unfamiliar to civil law thinking. Civil law is, however, entirely familiar with limited proprietary right: 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. It is sometimes seen as a temporary ownership right (cf Art 3.85 new Dutch Civil Code). Through conditional ownership rights, even if remaining underdeveloped in civil law (but see also s 1.7.1 below), similar splits or separations in ownership may be achieved more informally. In any event, also in civil law there are trust-like structures, but they are more incidental and have always appeared incapable of extension or the subject of 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 of Roman law allowed a person to leave his 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 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 survive: see for example section 2100 BGB in Germany. It creates forms of suspended interests or ownership and it may 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. This position is not dissimilar to that of a common law trustee in a testamentary trust. Also the new Dutch Civil Code accepts a similar structure (Art 4.1066), but the emphasis is on management and the ownership is with the beneficiary even if it may be immobilised in respect of him and he cannot dispose. Guardianships over minors

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are closely related, at least under German law,267 and also lead as a minimum to a split or separation between the ownership and disposal rights in the assets. The Roman fiducia had provided a somewhat broader framework covering various forms of custody, with split rights, although with a lesser proprietary protection for the beneficiaries than possible through the fideicommis.268 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 again it is now mostly considered a purely contractual arrangement and is therefore in its generality less developed, although modern statutory forms of it may be more pronounced, but again they are incidental. This remains the basic civil law position and is certainly also the drift of modern Dutch law (Art 3.84(3) CC), which superseded the earlier more friendly case law disposition towards the fiducia, see also Volume III, chapter 1, section 1.2.2. 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 times269—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 go well beyond what common law trusts mean to be. Nevertheless, in view of the forgoing, there should be little place for civil lawyers’ bafflement in matters of trusts. They know various instances of them, but it is the 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 was already explained how equitable 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 was not able to formulate broader structures and concepts of this nature, at least 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 saw, 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 like 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

267

See also Fratcher, 6 International Encyclopedia of Comparative Law (1973), ch 11, ss 127–28. 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 307 below. 269 See R Helmholz and R Zimmermann (eds), Itinera Fiduciae, Trust and Treuhand in Historical Perspective (Berlin, 1998). 268

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defended as such. This suggests at the same time that there is no proper segregation of the assets and that creditors of the formal owner have access to these assets. This may amount to a considerable windfall for them and is as such undesirable, for example, if we think of custodial arrangements or client money. 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 privileges, may sometimes help and may be more easily created or recognised in case law. In some countries, the 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 status 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 the intermediaries 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 thus by statute acquire sufficient segregation and may 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 also be said to operate rather on the basis of market practice: see for greater detail section 3.1.4 below. More generally, 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 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. It 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. These relationships are in civil law typically not further developed270 and civil law remains here rudimentary in what is in essence a trust. In the meantime, in common law, the trust concept fully evolved as an independent structure and overarching unitary concept since at least the nineteenth century—with much older but also much 270 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.

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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. Civil law may conceptually come close to the common law trust not only in charitable collections, but also in the conditional sale, which, in enlightened modern civil law thought, leads no less to suspended ownership rights and a duality in ownership between both parties to the transaction. Reservations of title and hirepurchases are acknowledged examples but there are many more: 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.271. It is not only the separateness of the fund but also this duality in ownership which counts in trusts, where trustees and beneficiaries have split or separate ownership rights which may go beyond the limited ownership rights that civil law commonly allows. In trust 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. All the same, common law is also advanced in the acceptance of future or suspended interests, which (at least in England) are equitable proprietary rights if created in personal property. Although they now often operate behind a trust, they should be well distinguished from trust structures, as, for example, in the case of the reservation of title. Given the example of the reservation of title, it is clear that conceptually there is also room in civil law for the notion of a split ownership, but it remains a more rudimentary concept. It results in segregation, however, but it notably misses a management structure innate in formal trusts and especially the tools to remedy any abuses (in terms of breaches of fiduciary duties). As just mentioned, in civil law, trust-like needs especially emerged in charitable collections, testamentary dispositions concerning minors with suspended interests, in 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 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 could amount to full ownership. The alternative in common law is a constructive or resulting trust giving the client lesser rights, however, an issue for indirect agency discussed more extensively in chapter 1, section 3.1.6 above. If in civil law, these assets do not properly belong to the estate of the custodian or agent either, it misses the proper means of expressing this in a more general manner or through a more general legal structure. Hence incidental statutory law that must here often come to the rescue. The foregoing suggests at least five essential points in connection with trusts or trust-like structures, both in common and civil law:

271 See also JH Dalhuisen, ‘Conditional Sales and Modern Financial Products’ in A Hartkamp et al (eds), Towards a European Civil Code, 2nd edn (1998) 525, and Vol. III, ch 1, s 2.1.5.

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(a) 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 a management structure,272 which, unlike in contract, may leave considerable discretion to the managers (trustees) and cannot be eliminated273 but is subject to the courts having the right to remove trustees and to a system of fiduciary duties;274 (c) the assets do not belong outright to the managers (trustees), are segregated, and not rightfully part of their estate;275 (d) the further consequence is that they donot belong to beneficiaries’ estate either (except for allocated benefits); beneficiaries have no joint ownership of the assets either; (e) there results a 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, whilst the managers or trustees will be duty-bound to deal with the assets accordingly, and (f) trustees are subject to strict fiduciary duties in their management. The separation of property in this sense does in common law technically not lead to legal personality of the trust, although this is often 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 civil law, but it remains different in that it 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 is exceptional for directors.

272 This is the idea of the ‘patrimony plus office’, see GL Gretton, ‘Trusts without Equity’ (2000) 49 ICLQ 599, 618. 273 See D Hayton, ‘The Irreducible Core Content of Trusteeship’ in AJ Oakley (ed), Trends in Contemporary Trust Law (Oxford, 1996) 47. 274 See on this development and its draw backs also R Cooter and BJ Freedman, ‘The Fiduciary Relationship: Its Economic Character and Legal Consequences’ (1991) 66 NYUL Rev 1045 and FH Easterbrook and DR Fischel, ‘Contracts and Fiduciary Duty’ (1993) 36 Journal of Law and Economics 425. 275 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 LJ 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.

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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 attempts 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 the benefit of a beneficiary or for a certain purpose’. Again, 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, he has only 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. He is accountable for the exercise of his powers and the performance of his duties. The Principles of European Trust Law (Art I), see section 1.6.7 below, are more elaborate. They also concentrate on the settlor transferring assets to a trustee with the intention that they shall not form part of the latter’s estate but 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 has always been endemic, especially in family trusts. As a consequence, in common law, a large array of fiduciary duties of trustees was built up by the courts to deal with it 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 to the same extent exist in civil law may be another reason why, besides structural and fitting-in difficulties, trust-like 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 as a separate source of law. Even then, civil law courts are not used to the same kind of activist intervention as the common law courts of equity are in a preliminary or final manner through injunctions and similar relief, especially relevant in this area of trusts. As we saw in chapter 1, section 3.1.4 above, similar problems of abuse have bedevilled indirect agency in civil law, where these types of agent have often been prone to ignore their clients’ vital interests and compete with them for the best deals. 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 procedural deficit in civil law. 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

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practiced. In particular, in common law, 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 makes the operation of informal trusts also possible. We should think here of constructive and resulting trusts. 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 rather contractual or more properly fiduciary in nature. They are not then 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, however, that the personal rights of the beneficiaries against the trustees were allowed to attach to the trust fund itself and gained as such 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 all the world. Rather 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, in fact 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. As we saw in section 1.3.3 above, this is the traditional way in which the common law protects third parties against an unbridled proliferation of equitable proprietary rights. That 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 rights including equitable proprietary rights in the assets they acquire. The separate existence of trust funds in this manner means that they are protected not only against the trustee and his creditors but also against the creditors of the beneficiaries, except for the benefits themselves as defined in the trust deed once accrued. In the USA, in so-called spendthrift trusts, the beneficiary cannot even freely dispose of his benefit, which is then completely shielded from his creditors. Whatever

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the additional terms, the key is that the trust assets themselves cannot be reached by either type of creditor whilst 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 him (without the trustee’s consent), but not more than he has under the trust deed and applicable law (which may restrict this facility). In the main, the beneficiary may be entitled to some future income stream, but he may also have the actual enjoyment and use of certain assets of which he will then acquire (equitable) possession. As just mentioned, he may be allowed to transfer these income rights (through assignment plus surrender) and also his possession to third parties, subject, however, to the beneficiary’s limitations 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.276 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, like 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 USA 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 himself into a trustee of his own assets for the benefit of others. The trustee and the beneficiary may 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 himself 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 amongst the legal community and the better off. They 276

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

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appear, either formally or constructively, and result all the time. 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. Segregation and management are here the issues. In modern times, tax and business considerations will be no less important in the use of trust structures. 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. They play a decisive role in client accounts, fund management and custody, and undisclosed agency. The common law flexibility presents here 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 business, it is mainly the (constructive or resulting) trust alternative that is of special interest foremost to obtain a more informal way of segregation and to avoid a windfall in the creditors of asset managers.277 That type of segregation cannot be achieved by contract alone. It may well be that in this connection the acceptance of the notion of constructive or resulting trusts is more important than that of formal trusts.278 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, that since 2009 proposes to introduce formal trusts for movable property in the EU. It means that the trust notion is not fully integrated. But this is not always the consequence of 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 juirsdictions. 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. 277 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 (Kluwer, London, 2002) 135–62, see also HLE Verhagen, ‘Ownership Based Fund Management in the Netherlands’ 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 LJ 165. 278 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 LJ 625.

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It is a more flexible security arrangement, although in the USA 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. The risk for the lender is, however, that bona fide purchasers of the assets are protected which would not be so 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 also superseded by Article 9 UCC and its filing requirements. In deceased’s estate planning, trusts play traditionally 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 which 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. 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. It was not uncommon in the USA and combating these combines gave rise to the term anti-trust 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, of which there is no equivalent in civil law.

1.6.4 Constructive Trusts, Tracing and Tracking, Resulting Trusts, Statutory Trusts and Charitable Trusts The constructive trust is a much 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; it suggests a more institutional approach. In the USA there may be greater discretion for the judge and there is a close connection with the judicial granting of equitable liens; this suggests a more remedial approach. But again in all cases it is the segregation 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

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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. As just mentioned, at least in common law countries other than England, the constructive trust tends to be remedial in this sense, 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 expression, especially in the USA.279 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, not normally obtainable under an unjust enrichment action. It shows the temporary nature of this type of trust where the analogy with the institutional trust ends. The remedial function thus arises particularly when title in an asset results 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 of the remedy and the notion of constructive trust. The return of the asset is not automatic, which as we saw earlier even at law it normally is not. As just mentioned, in England the constructive trust notion can be remedial also, for example when an asset has been sold but the title transfer is delayed, but it may there be a narrower concept. The application of constructive trust principles is thus mostly incidental, but 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-a-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 here a difference between adverse possession (at law) and constructive trust (in equity) but they seem not always to be clearly distinguished and may supplement each other. The equitable principle includes fiduciary duties, whilst handling the asset even during periods of adverse possession, which could amount to bailment: see for the relationship between both section 1.6.5 below. An element of overlap arises as the adverse possessor (even the thief) thus acquires at the same time features of a trustee. Another example of a constructive trustee may be an agent who holds the assets he acquired for his principal as constructive trustee whilst the principal is the true owner at law. Technically there seems here to be some confusion of concepts, as the beneficiary under the constructive trust is already the owner at law (as in the case of a theft), but

279

See Justice Cardozo in Beatty v Guggenheim Exploration Co 225 NY 380, 386 (1919).

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pending confirmation of this status, the assets may be held in trust by the wrongful legal owner for the rightful one, who has therefore also an equitable ownership which is as such protected. 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, like the reservation of title upon conversion of the asset. In the USA 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 be 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 his 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. This 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 tracing, especially in the USA. Obviously, the notions of constructive trust, tracing, and tracking are most acute in bankruptcy. There is no general theory in common law suggesting a clear approach, however, except perhaps for tracing under floating charges, and bankruptcy courts have always 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 USA, 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. All constructive trust or tracing rights (but by no means all tracing 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.280 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.281 A resulting trust should be clearly distinguished from a constructive trust and is created if a transfer without adequate consideration is made whilst there is no 280

See eg Department of Natural Resources v Benjamin, 40 Colo App 520, 587 P 2d 1207 (1976). See, for some incongruous results DMW Waters, ‘The English Constructive Trust: A Look into the Future’ (1966)19 Van der Bilt LR 1215. 281

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intention to make a clear gift. The transferor is then presumed to have had the intention himself 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 where a resulting trust is imposed by law as it sometimes is in England, there may be no appreciable difference with a constructive trust. There are also statutory trusts of which the bankrupt estate is the prime example. It was already said that charitable trusts 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 whilst 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 feauture is that any goods so acquired by the agent are held by him in trust for the principle. In the previous section this was already 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 an disclosed agency. Different types of agent may have further duties in this respect, like security brokers, 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 III, chapter 2, 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.

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Trusts and bailments also have overlaps.282 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, the bailee could still be agent at the same time. In any event, even in bailment, there may be fiduciary duties very akin to those of a trustee as we saw. 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. The suspended or dual ownership rights that flow from them are in those cases accepted, at least in embryo. These dual rights are now better 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 forms of conditional sales and transfers. Indeed in common law they often operate behind a trust when in movable assets. In modern financial arrangements, these conditional sales and split ownersip 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. The 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. In custody and agency, there are special needs for separation of assets, even if held in the name of the custodian or agent, implying also a duality or conditional or temporary ownership in them, if not an outright ownership of the client. Civil law cannot ignore that also. In modern client accounts, if sufficiently segregated, again the question of joint but separate ownership of the assets by the clients arises or of a constructive trust pending distribution. So it is in fund management, custody and in partnership forms without legal personality. 282

See C Uniken Venema, Law en Equity (Zwolle, Antwerp, 1990) 214.

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In legal commentaries, trustlike structures are becoming better known, also in civil law. 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.283 Special applications of the concept may be found in client and custody accounts, in investment management and indirect agency, where statute may, however, 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.284 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 has therefore 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 his 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. In civil law, the greatest weakness remains in the lack of segregation and in the consequential lack of protection of the trust assets in the case of the bankruptcy of a Treuhänder and in the lack of refinement in the fiduciary duties and powers of the courts. There is also the issue of tracing. At least in Germany, the first shortcoming could perhaps be overcome by a more extensive application of the regime of the Testamentsvollstrecker.285 As for fiduciary duties, some writers have concluded that a

283

See for an overview, S Grundmann, ‘The Evolution of Trust and Treuhand in the 20th Century’ in R Helmholz and R Zimmermann (eds), Itinera Fiduciae, Trust and Treuhand in Historical Perspective, (Berlin, 1998) 469. See also S Grundmann, Der Treuhandvertrag (1997) and H Koetz, ‘National Report for Germany’ in DJ Hayton, SCJJ Kortmann and HLE Verhagen, Principles of European Trust Law (1999) 85. 284 See for other incidental statutory examples more in particular Grundmann, n 254 above, 28 ff. 285 See Koetz, n 283 above, 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, The Treuhand kraft privaten Rechtsgeschäfts (1973) 178 and Grundmann, n 283 above, 315.

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much fuller regime already operates today in Germany.286 Yet it would not bring constructive trust notions, segregation, and tracing, which in business are perhaps the more urgent concerns. The inadequate judicial back up has not so far been given much attention in civil law. In Italy, the situation is even less developed. 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. In France, since 1990, there had been a renewed interest in the fiducia or fiducie.287 To create a securities transfer it was always possible and practices exist particularly for receivables: see also Volume III, chapter 1, section 1.3.5. Legislation was finally implemented in 2007 after overcoming serious objections from the tax autorities, see for the details Volume III, chapter 1, 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. It appears largely meant as a facility 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.288 This may also be the situation in the Netherlands, where, as we saw in section 1.6.1 above, the fiducia was outlawed under its new Code, thus eliminating and important support for the trust concept. In Switzerland, the environment has long been more congenial but legally no more certain.289 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

286

See Grundmann, n 283 above, 478 ff. See especially C Grimaldi, La Fiducie: reflexions sur l’institution et l’avant-projet qui la consacre (Repertoire Defrenois, 1991) 897. 288 See for France P Remy, ‘National Report for France’ in DJ Hayton, SCJJ Kortmann and HLE Verhagen (eds), Principles of European Trust Law (1999) 131 and for Italy, M Lupoi and T Arrigo, 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 interstate 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. 289 See AE von Overbeck, ‘National Report for Switzerland’ in Hayton et al (eds), n 288 above, 105. 287

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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.290 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 III, chapter 1, section 1.4.1. New Dutch law is much more reticent, Volume III, chapter 1, 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 more 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 proprietary rights officially recognised. 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 like finance leases, repurchase agreements and factoring of receivables, and its consequences will be discussed more fully below in section 1.7. They are also present in trust structures, which are therefore also difficult to place in civil law. The key is the status of trust assets in a bankruptcy of the trustee. 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

290 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), Principles of European Trust Law (1999) 67, and G Gretton, ‘Scotland: The Evolution of the Trusts in a Semi-Civilian System’ in Helmholtz and Zimmermann (eds), Itinera Fiduciae, Trust and Treuhand in Historical Perspective (Berlin, 1998) 507. Interestingly, Gretton cites the law of Quebec (Art 1261 CC) in this connection: ‘[t]he trust property, consisting of the property transferred, constitutes a patrimony by appropriation, autonomous and distinct from that of 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, in which a father claimed a constructive trust in real estate of a son in France, this 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 Article 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.

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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 replaccment assets as we saw 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 their Recognition, ratified also by some civil law countries like 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 USA are so far only signatories. The Convention itself will be more fully discussed below in section 1.8. 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 (Arts 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 derived in the EU Europe 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 23(4) in conjunction with Articles 5(6) and 2. Article 23(4) allows 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 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 of which they are habitually resident.291 In this manner the competent court acquires also jurisdiction over the trust which is not a separate entity. This is not without problems. If a foreign trust recognised in a EU member state has a trustee there, whilst others may reside elsewhere, that resident trustee may be sued in

291

See for these jurisdictional aspects also n 330 below and accompanying text.

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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 also 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. A similar facility may now also exist in the Netherlands.292 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.293 But the process is slow. Principles of European Trust Law were in the meantime developed at Nijmegen University.294 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, and seem to provide more direction than the European and UNIDROIT Principles of Contract Law, which are too detailed and 292 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 III, ch 1, 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. 293 See ch 1, s 3.1.6 above. 294 See D Hayton, ‘The Developing European Dimension of Trust Law’ (1999) King’s College Law Journal 48; M Lupoi, ‘Trusts and Civilian Categories’ in R Helmholz and R Zimmermann (eds), Itinera Fiduciae, Trust and Treuhand in Historical Perspective (Berlin, 1998) 497 and Hayton, Kortmann and Verhagen, n 288 above.

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elaborate, perhaps even contentious as we saw in chapter 2, 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 (Art 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 (Art 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 (Art IV). The trust fund not only consists 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 (Art III). Beneficiaries have a right to information to protect their interest and the trustee must account to them (Art 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 interests. 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 (Art 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 (Art 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 (Art 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 (Art VIII).

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1.7

Secured Transactions and Conditional 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 can sell his assets to obtain cash or he can try to take out a loan secured on these assets. Everyone would agree that 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 his 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 and less reliable, as the security is left with the debtor and therefore less safe, whilst in any event interest must be paid and much less than the real value of the asset may be obtained in financing. Naturally, the asset will 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. The economic value of this user right is likely to be added to the repurchase price, which may also contain a fee element. The seller is here more likely to obtain the full value of the asset. However, if he does not repurchase the asset on the appointed date, all interest in it may be lost, therefore also any right to any overvalue that may have been created in the meantime (eg in times of inflation or in the case of market related assets like 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. There are here immediately three issues to consider: first, how the repurchase right should be characterised; secondly how the sale and repurchase can be distinguished from a secured loan; and thirdly how either operates. These issues are discussed in greater detail in Volume III, chapter 1, 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-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 principally in terms of (a) a (call) option for the original seller to repurchase the asset on a given date. In that sense, he has probably no more than a personal right to do so. 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 remère (Art 1659 CC).

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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. Finally, the salerepurchase may be cast in terms of (c) a (put) option for the buyer. In Germany this is called an uncharacteristic (unechte) repo and will be of lesser interest in this context. These options should be clearly spelled out in the repurchase contract, but it may be less than clear in this respect and it is then a matter of interpretation. 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 and could be seen as a purely contractual arrangement but also as resulting in a conditional sale under which, upon a timely tender of the repurchase price, the asset would automatically revert to the original seller. 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 in bankruptcy such a repossession is not stayed pending liquidation or, more likely, reorganisation proceedings, or where other considerations may prevail, like the notion of the solvabilité apparente in France, which protects the outward signs of creditworthiness, or more generally the impossibility under applicable law for conditions to mature against a debtor after his bankruptcy has been opened.295 An important issue is therefore the reclaiming or appropriation right upon default, in other words the proprietary nature of the repurchase right. As we shall see, the importance of the characterisation early made itself felt in reservations of title, which, at least in Germany and the Netherlands, are conditional sales. It is no less relevant, however, in the modern financing structures of the hire-purchase, finance lease, investment securities repo, and (recourse) factoring of receivables as we shall see. How the conditional sale works in this context will be briefly explained below and in more detail in Volume III, chapter 1, section 2.1. At this stage, it may suffice 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, whilst the seller retains title for himself. The conditional sale nature of this transaction, at least in Germany and the Netherlands, means that the seller retains a conditional title only, 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 (dingliche Anwartschaft), as German case law confirms. 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, whilst at the end of all instalment payments title automatically passes to him. In the finance lease it is not much 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

295

See s 1.4.6 above.

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instalment payment either automatically or at his 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 like in the USA, 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 automatically to become one. Especially in that case, the arrangement could be characterised as a conditional sale. In the repurchase agreement of investment securities or repos, what happens is that an investor wishes to acquire bonds or shares for a short time and wants to finance this transaction by obtaining funds through a sale and repurchase of the same securities with a third party, usually a bank that is specialised 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. Again the result may be characterised as a conditional sale under which the assets will automatically revert to the seller upon a tender of the repurchase price. This would introduce 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. This legal characterisation may be affected by any fungibility of the securities, as we shall see. In the factoring of receivables, also called receivable financing, their transfer may be made conditional on the approval or collectibility 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 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 create funding and may be referred to as finance or title 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. They have become very important. Repos are used to finance large short-time 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 in fact considerably older. Under common law, the traditional real estate mortgage was a conditional sale under which the party in need of financing sold his land upon the condition that he could repurchase it on the appointed date whilst 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

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execution sale and the mortgagee became full owner. There was no return of overvalue either (although it could 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. Yet the courts in equity, which abhorred forfeiture, devised a special protection (the equity of redemption) as we have seen allowing the debtor to repurchase the asset by still offering payment of principal 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 USA, under state law, they were often also 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. 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 always 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 USA. It was the origin of the German Sicherungsübereignung and of the Dutch fiduciary transfer, both creations of case law, in Germany gradually transformed into a kind of security interest,296 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. Under a conditional sale, it became thus possible to transfer equipment and inventory whilst retaining the physical assets, although there is 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 floatinmg charges thus remain problematic, but may be achieved by contract in Germany. 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, also 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 to reclaim them because of the general impossibility for conditions to mature in bankruptcy (except in pure sales) and in any 296 In Germany, in the 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.

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event because 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. In England, there was no such problem with non-possessory security and the English here developed equitable floating charges as just mentioned as true security interests instead of building further on the conditional sale structure inherent in (chattel) mortgages. As these chattel mortgages were legal interests, they had to be in specific assets whilst the automatic shift of the interest into replacement goods was more problematic than in equity, the reason floating (in equity) charges 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 USA where the priority is established as of the filing date. Both in England and the USA, 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 USA, this remains a traditional way of financing real estate. True conditional sales for financing purposes are also still possible under common law (although for chattels and intangibles no longer in the USA, as we shall see) 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. It is true that even the reservation of title is in England seen as a delayed rather than as a conditional sale and transfer, but in any event never as a security interest. Common law (except under statute in the UCC in the USA, as we shall see) is not inclined to go here behind the wishes of the parties. In the US Article 9 UCC there is now an important re-characterisation risk, partly redressed by amendments to the federal Bankruptcy Code, which for complicated financial structures does not encourage the re-characterisation.297

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 III, chapter 1, section 2.1. It results in conditional or temporary ownership rights. 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 297

See also S Vasser, ‘Derivatives in Bankruptcy’ 60 The Business Lawyer 1507, 1537.

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Sicherungsuebereignung in Germany and to the so-called fiduciary transfer in the Netherlands, as we have seen. They are also clearly apparent in the reservation of title, modern hire-purchase, and in finance leasing, repo-financing and even some forms of (recourse) receivable financing as we have also 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.298 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 to have third-party effect (on the basis of D.2.14.61) unless they were imposed by statute. Later, the resolving condition could manifest itself more independently of which the Digests give some examples, 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) being the most important ones, but at first again mostly without proprietary effect (although less sure for the lex commissoria, D.18.3.8), a view that only changed later in the Ius Commune299 and ultimately in the German Pandektist School. These conditions thus became proprietary and that remains in civil law the trend till this day, even though modern Dutch law does no longer see the proprietary effect as deriving from the contractual condition, it being no longer considered retroactive (Art 3.38(2) CC since 1992) but rather independently from special statutory provision (Art 3.84(4) CC). That approach has been criticised, but it appears for the moment the statutory position. It leaves the conditional ownership well in tact although operating only ex nunc (unless otherwise agreed) and not retroactively (whilst, even more surprisingly, the temporary ownership is now viewed as a usufruct, Art 3.85 CC). The conclusion is that in conditional or temporary 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 chapter 5, section 2.1.4. This was an early perception particularly strong in France (see Volume III, chapter 1, section 1.3.3 and in the Netherlands, see Volume III, chapter 1 section 1.2.3, although less so in Germany where an Anwartschaft or proprietary expectancy was assumed instead, see Volume III, chapter 1 section 1.4.1. It is an approach which now also finds support in the Netherlands, see further also the discussion of the split ownership right in section 1.7.5 below. Although their proprietary effect may remain unclear, 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. The date at 298 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). 299 See J Voet, Ad pandectas D.18.3 para 2. See later Pothier, Traite de contrat de vente, Partie V, ch II, 2–5.

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which the condition matures (or not) may be certain, but the event is not. If the event is certain, there is a term of time, for example when ownership is only transferred after a certain date, even though that 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 (Art 3.85 CC), transfers for terms are (surprisingly) converted into usufructs as we have seen, not, however, the conditional transfers. That suggest a more fundamental difference but in truth it is the recharacterisation of temporary transfers as usufruct that is artificial. It came in late into the recodification project and is hard to explain. 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 as defeasible titles in land and subsequently in equity, also in chattels. Besides the fee simple, the life interests, and the estates for years or leaseholds, they arose early in common law (as defeasible title). 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 normal 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, any type of condition 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 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 (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 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 of the legal interest or bailees. In England, these future interests in chattels are now mainly hidden behind trust structures. They receive as such less attention separately. That

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may be different in the USA, although if used for financial purposes they risk to be hidden behind and be re-characterised as security interests under Article 9 UCC, as we have seen. There is no proper equivalent for these future proprietary interests in civil law.

1.7.4

When are Finance Sales Converted into Secured Transactions?

Secured transactions concern loans supported by security interests in the debtor’s assets. In this sense, security interests are more in particular 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 USA security interests support any payment or performance of an obligation: see section 1–201(a)35 UCC. In that country, reservations of title, conditional sales, finance leases and receivable financings are now all converted into secured transactions if supporting such payments or the performance of other obligations, see sections 1–201(a)35, 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 that the UCC looks at economic realities in a unitary functional approach. 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 whilst the debtor remains liable for any shortfall. 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 (Art 3.84(3) CC). Unlike in the US, there is here no conversion into a security interest either (subject to its formalities and safeguards). On the other hand, since securities are not defined, it is difficult to determine what true security substitutes are. The conditional sale seems not to be included, as under Article 3.84(4) CC the proprietary effect of conditions is explicitly accepted in the Netherlands, 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. It does not clearly exclude it either. It has left the status of the modern finance sales in considerable doubt and required it to be determined by case law. New case law does not give the lessee in a financial lease a proprietary interest except where clearly so negotiated: see more particularly Volume III, chapter 1, section 1.2.3. The result is the opposite of the situation in the USA 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 like in reservations of title is not considered a security interest, whilst conditional or finance sales may present other funding techniques

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altogether, even if their characterisation (as conditional sales and what that means) may remain subject to (considerable) doubt. In this approach, security is connected with loan credit and 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 hire-purchases are not normally converted into a security interest. If there were such a structure, however, it would be normal to assume such a conversion. It would render them subject to the formalities of secured transactions in terms of creation and enforcement or foreclosure. The 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, whilst in Germany the position of the bank was further eroded as in a bankruptcy of the borrower it was given a preference only in the proceeds of a sale of the relevant assets rather than a separate repossession and execution right. However, if there is no such loan structure, as there may not be in finance leases, repos and other finance sales, one should assume that there is a true conditional sale without any need for conversion. English law bears this out: see Volume III, chapter 1, section 1.5.3. Such sales can indeed exist in Germany also but it should immediately be added that the finance lease, repos and factoring are not readily so analysed in that country: see Volume III, chapter 1, section 1.4.3. The distinguishing features are that secured transactions (a) 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 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. These security interests (b) 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. There is (c) also the question of the extension or shift of the interest into replacement assets and proceeds to be considered and there may be (d) extra formalities, especially in terms of publication or turning over of possession. Finally, there is (e) the questions of ranking and (f) 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 issue is concerned, it receives traditionally more attention in civil than in common law, see also Volume III, chapter 1, 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

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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 very important in factoring, where, depending on its terms, the creditor through the assignment of the receivable may also 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 this is different in the case of a reservation of title which is now considered accessory to the receivable it supports: see also Volume III, chapter 1, section 1.3.4. It shows French ambiguity as to the nature of the reservation of title and the security analogy is increasingly pursued, although 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 USA 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, 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 goes especially for 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 securitybased and ownership-based funding 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 see a change into a charge or security interest also in common law leading to a disposition upon default and a return of overvalue whilst the debtor remains liable for any undervalue to these secured creditors. 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. Thus only where a clear loan or a floating charge results in this manner a disposition with a return of overvalue is to be expected, although in the USA, in

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chattels, the conditional sale is no longer an acceptable alternative, as we saw, 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 more room for conditional sales in such countries. There are great differences here, however, as we shall see in Volume III, chapter 1, with German law being more liberal allowing creditor and debtor to agree to this shifting into replacement assets (only), section 1.4.3 above for the complication of the future nature of the asset which is in this manner also overcome in Germany. Dutch and French law is much less generous, which also applies to conditional sales like the reservation of title, which are not extended into replacement goods either. Then there are the formalities. In the case of a pledge, 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 USA (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 so in the USA, 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. Civil law mostly still accepts that the 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 in bankruptcy clear 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 instances special publication facilities were imposed which are very different in nature. In 2006, a broader floating charge facility was introduced by statute.300 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, like special documentation or registration requirements.

300 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.

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Then there is the ranking to consider. In 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 saw, 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 amongst 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). As far as the ranking of secured transactions 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 be considered. 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 whoever owns and is in possession of the asset (except if it has 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 is expressed in Germany as the Aussonderungsrecht; it is typical for owners and for those who benefit from reservations of title. It is in Germany 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, although 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. This changed to some extent with the implementation in Germany of the 2002 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. For the non-possessory security interest holders, there is in Germany in bankruptcy otherwise only an Absonderungsrecht, that is a preference in the execution proceeds after a sale is conducted by the trustee. It is a typical German limitation, not often

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followed elsewhere. Outside bankruptcy, the position is different and the status of the Sicherungsübereignung then depends much 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, whilst 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 have the highest rank, the collection of those who cannot repossess is thereby limited even if they rank higher than ordinary creditors. Modern bankruptcy statutes 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, however, suspended, but the self-help remedy may be reinstated if no adequate protection can be offered by the bankruptcy trustee. Security interest holders may also have to accept the immediate release of overvalue and accept alternative security interest if to the benefit of the estate, provided that they always remain adequately protected. They may now even be forced to co-operate in the reorganisation and their rights may be ‘crammed down’ under certain circumstances although they cannot be fully taken away from them against their will. Also the French Bankruptcy Act of 1985 included the secured creditors in the proceedings, which are mainly meant, however, to provide a delay to facilitate a reorganisation, see also Article 621−39 ff of de Code de Commerce of 2001 which incorporates this Bankruptcy Act. The new German Insolvency Act of 1999 goes in many respects in the direction of the American 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 Sicherungsuebereignung and mortgagees) in Germany, as we have seen. The repossession or self-help facility and separate position of the secured interest holders remains nevertheless 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. In addition, statute or case law may create statutory or similar liens with preferential rights. They could give certain creditors

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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.301 Conditional ownership rights as proprietary interest give in principle 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. Even in Germany, reservation of title gives an Aussonderungsrecht. Whether conditions of this nature may still mature after bankruptcy is, as we saw, in many countries an important issue whilst in France the theory of the solvabilité apparente or of ‘apparent ownership’ may be a further bar to the recovery rights. 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 proceeds in market sensitive structures. This will be discussed further in Volume III, chapter 1, sections 3.2.3–4 and Sections 2.2.6 and 4.2.4.

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 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 301 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. On the other hand, some individual creditors may also have preferential rights to the proceeds, like (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.

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asset to obtain objective values with the return of the overvalue to him was 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 itself as we saw, at least not the pactum de retroemendo of C.4.54.2, compare also D.41.4.2.3. On the other had, neither Roman law nor the Ius Commune elaborated much on the conditional ownership theme: 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 mortgage. It 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 as we have seen. 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 American statutory law in this area, especially for chattels, as may be seen in Article 9 UCC (Sections 9–601 ff).302 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 of course completely as the condition is fulfilled and all the seller’s conditional rights in the asset cease. The same goes for the buyer if he does not make timely payment, but 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. It may be 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

302

See SA Riesenfeld, Creditors’ Remedies and Debtors’ Protection, 3rd edn (1979) 149.

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even an implied right to sell the property on) unless otherwise agreed, which also suggests that he will be liable for the maintenance and harm caused to others (again, unless the contract says otherwise). The more important point, however, 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 his 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 e.g Art 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 would only be conditional. If the interest of the original seller under the reservation of title was disclosed, however, the purchaser from the buyer would obtain no more than the latter’s interest. The purchaser from the original seller 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. 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 German Supreme Court in 1956.303 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 III, chapter 1, 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 conditional sales may be able to operate.304 303

See BGH, 22 Feb 1956, BGHZ 20, 88 (1956), see also Vol III, ch 1, s 1.4.1. 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 304

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Where through conditional ownership concepts the duality of ownership in this manner forces itself also on civil law, it is finally necessary 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 USA before the UCC became effective there developed extensive case law,305 but much less 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 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-a-vis the secured and other creditors of the other conditional owner with possession of the asset.306

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, like the finance lease, the repo of investment securities, and the factoring of receivables with particular emphasis on their characterisation in terms of 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, factoring of receivables and, although less obviously so, in finance leasing. It should of course be borne in mind that in all 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 most developed in law, although in practice the finance repo and the factoring of receivables are no less better against hidden equitable proprietary interests. As suggested before, it may well be seen as the trade off in allowing their free creation: see also s 1.3.8. above. 305

See Vol III, ch 1, s 2.1.3. 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 is it 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 purchaser in the asset, including security interests. 306

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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 in Germany (s 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 saw, but both the finance lease and the factoring of receivables have caught the attention at the international level, the finance lease and factoring in UNIDROIT and receivable financing in UNCITRAL: see again for the details Volume III, chapter 1, 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 receivable financing itself. The UNIDROIT Leasing Convention has obtained a small number of ratifications and has thus entered into force. So did the Factoring Convention more recently. The UNCITRAL Convention has not received any ratifications so far but was signed by the USA, 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 he may have a mere option (possibly against further payment). Where he 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 hirepurchase statutes which are inappropriate in the finance lease which is normally a professional financing tool. In the USA, as we saw, 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),

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there may be a purer instance of a conditional sale, although again it is not widely so analysed and for investment securities there is in any event a problem with the fungible nature of these securities so that not the same securities are likely to be returned but only the same quantity of the same sort, which may further undermine any proprietary claims of the seller, at least in the absence of tracing notions: see for the German, Dutch, French, English and American attitudes more extensively, Volume III, chapter 1, sections 1.4.3, 1.2.3, 1.3.3, 1.5.2/3, 1.6.2. As we shall see in Volume III, chapter 1, 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 III, chapter 1, 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 his full ownership. 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 either be 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, 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 III, chapter 1, 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

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repos. It means for the finance lease that the lessor remains the full owner of the lease assets whilst the lessee has only contractual (and perhaps some possessory) rights, possibly subject to the protection of the lessee as if there was 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 in a personal action only. This is all pertinent especially in a bankruptcy of the financier when his 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 him. In the repo, it could mean that the bankrupt buyer/financier would insist on full performance of the agreement if the price of 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 had 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. Where the finance sale is characterised as a mere contract, some relief may be obtained through netting. This is an elaboration of the set-off principle and relevant particularly if there is a netting agreement that expands the concept, provided always that there are sufficient positions either way between the same parties. It may occur in repos where professional parties may be each other’s financiers in different repo transactions between them. The expansion of the set-off concept will allow netting of claims that are not all mature or even monetary or in the same currency: see also Volume III, chapter 1, section 3.1. The netting contract will have to introduce here acceleration of maturities and related discount clauses, valuation clauses for nonmonetary claims like 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 (s 104), especially so provide. Netting has become here the normal protection tool rather than reliance on proprietary concepts and options. The repo master agreement has acquired great significance in this connection, see Volume III, chapter 1, sections 4.2.5.

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 may now be deemed

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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 ss 9–315(a)(1)) and 9–401 UCC), the right to repossess the assets upon default (s 9–503 UCC) and, in the case of a security interest, the priority in the distribution of the proceeds upon a disposition (ss 9–609, 9–339 and 9–615 ff 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 may be 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 s 1.1.1 above, although the requirement of delivery for title transfer in chattels in most civil law countries and also under the older common law (see s 1.4.2 above), and of notification of assignments in some countries (see s 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 sometimes still 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 changes reflected in the system. In fact, no ownership can pass without 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 secret unless they coincide with physical possession.

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To minimise confusion, it has nevertheless 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, however, which allowed the non-possessory security interest (or hypothec) also in chattels and even a pledge with no more than constructive possession,307 nor was it that of the common law which accepted chattel

307 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 III, ch 1, s 1.2.2, n 68. 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 ch 1, 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. 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 (whilst 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 181 below) 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 that 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 clear 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.

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mortgages (usually a conditional sale, however),308 but it became progressively a requirement in the nineteenth century, especially on the European Continent and also

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 Nov 1737 cited in Van Bynkershoek, Observationes Tumultuariae ed Meijers (1962) IV, no 3051, but it disappeared in the nineteenthcentury codifications under the influence of earlier French customary law: see n 308 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 taxman 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 non-secured 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 his assets became a criminal offence. This is the stellionatus of D.47.20.3.1. 308 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 Coutume 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, Arts 91 and 109 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 L 42–5 Code de Commerce, was there a more limited floating charge facility, especially in respect of a business (which needs not to 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 Lemeunire, Fonds de Commerce (2001). By ordinance 2006–346 of 23 March 2006, a broader floating charge facility is being introduced in France. For receivables, the pledge became uncommon in France as it was doubtful whether it allowed collection by the lender. A conditional assignment became therefore the more common method of using receivables for funding purposes: see ch 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 III, ch 1, 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,

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in the USA.309 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 his 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 property is costly as it deprives the borrower/owner of the use of the asset in his business. It is the reason however, 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 in particular Vol III, ch 1, s 1.4.2 and for the development of the modern German reservation of title, Vol III, ch 1, s 1.4.1. 309

In England, the mortgage was a conditional sale: see Vol III, ch 1, 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. It also established priority in accordance with the time of registration, which was more generally meant to warn unsuspecting creditors, whilst at the same time protecting the debtor against hasty decisions in transferring assets to obtain funding. The conditional sale nature of the chattel mortgage was 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. At these conditional ownership rights could be structured as floating charges but that became progressively more difficult under statutory law and these floating charges subsequently developed in equity helped by the equitable tracing rights and shifts of charges into proceeds, see Vol III, ch 1, s 1.5.2. In English law, on the other hand, the pledge was a proper security interest and possessory but limited to chattels. As such is 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). The differences are mainly in the disposition requirements, overvalue repayment or redemption facility and position of bona fide purchasers. In the case of a bill of sale, 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 USA, 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 in particular Vol III, ch 1, ss 1.6.1 and 1.6.2.

