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DALHUISEN ON TRANSNATIONAL COMPARATIVE, COMMERCIAL, FINANCIAL AND TRADE LAW VOLUME 2 This is the seventh edition of the leading work on transnational and comparative commercial, financial, and trade 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 has proven to be unrivalled. The work is divided into three volumes, each of which can be used independently or as part of the complete work. Volume 2 deals with the transnationalisation of contract; movable and intangible property law; and the transformation of the models of contract and movable property in commercial and financial transactions between professionals in the international flow of goods, services, money, information, and technology. In this transnational legal order, the emphasis in the new law merchant or modern lex mercatoria of contract and movable property turns to risk management, asset liquidity, and transactional and payment finality. Common law and civil law concepts are compared and future directions indicated. The potential, effects and challenges of the blockchain are noted, especially with regard to the carriage of goods by sea. All three volumes may be purchased separately or as part of a single set.
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Dalhuisen on Transnational Comparative, Commercial, Financial and Trade Law Volume 2 Seventh Edition Contract and Movable Property Law
Jan H Dalhuisen Professor of Law, Dickson Poon School of Law King’s College London Chair in Transnational Financial Law Catholic University Lisbon Visiting Professor UC Berkeley Corresponding Member Royal Netherlands Academy of Arts and Sciences Member New York Bar Former ICSID Arbitrator
HART PUBLISHING Bloomsbury Publishing Plc Kemp House, Chawley Park, Cumnor Hill, Oxford, OX2 9PH, UK HART PUBLISHING, the Hart/Stag logo, BLOOMSBURY and the Diana logo are trademarks of Bloomsbury Publishing Plc First published in Great Britain 2019 Copyright © Jan Dalhuisen, 2019 Jan Dalhuisen has asserted his right under the Copyright, Designs and Patents Act 1988 to be identified as Author of this work. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage or retrieval system, without prior permission in writing from the publishers. While every care has been taken to ensure the accuracy of this work, no responsibility for loss or damage occasioned to any person acting or refraining from action as a result of any statement in it can be accepted by the authors, editors or publishers. All UK Government legislation and other public sector information used in the work is Crown Copyright ©. All House of Lords and House of Commons information used in the work is Parliamentary Copyright ©. This information is reused under the terms of the Open Government Licence v3.0 (http://www. nationalarchives.gov.uk/doc/open-government-licence/version/3) except where otherwise stated. All Eur-lex material used in the work is © European Union, http://eur-lex.europa.eu/, 1998–2019. A catalogue record for this book is available from the British Library. ISBN: HB: 978-1-50992-582-7 ePDF: 978-1-50992-581-0 ePub: 978-1-50992-580-3 Typeset by Compuscript Ltd, Shannon
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To my Teachers and my Students
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Table of Contents Table of Cases xix Table of Legislation and Related Documentsxxvii Chapter 1: Transnational Contract Law1 Part I General 1.1 Introduction 1.1.1 Modern Contract Law: Nature of the Parties or Type of Contract? Relationship Thinking and the Professional Contract 1.1.2 The Effect of Globalisation. Transnationalisation of the Contract Law Concerning Professional Dealings 1.1.3 Content and Coverage of this Chapter. Formal Transnationalisation Efforts 1.1.4 Modern Contract Law. Will Theories and the Relevance of Intent. Non-intentional Aspects of Contract Law. The Meaning of Party Autonomy 1.1.5 The Formation and Operation of the Professional Contract Standard Contracts 1.1.6 A New Model of Contract Law among Professionals? Modern Contract Theory 1.1.7 Modern Contract Theory and the Normative Interpretation Technique in Civil Law 1.1.8 The Contribution of Law and Economics 1.1.9 The Challenge of E-commerce 1.1.10 The Smart Contract 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 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
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1 7 14
16 22 26 31 35 39 41 45
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1.2.4
Contracts: Construction and Remedies in Civil and Common Law. The Parol Evidence Rule 59 1.2.5 The Practical Significance of the Consideration Requirement in Common Law 62 1.2.6 The Common Law Notion of Consideration and the Civil Law Notion of Causa Compared 64 1.2.7 Other Aspects of Contractual Validity: Capacity and Authority 67 1.2.8 Other Aspects of Contractual Validity: Formalities 68 1.2.9 Other Aspects of Contractual Validity: Definiteness 70 1.3 The Normative Interpretation Technique in Practice: The Civil Law Notion of Good Faith, the Common Law Alternatives, Liberal Interpretation and the Role of Other Sources of Private Law 71 1.3.1 The Modern Normative Approach and the Concept of Dynamic Contract Law 71 1.3.2 Roman Law, Ius Commune, Nineteenth-century Thinking, and the Modern Revival of Multiple Sources of Contract Law in Civil Law Behind the Good Faith Notion 75 1.3.3 Interpretation and the Notion of Good Faith in Civil Law 78 1.3.4 Good Faith as a Multifaceted Notion 82 1.3.5 Institutional Aspects of the Operation of the Notion of Good Faith in Civil Law 88 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 90 1.3.7 Good Faith in Common Law. Alternatives. Equity Distinguished94 1.3.8 EU Notion of Good Faith 98 1.3.9 Good Faith and Sources of Contract Law in the CISG, UNIDROIT and European Contract Principles. The DCFR 100 1.3.10 When is Good Faith a Mandatory Concept? 102 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 105 1.3.12 Practical Effects of Good Faith or Normative Thinking: Pre-contractual Negotiation Duties, Contractual Co-operation Duties, and Abuse of Contractual Rights 108 1.3.13 Practical Effects of Good Faith or Normative Thinking: The Status of Commercial Letters of Intent. ‘Best and Reasonable Endeavour’ Clauses 111 1.3.14 The Practical Effects of Good Faith or Normative Thinking: Force Majeure and Change of Circumstances in Professional Dealings112
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1.4 Performance of the Contract, Defences, Default, Excuses, Termination114 1.4.1 Performance in Kind/Specific Performance 114 1.4.2 Lack of Consensus in Civil Law and Defences to Performance in Common Law: Invalidity and Rescission 118 1.4.3 Excuses of Performance and the Meaning of Conditions and Warranties, Covenants and Representations 124 1.4.4 Default or Breach and Damages 128 1.4.5 The Excuses of Force Majeure and Change of Circumstances 131 1.4.6 Change of Circumstances, Frustration and Economic Impossibility. Development in Civil and Common Law 134 1.4.7 Unforeseen Circumstances and the Balance of the Contract: Hardship and Renegotiation Duties 135 1.4.8 Modern Legislative Approaches to a Change in Circumstances 141 1.4.9 Contractual Hardship Clauses 143 1.4.10 How to Secure Contractual Rights and Obligations in Common and Civil Law? 144 1.5 Privity of Contract 149 1.5.1 Privity of Contract or Third-Party Rights and Duties under a Contract 149 1.5.2 Development of Contractual Third-Party Rights and Duties in Civil Law 157 1.5.3 The Situation in Common Law and the Developments in the US and England 160 1.6 The UNIDROIT and European Principles of Contract Law. The Vienna Convention and UCC Compared. The Draft Common Frame of Reference in the EU and the Draft EU Regulation on a Common European Sales Law 162 1.6.1 Unification of Contract Law. Academic Texts and the EU Activity in this Area 162 1.6.2 The Unitary Codification Approach 168 1.6.3 The UNIDROIT Principles for International Commercial Contracts171 1.6.4 The Principles of European Contract Law (PECL) 177 1.6.5 The Draft Common Frame of Reference 179 1.6.6 Interpretation and Supplementation in the Principles and the DCFR. Sources of Commercial and Financial Law, Hierarchy, and Lex Mercatoria Compared 183 1.6.7 Approach to Contract Formation: Consensus, Reliance, and Exchange Notions, Capacity, Formalities and Specificity 186 1.6.8 Defences. The Question of Continued Validity of the Contract 190 1.6.9 Performance, Breach and Excuses 192 1.6.10 Privity of Contract 193
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1.6.11 The Nature and Impact of the PECL and DCFR 1.6.12 The 2011 Project of the Expert Group on European Contract Law 1.6.13 The 2011 EU Draft Regulation on a Common European Sales Law (CESL)
193 195 198
Part II Contracts for the International Sale of Goods 2.1 The Main Aspects of the International Sale of Goods 203 2.1.1 Introduction 203 2.1.2 The Minimum Requirements of the Sales Agreement: Special Features and Risks of International Sales 207 2.1.3 Legal Risk in International Sales 211 2.1.4 Special Arrangements to Cover the Risks of International Sales215 2.1.5 International Sales as Contracts between Professionals. Effect on the Applicable Law 217 2.1.6 Currency and Payments in International Sales: Free Convertibility and Transferability of Money 220 2.1.7 The Transfer of Title in International Sales. Finality Issues 222 2.1.8 Conform Delivery and the Passing of Risk in International Sales224 2.1.9 The Passing of Risk in the Sale of Goods in Civil and Common Law 227 2.1.10 Proprietary Sales Price Protection in Civil and Common Law 233 2.1.11 The Retention Right of the Seller 238 2.1.12 Alternatives to the Reclaiming Rights in International Sales. The Letter of Credit 240 2.2 Ancillary Arrangements in International Sales. The Role of Intermediaries and Documents 240 2.2.1 The Safe Harbour Function: Agents and Documents of Title 240 2.2.2 The Use of Agents: Their Position 242 2.2.3 The Use of Negotiable Documents of Title in International Sales: Bills of Lading and Warehouse Receipts 244 2.2.4 Documents of Title in Payment Schemes in International Sales244 2.2.5 The Use of Negotiable Instruments in International Sales: Bills of Exchange 246 2.3 The Uniform International Sales Laws. The Vienna Convention or CISG 247 2.3.1 Origin and Scope 247 2.3.2 The Coverage of the Vienna Convention 250
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2.3.3 2.3.4 2.3.5 2.3.6 2.3.7 2.3.8
2.3.9
2.3.10 2.3.11 2.3.12 2.3.13 2.3.14 2.3.15
The System of the Vienna Convention: Directory or Mandatory Rules? 253 Applicability of the Vienna Convention 255 The Sales Law of the Vienna Convention. Formation 257 The Sales Law of the Vienna Convention. Substance, Default and Remedies 258 Supplementation and Interpretation of the Vienna Convention263 The Interpretation of International Sales Contracts under the Vienna Convention: Meaning of Conduct and Custom in Terms of Contract Interpretation 270 Supplementation of the Vienna Convention: Private International Law and the EU Regulation on the Law Applicable to Contractual Obligations 273 The Main Rules of the 2008 EU Regulation on the Law Applicable to Contractual Obligations 275 The Vienna Convention and the Different Trade Terms in International Sales 280 Incoterms: Their Status and Relation to the UCC and Vienna Convention 283 The Vienna Convention and the ICC Model International Sale Contract. The 2004 Principles of European Law: Sales 286 The Law Merchant Concerning International Sales 287 The EU Efforts in the Area of the Law Concerning the Sale of Goods 289 Part III Contractual Agency
3.1 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. Trusts as Alternative in Common Law 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 3.2 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 Agents Directive
291 291 295 298 300 302 305 309 310 310 312 315 315
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Chapter 2: Transnational Movable Property Law319 Part I Ownership, Possession and Limited, Future, Conditional or Temporary Proprietary Rights in Chattels and Intangible Assets 1.1 Introduction 319 1.1.1 The Notion of Property Law 319 1.1.2 The Difference between Contractual and Proprietary Rights327 1.1.3 Proprietary Rights and the Role of Publicity. Prior Knowledge in the Transferee Distinguished 332 1.1.4 Proprietary Rights as Risk Management Tools. The Liquidity of Assets and the Finality of Transactions. The Transferability of Contracts 337 1.1.5 Types of Assets. Claims 339 1.1.6 Types of Movable Assets. The Requirement of Economic Value and Commerciability. Notions of Identity, Specificity and Definiteness and their Inherent Constraints. The Alternative of Adequate Description in the Contract 344 1.1.7 Assets as Classes Identified Through Mere Description and the Proprietary Status of Assets in Transformation and Replacement Assets 349 1.1.8 Importance of the Law of Chattels and Intangibles in Civil and Common Law. Its Development alongside Land Law 353 1.1.9 The Traditional Physical and Anthropomorphic Approach to Property Rights. Modern Perceptions 357 1.1.10 The Need for New Financial Structures and their Effect on Modern Property Law 360 1.1.11 Comparative Law, Transnationalisation, and the DCFR 365 1.1.12 The Approach and Organisation of this Chapter 368 1.2 The Types of Proprietary Rights in Civil Law 369 1.2.1 The Difference between Proprietary and Obligatory Rights in Civil Law 369 1.2.2 Nature and Structure of Proprietary Rights and their Special Manner of Protection in Civil Law. The Numerus Clausus Notion. Ownership, Possession and Detention 372 1.2.3 The Traditional Proprietary Rights in Civil Law and the Way They are Held. The Notion of Possession Revisited. Common Law Compared 377 1.2.4 The Way Proprietary Rights are Protected in Civil Law 382 1.2.5 The Acquisitive Prescription and its Importance in Civil Law. Difference with the Statute of Limitations and the Protection of Bona Fide Purchasers 387 1.2.6 Proprietary Defences in Bankruptcy 390 1.2.7 The Civil Law Relativity or Priority Principle in Respect of Proprietary Rights: The Difference from the Relativity of Obligatory Rights 392
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1.3 The Types of Proprietary Rights in Common Law: The Practical Differences from Civil Law. Modern Functional Theories 394 1.3.1 Legal and Equitable Interests in Chattels 394 1.3.2 Ownership and Possession of Chattels in Common Law 399 1.3.3 Equitable Proprietary Interests in Chattels 401 1.3.4 The Common Law System of Proprietary Defences: Tort Actions Based on Better Rather Than Absolute Rights 404 1.3.5 Constructive Possession and Delivery in Common Law. The Absence of Acquisitive Prescription. Statutes of Limitation 407 1.3.6 The Situation in Bankruptcy 408 1.3.7 Practical Differences between the Common and Civil Law Approaches to Proprietary Rights in Chattels 410 1.3.8 Approximation of the Common and Civil Law Systems of Proprietary Law in Chattels. General Emphasis on User, Enjoyment and Income Rights. The Unifying Impact of Modern Financial Structures and the Requirements of Modern Risk Management. The Need for and Effect of Legal Transnationalisation411 1.3.9 Virtues and Pitfalls of the Numerus Clausus Notion. Modern Functional Approaches 417 1.3.10 The Effects of Globalisation and Transnationalisation on the Law of Movable Property. The Question of the Public Interest and its Representation at the Transnational Level 423 1.4 Transfer of Proprietary Rights in Chattels in Civil and Common Law 428 1.4.1 The Legal Requirements for the Transfer of Chattels 428 1.4.2 The Formalities of a Sale: Contract or Delivery (Physically or Constructively); Double Sales; the Real or Proprietary Agreement in Civil Law 431 1.4.3 The Relevance of Identification. Effect on the Transfer. Sales of Future Assets, Bulk Transfers and De Facto Transfers of Title 436 1.4.4 The Development of the Rules Concerning Delivery as a Formal Requirement of Title Transfer in Civil and Common Law 440 1.4.5 Legal Capacity and Disposition Right. Causes of Contractual Invalidity. Effect on the Title Transfer. Future, Conditional and Temporary Sales 442 1.4.6 The Transfer Agreement and its Failure: The Abstract and Causal System of Ownership Transfer. The Finality Issue 447 1.4.7 The Origin of the Abstract and Causal Systems of Title Transfer 453 1.4.8 Disposition Rights and their Failure: The Nemo Dat Rule and the Protection of Bona Fide Purchasers. Its Contribution to Finality 460
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1.4.9
On the Origin of the Nemo Dat Rule and the Principle of Bona Fide Purchaser Protection 463 1.4.10 The Retention Right of the Seller in the Case of Default of the Buyer 469 1.5 Proprietary Rights in Intangible Assets in Civil and Common Law 474 1.5.1 Asset Status of Intangibles. Proprietary Rights in Intangible Assets and the Possibility and Method of their Transfer 474 1.5.2 Assignments, Conditions and the Meaning of Notification of the Debtor. Bulk Assignments. The Situation in Double Assignments. Civil Law Developments 476 1.5.3 The Development in Common Law. Equitable Assignments and Bulk Transfers 481 1.5.4 Assignment of Rights and Delegation of Duties. The Issue of Severability of Monetary Claims and the Transferability of Entire Contracts. The Debtor’s Defences 485 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 488 1.5.6 The Assignability of Future Claims. When is a Claim Future? 493 1.5.7 Assignment, Novation, Amendment, Subrogation and Subcontracting497 1.5.8 Different Types and Objectives of Assignments 500 1.5.9 The Better Right of the Assignee. The Notion of Abstraction, Independence and Finality. Comparison with Negotiable Instruments504 1.5.10 The Notion of Abstraction or Independence and the Liberating Effect of Payment by the Debtor 507 1.5.11 The Ranking between Assignees, The Nemo Dat Rule in Assignments 509 1.5.12 Contractual and Proprietary Aspects of Assignments. Mandatory Rules. Applicable Law and Party Autonomy 513 1.5.13 Special Assignment Issues: Warranties, Conditions and Default 515 1.5.14 Bankruptcy Aspects of Assignments. The Status of Recourse and Non-recourse Financing 516 1.5.15 Uniform Treaty Rules Concerning Assignments? 519 1.6 Trusts. Constructive and Resulting Trusts, Tracking and Tracing. Agency. The Civil Law Response 521 1.6.1 Basic Features of the Common Law of Trust 521 1.6.2 Definitional Issues, Fiduciary Duties and Court Intervention527 1.6.3 The Practical Significance of Trusts in Common Law Countries 530 1.6.4 Constructive Trusts, Tracing and Tracking, Resulting Trusts, Statutory Trusts and Charitable Trusts 532
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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 1.7 Secured Transactions and Conditional or Finance Sales. Floating Charges 1.7.1 The Importance of Conditional Sales in Finance and the Difference from Secured Transactions 1.7.2 What are Sale and Repurchase Agreements or Finance Sales? The Characterisation Issue. Property-based and Security-based Funding 1.7.3 The Evolution of Conditional and Temporary Transfers in Civil and Common Law 1.7.4 When are Finance Sales Converted into Secured Transactions? The Recharacterisation Issue 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? 1.7.6 Examples of Finance Sales: Finance Leases, Repos and Factoring. Finance Sales as Executory Contracts, Cherry Picking and Netting 1.7.7 The Outward Signs of Security Interests and Ownership-based Funding. Possession or Filing 1.7.8 Attachment and Perfection of Security Interests in Movable Property under the UCC in the US. Meaning and Weaknesses of the Filing System 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 1.7.10 Uniform Security Law and Principles of Security Laws 1.8 Private International Law Aspects of Chattels 1.8.1 When Conflicts Arise 1.8.2 The Application of the Lex Situs and the Concept of Transnationalisation 1.8.3 The Notions of Equivalence and Adaptation; Temporary and Conditional Ownership, Security Interests, 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 Modern Lex Mercatoria Concerning Chattels. Earlier Approaches in the Law of Admiralty: The Maritime Lien
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1.9 Private International Law Aspects of Assignments 597 1.9.1 Conflict of Laws Issues in Respect of Monetary Claims. The Special Problems with Bulk Assignments 597 1.9.2 Terminology and Characterisation Issues 605 1.9.3 Mandatory Proprietary Laws Relating to Assignments. The Situs Issue 607 1.9.4 Current Approaches to Choice of Laws Issues in Assignments: Different Views of the Legal Situs of Debts 609 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 614 1.9.6 The Lex Mercatoria Concerning Bulk Assignments 617 1.10 The Modern Law of Chattels and Intangibles 618 1.10.1 Traditional and New Approaches 618 1.10.2 The Modern Structure of Proprietary Rights as Promoted by International Commerce and Finance. Transnationalisation625 1.10.3 Paucity of Modern Property Theory 634 1.11 The European Draft Common Frame of Reference 644 1.11.1 Introduction 644 1.11.2 Chattels and their Transfer. The Problem of Physical Possession648 1.11.3 Intangible Assets and their Assignment. The Problem of Asset Status 650 1.11.4 Security Interests. Treatment of Reservation of Title, Finance Sales and Floating Charges 652 1.11.5 Trusts. The Question of Systemic Integration 654 1.11.6 Certainty, Finality and Predictability 654 1.12 Uniform or Harmonised Statutory or Treaty Law. The Alternative of Transnationalisation and the Need for and Emergence of a Dynamic Movable Property Law 656 1.12.1 Consumers and Professionals 656 1.12.2 Different Sources of Law in the Professional Sphere 657 1.12.3 Dynamic Movable Property Law 657 Part II Negotiable Documents of Title and Negotiable Instruments 2.1 The Role of Documents 2.1.1 Bills of Lading and Warehouse Receipts 2.1.2 The Concepts of Document of Title and Negotiability 2.1.3 The Origin and Nature of the Bill of Lading and its Operation in the Proprietary Aspects of the Transfer of Goods
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2.1.4
Consequences of the Different Attitudes to Documents of Title when Goods are Transfered 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 2.2 Negotiable Instruments 2.2.1 Bills of Exchange 2.2.2 Acceptance and Discounting of Time Bills 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 Limited 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 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 2.3.2 Electronic Systems and their Importance in Replacing Transportation Documents. The CMI Rules and Bolero. Clearing and the Use of Central Counter Parties? 2.3.3 The Bill of Lading and the Potential of the Blockchain 2.3.4 The Situation with Regard to Bills of Exchange: Electronic Bank Transfers. The Facility of ‘@Global Trade’
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Part III Investment Securities 3.1 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, Book-entry Systems, Security Entitlements and Compartmentalisation. Securities Accounts and Bank Accounts Distinguished
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3.1.3
Transfer Instructions and Finality. Tiered and Chained Systems of Transfer 721 3.1.4 Negotiability and Transferability of Investment Securities under Domestic and Transnational Law. Use of Securities Entitlements to Enhance Transferability and Liquidity 723 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 726 3.1.6 Modern Clearing and Settlement Systems. Their Internationalisation 732 3.1.7 The Evolution Towards Security Entitlements: Depository Receipts and the Earlier Developments Towards Dematerialisation and Immobilisation 734 3.2 The Transnationalisation of Custodial and Settlement Systems and its Opportunities 737 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 Implications737 3.2.2 The Law Applicable to Transactions in Investment Securities of the Book-entry Type 744 3.2.3 The Lex Mercatoria Concerning International Investment Securities Transactions 751 3.2.4 Uniform Law: The EU Financial Collateral Directive. The UNIDROIT Project and 2009 Geneva Convention 754 3.2.5 EU Activities in the Field of Clearing and Settlement. The Blockchain Potential 758 Index761
Table of Cases Australia Alstom Ltd v Yokogawa Australia; (No 7), SASC 49 (2012)������������������������������������������������������������������ 36 DKLR Holding Co (No 2) Ltd v Commissioner of Stamp Duty (1982) 149 CLR 431��������������������� 402 Hospital Products Ltd v US Surgical Corpn (1984) 156 CLR 41������������������������������������������������������� 301 Norman v Federal Commissioner of Taxation (1963) 109 CLR 9����������������������������������������������������� 349 Shepherd v Commission of Taxation [1966] ALR 969����������������������������������������������������������������������� 494
Belgium Commercial Court Brussels, 22 March 1988 [1989] RDCB 633�������������������������������������������������������� 588 Cour de Cass 17 October 1996, Sart-Tilman [1995–96] RW 1395����������������������������������������������������������������������� 734 9 December 1999, Pas I, 1669 (1999)����������������������������������������������������������������������������������������������� 306
Canada Bhasin v Hrynew 2014 SCC 71�������������������������������������������������������������������������������������������������������������� 95 Cansons Enterprises Ltd v Boughton & Co (1991) 85 DLR (4th) 129���������������������������������������������� 302 Rodaro v Royal Bank of Canada [2000] [QL] OJ 272������������������������������������������������������������������������� 490
European Union De Pinto Case C-361/89 [1991] ECR I-1189����������������������������������������������������������������������������������������� 13 Germany v European Parliament and Council of the European Union Case C-380/03 [2006] ECR I-11543������������������������������������������������������������������������������������������������������������������ 165 Gijsbrecht v Santurel Case C-205/07 ECJ, 16 December 2008, Jur I-9947���������������������������������������� 167 Gruber Case C-464/01 [2005] ECR I-439���������������������������������������������������������������������������������������������� 13 Webb v Webb Case C-294/92 [1994] ECR I-1717������������������������������������������������������������������������������� 539
France Cour d’Appel Aix en Provence, 24 October 1980, Bull de Transports, no 186 (1980)���������������������� 674 Cour de Cass 13 February 1834, s 1.205 (1834)����������������������������������������������������������������������������������������������������� 334 24 June 1845 [1845] D.1.309������������������������������������������������������������������������������������������������������������ 235 19 August 1849, D.1.273 (1849)������������������������������������������������������������������������������������������������������� 478 20 April 1858, D.1.154 (1858)���������������������������������������������������������������������������������������������������������� 371 9 May 1864, D.1.190 (1864)������������������������������������������������������������������������������������������������������������� 477 20 Mar 1872 [1872] D.1.140������������������������������������������������������������������������������������������������������������� 437 10 April 1878, D.78.1.289����������������������������������������������������������������������������������������������������������������� 684 29 June 1881, D.1.33 (1882)������������������������������������������������������������������������������������������������������������� 487 6 July 1886 [1887] D.I.25���������������������������������������������������������������������������������������������������������� 451, 455 15 June 1892 [1892] DI 596���������������������������������������������������������������������������������������������������������������� 86 24 January 1899, D.1.535 (1900)������������������������������������������������������������������������������������������������������ 371 14 March 1900 [1900] D.1.497��������������������������������������������������������������������������������������������������������� 437 28 November 1900 [1901] D.1.65���������������������������������������������������������������������������������������������������� 437 18 March 1903, D.1.126 (1905)�������������������������������������������������������������������������������������������������������� 371
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23 March 1903, D.1.337 (1903)�������������������������������������������������������������������������������������������������������� 371 12 May 1914 [1918–19] s 1.41������������������������������������������������������������������������������������������������������������ 86 27 May 1927, D.1928.25������������������������������������������������������������������������������������������������������������������� 219 3 May 1935 [1935] D.H.313������������������������������������������������������������������������������������������������������������� 235 20 June 1938, D.1.26 (1939)������������������������������������������������������������������������������������������������������������� 477 24 January 1939, Gaz Pal 1.5866������������������������������������������������������������������������������������������������������ 125 2 December 1947 [1948] Gaz Pal I.36������������������������������������������������������������������������������������������������ 86 20 October 1959 [1959] D 537��������������������������������������������������������������������������������������������������������� 117 30 October 1962 [1962] Bull Civ I 457�������������������������������������������������������������������������������������������� 230 20 March 1972 [1973] JCP 2.17542������������������������������������������������������������������������������������������������� 110 10 May 1972 [1972] Bull Civ III 214�������������������������������������������������������������������������������������������������� 47 27 November 1972 [1972] Bull Civ IV 282������������������������������������������������������������������������������������� 230 17 Mar 1975 [1975] D.S.553������������������������������������������������������������������������������������������������������������� 235 7 July 1975 [1976] D.S.70����������������������������������������������������������������������������������������������������������������� 235 20 November 1979 [1980] 33 Revue Trimestrielle de Droit Commercial 43�������������������������������� 236 8 July 1981 [1981] Bull Civ IV 316��������������������������������������������������������������������������������������������������� 230 12 June 1985, Bull civ III 95 (1985)������������������������������������������������������������������������������������������������� 477 15 March 1988, Bull civ IV, no 106�������������������������������������������������������������������������������������������������� 587 21 June 1988 [1988] Semaine Juridique (ed) G, II.21125��������������������������������������������������������������� 159 11 June 1991, Bull des Transports et de la Logistique no 2443������������������������������������������������������� 671 1 Dec 1995 [1996] JCP 22.565������������������������������������������������������������������������������������������������� 208, 259 29 June 2007 (Putrabali), Les Cahiers d’Arbitrage no 2007/2, Gaz Pal 17 July 2007, 44����������������� 11 Court of Appeal, 10 June 1992, Riom PTD Civ 343 (1993)���������������������������������������������������������������� 110 Court of Appeal Paris 31 January 1854, D.2.179 (1855)������������������������������������������������������������������������������������������������������ 496 27 November 1854, D.2.253 (1856)������������������������������������������������������������������������������������������������� 496 8 March 1904, D.2.65 (1905)������������������������������������������������������������������������������������������������������������ 487 Trib Gr Inst Paris, 8 March 1985, DS Inf Rap 346 (1985)������������������������������������������������������������������� 612 Tribunal de Commerce de Nanterre, 31 October 1990, Bull des Transports et de la Logistique, 136 (1991)���������������������������������������������������������������������������������������������������������������������������������� 670 Tribunal de la Seine, 18 December 1967, GP.2.108 (1968)����������������������������������������������������������������� 221
Germany BAG, 7 June 1963 [1963] NJW 1843���������������������������������������������������������������������������������������������������� 109 BGH 25 October 1952, BGHZ 7, 365 (1952)�������������������������������������������������������������������������������������������� 493 BGH NJW 190���������������������������������������������������������������������������������������������������������������������������������� 538 22 February 1956, BGHZ 20������������������������������������������������������������������������������������������������������������ 559 9 June 1960, BGHZ 32���������������������������������������������������������������������������������������������������������������������� 493 20 March 1963, BGHZ 39����������������������������������������������������������������������������������������������������������������� 587 14 Oct 1963, BGHZ 40������������������������������������������������������������������������������������������������������������� 476, 491 1 July 1970, 54 BGHZ, 214������������������������������������������������������������������������������������������������������� 236, 450 9 July 1975, 64 BGHZ 395���������������������������������������������������������������������������������������������������������������� 455 OLG Cologne, 2 February 1971 (1971) 47 NJW 2128������������������������������������������������������������������������ 222 OLG Düsseldorf, 27 October 1977 [1978]Neue Juristiche Wochenschrift 703��������������������������������� 471 RGH 8 March 1881, RGHZ 4��������������������������������������������������������������������������������������������������������������������� 478 RGZ 45, 80 (1900)����������������������������������������������������������������������������������������������������������������������������� 538 19 September 1905, RGHZ 61���������������������������������������������������������������������������������������������������������� 508 25 November 1911, RGHZ 77���������������������������������������������������������������������������������������������������������� 159 RGZ 84, 214 (1914)��������������������������������������������������������������������������������������������������������������������������� 538
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11 June 1920, 99 RGZ, 208 (1920)��������������������������������������������������������������������������������������������������� 306 23 September 1921, RGHZ 102�������������������������������������������������������������������������������������������������������� 491
International Award in the Matter of an Arbitration between Petroleum Development (Trucial Coast) Ltd and the Sheikh of Abu Dhabi (1952) 1 ICLQ 247 and (1951) 18 ILR 144������������������������������� 10 EctHr, App no 44302/02 15 November 2005��������������������������������������������������������������������������������������� 408
Netherlands HR 19 January 1898, W 5666������������������������������������������������������������������������������������������������������������������ 503 6 January 1922 [1922] NJ 265������������������������������������������������������������������������������������������������������������ 66 13 November 1937 [1937] NJ 433����������������������������������������������������������������������������������������������������� 66 15 November 1957 [1958] NJ 67����������������������������������������������������������������������������������������������������� 110 17 April 1964 [1965] NJ 23������������������������������������������������������������������������������������������������������� 364, 609 13 May 1966 [1967] NJ 3������������������������������������������������������������������������������������������������������������������ 277 19 May 1967 [1967] NJ 261�������������������������������������������������������������������������������������������������������������� 141 8 December 1972 [1973] NJ 377������������������������������������������������������������������������������������������������������ 221 12 January 1979 [1979] NJ 362�������������������������������������������������������������������������������������������������������� 159 12 January 1979 [1980] NJ 526�������������������������������������������������������������������������������������������������������� 459 24 October 1980 [1981] NJ 265������������������������������������������������������������������������������������������������������� 495 18 June 1982 [1983] NJ 723 Plas/Valburg��������������������������������������������������������������������������������������� 109 3 Feb 1984 [1984] NJ 752����������������������������������������������������������������������������������������������������������������� 309 25 March 1988 [1989] NJ 200���������������������������������������������������������������������������������������������������������� 495 15 February 1991 [1991] NJ 493������������������������������������������������������������������������������������������������������ 110 27 November 1992 [1993] NJ 287��������������������������������������������������������������������������������������������������� 298 11 June 1993 [1993] NJ 776����������������������������������������������������������������������������������������������364, 607, 609 26 November 1993 [1993] RvdW 15.108���������������������������������������������������������������������������������������� 674 18 Jan 1994 [1994] RvdW 61������������������������������������������������������������������������������������������������������������ 587 23 September 1994 [1996] NJ 461��������������������������������������������������������������������������������������������������� 728 16 May 1997 [1997] RvdW 126������������������������������������������������������������������������������������������������ 364, 609 20 Sept 2002, NJ 182 (2002)������������������������������������������������������������������������������������������������������������� 480 17 January 2003, NJ 281 (2004)������������������������������������������������������������������������������������������������������� 490 13 June 2003 RvdW nr 108, 2 July 2003������������������������������������������������������������������������������������������� 309 19 January 2007 PontMeyer, NJ 575 (2007)���������������������������������������������������������������������������������������� 3 29 2007 Derksen/Homburg NJ 576 (2007)����������������������������������������������������������������������������������������� 3 9 April 2009 UPC/Land, JOR 179 (2010)�������������������������������������������������������������������������������������������� 3 6 April 2012, LJN BV 6727��������������������������������������������������������������������������������������������������������������� 153 21 March 2014, NJ 167 (2015)������������������������������������������������������������������������������������������������� 476, 490
United Kingdom Adams v Lindsell (1818) 106 ER 250����������������������������������������������������������������������������������������������� 47, 52 Affrêteurs Réunis Société v Walford [1919] AC 801��������������������������������������������������������������������������� 161 Aiolos, The [1983] 2 Lloyd’s Rep 25����������������������������������������������������������������������������������������������������� 483 Amory v Delamirie [1558–1774] All ER 121��������������������������������������������������������������������������������������� 406 Appleton v Sweetapple 3 Doug 137 (1792)������������������������������������������������������������������������������������������� 54 Arnhold Karberg & Co v Blythe, Green, Jourdain & Co [1915] 2 KB 379����������������������������������������� 282 Ash v Ash (1696) Holt 701���������������������������������������������������������������������������������������������������������������������� 54 Aspden v Seddon (1876) 1 Ex D 496��������������������������������������������������������������������������������������������������� 489 Atlantic Computer Systems Plc, Re [1990] BCC 859�������������������������������������������������������������������������� 407
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Attorney General of Belize v Belize Telecom Ltd [2009] 1 WLR 1988������������������������������������������� 34, 60 Ayliffe v Tracey (1722) 2 P Wms 65�������������������������������������������������������������������������������������������������������� 52 Balder London, The [1980] 2 Lloyd’s Rep 489������������������������������������������������������������������������������������ 500 Bankline v Arthur Capel [1918] AC 435������������������������������������������������������������������������������������������ 60, 97 BCCI v Ali [2001] 2 WLR 735���������������������������������������������������������������������������������������������������������� 34, 60 Belvoir Finance Co Ltd v Stapleton [1970] 3 All ER 664�������������������������������������������������������������������� 456 Berkeley Community Villages Ltd and Another v Pullen and Others [2007] EWHC 1330 (CH)������ 94 Borden (UK) Ltd v Scottish Timber [1979] 3 WLR 672��������������������������������������������������������������������� 235 Brandao v Barnett (1846) 3 QBD 519������������������������������������������������������������������������������������������������� 472 Bristol and West of England Bank v Midland Railway Company [1891] 2 QB 653�������������������������� 673 Bristol Groundschool Ltd v Intelligent Data Capture Ltd and Or [2014] EWHC 2145 (Ch)������������ 95 British Movietonews v London and District Cinema [1951] 2 All ER 617������������������������������������ 60–61 Bulmer v Bollinger [1974] Ch 401��������������������������������������������������������������������������������������������������������� 50 Cammell v Sewell (1860) 5 H&N, 278������������������������������������������������������������������������������������������������� 581 Car and Universal Finance Co Ltd v Caldwell [1965] 1 QB 525�������������������������������������������������������� 457 Carlos Federspiel & Co SA v Charles Twigg & Co Ltd [1957] 1 Lloyds Rep 240����������������������� 433, 671 Chandler v Webster [1904] 1 KB 493��������������������������������������������������������������������������������������������������� 139 Channel Tunnel Group v Balfour Beatty Construction Ltd [1995] AC 334���������������������������������������� 10 Charnock v Liverpool Corpn [1968] 1 WLR 1498������������������������������������������������������������������������������ 161 Container Transport Inc v Oceanus Mutual Underwriting [1984] 1 Lloyd’s Rep 47�������������������������� 94 Cooper v Chitty 1 Burr 20 KB (1756)�������������������������������������������������������������������������������������������������� 401 Courtney & Fairbairn Ltd v Tolaini Brothers (Hotels) Ltd [1975] 1 WLR 297��������������������������������� 109 Crumlin Viaduct Works Co Ltd, Re [1879] II Ch 755������������������������������������������������������������������������ 439 Cundy v Lindsay (1878) 3 App Cas 459����������������������������������������������������������������������������������������� 456–57 Dalrymple v Dalrymple (1811) 2 Hag Con 54�������������������������������������������������������������������������������� 51, 57 Davis Contractors v Farnham [1956] 2 All ER 145����������������������������������������������������������������������� 61, 132 Dearle v Hall (1828) 3 Russ 1��������������������������������������������������������������������480–81, 483–84, 507, 509, 511 Dewar v Dewar [1975] 2 All ER 728���������������������������������������������������������������������������������������������������� 456 Don King Productions v Warren [1999] 2 All ER 218 (CA)��������������������������������������������������������������� 490 Drive Yourself Hire Co (London) Ltd v Strutt [1954] 1 QB 250�������������������������������������������������������� 160 Dunlop Pneumatic Tyre Co v Selfridge & Co [1915] AC 847������������������������������������������������������������ 160 Durham Bros v Robertson [1898] 1 QB 765������������������������������������������������������������������������������� 483, 500 Emirates Trading Agency v Prime Mineral Exports Private Ltd [2014] EWHC 2104����������������������� 112 Enichem Anic Spa and Others v Ampelos Shipping Co Ltd (the Delfini) [1990] 1 Lloyd’s Rep 252����������������������������������������������������������������������������������������������������������������������� 671 Esso Petroleum v Mardon [1976] 2 All ER 5��������������������������������������������������������������������������������������� 107 Euroption Strategic Fund Ltd v Skandinaviska Ensdkilda Banken AG [2012] EWHC 584 (Comm)����������������������������������������������������������������������������������������������������������������� 112 Evans v Marlett (1697) 1 Ld Raym 271������������������������������������������������������������������������������������������������ 668 Evans v Rival Granite Quarries Ltd [1910] 2 KB 979�������������������������������������������������������������������������� 349 Fibrosa v Fairburn [1943] AC 32��������������������������������������������������������������������������������������������������������� 139 First Energy UK Ltd v Hungarian International Bank [1993] 2 Lloyd’s Rep 194������������������������������ 298 Fitzroy v Cave [1905] 2 KB 364���������������������������������������������������������������������������������������������� 475, 482–83 Foakes v Beer (1884) 9 App Cas 605 (HL)��������������������������������������������������������������������������������������������� 55 Future Express, The [1993] 2 Lloyd’s Rep 542����������������������������������������������������������������������������� 671, 673 Glegg v Bromley [1912] 3KB 364��������������������������������������������������������������������������������������������������� 483–84 Glenroy, The [1945] AC 124����������������������������������������������������������������������������������������������������������������� 671 Goldsmith v Rodgers [1962] 2 Lloyd’s Rep 249���������������������������������������������������������������������������������� 232 Graham v Johnson (1869) LR 8 Eq 36������������������������������������������������������������������������������������������������� 487 Hazell v Hammersmith and Fulham London Borough Council and ors [1991] 1 All ER 545����������� 68 Henderson v Comptoir d’Escompte de Paris (1873) LR 5PC 253����������������������������������������������������� 670
Table of Cases xxiii
Hill v Tupper [1863] 2 Hurlst 7 C 121������������������������������������������������������������������������������������������������� 335 Hindley & Co v East Indian Produce Co [1973] 2 Lloyd’s Rep 515��������������������������������������������������� 701 Hirji Mulji v Cheong SS Co [1926] AC 497������������������������������������������������������������������������������������������� 97 Hollingworth v Tattersall 1778��������������������������������������������������������������������������������������������������������������� 54 Holroyd v Marshall [1862] 10 HL Cas 191���������������������������������������������������������������������������������� 438, 494 Hood v Anchor Line (Henderson Brothers) Ltd [1918] AC 837���������������������������������������������������������� 62 Hughes v Pump House Hotel Co Ltd [1902] 2 KB 190���������������������������������������������������������������������� 494 Independent Automatic Sales v Knowles and Foster [1962] 1 WLR 974������������������������������������������� 235 Independent Broadcasting Authority v EMI Electronics [1980] 14 Building Law Reports 1����������� 161 Interfoto Picture Library Ltd v Stiletto Visual Programmes [1989] 1 QB 433���������������������1, 50, 62, 96 Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896����������������������������������������������������������������������������������������������������������������������34, 60, 475 J Spurling Ltd v Bradshaw [1956] 1 WLR 461��������������������������������������������������������������������������������������� 62 Jade International Steel Stahl und Eisen GmbH & Co KG v Robert Nicholas (Steels) Ltd [1978] QB 917��������������������������������������������������������������������������������������������������������������������������� 687 Jet2.com Ltd v Blackpool Airport Ltd [2012] EWCA Civ 417������������������������������������������������������������ 112 Jones Ltd v Waring & Gillow Ltd, Re [1926] AC 670�������������������������������������������������������������������������� 687 Karen Oltmann [1976] 2 Lloyd’s Rep 708 (QB)������������������������������������������������������������������������������������ 61 Keech v Sandford (1726) 25 ER 223����������������������������������������������������������������������������������������������������� 301 Keppell v Bailey [1834] ER 1042���������������������������������������������������������������������������������������������������������� 335 Krell v Henry [1903] 2 KB 740������������������������������������������������������������������������������������������������������������� 139 Kwok Chi Leung Karl v Commissioner of Estate Duty [1988] 1 WLR 1035������������������������������������� 613 Lickbarrow and Another v Mason and Others [1794] 2 TR 63���������������������������������������������������������� 668 Linden Gardens Trust Ltd v Lenesta Sludge Disposal Ltd and Ors; St Martin’ s Property Corporation Ltd and Anor v Sir Robert McAlpine &Sons Ltd [1993] 2 All ER 417������ 484, 490 Lumley v Gye (1853) 2 E&B 216���������������������������������������������������������������������������������������������������������� 343 Macmillan Inc v Bishopsgate Investment Trust Plc (No 3) [1995] 3 All ER 747������������������������������� 748 McCutcheon v David MacBrayne Ltd [1964] 1 WLR 128�������������������������������������������������������������������� 62 Metropolitan Water Board v Dick [1918] AC 119��������������������������������������������������������������������������� 60, 97 Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd [2013] EWCA Civ 200����������������������������������������������������������������������������������������������������������������������������� 95 Miliangos v George Frank (Textiles) Ltd [1975] 3 All ER 801������������������������������������������������������������ 221 Moor v Hart (1683) 1 Vern 201�������������������������������������������������������������������������������������������������������������� 52 Moorcock, The (1889) 14 PD 64������������������������������������������������������������������������������������������������������������ 96 MSC Mediterranean Shipping Co v Cottonex Anstalt [2015] EWHC������������������������������������������������ 95 National Provincial Bank Ltd v Ainsworth [1965] AC 1175��������������������������������������������������������������� 346 Newson and another v Thornton and another (1805) 6 East 17�������������������������������������������������������� 668 North Central Wagon and Finance Co v Graham [1950] 1 All ER 780������������������������������������� 400, 405 Northern Ocean Shipping Co Ltd v Hyundai Construction Co Ltd [1978] 3 All ER 1170�������������� 123 Ord v White 3 Beav 357(1884)������������������������������������������������������������������������������������������������������������� 487 Pacific Motor Auctions Pty Ltd v Motor Credits Ltd [1965] 2 All ER 105����������������������������������������� 436 Paradine v Jane (1647) 82 ER 897�������������������������������������������������������������������������������������������������������� 132 Parker v Smith Eastern Railway Co [1877] 2 CDP 416������������������������������������������������������������������������� 62 Pfeiffer GmbH v Arbuthnot Factors Ltd [1988] 1 WLR 150�������������������������������������������������������������� 511 Pillans v Van Mierop (1765) 97 ER 1035 (KB)�������������������������������������������������������������������������������������� 55 Pitt v PHH Asset Management Ltd [1994] 1 WLR 327���������������������������������������������������������������������� 109 Pye v Graham [2003] 1 AC 419������������������������������������������������������������������������������������������������������������ 408 Quinn v Leathem [1901] AC 495��������������������������������������������������������������������������������������������������������� 343 Raffeisen Zentralbank Osterreich AG v Five Star General Trading LLC [2001] 1 All ER (Comm) 961���������������������������������������������������������������������������������������������������������������� 611 Raffles v Wichelhaus (1864) 2 HC 906������������������������������������������������������������������������������������������������ 123
xxiv Table of Cases
Rann v Hughes (1778) 101 ER 1014 (KB)��������������������������������������������������������������������������������������������� 55 Republica de Guatemala v Nunez [1927] 1 KB 669�������������������������������������������������������������� 482–83, 611 Rhodes v Allied Dunbar Pension Services Ltd [1987] 1 WLR 1703������������������������������������481, 509, 511 Ryall v Rolle (1749) 26 ER 107������������������������������������������������������������������������������������������������������������� 566 Ryan v Mutual Tontine Westminster Chambers Association [1983] 1 Ch 116��������������������������������� 118 St Martin’s Property Corporation Ltd and Anor v Sir Robert McAlpine & Sons Ltd [1993] 2 All ER 417����������������������������������������������������������������������������������������������������������� 484, 490 Sajan Singh v Sardara Ali [1960] 1 All ER 269������������������������������������������������������������������������������������ 456 Scarfe v Morgan [1835–42] All ER 43�������������������������������������������������������������������������������������������������� 456 Scruttons Ltd v Midland Silicones Ltd [1962] AC 446����������������������������������������������������������������������� 160 Shamia v Yoory [1958] 1 QB 448��������������������������������������������������������������������������������������������������������� 482 Shanklin Pier v Detel Products Ltd [1951] 2 KB 854�������������������������������������������������������������������������� 160 Sharpe, Re [1980] 1 All ER 198������������������������������������������������������������������������������������������������������������ 235 Shell UK Ltd v Lostock Garages Ltd [1976] 1 WLR 1187��������������������������������������������������������������������� 97 Sir James Laing & Sons Ltd v Barclay, Curle & Co Ltd [1908] AC 35������������������������������������������������ 437 Siu Yin Kwan v Eastern Insurance Co Ltd [1994] 2 WLR 370������������������������������������������������������������ 303 Smith and Snipes Hall Farm Ltd v River Douglas Catchment Board [1949] 2 KB 500�������������������� 160 Socimer International Bank Ltd v Standard Bank London Ltd [2008] EWCA Civ 116�������������������� 112 Solle v Butcher [1950] 1 KB 671���������������������������������������������������������������������������������������������������������� 122 Stag Line v Foscolo Mango & Co Ltd [1932] AC 328������������������������������������������������������������������������� 285 Stephens v Venables (1862) 30 Beav 625���������������������������������������������������������������������������������������������� 487 Sterns Ltd v Vickers Ltd [1923] 1 KB 78���������������������������������������������������������������������������������������������� 232 Suisse Atlantique v NV Rotterdamse Kolen Centrale [1967] 1 AC 361��������������������������������������������� 127 Sze Hai Tong Bank Ltd v Rambler Cycle Co Ltd [1959] AC 576 (PC)����������������������������������������������� 665 Tailby v Official Receiver (1888) 13 AC 523���������������������������������������������������������������������������������������� 494 Tancred v Delagoa Bay Co (1889) 23 QBD 239���������������������������������������������������������������������������������� 483 Taylor v Caldwell (1863) 3 B&S 826, (1863) 32 LJQB 164������������������������������������������������������������ 60, 132 TD Bailey Son and Co v Ross T Smyth (1940) 56 TLR 825���������������������������������������������������������������� 671 Teheran-Europe Co Ltd v ST Belton (Tractors) Ltd [1968] 2 QB 545����������������������������������������������� 310 Thornton v Shoe Lane Parking Ltd [1971] 2 QB 163��������������������������������������������������������������������������� 62 Tito v Waddell [1977] Ch 106�������������������������������������������������������������������������������������������������������������� 489 Total Gas Marketing Ltd v Arco British Ltd [1998] 2 Lloyd’s Rep 209������������������������������������������������� 34 TSG Building Services Plc v South Anglia Housing [2013] EWHC 1151 (TCC)�������������������������������� 94 Tulk v Moxhay (1848) 2 Ph 774����������������������������������������������������������������������������������������������������������� 371 Twyne’s Case (1601) 76 ER 809������������������������������������������������������������������������������������������������������������ 568 Vaessen v Romalpa [1976] 1 WLR 677������������������������������������������������������������������������������������������������ 235 Walford v Miles [1992] 2 WLR 174������������������������������������������������������������������������������������������ 95–97, 108 Walker v Bradford Old Bank (1884) 12 QBD 511������������������������������������������������������������������������������� 483 Ward v Bignall [1967] 1 QB 534���������������������������������������������������������������������������������������������������������� 456 Westdeutsche Landesbank Girozentrale v Islington LBC [1992] 2 All ER 961���������������������������������� 456 Winch v Keeley (1787) 99 ER 1284������������������������������������������������������������������������������������������������������ 482 Winkfield, The [1900–03] All ER 346�������������������������������������������������������������������������������������������������� 400 Winkworth v Christie, Manson and Woods Ltd [1980] Ch 496��������������������������������������������������������� 581 Worcester Works Finance Ltd v Cooden Engineering Co Ltd [1971] 3 All ER 708�������������������������� 436 Yam Seng PTE Ltd v International Trade Corporation Ltd [2013] EWHC 111���������������������������� 94–95
United States Alfred Dunhill of London v Republic of Cuba [1919] AC 801����������������������������������������������������������� 612 Banco Credito Agricola de Cartago 757 F2d 516 (1985)�������������������������������������������������������������������� 612 Barbin v Moore 85 NH 362 (1932)������������������������������������������������������������������������������������������������������ 611 Barnouw v SS Ozark 304 F 2d 717 (5th Cir 1962)������������������������������������������������������������������������������ 597
Table of Cases xxv
Beatty v Guggenheim Exploration Co 225 NY 380, 386 (1919)��������������������������������������������������������� 533 Benedict v Ratner 268 US 353 (1925)�������������������������������������������������������������������������������������������������� 613 Brandon v Denton 302 F 2d 404, 410 (5th Cir 1962)������������������������������������������������������������������������� 597 Branham v Fullmer 181 NW 2d 36(1970)������������������������������������������������������������������������������������������� 308 Brehany v Nordsstrom Inc 812 P 2d 49 (Utah1991)����������������������������������������������������������������������������� 98 Centric v Morrison-Knudsen Co 731 P 2d 411(1986)������������������������������������������������������������������������ 123 Clayton v Le Roy [1911] 2 KB 1031��������������������������������������������������������������������������������������������� 401, 406 Corn Exchange NB & T Co v Klauser 318 US 434 (1943)���������������������������������������������������������� 484, 511 Daniel v Bank of Hayward 425 NW rd 416 (1988)����������������������������������������������������������������������������� 468 Department of Natural Resources v Benjamin 40 Colo App 520, 587 P 2d 1207 (1976)����������������� 534 Eustis Mining Co v Beer, Sondheimer & Co 239 F 976 (1917)������������������������������������������������������������ 51 Fradey v Hyland 37 Fed 49 (1888)������������������������������������������������������������������������������������������������������� 308 Frech v Lewis 218 Pa 141 (1907)���������������������������������������������������������������������������������������������������������� 457 Fugato v Carter County Bank 187 BR 221 (ED Tenn 1995)��������������������������������������������������������������� 508 Garcia v Chase Manhattan Bank NA 735 F2d 645 (1984)������������������������������������������������������������������ 612 Gifford v Ford 5 Vt 532 (1833)������������������������������������������������������������������������������������������������������������� 458 Gorden v Hamm 74 Cal Rptr 2d 631 (1998)��������������������������������������������������������������������������������������� 469 Harris v Balk 198 US 215 (1905)���������������������������������������������������������������������������������������������������������� 611 Hayward v Andrews 106 US 672 (1883)���������������������������������������������������������������������������������������������� 484 Hoffman v Red Owl Stores Inc (1965) 26 Wis 2d 683, 133 NW 2d 267���������������������������������������������� 56 Houtz v Daniels 211 Pac 1088 (1922)�������������������������������������������������������������������������������������������������� 513 Johnson v Whiton 34 NE 543 (1893)��������������������������������������������������������������������������������������������������� 335 Kennedy v Lee (1817) 3 Mer 441������������������������������������������������������������������������������������������������������������ 52 Kidd v Thomas A Edison 239 F 405 (1917)����������������������������������������������������������������������������������������� 300 Kinetics Technology International Corp v Fourth National Bank of Tulsa 705 F 2d 396 (1983)����� 568 Lawrence v Fox 20 NY 268 (1859)������������������������������������������������������������������������������������������������������� 162 Lewis v Lawrence 30 Minn 244 (1883)������������������������������������������������������������������������������������������������ 613 Litwiller Machine and Manufacturing, Inc v NBD Alpena Bank 457 NW 2d 163(1990)����������������� 568 Meinhard v Salmon 249 NY 458(1928)����������������������������������������������������������������������������������������������� 302 Menendez v Saks 485 F2d 1355(1973)������������������������������������������������������������������������������������������������� 612 Moore Equipment Co v Halferty 980 SW 2d 578(1998)������������������������������������������������������������ 405, 457 Moore v Robertson 17 NYS, 554 (1891)���������������������������������������������������������������������������������������������� 613 Mort, In the Matter of 208 F Supp 309 (1962)������������������������������������������������������������������������������������ 458 Murphy v American Home Products Corp 448 NE 2d 86 (NY 1983)������������������������������������������������� 98 Pacific Gas & Electric v GW Thomas Drayage & Rigging Co 442 P2d 641 (Cal 1968)����������������������� 72 Perez v Chase Manhattan Bank 61 NY 2d 460 (1984)������������������������������������������������������������������������ 612 Poma’s Will, In re 192 NY Supp 2d 156 (1959)����������������������������������������������������������������������������������� 613 Salem Trust Co v Manufacturers’ Finance Co 264 US 182 (1924)��������������������������������������������� 484, 511 Seaver v Ransom 120 NE 639 (NY 1918)��������������������������������������������������������������������������������������������� 162 SEC v Cheney Corp 318 US 80, 85 (1942)������������������������������������������������������������������������������������������� 302 Shaffer v Heitner 433 US 186 (1977)��������������������������������������������������������������������������������������������������� 611 Sheinman and Salita Inc v Paraskevas 22 Misc 2d 436 (1959)����������������������������������������������������������� 471 Tanbro Fabrics Corp v Deering Milliken Inc 39 NY 2d 632 and 19 UCC 385 (1976)���������������������� 468 Teacher’s Ins & Annuity Assn v Butler 626 F Supp 1229 (SDNY 1986)����������������������������������������������� 97 Vishipco Line v Chase Manhattan Bank NA 660 F2d 854 (1981)������������������������������������������������������ 612 Von Wedel v McGrath 180 F 2d 716 (1950)���������������������������������������������������������������������������������������� 310 Wardell v Eden 2 Johns Cass 258 (1801)��������������������������������������������������������������������������������������������� 484 Wells Fargo Asia Ltd v Citibank NA 852 F2d 657 (1990)������������������������������������������������������������������� 612 Werner v Graham 183 P 945, 947 (1919)��������������������������������������������������������������������������������������������� 335
xxvi
Table of Legislation and Related Documents Austria Civil Code s 308��������������������������������������������������������������������������������������������������������������������������������������������������� 378 s 367��������������������������������������������������������������������������������������������������������������������������������������������������� 466
Belgium Bankruptcy Act�������������������������������������������������������������������������������������������������������������������������������������� 451 Bill of Exchange Act of 1872����������������������������������������������������������������������������������������������������������������� 696 Bill of Exchange Law 1872�������������������������������������������������������������������������������������������������������������������� 684 Civil Code������������������������������������������������������������������������������������������������������������������������������������������������ 67 Art 1690��������������������������������������������������������������������������������������������������������������������������������������������� 217 Royal Decree No 62 of 1967����������������������������������������������������������������������������������������������������������������� 733 Art 5��������������������������������������������������������������������������������������������������������������������������������������������������� 734 Art 10������������������������������������������������������������������������������������������������������������������������������������������������� 748
Brazil Civil Code���������������������������������������������������������������������������������������������������������������������������������������������� 362
Canada Quebec, Civil Code, Art 1261��������������������������������������������������������������������������������������������������������������� 539
European Union Bankruptcy Regulation 2002�������������������������������������������������������������������������������������������������������� 579, 613 Art 2(g)���������������������������������������������������������������������������������������������������������������������������������������������� 613 Brussels Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters 1968������������������������������������������������99–100, 273, 278, 539–40, 596–97, 678–79 Art 17��������������������������������������������������������������������������������������������������������������������������������������������������� 99 Collateral Directive�������������������������������������������������333, 367, 496, 639, 658, 730, 744, 748, 750, 755, 757 Commercial Agents Directive��������������������������������������������������������������������������������������������������������� 315–17 Common European Sales Law (CESL)����������������������������������������������������������������7, 11–12, 15–16, 34, 91, 129, 134, 162, 167, 170, 181, 184, 186, 188–91, 193, 195, 198–201, 204–5, 207–8, 210, 251, 254–55, 263, 267, 270, 287, 289, 644–45, 659 Preamble�������������������������������������������������������������������������������������������������������������������������������������������� 200 Art 1��������������������������������������������������������������������������������������������������������������������������������������������������� 185 Art 1(2)���������������������������������������������������������������������������������������������������������������������������������������������� 186 Art 1(3)���������������������������������������������������������������������������������������������������������������������������������������������� 200 Art 4��������������������������������������������������������������������������������������������������������������������������������������������������� 185 Art 7��������������������������������������������������������������������������������������������������������������������������������������������������� 185 Art 35������������������������������������������������������������������������������������������������������������������������������������������������� 188 Art 48(2)�������������������������������������������������������������������������������������������������������������������������������������������� 191
xxviii Table of Legislation and Related Documents
Art 67������������������������������������������������������������������������������������������������������������������������������������������������� 185 Art 87������������������������������������������������������������������������������������������������������������������������������������������������� 192 Art 88������������������������������������������������������������������������������������������������������������������������������������������������� 192 Art 120����������������������������������������������������������������������������������������������������������������������������������������������� 192 Arts 172ff������������������������������������������������������������������������������������������������������������������������������������������� 191 Consumer Sales Directive 1999/44/EC������������������������������������������������������������������������������������������������ 232 DCFR (Draft Common Frame of Reference)���������������������������������� 3–4, 9, 15–17, 24, 33, 39, 47, 79–80, 82, 84, 91–93, 100–1, 104, 107, 110, 113, 123, 127, 129–30, 133, 144, 162–64, 166–67, 169–71, 178–89, 191–93, 195–96, 198–99, 202, 204–5, 208, 210, 251, 254–55, 263, 267, 270, 272, 286–87, 289, 308, 315, 317, 334, 362, 365, 368, 377, 379, 382, 429, 438, 445, 452, 459, 474, 476, 500, 520–21, 531, 542, 559, 571, 574, 630, 632, 635, 638, 641, 644–59, 755 Art I-1:102������������������������������������������������������������������������������������������������92–93, 101, 104, 170–71, 263 Art I-1:102(1)������������������������������������������������������������������������������������������������������������������������������������ 181 (4)�������������������������������������������������������������������������������������������������������������������������������������������������� 171 Art I-1:102(2)���������������������������������������������������������������������������������������������������������������������������� 180, 657 Art I-1:102(2)(c)������������������������������������������������������������������������������������������������������������������������������� 647 Art I-1:102(3)������������������������������������������������������������������������������������������������������������������������������������ 171 Art I-1:102(3)(b)����������������������������������������������������������������������������������������������������������������������� 170, 657 Art I-1:102(3)(c)������������������������������������������������������������������������������������������������������������������������������� 186 Art I-1:102(4)������������������������������������������������������������������������������������������������������������������������������ 93, 181 Art I-1:102(b)���������������������������������������������������������������������������������������������������������������������������������� 9, 92 Art I-1:103�������������������������������������������������������������������������������������������� 3, 58, 84, 181, 183, 187–88, 649 Art I-1:103(1)�������������������������������������������������������������������������������������������������������������������������������������� 74 Art I-1:103(2)���������������������������������������������������������������������������������������������������������������88, 181, 183, 188 Art I-1:104��������������������������������������������������������������������������������������������������������������������������104, 182, 185 Art I-8:101����������������������������������������������������������������������������������������������������������������������������������������� 170 Art II-1:101������������������������������������������������������������������������������������������������������������������������������������������ 20 Art II-1:102���������������������������������������������������������������������������������������������������������������������������93, 101, 657 Art II-1:103���������������������������������������������������������������������������������������������������������������������������������������� 101 Art II-1:104����������������������������������������������������������������������������������������� 101, 104, 171, 181, 184, 272, 657 Art II-1:106(1)������������������������������������������������������������������������������������������������������������������������������������ 61 Art II-1:107���������������������������������������������������������������������������������������������������������������������������������������� 170 Art II-1:107(1)���������������������������������������������������������������������������������������������������������������������������������� 189 Art II-2.101���������������������������������������������������������������������������������������������������������������������������������������� 645 Art II-2:101���������������������������������������������������������������������������������������������������������������������������������������� 180 Art II-3:101���������������������������������������������������������������������������������������������������������������������������������������� 170 Art II-3:101(2)�����������������������������������������������������������������������������������������������������������������������3, 106, 182 Art II-3:104(2)���������������������������������������������������������������������������������������������������������������������������������� 113 Art II-3:105������������������������������������������������������������������������������������������������������������������������������������������ 40 Art II-3:301���������������������������������������������������������������������������������������������������������������3, 21, 113, 170, 182 Art II-3:301(2)�������������������������������������������������������������������������������������������������������������������104, 110, 171 Art II-3:302�������������������������������������������������������������������������������������������������������������������������������� 170, 193 Art II-3:502���������������������������������������������������������������������������������������������������������������������������������������� 192 Art II-4:101�������������������������������������������������������������������������������������������������������������������������� 183, 188–89 Art II-4:101(a)����������������������������������������������������������������������������������������������������������������������������������� 170 Arts II-4:101ff����������������������������������������������������������������������������������������������������������������������������������� 187
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Art II-4:102�������������������������������������������������������������������������������������������������������������34, 58, 170, 187, 189 Art II-4:103�������������������������������������������������������������������������������������������������������������������������������� 170, 189 Art II-4:103(1)(a)������������������������������������������������������������������������������������������������������������������������������ 189 Art II-4:104���������������������������������������������������������������������������������������������������������������������������������������� 170 Art II-4:201���������������������������������������������������������������������������������������������������������������������������������������� 189 Art II-4:201(1)(b)����������������������������������������������������������������������������������������������������������������������������� 170 Art II-4:201ff��������������������������������������������������������������������������������������������������������������������������������������� 34 Art II-4:202���������������������������������������������������������������������������������������������������������������������������������������� 170 Art II-4:202(3)�������������������������������������������������������������������������������������������������������������������������� 183, 188 Art II-4:202(3)(c)���������������������������������������������������������������������������������������������������������������������� 170, 187 Art II-4:204�����������������������������������������������������������������������������������������������������������������170, 183, 187, 189 Art II-4:204–6������������������������������������������������������������������������������������������������������������������������������������� 47 Art II-4:205�������������������������������������������������������������������������������������������������������������������� 34, 170, 188–89 Art II-4:205(1)���������������������������������������������������������������������������������������������������������������������������������� 189 Art II-4:205(3)���������������������������������������������������������������������������������������������������������������������������������� 181 Art II-4:206������������������������������������������������������������������������������������������������������������������������������������������ 47 Art II-4:211���������������������������������������������������������������������������������������������������������������������������������������� 189 Art II-7:101���������������������������������������������������������������������������������������������������������������������������������������� 170 Art II-7:101(2)���������������������������������������������������������������������������������������������������������������������������������� 191 Art II-7:102�������������������������������������������������������������������������������������������������������������������������������� 187, 191 Art II-7:201�������������������������������������������������������������������������������������������������������������������������������� 170, 191 Art II-7:201(1)(a)(iii)����������������������������������������������������������������������������������������������������������������������� 191 Art II-7:201(2)(b)����������������������������������������������������������������������������������������������������82, 106–7, 183, 191 Art II-7:202�������������������������������������������������������������������������������������������������������������������������������� 170, 191 Art II-7:202(1)���������������������������������������������������������������������������������������������������������������������������������� 191 Art II-7:203���������������������������������������������������������������������������������������������������������������������������������������� 191 Art II-7:204���������������������������������������������������������������������������������������������������������������������������������������� 187 Art II-7:205�������������������������������������������������������������������������������������������������������������������������������� 170, 191 Art II-7:206�������������������������������������������������������������������������������������������������������������������������� 170, 191–92 Art II-7:207�������������������������������������������������������������������������������������������������������������������������������� 170, 191 Art II-7:211���������������������������������������������������������������������������������������������������������������������������������������� 191 Art II-7:212���������������������������������������������������������������������������������������������������������������������������������������� 191 Art II-7:212(2)���������������������������������������������������������������������������������������������������������������������������������� 191 Art II-7:214���������������������������������������������������������������������������������������������������������������������������������������� 191 Art II-7:215���������������������������������������������������������������������������������������������������������������������������������������� 191 Art II-7:301�������������������������������������������������������������������������������������������������������������������67, 171, 185, 191 Art II-7:301(a)����������������������������������������������������������������������������������������������������������������������������� 92, 180 Art II-7:303���������������������������������������������������������������������������������������������������������������������������������������� 655 Art II-8:101�����������������������������������������������������������������������������������������������������������������101, 106, 187, 190 Art II-8:102�������������������������������������������������������������������������������������������������������������������������101, 183, 187 Art II-8:102(1)(e)�������������������������������������������������������������������������������������������������������������������������� 3, 104 Art II-8:102(1)(f)������������������������������������������������������������������������������������������������������������������������������ 171 Art II-8:102(1)(g)����������������������������������������������������������������������������������������������������������������������������� 182 Art II-8:102(g)����������������������������������������������������������������������������������������������������������������������������������� 170 Art II-9:101�������������������������������������������������������������������������������������������������������������������������� 170–71, 181 Art II-9:101(2)(a)�������������������������������������������������������������������������������������������������������������������������� 3, 104 Art II-9:101(2)(c)������������������������������������������������������������������������������������������������������������������������������ 182 Art II-9:102���������������������������������������������������������������������������������������������������������������������������������������� 171 Art II-9:102(1)���������������������������������������������������������������������������������������������������������������������������������� 170 Arts II-9:301ff����������������������������������������������������������������������������������������������������������������������������������� 193 Arts II-9:401ff����������������������������������������������������������������������������������������������������������������������������������� 183