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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 nonpossessory hidden liens of the Sicherungsübereignung became all the same 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 unaware of the earlier interests. Only in the USA did a bona fide protection of these assignees develop: see section 1.5.9 above. Earlier in England, in equity the bona fide later assignee who collected became also protected provided the debtor paid him 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 USA 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 himself. May the lender rely on the outward signs of the debtor’s personal property whilst 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 his possession to transfer it to a lender as security.310

310

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 has also 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 granting instead 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).

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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. 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.311 Unless clear exceptions are made like 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 that works here in favour of secured creditors may under modern law not or no longer be sufficient to protect ordinary, non-secured, bona fide creditors312 or even judicial or statutory lien creditors, at least no longer in the USA 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, works no longer 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.313 Security interest holders, even if hidden, are therefore better protected all the time unless their interests clearly arise from fraudulent conveyances.314 However, these security interests, if non-possessory, are now mostly subject to a filing requirement in the USA, 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 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.

311 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 Ala LR 683. 312 See for this notion also Vol III, ch 1, ss 1.1.10 and s 1.3.2, n 97 and for its demise in England in the Bankruptcy Act of 1986 s 1.5.2, n 182. 313 See Vol III, ch 5, s 1.3.4 for the situation in France and Vol III, ch 1, s 1.5.4 for the situation in England. 314 This is the English approach since the famous Twyne’s Case (1601) 76 ER 809, when a debtor transferred his assets to a friend whilst 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.

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1.7.8 Attachment and Perfection of Security Interests in Movable Property under the UCC in the US. Meaning and Weakness 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 against purchasers and other creditors. For this third-party effect itself, no filing or publication is necessary at all. No formalities are therefore 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 unless parties agree otherwise. It is to be noted in this connection that any public filing of a security interest does not replace the delivery of possession requirement. In the US, the security interest attaches immediately, therefore even before filing or the taking of (physical) possession and is under sections 9–201 and 9–203 UCC 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, as just discussed). 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 pushes the attached but non-perfected security interests automatically 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. Even perfection through filing does not affect them. From that point of view attachment and even perfection is only of importance between secured creditors and determines their ranking. It was earlier expressed as a facility operating amongst insiders, here especially other lenders and suppliers, in the nature of all equitable proprietary rights, which do not affect outsiders who have no search duty either. The ordinary commercial and financial flows protect them, see section also the summary in section 1.10 below. Thus the publication/filing or perfection itself only establishes priority over later secured creditors under voluntary or (often) statutory and judicial liens. That is all. The filing is limited to a finance statement. This latter document only indicates in summary terms the type of collateral covered. Its importance is the warning it gives to later secured lenders. Filing establishes clearly the time of the priority over other secured creditors and 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 (s 9–204 UCC), whilst the priority always relates back to the time of the filing of the finance statement. These last two aspects of the filing requirement are especially important. The warning function on the other hand is

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a means of giving the enquirers a rough idea, but any professional lender will have to make own enquiries anyway, ask for detailed information from the borrower, and search its accounts. 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 but this does not result from the filing. 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 whilst 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 as we saw, 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 as we saw, which will be free and clear regardless of the filing and there 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 guarantees nothing, it is relatively costly whilst in the US the filing systems in many states are still cumbersome, the place of filing and investigation 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 American example than would appear from its face. Even in the US, scepticism has been expressed although no abolition suggested.315 It may therefore come as less than a surprise that filing was not foreseen in earlier drafts of Article 9 UCC.316 In Europe

315 RT Nimmer, IM Hillinger and MG Hillinger, Commercial Transactions: Secured Financing Cases, Materials, Problems (1999) 144 are critical and suggest that Art 9 notice requirements have long outgrown their historical roots. In Europe, the American 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-, Giro- und 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)?’ Private and Commercial Law in a European and Global Context, Festschrift Horn (Berlin, 2006) 191. 316 See G Gilmore, Security Interests in Personal Property (1965), s 15.1.

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not much need has been felt for a similar system, particularly not 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. Thus in an international context more than lip service is sometimes paid to it. As an alternative, some form of filing also appeared 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. Filing as a substitute for possession remains an article of faith in many quarters, but is not here the true issue. Again, as bona fide purchasers are normally protected and have no investigation duties (except where security purchasers), the essence is (except in the Mobile Equipment Convention where it concerns specific high value items) 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.

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 USA is rightly famous for the system of security 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, 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 what 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 he may owe the bank for whatever reason: see for the US system further also the previous section and more in particular Volume III, chapter 1, section 1.6.1. In England, there is a similarly broad approach, in that country 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

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charge, which is normally the date of default of the debtor (proposed to be changed in that country also).317 It has a low rank and is therefore a less potent security. As a consequence, it will include also 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 III, chapter 1, section 1.5.2. The existence of floating charges is a test of the modernity of any security regime in the manner as now accepted 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 III, chapter 1, 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 debtor only after his bankruptcy, even though included in the charge and regardless of the earlier release of assets from the charge (eg 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 1.5.4 above, and may entail a considerable windfall for the other creditors in a bankruptcy, see further Volume III, chapter 1, 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 cannot continue to deliver goods free and clear to prospective buyers, whilst the present charge over them ‘crystallises’ and gives rise to execution remedies (or Absonderung in a German bankruptcy). 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 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. 317 In England, the Law Commission Paper no 164 of July 2002 suggested an advance filing system along American 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.

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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, there may be a difference with 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 1.5.4 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 his goods free and clear of any charge. This is expressed in section 9–320 UCC for goods sold in the ordinary 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 American 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.318

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 III, chapter 1, section 2.1.8, see for finance leasing also the Ottawa Leasing Convention of Unidroit of 1988, Volume III, chapter 1, section 2.3.5. In respect of receivables, the Unidroit Factoring Convention of 1988 and the 2001 Uncitral Convention on the Assignment

318 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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of Receivables in International Trade are also relevant: see more particularly Volume III, chapter 1, section 2.4.5. The attempt to formulate some principles of security laws, especially by the EBRD and its Model Law are briefly discussed in Volume III, chapter 1, sections 1.1.7 and 2.1.7, see further also section 1.8.5 below. Some early efforts were also made in the EU: see Volume III, chapter 1, section 1.1.7, now further pursued in the DCFR, see section 1.11 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 in the area of settlement, netting and collateral or margin in or concerning investment securities harmonised systems of law EU-wide, albeit only in these narrower fields in which local law could otherwise operate as a serious impediment.

1.8 1.8.1

Private International Law Aspects of Chattels

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. Parties cannot freely create proprietary rights, as we have seen, and it follows that they cannot not freely choose the applicable law in these matters either, except as to the manner the particular proprietary right functions between them (which is in such a case a purely contractual and not a proprietary issue, as there is no effect on others). In proprietary matters, the search is therefore on primarily for the applicable objective law, also in international transactions. It is true that, in the approach of this book, party autonomy has an important place in modern proprietary law, certainly also at the transnational level (see also section 1.10 below), but only if the inroads into the numerus clausus principle of proprietary rights, which result, are balanced by proper bona fide purchaser protection, normally available only in respect of equitable interests in common law countries as we saw. It follows that party autonomy operates here only amongst a group of professional insiders who are able to gauge the extent of these rights. Contract principles will have a place here but outsiders will always be protected against the interests so created. In this book this is more broadly considered a question of the protection of the commercial flows as a public order requirement and necessity. It is the essence of equity in this area in common law countries. It means that contract principles operate here but that the rights so granted or obtained are always cut off at the level of the bona fide purchaser or rather the purchaser in the ordinary course of business of commoditised products. It may be the reason why common law legal systems are here often more comfortable with the parties’ choice of law or party autonomy also in international cases, for

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example in international sales agreements, at least the resulting foreign interests may be recognised as equitable proprietary interests in the relevant common law country in terms of nearest equivalents, subsequently always subject to bona fide purchasers’ protection. Ordinary contract conflicts of law principles may thus apply in principle in respect of these interests but not in the proprietary consequences. For trusts proper, as we shall see, there is the 1985 Hague Convention which maintains, as a consequence, a much more elaborate approach in respect of the recognition of foreign trusts Barring treaty law, an approach recognising some proprietary effect of these equitable structures would be unlikely in civil law countries. It means that party autonomy leading to a contractual choice of law to determine these issues is not on the whole appropriate and will not be accepted, although, as we shall see in section 1.9 below, it is now (quite separately from the creation of equitable interest in the above sense) sometimes defended regardless, also in civil law countries, for the transborder transfer or assignment of intangible assets, notably monetary claims including therefore the proprietary aspects. In general, a choice of law problem truly arises when the applicability of several legal systems present themselves. Conflicts in respect of the creation and transfer of proprietary rights commonly arise at the level of the contract which creates them or sets the transfer in motion only if both parties are in different countries. At that level, 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 arise more properly 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). The basic objective rule concerning the properly applicable law in proprietary matters is traditionally the lex situs, at least for tangible assets. This is usually no problem for land, as their location is normally easily identifiable and the applicable law results from it. This is mostly also true for chattels as long as they do not move between countries. Application of the lex situs in this manner may in fact hardly be a true choice of law rule but merely a statement of fact that solves nothing when an asset moves across borders. As a minimum, it raises the question whether the old or new lex situs applies. 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 and leaves open the question whether the applicable law is the law of the situs of origin or of destination of the asset or how they may relate. Even when no asset moves, a transfer in bulk, either outright or conditionally or as security of chattels located in different countries, presents applicable property law problems, especially where the notion of bulk remains underdeveloped. The problem with the traditional lex situs approach is then that there is no single one 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 1.9.4 below, and is more generally perhaps the direction of modern thought. It still raises the issue of any shift into replacement assets under various legal systems, including receivables,

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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.319 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. Execution is always closely connected with the situs. In fact the applicability of the lex situs in proprietary matters may be seeen as closely related to the execution possibility and normally coincides with the lex executionis, but it must be remembered that bankruptcy jurisdiction 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 his assets may be elsewhere. In any event, conflicts of law in matters of enforcement against the asset do not normally derive from the movement of the asset (if it moves, the law of the new location applies), but from any attempt to conduct enforcement proceedings from a place other than the situs whilst effect is wanted in that place. Again this is a question of recognition and public policy, which will on the whole not be favourable. Enforcement against an asset normally requires judicial intervention and the courts of the place of the asset are usually considered to have exclusive jurisdiction: Article 23(5) of the EU Regulation on Jurisdiction and Enforcement of Judgments in Civil and Commercial Matters of 2002 (Brussel I) bears this out. Foreign enforcement decisions and even preliminary attachment orders are therefore unlikely to be recognised under the Convention and courts will apply their own law in matters of enforcement against assets within their jurisdiction. This principle of exclusive jurisdiction avoids conflicts of law in this area and emphasises the applicability of the lex situs, when it comes to an execution, which cannot therefore extend abroad in its effects or reach. At least that is the principle, although recognition of foreign bankruptcy jurisdiction may imply enforcement under a foreign regime. Thus in bankruptcy, the situation may seem somewhat different as a bankruptcy decree is likely under its own law to cover all assets of the bankrupt worldwide regardless of their situs, but for effectiveness at the situs it would still be dependent on recognition of this jurisdiction and public policy in the country where enforcement is sought. This is now increasingly promoted internationally, see the EU Bankruptcy Regulation of 2002, Chapter 15 US Bankruptcy Code 2005, and the UNCITRAL Model Law of 1997. 319 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 for publication of non-possessory security interests to the place of the owner, who may be elsewhere. 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 USA in the UCC, revisited in the 1998 revisions of Art 9. The emphasis is here for the formalities of the creation of non-possessory security interests on the law of the debtor/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).

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Modern law in many countries allows increasing discretion for the judiciary in recognising countries, that is both in the recognition of foreign enforcement jurisdiction but also in the recognition of foreign charges in assets that are properly within the jurisdiction of any enforcement authority. 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, whether or not the underlying asset is physically within its jurisdiction. In any event, the effect of the bankruptcy on assets elsewhere and on the interests therein comes 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. His foreign interests will then be given their proper place and any preferential separate execution at the situs may be discounted accordingly and affect the interest holder’s share in the distribution of the bankruptcy proceeds. Whether in this manner or through the recognition process, the result is that the foreign proprietary interests (like security interests or conditional ownership interests) are increasingly given their own status and ranking in the execution with adaptations of their original status if necessary and this may now also increasingly be the case outside bankruptcies, in particular when an asset subject to all kind of charges travels to another country and becomes involved in execution measures there.

1.8.2

The Application of the Lex Situs

In section 1.8.1, the main areas in which proprietary conflicts of law may arise were identified. Normally, in the traditional conflict of laws approach, proprietary rights must be assumed to be created pursuant to the lex situs of the country of origin of the asset, that is where it was at the time of the creation of the interest in the asset. Once an asset moves to a new situs, the conditions under which acceptance or recognition may follow elsewhere are more likely those of the lex situs of the country of destination. It may at least have some relevance. Indeed, there is some test. 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 created under the proprietary law of that place, 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 new Dutch law. Secondly, there should be no adverse policy 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.320 The key is thus to accept that in the case of conflicts in a proprietary sense, principally occasioned when assets move (therefore a typical

320 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.

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problem for chattels), 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. 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 is likely to be accepted at the new situs. In the case of a full ownership right, this will normally be the case and recognition will be implied.321 It seems to be a matter of the acceptance of acquired rights. Much more problematic may be the recognition of more limited ownership interests like usufructs or other temporary ownership rights, especially reservations of title or other conditional ownership rights, security rights or common law equitable proprietary interests like those of the beneficiary under (constructive) trusts. On the other hand, when good value is given in the country of origin for the creation of these more limited interests, it is difficult to see how these more atypical proprietary rights 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 opened or recognised at the (new) situs.322 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, it is unlikely that the formalities of this foreign law have been observed at the creation stage. Recognition could then create an important disparity amongst 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 without it 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. In this system, it cannot be denied or avoided that the recognising court exercises considerable discretion. 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. It may be 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 321 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, above n 320, 184. 322 See also JH Dalhuisen, ‘International Aspects of Secured Transactions and Finance Sales involving Moveable and Intangible Property’ in Kokkini and Grosheide (eds), Molengrafica (1994) 405, 430.

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origin or of destination. Thus if a German and 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 physically take place in Germany and the sales agreement itself may be under English law It means that the asset, upon arrival in England, is still owned by the German seller, whilst title transfers in England only upon the delivery and the asset remains part of the seller’s estate until that moment, relevant especially if he 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 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. Yet the question of equivalence and public policy would 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 beneficiary might have no more than a contractual claim to his benefit rather than a proprietary right. In any event, the validity of the interest created at the original situs of the asset depends on the law of the situs of the asset at the time of the conclusion of the agreement and not on where or under which law the agreement itself was concluded or operates. 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). Whether and when such a proprietary right attaches depends on the objective law of the situs of the asset at the moment of the conclusion of the agreement.

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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 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, whilst its ranking will be further determined by any formalities (eg 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 when the asset moves, but the above pattern as to finding the applicable law is likely to remain the same under modern private international or conflicts laws. To highlight yet another variation, the following example may be of interest also. 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 saw, 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 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, 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, 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 result on the title transfer is again a question of the lex situs, and if the asset were still in England, English law would apply. As we saw, 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. 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 law: see section 1.4.8 above. Had the asset been in the USA, 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

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upon delivery there, 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 if, under the law of the situs of origin, delivery could have been constructive, but for bona fide purchaser protection it would have had to be physical (therefore to the buyer in the country of destiny). The sale to the bona fide purchaser could therefore not be completed under the original lex situs and his 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 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 substantially nationalised following the codifications in Europe at the beginning of the nineteenth century, although never fully 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 I, section 3.2.2. 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 1.1.7 above. It would probably mean that the intention of the parties as expressed in their contractual arrangement and the law applicable thereto would acquire a greater significance in the proprietary aspects; greater party autonomy may here be especially relevant for intangible assets, see section 1.9.2 below, always subject, it was submitted, to the unhindered protection of the commercial flows. This law could itself be the lex mercatoria (see further section 1.8.5 below), as it always was for negotiable instruments and documents of title. Although in a transnationalised environment the creation of proprietary rights may be left more fully to the 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 and is therefore not truly a matter of party autonomy, as it never was in purely domestic systems either, also not in common law where there is nevertheless greater freedom in the creation of equitable proprietary rights, as we saw 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 requirement of (some) publicity of the interest so created or of possession of the asset, either physically or possibly

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constructively. Again, more practical would be a reinforced (uniform) protection of bona fide purchasers or of all purchasers in the ordinary course of business to cut out all adverse proprietary interests, whether domestic, foreign or transnational. As will be further discussed in section 1.10 below, it is not to be excluded that these mandatory rules and bona fide purchaser protection notions are themselves becoming transnationalised and therefore uniform. It 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-a-vis third parties (and creditors of the interest holders so created): see more particularly also Volume I, section 3.2.2. Again, the trend has long been clear in negotiable instruments, including eurobonds, and most likely also for documents of title. Where monetary claims are increasingly commoditised and their free negotiability established regardless of contrary contractual clauses and defences, see section 1.5.7 above, the same could apply to them and there is no reason why chattels should then be exempt. It 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 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 transborder trade in goods is estimated by the World Trade Organisation to have reached a US$ equivalent amount well beyond 10,000 billion per year, title in which thus remains largely unclear at least until the moment of physical delivery. The somewhat humbling conclusion for 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 that remain even under the Vienna Convention, see Volume I, section 2.3 above, often unsettled. It could be argued, however, that the surge of international trade is now such that it no longer accepts domestic laws and concepts as an impediment to it and transforms the proprietary and other legal concepts if necessary at a transnational level. It is in any event 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 I. In proprietary matters, this is especially obvious in respect of assets that move to another country as part of the sales process but it is also 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). On the other hand, there is a particular reason why the international proprietary problems should not be exaggerated, at least in international sales (without purchase money securities attached). 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

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in the USA 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 are 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. These remain exceptional events, but require clarity in the proprietary aspects, not least when these assets are also 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 physical possession of the asset, which reduces their exposure. Finality remains here an important issue also, as we shall see. It should be admitted also that in other transactions besides sales, notably in financial dealings, the proprietary aspects cannot be similarly ignored or minimised as we shall see also.

1.8.3 The Notions of Equivalence and Adaptation; Conditional Ownership, Security and Retention Rights Requiring equivalency for recognition of foreign proprietary rights 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. In France, for example, the right is of an accessory nature,323 transfers therefore with the receivable (like a security right), for example to a factoring company. The factoring company/assignee is the new creditor under the assignment, suggesting that the seller/assignor under the reservation of title has been satisfied without apparently the debtor/buyer obtaining full title as a consequence. In countries like Germany and the Netherlands324, on the other hand, the reservation of title is a conditional ownership right not accessory to the underlying indebtedness. It is 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 has no longer any meaning for him. This result may 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 USA, under Article 9 UCC reservation of title, even if the term is used, is, as we saw, fully equated with a security interest to the point that it requires upon default 323 324

Cour de Cass, 15 Mar 1988, Bull civ IV, no 106. HR 18 Jan 1994 [1994] RvdW 61.

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an execution sale with reimbursement of any overvalue to the debtor, whilst in Europe an American reservation of title is more likely to be seen as a conditional sale. What looks the same is therefore legally often treated differently and may be subject to transformation. Thus even similar rights might be substantially transformed in the country of recognition upon movement of the asset. 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.325 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 an American reservation of title in a piece of professional equipment may easily be accepted in the Netherlands and may well allow the American seller to repossess the asset in the Netherlands upon shipment of the asset to that country, even though he could not have done so in his country of origin. A Dutch seller would certainly not have a similar repossession right in the USA 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 USA, 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 USA). It is likely to be an extra recognition requirement in the USA, 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. In the traditional private international law or conflicts 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. Everywhere, the execution judge clearly has a measure of discretion in this regard. The solution is therefore not here in a hard-and-fast conflicts rule.

325

BGH, 20 March 1963, BGHZ 39, 173 (1963).

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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 (whilst 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 even apply to the execution or bankruptcy laws of the recognising forum themselves, especially when making room for foreign security interests not known in the system of the country of origin.326 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 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, like 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.327 It was already 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 party autonomy in terms of the applicable law. It may be that the foreign interests so created could be considered equitable proprietary interests as nearest equivalents subject to bona fide purchaser protection in the recognising common law country. It makes party autonomy and the inroads into the numerus clausus of proprietary rights it is likely to entail palatable, also at the international level, but this would only be so in international cases playing out in common law countries. 326 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) 3–398 ff. 327 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 purely contractual 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 whose law is more congenial to these rights.

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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 separateness from his own estate). As explained above, under the normal 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 off-shore trusts, however, such as those in the Channel Islands or in the Caribbean) and the trustee took control of the goods. Normally, the trustee may,however, 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 which might even include assets 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 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 had moved. Again, this leaves wide open the question of 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 right for the beneficiaries, which they may lose in a bankruptcy of the trustees. Particularly if the trust was a substitute security interest (eg an indenture under which a debtor/lender 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 would still be considered part of the bankrupt estate of the settlor, but it might be subject to a security interest of the beneficiary, if that were considered the nearest equivalent (see for this structure s 1.6.6 above), relevant especially if the assets were moved to the country of the bankruptcy, in which case the rank of the security interest would in any event have to be determined. Even if they have not moved to that country, they may still be treated as security in the bankruptcy. However, if the end effect is not similar, the result would be less likely to be accepted in the country of the assets (if they had not moved) where the trust in respect of them was created, 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

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trust so created could be recognised in the country of the assets concerned. This is the situation with off-shore 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 rules of the 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, whilst France is also contemplating ratification. It is mainly a vehicle for recognising the typical common law trusts, although according to the Preamble328 similar civil law structures are also covered, and amongst civil law countries Liechtenstein and Luxembourg in particular developed them:329 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 (Arts 6–10), assuming that such applicable law provides for trusts (Art 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, therefore in proprietary matters. Such trusts will then be recognised in their most salient aspects (Art 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 Art 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 (Art 13) or if there are serious tax avoidance problems (Art 19) or other public policy considerations against recognition (Art 18). It was already said that 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

328 They show the characteristics of Art 2 under their own law (Art 5) if 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 (1985), no 13. Thus conditional ownership structures or foundations do not benefit from the recognition regime of the Convention. 329 See for similar structures in other non-common law countries also ibid, nos 33 ff.

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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 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. 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 is 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 Art 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 s 1.4.3 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 (Art 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 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 could happen for example in the case of lack of capacity, intent, or formality, in the absence of consideration 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

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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.330 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 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 (Art 22).

1.8.5

The Details of the Trust Convention

As to the details of the Convention, the more important point is the applicable law, determined by Articles 6 and 7. In particular, the broad powers for the settlor to choose an applicable law 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 conflicts approach had been uncertain whilst literature on the subject was sparse.331 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: 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 (Art 6). Article 7 gives a uniform conflicts 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 amongst themselves if there are more than one; (c) the right of the trustee to delegate his 330 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. 331 See for a more extensive comment, Dicey and Morris on the Conflict of Laws, 14th edn (London, 2006) 29–016 at p 1309 ff.

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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. Whilst 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. Whilst the Convention does not 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 applicable to the choice of law rules of the forum which, as far as tangible assets are concerned, will 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 Arts 6 and 7) shall be recognised in Contracting States, and this without special proceedings. 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 the trust construction is known and operates under that law (Art 6). This is a very liberal approach, balanced, however, not only by public policy considerations in the recognising country (Art 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 re-balancing 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 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

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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) the 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 (Art 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 rules concerning matrimonial property rights and in inheritance matters. It may also result from a more liberal recognition of foreign bankruptcies. 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 III, chapter 1, section 1.2.2), is also not seen as an impediment whilst 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.

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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 here greater freedom.332

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 being made by UNIDROIT in its 2001 Convention on International Interests in Mobile Equipment: Volume III, chapter 5, section 2.1.8; see for finance leasing also the Ottawa Leasing Convention of UNIDROIT of 1988, Volume III, chapter 1, 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 III, chapter 1, section 2.4.5. 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 manners. In 1994, the European Bank for Reconstruction and Development (EBRD) presented its Model Law on Secured Financing. This will be discussed in Volume III, chapter 1, section 1.1.8 and 2.1.9. Some efforts at harmonisation were also made earlier within the EU: see Volume III, chapter 1, section 1.1.8 and also now pursued in the DCFR, see section 1.11. The sum total of efforts in this area remains limited and they are geared to special areas of the law.

332 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 R Helmholz and R Zimmermann (eds), Itinera Fiduciae, Trust and Treuhand in Historical Perspective (Berlin, 1998) 507.

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The Lex Mercatoria Concerning Chattels

In Volume I, section 3.2.2, 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. There appears to be little room for more sophisticated non-possessory security interests under the lex mercatoria as it has developed so far. It was also said, however, that there may be room 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 I, section 1.1.4. The contours of a modern approach transnationally, particularly important in international finance, will be further explored below in section 1.10.

1.9

Private International Law Aspects of Assignments

1.9.1 The Various Aspects of Assignments. Conflicts of Law Issues especially in respect of Bulk Assignments The international aspects of assignments are acquiring a particular importance in international financings based on bulk transfers/assignments of receivables with debtors in various countries, but they may be of interest also if the assignor and assignee are in different countries even though the debtors are not, for example when a creditor assigns a domestic portfolio of receivables to a foreign bank. Naturally, they also arise in assignments of individual claims when assignor, assignee and/or the debtor are in different countries. Like for other assets, in particular chattels, see section 1.8.1 above, it may be useful to distinguish between the contractual, proprietary, and enforcement aspects, whilst adding, in the case of an assignment, as a special category, the protection of the debtor. This reflects the internal aspect of the asset and is a special assignment complication. Although it concerns here a third party aspect in the sense that a debtor in an assignment is confronted with an involuntary creditor substitution under his contract or at least the monetary claims arising out of it, the issue of his protection is not truly propriety and he may usually waive his defences in this connection in the underlying contract (unless public policy or public order requirements dictate otherwise). On the other hand, the types of assignment that may operate as a proprietary issue in intangible assets, normally claims, and how their transfer or assignment is achieved

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are, like for other assets, in the nature of the prescriptions of the objectively applicable property laws and as such commonly not considered matters of party autonomy although as we shall see there are here other views for intangibles, especially because of the problems with the asset status of claims and their location. It may be recalled in this connection that a claim according to its internal aspect is obligatory, but according to its external aspect, therefore in respect of third parties, it is an asset as any other, cable of transfer and the creation therein of ordinary proprietary rights, like ownership, usufruct, and security interests, see also section 1.1.2 above. We further saw that in civil law terminology, a claim may also be possessed and defended as such and is capable of acquisitive prescription although particularly in countries like Germany where the external aspect is not developed in this manner, there may still be some doubt in these aspects, see section 1.5.1 above. This may also complicate the private international law approach, where, as a consequence, the analogy with other assets, notably chattels, may be lost when conflicts of law arise, especially relevant in the proprietary and enforcement aspects. As we shall see, the law applicable to the internal aspect is then soon transposed to the external or proprietary and enforcement aspects as well. This especially raises the issue of party autonomy in the choice of law in these aspects. It may be useful to keep here in mind also the more specific civil law distinctions in terms of all asset transfers: power, intent, and formalities, see sections 1.4.1 and 1.5.1 above, although, as we shall see below in section 1.9.2, a different terminology has developed in connection with the international aspects of transfers of claims. Altogether there is no recognised traditional legal framework for assignments in the conflicts of law and this may lead to greater confusion than would appear to be necessary. The principal reason is again the problems that still derive from not considering claims ordinary assets and the resulting confusion between the obligatory and proprietary aspects of claims.333 If we follow for the moment the traditional distinction between the contractual, proprietary, and enforcement aspects of an asset transfer and add for assignments also the internal or debtor protection aspects, it is clear that in the contractual aspects conflicts of law normally arise only when assignor and assignee are in different countries. As for the proprietary and enforcement aspects, which can largely be dealt with together, conflicts of law are foremost likely to arise when the asset moves between countries, as we also saw for chattels. This requires a notion of location of the asset, particularly troublesome for claims. If the place of the debtor may be considered controlling in this regard, which will be suggested below, one could say that no true

333 The confusion is compounded by the erroneous 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 financiale overeenkomsten in Rome I’ (2009) WPNR 6824, 1038, 1039, a misunderstanding also common in Germany, see U Drobning, n 67 above. There are no proprietary rights as such between contract parties: all is here contractual. Proprietary effect is per definition third-party effect, no more, no less.

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conflicts of law are likely to arise under an assignment as the intangible asset does not normally move as a consequence, the debtor being the same and usually remaining in the same place. In this view, only if the debtor moves his residence (or seat in the case of a legal entity) does a proprietary conflict of laws arise (which would not then be related to an assignment). It poses first issues of proper creation of the debt or any other proprietary interest therein (like a conditional or temporary ownership right or a security interest or, in common law countries, equitable proprietary interests like floating charges) in the country of origin of the debtor and subsequently issues of recognition of the debt and the characterisation of any other interests so created in terms of nearest equivalents in the country of destination of the debtor, just like in the case of chattels that move between countries: see section 1.8.3.above. Debtors’ moving their residence to other countries is exceptional, however. For this discussion, more important is the conclusion that special proprietary or enforcement aspects as conflicts of law issues are thus unlikely to arise in connection with an assignment of an interest in their debts. Normally the situation in the case of an assignment is therefore just like when a chattel is sold by two foreigners but remains in the same country. It does not create special proprietary problems in terms of conflicts of law, not even when special interests such as floating charges are created in them through assignment. They could be enforced only under the law of the debtor. This is probably the true reason why in international assignments—thus in assignments between an assignor and assignee in different countries—the proprietary and enforcement aspects traditionally received so little attention,334 although, as we already saw, there may here still be a question of recognition if the charge was originally created under the law of another country. However, it was already noted before that situations in which international proprietary conflicts may be identified in the context of assignments, may also arise in the more modern environment of bulk assignments of receivables with debtors in various countries (who do not move). This has become a matter of special concern in the context of modern international financings, where the application of one singular or unitary legal system to all would be useful, but still raises issues of recognition at the place of the location of each individual debt, that is, in the place of each debtor, especially in terms of collection, therefore enforcement and also his proper protection, here identified, however, as a separate issue, not itself proprietary.335 In view of their significance, the discussion below is largely concentrated on these bulk assignments of monetary claims for payment of goods or services that may be recoverable in different countries, especially in connection with their use in financial

334 Other reasons why the private international law or conflicts’ aspects of assignments have until more recently not raised a great deal of interest is perhaps that claims, even if monetary, were not considered important asset classes, see s 1.1.4 above. This is changing and particularly bulk assignments of trade receivables were already marked as being of ever greater importance. 335 Another example of conflicts of proprietary law is perhaps the situation in which a foreign debtor creates a charge (through a more limited assignment) in one of his intangible asset abroad whilst filing is supposed to happen at the place of the owner/debtor under the law of the charge.

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transactions, as in floating charges, receivable financing, and securitisations, and will particularly focus on the proprietary and enforcement consequences of such assignments. Where in the case of these bulk assignment, the debtors are in different countries, there is in this connection foremost the issue whether and under what law (in the traditional conflict of laws approach) the bulk assignment is binding upon them all. In other words, when must they consider the claims to have transferred to another creditor? As in all proprietary transfers, it raises first questions of the proper law concerning power, intent and formalities. Was there sufficient power in the assignor to dispose in this (bulk) manner? Was there a valid assignment agreement and what if it was deemed to have failed after the claims were already transferred, and which laws must here be considered as applicable (to an assignment in bulk or its failure), not merely in the contractual aspects therefore, but also in the matter of transfer. May the assignment in its proprietary effects still stand if the contract has failed but the transfer was made? That would be the abstract system, see section 1.5.9 above. The more specific question is then whether there is conceivably one unitary law covering all these aspects. As for the formalities, more especially documentation or, if the assignment is meant to achieve a secured interest, possibly registration or publication may become relevant. Also here, the question is whether there may conceivably be a unitary law that could cover all claims and which law should that be? More in particular, can it also take care of the proprietary and enforcement aspects in a unitary fashion regardless of the location of the debtors ideally dispensing with recognition problems and finding the nearest equivalent? In the traditional private international law approach that may seem unlikely. It also raises questions of the applicable law concerning validity, which poses the further issue whether the notification is a constitutive requirement for the assignment. If so, a bulk assignment would hardly seem to be efficient. As a form of financing is usually the objective of bulk assignments of monetary claims, the further question is then whether the arrangement may be a simple security interest, a floating charge in a whole cash flow, or conditional sale, what kind of disposition is necessary upon default in these various instances, and who is entitled to the collections and overvalue in the portfolio. Another question is in that case the moment of effectiveness of the transfer (either at the time of the assignment or upon notification of each individual transfer). Again, is there a unitary approach possible and which domestic law must then be preferred? In fact, it would acquire the form of a uniform law even though formally it may not be treaty or statutory law. It could be transnational customary law. There is further the question of the assignability (particularly of highly personal claims, claims for services, and claims in contractually blocked accounts) and in connection with assignability the question of the assignment of future claims, connected with proper identification and the required specificity. Another assignability issue is the third-party effect of any clauses in the underlying contract out of which the claims arise limiting the assignability. Closely related is the matter of the defences

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and counterclaims of debtors and whether and to what extent they can be raised against an assignee, in which connection any counterclaim or set-off right is of particular interest. There is also the related question of the extra burdens or risks debtors may encounter as a result of an assignment, for example in terms of a different place and method of payment, or in terms of being sure that any payment to an assignee is liberating for the debtor. It raises again the question of the notification, now for its form, manner and effect, and bona fide payment or collection pursuant to it. Another well-known question is in this connection the effect of contractual amendments between debtor and assignor on any assigned (future) receivable. These are on the whole typical debtor protection issues and therefore issues of the internal relationship, which is likely to be obligatory; and these defences can be waived. The applicable law will also have to determine whether receivables can be fully separated from the underlying contract out of which they arise, to what extent related duties will be transferred automatically with such claims, and whether the assignor may be considered discharged in respect of them. Another question will be whether the contract as a whole can be assigned or other duties under it delegated by the assignor and what the effect is on his liability. Does the assignor remain at least a guarantor, and of what type? It raises also the question whether the assignment may imply an amendment or novation of the agreements out of which the claims arise, especially if there was a form of debtor’s consent. Novation poses in this connection the further question of the continued validity of any supporting security. Again, in bulk assignments the underlying issue is whether a measure of unity of the entire portfolio of receivables to be assigned may be legally assumed or construed, even if debtors come from different countries, and if so under whose laws. Short of such unity, practical problems arise in particular when, in different countries, there are different requirements of notification of debtors as a precondition for validity. To the extent individual notification becomes necessary, that will at the same time destroy the possibility of one assignment in bulk, whilst requirements of specificity or identification in any one country may also affect the inclusion of future debt and therefore the assignment of whole cash flows. There may also be different policies in matters of secured transactions, floating charges, and finance sales, but in fact the issues of formalities, validity, time of effectiveness, assignability, and defences, just mentioned, may all create special problems if no unity in the applicable law may be assumed. It would appear that in all these aspects, short of the unitising effect of transnationalisation through international custom or otherwise (including treaty law or EU Regulation, if at all dealing with these specific issues), it would be hard to find any unitary law amongst the various domestic possibilities in terms of the traditional conflicts of law approach. Various domestic laws will thus remain relevant in the different aspects of the assignment. As most of these issues are hardly questions that can be determined by the parties in the assignment agreement itself or in the underlying agreements out of which the claims arise, it is then also questionable whether a contractual choice in respect of them can be successful in achieving unity of the legal regime.

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By choosing a particular legal system to apply to the assignment, parties may, however, endeavour to influence the outcome and try to achieve the so desirable unity in the applicable law in this manner, even if such a law would be merely domestic. It still raises a host of issues, however, all centring on the question whether (unitary) proprietary effect can truly be achieved in this manner, and no less whether the debtors’ protections under their own laws can be affected, even curtailed, in this manner without their consent. Parties can, of course, also 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 assignees. 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, but even then, the third-party effect of such clauses in the underlying contracts may still be in doubt, and therefore also the question whether any subsequent assignment can be fully affected by such clauses in so far as the assignee is concerned. In fact we are concerned here with the infrastructure of assignments, which, in their proprietary and protection effects, is not truly at the free disposition of the parties (assignor and assignee), therefore truly a matter of party autonomy unless the debtor co-operates which raises at the same time the danger of novation and loss of all connected rights. Although party autonomy may appear here inappropriate, or at least ineffective in so far as third-party effect, including proprietary aspects, is concerned, it is indeed the thesis of this book that party autonomy has an important place in modern proprietary law, especially at the transnational level, and that in particular the inroads into the numerus clausus principle of proprietary rights which result are acceptable, provided they are balanced by adequate bona fide purchaser protection, in this case the protection of bona fide collecting assignees (or even all assignees in the ordinary course of business), in respect of intangible assets normally available only against adverse interests in common law countries, if equitable in nature, as we have seen. Such a newer approach also facilitates the question of recognition of foreign proprietary interests, which may thus all be considered ‘equitable’ in this sense. As has already been observed in respect of chattels, it may be the reason why common law legal systems are here often more comfortable with the parties’ choice of law in international cases, also in the assignment agreement or in the underlying contracts and claims. In common law countries, the resulting foreign interests are indeed likely to be recognised only as equitable proprietary interests being the nearest equivalents, and subject therefore to bona fide purchasers/collectors protection against any adverse interests of which they did not know. This concerns, however, primarily the question whether receivables may be the subject of finance sales and floating charges. In particular, party autonomy may not solve the protection needs that individual debtors may have under their own laws. In these aspects, in the foregoing, the emphasis was put on a measure of consent or co-operation, even duties to co-operate, which can also be determined at the time of the conclusion of the underlying contract out of which the claims arose. In this connection, the modern receivable is considered in this book ever more from the

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perspective of the analogy with the promissory note, see section 1.5.9 above, but this is as yet no generally held conviction and domestic laws are here likely to vary considerably in the details. It is doubtful whether a contractual choice of law to achieve unity in the legal regime can do much about it.336 Finally, enforcement issues against the debtor, may also still have to be considered for each assigned claim individually, including the questions: who (assignor or assignee) may sue the debtor if collection fails, especially relevant if the assignment was only a partial or security assignment; who may invoke the protection of the accessory or supporting rights or securities if the interest transferred was itself only a limited proprietary interest like a security or usufruct; or who may recover from other assets of the debtor in the case of his default. Here arise also the issues of set-off and netting. Also in these cases, assignor and assignee can hardly make provisions in the assignment agreement itself and the applicable law will have to be established more objectively and is not automatically the law (made) applicable to the assignment agreement itself, whether or not chosen by the parties. It could also be the (objective) law of the underlying receivables, of the residence of the assignor, or of the residence of each debtor. Whatever the approach, which will be more extensively discussed in the next sections, in all these aspects there is a mandatory element and these matters, like the proprietary ones, are upon a proper analysis not normally considered to be at the free disposition of the parties and subject to their contractual choice of law.

1.9.2

Terminology and Characterisation Issues

Rather than the framework of contractual, proprietary and enforcement aspects, or references to power, intent and formalities, the terms commonly used or the distinctions made in this connection in conflicts of law doctrine concerning assignments are validity, assignability, or protection of the debtor, not therefore proprietary aspects, or even enforceability. The accepted terminology is necessarily tentative and its terms all poly-interpretable, although this is not always fully appreciated: see for example the use of the term ‘assignability’ in Article 12(2) of the 1980 EU Rome Convention on the Law Applicable to Contractual Obligations, now replaced by Article 14(2) the EU Regulation of 2008 (Rome I). In may be said straight away, that in these various aspects, the new Regulation hardly achieves any greater clarity. The issues appear not to be properly understood and it might have been better if the earlier Convention and subsequent Regulation had left the subject alone for the moment. Especially, the distinction between proprietary and obligatory issues and the matter of party 336

A special aspect here is also the abstraction or independence of the claims: see s 1.5.9 above. In modern thinking, it increasingly lifts a monetary claim out of its own contractual or other context so that upon assignment new rules may apply in the assignee/debtor relationship which may supplement or even amend some of the aspects of the former relationship between the assignor/debtor out of which the claim arose, whilst also the aspect of the debtor’s protection may not be seen entirely in the light of fulfilling the old relationship after an assignment in terms of defences, assignment prohibitions and even the ranking of various assignees of the same claims.