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Art II-9:404/5���������������������������������������������������������������������������������������������������������������������������������������� 3 Art II-9:405���������������������������������������������������������������������������������������������������������������������������������������� 171 Art II-9:301���������������������������������������������������������������������������������������������������������������������������������������� 159 Art II-9:303���������������������������������������������������������������������������������������������������������������������������������������� 159 Art III-1:103�����������������������������������������������������������������������������������������������������������������������3, 21, 71, 170 Art III-1:103(1) and (2)�������������������������������������������������������������������������������������������������������������������� 171 Art III-1:103(2)������������������������������������������������������������������������������������������������������������������������� 104, 181 Art III-1:104�������������������������������������������������������������������������������������������������������������������������������������� 170 Art III-1:110�����������������������������������������������������������������������������������������������������3, 113, 142, 170–71, 182 Art III-1:110(3)(c)���������������������������������������������������������������������������������������������������������������82, 106, 183 Art III-3:104�������������������������������������������������������������������������������������������������������������������������������������� 170 Art III-3:104(2)��������������������������������������������������������������������������������������������������������������������������� 82, 106 Art III-3:303�������������������������������������������������������������������������������������������������������������������������������������� 193 Art III-3:401�������������������������������������������������������������������������������������������������������������������������������������� 193 Art III-5:104�����������������������������������������������������������������������������������������������������������������������429, 648, 650 Art III-5:104(1)(a)���������������������������������������������������������������������������������������������������������������������������� 653 Art III-5:106�������������������������������������������������������������������������������������������������������������������������������������� 650 Art III-5:108������������������������������������������������������������������������������������������������������������������������������ 651, 653 Art III-5:118(2)��������������������������������������������������������������������������������������������������������������������������������� 655 Art III-5:121������������������������������������������������������������������������������������������������������������������������������ 651, 654 Art III-5:122�������������������������������������������������������������������������������������������������������������������������������������� 651 Art III-5:203(3)��������������������������������������������������������������������������������������������������������������������������������� 651 Art III-5:206�������������������������������������������������������������������������������������������������������������������������������������� 651 Art III-5:302�������������������������������������������������������������������������������������������������������������������������������������� 651 Arts III-9:401ff���������������������������������������������������������������������������������������������������������������������������������� 171 Art IVA-2:101���������������������������������������������������������������������������������������������������������������������������� 649, 655 Art IVA-3:101������������������������������������������������������������������������������������������������������������������������������������ 649 Art V-4:101���������������������������������������������������������������������������������������������������������������������������������������� 648 Art VII-2:101������������������������������������������������������������������������������������������������������������������������������������� 655 Art VII-5:101������������������������������������������������������������������������������������������������������������������������������������� 655 Art VIII-1:201����������������������������������������������������������������������������������������������������������������������������������� 648 Art VIII-1:202��������������������������������������������������������������������������������������������������������������������������� 377, 648 Art VIII-1:204����������������������������������������������������������������������������������������������������������������������������� 648–49 Art VIII-1:205��������������������������������������������������������������������������������������������������������������������������� 379, 649 Art VIII-1:301����������������������������������������������������������������������������������������������������������������������������������� 651 Art VIII-2:101������������������������������������������������������������������������������������������������������429, 648–49, 651, 653 Art VIII-2:104����������������������������������������������������������������������������������������������������������������������������������� 649 Art VIII-2:105����������������������������������������������������������������������������������������������������������������������������������� 649 Art VIII-2:202����������������������������������������������������������������������������������������������������������������������������������� 655 Art VIII-2:203��������������������������������������������������������������������������������������������������������������������������� 647, 652 Art VIII-2:305����������������������������������������������������������������������������������������������������������������������������������� 650 Art VIII-2:307��������������������������������������������������������������������������������������������������������������������������� 647, 652 Art VIII-6:101����������������������������������������������������������������������������������������������������������������������������������� 648 Art VIII-6:102����������������������������������������������������������������������������������������������������������������������������������� 647 Art VIII-6:201����������������������������������������������������������������������������������������������������������������������������������� 649 Art VIII-6:202����������������������������������������������������������������������������������������������������������������������������� 379–80 Art IX������������������������������������������������������������������������������������������������������������������������������������������� 653–54 Art IX-1:101(1)(b)���������������������������������������������������������������������������������������������������������������������������� 652 Art IX-1:102(4)(c) and (d)��������������������������������������������������������������������������������������������������������������� 652 Art IX-1:103������������������������������������������������������������������������������������������������������������������������������ 647, 652 Art IX-1:104�������������������������������������������������������������������������������������������������������������������������������������� 652
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Art IX-1.104(4)��������������������������������������������������������������������������������������������������������������������������������� 647 Art IX-2:102�������������������������������������������������������������������������������������������������������������������������������������� 653 Art IX-2:104�������������������������������������������������������������������������������������������������������������������������������� 652–53 Art IX-2:105�������������������������������������������������������������������������������������������������������������������������������������� 653 Art IX-2:108�������������������������������������������������������������������������������������������������������������������������������������� 653 Art IX-2:301�������������������������������������������������������������������������������������������������������������������������������������� 653 Art IX-2:306�������������������������������������������������������������������������������������������������������������������������������������� 653 Art IX-2:307������������������������������������������������������������������������������������������������������������������������������ 647, 653 Art IX-3:102�������������������������������������������������������������������������������������������������������������������������������������� 654 Art IX-5:204�������������������������������������������������������������������������������������������������������������������������������������� 654 Art IX-6:102�������������������������������������������������������������������������������������������������������������������������������������� 654 Art IX-7:103�������������������������������������������������������������������������������������������������������������������������������������� 652 Art IX-7:213ff������������������������������������������������������������������������������������������������������������������������������������ 654 Art IX-1-101(2)(a)���������������������������������������������������������������������������������������������������������������������������� 652 Art IX-1-102�������������������������������������������������������������������������������������������������������������������������������������� 652 Book IV������������������������������������������������������������������������������������������������������������������������������������������������� 3 Ann A����������������������������������������������������������������������������������������������������������������������������������������������������� 3 Directive 68/151/EEC (First Company Law Harmonisation Directive)���������������������������������������������� 68 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����������������������������������������������������������������������������������� 13 Directive 84/450/EEC on misleading and comparative advertising����������������������������������������������������� 13 Directive 85/374/EEC on the approximation of the laws of the Member States concerning liability for defective products���������������������������������������������������������������������������������������������������� 13 Directive 85/577/EEC����������������������������������������������������������������������������������������������������������������������������� 13 Directive 87/102/ EEC concerning consumer credit����������������������������������������������������������������������������� 13 Directive 90/314/EEC on package travel, package holidays and package tours����������������������������������� 13 Directive 93/13/EEC on unfair consumer contract terms�������������������������������������������������������������������� 13 Preamble���������������������������������������������������������������������������������������������������������������������������������������������� 99 Art 3(1)������������������������������������������������������������������������������������������������������������������������������������������������ 98 Directive 97/5/EC on cross-border credit transfers������������������������������������������������������������������������������ 13 Directive 97/7/EC on the protection of consumers in respect of distance contracts�������������������������� 13 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��������������������������������������������������������������������������� 13 Directive 1999/93/EC on a Community Framework for Electronic Signatures���������������������������������� 40 Directive 2000/13/EC������������������������������������������������������������������������������������������������������������������������������ 40 Directive 2000/31/EC on certain legal aspects of electronic commerce in the internal market��������� 13 Directive 2000/78/EC establishing a general framework for equal treatment in employment and occupation���������������������������������������������������������������������������������������������������������������������������� 13 Directive 2002/65/EC concerning the distance marketing of consumer financial services���������������� 13 Directive 2002/87/EC on e-commerce��������������������������������������������������������������������������������������������������� 44 Art 3����������������������������������������������������������������������������������������������������������������������������������������������������� 40 Art 3(4)�����������������������������������������������������������������������������������������������������������������������������������13, 40, 705 Directive 2005/29/EC concerning unfair business-to-consumer commercial practices in the internal market������������������������������������������������������������������������������������������������������������������ 13 Directive 2008/48/EC on credit agreements for consumers����������������������������������������������������������������� 13 Directive 2011/83/EU on consumer rights�������������������������������������������������������������������������13, 44, 98, 289 Directive on Consumer Sales and Guarantees�������������������������������������������������������������������������������������� 80 Directive on self-employed commercial agents Art 3(1)������������������������������������������������������������������������������������������������������������������������������������������������ 99 Art 4(1)������������������������������������������������������������������������������������������������������������������������������������������������ 99
xxxii Table of Legislation and Related Documents
EBRD Model Law on Secured Financing��������������������������������������������������������������������������������������������� 596 EEC Treaty��������������������������������������������������������������������������������������������������������������������������������������������� 273 Expert Group Draft������������������������������������������������������������15–16, 34, 184–85, 188–93, 195–97, 199, 205 Art 1������������������������������������������������������������������������������������������������������������������������������������184, 186, 196 Art 1(2)���������������������������������������������������������������������������������������������������������������������������������������������� 196 Art 4������������������������������������������������������������������������������������������������������������������������������������������� 185, 197 Art 7��������������������������������������������������������������������������������������������������������������������������������������������������� 197 Art 8��������������������������������������������������������������������������������������������������������������������������������������������� 21, 197 Art 23������������������������������������������������������������������������������������������������������������������������������������������������� 197 Art 29������������������������������������������������������������������������������������������������������������������������������������������������� 197 Arts 30ff��������������������������������������������������������������������������������������������������������������������������������������������� 197 Art 34������������������������������������������������������������������������������������������������������������������������������������������� 47, 188 Art 57������������������������������������������������������������������������������������������������������������������������������������������������� 196 Art 64������������������������������������������������������������������������������������������������������������������������������������������������� 197 Art 65����������������������������������������������������������������������������������������������������������������������������������������� 184, 196 Art 89������������������������������������������������������������������������������������������������������������������������������������������������� 197 Art 91������������������������������������������������������������������������������������������������������������������������������������������������� 195 Art 94(1)(b)��������������������������������������������������������������������������������������������������������������������������������������� 196 Financial Collateral Directive 2002/47/EC�����������������������������������274, 333, 367, 496, 555, 571, 574, 639, 658, 730, 738, 744, 748–50, 753–55, 757 recitals 3, 5, 7 and 8��������������������������������������������������������������������������������������������������������������������������� 755 recitals 5, 9 and 16����������������������������������������������������������������������������������������������������������������������������� 756 Art 2(2)���������������������������������������������������������������������������������������������������������������������������������������������� 755 Art 7��������������������������������������������������������������������������������������������������������������������������������������������������� 756 Art 8(2)���������������������������������������������������������������������������������������������������������������������������������������������� 756 Art 8(3)���������������������������������������������������������������������������������������������������������������������������������������������� 756 Art 9��������������������������������������������������������������������������������������������������������������������������������������������������� 756 Financial Services Directive 1993, Art 11(3)�������������������������������������������������������������������������������������������� 2 First Company Law Harmonisation Directive�������������������������������������������������������������������������������������� 68 Insolvency Regulation��������������������������������������������������������������������������������������������������������������������������� 741 Insurance Directives���������������������������������������������������������������������������������������������������������������������� 273, 275 Investment Services Directive������������������������������������������������������������������������������������������������������ 302, 309 Lugano Conventions on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters 1988����������������������������������������������������������������������������������������� 540, 592 Market in Financial Instruments Directive (MiFID) 2004������������������������������������������������������2, 302, 309 Non-Life Directive�������������������������������������������������������������������������������������������������������������������������������� 275 PECL (Principles of European Contract Law)������������������������������ 3, 15–16, 47, 58, 88, 100–4, 113, 123, 127, 130, 134, 162–63, 168–70, 177–79, 181–87, 189–91, 193, 196, 204, 210, 254, 263, 286–88, 308, 315, 520, 644, 650 Art 1.101�������������������������������������������������������������������������������������������������������������������������������������������� 177 Art 1.102�������������������������������������������������������������������������������������������������������������������������������������� 170–71 Art 1.102(2)������������������������������������������������������������������������������������������������������������������������������� 171, 178 Art 1.103������������������������������������������������������������������������������������������������������������������������������ 170–71, 178 Art 1:103�������������������������������������������������������������������������������������������������������������������������������������������� 185 Art 1.104�������������������������������������������������������������������������������������������������������������������������������������������� 170 Art 1.105������������������������������������������������������������������������������������������������������������������������������������ 171, 178 Art 1.105(2)������������������������������������������������������������������������������������������������������������������������������� 184, 272 Art 1.106�����������������������������������������������������������������������������������������������������������������������������170, 270, 273 Art 1:106�������������������������������������������������������������������������������������������������������������������������������������������� 101 Art 1.106(2)��������������������������������������������������������������������������������������������������������������������������������������� 171
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Art 1.201������������������������������������������������������������������������������������������������������������������������������������ 170, 178 Art 1:201(2)����������������������������������������������������������������������������������������������������������������������������������������� 21 Art 1.202�������������������������������������������������������������������������������������������������������������������������������������������� 170 Art 1.302�������������������������������������������������������������������������������������������������������������������������������������������� 178 Art 1:302�������������������������������������������������������������������������������������������������������������������������������������������� 103 Art 1.305�������������������������������������������������������������������������������������������������������������������������������������������� 179 Art 2.101�������������������������������������������������������������������������������������������������������������������������������������������� 170 Art 2.101(1)(b)���������������������������������������������������������������������������������������������������������������������������������� 170 Art 2.101(2)��������������������������������������������������������������������������������������������������������������������������61, 170, 189 Art 2.102�����������������������������������������������������������������������������������������������������������������������������170, 187, 189 Art 2.103������������������������������������������������������������������������������������������������������������������������������������ 170, 189 Art 2.105�������������������������������������������������������������������������������������������������������������������������������������������� 170 Art 2.201�������������������������������������������������������������������������������������������������������������������������������������������� 170 Art 2.201(1)(b)���������������������������������������������������������������������������������������������������������������������������������� 189 Art 2.202�������������������������������������������������������������������������������������������������������������������������������������������� 170 Art 2.202(3)��������������������������������������������������������������������������������������������������������������������������������������� 188 Art 2.202(3)(c)�������������������������������������������������������������������������������������������������������������������������� 170, 187 Art 2.204�������������������������������������������������������������������������������������������������������������������������������������������� 170 Art 2.204(1)������������������������������������������������������������������������������������������������������������������������������� 170, 187 Art 2.204–6������������������������������������������������������������������������������������������������������������������������������������������ 47 Art 2.205�������������������������������������������������������������������������������������������������������������������������������������������� 170 Art 2.205(1)��������������������������������������������������������������������������������������������������������������������������������������� 189 Art 2.301������������������������������������������������������������������������������������������������������������������������������������ 170, 179 Art 2.301(2)��������������������������������������������������������������������������������������������������������������������������������������� 179 Art 2-101������������������������������������������������������������������������������������������������������������������������������������������� 188 Arts 3.301ff�������������������������������������������������������������������������������������������������������������������������������� 294, 308 Art 4.101������������������������������������������������������������������������������������������������������������������������������������ 179, 191 Art 4.102�������������������������������������������������������������������������������������������������������������������������������������������� 191 Art 4.103������������������������������������������������������������������������������������������������������������������������������������ 179, 191 Art 4.103(1)(a)(ii)��������������������������������������������������������������������������������������������������������������������� 170, 191 Art 4.103(1)(a)(iii)��������������������������������������������������������������������������������������������������������������������������� 191 Art 4.103(2)��������������������������������������������������������������������������������������������������������������������������������������� 179 Art 4.103(2)(b)���������������������������������������������������������������������������������������������������������������������������������� 191 Art 4.104������������������������������������������������������������������������������������������������������������������������������������ 170, 191 Art 4.105�������������������������������������������������������������������������������������������������������������������������������������������� 191 Art 4.107������������������������������������������������������������������������������������������������������������������������������������ 170, 191 Art 4.108������������������������������������������������������������������������������������������������������������������������������ 170, 191–92 Art 4.109�������������������������������������������������������������������������������������������������������������������������������������������� 191 Art 4.109(2)��������������������������������������������������������������������������������������������������������������������������������������� 191 Art 4.110������������������������������������������������������������������������������������������������������������������������������������ 170, 179 Art 4.114�������������������������������������������������������������������������������������������������������������������������������������������� 191 Art 4.115�������������������������������������������������������������������������������������������������������������������������������������������� 191 Art 4.116�������������������������������������������������������������������������������������������������������������������������������������������� 191 Art 4.117�������������������������������������������������������������������������������������������������������������������������������������������� 191 Art 4.118(2)��������������������������������������������������������������������������������������������������������������������������������������� 191 Art 5.101���������������������������������������������������������������������������������������������������������������������106, 170, 187, 190 Art 5.101(g)��������������������������������������������������������������������������������������������������������������������������������������� 170 Art 5:102�������������������������������������������������������������������������������������������������������������������������������������������� 101 Art 5.102(f)��������������������������������������������������������������������������������������������������������������������������������������� 171 Art 6.1.1.1������������������������������������������������������������������������������������������������������������������������������������������ 113 Art 6.101�������������������������������������������������������������������������������������������������������������������������������������������� 170
xxxiv Table of Legislation and Related Documents
Art 6.101(1)��������������������������������������������������������������������������������������������������������������������������������������� 170 Art 6.102������������������������������������������������������������������������������������������������������������������������������������ 170, 184 Art 6.110�����������������������������������������������������������������������������������������������������������������������������159, 170, 193 Art 6.111���������������������������������������������������������������������������������������������������������������������� 145, 170–71, 179 Art 8.108�������������������������������������������������������������������������������������������������������������������������������������������� 170 Art 9.102������������������������������������������������������������������������������������������������������������������������������������ 170, 193 Art 9.103�������������������������������������������������������������������������������������������������������������������������������������������� 193 Art 9.201�������������������������������������������������������������������������������������������������������������������������������������������� 193 Art 15.101������������������������������������������������������������������������������������������������������������������������������������ 170–71 Principles of European Law concerning Sales, ch 5���������������������������������������������������������������������������� 226 Principles of European Trust Law���������������������������������������������������������������������������������� 528, 537, 542–43 Regulation establishing common rules for a denied-boarding compensation system in scheduled air transport����������������������������������������������������������������������������������������������������������� 13 Regulation on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters (Brussels I)������������������������������������������������������������������������������ 100, 278 Art 2��������������������������������������������������������������������������������������������������������������������������������������������� 540–41 Art 5(6)���������������������������������������������������������������������������������������������������������������������������������������� 540–41 Art 22������������������������������������������������������������������������������������������������������������������������������������������������� 539 Art 23(4)�������������������������������������������������������������������������������������������������������������������������������������������� 540 Art 23(5)�������������������������������������������������������������������������������������������������������������������������������������������� 578 Regulation on online dispute resolution for consumer disputes��������������������������������������������������������� 41 Regulation on the Law Applicable to Contractual Obligations (Rome I)������������200, 273, 275–79, 288, 312, 600, 608, 623 Preamble������������������������������������������������������������������������������������������������������������������������������������ 277, 607 Art 1(2)(g)����������������������������������������������������������������������������������������������������������������������������������������� 312 Art 3������������������������������������������������������������������������������������������������������������������������������������������� 275, 615 Art 3(3)�������������������������������������������������������������������������������������������������������������������������������������� 275, 277 Art 4����������������������������������������������������������������������������������������������������������������������������� 256, 275–76, 615 Art 4(1)�������������������������������������������������������������������������������������������������������������������������������������� 276, 616 Art 4(1)(h)���������������������������������������������������������������������������������������������������������������������������������������� 623 Art 4(2)���������������������������������������������������������������������������������������������������������������������������������������� 40, 276 Art 4(5)���������������������������������������������������������������������������������������������������������������������������������������������� 276 Art 5��������������������������������������������������������������������������������������������������������������������������������������������������� 276 Art 5(1)���������������������������������������������������������������������������������������������������������������������������������������������� 276 Art 6(2)���������������������������������������������������������������������������������������������������������������������� 40, 200–1, 276–77 Art 6(3)���������������������������������������������������������������������������������������������������������������������������������������������� 276 Art 6(4)(e)����������������������������������������������������������������������������������������������������������������������������������������� 623 Art 7��������������������������������������������������������������������������������������������������������������������������������������������������� 316 Art 8��������������������������������������������������������������������������������������������������������������������������������������������������� 276 Art 8(1)���������������������������������������������������������������������������������������������������������������������������������������� 40, 277 Art 9������������������������������������������������������������������������������������������������������������������������������������173, 213, 316 Art 9(1)���������������������������������������������������������������������������������������������������������������������������������������������� 277 Art 9(2)���������������������������������������������������������������������������������������������������������������������������������������������� 277 Art 9(3)���������������������������������������������������������������������������������������������������������������������������������������������� 277 Art 14����������������������������������������������������������������������������������������������������������������������279, 364, 607–8, 615 Art 14(1)���������������������������������������������������������������������������������������������������������������������605, 608, 616, 624 Art 14(2)�����������������������������������������������������������������������������������������������������������������605–6, 608, 616, 624 Art 14(3)���������������������������������������������������������������������������������������������������������������������������������������� 607–8 Art 19������������������������������������������������������������������������������������������������������������������������������������������������� 276 Art 21������������������������������������������������������������������������������������������������������������������������������������������������� 277
Table of Legislation and Related Documents xxxv
Rome Convention��������������������������������������������������������������������������������273–74, 276, 364, 606–11, 615–16 Art 4(2) and (5)�������������������������������������������������������������������������������������������������������������������������������� 276 Art 12����������������������������������������������������������������������������������������������������������������������������������������� 614, 617 Art 12(1)������������������������������������������������������������������������������������������������������������������������������������ 610, 624 Art 12(2)������������������������������������������������������������������������������������������������������������������������ 605–6, 610, 624 Art 20������������������������������������������������������������������������������������������������������������������������������������������������� 273 Art 21������������������������������������������������������������������������������������������������������������������������������������������������� 273 Art 24������������������������������������������������������������������������������������������������������������������������������������������������� 273 Second Life Directive���������������������������������������������������������������������������������������������������������������������������� 275 Settlement Finality Directive 98/26/EC������������������������������������������������������� 274, 574, 726, 729, 732, 744, 748, 750, 753–54, 756–57 Statute of the European System of Central Banks������������������������������������������������������������������������������� 748 Tobacco Advertising Directive�������������������������������������������������������������������������������������������������������������� 165 Treaty on European Union (TEU)��������������������������������������������������������������������������������������������������������� 13 Treaty on the Functioning of the European Union (TFEU)����������������������������������������������������������������� 13 Art 114������������������������������������������������������������������������������������ 13, 165, 167, 181, 185, 199, 644–45, 755 Unfair Commercial Practices Directive������������������������������������������������������������������������������������������������� 13
France Arbitration Act���������������������������������������������������������������������������������������������������������������������������������������� 11 Bankruptcy Act���������������������������������������������������������������������������������������������������������235–37, 451, 472, 556 Art 115����������������������������������������������������������������������������������������������������������������������������������������������� 237 Art 121����������������������������������������������������������������������������������������������������������������������������������������������� 237 Civil Code�������������������������������������������������������������������������������������������������������������������������������������������������� 2 Art 208(2)������������������������������������������������������������������������������������������������������������������������������������������ 503 Art 543����������������������������������������������������������������������������������������������������������������������������������������������� 378 Art 544����������������������������������������������������������������������������������������������������������������������������������������������� 377 Art 711������������������������������������������������������������������������������������������������������������������������334, 432, 441, 669 Art 1104��������������������������������������������������������������������������������������������������������������������������������������2, 79, 87 Art 1108������������������������������������������������������������������������������������������������������������������������������������47, 64, 66 Art 1109��������������������������������������������������������������������������������������������������������������������������������������������� 230 Art 1112��������������������������������������������������������������������������������������������������������������������������������������� 87, 110 Art 1113������������������������������������������������������������������������������������������������������������������������������������������� 2, 70 Art 1114������������������������������������������������������������������������������������������������������������������������������������������� 2, 70 Art 1118����������������������������������������������������������������������������������������������������������������������������������������������� 64 Art 1121��������������������������������������������������������������������������������������������������������������������������������������������� 158 Art 1128(3)������������������������������������������������������������������������������������������������������������������������������������������ 70 Art 1129��������������������������������������������������������������������������������������������������������������������������������������������� 428 Art 1130��������������������������������������������������������������������������������������������������������������������������������������������� 437 Art 1130(1)���������������������������������������������������������������������������������������������������������������������������������������� 437 Art 1131����������������������������������������������������������������������������������������������������������������������������������������� 64, 66 Art 1133����������������������������������������������������������������������������������������������������������������������������������������� 64, 66 Art 1134����������������������������������������������������������������������������������������������������������������������������������������������� 86 Art 1135����������������������������������������������������������������������������������������������������������������������������������������� 78, 86 Art 1138��������������������������������������������������������������������������������������������������������������229, 432, 441, 477, 669 Art 1141��������������������������������������������������������������������������������������������������������������������������������������������� 435 Art 1142������������������������������������������������������������������������������������������������������������������������������������� 115, 117 Art 1143��������������������������������������������������������������������������������������������������������������������������������������������� 117 Art 1144��������������������������������������������������������������������������������������������������������������������������������������������� 117 Art 1147��������������������������������������������������������������������������������������������������������������������������������������������� 133
xxxvi Table of Legislation and Related Documents
Art 1148��������������������������������������������������������������������������������������������������������������������������������������������� 133 Art 1174��������������������������������������������������������������������������������������������������������������������������������������������� 208 Art 1178������������������������������������������������������������������������������������������������������������������������������������� 233, 239 Art 1184����������������������������������������������������������������������������������������������������������������125, 129, 235–36, 451 Art 1184(2)�������������������������������������������������������������������������������������������������������������������������������� 115, 117 Art 1188����������������������������������������������������������������������������������������������������������������������������������������������� 46 Art 1195������������������������������������������������������������������������������������������������������������������������������������� 133, 142 Art 1196������������������������������������������������������������������������������������������������������������������������������������� 228, 236 Art 1217��������������������������������������������������������������������������������������������������������������������������������������������� 115 Art 1221��������������������������������������������������������������������������������������������������������������������������������������������� 115 Art 1226������������������������������������������������������������������������������������������������������������������������������������� 233, 239 Art 1247(3)���������������������������������������������������������������������������������������������������������������������������������������� 259 Art 1249��������������������������������������������������������������������������������������������������������������������������������������������� 499 Art 1250��������������������������������������������������������������������������������������������������������������������������������������������� 499 Art 1291��������������������������������������������������������������������������������������������������������������������������������������������� 487 Art 1341������������������������������������������������������������������������������������������������������������������������������������� 271, 431 Art 1351��������������������������������������������������������������������������������������������������������������������������������������������� 228 Art 1354����������������������������������������������������������������������������������������������������������������������������������������������� 10 Art 1374����������������������������������������������������������������������������������������������������������������������������������������������� 87 Art 1583��������������������������������������������������������������������������������������������������������228, 235–36, 432, 441, 669 Art 1584��������������������������������������������������������������������������������������������������������������������������������������������� 235 Art 1591������������������������������������������������������������������������������������������������������������������������������������� 208, 259 Art 1610������������������������������������������������������������������������������������������������������������������������������115, 236, 451 Art 1612����������������������������������������������������������������������������������������������������������������������� 238–39, 441, 470 Art 1613����������������������������������������������������������������������������������������������������������������������� 238–39, 441, 470 Art 1644��������������������������������������������������������������������������������������������������������������������������������������������� 230 Art 1654������������������������������������������������������������������������������������������������������������������������������������� 236, 451 Art 1656��������������������������������������������������������������������������������������������������������������������������������������������� 451 Art 1659��������������������������������������������������������������������������������������������������������������������������������������������� 544 Art 1690��������������������������������������������������������������������������������������������������������������217, 442, 477, 499, 508 Art 2061��������������������������������������������������������������������������������������������������������������������������������������������� 415 Art 2072��������������������������������������������������������������������������������������������������������������������������������������������� 566 Art 2073��������������������������������������������������������������������������������������������������������������������������������������������� 478 Art 2074������������������������������������������������������������������������������������������������������������������������������������� 477, 566 Art 2075��������������������������������������������������������������������������������������������������������������������������������������������� 499 Art 2076��������������������������������������������������������������������������������������������������������������������������������������������� 566 Art 2093��������������������������������������������������������������������������������������������������������������������������������������������� 390 Art 2102(4)�������������������������������������������������������������������������������������������������������������������������235, 239, 470 Art 2114��������������������������������������������������������������������������������������������������������������������������������������������� 566 Art 2119��������������������������������������������������������������������������������������������������������������������������������������������� 566 Art 2123��������������������������������������������������������������������������������������������������������������������������������������������� 390 Art 2279����������������������������������������������������������������������������������������������������������������������383, 435, 455, 462 Art 2282��������������������������������������������������������������������������������������������������������������������������������������������� 385 Art 2643��������������������������������������������������������������������������������������������������������������������������������������������� 539 Civil Code 1804������������������������������������������������������������������������������������������������������������������������������������� 158 Art 2����������������������������������������������������������������������������������������������������������������������������������������������������� 88 Art 7����������������������������������������������������������������������������������������������������������������������������������������������������� 88 Art 1165��������������������������������������������������������������������������������������������������������������������������������������������� 158 Code de commerce������������������������������������������������������������������������������������������������������������������������������� 696 Art L 14���������������������������������������������������������������������������������������������������������������������������������������������� 566 Art L 110-3�������������������������������������������������������������������������������������������������������������������������������� 477, 566
Table of Legislation and Related Documents xxxvii
Arts L 131ff���������������������������������������������������������������������������������������������������������������������������������������� 669 Arts L 142-1 to L142-5���������������������������������������������������������������������������������������������������������������������� 566 Art L 511-12�������������������������������������������������������������������������������������������������������������������������������������� 687 Art L 521-1���������������������������������������������������������������������������������������������������������������������������������������� 566 Art L 611-1���������������������������������������������������������������������������������������������������������������������������������������� 236 Arts L 621-39ff���������������������������������������������������������������������������������������������������������������������������������� 556 Code de Consommation��������������������������������������������������������������������������������������������������������������������� 2, 80 Code Monetaire et Financier������������������������������������������������������������������������������������������������������������������ 80 Coûtume de Paris, Art 170������������������������������������������������������������������������������������������������������������������� 566 Coûtumes de Beauvais���������������������������������������������������������������������������������������������������������������������������� 46 Coûtumes d’Orléans, Art 278��������������������������������������������������������������������������������������������������������������� 441 Decree n 2011-48, Art 1504������������������������������������������������������������������������������������������������������������������ 219 Loi Dailly����������������������������������������������������������������������������������������������������������������477, 496, 499, 508, 609 Ordonnance 2006-346������������������������������������������������������������������������������������������������������������������ 415, 554 Ordonnance de Commerce 1673��������������������������������������������������������������������������������������������������������� 566 Ordonnance de Moulins, Art 54������������������������������������������������������������������������������������������������������������ 68 Ordonnance of March 2005����������������������������������������������������������������������������������������������������������������� 517
Germany Allgemeine Deutsche Wechselordnung 1848��������������������������������������������������������������������������������������� 696 Allgemeines Landrecht (Prussia), I 2 s 136 (1794)������������������������������������������������������������������������������������������������������������������������������������ 438 5 s 378 (1794)������������������������������������������������������������������������������������������������������������������������������������ 138 Allgemeines Landrecht (Prussia)(1794)���������������������������������������������������������������������������������������������� 466 Banking Act������������������������������������������������������������������������������������������������������������������������������������������� 716 Bankruptcy Act 1877 s 14����������������������������������������������������������������������������������������������������������������������������������������������������� 566 s 26����������������������������������������������������������������������������������������������������������������������������������������������������� 236 s 43��������������������������������������������������������������������������������������������������������������������������������������������� 236, 566 Bills of Exchange Act 1933�����������������������������������������������������������������������������������������������������246, 687, 689 Civil Code (BGB)���������������������������������������������������������������������������������� 65, 67, 79–80, 110, 129, 163, 169, 195, 222, 225, 228, 370, 378–79, 435, 448, 453, 474–75, 479, 504, 566, 647–48, 716 s 90����������������������������������������������������������������������������������������������������������������������������������������������������� 342 s 119����������������������������������������������������������������������������������������������������������������������������������������������������� 78 s 121��������������������������������������������������������������������������������������������������������������������������������������������������� 231 s 123��������������������������������������������������������������������������������������������������������������������������������������������������� 450 s 123(1)���������������������������������������������������������������������������������������������������������������������������������������������� 123 s 130��������������������������������������������������������������������������������������������������������������������������������������������� 47, 188 s 137������������������������������������������������������������������������������������������������������������������������������������������� 476, 491 s 138(2)������������������������������������������������������������������������������������������������������������������������������������������������ 64 s 157����������������������������������������������������������������������������������������������������������������������������������������������� 78, 88 s 159��������������������������������������������������������������������������������������������������������������������������������������������������� 449 s 164��������������������������������������������������������������������������������������������������������������������������������������������������� 305 s 181��������������������������������������������������������������������������������������������������������������������������������������������������� 306 s 195��������������������������������������������������������������������������������������������������������������������������������������������������� 231 s 226����������������������������������������������������������������������������������������������������������������������������������������������������� 78 s 241������������������������������������������������������������������������������������������������������������������������������������������� 106, 159 s 241(1)���������������������������������������������������������������������������������������������������������������������������������������������� 117 s 241(2)�����������������������������������������������������������������������������������������������������������������������������������79, 85, 111
xxxviii Table of Legislation and Related Documents
s 242����������������������������������������������������������������������������������������������������������������������������������������������� 78, 88 s 273��������������������������������������������������������������������������������������������������������������������������������������������� 470–71 s 275��������������������������������������������������������������������������������������������������������������������������������������������������� 125 s 280��������������������������������������������������������������������������������������������������������������������������������79, 85, 125, 129 s 280(1)���������������������������������������������������������������������������������������������������������������������������������������������� 106 s 311(2)���������������������������������������������������������������������������������������������������������������������������������������� 85, 106 s 311(2) and (3)����������������������������������������������������������������������������������������������������������������������������������� 79 s 311(3)���������������������������������������������������������������������������������������������������������������������������������85, 156, 159 s 311a������������������������������������������������������������������������������������������������������������������������������������������������� 123 s 311b��������������������������������������������������������������������������������������������������������������������������������������������������� 69 s 313������������������������������������������������������������������������������������������������������������������������79, 85, 114, 139, 141 s 320��������������������������������������������������������������������������������������������������������������������������������������������� 470–71 s 322��������������������������������������������������������������������������������������������������������������������������������������������������� 238 s 323������������������������������������������������������������������������������������������������������������������������������������������� 125, 231 s 323(2)���������������������������������������������������������������������������������������������������������������������������������������������� 125 s 323(6)���������������������������������������������������������������������������������������������������������������������������������������������� 125 ss 323ff����������������������������������������������������������������������������������������������������������������������������������������������� 231 s 326(1)���������������������������������������������������������������������������������������������������������������������������������������������� 125 s 328��������������������������������������������������������������������������������������������������������������������������������������������� 158–59 s 333��������������������������������������������������������������������������������������������������������������������������������������������������� 159 s 398������������������������������������������������������������������������������������������������������������������������������������������� 343, 478 s 399������������������������������������������������������������������������������������������������������������������������������������� 476, 490–91 s 403��������������������������������������������������������������������������������������������������������������������������������������������������� 508 s 404��������������������������������������������������������������������������������������������������������������������������������������������������� 487 s 405������������������������������������������������������������������������������������������������������������������������������������������� 490, 504 s 406��������������������������������������������������������������������������������������������������������������������������������������������������� 487 s 407������������������������������������������������������������������������������������������������������������������������������������������� 487, 508 s 409��������������������������������������������������������������������������������������������������������������������������������������������������� 508 s 410��������������������������������������������������������������������������������������������������������������������������������������������������� 508 s 434��������������������������������������������������������������������������������������������������������������������������������������������������� 231 s 437��������������������������������������������������������������������������������������������������������������������������������������������� 230–31 ss 437ff����������������������������������������������������������������������������������������������������������������������������������������������� 231 s 438(3)���������������������������������������������������������������������������������������������������������������������������������������������� 231 s 446������������������������������������������������������������������������������������������������������������������������������������������� 229, 231 s 449��������������������������������������������������������������������������������������������������������������������������������������������������� 236 s 455��������������������������������������������������������������������������������������������������������������������������������������������������� 236 s 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688��������������������������������������������������������������������������������������������������������������������������������������������������� 717 s 766����������������������������������������������������������������������������������������������������������������������������������������������������� 69 s 817��������������������������������������������������������������������������������������������������������������������������������������������������� 120 s 819����������������������������������������������������������������������������������������������������������������������������������������������������� 78 s 854��������������������������������������������������������������������������������������������������������������������������������������������������� 717 s 854(1)���������������������������������������������������������������������������������������������������������������������������������������������� 379 s 870����������������������������������������������������������������������������������������������������������������������������343, 386, 461, 559 s 872��������������������������������������������������������������������������������������������������������������������������������������������������� 380 ss 903ff����������������������������������������������������������������������������������������������������������������������������������������������� 342
Table of Legislation and Related Documents xxxix
s 929����������������������������������������������������������������������������������������������������������������������������431, 434, 442, 455 s 929(1)���������������������������������������������������������������������������������������������������������������������������������������������� 436 s 930������������������������������������������������������������������������������������������������������������������������������������������� 343, 434 s 931������������������������������������������������������������������������������������������������������������������������������������343, 380, 434 s 932��������������������������������������������������������������������������������������������������������������������������������������������������� 466 s 932(2)���������������������������������������������������������������������������������������������������������������������������������������������� 462 s 933��������������������������������������������������������������������������������������������������������������������������������������������������� 461 s 934��������������������������������������������������������������������������������������������������������������������������������������������������� 461 s 937(1)���������������������������������������������������������������������������������������������������������������������������������������������� 388 s 937(2)���������������������������������������������������������������������������������������������������������������������������������������������� 388 ss 985ff����������������������������������������������������������������������������������������������������������������������������������������������� 383 s 986��������������������������������������������������������������������������������������������������������������������������������������������������� 470 s 1000������������������������������������������������������������������������������������������������������������������������������������������������� 470 s 1205������������������������������������������������������������������������������������������������������������������������������������������������� 566 s 1259������������������������������������������������������������������������������������������������������������������������������������������������� 555 s 2100������������������������������������������������������������������������������������������������������������������������������������������������� 522 Code of Civil Procedure s 804��������������������������������������������������������������������������������������������������������������������������������������������������� 390 s 867��������������������������������������������������������������������������������������������������������������������������������������������������� 390 ss 883ff����������������������������������������������������������������������������������������������������������������������������������������������� 117 s 930��������������������������������������������������������������������������������������������������������������������������������������������������� 390 Commercial Code (HGB)�������������������������������������������������������������������������������������������������������������������� 716 s 340b������������������������������������������������������������������������������������������������������������������������������������������������� 560 s 354a������������������������������������������������������������������������������������������������������������������������������������������������� 490 s 363II������������������������������������������������������������������������������������������������������������������������������������������������ 668 s 366��������������������������������������������������������������������������������������������������������������������������������������������������� 462 s 369��������������������������������������������������������������������������������������������������������������������������������������������������� 471 s 392(1)���������������������������������������������������������������������������������������������������������������������������������������������� 305 s 392(2)�������������������������������������������������������������������������������������������������������������������������������������� 305, 307 s 650��������������������������������������������������������������������������������������������������������������������������������������������������� 668 Insolvency Act 1999�����������������������������������������������������������������������������������������������236, 494, 556, 563, 573 Negotiable Instruments Law���������������������������������������������������������������������������������������������������������������� 696
International Berne Convention on the Protection of Literary and Artistic Works������������������������������������������������ 640 CMI Rules���������������������������������������������������������������������������������������������������������������������������������������������� 702 Convention on the International Recognition of Rights in Aircraft�������������������������������������������������� 595 European Convention on Human Rights 1950, Art 6������������������������������������������������������������������������� 269 General Agreement on Tariffs and Trade��������������������������������������������������������������������������������������������� 209 Geneva Convention 2009������������������������������������������������������������������������������������������������������������� 749, 754 Art 2��������������������������������������������������������������������������������������������������������������������������������������������������� 757 Art 4��������������������������������������������������������������������������������������������������������������������������������������������������� 758 Art 9(1)(a)����������������������������������������������������������������������������������������������������������������������������������������� 758 Art 9(2)(a)����������������������������������������������������������������������������������������������������������������������������������������� 758 Arts 11–12����������������������������������������������������������������������������������������������������������������������������������������� 758 Art 12(3)�������������������������������������������������������������������������������������������������������������������������������������������� 758 Art 14������������������������������������������������������������������������������������������������������������������������������������������������� 758 Art 18������������������������������������������������������������������������������������������������������������������������������������������������� 758 Art 24������������������������������������������������������������������������������������������������������������������������������������������������� 758 Art 26������������������������������������������������������������������������������������������������������������������������������������������������� 758 Geneva Conventions 1930���������������������������������������������������������������������������������������� 246, 683–85, 695–96
xl Table of Legislation and Related Documents
Geneva Conventions 1932�������������������������������������������������������������������������������������������������������������������� 696 Hague Convention on the Law Applicable to Agency 1978�����������������������������������������273, 312, 314, 316 Art 1��������������������������������������������������������������������������������������������������������������������������������������������� 312–13 Art 2(f)���������������������������������������������������������������������������������������������������������������������������������������������� 315 Art 5��������������������������������������������������������������������������������������������������������������������������������������������������� 314 Art 6��������������������������������������������������������������������������������������������������������������������������������������������� 313–14 Art 8��������������������������������������������������������������������������������������������������������������������������������������������������� 313 Art 8©������������������������������������������������������������������������������������������������������������������������������������������������ 314 Art 11������������������������������������������������������������������������������������������������������������������������������������������������� 313 Art 13������������������������������������������������������������������������������������������������������������������������������������������������� 314 Art 14������������������������������������������������������������������������������������������������������������������������������������������������� 314 Art 17������������������������������������������������������������������������������������������������������������������������������������������������� 314 Art 18������������������������������������������������������������������������������������������������������������������������������������������� 314–15 Art 26������������������������������������������������������������������������������������������������������������������������������������������������� 312 Hague Convention on the Law Applicable to Certain Rights in Respect of Securities held with an Intermediary 2002��������������������������������������������������������������������������������367, 750, 754 Art 4��������������������������������������������������������������������������������������������������������������������������������������������������� 747 Art 4.1���������������������������������������������������������������������������������������������������������������������������������������� 364, 624 Hague Convention on the Law Applicable to Trusts and their Recognition 1985������������273, 364, 415, 527, 540, 589–96 Art 2������������������������������������������������������������������������������������������������������������������������������������� 540, 590–91 Art 3��������������������������������������������������������������������������������������������������������������������������������������������������� 540 Art 4��������������������������������������������������������������������������������������������������������������������������������������������������� 592 Art 5������������������������������������������������������������������������������������������������������������������������������������� 364, 590–91 Arts 5–10������������������������������������������������������������������������������������������������������������������������������������������� 592 Art 6������������������������������������������������������������������������������������������������������������������������������������� 541, 592–93 Arts 6–10������������������������������������������������������������������������������������������������������������������������������������� 590–91 Art 7��������������������������������������������������������������������������������������������������������������������������������������������� 592–94 Art 8��������������������������������������������������������������������������������������������������������������������������������������������������� 593 Art 11������������������������������������������������������������������������������������������������������������������������������������������� 591–94 Art 11(d)�������������������������������������������������������������������������������������������������������������������������������������� 591–92 Art 12������������������������������������������������������������������������������������������������������������������������������������������������� 594 Art 13����������������������������������������������������������������������������������������������������������������������������������������� 591, 594 Art 15����������������������������������������������������������������������������������������������������������������������������������� 591, 593–94 Art 15(d) and ©�������������������������������������������������������������������������������������������������������������������������������� 594 Art 15(f)�������������������������������������������������������������������������������������������������������������������������������������������� 591 Art 18����������������������������������������������������������������������������������������������������������������������������������541, 591, 594 Art 19������������������������������������������������������������������������������������������������������������������������������������������������� 591 Art 20������������������������������������������������������������������������������������������������������������������������������������������������� 592 Art 22������������������������������������������������������������������������������������������������������������������������������������������������� 592 Hague Private International Law Convention on International Sales 1955, Art 1(1)����������������������� 218 Hague Rules��������������������������������������������������������������������������������������������������������������676, 678–80, 699, 703 Hague Sales Conventions 1964������������������������������������������������������������� 11, 57, 93, 129, 188, 206, 247–48, 250, 252–53, 257, 264, 270, 284 Art 1(a)���������������������������������������������������������������������������������������������������������������������������������������������� 219 Art 2��������������������������������������������������������������������������������������������������������������������������������������������������� 264 Art 3��������������������������������������������������������������������������������������������������������������������������������������������������� 253 Art 4��������������������������������������������������������������������������������������������������������������������������������������������������� 271 Art 9��������������������������������������������������������������������������������������������������������������������������������������������������� 271 Art 9(3)���������������������������������������������������������������������������������������������������������������������������������������������� 285 Art 16������������������������������������������������������������������������������������������������������������������������������������������������� 264
Table of Legislation and Related Documents xli
Art 17������������������������������������������������������������������������������������������������������������������������������������������������� 264 Art 38(4)�������������������������������������������������������������������������������������������������������������������������������������������� 264 Art 89������������������������������������������������������������������������������������������������������������������������������������������������� 264 At 9(2)����������������������������������������������������������������������������������������������������������������������������������������������� 272 Hague-Visby Rules���������������������������������������������������������������������������������������������������285, 676, 678–80, 702 Hamburg Rules��������������������������������������������������������������������������������������������������������������� 678–80, 699, 703 Incoterms������������������������������������������������������������������������������������������������������������������������� 283–86, 288, 674 International Convention on Maritime Liens and Mortgages����������������������������������������������������������� 595 New York Convention������������������������������������������������������������������������������������������������������������������� 353, 597 Rotterdam Rules���������������������������������������������������������������������������������������������������������������� 678, 680, 706–7 Statute of the International Court of Justice, Art 38(1)���������������������������������������������������9, 164, 263, 707 UNCITRAL Assignment of Receivables in International Trade Convention������������270, 520, 561, 571, 574, 595, 608, 614, 617–18 UNCITRAL Convention on International Bills of Exchange and International Promissory Notes 1988������������������������������������������������������������������������������������������������������������� 697 UNCITRAL Model Laws�����������������������������������������������������������������������������40, 219, 579, 704, 706–7, 741 UNIDROIT Cape Town Convention and Aircraft Protocol 2001������������������������������������������������������ 586 UNIDROIT Convention on Agency in the International Sale of Goods 1983�������������15, 294, 308, 315 UNIDROIT Convention on International Factoring 1988�����������������������������������������270, 495, 519, 561, 574, 595, 617–18 UNIDROIT Convention on International Interests in Mobile Equipment��������270, 571, 574, 595, 639 UNIDROIT Ottawa Leasing Convention���������������������������������������������������������������������156, 270, 574, 595 UNIDROIT Principles for International Commercial Contracts�����������������3, 15, 17, 47, 58, 61, 70, 88, 100–2, 104, 113, 123, 127, 130, 134, 142, 168, 171, 174–79, 181–82, 185, 187, 191, 196, 204, 258–59, 267, 272–73, 520, 542, 644, 650 Preamble�������������������������������������������������������������������������������������������������������������������������������������������� 172 Art 1.1������������������������������������������������������������������������������������������������������������������������������������������ 171–72 Art 1.2���������������������������������������������������������������������������������������������������������������������������������������� 170, 189 Art 1.3������������������������������������������������������������������������������������������������������������������������������������������������ 170 Art 1.4������������������������������������������������������������������������������������������������������������������������������������������ 170–72 Art 1.5���������������������������������������������������������������������������������������������������������������������������������� 171–73, 175 Art 1.6�������������������������������������������������������������������������������������������������������������������101, 170–71, 270, 272 Art 1.6(2)������������������������������������������������������������������������������������������������������������������������������������������� 171 Art 1.7���������������������������������������������������������������������������������������������������������������������������������101, 103, 170 Art 1.7(2)������������������������������������������������������������������������������������������������������������������������������21, 102, 173 Art 1.8���������������������������������������������������������������������������������������������������������������������������������� 103, 171–72 Art 1.8(2)������������������������������������������������������������������������������������������������������������������������������������������� 103 Art 2.1���������������������������������������������������������������������������������������������������������������������������������170, 187, 189 Art 2.1.4(2)(b)����������������������������������������������������������������������������������������������������������������������������������� 187 Art 2.2���������������������������������������������������������������������������������������������������������������������������������������� 170, 189 Art 2.3(1)������������������������������������������������������������������������������������������������������������������������������������������� 189 Art 2.4������������������������������������������������������������������������������������������������������������������������������������������������ 170 Art 2.4(2)(b)�����������������������������������������������������������������������������������������������������������������������103, 170, 188 Art 2.5�������������������������������������������������������������������������������������������������������������������������������������������������� 47 Art 2.6������������������������������������������������������������������������������������������������������������������������������������������ 47, 170 Art 2.6(1)������������������������������������������������������������������������������������������������������������������������������������������� 187 Art 2.6(2)����������������������������������������������������������������������������������������������������������������������������������� 170, 189 Art 2.14�������������������������������������������������������������������������������������������������������������������������������170, 175, 189 Art 2.15���������������������������������������������������������������������������������������������������������������������������������������������� 170
xlii Table of Legislation and Related Documents