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autonomy bedevils the subject, quite apart from the desire to still find the appropriate domestic laws in all these aspects rather than subject international bulk assignments to a transnationalised regime and allow international custom in particular to operate here constructively. As for the polyinterpretable term ‘assignability’, for example, it could mean 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 them out of the rest of the contract; but also to (b) the type of proprietary right that might be created like 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 as regards them. The reference to validity, often also used in this connection (although strictly speaking not in the original Art 12(1) or its replacement Art 14(1)), could imply a reference to: (a) the validity of the assignment agreement itself, including the documentation; (b) the formalities required for the assignment itself, 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 existence of a proper assignment agreement or other cause of the assignment; (d) the validity of proprietary interests created thereunder; or, in the case of a bulk assignment, (e) the possibility of a bulk transfer as such and to the type of interest created thereby (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 to, or even impossibilities of, being included in the case of future debt. Equally, the reference to the protection of the debtor also often used in this connection (although not so broadly in the old Article 12(2), now Article 14(2)) may have many meanings. It may cover: (a) his liberating payment in view of his vulnerability to creditors of the assignor, as well as to other assignees (or their creditors) claiming better collection rights and who may attempt to recover from his other assets (in their own countries if more convenient) or invoke guarantees or execute security interests given by the debtor if he defaults as regards them; (b) the type of notice he may or must accept; (c) any need for his bona fides as regards better collection rights of others; or (d) the survival of his defences and his right to resist or ignore burdensome assignments. References to proprietary interests (not directly made in Arts 12 or 14 either) 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 (c) the rights of assignors pursuant to a default under the assignment or upon the fulfilment of the

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conditions leading to an (automatic) return of some or all receivables, but the reference to enforcement may cover similar ground. Any reference to the enforcement (also not directly made in Arts 12 or 14) 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 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. It should be clear from the foregoing that use of the terms ‘assignability’, ‘validity’, ‘protection of the debtor’, ‘proprietary aspects’ or ‘enforcement aspects’ may all lack precision, especially in respect of monetary claims, and they may overlap. In private international law terms, the use of these terms and the different legal characterisations they suggest are nevertheless often most important as they may lead to different legal systems being made applicable in different aspects of assignments (in a process of so-called dépéçage) but is unsatisfactory, again because it is not always clear what they cover. As a consequence, these terms cannot themselves determine the conflict rule and the applicable law without further analysis and may not be sufficient characterisations in themselves. 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) 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) of the Rome Convention. There was no further investigation of contractual or rather proprietary and enforcement aspects of the assignment,337 which were always unlikely to be specifically covered by the Convention which dealt with contractual obligations and in which aspects there might not have been a conflict issue in the case at all.

1.9.3

Mandatory Proprietary Laws Relating to Assignments. Lex Situs Issues

However desirable a degree of party autonomy may be, at least to achieve some unity of law in matters of bulk assignments, the proprietary and enforcement aspects of assets as mandatory laws or laws that affect third parties more generally may not be so captured, and are traditionally subject to their lex situs. It is clear that, in the case of intangible assets, the situs cannot be taken in a physical sense, but that does not mean 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 saw in section 1.5.1 above, but it is constructive and cannot of course be physical. So is their situs.

337

HR, 11 June 1993 [1993] NJ 776.

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As non-obligatory matters, proprietary aspects of assignments could not truly be considered covered by the Rome Convention and its replacement as they deal only with the proper law of obligations, which is the internal aspects of claims, where party autonomy may be important. Yet it became mostly assumed that the Convention, now the Regulation, covers assignments in all their aspects. Although the new Preamble (38) intends to include proprietary aspects especially, it is worded in such a way that it may achieve the opposite.338 All the same, the new Article 14(3) appears to bear out the idea that the proprietary aspects are covered where it extends the reach of Article 14 to outright assignments and security assignments (although not to conditional or temporary assignments which would seem to remain outside the scope of the Regulation). It could still have worked, at least to the extent that it is realised that many of the legal issues that arise here, especially the relationship with third parties such as other assignees upon double assignments or subsequent assignments of different kinds of interests in the asset(s), and the protection of the debtor, are not at the free disposition of the parties and therefore not contractual in that sense. From here, it would follow that the freedom to choose the applicable law under Article 3 of the Regulation cannot here properly apply either. But the real problem is that, even though the idea is that Article 14 should also deal with the proprietary effects of assignments, in truth it does not do so or at least leaves the applicable regime wide open to doubt, especially in terms of the applicability of either section 1 or 2 of the Article. There is no clarity in these aspects, as we shall see more particularly below, because they were never truly considered. To repeat, at least in the more traditional approaches, these issues cannot strictly speaking be the subject of a chosen law or party autonomy, be this the law of the assignment contract, of the underlying relationships out of which the claims arose, or any other. These are objective or mandatory rules, not mere contract.339 This points to continuing emphasis on the traditional lex situs approach instead, whatever the Convention, now Regulation, may say. There are here autonomous rules or forces at work, which in classical conflict of laws style are more properly those that derive from the place where the claim has its greatest impact or effect rather than from the underlying contractual law of the claim or of the assignment, which might be chosen by the parties (and may be effective at least in some of the aspects of the assignment, and it then needs to be determined which ones). In fact, rather than referring here to formation, validity and assignability, as the 1980 Rome Convention did and the 2008 EU Regulation replacing it still does, or 338 The Preamble (38) to the 2008 Regulation tries to clarify that Art 14 also means to deal with proprietary aspects of assignments, but quite apart from the legal effect of a declaration in the Preamble, there are considerable problems with the terminology, as it seems to be limited to the relationship between assignor and assignee, but it has already been said that the nature of proprietary rights is solely in respect of third parties, see n 333 above, so that one could conclude that the new Preamble (in its innocense) only serves to underline that the ‘real’ proprietary effects of the assignment are now excluded. 339 See also P Lalive, The Transfer of Chattels in the Conflict of Laws (1955) 114.

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additionally to the debtor’s protection, the more useful distinction was already proposed to be the traditional one between (a) contractual, and (b) proprietary or (c) enforcement aspects of assignments. Added may be (d) issues of protection of the debtor, another third party aspect, although not strictly speaking proprietary. The first (contractual) ones are covered by the contractual law of the assignment itself, whether or not chosen by the parties and assume that assignor and assignee are in different countries Problems may arise here particularly in common law, which does not so sharply distinguish between contractual and proprietary aspects, certainly in the case of intangibles, but a reference to the enforcement aspects, as distinguished from the others, may give similar results in that it puts emphasis on the law of the debtor in the proprietary and enforcement aspects of the assignment. Indeed the proprietary and protection aspects are largely issues of the law of the debtor as will be discussed further below. The same goes for the enforcement aspects. As we saw, the Rome Convention in its Article 12, now Article 14 of the 2008 Regulation, rather distinguished between the formation and validity aspects (although these terms are not used as such) and assignability. It makes the law of the assignment applicable to the formation and validity aspects (Art 14(1)) and the law of the underlying claim to the assignability (Art 14(2)), at least in the obligatory aspects. That is also the law of the protection and release of the debtor. Again, strictly speaking, this does not cover proprietary and enforcement aspects at all, although this has become contested in case law and, as has been said before, that it is now widely assumed that the Convention and subsequent Regulation cover assignments in all their aspects. A lex situs reasoning is thus avoided, but it leaves a large area where the applicable law remains unclear or in doubt.

1.9.4 Current Approaches to Choice of Laws Issues in Assignments: Different Approaches to the Legal Situs of Debts In Germany, established opinion remains that the law of the contract out of which the receivable arises determines its proprietary regime, transfer possibility, and transfer method.340 There is apparently not much of a general principle involved, probably as a consequence of German law understating the proprietary aspects of claims. It virtually rules out bulk transfers (Globalzession) internationally, the reason why German 340

See Kegel, Internationales Privatrecht, 6th edn (1987) 478; C Von Bar, ‘Abtretung und Legalzession im neuen deutschen Internationalen Privatrecht’ [1989] RabelsZ 462 and ReithmannMartiny, Internationales Vertragsrecht 5th edn, (1988), no 214 ff, but cf also EM Kieninger, ‘Das Statut der Forderungsabtretung in Verhältnis zu Dritten’ [1998] 62 RabelsZ 678, who argues for the law of the residence of the assignor, which will normally follow 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 Keller, Zessionsstatut im Lichte des Übereinkommens über das auf vertragliche Schüldverhältnisse anzuwendende Recht (Munich, 1985) 145, and Kaiser, ‘Verlängerter Eigentumsvorbehalt und Globalzession’ [1986] 219, see also Kieninger, cited above.

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doctrine sometimes switches to applicability of the (proprietary) law of the assignor in that case, Again without much considering the consequences elsewhere of proprietary interests so created and the defences of debtors.341 In common law countries, the law of the assignor is often also accepted for global statutory assignments, like a bankruptcy in respect of the transfer of the estate (worldwide) to the trustee in bankruptcy. It is unlikely to find universal support at the place of the account or receivable debtors, however, if in other countries. Also in France, leading authors often still opt for the law of the underlying contract out of which the claims arise,342 bulk transfers not having been of great interests 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 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 at all, but probably a greater acquiescence at the moment in party autonomy.343 341

See Kegel, n 340 above and Kieninger, n 340 above. See Loussouarn-Bourel, Droit International Privé, 3rd edn (1988) nos 424 and 425 and Batiffol-Lagarde, Droit International Privé, 7th edn (1983) no 611, but cf also B Audit, Droit International Privé, 3rd edn (2001) no 762, who opts for the law of the residence of the debtor. 343 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 on the law of the debtor or that of the assignor. This even 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 Apr 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 Festschrift KokkiniIatridou, Comparability and Evaluation (Asser Institute, 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 and Kieninger, n 340 above, 678. In 1964, with reference to the never ratified Benelux Uniform Private International Law Statute (Arts 17 and 21), the law governing the underlying claim 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. 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 342

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In England, on the other hand, there is a preference, at least in matters of validity, for the applicability of the law of the assignment,344 which may also be chosen by the parties, whilst a clear distinction between the contractual and proprietary aspects is not made, so that this chosen law could also cover proprietary aspects, although enforcement always seems to be covered by the law of the debtor. On the other hand, 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 tile extending into the receivable) under which according to German law the sale of goods to a Dutch manufacturer who sold them on to an end-user 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 whilst all alternative securities are invalid (Art 3(84(3)). The Dutch manufacturer went bankrupt and the question was to 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 to whom should the debtor pay, was the issue in both cases and is in truth a proprietary issue, according to most authors not covered by the Rome Convention. Not so, or no longer so, 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 seem 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). Dutch case law seems here to follow German law, which has always had difficulty in distinguishing between the proprietary and contractual side of assignments because it does not qualify claims as proper assets. Neither does modern Dutch law; see s 1.1.3 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; there is also some support for the law of the assignment: see n 340 above. The law covering the assignment agreement was thus thought controlling. On the other hand, the applicability of the law of the underlying claim is defended in the proprietary aspects in a more recent 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] (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) WPNR 6088, 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 H Verhagen, Assignment in European Private International Law, Claims as Property and the European Commission’s Rome 1 proposal (2006) and also n 358 below. 344

See Dicey and Morris on the Conflict of Laws, 14th edn (2006), r 126, 1181, see also CGJ Morse, ‘Retention of Title in English Private International Law’ [1993] Journal of Business Law 168.

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in this English approach, assignability and priorities are often thought to be governed by the proper law of the assigned claim.345 But an important, more commerciallyoriented train of thought considers the law of the debtor applicable in these aspects.346 In this vein, bank accounts, whether in credit or debit, are normally also deemed located in the place of the bank branch in which they are opened, therefore of the debtor. 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 securities in book-entry systems: see for the notion of PRIMA, section 3.2.2 below. Otherwise, negotiable instruments and documents of title are normally deemed located in the place of their physical whereabouts, which is at the debtor’s 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. In any event, in England party autonomy 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, as we have seen. This may indeed facilitate the acceptance of party autonomy in international assignments in common law countries, subject to the conversion of the resulting interests into equitable proprietary rights as nearest equivalents cut short by the protection of bona fide purchasers or collectors. This is an entirely different approach, but it has already been said above that it by no means solves all third party issues, notably those concerning the protection of the debtor to the extent they may be considered of public order. In line with common law thinking which, as just mentioned, does not clearly distinguish the contractual and proprietary aspects of assignments, US law 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 interests as equitable proprietary rights (as nearest equivalents) leading to bona fide purchaser protection. The place (situs) of the assignment to which reference is often made in this connection as the default rule is for its determination itself made dependent on the applicable law and is therefore not a useful departing point. In practice, it appears to be the place of the contract of assignment rather than the situs of the claim.347 Yet there is at least in case law also much support for the law of the debtor in terms of the lex situs of the debt.348 345 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] 1All 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). 346 See R Goode, Commercial Law, 3rd edn (2004) 1110 and Moshinsky, ‘The Assignment of Debts in the Conflict of Laws’ (1992) 109 LQR 613, except for bulk assignments which are thought covered by the law of the assignor), and Dalhuisen n 343 above. 347 See eg Barbin v Moore 85 NH 362 (1932). 348 The most important case in this connection is Harris v Balk 198 US215 (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 USA, like 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

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The UCC firmly opts, however, for the applicability of the law of the borrower/debtor who offers the receivables, therefore of the assignor (s 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 security in more than one jurisdiction (like aircraft). It is in line

accounts (receivables) applying the rule of the secured debtor, therefore of the assignor in the case of receivables, see s 9–301(1) at n 319 above. In act of state matters, the issue 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 whilst in addition some freezing orders were put on some deposits (of certain individuals whilst 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 Manhatten 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 closes its foreign branch voluntarily (in Saigon before the collapse of the old regime) was considered to retain the deposits on its book 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 Manilla that could not be repaid there. Ultimately New York law was held applicable under which the head office of City Bank 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 were 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

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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) and also section 1.8.1 above.349 For the assignment of accounts receivable, the most important issues in this regard in the USA appear to be the conflicts arising in double assignments or in attachments of the assigned accounts, when the law of the assignor’s business is sometimes held to be the most appropriate to apply.350 As just mentioned, modern opinion especially amongst 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.351 They see it as a normal extension of the lex situs notion, which they perceive as a legal not a physical concept, and emphasise the close relationship between proprietary and enforcement matters, the latter being normally also 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.

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. 349

At n 319 above. See the authorative ‘Comment’ (1958) 67 Yale LJ 401, 418, but see also AA Ehrenzweig, Conflict of Laws (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, whilst his own courts would naturally protect him in collection suits when the lex fori includes such a statute, cf also ss 2–210 and 9–404 ff (9–318 old) UCC. 351 See Goode, n 346 above; Dalhuisen, n 343 above; Anne Sinay-Cytermann ‘Comment’ (1992) 81 Rev crit dr internat privé 35; Moshinsky, n 346 above, 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 (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 (tr 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 (1896) 533. In more recent times AA Ehrenzweig accepted the law of the debtor in matters of his protection: see Conflict of Laws (1962) 641; cf also E Rabel, 3 The Conflicts of Law, A Comparative Study (1950) 424, 434; see in the USA 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 a most 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. 350

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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.352 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 still at the debtor’s residence, it being always the residual enforcement place.353 In fact, creating a contractual enforcement jurisdiction away from the place of the debtor does not change the location of the debt, which requires a more objective criterion. Again, it suggests as proper legal situs of a debt at the place where claims are normally enforceable, which is the place of the debtor (which only changes when he moves to another country with the related recharacterisation 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 at the place of the owner or assignor.354 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,355 but there is perforce such a difference in regime when it comes to enforcement of the proprietary claims. The unity that may be achieved by locating all assets at the place of their owner, thus exists only at the surface and may therefore still be considered artificial. Yet the concept is important as it leads to a unitary approach in the case of bulk assignments of claims against debtors in different countries. It also leads into transnationalisation which, if accepted at the place of the transferor could then cover all his movable assets, see also section 1.1.7 above.356 It was already pointed out that the result would be uniform law, but we are still somewhat removed from such an achievement. To avoid more problems than necessary, in practice, bulk assignments are normally in respect of portfolios of claims grouped per country of debtors.

352 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 351 above. 353 Re Herbert Wagg & Co Ltd [1956] Ch 323. 354 See T Struycken, n 343 above, 345, and Kieninger, n 340 above. 355 See also the approach of Moshinsky and Kegel for bulk assignments, respectively nn 346 and 340 above. 356 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.

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1.9.5 EU Regulation and Treaty Law Approaches to the Law Applicable to Assignments: The Choice of Law Provision of Article 14 of the EU Regulation 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 Members 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. 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.357

The 2008 EU Regulation replacing the Rome Convention in Article 14 now provides 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

The concept of assignment in this Article includes outright transfers of claims, transfers of claims by way of security and pledges or other security rights over claims. It has already been said that sections 1 and 2 (except for the addition of contractual subrogation) are essentially unchanged. As already mentioned, section 3 suggests that the proprietary aspects may also be covered, but it is not aware in this connection of conditional or temporary title transfers which technically remain therefore outside the scope of the Regulation. More importantly, even if proprietary aspects are covered it is unclear how and whether they fall under section 1 or 2.

357 It may in this connection be of interest to cite an earlier draft (then contained in Art 16): see (1973) 21 AJCL 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. 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.’

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The major shortcomings in the text remain: (a) the absence of the concept of bulk assignments and the special problems they raise, especially in terms of recognition elsewhere even if a unitary law could be agreed by assignor and assignee; (b) particularly in that context, any great awareness of proprietary and enforcement issues, which goes back to the problems with the asset status of claims;358 (c) how these proprietary aspects are covered in terms of the applicable law; (d) how and to what extent a contractual choice of law can intervene; and (e) the related matter of recognition elsewhere of any proprietary interests created through the various forms of assignment. 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 (Arts 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. One must assume that it is the assignor who performs that obligation as he must deliver the intangible, except perhaps in collection arrangements where it is the assignee who must administer and collect, usually for the benefit of the assignor. In other aspects, section 2 suggests the applicability of the law of the underlying contract (or other legal relationship) out of which the claims arise. That applies in particular to the assignability, the relationship between assignee and debtor, the collection right against the debtor upon assignment, and the liberating payment of the debtor to the latter. It was already noted in section 1.9.2 above, that many of these terms or polyinterpretable and may overlap and it is not clear where proprietary and enforcement issues fit. It has been noted above that the term ‘assignability’ in section 14(2) remains undefined, see for its various meanings also section 1.9.2 above.359 Also the area of the 358

See also A Flessner and H Verhagen, Assignment in European Private Law: Claims as Property and the European Commission’s Rome 1 Proposal (2006), who are comfortable with party autonomy in the proprietary aspects and they would 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. 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. The law governing the internal issues would thus also control the external issues. That would hardly help in the case of bulk assignments. There is no search here for nearest domestic equivalents in the rights so created when recognition abroad becomes an issue, mainly in the place of the various debtor in enforcement. The first rule nevertheless has the considerable advantage that in a bulk assignment there is a flexible unitary regime, although, as already mentioned, it would unavoidably break down in matters of enforcement when the law of the debtor would still prevail. Under the default rule, all claims would still need to be researched to determine the law applicable to the proprietary and enforcement aspects, which is inefficient and for bulk assignments unworkable. 359 The undefined nature of the assignment aspects covered in s 14(1) and (2) unavoidably leads to confusion as was shown in the Dutch cases mentioned in n 343 above. If s 1 aims to cover the aspects of formation and validity of the assignment, it could also be thought to cover: (a) the validity of the proprietary interests created; (b) the possibility of bulk assignments; and (c) the interests created thereby. The term ‘assignability’ used in s 2 could, however, also imply references to at least: (a) the proprietary aspects (and the assignability of title); and (b) the types of proprietary rights that can be created (therefore the unbundling of the property right and the assignability as security, usufruct or by way of a conditional transfer). Assignability could also cover (c) the collection right

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debtor’s special duties pursuant to an assignment and his protections is not clearly covered. The letter of Article 14(2) goes here beyond the mere contractual; how far is not clear. 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 often overlap; again, it depends on the meaning of these concepts: see the discussion in section 1.9.2 above. In any event, subsequently to apply the law of the underlying claim also in its proprietary and enforcement aspects does not follow or even make much sense. As already suggested in section 1.9.1 above, if one continues to believe that traditional conflict of laws doctrine can still 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, it would seem by far the simplest to continue to use as a general direction the approach in respect of other assets and thus 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 legal lex situs of claims. 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, but this still leaves the question of recognition and characterisation of the particular interests so created in the country of each debtor in terms of enforcement. The law covering the protection and liberation of the debtor would still be the law of the underlying claim being assigned. It was posited above that party autonomy selecting some domestic law or setting up specific user, enjoyment and income rights intended to have third-party effect remains here inappropriate unless balanced by adequate bona fide purchaser/collector protection, which has been the proposition of this book all along. It adds a different dimension to the problem of party autonomy in proprietary matters which is more likely to be accommodated only in the formation of a true transnational (uniform) law on the subject in terms of the interests that may be created and their international recognition. The UNIDROIT Convention on International Factoring of 1988 has uniform rules and no private international law rules. This is different for the 2001 UNCITRAL Convention on Assignments of Receivables in International Trade which (Arts 28 ff) deals in particular with bulk assignments, and is therefore of major interest, but still has a number of conflict rules supporting its Article 8 that require 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 is likely to lead to considerable problems, as it is not immediately clear what these general principles may be. It may well undermine the usefulness of the uniform regime as any doubt about its interpretation and meaning (which can also not truly be separated from supplementation) may end in a search for local rules, see more in vis-a-vis the debtor (or the lack of assignability vis-a-vis him because of extra burdens), and (d) the position of the various assignees inter se (or the lack of assignability vis-a-vis older ones).

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particular the discussion in Volume III, chapter 1, section 2.3.6. One key problem is here that the matter of notification was not even brought under one uniform rule. Many other 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 28 ff were closely modelled on Article 12 of the Rome Convention. As a consequence, they leave similar questions about the applicable proprietary and enforcement rules, which, under this Convention, are usually assumed to be covered, even if it is often not clear how, except that as regards priority between assignees the law of the assignor is made applicable. In fact, a Convention as the one of UNCITRAL should be considered sufficiently self-contained and specific, therefore allowing interpretation and supplementation by anology, induction, deduction or teleologically in the usual manner to cover all issues, except when clearly not meant to. The presumption should be that it does. Adding rules of private international law suggests otherwise and only increases the confusion, unnecessarily distracting from whatever unity the Convention was meant to bring. This must be the major reason why in the end the UNCITRAL Convention, important as its subject was, proved a disappointment and did not attract the minimum number of ratifications. A contributing factor may also have been that the concept of bulk assignments and what they are meant to achieve were still not fully understood.

1.9.6

The Lex Mercatoria Concerning Bulk Assignments

It is of course possible to take a much more radical approach and allow transnational concepts to intrude into the non-contractual aspects of assignments, therefore in the aspects of debtor protection, in the proprietary and enforcement aspects, in questions of what types of assignments (including bulk assignments for whatever purpose) are possible, and in what their effect is on the collection right of various assignees against the debtor. They could be derived from international Conventions like the UNIDROIT Factoring Convention and the 2001 UNCITRAL Convention on Assignments of Receivables in International Trade, even in Non-contracting States. They could, however, also derive from fundamental legal principle, international custom, and general principles or party autonomy (subject to the protection of bona fide purchasers/assignees/collectors against adverse interests so created): see more particularly Volume I, section 3.2.2. It would allow other than purely domestic proprietary rights to be created at the situs pursuant to whatever assignment agreement, international or not, and regardless of the otherwise applicable domestic law. This would result in another, more informal but probably also more responsive type of uniform law and facilitate international bulk assignments and 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). In such cases, the key question is always

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who has the collection right and whether the debtor was right not to pay the assignee in view of his own defences or of the better rights of other assignees. Transnational law may set here uniform standards also to be recognised in local bankruptcies. Again, this is more properly the area of modern international finance: see also section 1.10.2 below. The traditional example derives here from negotiable instruments and in more modern times their eurobond variety. The more the notion of abstraction or independence is accepted in respect of the transfer of claims when they are commoditised, the more like negotiable instruments or semi-chattels they become: see also section 1.5.9 above. That would also mean that they become more susceptible to transnational ownership and assignment facilities regardless of more traditional numerus clausus restrictions, also allowing newer security and conditional or temporary transfers subject to an own transnational regime of bona fide purchaser/collector protection. It is suggested that this is the true way forward and again the proper perspective on the eurobond. Private international law depending entirely on some domestic legal regime even in major international financial transactions is, quite apart from the great confusion that reigns here in the subject, is no longer likely to provide sensible answers, and has now come to its natural end.

1.10 1.10.1

The Modern Law of Chattels and Intangibles

Traditional and New 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 became here in sales the protection of bona fide purchasers, outside equity not a common law feature itself, however, but introduced by statute (Sale of Goods Act 1979), see sections 1.4.8 and 1.4.9 above. In fact, other proprietary aspects of the law of chattels were subsequently considered commercial matters too, which went particular 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 part of this commercial law as well, 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

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the aspiration and is clear, for example in the important matter of the protection of bona fide purchasers or holders in due course of these negotiable instruments which protections developed especially for them, recognised in case law, whilst, surprisingly because 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 the Sale of Goods Act as just mentioned. It suggested from the beginning a fractured product oriented approach to proprietary issues or at least a pragmatic attitude. Analogy was thus not always the answer. Again, in this approach to commercial assets and the law concerning them, their transfer as security for debt became also a commercial law matter in common law countries 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 some close connection with equity when the need arose for non-possessory security interests and bulk transfers in this connection 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 in which especially non-possessory equitable (security or other) interests were created.360 This provided important flexibility, especially for all kind of non-possessory security interests. It also allowed interests in future assets or a shift of the interests into replacement assets as in floating charges but it still underscored the product oriented approach at the same time and supported a close connection with trust notions. Thus modern floating charges in particular were especially dependent on equitable notions of inclusion of future assets, tracing rights, shifting interests and constructive trusts. Equity influence may also be detected in the important facility of bulk transfers of tangible asserts 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 terms that was earlier identified as a most important feature of modern commercial (and financial) law in common law countries: see Volume I, sections 1.1.1 and 1.1.3. In the English-speaking world, this has given modern financial law, which now drives commercial law, its flexibility and sophistication.361 Another area where equity was active was in the conditional and temporary ownership rights, their creation, operation and transfer, for our purposes again 360 Discussions of these issues are few, however, especially in the US, where equity has long disappeared from the law schools’ curricula. See also n 31 above for a certain standardisation in the development of equitable proprietary rights which did not, however, restrain 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. III, ch 1, s 1.6.1. 361 It was explained 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 I, 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, like equitable proprietary interests in assets including trusts and future (or conditional or temporary) interests in chattels, assignments of proprietary rights in intangibles, client protection

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especially important in personal property, including monetary claims, and finance sales concerning them. Again a product approach becomes here 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 modes of the holding and transfer of these entitlements became other commercial law matters (in a common law sense), again with a strong equitable bend in the proprietary aspects. The law of guarantees and letters of credit were added earlier, which, although not proprietary as such, introduced or built in this connection on notions of independence, finality and bona fide payee protection borrowed from negotiable instruments, in which credit risk protection (guarantees) and payments stand alone and are separated and considered independent from the underlying contractual framework out of which they arise. Their effectiveness is thus immunised against any legal defects in the steps leading up to the protections given or payments made. The notion of finality, the certainty it is supposed to bring, and its legal underpinnings are now increasingly considered crucial for all kind of commodity and financial transactions including payments. Given this trend, ultimately, in this kind of commercial law receivables began to be treated in a way similar to chattels so as to promote their assignability, the finality of their transfer, and use in funding schemes, although as an asset class they had 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 ever more obvious, see also section 1.5.9 above. Again in common law countries equity came here to the rescue, sometimes supported by statute especially in the USA, first in reducing the effect of assignment restrictions, see sections 2–210 and 9–406(d) UCC. Thus in common law countries, their liquidity is enhanced. Subsequently, bulk transfers or assignments in floating charges creating liens covering inventory, 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 Uniform Commercial Code in the US, which 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 like 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. The most significant feature is here indeed that different proprietary structures are developed per product (or Article) and there is no unitary proprietary system, not 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.

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even for chattels, nor is there any desire to create one.362 Modern bankruptcy protection is thus also likely to be different per product, especially important in modern finance.363 Intangible assets especially receivables are here likely to be considered yet another asset class. But the importance is that they are assets all the same and treated as such rather than as mere obligatory rights. In truth, these approaches, which are now becoming an important focus of transnational commercial and financial law, are being reinforced because finance is becoming so much 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 common law terms. This introduces tensions, particularly in the civil law tradition, in the sense that the more traditional proprietary notions are being expanded. This development is probably more fundamental than it may seem at first and goes still largely unnoticed. Reference may be made in this connection to Volume III, chapter 1, Part II, where a number of the more important modern financial instruments and systems 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 either. Even in the USA, not all is being taken care off in the UCC. Especially repos, securitisations, different forms of factoring, modern derivative transactions, and systems of clearing and settlement, and modern netting methods have not found expression 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 any 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.364

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In the UCC in particular, it is clear that in proprietary matters, an approach per product is now favoured leading a different attitude to proprietary rights and their transfer in Art 2 (sale of goods) where the emphasis eg remains 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 interest 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 maintain again different approaches, none of which are interconnected. 363 See S Vasser, ‘Derivatives in Bankruptcy’ (2005) 60 The Business Lawyer 1507 364 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

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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 UCC as we saw whilst converting them into secured transactions. It had a near fatal effect on finance leases which had to be given some 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 (s 559), and on forms of factoring where the collection and risk had not been entirely transferred to the factor or receivable financier (ss 9–607 and 9–608 UCC). It is the issue of the unitary functional approach to asset-backed funding in Article 9 and the re-characterisation issue which has also raised its head in securitisations: see Volume III, chapter 1 section 2.5.4. It undermined for no good reason many perfectly normal modern funding transactions which have a sale of assets rather than a pledge structure at their core.365 Circumstantial problems derive from the international character of the modern financial practices and products, leading unavoidably to further characterisation problems 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 regardless of the UCC. The perception of many that these problems must still be solved with reference to domestic laws creates enormous tension and may seriously undermine these practices and products in international transactions quite apart from the fact that conflict rules proved hard to formulate in this area, as we saw in sections 1.8 and 1.9 above.366 Legal transnationalisation is here the unavoidable answer, that is to say that fundamental and general principle, international custom and practices must precede the application of domestic laws and be accepted by domestic bankruptcy courts. 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 I, section 3.1.2. This also poses the issue of party autonomy in the proprietary area 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 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 III, ch 1, Pt II. 365 The Bankruptcy Code s 559 did not fully take care of the re-characterisation problem in respect of repos in particular, but courts seem now less than keen to re-characterise in respect of sophisticated financial products, see also S Vasser, n 363 above, at 1537. 366 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 Bierrman and T Struycken, ‘Rome I on contracts concluded with multilateral systems’ (2009) NIPR 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 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.

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properly) believed 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, through financial structuring, party autonomy is becoming more important in the proprietary aspects of modern financing, perhaps at first more in particular in the modern law of receivable financing and in the assignment techniques that underlie it. Contractual choice of law in proprietary matters through which more favourable domestic proprietary regimes may be selected by the parties point in a similar direction and may now also apply, for example, to the legal regime covering securities entitlements and international assignments.367 It was observed before that the consequence is the opening up of the limited number of proprietary rights. Common law countries are in equity used to this, subject to a strong bona fide purchaser protection. Also here, it is suggested in this book that the common law of equity should in essence be 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 regardless of their knowledge at least in respect of commoditised products. This is all unusual from a civil law perspective. Civil law continues to think systematically in what is in essence a closed system or numerus clausus of proprietary rights in which these right are systematically connected and form one pattern, as we have seen. It is an approach in which the nature of the underlying asset (in terms of immovable and movable tangible or intangible property) and the type of products in

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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 be 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 (transborder) 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 here a limitation: 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 law of the debtor or that of the assignor, see more particularly n 343 above. This 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.

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which proprietary rights are used are commonly ignored. Physical notions of holdership, so strong at law in common law countries, have long been abandoned in civil law in favour of a more rights-based system, although this development may not yet be completed, see section 1.2.2 above. Nevertheless, equitable flexibility curtailed by rights of bona fide purchasers, which is also rights-based, even if often still incidental, has so far no place in the civil law system. It needs to be tested whether the system approach of civil law with its intellectual rigour but limited flexibility remains valid in a more modern environment or is becoming a handicap in civil law and prevents its urgent updating. It is the conclusion of this book that this 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, modern risk management in particular requires a dynamic concept of movable property law and the proprietary interests that can be created therein, see also Volume I, section 1.1.4 but, as we saw, the ordinary commercial and financial flows also 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 also into a matter of finality.

1.10.2 The Modern Structure of Proprietary Rights as Promoted by International Commerce and Finance. Transnationalisation The law of chattels and intangible assets (movable property in civil law or personal property in common law terminology) remains both in civil law and common law underdeveloped 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 propriety law development, it is submitted, is in the operation of the law of chattels and intangibles in an international commercial and especially financial setting. Its natural focus is then the bankruptcy resistency of modern financial products in which movable assets of a counterparty are used in new ways to raise financing (such as in floating charges or finance sales). We are concerned here with the survival of these facilities and their inbuilt protections in a bankruptcy of a counterparty requiring funding in these ways. As such, these new proprietary laws remain conceptually often undervalued and do not yet get the attention they need and deserve. But certain trends are clear. It is posited that they direct the modern transnational law and new lex mercatoria in these matters and may perhaps be summarised as follows: (a) Modern property law is rights-based. That means that it always concerns (intangible) rights and obligations in respect of underlying assets (which may themselves be tangible or intangibles) vis-a-vis other legal or natural persons not themselves directly involved in their acquisition. It concerns here in particular the use, enjoyment and income of these assets and the protection and the effect of the

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transfer of these benefits in them vis-a-vis others, who must respect them as the new status quo. In a legal sense, proprietary rights are not then ever physical as the underlying assets themselves may or may not be. In other words, in a proper legal analysis, the property rights should not be identified with the underlying assets. In such a modern proprietary system, all assets that can have a commercial value will be capable of being the object of proprietary rights in this sense. That also includes intangible rights. Thus not only chattels but also receivables, patents, copyrights, trademarks, domain names, etc. are all capable of being owned (or being the object of proprietary rights) in a legal sense and may as such be protected and made transferable either outright, conditionally, as security, or in usufruct/life interest, etc. Statutes may back this up, especially in the area of intellectual and industrial property, but the principle itself is more fundamental and concerns ultimately the simple question of mine and thine. In a rights-based system, it follows from a legal point of view that it is wrong to say that we own our car (in a physical sense). This may often be better understood in civil law: see section 1.2.2 above. Legally, we only have an ownership right in our car which will normally give us the rights vis-a-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. It all depends on the balance of proprietary (and other rights) in them and the user, enjoyment or income rights or facilities in the underlying asset they give. The relevant proprietary rights are thus abstracted from physical realities and are all intangible even in respect of physical assets. Although the nature of the underlying assets may still have some impact on how they can be exercised, protected or transferred, especially in the case of intangible monetary claims or industrial and intellectual property rights even in civil law that on the whole prefers a unitary system (see sections 1.1.5 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. We say that user, enjoyment or income rights in assets are proprietary if they can be defended vis-a-vis legal or natural persons that have not been involved in their acquisition. It is also said that they can be maintained against all the word. In civil law thinking, these rights are limited in number (that is the numerus clausus of proprietary rights), the main ones being ownership, usufructs, some long leases and servitudes (in land), and security interests. In civil law, these rights may be proven and claimed on the basis of acquisitive prescription, itself depending on bona fide possession in the sense of control of the relevant assets for a number of years. In civil law, that leads in essence to the reivindication 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. Whilst there continues to be here confusion in

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countries like Germany in respect of obligatory claims as we have seen as these countries do not recognise the asset status of these assets, this may be considered here a detail for the moment. In a civil law sense, possession is a different way in which 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. It always was in respect of intangible assets. The emphasis is here on control. It may give rise to possessory actions in respect of each proprietary right and its reclaiming as alternative to the reivindication. It is often an easier way to protect as control of the relevant proprietary right is asked to be re-established, but it is not as strong a remedy as the reivindication, as it is based on a better, not on an absolute right. Holdership of a proprietary right forms here another category of 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, enjoyment or income rights are transferred purely contractually, for example when assets a lent or otherwise made available to other persons for a short period of time. The manner of proprietary protection differs here between different civil law countries, notably in the rights of the holder in relation to those of the legal possessor, see section 1.2.2 above. For the present summary, it is sufficient to note that in traditional civil law, there are a limited number of proprietary rights and a limited number of ways in which they can be protected. This approach in essence dates from Roman law which was ingenious in early developing this 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, not necessarily to hold it as a physical condition.368 This allowed for highly original concept of possession and its defence. This is very different from the situation in common law, which has first different ways of formulating and protecting different assets classes, like land, chattels, and obligatory claims. Second, this protection still depends, especially for chattels, on physical possession. Possession is here considered a proprietary right, not merely a way in which a proprietary right is expressed. The ownership right is weaker, see section 1.3.2 above. For obligatory claims the concept of possession plays as a

368

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 we saw, in civil law it is eg not a requirement of acquisitive prescription either. As we saw, 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.

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consequence no role at all (in land it is the remnants of the feudal system which make for a different way of protection altogether). The actual protection for chattels and intangible assets is in tort; there are here no ownership or possessory actions proper. This approach in chattels may be seen as more basic in which all remains primarily physical, which originally also affected the transfer, which required physical delivery. It does not allow for a more universal concept of control that may also cover other asset types (k) It must be noted in this connection, however, that in common law countries, equity had always been less strict in matters of the physical identification, and as a consequence allowed more easily transfers per class or in bulk and of future assets (even chattels), including a shift in replacement assets. Physicality is here abandoned, but this has not led to a more fundamental re-appraisal; common law remains, as usual, pragmatic and moves step-by-step through case law on the basic of practicalities. As we saw, equity also opened up the system of proprietary rights whilst allowing trusts, conditional and temporary ownership rights and floating charges to operate, always subject, however, to the protection of the bona fide purchaser against such interests. Here the common law proved highly original. (l) It follows that any physical and anthropomorphic attitude to property is increasingly abandoned in either system, but in very different ways. In civil law more generally, 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 (where still required for a transfer) which could be entirely constructive and it could even affect the historically close connection, in civil law in particular, between identification and specificity requirements on the one hand and the disposition facility on the other as a key requirement for a valid transfer. (m) Indeed, moving to an abstract system of proprietary rights (and obligations), de-emphasising physicality and anthropomorphic ideas, creates here the important possibility of proprietary rights vesting in intangible assets such as monetary claims, but also in non-existing future assets, whilst creating at the same time disposition and transfer possibilities in them, including the possibility of their transfers in bulk Reasonable description of the asset (not physical existence) becomes here the key issue. (n) As we saw, civil law has not taken full advantage of these newer facilities even though its more abstract system could easily allow for them. Common law, even though more obsessed with physical possession has taken here a much greater step forwards, but only in equity. The fact is nevertheless that in civil law the concept of possession may be an entirely constructive notion, particularly where a form of delivery (of possession) is still required. Bulk transfers and the tracing of a proprietary interest into (future) replacement assets then become possible, the latter an issue of shifting proprietary rights into assets that can be identified but may not yet exist. It may 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). However, in

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civil law these developments are here only at a beginning or not noted at all. This is evident in the DCFR, as we shall see in the next sections. In an abstract proprietary system of pure rights and duties, notions of the legal independence of a transaction in respect of the steps leading up to it may also easily be assumed. The opposite system depending on causality is then likely to be considered equally anthropomorphic and atavistic. This ultimately also concerns the issue of transactional finality, which is an important proprietary issue in that the status of a transfers, assignment or payments, once completed, is not to be affected by extraneous defences of the transferor, assignor or payor, or by legal sophistry. This notion of independence is in particular underpinned by the German approach to title transfer that sees it always as abstracted from the transfer agreement and its validity: see section 1.4.6 above. It has a long pedigree, but is in fact highly modern. This concept of independence was earlier established in negotiable 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. 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 in them. Nineteenth-century will theories may here also be increasingly abandoned, and the rescission of a contract on the basis of a lack of will not 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, but rather than to the invalidity of the underlying agreement, it goes 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. The notion of reliance fulfils here a similar support function as we have seen 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 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 or other considerations. This may have an effect also on the mode of transfer of these rights (and obligations).369 Party autonomy may be acquiring here an important role through financial structuring, especially where temporary or conditional ownership rights or shifting liens are created as modern alternatives to or elaborations of secured transactions. It means the useful end of the notion of the numerus clausus of proprietary rights, subject always to a broad protection of bona fide purchasers or transferees

369

See also n 362 above.