Art 2.16���������������������������������������������������������������������������������������������������������������������������������������������� 103 Art 2.17�������������������������������������������������������������������������������������������������������������������������������������� 103, 170 Art 2.19���������������������������������������������������������������������������������������������������������������������������������������������� 170 Art 2.20���������������������������������������������������������������������������������������������������������������������������������������������� 103 Art 2.20.2������������������������������������������������������������������������������������������������������������������������������������������� 174 Art 3.1���������������������������������������������������������������������������������������������������������������������������������������� 170, 191 Art 3.2���������������������������������������������������������������������������������������������������������������������������������� 187–88, 190 Art 3.3������������������������������������������������������������������������������������������������������������������������������������������������ 191 Art 3.4���������������������������������������������������������������������������������������������������������������������������������������� 187, 191 Art 3.5���������������������������������������������������������������������������������������������������������������������������������������� 170, 191 Art 3.5(2)������������������������������������������������������������������������������������������������������������������������������������������� 179 Art 3.5(2)(a)�������������������������������������������������������������������������������������������������������������������������������������� 191 Art 3.5(2)(b)�������������������������������������������������������������������������������������������������������������������������������������� 191 Art 3.6���������������������������������������������������������������������������������������������������������������������������������������� 170, 191 Art 3.8���������������������������������������������������������������������������������������������������������������������������������103, 170, 191 Art 3.9�������������������������������������������������������������������������������������������������������������������������� 103, 170, 191–92 Art 3.10�������������������������������������������������������������������������������������������������������������������������������������� 103, 191 Art 3.12���������������������������������������������������������������������������������������������������������������������������������������������� 191 Art 3.13���������������������������������������������������������������������������������������������������������������������������������������������� 191 Art 3.16���������������������������������������������������������������������������������������������������������������������������������������������� 191 Art 3.17���������������������������������������������������������������������������������������������������������������������������������������������� 187 Art 3.18���������������������������������������������������������������������������������������������������������������������������������������������� 191 Art 3.19������������������������������������������������������������������������������������������������������������������������ 103, 170, 173–74 Art 3.20���������������������������������������������������������������������������������������������������������������������������������������������� 191 Art 4.1���������������������������������������������������������������������������������������������������������������������������������������� 170, 187 Art 4.1(1)������������������������������������������������������������������������������������������������������������������������������������������� 176 Art 4.1(2)������������������������������������������������������������������������������������������������������������������������������������������� 176 Art 4.2���������������������������������������������������������������������������������������������������������������������������������������� 170, 187 Art 4.2(1)������������������������������������������������������������������������������������������������������������������������������������������� 176 Art 4.2(2)����������������������������������������������������������������������������������������������������������������������������������� 103, 176 Art 4.3(b) and (f)������������������������������������������������������������������������������������������������������������������������������ 171 Art 4.3©��������������������������������������������������������������������������������������������������������������������������������������������� 187 Art 4.6������������������������������������������������������������������������������������������������������������������������������������������������ 103 Art 4.8���������������������������������������������������������������������������������������������������������������������������������������� 103, 170 Art 4.118�������������������������������������������������������������������������������������������������������������������������������������������� 179 Art 5.1.2��������������������������������������������������������������������������������������������������������������������������������������������� 187 Art 5.2���������������������������������������������������������������������������������������������������������������������������� 102–3, 170, 184 Art 5.2(b)������������������������������������������������������������������������������������������������������������������������������������������� 171 Art 5.3���������������������������������������������������������������������������������������������������������������������������������������� 103, 170 Art 5.4.2��������������������������������������������������������������������������������������������������������������������������������������������� 103 Art 5.5������������������������������������������������������������������������������������������������������������������������������������������������ 103 Art 5.6������������������������������������������������������������������������������������������������������������������������������������������������ 103 Art 5.7������������������������������������������������������������������������������������������������������������������������������������������������ 103 Art 5.8������������������������������������������������������������������������������������������������������������������������������������������������ 103 Art 6.2���������������������������������������������������������������������������������������������������������������������������������������� 170, 175 Art 6.2.1��������������������������������������������������������������������������������������������������������������������������������������������� 170 Art 6.2.2��������������������������������������������������������������������������������������������������������������������������������������������� 107 Art 6.2.3��������������������������������������������������������������������������������������������������������������������������������������������� 103 Art 7.1.2��������������������������������������������������������������������������������������������������������������������������������������������� 103 Art 7.1.3��������������������������������������������������������������������������������������������������������������������������������������������� 193 Art 7.1.6������������������������������������������������������������������������������������������������������������������������������103, 170, 175
Table of Legislation and Related Documents xliii
Art 7.1.7������������������������������������������������������������������������������������������������������������������������������������� 103, 170 Art 7.2.2������������������������������������������������������������������������������������������������������������������������������������� 170, 193 Art 7.2.4��������������������������������������������������������������������������������������������������������������������������������������������� 193 Art 7.2.5��������������������������������������������������������������������������������������������������������������������������������������������� 193 Art 7.4.13����������������������������������������������������������������������������������������������������������������������������103, 170, 175 Uniform Customs and Practice for Documentary Credits��������������������������������������������������������� 240, 703 Vienna Convention on the International Sale of Goods (CISG)���������������4–5, 9, 15–16, 21, 38–39, 57, 69–70, 100–1, 108, 127, 129–30, 134–36, 162–63, 168, 170, 172, 176, 184–87, 189, 192, 195–97, 200, 203–5, 207, 210–12, 214, 218–19, 233, 247–75, 280, 283–87, 289, 586, 617, 758 Art 1����������������������������������������������������������������������������������������������������������������������������201, 210, 218, 255 Art 1(1)�������������������������������������������������������������������������������������������������������������������������������� 171, 255–56 Art 1(1)(b)��������������������������������������������������������������������������������������������������������������������������������� 255, 267 Art 1(2)���������������������������������������������������������������������������������������������������������������������������������70, 196, 256 Art 1(3)���������������������������������������������������������������������������������������������������������������������������������������������� 256 Art 2��������������������������������������������������������������������������������������������������������������������������������������������������� 250 Art 2(1)������������������������������������������������������������������������������������������������������������������������������������������������ 61 Art 2(2)���������������������������������������������������������������������������������������������������������������������������������������������� 256 Art 2(a)������������������������������������������������������������������������������������������������������������������������������������������ 6, 276 Art 3��������������������������������������������������������������������������������������������������������������������������������������������������� 250 Art 4��������������������������������������������������������������������������������������������������������� 11, 57, 70, 100, 123, 170, 179, 181, 184, 191, 205, 238, 250, 256, 263, 265, 270–71, 273 Art 4(2)�������������������������������������������������������������������������������������������������������������������������������206, 218, 233 Art 4(a)���������������������������������������������������������������������������������������������������������������������������������������������� 272 Art 5��������������������������������������������������������������������������������������������������������������������������������������������������� 250 Art 6������������������������������������������������������������������������������ 101, 171, 200, 251, 253–55, 266, 268, 271, 280 Art 7�������������������������������������������������������������������������������11, 100, 170, 183, 263, 270, 284, 288, 617, 758 Art 7.2������������������������������������������������������������������������������������������������������������������������������������������������ 171 Art 7(1)�������������������������������������������������������������������������������������������������100, 170, 254, 258, 265–68, 271 Art 7(2)������������������������������������������������������������������������������������������������ 57, 100, 136, 171, 227, 258, 262, 264–66, 268, 270, 273, 280, 284, 287 Art 8����������������������������������������������������������������������������������������������������58, 61, 170, 257, 265–66, 269–71 Art 9������������������������������������������������������������������������������������������������������� 11, 93, 100, 171, 184, 249, 251, 265, 270–72, 280, 285, 288 Art 9(1)���������������������������������������������������������������������������������������������������������������������������������������������� 272 Art 9(2)���������������������������������������������������������������������������������������������������������������������������������������������� 272 Art 11����������������������������������������������������������������������������������������������������������������������������������������� 170, 189 Art 12������������������������������������������������������������������������������������������������������������������101, 170, 189, 253, 266 Art 14��������������������������������������������������������������������������������������������������������57, 70, 170, 188, 207, 257–58 Art 14(1)������������������������������������������������������������������������������������������������������������������������������������ 189, 257 Arts 14ff������������������������������������������������������������������������������������������������������������������������������������� 187, 203 Art 15������������������������������������������������������������������������������������������������������������������������������������������������� 189 Art 16����������������������������������������������������������������������������������������������������������������������������������������� 170, 257 Art 16(2)���������������������������������������������������������������������������������������������������������������������������������47, 57, 188 Art 16(2)(b)������������������������������������������������������������������������������������������������������������������������170, 187, 265 Art 18������������������������������������������������������������������������������������������������������������������������������������57, 170, 188 Art 18(1)�������������������������������������������������������������������������������������������������������������������������������57, 170, 187 Art 18(2)�����������������������������������������������������������������������������������������������������������������������47, 170, 188, 257
xliv Table of Legislation and Related Documents
Art 19(2)�������������������������������������������������������������������������������������������������������������������������������������������� 265 Art 19(3)���������������������������������������������������������������������������������������������������������������70, 170, 189, 203, 257 Art 21(2)�������������������������������������������������������������������������������������������������������������������������������������������� 265 Art 23������������������������������������������������������������������������������������������������������������������������������������������������� 170 Art 24������������������������������������������������������������������������������������������������������������������������������������������������� 170 Art 25�������������������������������������������������������������������������������������������� 11, 126, 130, 133, 192, 207, 210, 259 Art 26����������������������������������������������������������������������������������������������������������������������������������130, 259, 265 Art 28��������������������������������������������������������������������������������������������������������������������118, 170–71, 193, 259 Art 29(1)������������������������������������������������������������������������������������������������������������������������������������ 188, 257 Art 29(2)�������������������������������������������������������������������������������������������������������������������������������������������� 265 Art 30������������������������������������������������������������������������������������������������������������������������������������������������� 285 Art 31��������������������������������������������������������������������������������������������������������������������100, 250–51, 258, 285 Art 31©�������������������������������������������������������������������������������������������������������������������������������������� 210, 249 Art 32������������������������������������������������������������������������������������������������������������������������������������������������� 219 Art 33����������������������������������������������������������������������������������������������������������������������������������������� 251, 258 Art 34������������������������������������������������������������������������������������������������������������������������������������������������� 285 Art 35������������������������������������������������������������������������������������������������������������������������������������������������� 251 Art 35(1)�������������������������������������������������������������������������������������������������������������������������������������������� 286 Art 35(2)������������������������������������������������������������������������������������������������������������������������������������ 227, 262 Art 35(2)(a)��������������������������������������������������������������������������������������������������������������������������������������� 224 Art 35(2)(b)��������������������������������������������������������������������������������������������������������������������������������������� 224 Art 35(2)(d)������������������������������������������������������������������������������������������������������������������������������ 224, 286 Art 39(1)�������������������������������������������������������������������������������������������������������������������������������������������� 265 Art 45������������������������������������������������������������������������������������������������������������������������������������������������� 251 Art 45(2)�������������������������������������������������������������������������������������������������������������������������������������������� 127 Arts 45ff��������������������������������������������������������������������������������������������������������������������������������������������� 127 Art 46������������������������������������������������������������������������������������������������������������������������������������������������� 259 Art 47����������������������������������������������������������������������������������������������������������������������������������������� 259, 265 Art 48������������������������������������������������������������������������������������������������������������������������������������������������� 249 Art 48(2)�������������������������������������������������������������������������������������������������������������������������������������������� 265 Art 49������������������������������������������������������������������������������������������������������������������127, 130, 233, 259, 261 Art 49(1)(b)��������������������������������������������������������������������������������������������������������������������������������������� 259 Art 50��������������������������������������������������������������������������������������������������������������������11, 130, 192, 210, 260 Art 55��������������������������������������������������������������������������������������������������������������70, 189, 208, 250, 257–58 Art 57����������������������������������������������������������������������������������������������������������������������������������210, 251, 259 Art 58����������������������������������������������������������������������������������������������������������������������������������������� 210, 259 Art 60������������������������������������������������������������������������������������������������������������������������������������������������� 250 Arts 60ff��������������������������������������������������������������������������������������������������������������������������������������������� 127 Art 61����������������������������������������������������������������������������������������������������������������������������������������� 249, 251 Art 61(2)�������������������������������������������������������������������������������������������������������������������������������������������� 127 Art 62������������������������������������������������������������������������������������������������������������������������������������������������� 259 Arts 62ff��������������������������������������������������������������������������������������������������������������������������������������������� 238 Art 63������������������������������������������������������������������������������������������������������������������������������������������������� 249 Art 64�������������������������������������������������������������������������������������������������� 127, 130, 196, 233, 249, 259, 261 Art 64(1)(b)��������������������������������������������������������������������������������������������������������������������������������������� 259 Art 64(2)�������������������������������������������������������������������������������������������������������������������������������������������� 249 Art 65������������������������������������������������������������������������������������������������������������������������������������������������� 265 Arts 66ff����������������������������������������������������������������������������������������������������������������������126, 216, 250, 280 Art 67����������������������������������������������������������������������������������������������������������������������������������������� 262, 286 Art 67(1)�������������������������������������������������������������������������������������������������������������������������������������������� 285 Art 68����������������������������������������������������������������������������������������������������������������������������������������� 262, 265
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Art 69����������������������������������������������������������������������������������������������������������������������������������������� 228, 262 Art 69(1)������������������������������������������������������������������������������������������������������������������������������������ 251, 258 Art 71������������������������������������������������������������������������������������������������������������������������������������������������� 249 Art 71(2)�������������������������������������������������������������������������������������������������������������������������������������������� 669 Art 71(3)�������������������������������������������������������������������������������������������������������������������������������������������� 265 Art 72(2)������������������������������������������������������������������������������������������������������������������������������������ 249, 265 Art 74������������������������������������������������������������������������������������������������������������������������������������������������� 251 Arts 74–77����������������������������������������������������������������������������������������������������������������������������������������� 260 Art 77������������������������������������������������������������������������������������������������������������������������������������������������� 265 Art 79��������������������������������������������������������������������������������������� 11, 112–13, 125, 127, 130, 133–34, 136, 145, 170, 192, 210, 251, 260–61 Art 79(4)�������������������������������������������������������������������������������������������������������������������������������������������� 265 Art 79(5)������������������������������������������������������������������������������������������������������������������������������������ 133, 261 Art 82������������������������������������������������������������������������������������������������������������������������������������������������� 261 Art 85����������������������������������������������������������������������������������������������������������������������������������������� 251, 265 Arts 85ff��������������������������������������������������������������������������������������������������������������������������������������������� 219 Art 86����������������������������������������������������������������������������������������������������������������������������������������� 251, 265 Art 88������������������������������������������������������������������������������������������������������������������������������������������������� 265 Art 90������������������������������������������������������������������������������������������������������������������������������������������������� 195 Art 95������������������������������������������������������������������������������������������������������������������������������������������������� 255 Art 96������������������������������������������������������������������������������������������������������������������������������������������������� 253 Art 122����������������������������������������������������������������������������������������������������������������������������������������������� 195 Vienna Convention on the Law of Treaties 1969 Art 31������������������������������������������������������������������������������������������������������������������������������������������������� 268 Art 53������������������������������������������������������������������������������������������������������������������������������������������������� 707 Washington Convention����������������������������������������������������������������������������������������������������������������������� 426
Italy Civil Code Art 1337����������������������������������������������������������������������������������������������������������������������������������������������� 79 Art 1366����������������������������������������������������������������������������������������������������������������������������������������������� 79 Art 1375����������������������������������������������������������������������������������������������������������������������������������������������� 79 Art 1376������������������������������������������������������������������������������������������������������������������������������������� 432, 441 Art 1448����������������������������������������������������������������������������������������������������������������������������������������������� 64 Art 1470��������������������������������������������������������������������������������������������������������������������������������������������� 441 Art 1472��������������������������������������������������������������������������������������������������������������������������������������������� 437
Luxembourg Grand-Ducal Decree of 1971��������������������������������������������������������������������������������������������������������������� 733 Grand-Ducal Decree of 19 July 1983 on fiduciary agreements entered into by credit institutions������734 Grand-Ducal Decree of 7 June 1996���������������������������������������������������������������������������������������������������� 748
Netherlands Bankruptcy Act����������������������������������������������������������������������������������������������� 236, 438, 445, 495, 573, 641 Civil Code 1838������������������������������������������������������������������������������������������������������������������������������������� 115 Civil Code 1992���������������������������������������������������������65, 376, 448, 452, 458, 477, 479, 523, 547, 636, 674 Art 3.1���������������������������������������������������������������������������������������������������������������������������������������� 342, 475 Art 3.7������������������������������������������������������������������������������������������������������������������������������������������������ 524 Art 3.11���������������������������������������������������������������������������������������������������������������������������������������������� 462 Art 3.12������������������������������������������������������������������������������������������������������������������������������������������������ 88 Art 3.17(1)(a)������������������������������������������������������������������������������������������������������������������������������������ 594
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Art 3.26���������������������������������������������������������������������������������������������������������������������������������������������� 594 Art 3.38���������������������������������������������������������������������������������������������������������������������������������������������� 237 Art 3.38(2)��������������������������������������������������������������������������������������������������������������������������������� 234, 549 Art 3.40������������������������������������������������������������������������������������������������������������������������������������������ 65–66 Art 3.44���������������������������������������������������������������������������������������������������������������������������������������������� 123 Art 3.53�������������������������������������������������������������������������������������������������������������������������������������� 234, 448 Art 3.36�������������������������������������������������������������������������������������������������������������������������������������� 490, 504 Art 3.61���������������������������������������������������������������������������������������������������������������������������������������������� 299 Art 3.61(2)����������������������������������������������������������������������������������������������������������������������������������������� 297 Art 3.62���������������������������������������������������������������������������������������������������������������������������������������������� 294 Art 3.66���������������������������������������������������������������������������������������������������������������������������������������������� 298 Art 3.69���������������������������������������������������������������������������������������������������������������������������������������������� 300 Art 3.70���������������������������������������������������������������������������������������������������������������������������������������������� 300 Art 3.81���������������������������������������������������������������������������������������������������������������������������������������������� 378 Art 3.83(2)��������������������������������������������������������������������������������������������������������������������������������� 476, 490 Art 3.83(3)��������������������������������������������������������������������������������������������������������������������������������� 476, 491 Art 3.84(1)����������������������������������������������������������������������������������������������������������342, 431, 442, 448, 475 Art 3.84(2)��������������������������������������������������������������������������������������������������������������������������������� 495, 503 Art 3.84(3)������������������������������������������������������������������������������������������������������������������523, 541, 551, 595 Art 3.84(4)����������������������������������������������������������������������������������������������������234, 236–37, 449, 549, 551 Art 3.85�������������������������������������������������������������������������������������������������������������������������������� 522, 549–50 Art 3.86(3)(b)���������������������������������������������������������������������������������������������������������������������������� 666, 689 Art 3.88�������������������������������������������������������������������������������������������������������������������������������452, 459, 466 Art 3.90(2)����������������������������������������������������������������������������������������������������������������������������������������� 436 Art 3.92���������������������������������������������������������������������������������������������������������������������������������������������� 236 Art 3.94�������������������������������������������������������������������������������������������������������������������������������������� 217, 480 Art 3.94(3)����������������������������������������������������������������������������������������������������������������������������������������� 508 Art 3.97�����������������������������������������������������������������������������������������������������������������������437, 495, 503, 642 Art 3.99�������������������������������������������������������������������������������������������������������������������������������������� 388, 475 Arts 3.107ff���������������������������������������������������������������������������������������������������������������������������������������� 475 Art 3.110���������������������������������������������������������������������������������������������������������������������������������������� 306–7 Art 3.115(3)��������������������������������������������������������������������������������������������������������������������������������������� 558 Art 3.118�������������������������������������������������������������������������������������������������������������������������������������������� 388 Art 3.123�������������������������������������������������������������������������������������������������������������������������������������������� 476 Art 3.125������������������������������������������������������������������������������������������������������������������������������������ 342, 383 Art 3.125(2)��������������������������������������������������������������������������������������������������������������������������������������� 386 Art 3.236(2)��������������������������������������������������������������������������������������������������������������������������������������� 480 Art 3.239�������������������������������������������������������������������������������������������������������������������������������������������� 503 Art 3.246������������������������������������������������������������������������������������������������������������������������������������ 503, 517 Art 3.290�������������������������������������������������������������������������������������������������������������������������������������������� 470 Arts 3.290ff���������������������������������������������������������������������������������������������������������������������������������������� 471 Art 3.291�������������������������������������������������������������������������������������������������������������������������������������������� 472 Art 3.292������������������������������������������������������������������������������������������������������������������������������������ 238, 473 Art 4.1066������������������������������������������������������������������������������������������������������������������������������������������ 522 Art 5.1ff��������������������������������������������������������������������������������������������������������������������������������������������� 475 Art 5.2���������������������������������������������������������������������������������������������������������������������������������������� 234, 448 Art 6.2�������������������������������������������������������������������������������������������������������������������������������������79, 87, 104 Art 6.34���������������������������������������������������������������������������������������������������������������������������������������������� 479 Art 6.52���������������������������������������������������������������������������������������������������������������������������������������������� 471 Art 6.52(2)����������������������������������������������������������������������������������������������������������������������������������������� 471 Art 6.57���������������������������������������������������������������������������������������������������������������������������������������������� 471
Table of Legislation and Related Documents xlvii
Art 6.127(2)��������������������������������������������������������������������������������������������������������������������������������������� 487 Art 6.145�������������������������������������������������������������������������������������������������������������������������������������������� 487 Art 6.150�������������������������������������������������������������������������������������������������������������������������������������������� 499 Art 6.203������������������������������������������������������������������������������������������������������������������������������������ 234, 448 Art 6.211�������������������������������������������������������������������������������������������������������������������������������������������� 120 Art 6.213�������������������������������������������������������������������������������������������������������������������������������������������� 159 Art 6.217(1)����������������������������������������������������������������������������������������������������������������������������������������� 47 Art 6.248�������������������������������������������������������������������������������������������������������������������������������������� 79, 159 Art 6.248(2)����������������������������������������������������������������������������������������������������������������������������������������� 87 Art 6.251�������������������������������������������������������������������������������������������������������������������������������������������� 153 Art 6.253�������������������������������������������������������������������������������������������������������������������������������������������� 159 Art 6.257�������������������������������������������������������������������������������������������������������������������������������������������� 159 Art 6.258�����������������������������������������������������������������������������������������������������������������������87, 114, 139, 141 Art 6.261�������������������������������������������������������������������������������������������������������������������������������������������� 159 Art 6.262�������������������������������������������������������������������������������������������������������������������������������������������� 238 Art 6.265���������������������������������������������������������������������������������������������������������������������� 231, 233–34, 448 Art 6.269���������������������������������������������������������������������������������������������������������������������� 234, 236–37, 448 Art 7.10�������������������������������������������������������������������������������������������������������������������������������� 228–29, 231 Art 7.10(3)����������������������������������������������������������������������������������������������������������������������������������������� 231 Art 7.17���������������������������������������������������������������������������������������������������������������������������������������������� 231 Art 7.39���������������������������������������������������������������������������������������������������������������������������������������������� 234 Arts 7.39ff������������������������������������������������������������������������������������������������������������������������������������������ 239 Art 7.42���������������������������������������������������������������������������������������������������������������������������������������������� 234 Art 7.420���������������������������������������������������������������������������������������������������������������������������������������� 307–8 Art 7.421���������������������������������������������������������������������������������������������������������������������������������������� 307–8 Art 7.423�������������������������������������������������������������������������������������������������������������������������������������������� 310 Art 7.424�������������������������������������������������������������������������������������������������������������������������������������������� 307 Art 8.413������������������������������������������������������������������������������������������������������������������������������������ 665, 668 Art 8.417�������������������������������������������������������������������������������������������������������������������������������������������� 668 Art 8.441�������������������������������������������������������������������������������������������������������������������������������������������� 669 Art 8.460�������������������������������������������������������������������������������������������������������������������������������������������� 669 Commercial Code 1838������������������������������������������������������������������������������������������������������������������������ 696
Switzerland Bankruptcy Act�������������������������������������������������������������������������������������������������������������������������������������� 473 Civil Code, Art 1�������������������������������������������������������������������������������������������������������������������������������������� 89
United Kingdom Bankruptcy Act 1914����������������������������������������������������������������������������������������������������������������������������� 235 Bankruptcy Act 1986����������������������������������������������������������������������������������������������������������������������������� 568 Bills of Exchange Act 1882�������������������������������������������������������������������������������������������������������������� 696–97 s 4������������������������������������������������������������������������������������������������������������������������������������������������������� 693 s 5������������������������������������������������������������������������������������������������������������������������������������������������������� 693 s 8(4)�������������������������������������������������������������������������������������������������������������������������������������������������� 246 s 16����������������������������������������������������������������������������������������������������������������������������������������������������� 685 s 24����������������������������������������������������������������������������������������������������������������������������������������������������� 689 s 72(2)������������������������������������������������������������������������������������������������������������������������������������������������ 693 Bills of Lading Act 1855���������������������������������������������������������������������������������������������������������������� 664, 676 Carriage of Goods by Sea Act (COGSA) 1992���������������������������������������������������������������������������� 664, 705 Companies Act 1948����������������������������������������������������������������������������������������������������������������������������� 235 Consumer Credit Act 1974��������������������������������������������������������������������������������������������������������������������� 62
xlviii Table of Legislation and Related Documents