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in the ordinary course of business. The restriction is therefore no longer in the number but in the operation of these rights. Party autonomy in this area therefore operates only amongst insiders, especially lenders and suppliers, who 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 here the basis for the third-party effect of these rights as they can be maintained against all who knew of them when acquiring an interest370 and conversely not against bona fide purchasers (for value).371 (t) In this manner, economic interests in terms of user, enjoyment and income rights even if purely contractual 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. It follows that if third parties acquire the underlying assets, these third parties would have to respect adverse user, enjoyment or income rights of which they knew. They would 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. (u) This was earlier identified (in sections 1.3.7 and 8 above) as presenting a major

370

However, prior knowledge in third parties may itself be a purely subjective or alternatively a more objective requirement. In the latter case, like 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 bona fide purchasers are not protected. Here proprietary rights have the broadest scope. That is as we saw not normally the approach in respect of filing systems of security interests in personal 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)) that protects any buyer in the ordinary course of business (regardless even of bona fides). Here proprietary rights acquire the most limited scope whilst 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 was already mentioned several times before, 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 1.1.1 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-a-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. 371 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. In terms of the proprietary regime of the modern lex mercatoria in the manner as here explained, this is an important pointer where one may thus observe the overtones of the law of equity although it never produced one coherent underlying proprietary concept in common law. Instead, it concentrated on special more incidental areas like 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 81 above.

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legal advance and 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. Newer law will also need to develop more specific concepts of bulk or generalities of assets, of future assets, of replacement assets, and of tracing, notions in their generality all commonly absent from civil law codes, even the most modern ones.372 It must 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 most ready example in common law jurisdictions. This is likely to happen first at transnational level in the professional sphere. It is the true challenge in the DCFR. (v) At the same time, the civil law triptych of ownership, possession and holdership in respect of all proprietary rights and the specific proprietary protections they give may lose its significance here. Protection will be rather in tort as even in civil law in respect of intangible assets it commonly is. This may also mean the end of the very special position possession holds in civil law in terms of control, at least in terms of possessory actions. (w) Yet in an international setting, for example in respect of offshore oil rigs, one may 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 a notion of ownership to develop separately, see also section 1.1.7 above. It is the old notion of seisin which did the same at law in England. However, once it starts to be balanced, as in England, by other concepts, this is indeed likely to be done through equitable notions and their rights-driven more abstract approach. Nonpossessory security interest 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 and flexible, operating side by side: see also Volume I, section 3.2.2. (x) Eurobonds may provide here a more vivid example of this development that was originally based on the physicality of this type of bond as bearer instrument, now superseded by concepts as security entitlements with 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 domesticate these products of which the Hague Convention gives an example, transnationalisation is here the better perspective, see also section 3.2.2 below. (y) It may also allow for the protection of various beneficial interests regardless of the ownership right in the underlying asset and also 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 372 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.

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effective). It also raises the question whether contractual positions may increasingly be transferred as property: compare again section 2–210 UCC, which favours it. (z) It concerns here primarily the law between professionals or professional dealings. It having traditionally been captured in commercial law in the common law tradition, it reflects these tendencies and explains the more flexible and specialised nature of this type of law, that is geared to risk 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 need for similar proprietary structures in both whilst in professional dealings even a unitary approach may no longer be sustainable as we have seen. This is unlikely to be a disaster.373

1.10.3

Paucity of Modern Property Theory

In section 1.1.6 above it was said that there hangs a veil of intellectual impotence and practical foreboding over movable property law, perhaps especially in civil law because its needs a more dynamic approach, which its notion of limited proprietary rights and its systematic attitude can hardly provide. 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, see chapter 1, sections 1.1.4 and 1.3.3 above. Common law needed this much less because it had always looked more at the nature of the relationship, notions of dependency, reliance, and implied conditions: see chapter 1, section 1.3.7 above, although especially in the US it is now additionally succumbing to good faith notions too. In property law, the common law has 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 as we have seen, always subject to bona fide purchaser protection. 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 373 See more particularly Vol I, s 1.1.8. 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 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 also n 362 above. That is also true in Art 9 on secured transactions that 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)). It 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.

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knowledge of the party acquiring the underlying assets, for example in respect of covenants that may thus start running with the land, like contractual passage rights.374 By introducing non-possessory security interests, at first often through case law, and by accepting increasingly conditional ownership rights in reservations of title, the civil law system was also prised open, but much more will have to be done, especially in the area of floating charges and finance sales, but there is no sense of direction.375 It is not fully appreciated either that this needs more room for party autonomy, in finance as a matter of risk 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, also therefore in respect of intangible monetary claims, their acquisition and protection as a major asset class. In this way proprietary user, enjoyment and income rights can indeed be more freely created and operate more flexibly. 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 American approaches, it was said before that property rights are intuitive in respect of all that has economic value or even fundamental in terms of ‘mine and thine,’ but how the law expresses them has always been problematic. 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 is in this respect more primitive but also more 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 the owner is for its protection dependent on the physical possessor except when he has a right of immediate repossession: see section 1.3.2 above. Again in such a system, proper ownership notions hardly develop and intangible assets can also barely be placed. As we saw, in common law countries, this physical approach became vitally balanced by the developments in equity. 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 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) based in essence on knowledge of the (equitable) interest in any successor when acquiring the underlying asset. In the civil law, starting in Roman times, the problem was early analysed to be in the concept of possession itself but also 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 374 375

See nn 35 and 36 above plus accompanying text. See s 1.2.1 above.

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abstract concept. It was not physical per se but signified the willingness to hold (the relevant proprietary right in) the asset for oneself. As such, possession became a matter of control over assets exercised through the various proprietary rights rather than their physical holding. 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, like the usufruct or servitudes and even the secured interests, together with ownership into one coherent system of proprietary rights which ultimately became identified as a closed system, the famous numerus clausus. In this system, which is thought of as unitary in principle applying to all assets,376 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 manifestation sense and not as a property right or title itself), possession or holdership of these different proprietary rights, all as legal concepts in the manner as 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, even those not aware of them, 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 civil law, the law of property was shaped in response to practical needs, not to grand ideas. It took a long time before its contours became intellectually clearer, could be described, and generally understood. Civil law, being by far the more intellectual, reached here much greater sophistication, but even if a system was ultimately found to exist, it must be realised that this was a resultant 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

376 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 1.1.2 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. A case law approach is here preferred over statutory amendment, yet 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 American 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 LJ 1, 59, see further s 1.3.9 above. It must be doubted whether with present legislative 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.

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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 the eighteenth century when on the European Continent in the Ius Commune the differences could be identified empirically on the basis of existing legal practices.377 Hence the way of protection, either against some identified parties (in contract) or against all the world (in property), the different types of rights (proprietary or contractual 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, 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 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 always had here the edge.378 This process of evolution guided by practical needs continues unabated, for example in finance sales, but has in civil law doctrine hardly started. Trust and trust-like structures as well as floating charges cannot then be far behind. The key is to understand that this development always progressed fragmentarily, regardless or even ignorant of any deeper thought, and is undoubtedly spurred on at the moment by the practical needs of international finance, where civil law is losing out. To repeat, an anthropomorphic attitude to property and property rights is here particularly unhelpful and increasingly abandoned. But as important to note is that in 377 See nn 19 and 34 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, it became fully understood that the essence of proprietary rights is that they can be maintained against all the 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 amongst 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. 378 In equity, common law thus made room eg for conditional and temporary ownership rights (besides trust structures and floating charges). They originated in land law, see s 1.3.1 above. Again, they are lost only 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, which produced in Germany the notion of the dingliche Anwartschaft: see s 1.3.8above. As 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 III, ch 1, s 2.1.4. Earlier the development of non-possessory security interests in Germany (Sicherungsuebereignung) 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.

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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. Modern proprietary rights are thus increasingly diverse and product specific.379 As a consequence even in civil law, the system opens up. We are thus seeing a class of user, enjoyment and income rights that, although contractually created, can increasingly be maintained against all subsequent interest holders in the underlying assets who knew of them, even in civil law. In civil law terms, this is a most important intellectual expansion of the notion of proprietary rights and their operation allowing increasingly room for trust structures, finance or conditional sales, and floating charges,380 But this development remains searching and hesitant. Again, there is no clear sense of direction, as the DCFR also demonstrates. It suggest, however, that there remain some broader underlying notions concerning the operation of assets and their protection in terms of private rights and obligations and how they function but a modern system of proprietary rights is likely to be much more flexible and dynamic than it was (and as it is still mostly perceived in civil law). There are of course also some clear external exigencies. Social peace is one and leads to the prima facie protection of the status quo in respect of all assets. In modern times, the social function of some assets, especially of real estate, is also better understood and this affects the rights in such assets too. More important is for our purposes that there is 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 an ever stronger protection of bona fide purchasers and even assignees. This is no less a public order requirement. It naturally limits the reach of newer structures based on knowledge in third parties who did not know of them but it also makes further inroads into the reach of the traditional proprietary rights. It 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 saw. 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. Even

379

This applies also to intangible claims eg bank balances and security entitlements or derivatives. The asset status of bank account balances and their transfer are discussed in Vol III, ch 2, s 1.2.1. In particular, the fact that in bank transfers we have a sui generis manner of transfer, see Vol. III, chapter 1, section 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 III, ch 1, s 2.6.2. Risk protection as commodity in credit swaps may become another newer asset class in the context of that product only. 380 See for the dubious role of publicity in the context of proprietary rights and their third-party effect s 1.1.1.above.

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here any residual physical element in terms of possession by bona fide transferees or of collection by bona fide assignees may be increasingly de-emphasised.381 The consequence is greater party autonomy in the formulation of these newer proprietary rights. Although the type of proprietary rights is thus likely to depend ever more on the type of commercial or (especially) financial products in which they function rather than on a system or on the nature of the asset,382 still hinges on what an asset generally is, even if it may assume a different role in different products. To repeat, 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 sales or trust structures. It also suggest 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. Barring public policy (like governmental intervention in state embargos or trading licensing) and public order consideration (in terms of fraudulent or other abusive behaviour), all such assets (unless highly personal like a right to a good name), must 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 defines them, although this does suggest transferability and liquidity. It may be statutorily supported, for example in respect of intellectual and industrial

381

See nn 368 and 370 above and more in particular ss 1.1.5 and 1.4.8 above. 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, not even in respect of the same asset. It may thus make a difference whether the same asset 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 362 and 369 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 (n). It goes also into 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 that introduces a new international interest resulting from a security agreement, reservation of title or finance sale of mobile equipment: see Vol III, ch 1, s 2.1.8 and from the EU Collateral Directive that 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, 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 major departure in many civil law countries although limited to the narrow field of financial dealings. 382

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property rights, but even without such statutes these rights are commercial assets all the same and as such transferable and protected.383 Again, legally, in a modern system, such assets may be present or future, provided always that they are capable of sufficient identification 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 by deemed to 383 See more generally also n 21 above for more modern theory. Especially in intangible assets, like 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 protection as we saw. Here the proprietary regime becomes product-specific also. That appears to be a more universal direction at this moment in time. 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 here arise and forum shopping encouraged. To avoid this, WIPO developed a simplified procedure concerning domain names conflicts. The WIPO procedure allows everyone to ask on line to be entitled to use a domain name registered in the name of someone else. The 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 are here 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 in so far 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 this right, which 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 have therefore 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. It 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 generally tradable also or will normally be 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 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).

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have passed to the buyer should the assets only emerge in the (physical) control of the seller after his bankruptcy. That is 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 can own and 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 his risk.384 is then no longer a legal issue. Eliminating this possibility as older law meant in fact no less than limiting business choices for no obvious reasons. 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 risk. In terms of other (more limited or divided or partial) proprietary interests like a security interest, usufructs, etc, we may then also create them in these assets (in the sense of objects of economic value), even (in floating charges) if they are future. In modern law, this may particularly include classes of assets like inventory of future manufactured assets and of receivables connected with their sale. We may then even be able to sell them free or clear or collect regardless of the security interest so as not to impede liquidity. If so, the security is likely to shift automatically into the replacement assets (replacement inventory, receivables or proceeds), whilst 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 USA and generally admired. In Germany, it was possible to achieve through contract (party autonomy) a facility that comes fairly close: see Volume III, chapter 1, section 1.4.1, but that flexibility does not obtain in most other civil law countries and was not even incorporated in new codes like the one of the Netherlands in 1992, which retains the notion of physical identification of individual assets and of physical disposition rights: see more particularly Volume III, chapter 1, section 1.2.2. The connection of physical identification with the disposition right is here particularly fatal. In such a system, future transfers and floating charges cannot thrive.385 384 Thus under modern law, the interest one has may be very little and entirely prospective: see Vol III, ch 1, 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 III, ch 1, s 1.1.9) without any requirement of physical possession in the transferee. 385 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

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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, the sharpness of the distinction between proprietary and contractual rights is accordingly 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 first 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 on several occasions that we see here true 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 presents in essence a very 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 the important extra of the preferential status however, of such damages 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 protection is another matter already raised before, as was the connected concept of acquisitive prescription. The common law that protects proprietary rights only in tort, normally therefore in terms of damage actions across the board, may well show here also the way of the future in the modern lex mercatoria. Although specific performance is here not necessarily the 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 to the protection of intangible assets, especially monetary claims. 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.

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 was already 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. III, ch 1, 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.

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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 also that proprietary and equitable rights are then more likely to be protected on the basis of them 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 out 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 unitary new system would appear premature although there are unifying aspects in: (a) the proprietary protection of modern contractual interests of which there is knowledge; (b) the protection of bona fide purchasers and the protection of the ordinary business through the notion of finality; and (c) the protection of the modern interests in the tort. Also, although (d) the basic distinction of proprietary rights being enforceable against the whole world and obligatory rights only against identified counterparties remains valid,386 in economic or equitable interests there is now important middle ground. In section 1.3.9 above, a reference was made to a more functional analysis in modern American 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.387 There is here no broader investigation, however, into the whole of modern property law, which is ever more clearly demanding greater flexibility and rejects the numerus clausus notion. The American functional theories would therefore seem remote from reality and out of date. They are not even a proper reflection of the present common law (and equity) set-up. In particular, there is here no discussion of the risk management aspect of modern property law and the need to allow variations per product. Any defence of a numerus clausus in the modern circumstances seems bizarre. 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 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 lack of certainty becomes a very relative issue. 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 risk management. 386 This traditional distinction, although much less clear in common law especially, as we saw, because of the operation of equitable proprietary rights, is nevertheless maintained by more modern thinkers in the USA: 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. 387 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 whilst 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, Hart Publishing, 2005).

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1.11 1.11.1

The European Draft Common Frame of Reference (DCFR).

Introduction

It is finally necessary to consider the Draft Common Frame of Reference (DCFR) and how it approaches the subject of proprietary rights in movable assets. The DCFR was discussed in chapter 1, section 1.6 above in respect of its coverage of contract law. In that connection it was also explained how it came about and what the objectives are. This development was also signalled in Volume I, section 1.4.19 in the context of the harmonisation of private law at EU level and of EU jurisdiction in these matters. The DCFR text issues from a group of European academics and is a response to an EU effort to at least achieve some greater uniformity in terminology under an Action Plan that dates from 2003. Method and methodology were never made clear, however, whilst the EU has no general jurisdiction in this area. In any event, the exact end product remains a matter for discussion and the EU Commission has so far not taken a clear stand, although the European Parliament is in favour of substantial harmonisation of private law to which an EU 2003 Action Plan just referred to and the later Way Forward (2004), which was much less ambitious, were the Commission’s response. Subsequently many academic working groups presented models, mostly in specific areas, all in the civil law codification tradition. Amongst them, the DCFR tries to synthesise and presents the first attempt to cover substantially the whole field of the private law of obligations and property with the exclusion of real estate, which rightly continues to be perceived as a domestic matter, even though it must still be asked how, in a systems approach, it will then fit the DCFR model. The DCFR is 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 is technique and logic is 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, to produce all answers. Sources of law besides statute are not considered and there is no decentralisation in that sense. Even fundamental principle only operates by statist fiat. First drafts were presented in 2008, mainly concerning the law of obligations, the contract part of which was discussed in chapter 1, section 1.6 above. In 2009, further chapters were added in the area of movable property whilst the Introduction was rewritten. It especially struggles 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 is allowed to operate in the interpretation of the DCFR). Again, it is the competition with other sources of law, including industry practices or custom and general principle that remains beyond the contemplation of the draftsmen. In particular for professional dealings, this is problematic. The attempt is as such unfriendly to more spontaneous law formation including transnationalisation (beyond the DCFR, which remains territorial for EU countries only). The DCFR does not understand the modern developments and needs in this direction, and still assumes that

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through codification a complete system of private law can be devised that will cover adequately all eventualities for all types of participants in a unitary manner. It has been pointed out above that there is not much awareness nor much special consideration in this connection of the nature of the relationship of the participants. The idea is one text for all of the EU that simultaneously covers professional and consumer dealings. It was already pointed out before in connection with contract law, that the DCFR is in truth a consumer law text which maintains an anthropomorphic concept of private law and does not properly distinguished on the basis of the nature of the parties. Prescriptive consumer law notions thus drift into professional dealings. Indeed the DCFR is in essence a consumer law text. This is also clear in the new chapters on movable property. Hence still the physical notion of possession, which remains basic in the German manner (in the nature of 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 their asset status. In the German manner, they are still covered under the law of obligations (Book III, ch 5) and are not considered objects of property rights as we have already seen. This makes no longer much sense. It seems that in the DCFR in these areas, there was hardly any proper comparative law analysis. The common law experience is especially ignored except for the important introduction of the trust in Book X. Important other areas of approximation, see section 1.3.8 above, were not explored whilst even the trust concept is considered only in isolation. It concerns here especially the operation of the equitable proprietary interests more generally and their significance in commerce and finance. Thus the concept of knowledge of adverse interests when acquiring an asset and their protection is not developed as a general concept and the modern role of party autonomy (subject to the protection of the commercial flows) and risk management in the operation of proprietary rights are ignored. A dynamic concept of modern property law cannot develop in this atmosphere, not even for professional dealings. The end result is, as in contract, substantially an update of the old German BGB and the proposals must 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 in particular. As just mentioned, physicality remains here at the centre of all proprietary rights in movable assets. We further see a closed system and no awareness of its opening, even in terms of conditional and temporary ownership rights—the example of the reservation of title is handled in isolation and the other example, the finance lease, is perceived to be purely contractual in the German manner. Thus finance sales are not properly understood whilst the floating charge is not favoured either and mainly seen as some contractual extension of existing property rights (Art IX-2:307). Again, this is very German but creates at least some flexibility although no conceptual clarity. Neither is there any awareness of the more conceptual matrix of proprietary rights and the way they are held and protected, see section 1.2.2 above. Again, 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

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level of common speech in the consumer or anthropomorphic manner but even then without much practical insight. It thus misses the opportunity for reform that a more abstract, rights-based, approach offers. The basic division is here along the line of the nature of the asset, either tangible or intangible, not in terms of transaction or product. On the other hand, the physical approach of the common law (excluding equity) and its basic simplicity is also eschewed. In this atmosphere, it may not surprise that the causal system of title transfer is adopted (Art VIII-6:102). Here the traditional German approach is abandoned in favour of what might seem more natural to a consumer, but it is incomprehensible from a professional and finality point of view, especially in a commoditised dealing environment where an abstract system of title transfer comes together with the protection of the ordinary course of business and reliance notions to protect finality (unless there is fraud). The result is ambivalence, product of a rigid, old-fashioned approach unaware of professional dealings, especially in finance. It is unsuitable for the operation of the international markets from Europe.

1.11.2

Chattels and their Transfer. The Problem of Physical Possession

In the DCFR, property rights only attach to physical assets, therefore in so far as movable property is concerned only to chattels and concern the way they are physically held, transferred, and defended.388 Real estate remains domestic which is quite understandable, although one may wonder how a duality in system may operate in countries which, like those of the civil law, engage here in 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 the true issue is physical possession. 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. The manner in which they are held and defended is dispersed, however. For the ownership right we find it in Article VIII-6:101 (the revindicatio) supported by acquisitive prescription, Article V-4:101 (based on possession which must 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.389 388 They are called here ‘goods’, which acquire here a narrower meaning following the common law tradition, see Art VIII-1:201 389 In respect of each of the iura in re aliena or limited proprietary rights, there is in Art VIII1:204 still a reference to national law; 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, whilst making it clear that proprietary rights in movables are covered, do not enter into the

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As just mentioned, in the DCFR physical possession or at least control stand besides ownership (not as proprietary right but as a strong base for protection), the preference, however, in a more theoretical sense being for the revindicatio as proper defence of the ownership right itself (not necessarily for the other proprietary rights). That is indeed the German tradition, not necessarily followed elsewhere in civil law and in any event different in the common law that (at law) is equally physical but where bailment gives the stronger protection, see section 1.3.2 above. In terms of possession, the emphasis in the area of protection is 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 shadow of each proprietary right) and is only protected in that limited sense (Art VIII.6:201). In the German tradition, we have here direct and indirect physical possession (corpus), the latter through another person (holder). Possession in this sense is meant to be factual in derogation of Roman law (animus). Again, this is the old German idea of gewere, but where there is reliance on control, it can hardly be mere fact. It may be seen that holdership is here no longer distinguished from legal possession. In fact, the mere holder or indirect possessor defends also on the basis of possession, Article VIII-6:201, as in German law. 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. Again, this may not be applicable to the operation and transfer of other proprietary rights. In this system, transfer of title is thus also physical, Article VIII-2:104 (although it may sometimes be constructive, see Article VIII-2:105).390 See for the physicality of this transfer also the sections in the chapter on Sales: Articles IVA-2:101 (b) in conjunction with. 2:201 and Article IVA- 3:101(b) in conjunction with 3:104. Further requirements for the transfer of ownership (only) are (Art 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 the transfers in bulk (see Article VIII-2:305 which still relies for goods to be 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 connected with physical notions of delivery and a (connected) limited concept of disposition rights in chattels. This is all typical German but, against the German tradition, there follows here the adoptation of a causal system of title transfer (in defiance of all modern trends), see relationship to domestic laws in respect of them. It may be noted that the good faith notion also covers proprietary dealings (Art I-1:103(2)), which then becomes a finality issue (ignored in the DCFR, a further indication of its consumer law orientation). 390 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, and commonly does not affect bona fide purchasers of the goods who acquire physical possession.

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Article VIII-6:102. It was already said that this is a perception also mired in anthropomorphic thinking unaware of finality needs especially in commodity trading. Finally, it may be of special 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 specifically 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. They also figure in so-called economic interests, aspects that do not receive attention in the DCFR. It may be further recalled in this connection that a third area where equitable interests 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 covered in the DCFR.

1.11.3

Intangible Assets and their Assignment. The Problem of Asset Status

As for intangible assets, the DCFR also follows the German approach, not even the somewhat diluted more recent Dutch version of 1992.391 As the general German approach towards assets is that they must be physical as we saw, there is no concept of ownership, possession or acquisitive prescription in intangible assets, the asset status of which is not considered and the rights in or to them are defended in tort. As a consequence 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 1.5.1 above. An advantage of sorts is that even absolutely future claims may then be included in the assignment, and that it may also be in bulk, although specifically hemmed in by the DCFR in Article III-5:106. In fact Article III-5:104 now requires the right to be assigned to exist, to be assignable, the assignor having proper disposition rights in them, whilst there must also be a contract or similar juridical act. It may be observed 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 important in this connection, however, that in the DCFR contractual assignment prohibitions have largely lost their third-party effect, see Article III-5:108, that now 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). In German thinking, the extended facilities for the transfer of claims followed from the absence of a need for notification of the debtor. The abstract system of title transfer appears here also still implied, see section 1.5.1 above. This approach may allow a greater degree of party autonomy now that we are (in this approach) truth outside the ordinary civil law proprietary regime and its numerus clausus of proprietary rights. That could even allow for equitable interests in a common law sense, including conditional and temporary transfers or security transfers of all kinds, including floating charges. 391 The DFCR was here preceded by later chapters of the UNIDROIT Principles of Contract Law and of the Principles of European Contract Law (PECL).

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Again this is an advantage of sorts, but only derives 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 here more restrictive than even the traditional German approach. Indeed, under the latter, it could have been argued that the more flexible approach to intangible assets and their transfer should become the more modern model of property rights and their transfer for all movable assets (doing away with physicality). Where the effort still fell down was in the lack of approximation of receivables to negotiable instruments, the consequent limitation of the defences to the minimum, the need for the debtor to co-operate in such assignments especially if for security purposes (which is likely to make his own credit possible), and in particular in the lack of protection of bona fide assignees. The DCFR retains all the old impediments, see in particular Article III-5:116. It protects, however, the bona fide assignee but forgets to require collection, see Article III-5:121(1).392 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 also seen) is to allow it unilaterally (without consent of the creditor) but that the assignor 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, he may object, see section 1. 5.4 above. There is no such idea in the DCFR which 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 Finance Sales and Floating Charges Much has already been said about secured transactions and much more will be said in Volume III, chapter 1, but the real test is the approach to finance sales as security substitutes and to the floating charge. The rest is detail. It was intimated earlier that the DCFR fails on both accounts. Although it reserves a special place for reservation of title as purchase money security still in the nature of a conditional sale, it fails to clearly 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 resolutive condition, withholds retroactive effect, whilst the suspensive condition works, more naturally, only for the future. Temporary

392 Of interest is also the position of the assignor as collection agent and the right of the preferred right of the assignee to the collections if reasonably set apart from the rest of the assignor’s assets, Article III-5:122.

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ownership rights are not considered. In this way, one must assume that the draftsmen meant to keep the system of proprietary rights firmly closed. More importantly, Article VIII-2:307 also avoids the terminology of conditional ownership in connection with the reservation or retention of title, but 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 III, chapter 1 section 1.4.1. The DCFR does not explain how this expectancy operates. When picking up the concept of retention 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) suggests, however, the operation of a conditional ownership right. Importantly, 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 recharacterisation under a unitary concept of securities, that has given so much trouble in the US. Hire-purchases are on the other hand sorted under retention of title, so 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 IX1:103(2)(b) and (c).393 The difference between a security interest and a retention of title is notably in the appropriation facility for the latter, see Articles IX-7:103(3) and 7:105(5). It was submitted before that this facility results from the lack of an interest rate structure which sets the finance sale apart from the security which always support a credit. 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. It may be recalled that in the US the recharacterisation 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 III, chapter 1, sections 1.6.2 and 1.6.3. Article IX-2:102 starts with the requirement that for the creation of a security interest the underlying assets must exist and are transferable. 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. 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, compare also Article IX-2:301(2) in conjunction with Article III-5:108(1). Future or generic assets may also be transferred (presumably also future claims) 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 393 In this connection it may also be noted that trusts for security purposes follow also the rules of Book IX, see Article IX-1–101(2)(a) and Article X-1:102.

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the protection of bona fide security assignees under Book 3, chapter 5. They have to accept earlier interests, why is not clear. Again, there are no provisions for a conditional or temporary assignment as we may see in some forms of recourse financing, see Volume III, chapter 1, section 2.3.4. They are, however, not excluded either. The above spells considerable trouble for floating charges. The situation is saved to some extent by Article IX-2:307, where security interests may be extended by agreement to replacement goods (chattels). This may also cover proceeds, see Article IX2:306. This follows 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. Fundamentally, it is no longer true that security transfers are only in specific existing assets and only affix when they do emerge. The protection of the commercial flows are the subject of Book IX, chapter 3. For non-possessory securities including retention of title (even in respect of consumer goods) a registration system is introduced, see Article IX-3:102. Article IX-5:204 protects, however, the commercial flows and allows the sale of inventory free and clear, compare also Article IX-6:102. There is no search duty. Equipment may only disposed of free and clear if so authorised by the creditor. Receivables and proceeds may at least be encumbered regardless of earlier charges and assignment restrictions as we saw, but bona fide collecting security interest holders appear to be subject to earlier charges under this Article IX, but cf. also 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 creditor and his own), see Articles IX-7:213 ff. 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 arise unless by operation of the law. It follows that in the perception of the draftsmen the system of proprietary rights remains firmly closed.

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1.11.6

Certainty, Finality and Predictability

The key issue of transactional finality is not squarely met in the DCFR. 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 legal sophistry should unsettle done transactions of this nature except if there is fraud. 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 de-emphasising the psychological nature of the will, notably in matters of mistake that could otherwise easily undermine any transaction, even the delivery itself as legal act where still required. The concept of independence, well known from negotiable instruments and letters of credit, is another support. One may see the abstract system of title transfer as a particular example of it, but there are other instances like the independence of the receivable vis-a-vis the contract out of which it arises (and once transferred 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), irrationally so it was argued and condemns participants to antiquated notions that may be so out of date that certainty of this nature means low quality law. One may here also recall the quote of Jerome Frank referring to a childlike need in this connection and the earlier remarks to the effect that future needs cannot be adequately covered by extrapolations of past experiences. Indeed the true issue is transactional finality where it matters (therefore as a much narrower 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 I, section 1.1.5. Note in this connection that the DCFR so far shows little appreciation for this key concept of finality and even seems to prevaricate as to the latter, especially in the abstract nature of the transfer, ultimately to embrace the causal system as we saw at least in the transfer of chattels, Article VIII-2:202. Nevertheless, it adopts the principle of separation between contract and transfer, see Article IVA-2:101, which 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 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.

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Whatever the right interpretation of these sections, in as far as finality goes, the DFCR’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, although it is conceivable that under the DCFR the abstract system still applies to assignments. Again, the main problem is that transactional finality is no central theme in the DCFR as it must be in modern property law amongst professionals and must cover also intangible assets, especially receivables and their use in financial funding schemes.

1.12 Uniform or Harmonised Statutory Law or Transnationalisation 1.12.1

Consumers and Professionals

It was observed in chapter 1, section 1.6. above 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.394 In fact, it has no idea of professional dealings or the operation of the modern market place or modern finance and the risk management tools needed in that connection, neither of their needs nor even of any justified public order concerns in this area. It continues to assume a nineteenth-century anthropomorphic and physical ethos coupled with a twentieth-century 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 market place on modern finance, it assumes further that all problems can be settled in the ambit of its text and that the result is satisfactory per se. There is here no need for empirical research nor indeed for much comparative analysis. The system, if sufficiently coherent and in accordance with past interpretations, will itself 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 hails and it remains its philosophy.

1.12.2

Different Sources of Law in the Professional Sphere

In the approach of the DCFR, there is indeed no need for 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 is considered the essence 394

See also Vol I, s 1.1.8 for this distinction and definitions.

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of the modern lex mercatoria and its operation in the international commercial and financial legal order, see in particular Volume I, section 1.4.13.. Thus, as far as the DCFR is concerned, fundamental principle, although mentioned and much struggled with in the Introduction of 2009, is not given any independent status in the text, except for human rights but then only as a matter of licence or concession (Art I-1:102(2)). The same goes for good faith behind which these sources of law now often hide (Art I-1:102(3)(b)). Custom and party autonomy similarly are no independent sources of law either (and are only allowed to operate in contract law, see Arts II-1:104 and II-1:102), nor is general principle. In fact, it is somewhat curious that the laws of Member States are not here figuring 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 is that the momentum of the international markets is not recognised or accepted. Civil law has never been particularly perceptive in this area as its main protagonists, France and Germany, are not traditionally trading nations. This shows, although France more recently has made strident efforts to at least keep abreast of modern financial developments.395 But even the Netherlands in its 1992 Code surrendered to the Continental attitude and was not able to make the necessary amendments for the professional sphere. The result is not geared to a modern mainly finance driven society with all the dangers and pitfalls of such an environment, on which such a society is nevertheless totally dependent.

1.12.3

Dynamic Movable Property Law

In Volume I, section 1.1.4, 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 and living. That change of paradigm was seen as an essential contribution of the modern lex mercatoria in this area and allows for a substantial measure of party autonomy in devising new proprietary structures operating amongst professionals subject to a better protection of the commercial flows. It speaks to a different and, for the uninitiated, often more dangerous world. Property rights are here a matter of risk management that operates worldwide. It may require special public order limitations but that is then foremost a matter of regulation not of private law. 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 I and needs not be here rehearsed, but it is clear that in as far as international business is concerned, the DCFR lives in a past world. It tries to remedy the failings of its laws and clarify its meanings as good as academic committee insight can. As for the future, the DCFR extrapolates past experiences and subsequently seeks to apply the end result to all. That would appear to be ‘safe’ in the sense of taking the least risk and of certainty 395

See notably Vol III, ch 1, s 1.3 and for a summary Vol I, text at n 39.

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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 whilst responding to ever newer needs. The DCFR presents no view of the future and in particular no view of the different place and 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 whilst it is now requiring even three Volumes in this present series) to present a more coherent view and understanding of what is required—but it would have been better if the draftsmen of the DCFR had been more conscious of their lack of international experience, and of commerce and finance expertise 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.

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Part II

Negotiable Documents of Title and Negotiable Instruments 2.1

2.1.1

The Role of Documents

Bills of Lading and Warehouse Receipts

As explained before, the international sale of goods is mostly still considered the key contract in international commercial law. 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 his goods to a carrier at the ship’s rail or in his warehouse. This is now called the received for shipment bill of lading. Once the goods were received on board, the bill 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 his own right under a CIF contract or as agent for the buyer under a FOB contract.396 This document allows full use to be made of the intermediaries’ safe harbour function, referred to the context of international sales in chapter 1, section 2.2.1 above, the goods thus being in neutral hands, especially if the document can be considered to incorporate the underlying assets when it is called a document of title, alt the more if it also becomes negotiable. That is usually deemed to be the case if it is expressed to order or bearer.397 It means first that the goods now being in the hands of neutral third parties can be traded without the danger that the seller may not deliver (for all kind of reasons). Second, the goods are traded and title is transferred at the level of the bill of lading. 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 is crucial in international sales, and provides great flexibility in any resale arrangements. 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 396

See for CIF and FOB sales, ch 1, s 2.3.9 above. 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 of such a bill of lading that is not negotiable. 397

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goods and their ultimate arrival in the place of destination, the issue 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 also allows seller and buyer to make special delivery and payment arrangements whilst the goods are under the control of a third party (carrier or warehouse), therefore out of the seller’s reach and beyond his retention rights but also as yet beyond the 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. 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 his payment, so that he gains control of the goods only thereafter (whilst the goods themselves may still be in transit). It is inherent in this system that the payment cannot be threatened by a buyer in 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 goods. 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. 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 whilst 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 co-operation of the seller in this aspect. 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. It is very much the idea behind collection arrangements and letters of credit of credit.398 As we shall see, negotiability of this nature may in some legal systems (but less so in the UK as we shall see) also imply a measure of independence and abstraction resulting in justified reliance of a transferee 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:

398 See for the ‘pay first, argue later’ nature of this payment ch 1, s 2.2.3 above and Vol III, ch 1, s 3.3.12. See for collection arrangements and letters of credit more in particular Vol III, ch 1, ss 3.37–8.

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(a) acknowledgement of receipt of the goods; (b) prima facie proof of the transportation or carriage arrangements (although as between the original shipper and the carrier their underlying transportation agreement may remain determining)399 and of the right to request performance and present claims and, if necessary, renegotiation of the shipping arrangements;400 (c) expression of the shipper’s presumed ownership or at least constructive possession of the goods and especially of his reclaiming right; (d) confirmation of the apparent condition of the goods, that is of their proper aspect and packaging;401 and (e) 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 statutory codifications. Also in common law countries, such as England and the USA, 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 USA, although as we shall see 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 and only a quasi-negotiable document. In this system, the transfer of the bill of lading as a negotiable document of title usually also implies the transfer of the underlying transportation contract. This is so 399

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. 400 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 leases 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. 401 A clean bill of lading is in this connection 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.

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both in respect of the rights (of carriage) and the related duties, like payment of the freight and insurance, although this payment may already have taken place under a CIF term. As for an arbitration duty, this would appear to require the arbitration clause to be included in the bill of lading and a reference to general trade conditions may not be sufficient. On the other hand, much against the normal rules of delegation of duties (see section 1.5.3 above), usually therefore by statute, the transfer of the document commonly even 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. One result is that it makes the present holder and the original contract party the sole persons liable to pay the transportation cost. Becoming a party to the contract of carriage in this manner thus 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 also).

2.1.2

The Concepts of Document of Title and Negotiability

As already mentioned, documents of title, like bills of lading and warehouse receipts, whether or not negotiable at the same time, 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 system, where the normal way to transfer title in chattels is through delivery of the goods themselves. It provides for an easy way of transfer of the underlying assets and is in respect of them a substitute delivery.402 The term ‘holder’ has here 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 here normally the issue.403 The situation is more complex in other countries, particularly England and France, where title to the goods normally transfers not upon delivery but at the mere conclusion of the sales agreement: see section 1.4.2 above. For a bill of lading to operate as a document of title in the above manner in these countries, some intent to 402 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). 403 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.

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delay title transfer in the underlying goods until the presentation of the document must then be implied or demonstrated. This is in these countries indeed normally deemed to be the case under the CIF term and possibly also under the FOB term, certainly if payment against documents is agreed. In any event, 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 someone other than the holder of the bill, like the carrier or the warehouse owner. The latter could still physically (even though improperly)404 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 document of title truly is. 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,405 and then transfers either through physical delivery (if to bearer) or through endorsement (signature) plus physical delivery (if to order). Strictly speaking a bill of lading not expressed to bearer or order is a document of title without negotiability, as only the holder can claim the assets. 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 will have to be given notice. Any holder, although prima facie entitled to the goods, will still have to prove rightful holdership of the bill itself if questioned, but may be able to do so merely on the basis of his bona fide acquisition of the bill for value. However, this may not be so if the bill is not expressed as a negotiable instrument and may not even then be so in common law countries as they do not normally accept exceptions to the nemo dat rule (unless by statute), although we are concerned here with an expression of the law merchant and not of a traditional common law principle and this protection is therefore implicit. It also suggests that there is no need for consideration to render the transfer of the bill valid. All the same, even if the bill of lading is 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 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. 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 assets

404 See Lord Denning in the leading English case Sze Hai Tong Bank Ltd v Rambler Cycle Co Ltd [1959] AC 576 (PC). 405 See eg Art 8.413 of the new Dutch CC.

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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. As a consequence, except in countries like England where the bill of lading is therefore often considered to be only a quasi-negotiable document of title, documents of title might thus 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. Again, this is the notion of independence or abstraction. Especially bona fide holders of such bills may further ignore all personal defences of their predecessors, like 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 s 7–507(2) UCC in the USA but differently Art 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. There may thus result a different treatment for bona fide holders of the bill compared to those of the underlying assets in a transfer without a document of title. 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, in essence independent from domestic law. In fact, this is so for all bearer and order paper. This concerns ultimately especially the finality of the transfer which for documents of title and negotiable instruments is traditionally highly prized. It 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 I, section 3.2.2. It follows that the more they abandon their international form and become 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, not even in countries that accept a high degree of independence and protect bona fide holders of the bill, and is 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. 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.

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This may also occur under a bill of exchange but is less likely, and holders of claims, even if bona fide, are in any event less protected: see also section 1.5.9 above. This separation between bill and goods means on the other hand that the new holder of a bill of lading must 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 means that in an international context the situs of the underlying goods will unavoidably remain relevant when bills of lading are presented. This is 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. The physical whereabouts of the goods therefore remain relevant. However, 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, electronic bills of lading are increasingly being considered. They and their status will be discussed below in section 2.3.2 in connection with the dematerialisation of negotiable instruments and documents of title and the issue of electronic transfers more generally. 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 an 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 nineteenth-century era of the codifications or 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 as from the end of the eighteenth century, so that the carriage of the goods was no longer done by the parties themselves, which were now able to leave the goods for transportation with independent third parties like shipping companies. At first, the bill of lading was undoubtedly

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considered based on the custom of merchants.406 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,407 it was indeed confirmed that property could be transferred with the bill of lading, thus recognising its potential status as a document of title. 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,408 and those that normally do not, like England and France. The consequence is that in the first type of countries 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,409 which are in principle transferred with the delivery of the document itself. Other ownership rights or more limited proprietary rights created in 406

See the 1787 case of Lickbarrow and Another v Mason and Others [1794] 2 TR 63. 6 East 17, with reference to the much earlier 1697 case of Evans v Marlett 1 Ld Raym 271 (1697). See for this history also DE Murray, ‘History and Development of the Bill of Lading’ (1983) 37 U Miami LR 689. 408 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, whilst 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. 409 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. Amongst the original interested parties (like 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 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 then, the question of abstraction and independence arises. 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 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. Finally, in all cases it needs also to be considered that (c) the goods still retain their own life and, 407

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the underlying assets at the same time or later but not marked on the bill, like 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.410 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.411 In France412 and England,413 on the other hand, where title in chattels in principle transfers upon the conclusion of the sales agreement, the bill of lading can be a document 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 if disposed of regardless of the bill of lading, bona fide third parties may still be protected and be able to ignore the bill of lading under the applicable law of the situs of the assets. 410

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). 411 If more than one bill of lading is issued, the first endorsee has the best right amongst 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 USA, s 7–402 UCC makes the issuer liable for any damage caused to holders of duplicates not so marked, whilst 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). 412 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 Art 131 ff Code de Commerce. It emphasises the nature of the document as presumption of proof of receipt of the goods whilst 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 a FOB sale payment against documents is agreed, it is assumed that title transfer is always delayed by common agreement of the parties under Arts 1583–1138 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. 413 See Carver, Carriage by Sea, 13th edn (1982) 113.

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of the bill of lading as a document of title then depends on the intention of seller and buyer,414 and any subsequent bona fide holder of the bill takes in principle also subject to that intention and is accordingly at risk, although this is not fully clear under French law.415 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, which means that he cannot acquire better title than his 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 its negotiability, if intended, must be practically possible, as demonstrated by the requirement that the assets it represents have been sufficiently set aside, compare section 16 of the Sale of Goods Act 1979, and are not commingled (although in some other countries co-ownership may result). As a consequence, 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 not in an FOB sale. Even in a CIF sale, it remains rebuttable and may not be complete. In common law (therefore not in countries like France and Belgium), the holder takes also 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 he is a bona fide holder 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. It does 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.416

414 In England, even if the bill of lading is clearly expressed in negotiable terms through the use of the ‘bearer’ or ‘order’, the intent as to it being a document of title is still 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. 415 See in France, Tribunal de Commerce de Nanterre, 31 Oct 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. 416 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 instructed bank, although the position of the buyer as title holder is all the stronger if somehow he obtains the goods from the carrier without the bill of lading: for English case law see the text below.

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This is confirmed in the USA 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 still takes subject to any proprietary rights in the assets themselves established before the first negotiation.417 As already mentioned, 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.418 Especially under the CIF term, under which the seller makes the transport arrangements, see also chapter 1, 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, also in England (when any other moment of title transfer indicated in the sales contract may become irrelevant). However, this is always rebuttable whilst the first transfer (to the original buyer), if made at the time of

417 In line with common law practice, the UCC in the USA 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 (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 where marked as non-negotiable). 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 USA 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 USA, 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 the effect). 418 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.

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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.419 In a FOB sale (when the buyer traditionally organised the transportation in his own transport facilities: see again chapter 1, 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 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 USA) and in France, the presumption under a 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.420 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 a 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.421 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 419

See in France Cour de Cass, 11 June 1991, Bull des Transports et de la Logistique no 2443, 591 (1991), but it is in England 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 364 above, and The Glenroy [1945] AC 124. It could still be later also 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, cited in n 412, II No 219 (2000). 420 See for France in particular, ibid. 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. 421 See RM Wiseman, ‘Transaction Chains in North Sea Oil Cargoes’ [1984] Journal of Natural Resources Law 134.

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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 Goods are Transferred to Transferees Other than through a Transfer of the Bill of Lading In the German and Dutch systems, a buyer without the bill of lading (if there is one) especially likely to be the position pending payment is in a vulnerable position. Any holder of the bill including the original seller 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), his position may be enhanced even if he is aware of the bill of lading. The seller and his bank holding the bill for payment may then find their protection endangered. The problem also exists in England and was identified above. As we saw, except in a CIF sale, 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’ performance under the contract of sale (unless otherwise agreed). Indeed in Bristol and West of England Bank v Midland Railway Company,422 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 only left with a claim for damages against the carrier. If a bill of lading has been negotiated to a third party including a bank or a pledgee, the original buyer of the goods upon receipt of them is unlikely to be so protected if he is aware of the existence of the bill. At least in the Dutch and German systems, he would not receive title under the circumstances. If not so aware, protection could still result for the buyer in a situation in which the seller is obliged to deliver the goods to him at his 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 will 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 circumstance is more generally likely to fully protect the buyer even regardless of his bona fides. Another way of approaching this situation, more particularly so in England, is to say that in cases where a buyer is unaware of the shipping arrangement and receives the 422 [1891] 2 QB 653. It was followed by a long line of cases, cf lastly The Future Express [1992] 2 Lloyd’s Rep 79.

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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 way as to make it negotiable. If the seller in possession of the bill nevertheless negotiated this bill of lading, the subsequent rightful holder of the bill would 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.423

2.1.5

The Transfer of Risk

The transfer of risk in the underlying assets is not related to the title transfer and therefore also not to the handing over of the bill of lading to the buyer. Under modern law, the risk is normally associated with the physical possession of the assets: see chapter 2, section 2.1.9. More old-fashioned approaches, which still associate the risk with ownership like French law, 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.424 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 chapter 1, section 2.3.10 above.

423

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 lien in the assets they hold, not 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 USA 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 Nov 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. 424 See Cour d’Appel Aix en Provence, 24 Oct 1980, Bull de Transports, no 186 (1980).

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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 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 the 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 bill and to the goods. 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 be the proper way of transferring the bank’s rights under the bill. However, short of such an assignment, the buyer is not without proprietary rights, even without possession of the document, as it has no proper document of title status. It means that the transportation contract is more likely to indicate who is entitled to receive the goods whilst 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 the 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 banks 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. If a named bill is made out to the buyer, a bank having paid the seller under a letter of credit but retaining 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, not 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. The precise status of sea waybills is in many countries still unclear except that (unless otherwise intended) it is not a document of title. The Comité Maritime International (CMI) issued in 1990 Uniform Rules for Sea Waybills. Under these, only

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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 whilst being transported or when documents are not required in the payment circuit.

2.1.7

Private International Law Aspects of Bills of Lading

It may be of some interest 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. We are here foremost concerned with the proprietary aspects. Is (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 in respect of the bill. 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 would 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. 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 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 (lex situs), at least in the aspects of its

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negotiability, negotiability and the validity of the title in the bill itself,425 there thus 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, or when 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, it would be a question of discretion of the recognising courts in the country of negotiation and more in particular a question of the lex situs of the place of unloading (therefore of the country of destination) 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 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 of the nearest equivalent in the law of 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.

425 See for the attitude in connection with bills of exchange, Dicey and Morris on the Conflict of Laws, 14th edn (2006) 1802. 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 14th edition of 2006: see, however, Ehrenzweig, Private International Law (1964) 226 and E Rabel, The Conflict of Laws, 2nd edn (1958) 280 ff.

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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. 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 we saw above 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 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. Whilst uniform treaty law has been produced in this area, this is far more the case in the transportation aspects of the bill of lading than on its status as a document of title. In a transnational legal environment, this status is therefore principally 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 principles as ius cogens and further to be interpreted and supplemented on the basis of the principles common to domestic legislation in this area in mercantile countries 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 I, 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

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War I when the freedom of the parties to agree the transportation conditions left the carriers in practice great bargaining power to impose their conditions whilst there was often a lack of clarity even on the transportation terms as printed on the bill of lading. In the USA, 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 USA) and achieved a compromise between the conflicting interests of shippers and carriers. The USA 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. They were the subject of a diplomatic conference in Brussels in 1923 leading to the Brussels Convention incorporating these Hague Rules 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 between the time of loading and discharge (to hull cargo other than life animals), see Rule I(b)(c) and (e), whilst 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 Carriage of Goods by Sea Act (UK COGSA), incorporating the Hague Rules, was adopted as early as in 1924. The US COGSA dates from 1936. The result was the emergence of unavoidable differences 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 Comité Maritime International (CMI). They 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 are 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

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local law even as mandatory rules was noted.426 They may also apply to transportation arrangements other than under bills of lading, like those under sea waybills or charter parties (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, 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 like 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 so-called Hamburg Rules. They are a 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 by only a number of smaller countries, amongst which is Austria. The USA and France signed but have not so far ratified them. Some East European and African countries have ratified without apparently repealing The Hague or Hague-Visby Rules to which they had become a party. It may give rise to conflicts. 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). In 2009 via UNCITRAL, a new set of Rules appeared (the Rotterdam Rules) that covered the situation where the transportation was partly by sea and partly by land. 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 just mentioned, the Hague Rules put emphasis on the transportation aspect 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

426 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 the similar public order characterisation of the Hague-Visby Rules, W Tetley, Marine Cargo Claims, 3rd edn (Montreal, 1988) 944.

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Hamburg Rules define the bill of lading as a document of title if expressed as a negotiable instrument (Art 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 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.427 The bill of lading must also contain leading marks to identify the goods (see Rule III(3) of the Hague Rules).

2.2 2.2.1

Negotiable Instruments

Bills of Exchange

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 in their residence the cash they collected at these fairs. To this end, the Lombard banker would take the trader’s cash and instruct its correspondent in the residence of the trader to make the necessary payment. This instruction would be in writing and be given to the trader who would present it to the correspondent bank in his own town upon his return. It became also possible for buyers at these fairs to draw cash from the correspondents of their home banks present at the fairs, to which end they would carry a written instruction of their own banks. The bankers operated amongst themselves a clearing system 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 and new payment methods had to be

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

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designed. In this context, the old drafts were re-fashioned to suit the new needs. Like the bills of lading, they then acquired their present legal form.428 The modern bill of exchange in its simplest form is no more than an irrevocable instruction (in writing) by a creditor to his debtor to pay his debt 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 him to pay whatever he owes the drawer to a third person/beneficiary (the payee). The reason for this payment to a third party will often be that the drawer429 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).430 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 later case, he will subsequently hold the sight bill as his receipt and proof of liberating payment. 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, a drawee if he has accepted the bill by putting his signature on it, and the payee only upon

428 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 much affected its further development: see also Vol I, s 1.1.1 and JS Rogers, The Early History of the Law of Bills and Notes (Cambridge, CUP, 1995). 429 See for assignments competing with bills of exchange, s 2.2.8 below. 430 Except in Germany, see s 5 of the Wechselgesetz [Bill of Exchange Act] 1933.

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endorsement, which means the sale of the bill by him to someone else, as are 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 no 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 his acknowledgement. An accepted time draft thus signifies not merely a special liability of the debtor upon negotiation of the instrument but it also signifies a benefit in terms of credit for the drawee. It means that during the period of the bill the seller cannot invoke default remedies like 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. 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 he 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 release vis-a-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. Thus in a time draft the drawer may be the payee at the same time (when the bill of exchange is to the 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 has the bill of exchange. He is then in the same position as if the draft had been to the own order. 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 his own acceptance. It is also possible that the payee is not the drawer/seller himself but rather his 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 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 had

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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).431 The terms ‘to order’ or ‘to bearer’ were used above. 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 discouraged, unlike in common law. Under the Geneva Conventions of 1930 (see section 2.2.10 below) the bill of exchange to bearer is 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), whilst 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 payment than his predecessor as he 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 he 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 signatory indicating that he is 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, he 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-a-vis the payee and all his successors in interest.

431 See also I Ronse, Wissel en Orderbriefje (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 results. 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.

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Acceptance and Discounting of Time Drafts

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 he loses the defences he may have had against his 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 his obligations under the contract, therefore in the case of a sale upon delivery of the goods: see Article 127 of the Dutch Commercial Code. 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 (Art 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 concerns 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 had earlier rejected the obligation.432 As a sanction, a buyer refusing to accept loses his sales credit and the price becomes immediately due. 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.433 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.434 The drawer whilst 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. 432

10 April 1878, D.78.1.289. See also Ripert/Roblot, 2 Droit Commercial, 16th edn (2000), nos 1986 ff. 434 This was earlier also suggested in the leading Dutch treatise of Scheltema/Wiarda, Wissel en Cheque Recht, 285. 433

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Acceptance is a condition for the discounting of bills of exchange. Banks that make a business out of the discounting of time drafts become themselves the holders of the drafts they discount and they will present them to the drawees on the appointed dates. They incur therefore 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 persons liable under a bill of exchange are in principle all those whose signatures appear on the bill. They all function as guarantors of payment vis-a-vis the holder. They are principally the drawer and any endorsers, except for the latter if they signed ‘without recourse’. As we saw, 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 USA. 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, which 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.435 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 his 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 a bearer draft is, from the point of view of his 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 he cannot and need not show a continuous line of endorsements so that it is easier for him to establish that he is the proper holder. An endorser against whom recourse is taken does not strictly speaking become a holder in due course as a consequence of his payment. He has recourse only against 435 See about this problem which will not be discussed here any further: R Goode, Commercial Law, 3rd edn (1995) 504.

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his predecessors and therefore not against all signatories of the bill of exchange. 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. He 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 draft, 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. 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 him. 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.

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 separate from domestic laws under which the transfer 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 has only introduced more refinement). Any national law not accepting these principles destroys thereby the essence of the bill of exchange. The principle of independence is particularly important in this connection and serves as a 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 even if the drawee has accepted the bill. There is an effect in so far that the burden of proof may shift to

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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 particularly relevant for any third party holder acquiring the bill in good faith, and thus for the holder in due course.436 It protects against all 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 the holder in due course 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 he did not know. It means that in connection with payment of the purchase price in a sale, the drawer or a drawee, whilst 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 and may therefore have a weaker position, at least under English law.437 In his presentation of the bill to the drawer, he may be faced with the defences derived from his own underlying relationship with the drawer giving rise to him becoming the payee in the first place. This may not apply in the case of his presenting the bill of exchange to the drawee. At least in England, he may also be able to claim the status of holder in due course vis-a-vis the drawer if he later renegotiated the draft and became an endorsee.438 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 saw in the previous section, the holder in due course 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 have acquired the bill of exchange for value and, under all legal systems, in good faith as regards any prior defects in the 436 See s 17 of the German Wechselgesetz, Art 121 of the French Commercial Code and s 3–305 UCC in the USA. 437 See RE Jones Ltd v Waring & Gillow Ltd [1926] AC 670. 438 See Jade International Steel Stahl und Eisen GmbH & Co KG v Robert Nicholas (Steels) Ltd [1978] QB 917.

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chain of transfers. He should not have any notice of a previous dishonour. The transfer of the bill to himself will 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 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 of which they were not involved and did not know. However, there may 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 likely to be based on their underlying sales agreement. Between succeeding holders they are likely to be based on 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 his status as holder in due course, therefore the requirements of that status, like proper acquisition or otherwise the bona fides itself, or, in respect of the immediate predecessor, they concern the circumstances under which the holder acquired the bill of exchange. As already mentioned above, 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-a-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 it 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 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,439 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 (eg the amount), forged later signatures, or irregular 439 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 USA: 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.

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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-a-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 amongst 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. 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. Under English law the (mere) holder, the (normal) holder for value, and the holder in due course,440 each have different defences. Continental law distinguishes only between the (mere) holder and the holder in due course.

2.2.6

Cheques

Cheques are still very common in common law countries, also amongst professionals. They are simply sight drafts to order, drawn on one’s bank 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 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 any one 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 his 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.

440

See R Goode, Commercial Law, 3rd edn (2004) 492.

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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 do (see also section 1.5.1 above), this requirement could be avoided by drawing a bill of exchange in favour of the third party. As the bill of exchange is usually presented 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 III, chapter 1, section 3.3.8. They 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 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 to obtain ready 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 make straight discounting often complicated. Hence the need to make receivables themselves more abstract undertakings: see section 1.5.8 above. The other need is for a bulk assignment facility. Here again 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 draft 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, but 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 have extensive use in countries like England and the USA in the consumer sphere. They have been 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. 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.

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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 often presents itself 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 his 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 he has already honoured the bill, be able to refuse any payment to the assignee on that ground or as a defence under his original contract with the assignor/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 draft 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 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 whilst 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 even 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 even if the drawee is subsequently forced to pay to the assignee also. In that case, he is more likely to recover any double payment from the drawer/assignor than from the holders in due course.

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2.2.9 Position of the Holder in Due Course of a Bill of Exchange Compared to 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 (like 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 saw 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 saw, 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 hand 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,441 although, as we saw 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 saw 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.

2.2.10

Foreign Bills of Exchange: Private International Law Aspects

So-called foreign bills of exchange have under domestic legislation sometimes a somewhat different status, as for example under the English Bills of Exchange Act 1882 (s 4). They are in English law defined as bills of exchange drawn by non-residents 441

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

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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 (s 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 (s 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.442 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 his 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 has therefore 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 exchange443 acceptance is subject to a bill of lading being handed over and/or having been genuine, the effects of this conditionality are again determined by the law of the place of delivery of the 442

See also Dicey and Morris, n 425 above, 1812 ff. 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 443

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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. 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 the desired effect in that place (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 as to the timeframe for payment. See also, 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 USA. It appears that whether an acceptance can be imposed would in this approach not depend on the law of the residence of the acceptor 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 which accepts such endorsements under its own law like England. 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.

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The attitude in all these cases may be contrasted with the more traditional approach in conflicts 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 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, however. 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, 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.444 The second of the 1930 Geneva Conventions deals with certain aspects of conflicts of law concerning bills of exchange. The obligations of the drawee who has accepted are covered by the law of the place of payment (Art 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 (Art 3). Conflicts of law problems are difficult to resolve in all tripartite situations, as we saw in the case of agency and trusts: see chapter 1, 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 conflict 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.

444

See also Dicey and Morris, n 425 above, 1807.

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Uniform Treaty Law

Considerable differences developed in the details of 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, the Germans in the Allgemeine Deutsche Wechselordnung of 1848, the English in the Bills of Exchange Act of 1882, and the Americans 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 the Belgian and Dutch), 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 claim, therefore as an alternative to an assignment, which required the payee to give (or to have given) counter-value, whilst 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, whilst the Anglo-American group protected 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 law, and stamp duty aspects). Although common law countries participated in the deliberations, they ignored the results whilst a number of South American countries signed but did not ratify (except 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 allowed also certain deviations and reservations. Moreover, the incorporation legislation was differently interpreted. Nevertheless, the Conventions introduced a substantial measure of unification of the law in the civil law countries in the areas of bills of exchange and cheques 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:

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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.445 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 is likely to prevent 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 concerning bills of exchange follow completely from the general rules of the applicable law. 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. 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 I, 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 445 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, Boston, 1989) 243, with an Appendix B comparing the Geneva Convention with Art 3 UCC and the English Bills of Exchange Act 1882.

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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, like bills of lading, and negotiable instruments, which are documents of title concerning money, like bills of exchange and promissory notes, have 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 III, chapter 1, section 3.3.7. Yet the need physically to handle them is cumbersome, largely because of the need for them to travel to the person who is entitled to them. In the case of bills of lading in particular, there are also likely to be costly delays in the handling of the goods when, for example, they need to be checked physically before they can be handed over to the buyer, as in the case of documentary letters of credit, which are also discussed in greater detail in Vol. III, chapter 1, section 3.3.8ff. The consequence is that a buyer of goods may well receive the bill of lading (through the mail or otherwise) after the arrival of the goods 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 delays for the carrier also, 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 whilst the ship is held up. It may encourage neglect of the goods or even the handing over of the goods to the buyer without presentation of the bill of lading, although often in exchange for an indemnity. This may be understandable but it undermines the effective use of the bill 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. 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 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. They are mere receipts and only

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sometimes reclaiming instruments, but are not negotiable. They do not 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 to reclaim the goods. 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, the status of these sea waybills has been the subject of comprehensive legislation in 49 USCS sections 80101 ff (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 function proper 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. Nevertheless, banks do sometimes accept them for documentary credit purposes when 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 (Art 3.3) and the Hamburg Rules (Art 14), he must do so whenever the shipper (often but not always the seller or his agent) requests it. It renders 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 he 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). It 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 his 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. The bank will not then have any proprietary leverage against a buyer who has not yet put the bank into funds. If he already has, the buyer will obtain the sea waybill from his 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 whilst 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 ask indemnities 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.

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The problem of indemnities has become endemic and is particularly felt in the oil industry.446 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 have even been asked by the carriers from a seller (oil company) if arranging the transportation as the buyer may be less well known to the carriers. 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 remains in both cases still common: see also Volume III, chapter 1, section 3.3.7. Also here ways of electronic filing, registration and communication could 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 the 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 his 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, like altering ‘received for shipment’ to ‘shipped’ so as to convert a mere receipt into a document of title. Modern recording methods may allow here verification

446 See FL de May, ‘Bills of Lading Problems in the Oil Trade: Documentary Credit Aspects’ [1984] Journal of Natural Resources 197.

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possibilities and therefore added protection for participants. The same may apply to shares and bonds where still physical pieces of paper.447 The electronic systems that may increasingly be used in this connection are computer to computer 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 application in the interbank payments and money transfer circuit. A similar system is conceivable to create electronic bills of lading. Similar electronic bills of exchange are also possible. 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 is superseded by the more recent Comité Maritime International (CMI) proposals for a more truly electronic bill of lading to be discussed shortly 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 I, section 3.2.2. The main legal issues in electronic data transfer systems of this nature are: (a) the authenticity and evidentiary effect of signatures (upon loading and unloading) and documentation; (b) access by the most directly concerned parties and their successor (including their 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 who acquire the rights to the electronic document;

447 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] Lloyd’s Rep 515.

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(e) the identification of the time of electronically created proprietary rights and of charges in them, of particular importance in enforcement; (f) liability for faulty messages, communication failures and systems breakdown; (g) 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); (h) the confidentiality of the system; and (i) determination of the applicable proprietary law as the lex situs principle based on the location of the bill of lading loses its meaning. 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 CounterParties? 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 (like 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.448 An earlier experiment for bills of lading concerned a kind of book-entry 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, 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. An important key to success of any alternative electronic system will be 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. 448

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 Kortryk 2006, to be published later in 2007, discussing amongst others the seven points raised in the previous section in the context of electronic bills of exchange and electronic documents.

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The problem is to find the right way around the need to produce the bill, its signing and endorsement and handing over and therefore its physical aspects, which is becoming undesirable, as it is inefficient. The international community is receptive to the notion of electronic bills of lading, as shown in Article 14(3) of the Hamburg Rules, which refers to them but does not provide any suggestions or criteria. Many domestic COGSAs now allow contracts of carriage covered by a sea carriage document to be in the form of a data message as well. To progress, in 1990 the Comité Maritime International (CMI) developedRules for Electronic Bills of Lading. It allows 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 like the Hague Rules and 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 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 whilst 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, 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 an insufficient basis for its effectiveness. Transfer would in effect be through (a transnational) assignment of the instruction right, which could require additional formalities under applicable law. The acknowledgement by the carrier introduces here a uniform rule, 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 co-operation 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 the industry and its 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

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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 is not necessary, as they do not cover the substance of the transaction either. The Rules 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 is no provision on transferability of the underlying rights, however, which is an issue to be dealt with later. Until such time it seems that the Uncitral Rules have no special meaning for bills of lading and bills of exchange. In 1996 there followed a UNCITRAL Model Law on Electronic Commerce. Articles 16 and 17 are more in particular 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 (Art 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 they are in essence the result of a number of data messages, the legal status of which is no further explored. No proper, or at least legally reliable substitutes of 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 either. The International Chamber of Commerce 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 set for EDI by the UN (UN/Edifact) which particularly relate to the trade in goods and services and also covers 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

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laws.449 At the Centre there is a multilateral contract between participants governed by the Bolero Rule Book.450 The succession in rights and obligations is here by way of a form of novation that does not, however, entirely discharge predecessors whilst new holders carry on the obligations of the shipper in terms of disclosure (eg of dangerous substances) and timely unloading.451 The system452 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 consider themselves absolutely mandatory in the carriage of goods from and to the country of this domestic law. 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 in the way 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, UNCITRAL may have to provide a better transnational legal infrastructure even if its success in achieving treaty law is modest.453 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 III, chapter 1, sections 2.7.4 and 2.9.5. 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 449

See the information memorandum prepared by Bolero International Ltd: Bolero Bills of Lading under US Trade and Commercial Law, 8 November 1999. 450 This system is described by R Caplehorn in Walden and Edgar (eds), Crossborder Electronic Banking (2000) ch IV. 451 This follows the much criticised s 3 of the UK COGSA of 1992. 452 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. 453 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.

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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 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 might seems 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 bank to pay a foreign creditor which proved a lengthy process causing much payment delay 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 own 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 (electronic data interchange). 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 have 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 in the context of letters of credit and collection schemes, bills of exchange appear to remain more common, see Volume III, chapter 1, sections 3.3,7ff. Like 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 whilst their status under the international law merchant may be further undermined by 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. Here ‘@Global Trade’ may provide a new departure. It is an internet-based trade servicer that aims at enabling buyers and sellers to conduct commercial transactions in a secure, cost-effective and efficient environment whilst 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

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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 concept. 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 certainty and finality in delivery and payment. This is a major task, which requires a sophistication, imagination and international co-operative spirit that may not be presumed naturally to exist, not even between professionals in their dealings internationally amongst themselves.

Part III 3.1

Investment Securities

The Different Types of Shares and Bonds

3.1.1 Traditional Distinctions. Negotiable Instruments and Transferable Securities. Dematerialisation Investment securities are capital market instruments issued and used to raise capital in the capital markets. In Volume III, chapter 2, section 1.3.1, the nature of investment will be more fully discussed. The most common types are bonds and shares. Bonds are promissory notes of an issuer, which may be a company or a government or governmental agency and signify a form of lending/borrowing. They are the prime instruments of the debt market. Shares, on the other hand, are rather participation certificates denoting (some form of) ownership of the company issuing them. They are therefore more typically connected with the ownership and financing of corporations. The joint shareholders are mostly considered to own the company and their shares give them typically rights to (a) dividends, (b) voting in shareholders’ meetings, (c) any liquidation surplus, and (d) corporate information. If the company is organised as a limited liability company, they have only limited liability for the obligations of their company (only to the extent of their investment). The trade-off is that they do not have a direct say in its management. If they nevertheless involve themselves, they may have the limited liability lifted. This is an example of the lifting of the corporate veil, a risk inherent particularly in parent–subsidiary situations, or one-shareholder companies. Even banks, whilst interfering in daily management, may also take some risks (although no 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

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preferred at the same time (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 non-voting shareholders altogether. Bonds come also 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 paper is also called a money market instrument and often comes in the form of commercial paper (CPs), issued by commercial companies, and of certificates of deposit (CD’s), issued by banks. Medium-term paper may take the form of medium term notes (MTNs). Long-term paper may even take the form of a perpetual bond. They may also be subordinated and then approach shareholdings, although in a liquidation these bond holders will be just ahead of shareholders 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 like bonds convertible into shares at a certain striking price. There are also 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 concerns their liquidity, which is the facility to reduce them to money (through a sale) at any time. Investment securities that are intended to be traded were historically issued as negotiable capital market instruments. These are bearer or order instruments and as such documents incorporating title in the securities, which title was transferred with the document. Their trading normally took and often still takes place on regular stock exchanges, on which they would be quoted for this purpose, but this trading could often also be informal in the so-called over-the-counter or OTC markets and is for the more important issues now frequently conducted in the informal international (telephone) markets 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 III, chapter 2, 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 I, section 3.2.2. As just mentioned, investment securities as negotiable instruments could be to bearer or order, transferable respectively through handing over the document or through endorsement plus handing over. In common law countries there is no need for consideration. In fact, these structures are product of the markets and legally supported by the law merchant as we saw, see section 2.2.1 above. 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.

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The bearer type of shares and bonds was the common type 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 the USA (if endorsed in blank, they become bearer securities). Under the company laws of the various states of the USA (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. They could also be of the purely register type, like they are mostly also in England when negotiability is not implied, even though these shares are commonly still transferable but such a transfer depends on notification to and a change in a share register held at the company. 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 III, chapter 2, section 1.3.1. Mainly for regulatory purposes (including prospectus requirements in respect of public offerings), it no longer puts emphasis on negotiability per se but more generally on all forms of transfers in respect of publicly offered securities and may even cover contractual rights, likes 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 Vol III, ch 1, s 2.6.5) In the USA, Article 8 UCC, which presents perhaps the most important modern statutory instrument in this connection, deals with investment securities, not generally but only in terms of investment security holdings/custodial arrangements and security entitlements as we shall see, and was last updated in the Revision of 1994. Issuing activity is covered by state company statutes and for public issues 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. It 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 whilst creating a special transfer facility for these entitlements (only), see section 8–501 ff UCC,454 the nature and importance of which will be discussed shortly. Thus, in bearer form, securities proper transfer through mere delivery (s 8– 301(a)(1)). In the registered security certificate form, the owner is indicated on the

454 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 un der applicable state law.

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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 achieved by the company having to accept the transfer instructions from the registered owner. Where they exist, these registers are then 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 other type of share till but most now also allow registered shares fully dematerialised. These dematerialised securities thus transfer only through registration of the new holder in the company’s register of which normally notice is sent in the same way the investor.455 Securities of this (registered) type are registered in books maintained for that purpose by or on behalf of the issuer and there may be (except in the UK) no document or certificate at all.456 They are then fully uncertificated or dematerialised.457

455 The fact that securities may be dematerialised and thereby become intangible does not rule out that they are owned, albeit not in a physical sense. Just as one can own a claim, one can own the rights inherent in a share even if it is not physical. The same goes for a registered bond. In other words, the holder of a registered (and not a physical) bond has a different position compared to the owner of a monetary claim that is not embodied in a security or other type of negotiable instrument (like a bill of exchange or promissory note), even if there is no longer a physical element. Although the claimant with a monetary claim (or any other) also has a proprietary interest in his claim (see s 1.1.2 above) and the transfer will in either case (monetary claim or dematerialised security) be a kind of assignment, the manner will be different. So will be the position of bona fide purchasers and of pledgees or other security interest holders in dematerialised securities. That is indicative of a different type of proprietary right. The conclusion should therefore be avoided that the registered investment security owner has only a personal claim on the register. That is a fallacy. He is a true share or bond holder. As we shall see in the case of securities entitlements there is equally a kind of proprietary right created which is more than a purely contractual right against the custodian. 456 Dematerialised securities should not be confused with fungible securities. Fungibility is connected with custodial arrangements, not with issuers. There is a parallel to the extent that in neither case the investor is entitled to specific 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 not only be determined in numbers of shares but also in register numbers. It allows them to be part of a custody portfolio (on which entitlements might be based as we shall see) and book-entry systems. 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. 457 In the US, this type of security may also 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 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).

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3.1.2 The Notions of Immobilisation, Bookentry 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 first 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 choose 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. If there is only one it is also referred to as the central securities depository (CSD).458 A depository holding securities in this manner (as owner) leads to so-called immobilisation of the underlying investment securities, which themselves need not be dematerialised.459 Second, investors will hold security entitlements460 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. In practice, the system will 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

458 Not all securities are necessarily so held and especially units or shares in collective investment schemes commonly continue to be held directly, although there may in some countries now also be regulatory requirements in this respect. 459 It 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. 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. 460 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.

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ownership rights. It poses the important question of the legal nature of the bookentry entitlement, especially in terms of the rights of end-investors in the underlying securities deposited by the issuers with the (central) depositories. The idea is that clients or end-investors hold entitlements against their immediate intermediary only, who in turn hold 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.461 In this 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), who has an entitlement against a Dutch broker (say ABN/Amro), who has an entitlement against a Dutch (central) depository. It may also be that both BNP and ABN have a securities and bank account at Euroclear in Brussels where the positions are settled whilst 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, who 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, who have them with the depository (either directly or via sub-custodians 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. 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, an investor has a proprietary right against his broker under his securities account. 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 his own

461 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 depositary 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 reaches the end-investors.

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(at least to the extent that the entitlement corresponds to its clients’ investments and not his own investments). He may not pledge these entitlements either. The right of each entitlement holder is often understood (in civil law)462 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 462 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 is hardly convincing. The key text is the Depotgesetz (DepG) which has a history going back to 1937 and which allows for the holding of fungible securities (Sammelverwarung), 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. Dematerialisation through global notes (Sammelurkunde) has in the meantime indeed 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. S 1 DepG makes clear that this statute does not only apply 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 fuer Wertpapiergeschaefte) normally used by all intermediaries are relevant here 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 a-typical 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). This holdership is based on an obligatory right under the custody agreement with sub-custodians. The end-investor has no more than a mere contractual relationship with his broker or intermediary but can in this system of contractual rights 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 über die Behandlung von Anleihen des Deutschen Reichs)) and 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

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the legal owner of the shares, but in the nature of a trustee. This is the better approach as we shall see as compartmentalisation really means that there are no rights in underlying pools. Civil law introduces here in truth a beneficial ownership interest in defiance of its closed system of proprietary rights, see Volume III, chapter 1, 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 exerted against the previous tier. This leads to pro rata beneficial ownership right or some similar sui generis pooled proprietary or co-ownership right against the intermediary in his bankruptcy, that at most suggest an indirect right in the underlying pools. It is in this connection not useful to speak of a personal right against the intermediary to a co-ownership or beneficial ownership right in his 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.463 In the US, Article 8 UCC has a general regime and decides so at all levels of entitlement holdings (s 8–508 UCC). The interest of investors is not truly defined in this connection and neither is therefore the exact nature of their proprietary right; rather a number of consequences are identified.464 A joint beneficial ownership under a constructive trust is probably also the English approach, also at all levels.465 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 pass-through 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 must therefore be deemed 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 his clients. 463

S 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’. 464 It is an approach also used in Art 2A UCC in respect of the rights of equipment lessees and a consequence of the American attitude that is not interested in abstract or systematically interconnected ownership notions in chattels and intangible assets, to which in sales Art 2 UCC also testifies. 465 See R Goode, Legal Problems of Credit and Security, 3rd edn (2003) 6–08, see also J Benjamin, Interests in Securities (2000).

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absence of statutory support, in England there is still a more explicit reliance on the trust concept and the fiduciary relationship between legal owner (depository) and equitable owner or beneficiary (the entitlement holder),466 but it is easy to see that the statutory approach of Article 8 UCC in the US is in reality no different. It is possible to see here a double trust structure in the sense 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 has therefore a beneficial right in respect of his intermediary) in what was itself never more 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. In common law terminology, it may be best to say that what is a beneficial interest in the one tier is a legal interest in the next one.467 But in truth, the true nature of the proprietary rights of the end-investors remains remarkably obscure,468 certainly if one considers the economic interests here at stake and the legal risks involved for end-investors.469

466

It may be illustrative in this connection to compare the right of a security entitlement holder to 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 his 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 manager of the fund. In that respect, the situation is similar to that of a securities entitlement holder vis-a-vis his intermediary. 467 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) 223 ff. 468 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, however, that the book-entry is valid without back up, which means that the book 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). 469 Most end nvestors 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 if both in proprietary terms is quite different, it does not solve the riddle what investors truly have. It is surprising how little attention this issue got when the paper crisis demanded some kind of solution.

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At least there follows some special regime for investors in the bankruptcy of their immediate intermediary. It shows that there are more than purely contractual rights. This is different from bank accounts, and the investor may in such cases shift his entitlement to another broker with the duty of the bankruptcy trustee to shift the back-up entitlement also. 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 his 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 important issues of segregation and tracing which may be indeed easier handled or 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 section 8–501 ff UCC. It should 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 whilst 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 have no proper right against the issuer or depositary 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 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),470 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

470 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, Art 8–503(b), the characterisation of their interest as common or joint property (as is usual in civil law) is less satisfactory.

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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.471 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 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). 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 that the securities could as such be identified per client. 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-a-vis him and credit his security account accordingly. 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. In practice, in the case of a purchase, the buyer is credited immediately (and unconditionally) by his 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. 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 his broker) will never know who the seller (or his broker) was, unlike when payments are made. In that case, the payor and payee are directly connected by way of credit transfers through the system: see Volume III, chapter 1, section 3.1.5.. Here the adjustments are made as part of the asset-maintenance obligations of intermediaries,

471 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 for more than absolutely necessary to achieve this limited objective.

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who will either increase or decrease their back-up holdings as a result of the transactions of their clients. The intermediary subsequently acts as a kind of trustee of the back-up for the investor as we saw. 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 whilst only other brokers are their counterparties either acting for themselves or customers. The resulting adjustments in entitlements will thus happen between brokers. 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 whilst 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 intermediaries, who, whilst 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 will not be liable in this connection for inappropriate transfers (s 8–115 UCC). It is an important elaboration of the notions of abstraction or independence better known from letters of credit and negotiable instruments, there 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 can operate effectively without such a rule. Systems would become paralysed if they had to assume the reversibility of instructions and transfers on this or other grounds (except between two intermediaries if a mistake was made and the transfer has not yet involved others in the ‘pipeline’ or perhaps if there was clear fraud in the instructions when the ultimate transfer to the buyer would have to be prevented or any credit to him be reversed). This raises 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 III, chapter 1, Part IV and for finality, section 4.1.2, taking into account, however, that in the case of securities the intermediary that operates a book-entry system is not the owner of the underlying rights and cannot dispose of them as if they were his own. As just mentioned, he is at most a kind of trustee and cannot use the underlying securities for his own benefit (or

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pledge them) as a bank may use depositors’ money for its own account since it has become the owner of the deposited money. In this connection, an entitlement order is an instruction to transfer an investment security given by the client to its intermediary (s 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 that 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 but only to the extent specifically defined. To promote finality it is as we saw enhanced by: (a) deprecating or objectivising notions of capacity and intent; (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 like in payments the sui generis nature of the transfer leaves room for these fundamental notions that enhance the finality principle, which is key for the transfer of commoditised instruments of all sorts and their liquidity. In this aspect of finality, there is thus a clear similarity with bank accounts and payment systems, demonstrated also by the absence of bailment in either case, even if in the case of securities entitlements that does not lead to the intermediaries’ ownership of the rights in the underlying assets.472 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 chapter 3, section 1.1.5473. This does not happen in book-entry systems.

472

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 usual 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. 473 See for a clear expose 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

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In such systems there remains an important risk for the end-investor in so far that even though the intermediary must retain sufficient back-up entitlement, he may not have done so in which case the pool and the pro rata shares of investors are diluted. This may also happen through the emergence of (bona fide) purchasers from a fraudulent intermediary who sells more entitlements than he has a back-up for and ignores his asset-maintenance obligation. That is the risk of clients whilst choosing their broker. The immediate consequence 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.

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 his investments instantly. This was facilitated by regular securities exchanges, which would centralise liquidity in respect of the issues they listed. Negotiable instruments themselves denote a special, simplified form of transfer 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 instruments unless marked thereon. If so marked, these instruments would most likely no longer be negotiable instruments in the traditional sense. This status as negotiable instruments derived from their legal roots in the old law merchant. 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 euro-market, could, on the other hand, enhance the status of investment securities as negotiable instruments in the traditional sense. This proved especially relevant for eurobonds as bearer securities. Because many conditions could be printed on them in connection with payment 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.

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of interest and principal, these bonds did often not qualify under local laws as bearer instruments, for example, because no sum certain was due under them, not therefore either under those laws that were often made explicitly applicable to them by the issuer (often English or New York law). In such cases, international market practices were likely to prevail instead and imposed their own proprietary regime and notion of negotiability, see also Volume I, 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 euro-market. At least that is posited in this book. It suggests a transnational notion of transferability and transferee protection, even if 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 has served to destroy the transnational character of eurobonds and their transfer and (like 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. It is true, as we saw in the previous section, that under purely domestic laws, register(ed) shares do not have the status of negotiable instruments (unless certified securities in the USA) and are therefore primarily domestic instruments. This allows limitations on their transferability in the Memorandum or Articles of Association, by domestic company law, or local (stock exchange) regulation. In Continental Europe, the more international bearer securities variety was normal but only in publicly quoted companies, therefore not in private companies, which are companies typically not quoted on stock exchanges, like 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 whilst commonly submitting them to first-refusal rights of other shareholders or to company approval. They never were negotiable instruments. Dematerialised investment securities have thus long existed in these situations, but the difference with the modern dematerialised registered shares is that they were never meant freely to trade whilst their issuance was not directed to the public either. Registered (non-certificated) shares, even if targeted to the public and made tradable, were thus always more domestic in nature and were therefore more readily subject to domestic transfer restrictions. They are certainly less easy to handle in an international context when quoted on foreign exchanges or traded in internationalised informal telephone exchanges as they are subject to domestic registration requirements which may, as a minimum, raise formal, stylistic and linguistic problems in a transfer.474

474 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.