Factors Act 1889 s 2(1)�������������������������������������������������������������������������������������������������������������������������������������������������� 467 s 8������������������������������������������������������������������������������������������������������������������������������������������������������� 435 Financial Services Act 1986���������������������������������������������������������������������������������������������������������2, 62, 309 Financial Services and Markets Act 2000����������������������������������������������������������������������������2, 62, 309, 718 Insolvency Act 1985������������������������������������������������������������������������������������������������������������������������������ 235 Insolvency Act 1986���������������������������������������������������������������������������������������������������������������������� 235, 409 s 283(1)���������������������������������������������������������������������������������������������������������������������������������������������� 409 s 436��������������������������������������������������������������������������������������������������������������������������������������������������� 409 Judicature Act 1873������������������������������������������������������������������������������������������������������������������������������� 483 Land Registration Act 2002������������������������������������������������������������������������������������������������������������������ 408 Law of Property Act 1925������������������������������������������������������������������������������������������������������381, 483, 511 Law Reform (Frustrated Contracts) Act 1943����������������������������������������������������������������������������� 133, 139 Limitation Act 1980������������������������������������������������������������������������������������������������������������������������������ 408 s 4(5)�������������������������������������������������������������������������������������������������������������������������������������������������� 387 Misrepresentation Act 1976������������������������������������������������������������������������������������������������������������������ 120 Recognition of Trusts Act 1987������������������������������������������������������������������������������������������������������������ 593 Sale of Goods Act 1979������������������������������������������������������������������������������ 14, 381, 403, 456–57, 567, 619 s 2(1)�������������������������������������������������������������������������������������������������������������������������������������������������� 440 s 5(2)�������������������������������������������������������������������������������������������������������������������������������������������������� 437 s 5(3)�������������������������������������������������������������������������������������������������������������������������������������������������� 437 ss 13–15��������������������������������������������������������������������������������������������������������������������������������������������� 232 s 15����������������������������������������������������������������������������������������������������������������������������������������������������� 224 s 16��������������������������������������������������������������������������������������������������������������������������������������������� 394, 670 s 17������������������������������������������������������������������������������������������������������������������������������432, 440, 480, 583 s 18��������������������������������������������������������������������������������������������������������������������������������������432, 480, 583 s 18(1)������������������������������������������������������������������������������������������������������������������������������������������������ 437 s 20(1)���������������������������������������������������������������������������������������������������������������������������������������� 228, 232 s 20(2)������������������������������������������������������������������������������������������������������������������������������������������������ 232 s 21��������������������������������������������������������������������������������������������������������������������������������������������� 460, 467 s 23��������������������������������������������������������������������������������������������������������������������������������������������� 121, 457 s 24��������������������������������������������������������������������������������������������������������������������������������������������� 436, 467 s 25����������������������������������������������������������������������������������������������������������������������������������������������������� 467 s 27����������������������������������������������������������������������������������������������������������������������������������������������������� 118 s 28����������������������������������������������������������������������������������������������������������������������������������������������������� 401 s 29����������������������������������������������������������������������������������������������������������������������������������������������������� 401 s 29(4)������������������������������������������������������������������������������������������������������������������������������������������������ 434 s 41��������������������������������������������������������������������������������������������������������������������������������������238, 440, 470 s 47(2)������������������������������������������������������������������������������������������������������������������������������������������������ 670 s 51����������������������������������������������������������������������������������������������������������������������������������������������������� 118 Statute of Frauds 1677�����������������������������������������������������������������������������������������������39, 69, 119, 401, 431 Supply of Goods (Implied Terms) Act 1973���������������������������������������������������������������������������������������� 127 Torts (Interference with Goods) Act 1977, s 8(1)�������������������������������������������������������������������������������� 407 Unfair Contract Terms Act 1977�����������������������������������������������������������������������������������������������62, 95, 127 United States of America and Republic of France v Dolfus Mieg & Cie SA and Bank of England��������������������������������������������������������������������������������������������������������� 400, 405
United States 49 USCS s 80105(a)(1)(A), and (b)����������������������������������������������������������������������������������������������������� 671 Bankruptcy Abuse Prevention and Consumer Protection Act 2005�������������������������������������������������� 622 Bankruptcy Code����������������������������������������������������������������������������������� 409, 439, 458, 503, 548, 622, 653
Table of Legislation and Related Documents xlix
ch 15������������������������������������������������������������������������������������������������������������������������������������������ 579, 741 s 101(25)�������������������������������������������������������������������������������������������������������������������������������������������� 622 s 101(47)�������������������������������������������������������������������������������������������������������������������������������������������� 622 s 101(53B)(A)������������������������������������������������������������������������������������������������������������������������������������ 622 s 362������������������������������������������������������������������������������������������������������������������������������������236, 556, 622 s 365(c)(1)����������������������������������������������������������������������������������������������������������������������������������������� 343 s 365(e)�������������������������������������������������������������������������������������������������������������������������������234, 237, 457 s 365(n)���������������������������������������������������������������������������������������������������������������������������������������������� 343 s 522��������������������������������������������������������������������������������������������������������������������������������������������������� 409 s 541(a)���������������������������������������������������������������������������������������������������������������������������������������������� 409 s 541(b)(2)����������������������������������������������������������������������������������������������������������������������������������������� 409 s 544(a)(3)����������������������������������������������������������������������������������������������������������������������������������������� 409 s 546(c)�������������������������������������������������������������������������������������������������������������������������������������� 239, 458 s 555��������������������������������������������������������������������������������������������������������������������������������������������������� 622 s 556��������������������������������������������������������������������������������������������������������������������������������������������������� 622 s 559������������������������������������������������������������������������������������������������������������������������������������� 563, 622–23 s 560��������������������������������������������������������������������������������������������������������������������������������������������������� 622 s 561��������������������������������������������������������������������������������������������������������������������������������������������������� 622 s 562��������������������������������������������������������������������������������������������������������������������������������������������������� 563 s 741(7)���������������������������������������������������������������������������������������������������������������������������������������������� 622 s 761(4)���������������������������������������������������������������������������������������������������������������������������������������������� 622 Carriage of Goods by Sea Act (COGSA) 1971������������������������������������������������������������������������������������ 676 Consumer Protection Act 2005������������������������������������������������������������������������������������������������������������ 622 Harter Act 1893����������������������������������������������������������������������������������������������������������������������������� 671, 678 Pomerene Act�������������������������������������������������������������������������������������������������������������������������671, 674, 699 Restatement (Second) of Agency������������������������������������������������������������������������������15, 298–99, 302, 308 Restatement (Second) of Contracts���������������������������������������������20, 53, 55, 123, 302, 457, 481, 484, 512 s 1��������������������������������������������������������������������������������������������������������������������������������������������������������� 53 s 3��������������������������������������������������������������������������������������������������������������������������������������������������������� 53 s 24������������������������������������������������������������������������������������������������������������������������������������������������������� 53 s 35������������������������������������������������������������������������������������������������������������������������������������������������������� 53 s 71������������������������������������������������������������������������������������������������������������������������������������������������������� 55 s 164��������������������������������������������������������������������������������������������������������������������������������������������������� 457 s 205��������������������������������������������������������������������������������������������������������������������������������������������� 98, 110 s 342������������������������������������������������������������������������������������������������������������������������������������481, 484, 512 s 379��������������������������������������������������������������������������������������������������������������������������������������������������� 123 Restatement (Third) of Foreign Relations Law, ss 401ff��������������������������������������������������������������������� 213 Securities Exchange Act 1934������������������������������������������������������������������������������������������������������� 310, 713 Uniform Commercial Code (UCC)������������������������������������������3, 14, 16, 33, 63, 85, 87, 97–98, 106, 111, 129–30, 133, 162, 166, 170–71, 187, 189, 194, 197–98, 216, 223, 228–29, 233, 237–40, 245, 252, 255, 257, 260, 266, 271–72, 283–85, 302, 330, 335, 339, 362, 369, 400, 414, 416, 418, 432, 441, 457, 468, 484, 490, 495, 508–9, 532, 551, 553, 559, 567–72, 612, 620–23, 635, 639, 656, 671, 697, 750 Art 2������������������������������������������������������������������������������������14, 57, 69–70, 170, 210, 223, 357, 377, 418, 440, 485, 567, 586, 621, 631, 634, 718 Art 2A������������������������������������������������������������156, 362, 364, 548, 568, 570, 621–22, 631, 634, 646, 718 Art 3��������������������������������������������������������������������������������������������������������������������������������������������� 696–97 Art 4������������������������������������������������������������������������������������������������������������������������������������621, 631, 752 Art 4A�����������������������������������������������������������������������������������������������������������������362, 621, 631, 634, 646
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Art 5������������������������������������������������������������������������������������������������������������������������������������621, 634, 752 Art 6��������������������������������������������������������������������������������������������������������������������������������������������������� 438 Art 7������������������������������������������������������������������������������������������������������������������������������������������� 621, 664 Art 8��������������������������������������������������������������������������������������� 362, 364, 621, 634, 646, 713–14, 718–20, 731, 735–36, 752, 754 Art 9��������������������������������������������������������������������������������71, 115, 236, 330, 349, 362, 377, 409, 418–19, 439, 484–85, 495, 502–3, 512, 531, 534, 546–48, 550, 553–54, 561, 567–68, 570–72, 578, 587, 612, 621–22, 628, 631–32, 634, 641, 646, 653 s 1-102����������������������������������������������������������������������������������������������������������������������������������������������� 170 ss 1-102���������������������������������������������������������������������������������������������������������������������������������������������� 170 s 1-103��������������������������������������������������������������������������������������������������������������������78, 166, 170–71, 440 s 1-103(e)������������������������������������������������������������������������������������������������������������������������������������������� 171 s 1-201(20)���������������������������������������������������������������������������������������������������������������������������������������� 170 s 1-201(5)������������������������������������������������������������������������������������������������������������������������������������������ 706 s 1-201(a)(20)������������������������������������������������������������������������������������������������������������������������������� 87, 97 s 1-201(a)(35)����������������������������������������������������������������������������������������������������������������������������������� 551 s 1-201(a)(9)������������������������������������������������������������������������������������������������������������������������������������� 468 s 1-201(b)(20)������������������������������������������������������������������������������������������������������������������������������� 85, 97 s 1-205����������������������������������������������������������������������������������������������������������������������������������������������� 171 s 1-301����������������������������������������������������������������������������������������������������������������������������������������������� 171 s 1-302����������������������������������������������������������������������������������������������������������������������������������22, 104, 171 s 1-302(a)������������������������������������������������������������������������������������������������������������������������������������������ 174 s 1-302(b)���������������������������������������������������������������������������������������������������������������������������������36, 93, 97 s 1-304����������������������������������������������������������������������������������������������������������������������������������97, 110, 170 s 2-103(1)(b)������������������������������������������������������������������������������������������������������������������������������� 97, 170 s 2-103(1)(j)���������������������������������������������������������������������������������������������������������������������������������������� 97 s 2-105����������������������������������������������������������������������������������������������������������������������������������������������� 621 s 2-134(2)(c)������������������������������������������������������������������������������������������������������������������������������������� 224 s 2-201��������������������������������������������������������������������������������������������������������������������69–70, 170, 189, 485 s 2-202����������������������������������������������������������������������������������������������������������������������������������61, 170, 189 s 2-202(a)������������������������������������������������������������������������������������������������������������������������������������������ 171 s 2-204��������������������������������������������������������������������������������������������������������������������������������������20, 53, 57 s 2-204(2)������������������������������������������������������������������������������������������������������������������������������������ 70, 170 s 2-204(3)������������������������������������������������������������������������������������������������������������������������������������������ 170 s 2-205����������������������������������������������������������������������������������������������������������������������������47, 57, 170, 189 s 2-206������������������������������������������������������������������������������������������������������������������������������������������������� 57 s 2-206(2)������������������������������������������������������������������������������������������������������������������������������������������ 170 s 2-208����������������������������������������������������������������������������������������������������������������������������������������������� 171 s 2-209����������������������������������������������������������������������������������������������������������������������������������������������� 170 s 2-210�������������������������������������������������������������152, 327, 341, 476, 484–86, 488–89, 505, 613, 621, 633 s 2-210(2�������������������������������������������������������������������������������������������������������������������������������������������� 492 s 2-210(2)���������������������������������������������������������������������������������������������������������������������������������� 485, 489 s 2-210(4)������������������������������������������������������������������������������������������������������������������������������������������ 489 s 2-302������������������������������������������������������������������������������������������������������������������������������������20, 97, 170 s 2-303����������������������������������������������������������������������������������������������������������������������������������������������� 171 s 2-311(3)������������������������������������������������������������������������������������������������������������������������������������������ 170 ss 2-314–2-315���������������������������������������������������������������������������������������������������������������������������������� 233 s 2-315����������������������������������������������������������������������������������������������������������������������������������������������� 224 s 2-401����������������������������������������������������������������������������������������������������������������228, 432, 473, 568, 671
Table of Legislation and Related Documents li
s 2-401(2)�����������������������������������������������������������������������������������������������������������408, 435, 440, 450, 457 s 2-401(4)������������������������������������������������������������������������������������������������������������������������������������������ 457 s 2-403��������������������������������������������������������������������������������������������������������������������������������121, 440, 469 s 2-403(1)������������������������������������������������������������������������������������������������������������������������������������������ 468 s 2-403(1)(c)������������������������������������������������������������������������������������������������������������������������������������� 457 s 2-403(2)������������������������������������������������������������������������������������������������������������������������������������������ 468 s 2-501����������������������������������������������������������������������������������������������������������������������������������������������� 437 s 2-507(2)������������������������������������������������������������������������������������������������������������������������������������������ 458 s 2-509(2)������������������������������������������������������������������������������������������������������������������������������������������ 229 s 2-509(3)���������������������������������������������������������������������������������������������������������������������������������� 228, 233 s 2-510����������������������������������������������������������������������������������������������������������������������������������������������� 233 s 2-603������������������������������������������������������������������������������������������������������������������������������������������������� 97 s 2-615����������������������������������������������������������������������������������������������������������������������������������97, 133, 135 s 2-702��������������������������������������������������������������������������������������������������������������������������������������� 433, 458 s 2-702(3)������������������������������������������������������������������������������������������������������������������������������������������ 458 s 2-716(1)���������������������������������������������������������������������������������������������������������������������������������� 118, 170 ss 2A-301 and 307����������������������������������������������������������������������������������������������������������������������������� 364 s 2A-309��������������������������������������������������������������������������������������������������������������������������������������������� 568 s 3-103(a)(4)��������������������������������������������������������������������������������������������������������������������������������������� 98 s 3-103(a)(6)��������������������������������������������������������������������������������������������������������������������������������������� 97 s 3-302����������������������������������������������������������������������������������������������������������������������������������������������� 687 s 3-305����������������������������������������������������������������������������������������������������������������������������������������������� 687 s 3-404����������������������������������������������������������������������������������������������������������������������������������������������� 689 s 3-415����������������������������������������������������������������������������������������������������������������������������������������������� 685 s 4A-108��������������������������������������������������������������������������������������������������������������������������������������������� 634 s 5-102(9)(b)������������������������������������������������������������������������������������������������������������������������������������� 634 s 5-102(a)(7)��������������������������������������������������������������������������������������������������������������������������������������� 97 s 5-102(a)(9)������������������������������������������������������������������������������������������������������������������������������������� 752 s 6-104����������������������������������������������������������������������������������������������������������������������������������������������� 438 ss 7-307–7-308���������������������������������������������������������������������������������������������������������������������������������� 674 s 7-402����������������������������������������������������������������������������������������������������������������������������������������������� 669 s 7-501����������������������������������������������������������������������������������������������������������������������������������������������� 671 s 7-502����������������������������������������������������������������������������������������������������������������������������������������������� 702 s 7-502(1)������������������������������������������������������������������������������������������������������������������������������������������ 671 s 7-502(2)������������������������������������������������������������������������������������������������������������������������������������������ 671 s 7-503����������������������������������������������������������������������������������������������������������������������������������������������� 671 s 7-507(2�������������������������������������������������������������������������������������������������������������������������������������������� 666 s 8-102����������������������������������������������������������������������������������������������������������������������������������������� 97, 715 s 8-102(a)(13))���������������������������������������������������������������������������������������������������������������������������������� 714 s 8-102(a)(15)����������������������������������������������������������������������������������������������������������������������������������� 713 s 8-102(a)(17)����������������������������������������������������������������������������������������������������������������������������������� 718 s 8-110����������������������������������������������������������������������������������������������������������������������������������������������� 752 s 8-110(b)������������������������������������������������������������������������������������������������������������������������������������ 747–48 s 8-110(e)����������������������������������������������������������������������������������������������������������������������������364, 747, 750 s 8-110(e)(2)����������������������������������������������������������������������������������������������������������������������� 624, 747–48 s 8-115����������������������������������������������������������������������������������������������������������������������������������������������� 721 s 8-301(a)(1)������������������������������������������������������������������������������������������������������������������������������������� 713 s 8-301(a)(3)������������������������������������������������������������������������������������������������������������������������������������� 714 s 8-313����������������������������������������������������������������������������������������������������������������������������������������������� 735 s 8-501(b) and (c)����������������������������������������������������������������������������������������������������������������������������� 719
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ss 8-501ff����������������������������������������������������������������������������������������������������������������������������713, 715, 719 s 8-503����������������������������������������������������������������������������������������������������������������������������������������������� 364 s 8-503(b)������������������������������������������������������������������������������������������������������������������������������������������ 719 s 8-505����������������������������������������������������������������������������������������������������������������������������������������������� 715 s 8-506����������������������������������������������������������������������������������������������������������������������������������������������� 715 s 8-507����������������������������������������������������������������������������������������������������������������������������������������������� 722 s 8-508��������������������������������������������������������������������������������������������������������������������������������715, 718, 736 s 9-102����������������������������������������������������������������������������������������������������������������������������������������������� 569 s 9-102(2)������������������������������������������������������������������������������������������������������������������������������������������ 236 s 9-102(a)(2)������������������������������������������������������������������������������������������������������������������������������������� 485 s 9-102(a)(43)������������������������������������������������������������������������������������������������������������������������������������� 97 s 9-102(a)(5–6)��������������������������������������������������������������������������������������������������������������������������������� 502 s 9-104(1)������������������������������������������������������������������������������������������������������������������������������������������ 752 s 9-109(a)(3)����������������������������������������������������������������������������������������������������������������������������� 485, 502 s 9-109(a)(5)������������������������������������������������������������������������������������������������������������������������������������� 457 s 9-109(a)(5–6)��������������������������������������������������������������������������������������������������������������������������������� 551 s 9-109(d)(13)��������������������������������������������������������������������������������������������������������������������������� 634, 752 s 9-109(d)(4–7)��������������������������������������������������������������������������������������������������������������������������������� 502 s 9-109(d)(5)������������������������������������������������������������������������������������������������������������������������������������� 512 s 9-110����������������������������������������������������������������������������������������������������������������������������������������������� 495 s 9-201��������������������������������������������������������������������������������������������������������������������������������469, 512, 569 s 9-202����������������������������������������������������������������������������������������������������������������������������������������������� 236 s 9-203��������������������������������������������������������������������������������������������������������������������������������������� 468, 569 s 9-203(1)(c)������������������������������������������������������������������������������������������������������������������������������������� 641 s 9-203(3)(A) and (D)������������������������������������������������������������������������������������������������������������������������ 69 s 9-203(b)(2)����������������������������������������������������������������������������������������������������������������������������� 567, 569 s 9-203(b)(3)(C)������������������������������������������������������������������������������������������������������������������������������� 431 s 9-204������������������������������������������������������������������������������������������ 362, 439, 446, 495, 534, 570–71, 620 s 9-301(1)���������������������������������������������������������������������������������������������������������������������������������� 578, 612 s 9-302����������������������������������������������������������������������������������������������������������������������������������������������� 551 s 9-304����������������������������������������������������������������������������������������������������������������������������������������������� 752 s 9-309(2)���������������������������������������������������������������������������������������������������������������������������������� 485, 512 s 9-315(a)(1)����������������������������������������������������������������������������������������������������������������������469, 534, 564 s 9-317��������������������������������������������������������������������������������������������������������������������������������������� 569, 752 s 9-317(d)������������������������������������������������������������������������������������������������������������������������������������������ 485 s 9-320��������������������������������������������������������������������������������������������������������������������������71, 468, 573, 628 s 9-320(a)�������������������������������������������������������������������������������������������������������������������� 462, 468–69, 632 s 9-322(a)������������������������������������������������������������������������������������������������������������������������������������������ 512 s 9-323��������������������������������������������������������������������������������������������������������������������������������������� 468, 569 s 9-329����������������������������������������������������������������������������������������������������������������������������������������������� 363 s 9-401��������������������������������������������������������������������������������������������������������������������������������������� 476, 564 s 9-403����������������������������������������������������������������������������������������������������������������������������������������������� 487 s 9-404����������������������������������������������������������������������������������������������������������������������������������������������� 487 ss 9-404ff����������������������������������������������������������������������������������������������������������������������������476, 485, 489 s 9-405����������������������������������������������������������������������������������������������������������������������������������������������� 491 s 9-406��������������������������������������������������������������������������������������������������������������������������������363, 490, 495 s 9-406(5)������������������������������������������������������������������������������������������������������������������������������������������ 485 s 9-406(a)���������������������������������������������������������������������������������������������������������������������������485, 508, 512 s 9-406(d)������������������������������������������������������������������������������������������������������������������������������������������ 484 s 9-501����������������������������������������������������������������������������������������������������������������������������������������������� 485
Table of Legislation and Related Documents liii
s 9-503����������������������������������������������������������������������������������������������������������������������������������������������� 564 s 9-601(a)������������������������������������������������������������������������������������������������������������������������������������������ 675 ss 9-601ff������������������������������������������������������������������������������������������������������������������������������������������� 558 ss 9-604ff������������������������������������������������������������������������������������������������������������������������������������������� 485 s 9-607������������������������������������������������������������������������������������������������������������������������485, 502, 517, 622 s 9-608��������������������������������������������������������������������������������������������������������������������������������������� 502, 622 s 9-609����������������������������������������������������������������������������������������������������������������������������������������������� 564 s 9-615(e)������������������������������������������������������������������������������������������������������������������������������������������� 485 ss 9-615ff������������������������������������������������������������������������������������������������������������������������������������������� 564
liv
1 Transnational Contract Law Part I General 1.1 Introduction 1.1.1 Modern Contract Law: Nature of the Parties or Type of Contract? Relationship Thinking and the Professional Contract In this chapter on contract law, the emphasis will be on: (a) the formation of the contract; (b) its binding force; (c) the choices parties have made in terms of their roadmap and risk management, (d) the interpretation and supplementation (or construction) of these choices and the (limited) grounds for correction of the terms; (e) performance and the most current defences; (f) default and excuses including force majeure and potentially change of circumstances; (g) remedies including specific performance (or real execution) and ordinary or expectation damages, or renegotiation in appropriate cases; and (h) privity of contract and the exceptions to this principle. These aspects will first and foremost be discussed from the point of view 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 aspects, takes into account the types of parties that conclude or have concluded the contract. In this approach it is possible that among professionals
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 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, 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 analysed it as an overriding norm and noted that English law had no such principle (on which there is hardly unanimity in civil law, see s 1.3 below), 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 the nature of the parties, which thus confirmed this dominant theme. Note in this connection also 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. This is another consequence of relationship thinking. In that approach, the administrative contract as such is, unlike in civil law countries, unfamiliar although the type of relationship will give rise to similar adjustments in common law and it is not correct to conclude that the concept is unknown in common law countries.
2 VOLUME 2: CONTRACT AND MOVABLE PROPERTY LAW
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 among themselves. Closely related is the development in common law of special fiduciary duties between parties in situations of trust, dependency and confidence. This again suggests different treatment depending on the nature of the relationship and not primarily the type of contract.2 In civil law on the other hand, the emphasis is traditionally on types of contracts, not on types of parties.3 This is an important difference. As we shall see, 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, may one find greater sensitivity to relationship thinking in civil law as well. However, it remains a fact and a natural civil law reflex to apply special protections developed in this way, for example for consumers or workers, also to professional dealings of the same contractual type. It shows that the sensitivity to relationship thinking has not yet been fully subsumed in civil law thinking and that the good faith concept here needs further development and elaboration to propel a true private law concerning professional dealings which is at the same time likely to be transnationalised.4 As will be shown throughout, in a proper 2 It should be noted, however, that there are lapses also in England, and the protection accorded to investors against their brokers under the Financial Services Act 1986 did not at first properly distinguish between professional and consumer dealings under agency agreements and the extra protection given to small investors was then also given to the larger. It was much criticised and this was reflected in Art 11(3) of the 1993 EU Financial Services Directive, which specifically allowed for differentiation in protection levels among 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 3, ch 2, s 3.5 amended and replaced by MiFIDII see Vol 3, ch 2, s 3.7.5. 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, in this analysis, 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 supported by the development of the overarching notion of the parties’ will and their autonomy in contract, although now in a strict legal framework, see FC von Savigny, System des heutigen römischen Rechts, III (Berlin, 1840). It was followed by a more sophisticated distinction of the contractual types in the German Pandectist School of the nineteenth century, which 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 It should be noted, however, that 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 (Munich, 1987) 14, but, as we shall see, recent (2002) 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. This was confirmed by the adoption of the 1999 EU Consumer Sales and Guarantee Directive into the German general contract law in 2002 on the one hand, and of the Vienna Convention on the International Sale of Goods (CISG)’s subjective contract formation thinking on the other. In France, after the amendments to the contract law in 2016, typical consumer protections were moved to the 1993/5 Code de Consomation, but that did not make the revised general contract law more professional law, which remained anthropomorphic and even expressed more clearly intent and will as the foundation of contract in Arts 1113/4, supported by a more general good faith concept covering all stages of the contract (Art 1104 as against the old Art 1134 CC) without defining it or stating what it means and how it was to be applied except to declare it a public policy issue, which suggests it to be absolutely mandatory.