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As we saw, transfer of registered (non-certificated) shares, even if not restricted, is unlikely to be through a simple handing over of a document and endorsement. Legally, a type of assignment may be required, which may, besides registration as a constitutive requirement of such an assignment under local law, further depend on other formalities like specific documentation. It is on the whole not therefore useful to develop the assignment analogy 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. When transferability in dematerialised securities is encouraged, local formalities in this respect may all the same prove to be particularly destructive of transfers if the securities are internationally traded on foreign exchanges or in the international telephone markets. In the first case, the company concerned may seek 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. The issuing company may favour either approach if it encourages its shares to be traded elsewhere. 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. Yet, on the whole, if a company seeks to complicate or limit the transfer of its shares under local law through a registration system, it better stays at home. This is indeed the normal situation for shares in private companies. However, especially if international capital-raising or trading is favoured in the formal foreign or informal international markets, the need is for a form of transnationalisation of the ownership transfer practices at least in respect of registered (non-certificated) shares. Sooner or later, there will be a drive for uniformity in those markets, especially if they are themselves internationalised as the euro-market is. In any event, it is likely that the practices in this respect will ultimately be lifted beyond the legal patterns and limitations of transfer of the lex societatis and incorporation documents. If there are book-entry entitlements, security transfers acquire another form and become then much more akin to payment through simply crediting and debiting security accounts (important remaining differences were already highlighted in the previous sections). The sui generis transfer method is here even more obvious.475 For international transfers, the use of book-entry systems may prove most useful and provide an opportunity to facilitate transfer of local securities that otherwise would be difficult to sell, as did earlier the introduction of depositary receipts: see section 3.1.7 below. It could lift the transfer even of register shares or shares in private companies

475 Like 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 whilst there may also be a right of first refusal for existing shareholders, as we have seen).

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beyond the domestic laws and limitations, all the more so therefore if these bookentry systems are themselves transnationalised. One could also say that, like 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, we saw this happen earlier with the eurobond as (materialised) bearer security of a transnationalised type. It is not a new phenomenon therefore and should be considered reinforced now bookentry systems are becoming common in international markets and may also happen when domestic shares are traded internationally in the form of book-entry entitlements. This would be a most important development, which may impose itself further with the increase in international trading. 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) not only promotes their transfer and liquidity internationally but also the versatility in the type of other interests that may subsequently be created in them, like 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 transnationalised independently and which is in any event separated from the underlying securities and not per se covered by their applicable laws. Again, through a book-entry system, these domestic securities may become indirectly transnationalised. In any event, 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), and 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 (like repos, conditional transfers, pledges, and the like), domestic laws so found applicable may not contain much guidance and international market practices may start here to prevail, 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 is the ultimate opportunity to provide certainty and finality internationally. Issuers if not actively promoting this transnationalisation, will ultimately have to accept the results which are likely to be dictated by the interests of the international

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investors and not by those of the issuers or their legal systems. Through the tiering inherent in book-entry systems, in reality (if not also legally), the nature and status of domestic securities may thus be transformed indirectly and the trading therein at the same time. That can be seen as the risk an issuer takes whilst encouraging international trading in its investment securities, whether through special share registers abroad or through depository arrangement 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 them out for this reason. As risk selection, not risk elimination, is here likely to be the issue, 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. That is 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). It concerns here the depository arrangements or the 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 will either: (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 bank account at the same time); (b) match buy- and sell-orders amongst his clients in the same securities (internalisation); or (c) go into the market to purchase the investments for the client. In the latter case they are likely to come to him after a process of clearing and settlement as a market facility under which mutual claims to securities are being set-off. 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

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book-entry system, it is our broker who simply credits our securities account and debits our cash account at the prevailing market price. For us, that is the end. Even if the broker goes into the market for us, he will normally obtain the investment securities anonymously through the matching 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. If the broker credits his client, he may be short himself and would then have to wait for more opposing orders of his other clients or go into the market for himself. In a book-entry facility, he would do so as part of his asset maintenance obligation to balance the system and make sure that his clients entitlements against him are balanced by his own entitlements against the system. 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 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’. The issue arises broadly in three different ways: (a) even before entitlement systems became common, there was always the question who owns the investment held by a broker for his clients upon the broker’s bankruptcy, in which respect a distinction could usefully be made between situations in which the insolvent broker held (i) negotiable bearer instruments directly for his client but in his own name and possession, or (ii) had them pooled in client accounts with a third party custodian. The further question then was (b) whether this situation could be affected by operating a book-entry system. The situation could be additionally complicated (c) in respect of a broker who went bankrupt whilst transfers remained unexecuted. Other problems could derive in this connection from (d) the applicable bankruptcy law itself and its effect 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. In the first situation (under (a)) there are problems of ownership and commingling to be considered, in the second and third case (under (b) and (c)), there is first the question of what happens if the back-up entitlement is already credited but not yet the end-investor and more generally problems of ownership and its acquisition through an agent. In the fourth case (under (d)), there is the issue of finality. The problem under (c)476 can be broken down further in the question of: (i) the ownership of the securities (or securities entitlements), the delivery of which was already in the pipeline and coming to the bankrupt broker either as a netted number in a clearing system or more directly, which raises the question already discussed above of the rights of the end-investor in these back-entitlements; (ii) the ownership 476 The Dutch Supreme Court in a decision of 23 Sept 1994 [1996] NJ 461 characterised that kind of claim to delivery as no more than a personal right even in investment securities. The clients do not therefore under present Dutch law automatically stand in the place of their bankrupt broker vis-a-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.

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of the rights to delivery of undelivered securities (or securities entitlements) upon a purchase, which was executed but the settlement of which was not yet in the pipeline or clearing or of any moneys owed upon a sale; and (iii) the approach in book-entry systems where securities accounts were immediately credited but still subject to an asset maintenance duty which had not yet been fulfilled. 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) a number of special so-called finality issues, which have to do with the power of the insolvent intermediary still to give transfer and settlement instructions, his (continued) functioning in the relevant clearing and settlement facilities, the effect on his participation in the netting, and any retroactivity of the bankruptcy in this regard till 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 is 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 liquidity providing function 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 technique more in particular Volume III, chapter 1, section 4.2.477 As just mentioned, in a bankruptcy of the broker holding securities for his clients, a distinction should first be made whether the broker holds these assets physically (in the case of negotiable instruments) or is registered as owner for them (in the case of registered or dematerialised securities) 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, therefore by the printed numbers in the case of bearer instruments or by sufficient identification in the register entry or by them 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

477 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 I, s 1.1.5.

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indirect agency in civil law. Especially if they are in a client account, it may be that these securities are pooled with others. This may then lead to forms of co-ownership. The assumption is here always that the investments can be segregated from those of the intermediary. That may be particularly difficult if they are of the same sort and fungible when ownership might be deemed lost, perforce upon commingling, so that the broker may result as the true owner, at least if there is no sufficient segregation with his own assets of the same sort. Hence the serious problem of commingling and (lack of) segregation in this type of situation. As just mentioned, one way around this is the holding of the securities in an omnibus client account held by the broker (even in his own name but marked as client account) with a third-party custodian (in the case of physical securities) assuming that under applicable law a kind of trust account may here be construed. It reinforces segregation notions and avoids commingling with the broker’s other assets. Otherwise (therefore in the case of commingling and lack of segregation) tracking becomes the issue, a concept much less developed in civil law (where one may have to construe some form of co-ownership with the broker instead). It is also a serious issue when client moneys (even in client accounts) are reinvested by the intermediary in his own name. For the indicated reasons, 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 an intermediary 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 a liquidation proceeds of their bankrupt brokers, 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. It would seem inappropriate as long as investors can still identify how many securities they contributed assuming the totals add up. It follows that altogether trust notions and beneficial ownership are the most appropriate characterisations for the investors’ rights. Otherwise, there must still be some reliance on co-ownership notions, an approach more likely to be tried in civil law countries but at least in the case of book-entry systems less appropriate since, because of the tiering and compartmentalisation, investors do not truly have a right in the assets held in the prior tier. In any event, these two proprietary approaches (co-ownership and trust) should be well distinguished.478 Civil law is often condemned to the former in the absence of a trust concept. Common law has here the advantage and provides traditionally the better tools of protection.479-entry systems are here a further important step in the

478 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). 479 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.

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direction of investors’ protection. In this context, the notion of fungibility, segregation and pooling of assets is further developed, also statutorily in civil law countries, and the rights of the investors in the underlying investment securities are more fundamentally addressed. The question of beneficial ownership and co-ownership rights of entitlement holders then arises more directly leading to the possibility to move these rights (as book-entry credits) simply to other brokers after a bankruptcy of the first one in the ordinary manner of shifting accounts. Indeed in modern book-entry systems that right is now institutionalised, and segregation is to that extent presumed. It may, however, still leave the issue of pending transactions, either in or not yet in the settlement pipeline, that is short of an immediate credit of the client account. It would appear that when they result in a credit in the security account of the bankrupt broker, therefore as back-up entitlement, the investor will be protected as off that moment whilst an intervening bankruptcy of the intermediary is no longer allowed to interfere with the clearing and settlement itself. That at least must be seen as the significance of the Settlement Finality Directive in the EU. 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 set-off rights in client assets. It is in truth a question of unjust enrichment. Notions of segregation or pooled ownership and constructive trust are here of great importance even if the latter remain underdeveloped in many countries of the civil law and may lead, even in common law, to uncertainties, especially where client and broker assets are practically commingled in such a way that they can no longer be clearly distinguished, especially likely where proceeds (dividends or coupons) have been reinvested in the broker’s own name. A liberal tracing facility, again in common law closely connected to the unjust enrichment action and constructive trusts, is here one answer. As already mentioned, the fungible nature of investment securities themselves may still be another complicating factor and is itself often seen as another bar to clear ownership rights of clients. The special risk and complication of the intermediary or broker going bankrupt whilst the transaction between client (principal) and the third party is not completed may be easier handled in a system of security entitlements and be simplified in that an intermediary will normally credit and debit client accounts regardless of whether securities have moved through the system. In fact, as already mentioned in the previous section above, that may become increasingly exceptional. Balancing is achieved through adjustments of holdings through the entire system later, mostly under asset maintenance obligations of custodians/intermediaries (book-entry holders). Ultimately, the question would appear to be what the back-up is in terms of a bankrupt broker’s own entitlement in the prior tier. It has already been mentioned that the fact that normally a broker credits the security account of his client immediately, may result in the broker being short (if he has not himself enough entitlements). This creates further risks for the investors. The intermediary/custodian is obliged in such cases to buy entitlements for his own account under his asset maintenance obligation. Not doing so makes the back-up pool of assets smaller than the sum total of the entitlements.

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This is serious mismanagement (if not fraud or other misconduct) of the intermediary who is in charge (but is normally contractually released from any liability in this connection). The result is that in a bankruptcy of the intermediary/custodian the entitlement holders incur an additional risk because there may not be sufficient backup entitlements. Indeed the broker might have been tempted to sell more entitlements than he has to obtain extra funding to stave of the bankruptcy. Upon a bankruptcy of the intermediary any mismanagement in respect of asset maintenance duties may deprive investors pro rata of a part of their investment and any dividends not yet paid out will also be curtailed, pro rata. That is the risk a client takes whilst choosing an intermediary. Apart from these important ownership, settlement and clearing risks when intermediaries are or become insolvent, another risk for investors is in this connection that intermediaries have not collected and transferred to them timely any distribution on the investment securities, did not (timely) follow their instructions, for example to obtain and deliver the underlying security certificates (if a pass-through right still exists in a book-entry system), have not timely made the necessary sales (or purchases) or create the required security interests in respect of his 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. 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. In this connection, there is another closely related risk, which derives from order mistakes. It is therefore important that buy and sell orders can be immediately matched so that any mistakes or misunderstandings as regards number and class of investment securities are resolved promptly and the necessary corrections made, and that the deal does not close before that is done. The second risk is that, unknown to the buyer, the transferred securities or entitlements did not legally belong to the intermediary because of defects in his acquisition or because they were encumbered. This affects therefore the legal status of the back-up entitlements and the question then is whether a bona fide purchaser of a security or security entitlement is protected. Under modern law, it is normally established that the intermediary may not encumber his own entitlements that back up those of his clients. Yet again if he does, there may be a problem. Market practices may have something to say in this regard and protect the bona fide purchaser. It is an issue nevertheless subject to some doubt.

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Modern Clearing and Settlement Systems. Their Internationalisation

Technically, clearing and settlement organisations operate on a membership or participants’ basis subject to a membership agreement or general conditions.480 In the case of a transfer, the modern clearing systems themselves may guard against default by the broker, of which the central counterparty (CCP) technique is the more advanced.481 It implies a guarantee of the operation of the system by a counterparty, who takes over all rights and obligations from the participants through a kind of novation and nets-out all mature obligations in terms of security transfers and payments. 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. Members are the

480

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 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 that involves in principle 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 each participant. That is the system of settlement through Euroclear and Clearstream and most modern payment systems: see for investment securities Vol III, ch 1, s 4.1.4 and for payments Vol. III, ch.1, s.3.1.6. (c) a central counterparty (CCP) system allows all transactions to be conducted with the same counterparty through back-to-back transactions, whilst 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 end-users who have matching trades, the exchange becomes technically the buyer to any potential seller and the seller to any potential buyer, see Vol III, ch 1, s 4.1.4. 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 practiced, 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. 481 See for Clearing also HF Minnerop. ‘Clearing Arrangement’ (2003) 58 The Business Lawyer 197.

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established underwriters, brokers and traders in the euromarket.482 In addition to their general conditions for membership,483 these organisations have developed 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).484 Indeed, by introducing the book-entry system, these organisations did away substantially 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 a domestic legal regime, respectively that of Belgium and Luxembourg,485 the manner of their operation in the euromarket, the functioning of their book-entry system,486 the rights in the pools,487 the manner of clearing, settlement and netting, the repo business in, and manners 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 to the practices of the euro-market and should as such be considered transnationalised. This was mentioned in the previous section: see further Volume I, 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.

482 See for a description of them, R M Goode, ‘The Nature and Transfer of Rights in Dematerialised and Immobilised Securities’ in F Oditah (ed), The Future for the Global Securities Market (1996) 107. 483 ‘The Terms and Conditions Governing Use of Euroclear and the Operating Procedures of the Euroclear System’. 484 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 Cedel. 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. 485 See Belgian Royal Decree No 62 of 1967 (as amended) and the Grand-Ducal Decree of 1971 (as amended). 486 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. 487 Technically, the Belgian Decree backing up the Euroclear system (see n 485 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.

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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 trans-national market practices. At least in the euro-market, it allows a system of transfer, bona fide purchaser protection, repos and pledges to develop in respect of euro-securities regardless of the laws of these two countries and sudden changes therein, for example through adverse case law (like the 1996 Tilman case in Belgium, see the next section).488 The result is a much less legally risky and also much more predictable and cost effective system, although, as already noted, amongst legal scholars much lip service is still paid to private international law notion 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 was proving increasingly cumbersome, because of the great volume of transactions that each time involved a great number of physical (bearer) certificates. It was one of the reasons for the creation of Euroclear and

488

A shock resulted in this connection from the decision of the Belgian Supreme Court of 17 October 1996 (Sart-Tilman) [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. Belgium law at most applies residually. That 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 fund raising 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 Cedel), s 3.2.2 below.

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Clearstream (Cedel) as centralised custodial, clearing and settlement institutions through which order verification and matching, payment and delivery were to be directed. As we saw, 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 (in 1977). 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. Much later it also proved the wrong environment for electronic trading. 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 USA, changes to Article 8 UCC in 1977 (s 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. In the event, this statutory initiative did not succeed but an alternative practitioners’ approach developed in the USA 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. 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 as we saw 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 USA, the Depositary Trust Company was likely to hold substantially all the shares of an issuer forever 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 USA) 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)489 and was for eurobonds already introduced 489 In Germany under the Depotgesetz and in the Netherlands under the Wet Giraal Effectenverkeer (Wge).

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earlier by Euroclear and Clearstream (formerly Cedel).490 The new 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 dematerialised way. 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 end-investors 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 saw, 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. In the depository tier, there is an unchanged owner of the corporate shares and bonds in as far as the company is concerned. All income flows and information supplies are directed by the issuer to the depository, who deals with its 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 on a distinction between investment securities held directly by share- or bondholders 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 amongst their assets securities indirectly owned by their clients through a book-entry system. Again dematerialisation is here less important than the 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 end-investors) 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 490 See also RD Guynn, ‘Modernizing Securities Ownership, Transfer and Pledging Laws’ (International Bar Association, 1996) section on Business Law.

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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-a-vis the depository institutions which cater for them as members, whilst their clients’ entitlement will only be marked in the brokers’ own books. Pooling results therefore at different levels. The nature of the entitlements and their protection will be more fully discussed in the next section. 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. As already mentioned before, 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 transferable. 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 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 its 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. They may themselves become subject to immobilised depository and book-entry systems at the DR level. In these DR systems, there may also still be a facility to receive the underlying shares (the ‘pass through’ right). 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. The limitations on the pass through right resulted in Europe often from schemes organised by a company to prevent an unfriendly take-over of the underlying shares. This is still a common protection method in the Netherlands, although even there conversion by DR holders cannot be entirely excluded.

3.2

The Internationalisation 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 was already noted and might, from a legal point of view, be summarised as follows:

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(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, whilst still a bearer instrument, was undeniably subject to the practices of the international euromarket: see Volume I, 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 IPMA and ISMA, since 2005 merged into ICMA, which are in the first instance explained and enforced by market practitioners on the basis of their transnational practices, see Volume I, 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 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 an own transnationalised rule for the protection of bona fide purchasers; (d) subsequently, there emerged in that market also 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,491 all being determined and further developed by (euro-)market practices;492

491 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] JIBL 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 will 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 cases 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 his Articles of Association or his lex societatis. It is clear that one must distinguish here between the various layers at which entitlements and pass-through rights work. 492 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,

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(e) these practices prevailed 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; (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 in particular because domestic laws are often totally 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 right or proprietary rights sui generis, and the effects of 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 like repos and security interest 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 private arrangements with their custodians or other intermediaries that operate book-entry systems; (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 third-party effect, which is the essence of proprietary rights, international book-entry entitlements must be supported by market practices, therefore by usage or custom, 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 bond market in the world. The lack of

relevant especially for repos. See for the distinction between ownership and security-based funding in this connection Vol III, ch 1, s 2.1. See for the EU Financial Collateral Directive, s 3.2.4 below.

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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. Flexible law is for international markets and their participants always preferable to wrong or underdeveloped mandatory laws—contrary to what is often said by these same practitioners—and 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. The internationalisation of the security markets has also moved in the direction of covering (domestic) shares that are substantially internationally traded. Once expressed in securities entitlements, this is greatly facilitated as they have their own simplified transfer method as we saw.493 It may even lead to foreign proprietary interests, like pledges and similar security interests or repos created in them subject to the laws and practices of the countries of the next layer.494 It would be better still to accept the transnationalisation of such interests at least to the extent these interests are supposed to operate transnational. Indeed transnationalisation of the international flows in securities and of the trading facility in them 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. Issuers encouraging these securities to be traded through internationalised book-entry systems enhance that development. Naturally, the question arises as to what all this may mean in the bankruptcy of one of the participants under the applicable bankruptcy laws. How do these transnationalised rights fit, especially under bankruptcy laws that remain 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 whilst in the bankrupt estate there are entitlements against a higher domestic (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 entitlement higher up in the chain of

493

Immobilisation may be less complete for shares if still largely traded and settled through domestic stock exchanges and settlement agencies. These may practice 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. 494 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 USA and some other countries especially in respect of nonpossessory 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.

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entitlements or (more likely) may transfer their accounts to another broker with the corresponding adjustments of the back-up entitlements of the bankrupt broker; 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 outside the bankruptcy jurisdiction, in which respect there may be a further difference when the end-investors are also foreign; 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, whilst (iii) the broker himself may have been declared bankrupt being outside the bankruptcy jurisdiction, becomes 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; the 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;495 in the US there is a favourable (unilateral) regime in the form of the new Chapter XV of the US Bankruptcy Code (2005); even then, the foreign bankruptcy measure may not affect the legal (proprietary) rights and practices in the recognising Member State without an adjustment process; 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 precondition for any extraterritorially and its recognition elsewhere;496 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

495 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, 1Dalhuisen on International Insolvency and Bankruptcy (1986) 3–162, which might be relevant to Euroclear if its book-entry system were considered Belgian. 496 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-a-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.

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practices of distribution of entitlements within Euroclear and the euromarkets, not therefore pursuant to Belgian bankruptcy legislation if different; this would be very much clearer where there still is a pass-through right; 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) whilst such third parties/ interest holders may indeed become the entitlement holders upon default of the original one; 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 rights elsewhere (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; 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, whilst (iii) a third uncertainty results from the lack of transnational status of such interests themselves; 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 book-entry holder or the entitlement holder), 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.

The transnationalisation of investment security transactions along the above lines is in full swing and is a natural sequel to the globalisation of the capital markets in which domestic transfer restrictions and impediments are most quickly felt to be excessive and outmoded. In this evolution, the 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 must here become increasingly accommodating of transnational practices and risk management facilities. 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 be usefully repeated. It has become quite normal for, for example, a French end-investor who buys Dutch government bonds to have an entitlement against its French broker (say BNP), who has a back-up entitlement against a Dutch broker (say ABN/Amro),

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who has in turn an entitlement against a Dutch depository. It may also true that both BNP and ABN have a securities and bank account at Euroclear in Brussels, where the positions may be settled, whilst 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, who 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 it would be better if these entitlements were treated uniformly. Globalisation offers a great opportunity 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.497 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 other domestic book-entry systems in other countries, for example, for foreign shares traded on the exchanges of those countries; however, traditional conflicts of laws are likely to arise in such situations. (b) They may also be relevant for international book-entry systems such as Euroclear and Clearstream; if the latter holds (directly or indirectly) an 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

497 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 Cross-Border 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.

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domestic systems hold accounts with internationalised systems, they should on the other hand conform to international practices.498 (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) Transnationalisation 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 in other countries, any remaining pass through rights through tiers in other countries, the prohibition on the pledging of back-up entitlements and the issue of rehypothication, 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.499

3.2.2 Law Applicable to Transactions in Investment Securities of the Book-entry Type 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.500 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 clearly internationalised and deal with international products. This is clearly not the approach of this book, which seeks a higher quality form of certainty and is more comfortable with transnationalition serving the international flows as a consequence of globalisation. Nevertheless the more conventional approaches cannot yet be ignored.

498

On the other hand, in the case of domestic register securities it was already 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, limited proprietary rights that can be created in them and eventually also pass-through rights whilst 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. 499 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. 500 See eg H Kronke, ‘Capital Markets and Conflict of Laws’ 286 Receuil des Cours (Hague Academy of International Law, 2000) 318 and earlier RM Goode, ‘The Nature and Transfer of Rights in Dematerialised and Immobilised Securities’ in F Oditah (ed), The Future for Global Securities Markets (1996) 107. See also JH Sommer, ‘A Law of Financial Accounts: Modern Payment and Securities Transfer Law’ (1998) 53 The Business Lawyer 1181, 1206.

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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 book-entry system, or the law chosen by the parties. All have their defenders. The differences in view 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, but local law may remain relevant for domestic end-investors and, in the approach of this book, constitutes in any event still the lowest ranking of rules within the lex mercatoria, which will be summarised in the next section. Here these five possible conflict approaches and their variants will be briefly analysed: (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. Traditionally, it has recommended itself in respect of negotiable instruments like bearer securities that are treated as chattels, but presents problems when they move crossborder.501 It does not exclude the investment securities existing separately, for example as bearer instruments, attracting their own lex situs. Indeed, in the case of Euroclear and Clearstream being depositories, there is usually 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 then the natural rule also for immobilised securities and would operate in the place of their immobilisation, so normally at the place of the depositories. The disparity this may create in the law applicable to the different pools of securities at the level of an international book-entry system may make such a system based on the lex situs of the underlying securities unworkable.502 For book-entries proper as intangible entitlements, the lex situs separated from the underlying securities would in any event appear to hold no 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 if there are tiers in different countries. So the lex situs idea would only work well if all tiers were in the same location as the depositories whilst 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;

501 Indeed, the lex situs has long been the preferred conflict 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. For chattels, however, the complication of their movement presents a problem, which 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 1.8.1 above). They would also arise when negotiable instruments are traded internationally. For assets that constantly move crossborder, the 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. 502 See for this objection also Goode, n 423 above, 134, and J Benjamin, ‘Immobilised Securities: Where are They?’ [1996] JIBFL 85.

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(c) The lex societatis or the law of the issuer is a variation on the lex situs, feasible more in particular 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 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 (but there could be several in different countries); (d) 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. This approach is sometimes referred to as the paper-based approach even though there may not 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 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 or register; (e) To protect book-entry systems more particularly, the applicability of the law of each intermediary, sometimes also referred to as the lex loci actus or the recordbased approach (therefore the law of the place where the changes are made or 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 is often considered a variation of the paper-based approach (which is itself a lex situs variant), moving from depository to intermediary, therefore to a level lower amongst the various tiers. There is no unity in the applicable law which may thus vary per tier. It is the system now often preferred and also called PRIMA (Place of the Relevant Intermediary Approach); (f) 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 saw. In international assignments, some accept indeed the application of the law of the claim in its proprietary aspects. That law could be determined by the parties. There is some case law to that effect in Europe: see for a discussion also section 1.9.2 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 of accounts rather than on a transfer reduced to certain more specific bona fides protections, see section 3.1.6 above. Without it, party autonomy in proprietary matters should not be introduced through the back door of conflict’s law. – All the same, Section 8–110(e) UCC suggests party autonomy for the proprietary law applicable to investment security entitlements503 even though it has been

503 The normal rule is, however, the law of the securities intermediary (and his book-entry system): see Art 8–110(b) and (e)(2) UCC.

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questioned.504 Nevertheless, 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 like 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. 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 its system. Although contractual in origin, these general conditions may thus soon acquire the status of industry practice, and the line between contract and custom cannot always be sharply drawn. The emphasis should nevertheless always be on industry practice as objective law even if started by contractual arrangements amongst members. These practices can of course be entirely domestic, but for international agencies like Euroclear and Clearstream they are international 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 under PRIMA also shows that there is in practice no great fundamental inconvenience against party autonomy in this area. Contractual choice may then 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 law could also be avoided whilst doing business with a broker operating from a country with poor law. In short, on practical grounds much may be said for party autonomy in these matters. The drawback for the intermediary is, however, that each client may have a different legal regime.

PRIMA was adopted 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).505 504 See R Goode, ‘Securities Entitlements as Collateral and the Conflict of Laws’ (Oxford Law Colloquium, 1998) 16. 505 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).

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The approach was earlier accepted for Euroclear and Clearstream by the laws of Belgium and Luxembourg.506 After party autonomy, the applicability of the law of the immediately involved securities intermediary (and its booking system) is also the residual rule in the US, see Article 8–110(b) and (e)(2) UCC. It is for security interests in investment securities also the approach of the EU Directive on Financial Collateral of 2002 (Art 9): see in particular section 3.2.4 below.507 PRIMA leaves some important open questions, however, especially about the creation or enforcement of collateralised rights like security and similar interests and also whether the rule could apply to internationalised book-entry systems within the EU, which appears to be accepted. It would appear a workable solution, but is difficult to operate at the last 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 whilst travelling through several tiers in different countries. 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 whilst 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 an 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 players themselves, but it underlies indeed the entire PRIMA approach, which is as such defensive and temporary in its (complete) reliance on domestic laws no matter how atavistic or parochial. 506 See for Euroclear the Royal Decree No 62, Art 10, as amended in 1995; see for Clearstream (Cedel) the Grand-Ducal Decree of 7 June 1996. 507 There are problems in the formulation of the rule, however. Art 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 conflict’s 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). Art 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.

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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 dependent on no matter how atavistic or under-developed the law so found may be unless in international transactions international custom and practices may be considered to prevail or precede the application of domestic laws. It should further be considered that for intermediaries including international custodians like Euroclear and Clearsteam, 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 euromarket being substantially covered by Belgian or Luxembourg laws, which is incongruous. For the euromarket and its instruments, transnational law has in any event 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 1996,508 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 and at least present the residual rule. If not so corrected, PRIMA may, however, 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. The conclusion must be that a formal conflicts rule that cannot accept this state of affairs could not successfully operate without a substantial unification of the laws at national levels. In the EU, an attempt at harmonised law was here being made in the Financial Collateral Directive discussed in section 3.2.4 below. It would reduce the need for any conflicts rule, at least within the EU but only in the limited areas it covers. The consequence of the PRIMA approach is in any event 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. Even for members of Euroclear and Clearstream, Belgium or Luxembourg law can be avoided by interjecting 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. PRIMA is now only the residual rule (Art 5) in the 2002 Hague Convention, where party autonomy is preferred in the choice of the applicable law (Art 4(1)). This is an

508

See n 488 above.

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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 (s 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 American experience, it is unclear why there is this limitation. It reflects reality in so far that an intermediary may have offices in different countries and may change custody 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. There is some other curiosity in as far as the 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 regimes. The seller may have an intermediary with whom the account is held in one country and the buyer in another whilst their intermediaries have both an account with a custodian/depository in a third country, for example Euroclear.509 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-a-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. In any event regardless of a choice of law, 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 and is not therefore affected by a contractual choice of law

509 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).

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whomsoever the ultimate investor may be and whatever his agreement with his intermediary may say in terms of choice of law.510

3.2.3 The Lex Mercatoria concerning International 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 connected. 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 made. In fact, in securities dealings increasingly both must be considered immediately connected as most end-investors will have securities and bank 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 sense, therefore 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 (that needs therefore to be further defined, centres on the 510 In any event, under the applicable rules for each tier, different claimants may arise, but it would appear immaterial in as far as the voting or dividend collection is concerned in each tier. Only an internationalised system could prevent this from happening. 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.

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notion of segregation, and does not necessarily flow from the general notions of traditional property law), whilst for 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. 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,511 but also in the type of collateral, therefore in the type of security interest that can be created in them,512 and in the way this is done which again is 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.513 Nevertheless, legal characterisations are important and often remain uncertain, in which connection in international transactions traditional conflict of laws theories and approaches may be a further disturbing factor. Modern commercial law must accept the new world and adjust and the modern lex mercatoria reflects these fundamental changes. Thus where once the law of negotiable instruments dominated the field of international payments and investments, it is now largely redundant and intermediaries and their relationship 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 511 A severe attitude to finality may well conflict with consumer interests. It is one of the reasons why consumer payments were excluded from Art 4A UCC 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 to grant security interests in their bank accounts (s 9–109(d)(13) (new)). 512 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. 513 A new form of formalism may arise here as was signalled for commercial law and the law of contract, see ch 1, s 1.1.4 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, third party 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 its 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 professionality is all. Regulatory supervision will help, but can not prevent individual lapses.

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accounts at prevailing market prices (subject to their asset maintenance obligation) or when clearing agents still operate systems for others rather than act as central counterparties or CCPs. As far as the applicable rules are concerned, in international securities transactions the discussion in the previous sections brings us back to the internationalisation of the modern investment securities business and to the transnationalisation of its applicable laws. 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 like that of Euro clear and Clear stream. 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 market place. 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: the various UNCITRAL and UNIDROIT efforts in the area of contract and financial products do not so far cover investment securities (although UNIDROIT has a project in this area), but the EU Settlement Finality and Financial Collateral Directives do. 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, but, if incorporating or creating standard practices, will be reflective of or add to the higher international 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. General principles of property law operating in this area in modern nations with similar domestic custody and book-entry systems may, however, produce further guidance. 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 of the 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 seems still appropriate to consider the applicable domestic laws in greater detail and more directly.

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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 harmonised treaty or (in the EU) EU Directives law where they operate or even general principle if suggesting an international normatively in the area of property law. Much depends in these matters on the behaviour and insight of (bankruptcy) judges or arbitrators, whilst 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 2007–09. 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.

3.2.4 Uniform Law: The EU Financial Collateral Directive. The UNIDROIT Project In the meantime, under pressure from the financial services industry, especially the International Swap Dealers Association (ISDA),514 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 European Central Bank 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). The 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 transaction, 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 eluded EU countries for personal property more generally. Investment securities are here broadly defined, including all tradeable investment instruments, including derivatives, and cash must be understood here 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. 514

See ISDA EU Collateral Report (2000).

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Although it is a private law measure meant to support the wholesale financial markets (being for professionals or rather ‘non-natural persons’), it is surprising in its comprehensiveness given the EU’s limited powers in this area. It is based on Article 95 of the EC Treaty seeking to further the internal market through an approximation of laws. Its professed aims 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. The most important features of the Directive are: (a) simplified uniform rules for the creation, perfection and enforcement of collateral more in particular security interests and rights under finance sales, which (as just mentioned) is 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) a sharp distinction between pledge and title transfer (or finance sales) leading to the enforcement through a sale in the former place 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 (Art 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.515 (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

515

Some confusion in the use of the term ‘floating charge’ may be easily created. In English law, the charge becomes fixed depending on the measure of possession or control of the chargee, see Vol III, ch 1, 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 are not necessarily always 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 in the Preamble only, 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.

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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; (f) in the case of a title transfer, there is a recognition of close-out netting arrangements (Art 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 face of an impending insolvency (Art 8(2)). 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 book-entry systems). Therefore, the legal nature of the underlying securities and especially of securities entitlements is not considered and as a consequence also not the important segregation and pooling issues and any underlying trust concept. Here conflict of laws notions may remain paramount in which connection the Directive follows 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 to 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 so found to be 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 problems nevertheless arise. 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-hypothication of any collateral collected under a pledge arrangement, se also Volume III, chapter 1, section 4.1.3, which possibility was in the end also accepted if the original collateral agreement

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allowed it, but the two agreements in respect of which collateral is given in this manner must be co-terminal so that both charges come to an end at the same time.516 If earlier different assets were returned under the subcharge, 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. The Directive called for a review by the end of 2006, and subsequently there were minor amendements. In 2005, France and Luxembourg were faulted by the Commission for not having timely incorporated the Directive. In other countries, it created major upheavals, and in Germany and the Netherlands it proved extremely 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 we saw 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.

3.2.5

EU Activities in the Field of Clearing and Settlement

The perception at EU level has for sometime 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 is often said that clearing and settlement in Europe is five times as expensive as in the US. That would be a matter for the competition authorities. Part of the problem may be the complications innate in transborder settlement. How to better interconnect a structure which remains largely fragmented along national (or stock exchange) lines becomes then the true issue. Euroclear and Clearstream on the other hand have long experience in crossborder dealings. Even so, that may not eliminate an extra layer of cost and exploitation of international inefficiencies and lack of transparency. 516 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-hypothication 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.

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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 in November 2001 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 EU 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 re-denomination 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 de-nominated 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 Cross-Border Clearing and Settlement Arrangements in the EU. 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 that the practical but also legal problems deriving from insufficient transnationalisation (p 54) in which connection a difference between shares and bonds was (rightly) identified, the latter being much more capable of transnationalisation: see chapter 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 like regulators, central banks or legislators or private bodies like the European Central Securities Depositories Association (ECSDA), SWIFT and the International Primary Market Association (IPMA now ICMA) and proposed co-ordinators where several were involved. 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 European Central Bank (ECB) and the Committee of European Securities Regulators (CESR) 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 European Union. The legal form of these standards has not yet been decided. They will most likely be incorporated in the regulatory systems of the Member States. In connection with clearing and settlement, the most important issues are: (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;

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(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 their effect on cross border dealings; (i) the impact of different regulatory regimes; and (j) the impact of different tax treatment. The tendency was to leave the technical aspects to the market and evolving market practices subject to competition review. It follows that the accent shifted to the legal issues and to the impact of legal fragmentation. That became the EU perspective, 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 thought to lead to inadequate progress. A functional rather than institutional approach could be the answer, and 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 advisor. In a legal sense, the EU proposed to address eight issues in particular: the nature of the book-entitlement, 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, eg 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 is 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. It may be submitted that its success was largely to depend 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 2007–09 and the need to restructure financial regulation more generally.