PART I GENERAL 3
analysis this is not so much a question of overriding higher principle but rather of a liberal interpretation technique which confirms relationship thinking, while singling out professional dealings in p articular, and accepts other sources of law to be recognised besides established texts and case law, among which sources fundamental and general principle and custom and market practices play an important role. For the time being, 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 also has more general notions of contract, such as offer and acceptance; the notion of consensus, the role of will or intent, including the defences against the binding force of the contract; and the question of performance, default, remedies and excuses. That is then the general part of contract law. It is still conceivable that in this connection the type of contract, like the contract for the sale of goods, also has some different formation aspects or disclosure duties and especially different remedies against default, but again in this approach that is less likely to depend on the types of parties. In the Netherlands, since 2007, in contract, modern case law is moving, see HR 19 January 2007 (PontMeyer), NJ 575 (2007); 29 June 2007 (Derksen/Homburg), NJ 576 (2007); 9 April 2009 (UPC/Land), JOR 179 (2010): see also PS Bakker, ‘Uitleg van Commerciele Contracten’ [Interpretation of Commercial Contracts], WPNR 6890/1 (2011) and also n 43 below and accompanying text. The idea is here indeed that the good faith notion itself may require a more literal interpretation of the commercial contract in which justified reliance plays a major role, especially if the contract is negotiated by outside law firms. 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 Vol 1 ch 1 s 1.4.21 and 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. Where reference to good faith (and fair dealing) is made, in the DCFR it is not to distinguish fundamentally between different kinds of parties, but it is presented primarily as higher principle, not even as a liberal interpretation technique through which the other traditional sources of law are revived as is defended in this book for professional dealings in which connection relationship thinking becomes indeed paramount. There is, in the DCFR definition of this notion in Annex A, and in Art I-1:103, however, a reference to the type of parties, which is quite different from the earlier European Contract Principles (PECL) and UNIDROIT Principles of International Commercial Contracts, on which the DCFR contract text is largely based, but which avoided a definition of good faith. The reference to the type of parties is here limited, however, by asking merely for openness and in that context for consideration of the interests of the other party to the transaction or the relationship in question. More generally, the lack of relationship thinking is fundamentally borne out in the DCFR’s unitary approach, meaning that its rules, which are contract type specific in the civil law tradition, apply to any type of contract party unless specifically stated otherwise. Art III-1:103 adopts this approach by expressly excluding any limitation of the good faith concept or any variation in the application thereof, which is perceived as mandatory and unitary in the performance of the contract between professions or in respect of consumers (although the DCFR may be less categorical than the European and UNIDROIT Principles in this respect as we shall see). It is submitted in this connection that at least professionals should be able to set good faith standards among themselves unless becoming manifestly unreasonable. This is the UCC approach in the US (s 1-302) but is not accepted in the DCFR (or earlier in the UNIDROIT and European Contract Principles or PECL). This again reflects a unitary approach under which professional and consumer dealings are treated similarly and not more fundamentally distinguished. Indeed, where sometimes in the text 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 pre-contractual 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 (subs (3)(c), not in Art II-3:301) which might be assumed to be more likely between professionals. Both require good faith negotiations but again that does not introduce in this approach basic relationship thinking.
4 VOLUME 2: CONTRACT AND MOVABLE PROPERTY LAW
Taking the rental agreement in terms of a temporary transfer of user rights in immovable assets as a ready example, in common law on the other hand, its basic characteristics are considered to be foremost determined by the type of relationship—be it between (a) professionals among 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 flats in the social sector; (e) companies and shareholders, as in the renting of group facilities; and (f) parents and children, as in the renting of housing bought for student accommodation. In proper relationship thinking of this nature, there follow in this way six different contracts, one for each type of relationship (rather than one for all), which may operate quite differently, and this attitude seems quite naturally also to be 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 the civil law of contract, even in its modern, good faith-imbued, variant. In the case of consumer contracts, see note 1 above, the traditional analysis of offer and acceptance may even be ignored altogether. 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 here continental influence. The reason is that these contract types have their origin in the law merchant, which was developed in England for trade with the Continent and showed some Roman law affinity, but this is not the normal common law attitude, important as these types of contracts are, also in common law. In any event, it should be noted in this connection that originally the types of contract of this nature also only operated between a particular type of parties, here merchants in the exercise of their trade. In fact, even in the law of sales in common law, precisely because of this commercial origin, one spots a different orientation. A can of milk is here bought in order to produce milk products rather than for consumption purposes. That suggests a very different perspective to the contract and property law aspects. In modern terms, it is likely to be part of a supply chain with interconnected sales, supply and production arrangements.6 In the 1980 Vienna Convention on the international sale of goods (CISG), see Part II below, the sales agreement is perceived to operate in the commercial sphere and it does not cover consumer dealings. They are different even though in the formation section of the Convention, in the notion of breach, and in the excuses and interpretation/supplementation paragraphs, as we shall see, this seems forgotten whilst anthropomorphic nineteenth century notions of contract formation and operation Another problem is, as we shall see in ss 1.1.4, 1.3.14, and 1.4.8 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. 6 This interconnectedness may also have an effect on the cause of action between (a wider group of) participants, see for the issue of privity in this connection s 1.5.1 below and on the proprietary side it may require advanced forms of (floating) charges and finance sales in classes of assets in movement and transformation rather than in individualised finished products which was the more trandional approach, at least at law in common law countries and in civil law. See ch 2 below.
PART I GENERAL 5
and consumer law ideas prevailed, largely focusing on intent and a subjective notion of breach and force majeure excuses. This may be the true reason for its lack of acceptance in the commercial practice. In this connection it may be usefully repeated that in common law the notion of contract at first largely developed as product of commercial law, which typically affects its nature. As we shall see, it has led generally to a less subjective and anthropomorphic attitude to contracting and to determining the contractual content—it is considered a road map and risk management tool (although in common law it may now be different for consumers but that was a more recent development). One may consider that this basically different attitude is also the deeper reason why the UK did not ratify the Convention. Notably the notion of will and intent did not acquire the same importance here as it did in civil law and from there also in the CISG: the common law of contract formation remains based on exchange and bargain (or consideration) or conduct and detrimental reliance, not strictly speaking on consensus and intent as we shall see. That may make a great difference, especially in professional dealings where it is not primarily what parties intended but what they objectively could rely upon or assumed in terms of risk that becomes the essence of contract formation and operation, in which connection the professional claimant must show also that he has put his money on the table or started to perform himself before he can start a cause of action. Common law is here factual in the sense that the law does not appear to operate or present a particular legal model but only attaches legal consequences to some acts.7 The type of relationship of the parties is again likely to play an important role also. One consequence is that professional contracts once concluded are less vulnerable to defences and excuses, unless in the first instance there are equitable remedies in terms of misrepresentation, see section 1.4.2 below or in the latter instance remedies, covered in the contract itself like a force majeure or hardship clause, see section 1.4.3 below. Again, in common law, the professional contract is foremost a road map and risk management tool. Intent is not then a formation issue but is only relevant where clear choices have been made which even so will be explained objectively or according to what market practices understand as we shall see. The civil law comes from the opposite direction: it being nineteenth century anthropomorphic, it is based on the idea that in sales we buy a can of milk to drink it. All is gone thereafter, no proprietary rights are left either, at most there may be some health concerns, with which the contract may be largely concerned, or product liability. Again, in modern terms this is consumer law which determines the nature of the civil law contract with its intent base and strong legal defences and excuses, where blame also plays an important role when it comes to non-performance. It means that the law, not the contract terms, distributes risk. That is not the common law approach in contract, at least 7 As we shall see in s 1.2.2 below, in the nineteenth century, the offer and acceptance model was introduced from civil law as a kind of ritual dance that started to emphasise the notion of intent and will, also in the common law of contract, and consequently a more intellectual model of contract formation. However, as we shall also see, it did not get as far as the civil law defences against the binding force of the contract and contractual validity and never convinced entirely. It may well be more successful in modern consumer dealings, but it became also the model of the Vienna Convention based there more directly on the civil law provenance and using it also for professional dealings in line with the unitary civil law approach, which remained nineteenth century anthropomorphic and does not fundamentally allow for relationship thinking as noted. It is not made for consumer dealings.
6 VOLUME 2: CONTRACT AND MOVABLE PROPERTY LAW
not in professional dealings. It is a different world where property law counts also: who has got what, eg, in a production chain when a can of milk is there to be converted into products? In civil law it is the notion of good faith that might start to distinguish the modern professional contract better and also re-establishes a more autonomous and powerful notion of party autonomy in the professional sphere, but it is here only at the beginning of this development as already noted. Accepting the importance of the nature of the relationship between the parties for their contractual rights and duties, 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 among themselves, having expertise in these operations, and doing so for a profit.8 Smaller companies (or SMEs) may form an uneasy intermediary category. They sometimes require a treatment and protection more akin to that of consumers but in other aspects they may be treated or even prefer to be treated as professionals. On the whole they are best off to copy them: what the professional does not want or excludes is seldom good for the SMEs. As just mentioned, considering contract law particularly from the point of view of professional dealings, this may give rise to lesser refinement in terms of defences and excuses, but also in terms of disclosure, negotiation and renegotiation duties and on occasion even to some rougher (and quicker) forms of justice as well, especially when the contract is a roadmap and risk management tool and may then need a more literal interpretation. Again, this is not strange in common law where risk redistribution is not inherent in commercial law; to repeat, in civil law the notion of good faith, if properly understood, may become here similarly restraining in professional dealings and may then mean fewer rights. In countries like France, which still have commercial courts, this even now may find some expression in different court proceedings, which may be quicker but also less detailed. They involve the peer group as (lay) judges who may favour an approach that goes against much legal sophistry. As for the types of contracts, this is not to say that they should be ignored altogether and 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). But these contract types will still be considered from the perspective of relationship thinking where different rules are likely to prevail between professionals. As far as the sale of goods is concerned, it follows that attention will in this connection be focused primarily on the international sale, which has always been a sale between professionals and is or should be structured accordingly, ie differently from consumer sales. These international sales between professionals are to be distinguished also because ancillary arrangements in terms of transportation, insurance and payment are often necessary and suggest a different layer of, and different concern with, risk and its management. Consumer sales may of course also be international (crossborder) but are not then commonly considered covered by a reference to international sales in this narrower professional sense: see again Article 2(a) of the 1980 CISG.
8
See for a discussion of the notion of the professional, Vol 1, ch 1, s 1.1.10.
PART I GENERAL 7
It is true that in the EU in the 2011 proposal (Regulation) for a Common European Sales Law (CESL), consumers (and SMEs) involved in cross-border sales were the inspiration (see section 1.6.13 below although professionals may also be covered if there is at least one SME among them). But in typical civil law fashion, which concentrates on the type of contract, much was simply copied from the CISG which, however, had only meant to deal with professional sales, even if one must admit of its incongruous anthropomorphic ethos in its formation paragraphs. These sales crossborder between Member States were essentially considered domestic at the EU level even if purely domestic sales remained covered by the laws of each Member State. Although a result of a lack of jurisdiction to legislate otherwise, it will be asked later whether creating two different (sales) regimes for smaller participants in this manner ever made sense, especially since for these cross-border sales the impact of ancillary arrangements for transportation, insurance and payment was not further considered. It should also be observed that although in cross-border dealings, even within the EU, consumers may have real concerns, they are likely to be quite different from those of professionals. None of this was reflected in the proposal, which still lived in the world of domestic consumer sales even when developing rules transborder in the EU for all; again this is a lack of relationship thinking and of any fundamental distinction in this regard. The project was ill conceived and too complicated. It was quietly dropped in 2014. 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.9 Again, it shows the importance of relationship thinking. Agency is not the same in every relationship and, especially in financial dealings, may acquire further specialised features and protectional aspects to be distinguished according to the nature of the parties. In particular, smaller investors are likely to be better protected against their brokers than the larger ones, which, again, has a transforming effect on the contract of agency for them when operating in this business. International investors may also be different which may have a further effect on the agency as well.
1.1.2 The Effect of Globalisation. Transnationalisation of the Contract Law Concerning Professional Dealings 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 legal principles and practices or uniform treaty law leading to the application of transnational law, often also referred to as the modern law merchant or lex mercatoria. This professional law is then perceived to operate in a new transnational commercial and financial legal order with its own autonomous sources of law; see the discussion in Volume 1, in particular chapter 1, section 1.5. These are the traditional sources of law: fundamental principle, custom and practices, treaty law (where existing), general principle, and party autonomy. They were 9
See also text at n 2 above.
8 VOLUME 2: CONTRACT AND MOVABLE PROPERTY LAW
largely abandoned in codification countries which depend on statutory texts, meaning in an international context treaty law. Whatever it is, in this approach or model the other sources of law will only operate to the extent especially allowed through statutory authorisation or licence. Rather the formation and operation of a new transnational law, including contract law, in this (informal, immanent or bottom up) manner in its own legal order is seen in this book as the consequence of placing ourselves in the international flows of goods, services, money, information and technology, where there is no natural legislator, whilst leaving a purely domestic framework. It means legally capturing these flows as flows in their movement (between countries) and transformation (in the international production and distribution process). It suggests a different view of risk management and a notion of assets which also allows for services, information and technology components, much of which may be virtual, and may then also cover classes of future assets in which notions of ownership and possession lose their physical connotation. The result is a vital modernisation of contract and property law and a principal means of avoiding conflicts of (domestic) laws which results from any perceived need still to cut up these international flows and the transactions in them into domestic pieces, mostly different for the contractual and proprietary aspects, never mind the often very basic and anthropomorphic domestic concepts of contract and property and the need to accommodate the constant transformation of the assets in these flows and the consequent movement transborder of the activities in international supply and distribution chains.10 As such transnationalisation of the law in these areas is considered the natural response to the globalisation of the marketplace and to the cross-border nature of much international commercial and financial activity, which is now normally conducted through professionals and is losing its typical domestic character, also in law. The technique and method was the subject of the discussion in Volume 1, chapter 1. Indeed, it concerns here transactions in the international flow of goods, services, money and information or technology, and the operation of supply and distribution chains in these flows, which because of their size and transient nature, can hardly any longer be rationally located and cut up into domestic parts covered by domestic laws. Much of it is service and technology related, often done in a virtual manner and therefore in any event ever more difficult to locate properly in any country under any particular national law pursuant to the traditional rules of conflicts of laws, which look in all this still for some national laws or an amalgam of them, in the hope that they together facilitate the international transaction and provide an adequate and efficient legal framework overall but it is increasingly unrealistic. As we shall see, in practice, the crux is here the floating charge to fund these transborder processes in their transformation and movement whilst giving them as security for working capital, which is in the nationalistic view is not realistically possible. It makes hardly any longer any sense and increases the cost of funding for no obvious reason. The development of conditional or temporary ownership forms in financial sales supporting newer forms of asset backed funding and the acceptance of trust structures are closely connected as we shall see. 10 Because of the increasingly virtual nature of much of these flows and the transactions in them, it was already noted that the notion of contact with a domestic law, which is the essence of all conflicts of laws, see Vol 1, ch 1. Part II, often still different for contract and property, was already under severe stress.
PART I GENERAL 9
This might suggest that the problem is mainly in the proprietary aspects of international transactions, also in their transfer cross-border, but it also affects contract law as in transportation, payments, and the risks and the insurance thereof. The legal problems arising in this connection were always somewhat clearer in the international sale of goods and were earlier spotted there, to which in contract the Vienna C onvention (CISG) was a partial and probably always an inadequate answer, as we shall see, covering some contractual aspects which could always have been covered in the contract itself, whilst avoiding all proprietary issues (Article 4), notwithstanding the fact that transfer of title is the true purpose of a sale. It is now a much more pervasive challenge and notably also concerns international services, technology and information flows, and then also the financing operations in them, including payments and funding, therefore legally increasingly the proprietary aspects of these flows and operations therein, in which the notion of property itself may acquire a different connotation and may become activity or product specific. It is hardly physical any longer. Indeed, international business is now much broader in which financial transactions have become much more dominant and often surpass the importance of the older mercantile activity primarily connected with the international sale and transportation of goods. 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, its nature and the operation and hierarchy of norms from different legal sources that support it, reference may again be made to the discussion in Volume 1, chapter 1, section 1.5. Thus in the view presented in this book, the modern law merchant or lex mercatoria, in the transnational commercial and financial legal order in which it 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, whose rules are not territorial. In Europe this means a return to pre-codification perceptions when law was considered the embodiment of a rationality, which did not stop at borders. Rather it was perceived to be universal in principle and not primarily national; nothing of it was considered domestic per se. Like in the law between states, from which in this book we derivate inspiration, in international professional dealings, it concerns here especially fundamental legal principle,11 11 In codification countries, the impact of fundamental principle as overriding in private law remains particularly contested, see Vol 1, ch 1, s 1.4.6 and the Introduction to the DCFR of 2009. In this respect, in recent times, the impact and so-called horizontal effect of human rights on private law formation has, however, also been noted and is now often referred to as the constitutionalisation of private law, see for this aspect 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 (Oxford, 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 considered especially important in terms of the power of states to intervene. Then there are procedural protections, not merely against states, and relevant especially in their courts. It must be considered in this connection to what extent the horizontal effect (sometimes) of human rights, and therefore their effect between private parties is in truth simply a revival of natural law notions or fundamental or general legal principle, although in the view of many still limited to what governments allow in human rights. In this vein, the DCFR in Art I.-1:102(b) also makes reference to this horizontal effect in the interpretation of contracts, but only allows it to operate in so far as these human rights emanate from Member States, which thus retain the last word. There are still no fundamental principles beyond them. That is a severe limitation, earlier found to follow from the statist tradition in civil law, which does not otherwise admit of such principle, although some analogy may still present itself where power is exerted between private parties. There is here also an overlap with the normative interpretation technique, see s 1.1.7 below, while public order arguments might also be used.
10 VOLUME 2: CONTRACT AND MOVABLE PROPERTY LAW
custom and practices,12 general principle,13 and party autonomy.14 There may also be treaty law, which must then find its place among these other sources of law and it may not be assumed that it automatically overrules them, also because of its territorial character; see further the discussions in Volume 1, chapter 1, section 1.4, which are here only briefly summarised.
12 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 perceived in that group to be the most desirable in terms of common sense and experience, also when situations change. It concerns its routines. As such, resort to custom is ingrained in all law and its application and gives rise to justified reliance notions that will then be legally supported, unless the parties have agreed otherwise (assuming the custom was not mandatory as it may be for example in property 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 to facilitate and support the needs of that community as well as possible, given its own perceptions of reality. Being routine, custom is dynamic in concept and can never be fully captured; neither, therefore, can the lex mercatoria or any other living law, see further JH Dalhuisen, ‘Custom and its Revival in Transnational Private Law’ (2008) 18 Duke Journal of Comparative & International Law 339, and the discussion in Vol 1, ch1, s 1.4.8. 13 Earlier, in international law concerning disputes in the extraction industry, 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 (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 ICLQ 247 and (1951) 18 ILR 144. That formula was taken up in oil concessions later, see further Vol 1, ch 1, s 1.4.7, therefore as a matter of a contractual choice of law. In private law, the construction contract for 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 Construction 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: see further the discussion in Vol 1, ch 1, s 1.4.7. 14 It concerns here party autonomy as an autonomous source of law. It not only operates in contract, with which it is often identified, but is also a key notion in modern movable property law as we shall see in ch 2 below. How far party autonomy is also effective in property law was, however, always less clear as third parties become involved: they must in principle respect these rights. The distinctions in this respect were not truly understood until well into the eighteenth century and then became connected on the European Continent with the notion of the numerus clausus of proprietary rights, see ch 2, s 1.2.2 below. In this book, party autonomy in proprietary matters is accepted for international commerce and finance subject to the protection of the consumers, similar therefore to the operation of equitable proprietary interests in common law, see for a summary Vol 1, ch 1, s 1.1.6 and the discussion in ch 2 below. In contract, party autonomy evolved in the idea that the single word 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 Code Civile (CC) still reflects this: ‘Les Conventions légalement formées tiennent lieu de loi a ceux qui les ont faites’ and suggests the autonomy of the law that parties create. In more 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, 3 Assembled Works (1930) 187, 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, MA, 1981), but party autonomy is now mostly explained as government licence or as operating by permission of the sovereign, being the only source of all law. It is then no longer autonomous but nationalised. That became increasingly the civil law codification idea, although it may have been different in the earlier laws of France (see n 30) below, and it may also be different in transnational law, as will be posited later, where for contract formation and its binding force, the key is rather detrimental reliance on the conduct of the other party (rather than the mere given word), and a commencement of performance before action can be taken by a party, much as it now is in common law. See for a broader discussion of party autonomy, Vol 1, ch 1, s 1.4.10 and for the perceived need for investment in the contract as a requirement
PART I GENERAL 11
As far as this treaty law goes, it remains rare in international commerce and finance (although less so in maritime law), but in the international sale of goods, some uniform international sales law for professional dealings was created through the 1980 CISG after an earlier attempt in the Hague Conventions of 1964, see further the discussion in Part II below. This treaty law, which has already been repeatedly mentioned, provides only a partial coverage of the subject while important trading nations like the UK and Portugal have not ratified it and the larger commercial practice remains sceptical and mostly excludes its application, mainly because of the subjective nature of the key notions of fundamental breach (Article 25) and force majeure (Article 79) and the unilateral right of the buyer to reduce the price (under Article 50)—notions, however, that returned in the CESL, see further the discussion in section 2.3 below. But there is more generally also the point that in its approach to contract formation, the Vienna Convention is intent and will-based in the nineteenth-century civil law anthropomorphic manner, which renders the approach to the defences, to breach, and to the excuses also subjective, as was already mentioned, and much of the text is consumer oriented in a German nineteenth century fashion, the lack of proper relationship thinking in a more modern way. It may not be what business wants or can handle. Typically, there is also a lack of understanding as to how this text relates to the other, more immanent, sources of law, which are poorly covered in Articles 4, 7 and 9. In the typical civil law codification tradition, these sources are rather ignored or their existence denied or deprecated, although it must be doubted whether treaty law of this nature has the status and power to determine its own rank amongst the other
for its binding force transnationally in the professional sphere and as a precondition for bringing any legal action for enforcement (with the attendant lesser importance of intent and consensus in the aspect of contract formation), ss 1.1.4/5 below. As an autonomous source of contract law, party autonomy revived at least to some extent in France for international contracts. This became particularly relevant for the validity of gold clauses, which were upheld in international contracts (but not in domestic French contracts) in the 1930s: see GR Delaume, Transnational Contracts (New York, 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 this notion of the ‘international contract’ operating under its own internationalised rules, although only in so far as permitted by French law in respect of conduct and effect in France, see further the discussion in Vol 1, ch 1, s 1.4.10. The concept of party autonomy as an autonomous source of law, at least at the transnational level, was dramatically underlined in recent French case law in that international arbitration clauses were considered autonomous and not anchored in any domestic law, this being the 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 ultimately a matter of French recognition 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, 44. 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 1, ch 1, n 20, and further also P Pinsolle, ‘The Status of Vacated Awards in France: the Cour de Cassation Decision in Putrabali’ (2008) 24 Arb. Int´l 277. In view of the new French Arbitration Act, Decree No 2011-48 of 13 January 2011, one may still ask, however, how far the French legislator has drawn the consequence. Under the new arbitration law, international arbitration still seems to be a French concept in France rather than a question of the recognition of an international facility subject merely to French public policy and French public order concerns to the extent the international arbitration comes on shore in France. Indicative is that the severability of the arbitration clause is fully accepted but it is not automatically put under international law, while domestic arbitration concepts are still extended to international arbitration. Its special status may therefore still be in doubt under new French statutory law, which did not, therefore, contribute much at the conceptual level, see also the discussion in Vol 1, ch 2, s 1.1.8.
12 VOLUME 2: CONTRACT AND MOVABLE PROPERTY LAW
t ransnational sources of law. In any event, these sources of law are likely to return in the interpretation and supplementation of the text.15 This is to demonstrate that treaty law of a private law nature covering international dealings is no panacea and may well create more problems than it solves. Its success is foremost dependent on the legal practice recognising itself in the result and this is often not the case in what is mostly no more than some academic compilation, never asked for by business. It has the further disadvantage that it is difficult to update and change as it will involve many nations. This may be the reason why in other areas of private law, formal uniform treaty law has remained even more incidental.16 As just mentioned, an informal but broader creation of transnational 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 or bottom-up) sources of law among which any treaty law must find its place. The resulting modern law merchant or 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).17 See more particularly the discussion in Volume 1, chapter 1, sections 1.4.13/14 and 3.1.2. So far it has proven particularly important in the Eurobond and international swap markets, the first being the largest capital market, the latter being the largest market of all. Domestic law may remain more 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, while the 2011 proposal for an EU Regulation concerning a Common European Sales Law (CESL) introduced what was in essence a consumer sales law for purchases cross-border in the EU. Its need, purpose and approach have been questioned in the previous section and these issues will be revisited in section 1.6.13 below. There is also the question of quality. It was already mentioned that the project was quietly withdrawn in 2014.
15 Much of the thinking behind the Convention, at least in the area of formation, dates from 1939 and still appears to have as its main perspective the spot sale of an individual item between natural persons or small companies, see further the discussion in Part II below. The modern emphasis transnationally is at least as much on duration or repeat contracts between large international companies concerning multiple deliveries with a substantial service and technology element, as already mentioned. As for the details of the Convention, it may further be observed that the ancillary arrangements and special risks in transportation, insurance and payment are hardly determining in its set-up, which remains based on delivery ‘ex works’ and presents as such a variation of domestic sales law, another reason probably why in practice the Convention has not proved the success that it is often claimed to be. In fact, there are serious problems with the academic model of the international sale it uses and tries to make operational. In particular, the concept of internationality itself is here poorly understood. 16 See Vol 1, ch 1, s 1.4.20. 17 JH Dalhuisen, ‘What Could the Selection by Parties of English Law in a Civil Law Contract in Commerce and Finance Truly Mean?’ in M Andenas and D Fairgrieve (eds), Tom Bingham and the Transformation of the Law: A Liber Amicorum (Oxford, 2009) 619.
PART I GENERAL 13
Most of these EU efforts on behalf of consumers,18 and to a lesser extent workers,19 do not have a bearing on cross-border activities and may then arguably better be left to local law if only as a matter of subsidiarity. Moreover, consumer law proper is often regulatory and for that reason protection of this nature may remain, it is submitted, also more properly the subject of domestic statutory law, if only because there is often no unanimity on the level of protection that needs to be given while the needs may still be very different even in the EU between the various Member States.20 It should
18 The ECJ has defined ‘consumers’ as natural persons acting outside the range of professional activity: see Case C-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 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 laws of the Member States concerning liability for defective products; Council Directive 85/577/EEC [1985] OJ L372, superseded by Directive 2011/83EU [2011] OJ L304 (see also n 20 below) 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 L133/66; 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 superseded by D irective 2011/83EU [2011] OJ L304 (see n 19 below); 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). 19 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. 20 The result may be an overall common denominator of protection which is to low in advanced countries and still too high in the lesser ones. An important effort is the EU was the key maximum Directive 2011/83/EU OJ L304 of 25 October 2011 on consumer rights, which became fully applicable as of 13 June 13 2014, based on the presumed needs of the internal market (Art 114 TFEU), further supported by a desire to avoid differentiation in areas where the EU tries to operate, and finally by some preconceived idea of where the level of consumer protection should be pitched for all. These bases for jurisdiction to legislate at EU level are contentious, see also Vol 1, ch 1, s 1.4.21. The last two did not exist in the EC Treaty nor do they exist now in the Lisbon Treaty successors (TEU and TFEU), while the first one suggesting that uniform EU private law materially promotes the internal market may lack sufficient empirical support, at least in terms of movement, cost and quality of consumer products proper. Again, the positive effect on the cross-border activity of producers or providers appears the better argument but also provides a weak basis that depends much on the type of activity. Thus EU jurisdiction was convincing in respect of product liability of manufacturers, but may be less so in other areas, especially for service providers to
14 VOLUME 2: CONTRACT AND MOVABLE PROPERTY LAW
also be realised that the motivation for uniformity in this area is quite different from consumer protection proper. Companies in their cross-border operations may benefit from such uniformity of law in the consumer area but, importantly, this is not then a consumer or employee protection perspective but in the EU an issue of promoting the internal market. 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 companies may benefit from harmonisation of the applicable private laws at the EU level in these areas,21 but again this is then primarily to protect businesses in their EU-wide trade, not consumers.22 The CESL, now abandoned, which wanted to do both, inclined here to confusion, which, as we shall see in section 1.6.13 below, also concerned the EU’s jurisdiction to legislate in this manner for this subject and its methodology. There is also the matter of costs while introducing a new regime besides the existing one for purely domestic sales. It has already been said that there is here the further issue of subsidiarity. For the question of EU jurisdiction in these matters see Volume 1, chapter 1, section 1.4.21.