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Index Introductory Note References such as ‘178–9’ 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 volume is about ‘contract law’ and ‘movable property’, the use of these terms (and certain others which occur constantly throughout the book) as entry points has been minimized. Information will be found under the corresponding detailed topics.

abandonment 62, 270, 548 absolute impossibility 100–2 absolute rights 310–11, 321, 324, 329 abstract system of title transfer 354, 360–4, 370, 372, 374–5, 535–6, 558–9 abstraction 239–40, 371, 419–20, 423, 570, 589–90, 621–2 principle of 239, 371, 420, 589, 604 abuse of rights 2, 51, 57–9, 80, 82, 141, 195 acceptance 11–15, 25–6, 32–4, 47–51, 142–4, 587–8, 596–8 forced 597–8 meaning 27–30 Accursius 365 acquiescence 405, 411 acquired rights 490–1, 578 Acquis group 125–6, 140 acquisition 46, 246–7, 306, 358, 375–8, 533–4, 628–9 acquisitive prescription 270, 300–1, 303–7, 325–6, 341–2, 372–3, 376–8 absence in common law 325–6 act of delivery 187, 234, 306, 343, 347 actio Publiciana 301–3, 307 actio utilis 390–1, 477 Action Plan EU Financial Services 125, 550 actions direct 114, 122–3, 147, 317 personal 272, 288, 365, 367, 370, 375, 429 activities, professional 540, 653 actual possession 178, 325–6, 377, 379–80, 383 adaptation 15, 101, 104, 106, 109–12, 204, 597–8 adjudicatory jurisdiction 157 administrative law 1 adverse interests 46, 265, 339, 483, 511, 526, 532 adverse possession 325, 446 aequitas 49 agency 9–10, 45, 186–7, 231–58, 371–2, 448–50, 629–30 agreements 187, 237, 257, 371, 448 consequences 241–3 disclosed 233, 248, 251–2, 256, 448 economic importance 250 and EU Commercial Agent Directive 256–8 general notion 231–50 indirect 233–5, 245, 248–9, 252–3, 255–6, 438–9, 620–1 international aspects 251–8 and lex mercatoria 255–6

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of necessity 238, 240 open 245, 247, 249–50 and private international law 251–3 relationships 45, 70, 187, 232, 240, 243 and treaty law 253–5 and trusts 448–9 undisclosed 9, 45, 233–4, 239–40, 244–5, 247–9, 254–6 agents 121–2, 231–3, 235–6, 242–3, 246, 250–2, 256–7 bankrupt 247, 249, 323 disclosed 241, 251, 588 and documents of title 184–6 explicit and apparent authority 235–8 position 186–7, 231–5 rights and duties 241–3 settlement 633, 656 undisclosed 122, 234, 236–7, 243–8, 250 agreement, real 361, 366, 370, 372, 392, 407, 570 analogical interpretation 436 anthropomorphic notions 54, 142, 282–3 anticipatory breach 194, 203 Anwartschaft 330, 457, 461, 471, 543, 556 apparent authority 43, 77, 210, 234–6, 238–40, 243 apparent ownership 180, 308, 362, 371, 469, 480–1 applicable domestic law 163, 166, 177, 214, 526 applicable law 157–9, 217–18, 487–8, 500–3, 509–12, 646–8, 650–1 assignments 427–9 bankruptcy 177, 308, 357, 431, 433–4, 467, 641–2 international sales 161–4 applicable private international law rules 153, 177, 206, 501, 601 arbitral awards 147 arbitration 6–7, 61–2, 157–8, 163, 216, 401–2, 566 clauses 6 commercial 34, 453 arbitrators 47, 77, 106, 159, 221, 226, 546 commercial 226 international 221, 226, 655 arrival, safe 160–1, 185, 188–9, 564 asset-backed funding 283–4, 531 asset classes 265, 274, 283, 484, 529–30, 544, 546 asset maintenance obligations 615, 621, 631, 645, 654 asset substitution 484–6 assets 275–311, 313–26, 341–52, 354–65, 437–50, 475–86, 488–503 commercial 527–8, 546 commoditised 263, 370, 425, 558

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future 275–6, 281–3, 348, 350–1, 355–8, 484–6, 536 movable see movable property ordinary 386, 395, 406, 410, 419, 507 physical 248, 270, 303, 320, 459, 534, 552 replacement 277, 356–7, 447, 464–6, 484–5, 528–9, 539 sold 151, 153, 181, 183, 266, 381 trust 285, 435, 441–3, 450, 452, 455, 499–504 types of 268–77 underlying 263–7, 328–32, 532–4, 543–4, 566–72, 578–80, 595 assignability 396, 399, 405–6, 427–9, 509–10, 512–19, 523–5 future claims 406–10 assigned claims 392, 394–5, 400–1, 417–19, 512, 518–19 assigned rights 410, 412, 418 assignees 387–405, 410–12, 414–35, 506–8, 510–17, 522–4, 594 bankruptcy 431–2, 522 better rights 417–20 bona fide 393, 397, 403, 420, 424, 426, 555 collecting 391, 393, 420, 422–5, 430, 433, 435 first notifying 393, 395, 421–3, 425, 433 ranking between 423–7 assignments 277, 356–8, 386–414, 416–35, 505–19, 521–6, 593–4 and bankruptcy 430–3 bulk 277, 388–9, 418–19, 508–10, 521–2, 524–6, 528–9 competing 421, 594–5 conditional 396, 410, 413–14, 478, 513 conflict of law issues 506–12 current approaches to choice of law 516–22 double 388, 391–2, 421, 424, 515, 521 earlier 391, 393, 421, 425–6 equitable 394–6, 407–8, 414, 425, 432, 519, 528 and EU law 523–6 international 432, 434, 508, 519, 532, 647 and lex situs 514–16 and mandatory proprietary laws 514–16 prohibitions and restrictions 112, 115, 269, 388, 394, 396, 403–4 and nemo dat 423–7 and private international law 506, 527 security 277, 392, 397, 399–400, 404–5, 408, 415 terminology and characterisation issues 512–14 types and objectives 413–17 and UNCITRAL, Convention on the Assignment of Receivables in International Trade 473, 484, 486, 505, 523, 526 and uniform rules 434–5 assignors 356–7, 390–2, 394–405, 414–24, 426–34, 506–13, 515–26 asymmetric information 105 Aussonderungsrecht 467–9 Australia 69, 453, 500, 607 Austria 16, 20, 53, 343, 361, 363, 582 authorisation 384–5, 423, 576 authority 27, 42–3, 109–10, 131, 234–5, 237–40, 251–4

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apparent 43, 77, 210, 234–6, 238–40, 243 automatic return 90, 180–1, 359–60, 366–7, 370, 430, 459 of title 153, 177, 179–81, 361 automaticity 180, 433 autonomous legal sources see autonomous sources of law autonomous sources of law 6, 14, 16, 36–8, 62–4, 130–2, 531 custom and practices 131, 531 fundamental principle 63 general principle 531 party autonomy 131, 531 transnational 132 autonomy 6–8, 16–18, 50–2, 487–9, 517–19, 531–3, 647–51 group 17, 487 party see party autonomy avoidance 53, 91–2, 94–8, 145, 176–7, 194, 203–4 back-up entitlements 546, 615, 619, 628, 631–2, 642–3, 645 bailees 309, 317–18, 322–9, 375, 378, 382–3, 449 bailment 279–81, 298, 315, 317–18, 320, 322–9, 448–9 and trusts 448–9 bailors 318, 322–4, 352, 375, 449 bank accounts 271, 519, 544, 614–15, 619, 622, 651–3 bank guarantees 117, 160, 184, 255, 371 bank transfers 544, 609, 622 banking 95, 191, 255, 564, 583, 608–9, 616 bankrupt agents 247, 249, 323 bankrupt brokers 628, 630–1, 642 bankrupt debtors 178, 308, 327 bankrupt estates 178–9, 260–1, 308, 326–7, 329, 358, 362 bankruptcy 177–83, 307–10, 326–31, 359–62, 430–5, 466–9, 641–3 applicable law 177, 308, 357, 431, 433–4, 467, 641–2 assignees 431–2, 522 and assignments 430–3 common law countries 326–8 foreign 489, 499, 504, 642 France 166, 177–81, 345, 362, 367, 384–5, 468–9 Germany 166, 179, 330, 361, 450, 466–7, 492 intervening 179, 266, 275, 320, 342, 356–7, 408 Netherlands 308, 355–7, 359, 361, 364, 408, 464 bankruptcy law 66, 177, 327, 431, 433–4, 469, 642 bankruptcy trustees 123, 182, 261, 309, 327, 368–9, 468–9 banks 160–1, 188–91, 577, 592–3, 601–5, 609–11, 622 bargain 13–14, 20, 26, 28–33, 35, 38, 40 in common law of contract 27–30 bearers 190, 271, 567–8, 570, 584–6, 611–12, 614 beginning of performance 13, 16, 32–3, 48, 81, 139 Belgium 161, 361–2, 498, 587, 634–5, 642, 649–50 beneficiaries donee 116, 118, 123–4 third-party 112–13, 116–17, 119–20, 122, 124, 129, 404–5 better rights 302–3, 308, 327, 420, 422–5, 433, 602 assignees 417–20 bills, sight 584–5

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INDEX bills of exchange 121–2, 190–1, 568–9, 583–601, 603–5, 607, 609 and competing assignments of undelrying claim 594 foreign 595–8 holders in due course 590, 592, 595 independence/abstraction 589–90 and lex mercatoria 600–1 modern use 593 persons liable under 588–9 and private international law 595–8 and uniform treaty law 599–600 bills of lading 185, 187–8, 527, 563, 565, 573, 602–9 bona fide holders 595 and lex mercatoria 580–3 named 577–8 on-board 224, 563–4, 573 origin, nature and operation 569–75 and private international law 578–80 and uniform treaty law 580–3 Blackstone, W 272, 346, 352 Bolero 605, 607–8 bona fide assignees 393, 397, 403, 420, 424, 426, 555 bona fide buyers 306, 355, 373, 379, 494, 575 bona fide creditors 177, 481, 556 bona fide holders 189, 503, 568, 571–3, 576, 578, 595 bona fide purchasers 279–85, 330–3, 362–4, 372–6, 379–81, 471–2, 476–80 protection 284–6, 306–7, 320, 363–4, 371–5, 377–81, 424–5 bona fide purchasers of chattels 90, 265, 303, 342, 363–4, 378, 393 bona fide transferees 305, 328, 545, 565, 621–2 bona fides 46, 305–6, 373–80, 418–22, 424–6, 480–2, 569–72 requirements 374, 377, 379–80, 425 bonds 271, 603–4, 611–15, 623–4, 634–8, 643–4, 646–7 types 610–38 book-entry entitlements 246, 285, 544, 612, 615, 624–6, 634 book-entry systems 603–5, 613–15, 619–22, 624–47, 649–51, 654–5, 657 international 641, 644–6, 654 Bourjon, F 377 Bracton, H 272, 316, 346 breach 95–8, 146, 176, 202–4, 402–4, 429, 455 brokerage 232, 234, 241–2, 244–6, 248–9, 256 brokers 232–6, 614–16, 619–23, 626–34, 636–8, 641–3, 650–1 bankrupt 628, 630–1, 642 bulk assignments 277, 418–19, 433–5, 508–11, 513–14, 521–2, 524–6 bulk transfers 273, 277, 281, 348–9, 484–5, 516–17, 528–9 buyers 165–9, 171–89, 222–4, 360–5, 368–74, 570–2, 574–7 bona fide 306, 355, 373, 379, 494, 575 first 311, 348, 368, 373 original 348, 380, 471, 573, 575–6 second 347–8, 467 Byzantium 24

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Canada 403, 453, 500, 607 Canaris, CW 5 Canon law 24–5, 40–1, 305 capacity 42–3, 115, 306–7, 340–2, 346–7, 354–5, 501–4 Cardozo, BN 242, 446 carriage, contracts of 52, 119, 187, 233, 566, 568, 582 carriage of goods 201, 218, 227, 581–2, 607–8 carriers 119, 185–7, 224, 563–8, 570–6, 581–3, 601–6 case law 39–40, 123–4, 367, 392–3, 463–5, 516–19, 541–2 good faith 1, 18, 48, 56–7, 59–60, 70, 392–3 cash sales 142, 144, 345, 352, 369–70, 381 causa 24, 34, 59, 88, 129, 142–3, 201 and consideration 39–42 causal system of title transfer 354–5, 359–65, 367, 370–1, 404, 552–3, 558–9 causality 369, 537 CCPs see Central Counter Parties Cedel 634–7, 639, 649 Central Counter Parties (CCPs) 86, 232, 605, 608, 633, 654 certainty 63, 184–5, 558–60, 641, 645, 649–50, 659–60 CFR (Common Framework of Reference) see Common Framework of Reference (CFR) chained systems of transfer 621–2 chains of transfer 341, 355, 363, 586, 591 change of circumstances 59–60, 76, 81–3, 97–9, 101–5, 107–9, 130 modern legislative approaches 109–11 professional dealings 81–3 charitable trusts 440, 445, 448, 450 chattel mortgages 319, 459–60, 479 chattels 263–72, 274–83, 292–5, 309–16, 339–43, 387–93, 476–80 bona fide purchasers of 90, 265, 303, 342, 363–4, 378, 393 law of 31, 272, 277–82, 312–16, 520–2, 527, 646 legal requirements for transfer 340–2 and lex mercatoria 506 modern law of 527–49 and private international law 487–506 transfer of 152, 356, 388–90, 392, 399, 427, 554 uniform laws concerning proprietary aspects 505 cheques 22, 592–3, 599, 609, 652 cherry picking 431, 472, 475 choice of law 199, 216–18, 220–2, 487–9, 501–4, 511–12, 651–2 clauses 159, 161, 220, 581 church law see Canon law CIF terms 163, 188–9, 223, 225–6, 566–7, 571, 573 circumstances, change of 59–60, 76, 81–3, 97–9, 101–5, 107–9, 130 CISG see Convention on the International Sale of Goods civil codes see codification; Table of Legislation and Related Documents civil law 19–43, 84–97, 259–76, 281–96, 298–318, 320–36, 532–45 approach 16, 19–20, 32–3, 35–7, 46–52, 281–4, 292–3 codification 10, 38, 46, 61–3, 125–7, 137–8, 550

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countries 39–40, 53, 267–8, 301–4, 342–4, 452–4, 499–500 judges 61–2, 66, 441, 454 law formation 42, 61–2 lawyers 69, 73, 313, 436, 438 modern 12, 23, 91–2, 97, 119–20, 278–9, 288–9 proprietary defences in bankruptcy 307–10 relativity 310–12 terminology 259, 268, 313, 315, 342, 439, 457 claims 94–9, 385–97, 403–10, 413–19, 423–32, 506–15, 517–25 assigned 392, 394–5, 400–1, 417–19, 512, 518–19 damage 86, 94, 111, 288 future 275–6, 396–7, 406–7, 409–10, 431–2, 485–6, 517–18 intangible 266–7, 270, 274–5, 278–9, 294, 356, 386–8 monetary 268, 271, 397–9, 405–6, 419–20, 423, 613 mutual 383, 627 obligatory 268, 307, 535 proprietary 84, 178, 268, 474, 522, 549, 630 tort 387, 394, 396, 406, 426 transfer of 388–9, 397, 409, 427, 507, 523, 527 underlying 165, 190, 285, 295, 516–18, 524–5, 594–5 clearing 165, 608–9, 623–4, 627–9, 631–7, 639, 654–60 EU activities 658–60 client accounts 247, 249, 351, 438–9, 444, 619, 630–1 client assets 323, 333, 446, 454, 619, 631 closed systems 336–7, 357, 444, 471, 543, 617 closely related rights and duties 394, 401 CMI Rules 605 co-operation duties 13, 57–8, 74, 78, 80, 118, 142 Coase, RH (Coase theorem) 273 codification 10, 60–4, 125–7, 137–9, 147–8, 206–7, 550–1 approach 58, 60, 62–4, 72, 137, 148, 206 civil law 10, 38, 46, 61–3, 125–7, 137–8, 550 and common law 46, 148 countries 46, 56, 61 ethos 63, 559 France 60, 364 Germany 2, 308, 364 nineteenth-century 559 partial 151, 156, 194, 200, 207, 228, 581 private 58, 61–2, 64, 125, 127, 148, 550–1 of private law 10, 58, 62, 64, 127, 139, 550–1 thinking 51, 56, 58, 62–3, 126, 137–9, 148 collateral 263, 284, 482–3, 627–9, 648–9, 653, 655–8 agreements 79, 122–4, 656 collecting assignees 391, 393, 420, 422–5, 430, 433, 435 Collins H 5, 16, 18, 318 L 5, 16, 18, 318 Comité Maritime International 577, 581, 604, 606 comity 158, 214 commerciability 271, 273 Commercial Agent Directive 256–8

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commercial and financial legal order 5–6, 51, 131, 211, 229, 560 commercial arbitration see arbitration commercial assets 527–8, 546 commercial courts 4 commercial flows 7, 17, 46, 64, 140, 265, 557 commerciality 130, 163, 213 commingling 447, 486, 628, 630 commoditised assets 263, 370, 425, 558 common creditors 177, 260–1, 274, 308, 362, 547 Common Framework of Reference (CFR) 125 see also Draft Common Frame of Reference common law 26–42, 65–70, 84–97, 239–45, 260–84, 312–37, 435–50 countries 263–4, 278–9, 291, 443–6, 498, 528–9, 594–5 courts 31, 61, 67, 85–6, 88, 97, 441 and equity 145, 396, 549 and interpretation 11–12, 28, 35–6 judges 61, 66, 441, 454 jurisdictions 126, 275, 281, 325, 336, 405, 442 law formation 61–2 proprietary rights 312–40 tradition 87, 100, 148, 444, 454, 530, 552–3 trusts 435–40, 443–5 common legal principles 229 company law 43, 127, 220, 530, 624–5 comparative law 6, 9, 12, 239, 286, 332–3, 582–3 compartmentalisation 614–15, 617, 630, 638 competing assignments 421, 594–5 competing creditors 262, 308–9 completeness 62–3, 206, 607 conditional assignments 396, 410, 413–14, 478, 513 conditional interests 315, 490 conditional ownership 84, 267, 436–7, 471–2, 476, 496, 556 conditional rights 414, 461, 470 conditional sales 180, 415–17, 430–3, 456–60, 463–7, 470–4, 477–9 conditional title 181, 457, 471 conditional transfers 332, 415–16, 432, 458, 462, 469, 474 conditionality 93, 95, 179–81, 357, 382, 469, 596 conditions 92–3, 95–101, 175–6, 178–80, 428–31, 461–3, 469–70 and assignments 429–30 general 228, 384, 633–4, 640, 648 conduct 25–6, 32–4, 57, 72–3, 142–4, 211–13, 237–9 confidentiality 73, 241, 441, 605, 607 conflict rules 34, 193, 199, 210, 229, 500–4, 650 conflicts of interests 10, 235–6, 241, 250, 455 conflicts of law 131, 155, 207, 278, 488–90, 506–8, 598 rules 131, 155 conform delivery 94, 160, 167–70, 172, 174–6, 185, 202–4 connexity 383–5, 498 conscience 314, 446 consensus 23–33, 35, 40–1, 75–6, 87–8, 90–2, 142–3 as basis for contract validity 23–7 lack of 87–92 consent 23–6, 116, 389–90, 396–9, 401–3, 405, 410–12

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INDEX debtors 389–90, 394–5, 400, 403, 405–6, 410–11, 418–20 consideration 27–30 and causa 39–42 development of notion in common law 30–4 practical significance of requirement in common law 37–9 constructive delivery 182, 202, 318, 326, 346, 348, 479 constructive possession 202, 300, 303, 317–19, 325–6, 346, 477–8 constructive trustees 233, 326, 446–8, 459 constructive trusts 244, 285, 298–9, 310, 445–9, 451–3, 631 consumer dealings/sales/transactions 2–4, 10, 70, 128–9, 141–2, 162–3, 168–9 consumer law 8, 10–11, 66, 73, 126–7, 132–3, 551 consumer protection 3, 7–9, 17, 21–3, 70, 75, 138–9 contract formation 12–13, 21, 23, 25, 29–30, 32–3, 142–3 contract interpretation 28, 36–7, 40, 49–52, 130, 208, 212–13 contract law 1, 9–11, 14–16, 18–21, 57–9, 65–6, 125–6 see also Introductory Note and detailed entries development 23–7 dynamic 46–8 modern 1, 14–15, 18, 30, 59, 66, 284 new model 15–19 private 125 revival of multiple sources 49–52 unification 125–8 contract principles 3, 37, 71, 140–4, 147, 211–12, 487 contract theory, modern 10–12, 16–19, 21, 26, 31, 54, 284 contracts 2 of carriage 52, 119, 187, 233, 566, 568, 582 construction and remedies in common and civil law 35–7 executory 29, 31, 41, 309, 431, 433, 472 original 113, 118, 120, 261, 405, 418–20, 594 under seal 29–31, 38, 40 underlying 232, 234, 239, 359, 403, 509–11, 596 contractual agency 2, 4, 9–10, 139, 231–2 contractual assignment prohibitions/restrictions 112, 115, 269, 388, 394, 396, 403–4 contractual choice of law 34, 199, 217–18, 220–2, 285, 488–9, 532 contractual interpretation 20, 29, 33, 36, 100, 105, 212 contractual purpose, demonstrable 14 contractual relationships 11, 22, 115, 122–3, 232, 234, 240 contractual retention rights 180–2, 382, 498 contractual rights 10–11, 25–7, 32, 36–8, 48–50, 247–8, 262 abuse of 78–80 contractual terms see terms contractual user rights 260–4, 266, 286, 292, 298, 309, 548–9 contractual validity 35, 42–3, 45, 77 Convention on the International Sale of Goods (CISG/ICSG) 34, 44–5, 71, 140–6, 151–4, 192–216, 226–9 applicability 198–200

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coverage 194–7 and different trade terms in international sales 222–5 formation 200–1 and ICC Model International Sales Contract 228 and Incoterms 225–7 meaning of conduct and custom 212–15 origin and scope 192–4 substance, default and remedies 201–5 supplementation and interpretation 206–12 system 197–8 convergence 62, 331 Cooter, RD 440 Corpus Iuris 24, 297, 365 counterparties 18, 43, 77, 187, 210, 542–3, 656 central see Central Counter Parties (CCPs) country of destination 153, 166, 490–2, 498, 508, 579–80 country of origin 23, 153, 166–7, 490–2, 496–8, 579–80, 598 courts see case law covenants 92, 95–6, 114–16, 119, 289–90, 330, 541 credibility 61, 82, 112, 127, 134–5, 139, 149 credit, letters of 159–61, 164, 183–6, 191, 231–2, 577, 601–3 credit risk 155, 160, 257, 398, 415–17, 430, 474 creditors 307–8, 386, 390–1, 410–13, 442–5, 468–70, 481–5 bona fide 177, 481, 556 common 177, 260–1, 274, 308, 311, 321, 547 competing 262, 308–9 original 250, 390–1, 394, 396, 402, 413 secured 260, 308, 350, 380, 465, 468, 482–3 unsecured 447, 466, 478, 482 cross-border services 162 currencies 90, 108, 153, 155–6, 161, 164–5, 475 custodial systems 221, 612 custodians 247–8, 271, 314, 373, 438–9, 532, 613 customary law 152, 228, 282, 391, 478, 509, 581 damage claims 86, 94, 111, 288 damages 77–80, 84–7, 89–92, 94–9, 153, 174–6, 202–5 DCFR see Draft Common Frame of Reference de facto transfers of title 348 De Iure Belli ac Pacis 2, 25, 120, 236, 288, 302 Dearle v Hall 392–3, 395, 397, 421–2, 425 debtors 100–3, 388–407, 409–13, 415–35, 465–6, 479–85, 506–27 bankrupt 178, 308, 327 consent 389–90, 394–5, 400, 403, 405–6, 410–11, 418–20 defaulting 326, 415, 429–30, 464, 477 defences 398, 412–13, 427 professional 14–15, 48, 51, 76, 82, 103 default 83–6, 93–8, 172–84, 201–4, 358–63, 456–61, 463–6 and assignments 429–30 default rules 47, 105, 151, 344, 517, 519, 524 defaulting buyers 177, 179, 310, 359, 366–7 defaulting debtors 326, 415, 429–30, 464, 477 defective performance 12, 97 defects 44, 76, 90–1, 173–5, 306, 371–3, 591 hidden 168–9, 172–3, 175–6, 205

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defences 87–9, 247–8, 399–402, 411–12, 417–20, 509–13, 590–7 debtors 398, 412–13, 427 to performance 87–92 personal 591–2, 597 real 590–2 definiteness 45–6, 129, 142, 144, 271 delays 85, 87, 155–6, 165, 179, 493, 601 delegation of duties 398, 402, 418, 566 delivery 166–76, 184–9, 200–5, 340–63, 378–82, 491–5, 564–8 act of 187, 234, 306, 343, 347 conform 94, 160, 167–70, 172, 174–6, 185, 202–4 constructive 182, 202, 318, 326, 346, 348, 479 as formal requirement 351–4 physical 152, 171–2, 174–6, 311, 347, 494–5, 567 of possession 152, 270, 293–4, 298, 320, 343, 346 requirement 264, 270, 294, 347, 361, 367, 372 dematerialisation 569, 610, 614, 616, 635–7 dematerialised securities 613, 616, 625, 629, 659 democratic legitimacy see legitimacy demonstrable contractual purpose 14 Denning, Lord 28, 36–7, 77, 122, 347, 367, 567 dependency 2, 10, 35–8, 49–50, 55–6, 65–7, 241 Depositary Trust Company (DTC) 636 depositories 604–5, 614–20, 626, 631, 636–8, 646–7 depository receipts 635, 638 derivative proprietary rights 319 derivatives 43, 416, 460, 530, 544, 655 Dernburg, H 270 destination, country of 153, 166, 490–2, 498, 508, 579–80 detrimental reliance 16, 26, 39, 48, 76, 78, 81 as modern alternative to consideration 30–4 Dicey 502, 518, 521, 579, 596, 598 Digests 24, 57, 365, 461, 521 dingliche Einigung 306, 346, 354, 361, 366–7, 370, 372 dinglicher Vertrag 347, 361, 366 direct actions 114, 122–3, 147, 317 Directives 8, 66, 69–70, 126–7, 215, 217, 654–5 directory law 47, 151 discharge 91–3, 175–6, 186–7, 231–3, 250–2, 581–2, 596 disclosed agency 233, 248, 251–2, 256, 448 disclosed agents 241, 251, 588 disclosure 3–4, 50–1, 53–5, 74–7, 172–4, 234–5, 242–6 duties 3, 50, 59, 75, 172, 210, 252 pre-contractual 74, 75–7, 79, 138 special 13, 55 discounting 190–1, 585, 588, 591, 609 discretion 55–6, 58, 60–1, 85–7, 104–5, 229, 235–7 disparity, gross 73, 75, 133, 145 disposition rights 43, 306–7, 340–2, 354–5, 363–5, 371–5, 553–4 sufficient 281, 355, 387, 553 dispute resolution 47, 155, 338–9 distributors, sole 232, 257–8 diversity 125, 197, 199, 230, 252 documentary letters of credit see letters of credit documents electronic 604–5, 607 written 44, 67, 78, 607

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documents of title 188, 271, 494–5, 563, 566–74, 576–80, 603 and agents 184–6 concept 566–9 consequences of different attitudes to 575–6 dematerialisation 601–10 negotiable 188, 223, 563, 565, 570, 576–7, 579–80 in international sales 187–8 in payment schemes 188–9 traditional use 601–5 domain names 273, 534, 546 Domat, J 2, 25, 353 domestic courts see national courts domestic public policies 131, 135, 214 domestic regulation 229 domestic transfer restrictions 624, 643–4 donee beneficiaries 116, 118, 123–4 double assignments 388, 391–2, 421, 424, 515, 521 double sales 311, 343, 345, 347, 576 Draft Common Frame of Reference (DCFR) 2–3, 63–4, 71–2, 125–6, 128–30, 136–49, 550–61 drawees 119, 121–2, 191, 584–91, 593–4, 596–8, 600 drawers 190–1, 584–92, 594, 596–7, 600 droit coutumier 13 DTC (Depositary Trust Company) 636 duality of ownership 265, 285, 327, 440–1, 449–50, 469, 471–2 duration contracts 11, 18, 35, 48, 104, 142 duress 87–8, 91–2, 146, 194, 368 Dutch law 170–1, 180, 269–70, 301–2, 408–9, 416–17, 517–18 duties 47–50, 78–80, 112–20, 397–8, 401–2, 410–12, 440–1 of care 14 closely related 394, 401 co-operation 13, 57–8, 74, 78, 80, 118, 142 delegation 398, 402, 418, 566 Fiduciary duties 66, 232–3, 235–6, 237–43, 200–6, 439–41, 448–50 post-contractual see post-contractual duties pre-contractual see pre-contractual duties renegotiation see renegotiation duties search 46, 263, 265, 332, 337, 398, 403 special 2, 65, 162–3, 232, 239, 441, 501 third-party see third-party duties dynamic contract law, and normative approach 46–8 dynamic movable property law 560–1 dynamism 58, 284, 542, 650 e-commerce 21–3 ECB see European Central Bank ECJ see European Court of Justice economic considerations 19, 48, 55, 60 economic hardship 103, 105–6 economic impossibility 101, 106–7, 153, 170 economic interests 125, 315, 320, 330–2, 335, 462, 538 economic value 61, 259, 261, 273–4, 329, 383, 456 requirement 271–7 economics, law and 264, 273, 335, 337, 440 EDI see electronic data interchanges effectiveness 10, 159, 179, 184, 357, 429, 509–10 efficiency 10–11, 14–15, 18–19, 51, 54–5, 126–7, 659 considerations 5, 11, 15, 19, 48, 51, 54

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INDEX eighteenth century 7, 25, 30–1, 41, 222, 288, 377 Einigung 246, 361, 372, 390–1 Eisenberg, MA 18, 20, 124 electronic bank transfers 609 electronic bills of lading 604, 606, 609 electronic data interchanges (EDI) 604, 607, 609, 638 electronic documents 604–5, 607 electronic transfers 569, 601, 609, 636 empirical research 559 end-investors 246, 614–19, 621, 628, 637, 642–3, 645–6 endorsement 190, 574–5, 585–6, 588–91, 596–8, 603, 606 endorsers 585–6, 588–9, 592, 596 enforceability 13, 512 enforcement 489–91, 506–9, 514, 516–18, 521–2, 524–6, 656–7 international 23, 165, 197, 206, 453, 507–9, 525–6 lex mercatoria 526 UCC 67–8, 98, 130 England see United Kingdom enjoyment 259–66, 291–3, 327–30, 335–6, 338–40, 533–5, 548–9 enrichment, unjust 10, 32, 35, 125–6, 268, 445–6, 631 entitlement holders 546, 614–16, 618, 620, 631–2, 637–8, 643 entitlements 338–9, 612–16, 618–23, 626–9, 631–2, 636–45, 649–52 back-up 546, 615, 619, 628, 631–2, 642–3, 645 EPCL see European Principles of Contract Law equality 210, 307, 451 equilibrium 74, 82, 133, 136, 358 equitable assignments 44, 357, 394–6, 403, 407–8, 414, 432 equitable interests 281–2, 314–15, 319–21, 327–9, 487–8, 548–9, 554 equitable owners 321, 436, 447, 618 equitable proprietary interests 7, 262–3, 265, 312, 381, 435, 527–8 equitable proprietary rights 263–4, 281–2, 298–9, 314–15, 320–1, 336, 414 equity 85–9, 280–7, 314–16, 327–33, 394–7, 459–62, 527–30 and common law 28, 148, 266, 328 and good faith 65–9 judges 61, 66, 321, 454 law of 66, 265–6, 273, 283, 289, 314, 538–9 of redemption 319, 459–60, 470, 479 equivalence 30–1, 38, 492, 496 error 30, 76–7, 90–1, 145, 354 estoppel 32, 58, 237, 379 promissory 32 eurobonds 165, 287, 623–4, 626–7, 634–6, 639–40, 644–6 Euroclear 438, 604, 615, 633–7, 639, 641–4, 648–51 euromarkets 611, 634, 637–8, 641, 643, 650 European Central Bank (ECB) 629, 648, 655, 659 European Continent 2, 7, 9, 20, 24, 190, 288 European Court of Justice 70, 215 European Principles of Contract Law (EPCL) 71, 73–4, 82, 125–6, 129–30, 134–48, 229 European Union see EU

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exceptio non adimpleti contractus 182, 203, 353, 382, 384, 400 excess receivables 358, 415, 430–1 exchange 38, 190–1, 568–9, 583–601, 603–5, 607, 609 in common law of contract 27–30 exchange of promises 29–30, 32, 41 exclusivity 62, 250 excuses 1, 3, 53, 92, 94–100, 104, 145–7 execution 158, 385, 464, 467, 469–70, 489–91, 497–8 executory contracts 29, 31, 41, 309, 431, 433, 472 expropriation 325, 517, 520 extended reservations of title 356–7, 407, 409, 484 external relationship 187, 233–4, 241, 247, 251 extrapolation of past experiences 137, 147 factoring 413–14, 429–31, 457–8, 464–5, 472–5, 496, 525–6 failed sales agreements 90, 179, 183, 326, 363, 365, 380 fairness 2, 21, 35, 37, 42, 66–7, 108 federal law 573 feudal system 279, 316, 321, 536 fideicommis 436–7, 451 fiducia 333, 436–7, 449–51, 477, 490 fiduciary duties 66, 232–3, 235–6, 239–43, 255–6, 439–41, 448–50 filing 263, 338, 358, 397–8, 425–6, 466, 480–5 systems 332, 476, 482–5, 538, 641 finality 358–9, 371–4, 552–4, 558–9, 621–2, 626–9, 653–5 payment 364, 371, 610, 621–2 transactional 286, 558–9 finance leases 118, 122, 278, 457–8, 463–4, 472–4, 529–31 finance sales 458–9, 463–5, 467, 472, 474–7, 555–6, 655–6 examples 472–5 and secured transactions 463–9 Financial Collateral Directive 216, 467, 487, 650, 655–8 financial crisis 655, 660 financial dealings 4, 128, 282, 334, 389, 496, 540 financial instruments 2, 221, 278, 283–4, 530, 545, 635 financial law 127–9, 140, 266, 282, 287, 334, 528 financial legal order see commercial and financial legal order financial products 266, 274, 287, 341, 364, 416, 530–1 financial regulation 286, 660 financial services 2, 4, 8, 23, 36, 70, 250 financial transactions 161, 294, 419, 527, 529, 544, 655–6 financing non-recourse 430–1 receivables 357, 413–16, 425–6, 430–2, 434–5, 457–8, 472–3 recourse 429–32, 557 repo 332, 458, 461, 545, 629 first buyers 311, 348, 368, 373 fitness 167–8, 175–6 floating charges 264–5, 477–80, 484–6, 508–11, 527–9, 543–5, 656 FOB terms 162, 222–3, 225–7, 567, 572–4

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force majeure 81–3, 91–4, 96–104, 106–7, 168–72, 174–6, 203–5 forced acceptances 597–8 foreign bankruptcy 489, 499, 504, 642 foreign interests 488, 490, 498, 511, 532 foreign law 278, 491–2, 649 foreign trusts 333, 451, 453–4, 488, 500, 502–5 forfeiture 459 formal trusts 265, 327, 439, 444, 552 formalism 18, 40, 52, 62–3, 584, 653 formalities 43–5, 340–1, 388, 413–14, 427–8, 463–6, 625 sale 343–8 formation of contracts in civil and common law 23–46 formation of law see law formation forum 146, 157–9, 177, 198–9, 216, 219–20, 500–4 selection 581 state 159, 198–9, 216, 219, 253, 500, 503 fourteenth century 24, 41, 106, 583 France 40–4, 165–7, 176–83, 359–64, 377–9, 451–4, 570–4 bankruptcy 166, 177–81, 362, 364, 457, 468–9, 517 codification 60, 364 law 6–7, 40–4, 152, 343–4, 381–4, 409–13, 599–600 fraud 45–6, 77–8, 87–91, 145, 173–4, 361–2, 364–70 free and clear sale 17, 182, 263, 292, 483–6, 535, 557 free convertibility 164 free disposition 217, 220, 428, 487, 511–12, 515, 531 free movement of goods 69–70, 128, 139 freedom 5, 14, 18–19, 47, 58, 235, 581–2 contractual 14, 18, 221, 344, 515 frustration 97, 99–102, 106–7, 133, 153, 337, 504 full owners 290, 294, 355, 358, 457–9, 465, 475 full ownership rights 308, 358, 440, 448, 491 functions 57–8, 64–5, 231–2, 234, 254–5, 284–5, 444–6 fundamental principles 50–3, 63–4, 81, 130–2, 134, 137–8, 209–11 funding 32, 156, 415–17, 458, 464–5, 474, 532 asset-backed 283–4, 531 fungible securities 432, 613, 616, 637 future assets 275–6, 281–3, 348, 350–1, 355–8, 484–6, 536 future claims 275–6, 396–7, 406–7, 409–10, 431–2, 485–6, 517–18 assignability 406–10 Gaillard, E 7 Gaius 270, 297, 340, 365, 386, 390, 437 Institutes of 365 GATT 155 general conditions 228, 384, 633–4, 640, 648 Geneva Conventions 190, 586–8, 598–600 Germany 165–8, 245–7, 301–8, 356–61, 449–53, 466–9, 491–3 case law 40, 83, 390, 422, 457, 557 Civil Code 2, 121, 179, 182, 276, 288, 359–60 codification 2, 308, 364 Historical School 2, 270, 288 @ Global Trade 609 globalisation 5, 65, 109, 158, 643–5 effect 5–9

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Glossa Ordinaria 365–7 good faith 18–21, 50–83, 107–10, 132–42, 209–12, 241–2, 375–80 case law 1, 19, 48, 56–7, 59–60, 70, 392–3 civil law 1–3, 10–11, 19–21, 39–40, 46–83, 128, 323 institutional aspects of operation 60–2 as multifaceted notion 55–60 notion 52–5 common law 21, 36–7, 46, 51–2, 61–3, 65–70, 242 alternatives 65–9 duty of 68, 70, 73–4, 441 and equity 65–9 EU notion 69–70 interpretation 2, 48, 104, 210 as mandatory concept 73–5 practical effects 75–83 and sources of law 71–2 Goode, R 65, 313, 318, 323, 326, 341, 645–6 Gordley, J 2, 16, 41, 298 governmental interests 48, 108, 158, 214, 219 governmental intervention see intervention gross disparity 73, 75, 133, 145 Grotius H 2, 24–5, 120–1, 236, 270, 288, 302 natural law school of 2, 24, 49, 236, 288 guarantee of performance 99, 103 guarantees 44, 93–4, 97, 101, 167–9, 175–6, 586–9 Hague Conference 64, 254, 500 Hague Convention on the Law Applicable to Trusts and Their Recognition 499–505 Hague Conventions 97–8, 192–4, 196–7, 206–7, 214–15, 285, 650–1 Hague Rules 581–3, 602 Hague-Visby Rules 227, 581–3 Hamburg Rules 580, 582–3, 602, 606 hardship 15, 20, 51, 82–3, 102–8, 110–12, 133 clauses 107, 111–12, 130, 138 economic 103, 105–6 harmonisation 7–8, 43, 127, 184, 257, 505, 550 private law 127, 550 hermeneutics 17, 19 hidden defects 168–9, 172–3, 175–6, 205 hierarchy 65, 131, 140–1, 207–8, 212, 221, 229–30 hierarchy of norms 7, 154, 158–9, 197, 208–12, 228, 654 higher norms 229 holders bona fide 189, 503, 568, 571–3, 576, 578, 595 in due course 46, 420, 528, 586, 588–92, 594–5, 597–9 holdership 290–3, 295–8, 300, 302–4, 325–6, 331, 569–70 Holmes, OW 31 Horn, N 483, 600 House of Lords 95, 122, 325, 367, 407 human relationships 56 human rights 5, 14, 51, 63–4, 72, 130, 211 hypothec 350, 477 ICC see International Chamber of Commerce ICMA see International Capital Market Association identification 45–6, 273–4, 276, 341, 348–9, 408–9, 509–10 identity 243, 245, 271, 274, 367, 405, 410

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INDEX illegality 40, 87–8, 145, 359–60, 366–7, 369–70, 591 illness 93–4, 96, 101–2 immanent law 6, 139 immediate repossession 84, 309, 317–18, 322–5, 378, 541 immobilisation 614, 635–7, 639, 641, 646 immovable property see real property implementation 8–9, 15, 18, 22, 80, 84, 104 legislation 9, 258 implied terms 21, 28, 35–8, 49, 67, 130, 136 impossibility 91, 93, 97, 99–103, 106–7, 120, 133 economic 101, 106–7, 153, 170 income rights 259–66, 291, 314–15, 328–30, 332, 335, 534–5 Incoterms 225–7 indemnities 601–3 independence 234, 238–42, 250–2, 419–20, 537, 558, 589 principle of 186, 234, 240, 419, 589, 600 independent sources of law 51, 72, 560 India 127 indirect agency 119, 234, 236, 245, 247–9, 253, 437–9 civil law 245–50 indirect contract parties 113–14, 116 induction 526 industry practices 51–2, 135, 137, 140, 161, 287, 648 information costs 337–8 infrastructure 18, 132, 151, 195, 273, 511, 581 injunctions 8, 441, 454 innocent misrepresentation 87, 89–91, 133, 146, 170, 175–6 innovation 10, 270, 273–4, 286, 340, 363 insolvency 93, 178–9, 327, 474–5, 503–4, 642, 660 Institutes of Gaius 365 insurance 154–5, 159–60, 162, 215, 217, 222–4, 226 intangible assets 268–72, 275–83, 291–5, 312–16, 386–8, 533–7, 554–6 modern law of 527–49 proprietary rights 386–435 intangible claims 266–7, 270, 274–5, 278–9, 294, 356, 386–8 intangibles see intangible assets intent 12–14, 19–21, 27–9, 31–3, 37–41, 80–1, 211–13 in civil law 23–7 meaning 27–30 original 14, 16, 47, 58, 110, 225 intention 34, 154, 345–6, 367–8, 399, 448, 493–4 see also intent common 72, 76, 130, 143 interest holders 259, 268, 295, 298, 320, 477, 495–6 interest rates 417, 420, 458, 464, 556, 584–5 interests adverse 46, 265, 339, 483, 511, 526, 532 conditional 315, 490 economic 125, 315, 320, 330–2, 335, 462, 538 foreign 490, 498, 532 governmental 48, 158, 214, 219 life 259, 279, 315, 462, 534 limited 259, 315, 318, 396, 491, 512 possessory 327, 467, 479–80, 483 reversionary 279, 462, 467 suspended 436, 439

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temporary 278, 281, 299, 336, 541, 626 internal relationship 232, 234–8, 240–2, 244, 246–7, 251–3, 255 internalisation 274, 627 international arbitration 6, 155, 157–8, 216 international arbitrators 221 international book-entry systems 641, 644–6, 654 International Capital Market Association (ICMA) 639, 659 International Chamber of Commerce 225, 607 International Chamber of Commerce (ICC), rules 609 international commerce 4, 7, 61, 108, 149, 151, 157 international commercial and financial legal order 5, 131, 211, 229, 560 international contracts 6, 220 international convergence see convergence international dealings 128, 135, 139, 148, 155, 195, 251 international finance 166, 262, 285, 334, 506, 527, 543 international harmonisation see harmonisation international promissory notes 600 international sale of goods see international sales international sales 151, 153–6, 161–6, 186–8, 192–3, 195–200, 214–15 alternatives to reclaiming rights 183–4 applicable law 161–4 conform delivery 167–70 as contracts between professionals 161–4 currency and payments 164–5 intermediaries and documents 184–91 law merchant concerning 228–30 legal risk 156–9 main aspects 151–230 passing of risk 167–70 retention rights 182–3 sales price protection 176, 181 special arrangements to cover risks 159–61 special features and risks 153–6 transfer of title 165–7 use of negotiable instruments 190–1 international trade 131–2, 192–3, 196–8, 210, 212–13, 495, 525–6 international transactions 34, 46, 48, 156–8, 161, 197, 201 internationalisation 153, 212, 633, 638, 641, 654 internationalism 582 internationality 130, 156, 162–3, 211, 213 interpretation 11–20, 27–33, 35–7, 46–54, 71–8, 127–30, 206–13 analogical 436 and civil law 29, 35 and common law 17, 27–8, 46, 148 liberal see liberal interpretation literal 11–13, 17–20, 27–8, 36–7, 48–9, 51–3, 211 logical 27, 56 normative 16–20, 33, 36–7, 46, 48–52, 56–8, 209–10 purposive 19, 48, 211 restrictive 36 statutory 20, 48, 211 techniques 12, 15, 19, 58, 61, 208

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teleological 14–16, 19, 48, 209–10 uniform 71, 127, 206, 228, 525 interpretational freedom 47 intervening bankruptcy 179, 266, 275, 320, 342, 356–7, 408 intervention 65, 100, 134, 157, 188, 210, 219 judicial 16, 106, 178, 202–3, 489 statutory 36, 276, 323, 451, 542, 548 investment securities 232–3, 248–9, 277–8, 456–8, 472–5, 529–31, 610–60 and lex mercatoria 652–5 repo of 457, 465, 472–3 underlying 22, 614, 618, 631, 638, 646, 649 see underlying securities uniform law 655–8 Investment securities, brokers 233, 235, 242, 245, 248 investments 241, 271, 610, 616, 618, 627–30, 653 investors 2, 612–15, 617–21, 623, 627–32, 636–8, 640–3 issuers 221, 612–16, 619–20, 626–7, 636–7, 639–41, 645–7 Italy 52, 60, 152, 275, 451, 453–4, 599 Northern 364 iura in re aliena 259, 289, 291, 293, 541–2, 552 Ius Civile 24 ius cogens 132, 228–9, 580 Ius Commune 24, 49–52, 288, 363–5, 389–91, 461, 477–8 ius tertii 311, 324 iusta causa 365, 377 Jansen, N 140 Japan 127, 386, 599 Jhering, R von 11, 41, 296–7, 300 judges 4, 58, 60–2, 106, 110–11, 216–17, 445–6 judgments, money 83–5 judicial discretion 55–6, 58, 60, 89, 104 judicial intervention 16, 106, 178, 202–3, 489 jurisdiction 69–70, 126–7, 157–8, 452–4, 489–90, 520, 642 adjudicatory 157 justice 4–5, 14, 19, 21, 31, 64, 274 Justinian 24, 40, 120, 270, 297, 352, 363 kind, performance in 83–6, 97 knowledge 46, 173, 262–3, 265–6, 289–90, 421–3, 538 lading, bills of see bills of lading land law 84, 272, 277–80, 314, 322, 325, 541 Lando, O 34, 73, 146 Larenz, K 2, 56 law formation 5, 42, 61–2, 64, 127–9, 139, 148 law merchant 4–5, 24, 130, 134, 208–9, 228–9, 567–9 leases, finance 118, 122, 278, 457–8, 463–4, 472–4, 529–31 leasing 118, 212, 332, 461, 472–3, 486, 505 legal capacity see capacity legal dynamism see dynamism legal formalism see formalism legal functionalism see functionalism legal orders 5, 51, 159, 211 domestic 51, 159, 211 independent 51 international commercial and financial legal 5, 211 legal personality 437–8, 440, 448–50, 452

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legal positivism see positivism legal possession 225, 246, 270, 296–7, 301–5, 326, 353 legal possessors 296, 302–5, 322, 376, 535 legal pragmatism see pragmatism legal principles 5, 36, 50, 56, 60, 107, 229 common 36, 229, 580, 601 general 36, 107, 154, 229, 238 legal realism see realism legal reasoning 18, 373 legal risk 155–7, 159, 271, 285, 618, 660 legal scholarship 40, 57–8, 249, 261, 272, 549 American 549 French 40 modern 549 legal sources see sources of law legal theory 12, 273 legal universalism see universalism leges 616, 635 legitimacy 22, 60–1, 131, 211, 219 lessees 116, 118, 121–3, 457–8, 463, 473, 475 letters of credit 159–61, 183–6, 191, 231–2, 577, 601–3, 605 letters of intent 13, 80–1 lex commissoria tacita 179–80, 362, 364 lex contractus 278 lex fori 87, 98, 146, 198, 200, 202, 216 lex mercatoria 5–7, 134–6, 154–9, 196–7, 207–9, 211–14, 506 and agency 255–6 approach 65, 126, 129, 131–2, 209, 548, 646 and bills of exchange 600–1 and bills of lading 580–3 and bulk assignments 526–7 and chattels 506 enforcement 526 and investment securities 652–5 new 158 old 538 operation 5, 126, 209, 213, 228, 266, 531 transnational 5–6, 135, 155–6, 266–7, 282, 287, 505–6 lex rei sitae see lex situs lex situs 488–91, 493–4, 498–501, 503–4, 521, 578–80, 646–7 application 490–6 and assignments 514–16 lex societatis 625, 639, 641, 646–7, 649 lex specialis 347 liability 8–9, 12, 66–7, 79–80, 232–4, 236–8, 581–2 non-contractual 450 product 8–9, 172 state 134 tort 12, 66–7, 117 liberal interpretation 15–16, 54, 196, 206, 208, 408 techniques 15 liberalisation 155, 164 liberating payments 391, 427, 513, 517, 524, 584 liens 308, 368–9, 382–5, 468–9, 477–80, 482–3, 505 life interests 259, 279, 315, 462, 534 limitation, statutes of 174, 305, 325 limited interests 259, 315, 318, 396, 491, 512

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INDEX limited proprietary rights 259, 264, 269, 293, 295, 300, 540–2 literal interpretation 4, 11–13, 17–20, 27–8, 30, 48–9, 51–3 living law 6 loans 82, 271, 368, 415, 430, 456, 463–4 location 488–9, 507–9, 578–9, 640, 643, 646–7, 649–50 Louisiana 280 Luxembourg 215, 343, 362, 453, 473, 634–5, 649–50 mandatory custom 131, 141, 197, 229 mandatory law 136, 146, 254 mandatory rules 130–6, 164, 197, 217–20, 256–7, 427–9, 504 foreign 217, 219–20 mandatory uniform treaty law 654 Mansfield, Lord 31, 33, 41, 319, 584 markets 158–9, 610–12, 625–8, 639–41, 643–5, 650, 659–60 eurobond 612, 626 methodology 10, 62, 125–6, 550 meubles n’ont pas de suite 374–5, 377, 478 misbehaviour 57, 77, 88 misrepresentation 35, 75–6, 87–92, 133, 170, 175–6, 180–1 innocent 87, 89–91, 133, 146, 170, 175–6 mistake 75–7, 87–8, 90–2, 136–7, 141–3, 145–7, 172–6 modern civil law 12, 23, 91–2, 97, 119–20, 278–9, 288–9 modern common law 46, 282, 313, 318 modern contract law 14–15, 18, 30, 66, 284, 334 nature of parties 1–4 type of contract 1–4 modern contract theory 10–19, 21, 26, 31, 46, 48, 284 and normative interpretation 19–21 modern private law see private law modern property theory, paucity 540–9 modernlex mercatoria see new lex mercatoria monetary claims 268, 271, 397–9, 405–6, 419–20, 423, 613 money judgments 83–5 morality 24, 31, 72 mortgagees 396, 459, 467–8 mortgages, chattel 319, 459–60, 479 movable assets see movable property movable property 180, 264, 266–8, 277, 282, 331–2, 550–1 law see also Introductory Note dynamic 560–1 types 271–7 movable tangible assets see tangible movable assets mutual claims 383, 627 named bills of lading 577–8 national courts 165 nationalisation 517 natural law 2, 5, 24, 49, 64, 120, 288 concept 236 school 2, 24, 49, 120, 236, 288, 391 secular 24 natural persons 7, 27, 42, 178, 291, 342, 533–4 see also legal personality negligence 53, 59, 67, 78–9, 98, 103, 322

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negotiability 22, 271, 566–7, 570, 577–9, 612–13, 623–4 negotiable documents of title 187–8, 223, 563, 565, 570, 576–7, 579–80 negotiable instruments 494–5, 527–9, 567–9, 583–601, 609, 611–13, 621–4 shares/bonds as 610–13 negotiation 3–4, 53–5, 78–80, 570–1, 573, 579, 591–2 duties 3–4, 50–1, 53–5, 57, 74, 78–80, 138 pre-contractual 78–80 negotiations 3–4, 78–80, 112, 133–4, 570–1, 579, 591–2 nemo dat 210, 244, 299, 371–2, 378, 424, 428–9 and assignments 423–7 origin of rule 375–81 Netherlands 41–4, 83–5, 355–7, 359–61, 453–4, 461–4, 496–8 bankruptcy law 498, 638 netting 15, 118, 264, 469, 475, 530–1, 657 new law merchant see new lex mercatoria new lex mercatoria 158 new owners 114–16, 152, 171, 260, 262, 353, 613 nineteenth century 2, 20, 24–5, 29, 459–60, 478–9, 599–600 early 2, 25, 460 late 236 non-defaulting party 175–6, 204, 382 non-payment 153, 179–81, 431, 588, 596 see also payment(s) non-performance 73–4, 92–4, 96–7, 102, 133, 145–6, 169 see also performance non-possessory security interests 264, 278, 287, 295, 466–7, 478–80, 527–8 non-professionals 540 non-recourse financing 430–1 non-secured creditors 478, 482 normative approach 16–17, 19, 36–7, 47–51, 54–5, 238, 284 normative interpretation 5, 17, 19–20, 28, 42, 91, 209–10 in practice 46–83 normative thinking 75, 78–83 normativity 6, 65, 132, 286 international 65, 132 norms 50, 54–6, 158–9, 208–12, 221–2, 228–9, 654 hierarchy of 7, 154, 158–9, 197, 208–12, 228, 654 higher 229, 654 notification 388–93, 395–7, 399–400, 404–7, 409–11, 420–3, 431–3 requirements 277, 389, 392, 408–10, 413, 421–2, 435 novation 39, 390, 394, 405, 410–12, 427–8, 510–11 numerus clausus 7, 264, 286, 290, 332–3, 542–3, 549 virtues and pitfalls 335–40 objective approach 47, 49, 101 objective law 11, 17–18, 41, 104, 109, 151–2, 175 objectivity 17, 27, 60, 143 obligations 13, 25–6, 84, 113–16, 215–17, 383–6, 523–4 asset maintenance 615, 621, 631, 645, 654 law of 120, 215–17, 251, 284–5, 385–6, 532, 550–1 payment 93, 99, 102, 185, 188, 224, 231

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obligatory claims 268, 307, 535 obligatory rights 112, 246, 261, 272, 290–1, 313, 542–3 and proprietary rights 288–90 relativity 310–12 offer 20–2, 25–6, 29–30, 32–4, 47–50, 142–4, 200–1 and acceptance language 12, 20, 26, 34, 139 meaning 27–30 offerors 25–6, 34, 143–4 on-board bills of lading 224, 563–4, 573 open agency 245, 247, 249–50 openness 57, 72, 327, 336, 340, 469 ordinary assets 386, 395, 406, 410, 419, 507 ordinary flow of goods 306, 363, 365, 372, 374 origin, country of 23, 153, 166–7, 490–2, 496–8, 579–80, 598 original buyers 348, 380, 471, 573, 575–6 original contracts 113, 118, 120, 261, 405, 418–20, 594 original creditors 250, 390–1, 394, 396, 402, 413 original owners 305, 325, 372, 378–80, 424, 658 original parties 112, 115, 117, 225, 289, 311, 404–5 original sellers 185, 290, 363, 456–7, 471, 570–1, 575–6 ostensible ownership see apparent ownership overvalue 167, 182, 260, 415–17, 456, 463–5, 468 owners 114–16, 292–6, 300–5, 307–11, 313–18, 321–6, 611–18 equitable 321, 436, 447, 618 full 290, 294, 355, 358, 457–9, 465, 475 new 114–16, 152, 171, 260, 262, 353, 613 original 305, 325, 372, 378–80, 424, 658 succeeding 115, 262, 289, 328, 330 ownership 263–70, 272–83, 290–308, 310–28, 339–45, 434–42, 534–43 apparent 180, 308, 362, 371, 469, 480–1 concepts 274, 279–80, 292, 297, 315, 317–18, 354 conditional 84, 267, 436–7, 471–2, 476, 496, 556 duality of 265, 285, 327, 440–1, 449–50, 469, 471–2 reputed 178, 180, 350, 367, 479, 481 rights 279–81, 298–300, 436–7, 439–40, 475–6, 541–3, 617–18 conditional 298–9, 436–7, 469–70, 472, 475–6, 536–8, 543 full 308, 358, 440, 448, 491 temporary 280–1, 298–9, 314–15, 414, 436–7, 460, 536–8 split 439, 461 transfer of 151–2, 264, 278–80, 294, 341–5, 351–2, 358 ownership-based funding 465, 475, 639 pacta sunt servanda 25, 132–3, 210 Pandectists see Germany, Historical School Papinianus 57 parol evidence rule 28, 35–7, 52, 99, 144, 221 partial codification 151, 156, 200, 207, 228 party autonomy 6–8, 16–18, 50–2, 487–9, 517–19, 531–3, 647–51 passing of risk civil and common law 171–6 international sales 167–70 passing of title 152, 171–2, 202, 205, 246, 343, 377

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past experiences, extrapolation of 137, 147 Paulus 300 payees 190–1, 265, 584–92, 594, 596–7, 599–600, 620 payment circuit 190–1, 578–9, 601–2, 608 payment obligations 93, 99, 102, 185, 188, 224, 231 payment risk 160, 185, 187, 233 payment systems 529, 622, 633 payment(s) 155–7, 159–65, 185–91, 398–403, 584–8, 596–8, 600–4 liberating 391, 427, 513, 517, 524, 584 liberating effect 420–3 performance 12–17, 30–3, 66–8, 79–112, 116–21, 144–6, 202–5 beginning of 13, 16, 32–3, 48, 81, 139 defective 12, 97 guarantee of 99, 103 in kind 83–6, 97 specific 83–8, 90–1, 97–8, 129–30, 146, 202–3, 368–9 personal actions 272, 288, 365, 367, 370, 375, 429 personal defences 591–2, 597 personal property 10–11, 271–2, 277–9, 312, 318–19, 322–3, 479–81 personal rights 273, 289, 295, 309, 312, 336, 442 personality, legal 437–8, 440, 448–50, 452 philosophy 66, 105, 559 physical assets 248, 270, 303, 320, 459, 534, 552 physical delivery 152, 171–2, 174–6, 311, 347, 494–5, 567 physical possession 169–72, 279–82, 296–8, 321–4, 330–3, 373–83, 476–80 protection of 321, 330, 352, 376 transfer of 153, 169, 340, 342, 351–3, 366, 388–9 pignus 477–8 pledges 295, 300, 317–18, 385, 477–9, 523, 656–8 Poland 343, 599 political risk 101, 155, 157, 159, 161, 185, 593 port of loading 226, 581–2 Portugal 7, 60, 125, 156, 196, 215, 253 positive law 6, 262, 277, 303, 334, 336–7 positivism 62–5 possession 291–306, 310–33, 350–5, 373–83, 466–72, 475–84, 534–6 actual 178, 325–6, 377, 379–80, 383 adverse 325, 446 legal 225, 246, 270, 296–7, 301–5, 326, 353 physical 279–82, 296–9, 315–19, 321–6, 330–3, 373–83, 551–4 transfer of 153, 340, 342, 388, 566 possessors 293, 296–8, 300–5, 307, 317–19, 322–6, 330 legal 296, 302–5, 322, 376, 535 possessory interests 327, 467, 479–80, 483 post-contractual duties 60, 129, 147, 195 renegotiation 3, 51, 53, 55, 136 post-contractual rights 58 Pothier, R-J 2, 25, 41, 84, 120–1, 353, 389 powers 43, 60–2, 233, 235–40, 440–1, 454–5, 499–503 practitioners 156, 196, 312, 581, 614, 636, 639 praetor 24, 57 pragmatism 49 pre-contractual duties 12, 45, 58–9, 67–8, 78, 136 disclosure 75–7

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INDEX information 75–7 negotiation 78–80 precedence 135, 141, 219–20, 407 precedent 57, 62, 93, 95, 180, 227 predictability 63, 141, 549, 558–9 preferential rights 308, 330, 468–9 prescription, acquisitive 270, 300–1, 303–7, 325–6, 341–2, 372–3, 376–8 price 39–42, 45, 144, 153–4, 173–6, 194–5, 199–203 repurchase 358, 456–8, 474–5 PRIMA 519, 647–50, 654, 657 Principles of European Law: Sales 228–9 Principles of European Trust Law 441, 450–2, 454 priority 307–11, 385, 425–6, 460, 465–7, 476–7, 481–3 private international law 130–1, 205–12, 215, 506–9, 517–18, 525–7, 578–80 and agency 251–3 and bills of exchange 595–8 and bills of lading 578–80 and chattels 487–506 modern 209, 211, 267, 434, 506, 580, 635 rules 23, 130–1, 135–6, 205–6, 208–9, 215, 525–6 private law 5–7, 46–8, 61–2, 64–5, 125–8, 139–41, 550–1 and common law 148 domestic 51, 65, 71, 141, 550 formation 5, 61–2, 127–8, 139 harmonisation 550 intervention 65, 125, 157 sources of 5, 7, 46–83, 127, 137, 141, 148 transnationalisation of 51, 64–5, 283 uniform 7, 71, 127, 140, 192 private parties 5, 18, 210, 316, 532 privity 1, 112–24, 129, 147, 243, 257, 262 pro rata rights/emtitlements 610, 613, 616–17, 622–3, 630, 632, 642 product liability 8, 172 professional activities 7, 540, 653 professional dealings 2–7, 15–16, 27–9, 126–8, 132–3, 146–9, 550–2 change of circumstances 81–3 professional debtors 14–15, 48, 51, 76, 82, 103 professional parties 3–5, 11–18, 51–3, 74–83, 104–7, 127–30, 132–5 professional sphere 13–16, 67, 80–3, 110–11, 137–8, 149, 162–3 sources of law 559–60 professionality 112, 146, 163, 213, 653 professionals see professional parties promises 6, 13, 24–6, 28–33, 38, 40–1, 92–3 exchange of 29–30, 32, 41 promisors 29, 31, 93–4, 96, 104, 123, 204 promissory estoppel 32 promissory notes 46, 190, 271, 400, 419–20, 520, 600–1 property law see Introductory Note property rights see proprietary rights proportionality 158, 219 proprietary claims 84, 178, 268, 474, 522, 549, 630 proprietary effect 115, 180, 251–2, 360, 428, 461, 515 proprietary interests 262–3, 308–9, 319–20, 434–5, 469–70, 490–2, 547–8

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equitable 262–3, 312, 315, 319–20, 381, 511, 527–8 proprietary laws 259–68 proprietary rights 195, 246–7, 259, 263, 273–4, 336, 541 civil law 288–312 closed system of 336–7, 357, 471, 543, 617 common law 312–40 intangible assets 386–435 modern structure of 533–40 nature and structure of 290–4 and obligatory rights 288–90 practial differences between civil law and common law 328–9 traditional 294–300, 544 traditional physical and anthropomorphic approach 280–2 transfer 340–85 unitary system of 313, 540, 545 proprietary structures 17, 261, 271, 279, 334, 529, 540 protection bona fide holders 503, 578, 600 bona fide purchasers 284–5, 363–4, 374–5, 380–1, 471, 495, 527–8 physical possession 321, 330, 352, 376 weaker parties 36, 50, 64 public international law 5–6, 102 public order 5–6, 40, 42, 131–2, 197–8, 210–11, 214 concepts 40, 73, 219 considerations 42, 159, 210, 214 requirements 42, 53, 131, 138, 197–8, 214, 334 public policy 17, 48, 126, 214, 219–20, 489, 492 bar 255 domestic 135, 156, 214, 494 publicity 263, 289, 294, 388–90, 392, 497, 538 Pufendorf, S 24–5, 49, 288, 343 purchasers, bona fide see bona fide purchasers quantity 45, 93, 144, 151, 153–4, 195, 199–201 Rabel, E 110, 192, 252, 521, 579 rationality 18–19, 24, 359 re-characterisation risk 635, 639 real agreement 361, 366, 370, 372, 392, 407, 570 real defences 590–2 real estate 44, 262, 277–8, 308, 363–4, 370–1, 477–8 see also real property real property 272, 278, 286, 313, 353, 442, 467 realism 50 realty see real property reasonable commercial standards, observance of 68 reasonable reliance 32, 34, 57, 143–4, 234 reasonableness 12, 67–9, 73–5, 108, 136, 141–2, 214 reasoning, legal see legal reasoning receipt 142–3, 187, 563, 570–1, 574–9, 582, 605–7 receivables 276–8, 397–402, 404–8, 413–19, 429–32, 471–5, 484–9 assignment 294, 353, 397 excess 358, 415, 430–1 factoring 250, 357, 452, 457–8, 472–4, 593 financing 357, 413–16, 425–6, 430–2, 434–5, 457–8, 472–3 reclaiming rights 88, 325, 375, 477, 564 alternatives to 183–4

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recognition 389–91, 488–93, 496–7, 499–501, 503–5, 524–6, 642–3 foreign trusts 453, 488, 500, 503–4 state 500, 660 recourse 114–15, 173, 403–4, 586, 588–9, 592–4, 596–8 financing 429–32, 557 redemption 319, 396, 459–60, 470, 479, 651 equity of 319, 459–60, 470, 479 registration 392, 409, 479, 491, 497, 613–14, 624–5 Regulation on the Law Applicable to Contractual Obligations 131, 158, 200, 209, 215, 217–22, 229 relationship external 187, 233–4, 241, 247, 251 internal 232, 234–8, 240–2, 244, 246–7, 251–3, 255 relationship thinking 1–4, 13–17, 53, 57–60, 63–4, 75, 128 relativity 310–12, 324, 467 relevant facts 56 reliance 12–14, 20–2, 26–8, 30–9, 47–50, 76–9, 142–4 detrimental 16, 21, 26, 32–3, 78, 81, 143 reasonable 32, 34, 57, 143–4, 234 religion 24 renegotiation 1, 3, 81–3, 104–6, 108–11, 133, 565 duties 3–4, 13, 48, 50–1, 103, 109–10, 136 post-contractual 3, 51, 53, 55, 136 rental agreements 2–3, 23–4, 101, 112, 115–16, 139, 262 repayment 415, 458–9, 464–5, 520 replacement assets 277, 356–7, 447, 464–6, 484–5, 528–9, 539 replacement goods 94, 102, 167, 179, 350, 447, 465–6 repo financing 332, 458, 461, 545, 629 repo of investment securities 457, 465, 472–3 repos 118, 456–8, 464, 474–5, 529–31, 556, 639–41 repossession 44, 84, 260, 263, 307–9, 457, 467–70 immediate 84, 309, 317–18, 322–5, 378, 541 representations 45, 88–90, 92, 95–6, 237, 246, 250 repurchase price 358, 456–8, 474–5 reputed ownership 178, 180, 350, 367, 479, 481 rescission 87–92, 173–81, 183–4, 202–3, 359–60, 362, 367–70 research, empirical 559 reservations of title 166–7, 177–81, 344–5, 361–2, 460–7, 469–73, 496–8 extended 356–7, 407, 409, 484 residence 161–2, 217–18, 502–3, 508, 512, 516–18, 521–2 restitution 1, 35, 78–9, 267–8, 270, 368, 394–6 resulting trusts 298, 319, 435, 439, 442, 444–5, 448 retention 182–4, 189, 352–3, 381–5, 465, 498, 577 contractual 180–2, 382 rights 115, 182–4, 203, 247, 252–3, 383–5, 498 contractual 180–2, 382, 498 statutory 182–3, 382, 385 retentors 115, 182, 311, 352, 382–5, 498 retransfers 178–9, 181, 342, 360, 364, 431, 458–9 return of title 35, 153, 178, 180–1, 183–4, 367, 369 reversionary interests 279, 462, 467 revindicatio 300–1, 303–4, 307–9, 311, 325, 552–3 rights

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absolute 310–11, 321, 324, 329 acquired 490–1, 578 assigned 410, 412, 418 bona fide purchasers 414, 501, 533, 651 closely related 394, 401 conditional 414, 461, 470 contractual user 260–4, 266, 286, 292, 298, 309, 548–9 ownership see ownership, rights personal 273, 289, 295, 309, 312, 336, 442 preferential 308, 330, 468–9 proprietary see proprietary rights security 491, 497, 523, 557, 570, 576 set-off 308, 399, 401, 418, 420, 598, 631 third-party 112, 115–17, 119–20, 124, 479 user 3, 295, 302, 435, 456, 470 voting 181, 611, 620, 651–2 rigidity 287, 641 risk acceptance 3, 11, 13–15, 53–5, 75–7, 79–83, 109–10 credit 155, 160, 257, 398, 415–17, 430, 474 division 19, 38, 81–2, 104, 108 legal 155–7, 159, 271, 285, 618, 660 management 4, 11, 17–19, 336–7, 540–2, 549, 559–60 passing of see passing of risk political 101, 155, 157, 159, 161, 185, 593 re-characterisation 635, 639 transfer of 173–5, 195, 201–2, 226, 495, 576 see also passing of risk Roman law 23–4, 49–52, 120–1, 288, 345–7, 349–54, 376–8, 477–8 classical 365, 367 influence 4, 24, 313, 352, 365 Ius Commune 2, 24, 49, 120, 288, 313, 365 Rome Convention on the Law Applicable to Contractual Obligations 215–16, 218, 285, 514–19, 523, 525–6, 532 safe arrival 160–1, 185, 188–9, 564 safe harbour function 184–6, 188, 563–4 sale of goods 2–4, 9–10, 44–5, 151–2, 171–3, 346–9, 527–30 sale-repurchase agreements see repos; finance sales sales cash 142, 144, 345, 352, 369–70, 381 conditional 180, 415–17, 430–3, 456–60, 463–7, 470–4, 477–9 consumer 4, 162–3, 168–9, 172, 194, 531 double 311, 343, 345, 347, 576 temporary 351, 354–5, 460, 650 sales agreements 101–2, 151–2, 172–6, 180–3, 342–5, 353–5, 491–3 failed 90, 179, 183, 326, 363, 365, 380 minimum requirements 153–6 sales price protection 176–82, 330, 472, 496 Savigny, FC von 2, 11, 25, 41, 297, 347, 366 Schmitthoff, C 165, 227, 521, 595 scholarship see legal scholarship Scotland 9, 66, 163, 327, 352, 444, 451–2 sea waybills 571, 577–8, 582, 601–2, 605 seal, under 29–31, 38, 40

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INDEX search duties 46, 263, 265, 332, 337, 398, 403 secular natural law 24 secured creditors 260, 308, 350, 380, 465, 468, 482–3 secured transactions 180, 283–4, 415–16, 430, 456, 463–4, 555–6 securities accounts 271, 614–17, 628–9, 632–3, 651–3 dematerialised 613, 616, 625, 629, 659 entitlements 299, 532, 613–14, 620, 622–3, 626–9, 653–4 dematerialised 616 fungible 432, 613, 616, 637 intermediaries 615–17, 647 transferable 610, 612 security entitlements 22, 284–5, 544–6, 614, 616–17, 631–3, 640 security interests 290–3, 379–81, 463–70, 472–83, 496–9, 504–9, 555–7 attachment and perfection 482–4 creation 45, 277, 341, 343 holders 260, 307, 464, 467–8, 478–81, 483, 613 non-possessory 264, 278, 287, 295, 466–7, 478–80, 527–8 outward signs 475–81 security rights 491, 497, 523, 557, 570, 576 security transfers 276, 350, 380, 392, 408–9, 416–17, 428 segregation 249, 260, 439–40, 444–5, 450–1, 617–19, 630–1 seisin 267, 272, 279–80, 314–17, 321, 351–2, 378–9 see also physical possession self-help 297, 307, 468–9 sellers 160–91, 201–5, 222–5, 346–58, 370–4, 379–83, 570–7 original 185, 290, 363, 456–7, 471, 570–1, 575–6 unpaid 167, 177, 181–2, 327, 382–3 separation 61, 206, 249, 313, 436–7, 440, 449–52 servitudes 259, 261, 289–90, 292, 295–6, 309–10, 387 set-off 15, 247–9, 252–4, 399–401, 418–20, 475, 598 rights 308, 399, 401, 418, 420, 598, 631 settlement 487, 627–9, 631–4, 636–9, 644–5, 648–9, 654–60 agents 633, 656 EU activities 658–60 systems 244, 633, 638, 644, 648, 659 Settlement Finality Directive 216, 487, 627, 629, 631, 633, 648–9 settlors 116, 285, 435–6, 440–3, 445, 450–5, 502 seventeenth century 24, 288, 306, 353, 364–5 shareholders 3, 115, 210, 399, 610–11, 618, 636–7 shares 271, 603–4, 610–15, 617–18, 623–5, 635–7, 641–2 types 610–38 underlying 636, 638 shippers 218, 565, 571, 573, 581, 602, 606 ship’s rail 187, 224–6, 344, 563, 573–4 Sicherungsuebereignung 330, 450, 459, 461, 464, 466–9, 479–80 sight bills see sight drafts sight drafts 584–5, 589, 592, 594, 597 signatories 190, 453, 586, 588–9, 591–3, 596, 598 signatures 22, 144, 567, 584–6, 588–9, 591, 603–4

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situs 221, 488–95, 497–8, 501–2, 514, 519–22, 579 debts 516–22 social costs 273 social peace 11, 19, 54, 281, 292, 297, 330 social policies 274 social values 18, 54, 57, 61 society 5–6, 14, 64, 196, 277–8, 281, 560 soft law 131 sole distributors 232, 257–8 solvabilité apparente 178–9, 362, 364, 367, 457, 460, 469 sources of law 51–2, 62–4, 71–2, 131–2, 140–2, 206–9, 559–60 autonomous 14, 36–7, 52, 62–3, 131–2, 138, 531 dynamic 37, 55, 127, 138 hierarchy 7, 131, 141, 208, 229, 531, 559 independent 42, 51–2, 72, 560 private law 5, 7, 51, 58, 62, 64, 127 traditional 62, 206, 550 transnational 42, 46, 51–2, 55, 132, 147–8, 559 sovereigns 6, 52 Spain 60, 343, 363, 376 special disclosure duties 13, 55 special duties 2, 65, 162–3, 232, 239, 441, 501 specific performance 83–8, 90–1, 97–8, 129–30, 146, 202–3, 368–9 specificity 45–6, 142, 271, 273–6, 331, 389, 509–10 split ownership 439, 461 stability 286, 605, 645 standard terms 1, 16, 23, 36, 45, 51–2, 58 state intervention see intervention statutes of limitation 174, 305, 307, 325, 342, 372, 462 statutory interpretation 20, 48, 211 statutory intervention 36, 276, 323, 451, 542, 548 statutory law 1, 8, 26, 39, 52, 60, 528–9 statutory retention 182–3, 382, 385 statutory trusts 445, 501 stock exchanges 621, 624–5, 658 straight bills of lading see named bills of lading sub-custodians 614–16, 620, 634, 646 subcontracting 86, 117, 121–3, 144, 200, 410, 413 subjective approach 49, 67, 93, 103, 213 subjective rights 41 subrogation 410, 412–13, 523 substantive law 227, 272, 505 succeeding owners 115, 262, 289, 328, 330 supplementation 57–8, 71–2, 130, 139–40, 147–8, 206–12, 214–16 suspended interests 436, 439 swaps 43, 118, 368, 530, 544 Switzerland 20, 36, 53, 61, 245–6, 451, 599 system thinking 19, 51, 54, 56, 58, 62, 126 tangible assets 3, 247, 253, 255, 275, 291, 387–8 movable see tangible movable assets tangible movable assets 140, 151, 162, 182, 193, 268–9, 271–2 tariffs 155–6 teleological interpretation 14–15, 19, 48 temporary interests 278, 281, 299, 336, 541, 626 temporary ownership 264–5, 278, 280–1, 298–9, 314–15, 436–7, 460–1 temporary sales 351, 354–5, 460, 650

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temporary transfers 3, 285, 334, 462, 554–5, 639, 643 termination 83–4, 96–7, 104–7, 109, 111–12, 257, 368 terms contractual/contract 1–2, 36, 47, 50, 53, 65–7, 227–8 trade 163, 201, 222, 224–5, 227–8, 576 unfair 3, 36, 66, 95, 130, 136 thieves 43, 296, 303–5, 311, 322–4, 374–7, 446 third parties 112–24, 231–41, 243–9, 251–7, 317–20, 442–3, 447–50 relationship between principal and 245–50 third-party beneficiaries 112–13, 116–17, 119–20, 122, 124, 129, 404–5 third-party benefits 113, 117–18, 120–1, 123–4 third-party duties 112–21 common law 122–4 development in civil law 120–2 third-party rights 112, 115–17, 119, 124, 479 common law 122–4 development in civil law 120–2 thirteenth century 280, 346, 352, 376 tiered systems of transfer 614–15, 617, 619, 621–2, 637 time drafts 585, 587–8, 593–4, 597, 600 acceptance and discounting 587–8 title 165–7, 177–84, 341–55, 357–61, 367–72, 490–500, 563–75 conditional 181, 457, 471 documents of see documents of title passing of 152, 171–2, 202, 205, 246, 343, 377 reservations of 166–7, 177–81, 344–5, 361–2, 460–7, 469–73, 496–8 extended 356–7, 407, 409, 484 return of 35, 153, 178, 180–1, 183–4, 367, 369 transfer 151–4, 177–80, 341–55, 357–63, 365–9, 491–3, 570–6 abstract system 178, 347, 372, 377, 379, 390, 558 international sales 165–7 origin of abstract and causal views 365–71 voidable 89, 352, 368–70, 380, 446, 481, 483 tort 12, 78–80, 113–18, 267–70, 301–4, 318–22, 394–8 claims 387, 394, 396, 406, 426 liability 12, 66–7, 117 tracing 256, 298–9, 432–3, 447, 450–3, 484–6, 503 tracking 333, 435, 445, 447, 449, 630 trade terms 163, 201, 222, 224–5, 227–8, 576 transaction costs 126 transactional finality 286, 558–9 transactions 130–4, 233, 247–8, 463–4, 529–31, 631–5, 652–6 cross-border 70, 609, 656 financial 161, 294, 419, 527, 529, 544, 655–6 interstate 126 secured 10, 283–4, 456, 463–4, 467–8, 529, 555–6 transfer(s) agreements 124, 294, 358–64, 388, 391, 414, 537 bank 544, 609, 622 chattels 152, 356, 388–90, 392, 399, 427, 554 claims 388–9, 397, 409, 427, 507, 523, 527 conditional 332, 415–16, 432, 458, 462, 469, 474 electronic 569, 601, 609, 636

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instructions 606, 613, 621, 653–4 ownership 151–2, 154, 264, 278–80, 294, 341–5, 355 physical 351, 353, 366, 368, 386, 389 physical possession 153, 169, 340, 342, 351–3, 366, 388–9 restrictions 284, 418, 624–5, 643–4 risk 173–5, 195, 201–2, 226, 495, 576 security 276, 350, 380, 392, 408–9, 416–17, 428 temporary 3, 285, 334, 462, 554–5, 639, 643 tiered systems 614–15, 617, 619, 621–2, 637 title see title, transfer transferability 116, 164, 273, 395, 418–19, 544–5, 623–6 entire contracts 398–400 transferable securities 610, 612 transferees 180, 282, 323, 413, 547, 556–7, 564–5 bona fide 305, 328, 545, 565, 621–2 transferors 306, 349–50, 387–8, 398, 413, 485, 547–8 transnational commercial and financial legal order see international commercial and financial legal order transnational movable property law 259–660 see also Introductory Note transnationalisation 51–2, 64–5, 282–3, 334, 530–1, 625–6, 643–5 concept 62, 148, 262, 334, 522, 641 transparency 605, 658 transportation 153–5, 159–60, 184–6, 222–3, 565–6, 573–4, 580–2 treaty law 7, 10, 228–9, 253–4, 452–3, 580, 599–600 agency 253–5 uniform see uniform treaty law trust funds 441–3, 448, 455, 459 trust structures 249, 280, 285, 439, 444, 452, 543–5 trustees 244–5, 431–3, 435–6, 439–50, 452–5, 467–9, 499–503 bankruptcy 123, 182, 261, 309, 327, 368–9, 468–9 trusts 298–9, 314–17, 319–20, 332–4, 435–55, 499–505, 556–7 and 1985 Hague Convention on the Law Applicable to Trusts and Their Recognition 499–505 and agency 448–9 assets/property 285, 435, 441–3, 450, 452, 455, 499–504 and bailment 448–9 charitable 440, 445, 448, 450 common law 435–40, 443–5 constructive 244, 285, 298–9, 318–20, 444–53, 501, 631 foreign 333, 451, 453–4, 488, 500, 502–5 formal 265, 327, 439, 444, 552 law of 299, 314, 452, 454, 499, 501–2, 528–9 practical significance in common law countries 443–5 and private international treaty law 452–5 and related civil law structures 449–52 resulting 298, 319, 435, 439, 442, 444–5, 448 statutory 445, 501 twelfth century 288 UCC see Uniform Commercial Code

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INDEX UCP 8, 606 UNCITRAL 22, 192–3, 195–6, 207, 473, 525–6, 606–8 Convention on the Assignment of Receivables in International Trade 473, 484, 486, 505, 523, 526 underlying agreements 354, 359–60, 363, 404–5, 418, 427, 510–11 underlying assets 263–7, 328–32, 532–4, 543–4, 566–72, 578–80, 595 underlying claims 165, 190, 285, 295, 516–18, 524–5, 594–5 underlying contracts 232, 234, 239, 359, 403, 509–11, 596 underlying pools 616–17 underlying securities 22, 614–15, 618–19, 626, 630–1, 638–40, 646–7 underwriting 66, 255, 639 undisclosed agency 9, 45, 233–4, 239–40, 244–5, 247–9, 254–6 undisclosed agents 122, 234, 236–7, 243–8, 250 unfair contract terms 3, 36, 66, 95, 130, 136 unforeseen circumstances 103, 105, 153 UNIDROIT 10–11, 71–3, 130–1, 133–6, 142–6, 192–3, 211–12 Agency Convention 233, 248, 256 Principles for International Commercial Contracts 10, 71, 73, 128–31, 133–6, 142–6, 214 Project 655, 658 unification of contract law 125–8 Uniform Commercial Code (UCC) 67–8, 129–30, 180–4, 380–1, 397–8, 479–86, 528–32 and Incoterms 225–7 uniform international sales laws 192–230 uniform security law 486–7 uniform treaty law 7, 10, 192, 197, 228, 486, 580 and bills of exchange 599–600 and bills of lading 580–3 mandatory 197, 654 unitary approach 3, 57, 63, 79, 126, 128–9, 283 unitary system 128, 279, 313, 341, 394, 534, 544–5 United Kingdom 122–4, 177–82, 279–80, 317–22, 343–7, 491–3, 571–6 United Nations Commission on International Trade Law see UNCITRAL

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United States 29–34, 67–75, 180–3, 194–201, 212–14, 396–8, 458–60 unity 163, 252, 510–12, 514, 517, 522, 647 universal natural law see natural law unjust enrichment 10, 32, 35, 125–6, 268, 445–6, 631 unpaid sellers 167, 177, 181–2, 327, 382–3 unsecured creditors 447, 466, 478, 482 unwilling defendants 85 updating 19, 149, 286, 533 USA see United States usage 37, 60, 141, 206–8, 213–14, 226, 229 user rights 3, 295, 302, 435, 456, 470 usufructs 289–93, 295–6, 300, 309–10, 436–7, 461–2, 534 utility 5, 444 validity 34–7, 42–3, 45, 390–3, 426–8, 512–16, 518–19 values 17–18, 21, 54, 57, 61, 64, 273–4 social 18, 54, 57, 61, 138, 274 Vienna Convention see Convention on the International Sale of Goods (CISG/ICSG) Vinnius, A 272, 366 Voet, J 365, 390–2, 461 voidable title 89, 352, 368–70, 380, 446, 481, 483 Volksgeist 137 von Jhering, R see Jhering, R von von Savigny, FC see Savigny, FC von voting rights 181, 611, 620, 651–2 warehouse receipts 184, 186–7, 231, 271, 486, 563, 566 warehouses 159, 186–7, 201, 231, 302, 346, 563–4 warranties 92–3, 95–6, 98, 147, 175–6, 203–4, 429 and assignments 429–30 waybills, sea 571, 577–8, 582, 601–2, 605 weaker parties 13, 15, 28, 36, 50, 53, 59 protection 36, 50, 64 Wernerius see Irnerius Western Europe 288, 376, 453 Windscheid, B 173, 270, 366, 390 Wolff, C 391 World War II 192 written documents 44, 67, 78, 607 Zimmermann, R 31, 49, 120, 140, 173, 343, 365

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