1.1.3 Content and Coverage of this Chapter. Formal Transnationalisation Efforts In this chapter, in Part I, contract law will first be dealt with in a comparative law context and subsequently in the context of its transnationalisation for business or professional dealings. As far as domestic contract law is concerned, 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 such as England, where there is the Sale of Goods Act 1979 (replacing a similar earlier statute of 1893), which is also in force in S cotland. In the US, there is in this connection Article 2 of the Uniform Commercial Code (UCC), consumers who remain largely domestic. Relevant here also is that consumers do not normally shop for products far away from home, less so even for services. A maximum Directive may still recommend itself in the first instance but hardly in the last one. In the US, in a much more integrated economy, 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 especially of its implementation, but no less the relevance of other factors such as, in the EU for consumers, language, economic development, distances from markets and the like, which are much greater impediments to the operation of the internal market than private law diversity; see further also the discussion in s 1.6 below on the attempts to codify private law at EU level, its methodology and quality. It was noted before that where these EU Directives can only be based on the needs and promotion of the internal market, they must be interpreted restrictively, which means not beyond this limited objective, see also n 290 below. 21
See for financial services also Vol 3, ch 2, ss 3.5, 3.6 and 3.7. 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 financing 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 Vol 1, ch 1, s 1.1.6 and ch 2, s 1.10 below. 22
PART I GENERAL 15
first proposed in 1951, with new texts in 1958 and 1962.23 It was introduced in all US States after 1964, albeit with some minor variations and there are several later amendments. More broadly there is in the US also the important 1981 Restatement Second of Contract but not as a legislative or otherwise binding legal text. In Part II below, the sale of goods will be discussed as traditionally the most common type of commercial contract. As for the other contract type, contractual agency, more especially covered in Part III, 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 US, there is in this connection the important Restatement (Second) of Agency, in the process of being replaced by a Third Restatement. 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 CISG or Vienna Convention already repeatedly 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 the 1994 UNIDROIT Principles for International Commercial Contracts, subsequently extended in 2004, and the Principles of European Contract Law (PECL or ‘European Contract Principles’), first published in 1995 and substantially completed in 1998, although new chapters on special types of contracts 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 relies heavily on these earlier efforts but also covers tort, unjust enrichment, trusts and personal property, including secured transactions. See further the discussion in Volume 1, chapter 1, sections 1.4.20/21. The DCFR text will be discussed at considerable length and used as an example where civil law now is in this area of contract law. It is in the nature of a full codification, still perceived in the traditional statist and static intellectual civil law style, as a piece of legislation imposed from above for all of the EU (real estate is excluded and thus remains a domestic matter), eliminating all other sources of law. It means to operate for professional and consumer dealings alike. So far, it is not an official document but in 2011 a further text appeared, now prepared by an EU appointed Expert Group and dealing mainly with the sale of goods. It substantially borrowed from the existing DCFR text. It was followed in October 2011 by the draft EU Regulation on a Common European Sales Law (CESL), already mentioned several times before. It could be seen as a DCFR carveout and first real attempt at EU private law codification, albeit so far only in the area of consumer and small company sales cross-border in the EU. It did not convince and was withdrawn at the end of 2014. See further the discussion in section 1.6.13 below. Although important compilations, used here as contrast in the discussion, these texts have as yet no official status, except for the withdrawn EU draft Regulation (CESL) and of course the Vienna Convention. It was submitted already that they show little progression and innovation, and are basically extrapolations of past experiences in the anthropomorphic consumer sphere. Typically, they do not sufficiently distinguish 23
See for the origin and scope of the UCC, Vol 1, ch 1, n 110.
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according to type of party allowing for a corporate environment and are hardly aware of modern contract theory (see the next sections). Notably, traditional codification methodology is not questioned as to its continuing efficiency and effectiveness. Other sources of law operating at the transnational level are not considered either. The UNIDROIT and European Principles were always consumer law oriented even though the former were meant for international commercial contracts only. They continue a subjective attitude to contract formation and interpretation and present a classic example of a failure of relationship thinking in civil law and show the dangers of extending special consumer law protections to professional dealings while in the civil law manner the emphasis remains on types of contracts rather than parties as we have already seen in section 1.1.1 above. The DCFR, the work of the Expert Group, and the CESL suffered from the same drawbacks. As we shall see in sections 1.6.5ff below, as a model they remained backward looking in the old civil law 19th Century anthropomorphic codification mode and have, as such, little to recommend them for the future of professional dealings in Europe. This impediment may become ever clearer after Brexit when financial business in particular is trying to be retrieved from London. Quality was assumed but there is no clear insight into the formation of private law in the professional sphere in a globalised environment and there is no conceptual rethinking, only an interest in promoting largely pre-existing legal texts as if they were uncontroversial. The need for ever more sophisticated standardisation including the operation of smart contracts is substantially ignored. In sales, the draft common European sales law (CESL) further suffered from all the defects of the 1980 Vienna Convention, already noted above in section 1.1.2, which made this Convention unsuitable for professional dealings and may be considered the reason why its approach has been rejected by the business community, and the same lack of enthusiasm would undoubtedly have befallen the CESL if it had ever become law. In the discussion below, it will be argued that these efforts are profoundly misconceived and unfriendly to the modern transnational lex mercatoria, which accepts different sources of law in transborder dealings, tries to address real needs, and is built on a clear distinction between different types of relationships and on respect for diversity in the law-making process in a modern society. As the UCC also does in the US (section 1-103), it favours bottom-up law formation in the professional sphere and is as such fundamentally different from the top-down civil law codification approach of the DCFR and its progeny, which continue to concentrate unquestioningly on statist models and their perceived monopoly in private law formation. These projects are political; quality and responsiveness to actual needs are secondary. At this stage they are truly not necessary as is shown by the lack of interest in them.
1.1.4 Modern Contract Law. Will Theories and the Relevance of Intent. Non-intentional Aspects of Contract Law. The Meaning of Party Autonomy As demonstrated 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
PART I GENERAL 17
from this relationship, supplementing or even amending the agreed texts as is clear, for example, in situations of dependency, but may also arise in pre-contractual and post-contractual duties, is an important issue in common law and much at the heart of fiduciary duties. It suggests in particular different rules for professional and consumer dealings even if the contract type, for example sale of goods, is the same. As noted in section 1.1.1, this distinction is much less fundamental in civil law but is now also creeping into it, notably through the good faith notion although often not yet sufficiently identified and in any event it is not complete as the European and UNIDROIT Contract Principles and the DCFR clearly demonstrate. Relationship thinking of this nature if properly understood is not limited to contract law either and may also affect the further development of the law of movable property, which, in a modern professional environment, becomes subject to a larger degree of party autonomy and is therefore no less dynamic, although in a different manner as already mentioned in section 1.1.2 above. Here again, civil law thinking is behind as we shall also see in chapter 2 below. The basic notion in the civil law of contract remains the intent of the parties tied together in their consensus as the basis for the binding force of contract. Particularly in professional dealings, this framework may be challenged as we shall see; again it was never the common law approach to contract formation. At least in contract law, we have seen also in civil law the emergence of these extra-intentional duties supplementing or even varying the contract text and include in appropriate cases notably pre-contractual disclosure and negotiation duties, contractual co-operation duties and possibly post-contractual renegotiation duties, although even so in civil law they are still less caught up in relationship thinking so that consumer protection notions sustaining these duties in these various contractual phases may soon spill over into professional dealings where they may be less appropriate—it was already mentioned and is an important theme throughout this chapter. Another important area of consideration is public policy and public order requirements and their effect on the contract and its content. An obvious example is competition policy but there are many others, for example environmental considerations and the need to keep markets clean, avoid abuse and corruption, and promote financial stability. When sufficiently pressing, considerations of justice, social peace and efficiency may also enter into and vary privately created relationships, although again perhaps less relevant in professional dealings as a matter of relationship thinking. The result is that these considerations may move the contract away from the mere intent of or consensus between the parties. In civil law, this could be seen as an elaboration of the abstraction principle or independence notion which we also note in property law, bills of exchange and bills of lading, and letters of credit, where the initiative for the transaction is still with the parties but where subsequently the facility created acquires a life and meaning of its own. So it is, it is submitted, also in the modern contract, which is initiated by the parties but subsequently stands alone. Party autonomy acquires a different meaning; one may also say that its autonomy is not merely a party product but achieves a measure of objectivity in its operation. On the one hand, an anthropomorphic idea of contract is here abandoned; on the other party autonomy may be reinforced in professional dealings. Relationship thinking itself creates here a more objective legal environment for professionals. This was always clearer in common law,
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where contract law (like the law of movable property) has its origin in commercial law. It may highlight in particular the following aspects of modern contracting in the professional sphere, assuming therefore proper relationship thinking: (a) how and when contractual rights and obligations emerge and are extinguished or modified between professional participants—in the modern professional contract foremost a matter of (i) initiative and (ii) conduct and detrimental reliance, not primarily of intent or consensus; (b) there being no fixed moment of contract formation but contractual rights and duties emerge all the time during the contract period, especially relevant in duration contracts; (c) an inclination towards a literal interpretation of contractual texts in professional dealings (again at the expense of the notion of intent) especially where they serve as roadmaps or risk management tools when clear choices have been indicated by the parties in respect of what they want to do and how they allocated the risk of what can be foreseen; (d) the degree of risk acceptance by them in respect of unforeseen future developments, and the liability for whatever subsequently happens unless the burden becomes manifestly unreasonable; (e) the limitation of the defences, see section 1.4.2 below, and excuses, see section 1.4.3 below; (f) the role and operation of the good faith notion as an interpretation technique in professional dealings, first tying together ever changing fact situations to ever changing norms whilst reintroducing in the process fundamental and general principle, custom and practices, and party autonomy as independent sources of law, at least in the interpretation and supplementation process of the agreement; (g) the likelihood of these sources of law supporting the notion of limited recourse and quicker (and rougher) justice in the professional sphere (through procedural informality, limitations of appeal, or international commercial arbitration); (h) the emergence of different contract phases confirming the continuing process of contract formation raising in particular the issue of the relevance and impact in these various phases of non-intentional rights and obligations for professional parties, such as pre-contractual disclosure and negotiation duties, contractual care and co-operation duties, and post-contractual renegotiation duties, and also the possibility (or not) of expectation damages claimed under them by professional parties; (i) the relevance of other objective requirements like those deriving from pressing moral, social peace or efficiency considerations playing a role at least in the interpretation and supplementation of the contract, in appropriate circumstances even correcting it but probably less so in professional dealings given proper relationship thinking, and finally (j) the impact of public policy or public order considerations arising in the transnational commercial and financial legal order or domestically under local laws to the extent an international professional transaction in conduct and effect comes onshore in the relevant country.
PART I GENERAL 19
This poses more particularly the question of the true meaning of party autonomy in the professional contract, and its objectivation in view of its operational dependence on (i) adequate signalling in conduct, (ii) detrimental reliance of the other party and proper investment before claims can be made, (iii) literal interpretation of the texts when serving as roadmap and risk management tools, and (iv) limitation of the defences and excuses, which are not then intent or blame related even where clear choices are made and intentions become clear.24 It was already said that the more objective nature and operation of party autonomy in this manner may be better understood in common law countries, where the very notion of contract itself developed first in commerce and depended on exchange and bargain (consideration) rather than on consensus or will of the parties. It was already said also that in civil law countries, some of this may now be expressed in good faith language, and may then come to mean fewer additional rights and protections in professional dealings. Again the nature of the relationship of the parties plays an important role when aspiring to determine the effect of the intentional and relevant extra-intentional considerations in individual cases. The result is likely to be the recognition of a more dynamic process of contract formation and operation, at least for professionals, in which rights and duties emerge all the time as long as and to the extent the relationship persists.25 Intent becomes here mainly relevant in connection with risk management, meaning formulating contractual terms that allocate at least the foreseeable risks and make choices in this regard. Intent is (a) not then a matter of the binding force in contract formation, is (b) limited in contract performance to situations where clear risk management choices have been made when even then a literal interpretation will there are clear texts, is (c) of limited value in terms of defences and excuses where risk acceptance rather than intent and blame becomes the real issue between professionals, and is (d) supplemented and in appropriate cases amended by considerations of justice, social peace and efficiency, but only if sufficiently pressing given the type of relationship, and further by public policy or public order considerations. Will theories and notions of psychological intent thus become secondary and an anthropomorphic approach to contract is abandoned. The contract as road map should be read more in the nature of an operational manual where nobody asks either what the writer might have intended. The concept of blame or fault then also becomes remote and the more relevant question is who bears the risk. Importantly, where the will and intent are less central, there may also be less room for expectation damages in the case of breach of the professional contract, certainly where it concerns the extra consensual duties. It follows that the dominance of n ineteenth-century will 24 It was already submitted that precisely this objectivisation of party autonomy may be an important reason why it can then also operate more freely as an autonomous source of law, although still subject to higher mandatory sources of law like fundamental principle and potentially pressing justice, social peace and efficiency considerations and relevant public policy and public order requirements in appropriate cases. 25 It has already been noted that it is not uncommon in this connection to distinguish between (a) the precontractual period concerned with disclosure and negotiation duties, (b) the contractual phase concerned with co-operation duties, and (c) the post-contractual phase concerned with renegotiation duties, in which different kinds of extra-intentional duties arise. But the process of conduct and (detrimental) reliance also continues, and also supplements, and in appropriate cases changes, the contract in its evolution.
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t heories, especially in civil law,26 and their inclination to look for intent, blame or fault, may be coming to an end. At least in professional dealings, the common civil law litany: ‘I did not mean it, I cannot help it, it is not my fault’ is then likely to carry less weight. It has already been said that this is all closer to traditional common law perceptions27 but a more mature understanding of good faith and its attendant relationship thinking in civil law will also tend towards these conclusions. Again, it suggests a form of abstraction and independence of the contract away from intent and consensus, then relevant mainly in terms of initiative but not in terms of defences and excuses, at least in professional dealings. It should also be considered that in such dealings, modern contract theory is now more likely to take the corporate environment as the starting point, underscoring the abandonment of a more anthropomorphic approach to contract, see section 1.1.6 below. Obviously, in major corporate contracts it is now often unclear who was involved at the personal level. The one who signs will have the authority but will seldom be aware of the details. All is teamwork, but between teams that may hardly co-ordinate among themselves, eg the technical departments being concerned with quality and the finance departments being concerned with payment and funding. Much may be arranged by outsiders such as law firms, which may be the only ones who understand the arrangement fully but are not a party. The question as to the intent of the parties thus becomes moot and is losing its traditional relevance, but it is in legal theory a slow process, especially in the will-based civil law notion of contract where corporate dealings remain commonly undistinguished due to a lack of relationship thinking. It has been said in 26 Since von Savigny, System des heutigen römischen Rechts, III (Berlin, 1840) 258, 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 (see also n 3 above), although R von Jhering, Zweck im Recht, 3rd edn (Leipzig, 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 particularly 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 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 subjective 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 also been criticised: see K Zweigert and 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 as such and not as part of a bigger idea. The DCFR maintains this German approach and covers in Book II ‘contracts and other juridical acts’. The will or intent remains here the central focus for all juridical acts, see Art II-1:101, but especially for professional dealings, it is submitted, it is not useful and is too anthropomorphic to operate well. Again, it is a consumer law concept, which as such may also have obtained credence in common law. 27 Intent was never the common law approach to contract formation. Williston denied it explicitly, see n 90 below, but in the US especially Corbin, Llewellyn and more recently Eisenberg (at least for agreements between natural persons) started to consider the contract as promise based, see AL Corbin, ‘Offer and Acceptance, and Some of the Resulting Legal Relations’ (1917) 26 Yale Law Journal 169; K Llewellyn, ‘On our Case-Law of Contract: Offer and Acceptance’ (1938) 48 Yale Law Journal 1, 14–28 and (1939) 48 Yale Law Journal 779, 782–83; MA Eisenberg, ‘Expression Rules in Contract Law and Problems of Offer and Acceptance’ (1994) 82 California Law Review 1127. It is even reflected in the UCC for the sales of goods (s 2-204 (Comment 5) balanced by the notion of unconscionability (s 2-302), followed in the Restatement (Second) of Contracts (1981), although nobody abandoned the consideration or detrimental reliance notions in the area of contract formation. The common law approach to defences was also not changed and made subservient to the notion of intent as it is in civil law.
PART I GENERAL 21
section 1.1.1 above that the Vienna Convention, while also succumbing to the intentor will-based concept of contracting (the subjectivity of which filters through into the notion of fundamental breach and force majeure), led to it being mistrusted in business and to its virtual elimination in practice. The unwillingness of the UK to ratify the Vienna Convention should be understood in this context also and concerns in fact the more fundamental issue of risk management, which is handled subjectively in the Convention and in an anthropomorphic manner, whilst the Convention itself is not averse to redistributing risk beyond what parties may have agreed. As common law never accepted will notions and parties’ intent as being similarly central in contract formation, interpretation and performance, it may have the advantage in professional dealings. Although there was here some borrowing, probably from German thought—notably in modern offer and acceptance language as we shall see—the exchange and bargain notion (consideration) remained always more important and led to a more objective approach, at least in contract formation and the contract’s binding force. This is now supplemented by conduct and (detrimental) reliance notions. Intent remains important, also in common law, but again mainly in matters of interpretation but mainly where clear risk management choices have been made. These intent notions are therefore not a matter of contract formation and its binding force, but are likely to surface only when the texts are not clear or where there are textual gaps in the choices that parties have made. Even then they may be reduced to the more objective reasonable person or industry standard, whether or not in the form of implied terms. The related danger, especially in civil law, that in the absence of proper relationship thinking modern consumer law protection, still caught in will and anthropomorphic terminology, pervades all contract law, has already been noted in the previous sections. It is supported by the view that the good faith notion is always a superior uniform norm and as such absolutely mandatory, as expressed in the European and UNIDROIT Principles (respectively Article 1:201(2) and Article 1.7(2)) and now in the DCFR (Article III-1:103, cf also Article II-3:301): see further Article 8 of the 2011 text of the EU Expert Group but this would also appear to be a misconception.28 Here the concept of good faith itself becomes central; what does it mean? As will be shown in section 1.3 below, good faith stands for many things and is not merely or even mostly redistributive, at least in the professional sphere. It was already said also that upon a proper analysis, in professional dealings, it is first and foremost a liberal interpretation facility and technique (better relating newer fact situations to newer norms, reintroducing in the process other sources of law and above all relationship thinking) even if sometimes also a redistribution tool in terms of risk, when it is likely to appeal to fundamental principle (of fairness), but between professionals only in appropriate, more extreme circumstances and always taking into account the nature of the relationship of the parties and their justified needs. As a redistribution device, it is more especially relevant in consumer cases. To repeat, good faith is then not merely the opposite of bad faith operating in the same manner in all relationships. Although it may be considered to affect all contractual dealings, and support and even correct the terms (when it may become an issue 28
See further s 1.3.4 below.
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of public policy or pressing need) it does not do so in the same way; in fact in professional dealings, it has already been said that good faith interpretation may mean strict or literal interpretation of the contractual text with the accent on the agreed risk distribution and therefore less protection. This may sound paradoxical but in truth it is not so and confirms custom and practice in that world. Professionals should even be allowed to set the precise (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 overriding objective uniform mandatory standards or a review of contract content per se. Adjustment of the contractual terms will only follow in extreme cases or where parties have opted for it. The same goes for the excuses of force majeure and change of circumstances. The unforeseen risks fall where they fall unless such clauses covering them are entered in the contract or extreme effects or public policy require it.
1.1.5 The Formation and Operation of the Professional Contract Standard Contracts Returning to the important issue of contract formation and its binding force, the key is that at least for professionals conduct and (detrimental) reliance move to the centre, not the idea of intent or consensus, or even the conventional analysis of offer and acceptance, while more objective elements enter. This must be kept firmly in mind more in particular also in the transnationalisation of contract law amongst professionals. Traditional offer and acceptance concepts are then a subset of this conduct and (detrimental) reliance notion. As already mentioned, intent has relevance more particularly for the terms concerning the agreed roadmap and risk management choices when clearly made by the parties,29 not therefore, it was submitted, in the area of formation and binding force of the contract itself. In this newer approach, reliance on reasonable expectations, which must further be detrimental (and cannot therefore be merely in the mind or on a piece of paper), are the basic issue in contract formation and the source of its binding force (not therefore intent and consensus). It means that for a contract to be binding, investment in the contract by the party who invokes it is required. That was probably always the correct idea behind the consideration notion in common law, at least in commercial dealings.30 It follows that culpable breach of reasonable expectations and duties is the prime ground for actions for damages.
29 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 considered an exception rather than the rule and it was normally not connected with detriment. 30 Detrimental reliance might mean some commencing of performance by the relying party. See for the conclusuion that this is also the requirement in common law PS Atiyah, ‘Contract, Promises and the Law of Obligations’ (1978) LQR 193. 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 A Esmein, Etudes sur les contrats dans le très ancien droit français (Paris, 1883) 5, 29. The codification dropped it and may therefore be considered to have a lesser requirement for the binding force of contract than common law and the immanent transnational law may have.
PART I GENERAL 23
It is clear that unless clear choices were made such actions may then be more closely related to tort than to the traditional subjective contract notions and may also affect the likelihood of expectation damages.31 This is reinforced where we accept that many extra-intentional rights and duties and a great deal of risk must be accepted by professional parties in the different phases of their contract, see the discussion in the previous section. Again, it shows that intent is often not the central issue in contract, but where it is still put at the centre by the parties, notably when a clear risk management choice has been made, it may follow that there are some better defences and excuses whilst expectation damages may then also be the correct remedy, but only in circumstances where the parties’ choice was evident and the resulting duties were breached. Importantly, and it may be repeated, this also means that the moment a contract is concluded may not be as clearly cast as it used to be (often in terms of offer and acceptance) and may show a progression. Rights and obligations may thus appear more gradually, depending on the stage reached in the negotiations and performance. As a result, there is no longer one fixed moment of contract formation either at which all rights and duties crystallise— it is the notion of a more dynamic contract law covering different phases potentially supplemented by extra-intentional duties as already mentioned. It follows that the formation phase of a contract may see an evolution when gradually parties acquire more rights and accept more obligations until there is a full-blown contract. Even then, this process does not stop. This will be discussed further in connection with negotiation duties and the status of letters of intent; see sections 1.3.12 and 1.3.13 below. In terms of reliance, other issues arise. In this connection, it may be clear that when one party chooses to organise itself and its business in special ways, for example a bus company in respect of the buying of a ticket on a bus or a supermarket in respect of the purchase of groceries, this organisation method may suggest a framework for contract formation which is activated only when the other party seriously reacts.32 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 from a consumer. This may be clearer under standard or adhesion contracts. Even among professionals, multiple contracting, for example in franchising or distribution agreements, may suggest special standards of protection for 31 Indeed, in modern contract theory, tort liability may have to some considerable extent superseded contractual liability. Defective performance often constitutes a tort with its more limited recourse, excluding recovery of future gains or expectation damages under the contract and other consequential damages. This is relevant in particular in respect of a breach of pre-contractual duties which might then give rise to tort rather than contractual liability, as we shall see in ss 1.2.4 and 1.3.7 below. Situations of dependency may create fiduciary duties, breach of which may also be limited in the claim for damages. In civil law they tend give rise to tort rather than contractual liability, although where they emerge under good faith it may still be different. Perhaps it could be said that, at least in professional dealings, except in the contractual core, when specific promises are made, there is a return to tort rather than contractual protection with the attendant limitation on expectation damages. That would be the true significance. 32 It can often best be explained by reliance on the organisation that the seller of these service or 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.
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the counterparties even though the contracts are not connected in any way. One may see here an aspect of market behaviour that gives rise to duties. In an economic sense, efficiency notions may then also enter the determination of what may be expected from the organisers, although they should not be asked to carry extra burdens lightly. However, where consumers are concerned, extra protection needs may more readily be assumed.33 The foregoing confirms that what was once cast in terms of the will of the parties and their intent is better fashioned in terms of reasonable expectations in which detriment of the petitioning party and relationship thinking are central themes rather than consensus notions and the type of contract. It means that in contract formation the whole set-up or organisation of the parties may have to be considered. That filters through to the interpretation of the roadmap and risk management terms, where intent may remain more important but a literal interpretation of the texts will be favoured among professionals. A reasonable interpretation—or good faith—may even require it. Again, this means that for defences and excuses, lack of intent or blame become secondary. While fully accepting and perhaps even extending the concept of party autonomy, this suggests indeed more objective standards all around—to repeat, it may even be seen as a form of abstraction or independence of the contract, which acquires its own life away from the mere intention or initiative of the parties. It was already said that it may enhance at the same time the status of party autonomy as an autonomous source of law. Such objectivation may be expected to be encouraged under the good faith perspective in contract interpretation and performance in civil law once properly understood in commerce and finance, especially in terms of relationship thinking and is much supported by industry custom and practices in professional dealings. This connects with 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 a more objective standard quite regardless of what the original intent of the parties may 33 The DCFR in its 2009 Introduction becomes here increasingly high minded, talking 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, see also Vol 1, ch 1, s 1.4.5. Some of this may be relevant in the professional sphere, especially when contracting becomes an organising technique and there are obvious social consequences and limitations when power is exerted in this way. Perhaps issues of efficiency and cost/benefit analysis also arise, but the question in contract is foremost what the consequence is for the relationship of the parties, not for society overall, which is a regulatory issue. In other words, contracts are not there to organise society and should not normally be considered from that perspective, although there are obvious public policy and public order limitations and contracting may sometimes have some broader organisational aspects and social consequences. Regulation may then be in order— competition law may be a vivid example—but should be well distinguished from the operation of ordinary contract law. This may be so also for the non-intentional duties that may arise in the different contractual phases. This may be demonstrated especially when private law becomes mandatory, eg to protect consumers against aggressive sales practices, or smaller investors against their brokers: the answer is better private law protection and the amending of private law. The essence remains proper relationship thinking in a private sense. Although this may be public policy in a broader sense, it is not necessarily to protect the public at large, but individuals or certain classes of them. As just mentioned, this may indeed be different with competition law under which contracts may be voided or where markets are to be protected against abusive practices. Remedies are then of a regulatory nature depending on the intervention of regulators for enforcement; there may also be fines, even though, as in competition law, there may still be private actions as well.
PART I GENERAL 25
or may not have been. This is the essence of purposive and teleological interpretation. Here the contract type may also acquire important meaning. It follows that entering into a relationship of whatever nature implies acceptance of much that one may not have bargained for or may not have been aware of. Especially in duration contracts, a great deal may happen during the contract period which could not have been foreseen and is difficult to allocate in advance. Extra duties of disclosure, care and co-operation may be imposed objectively to create a better balance, although at least for professionals, this should 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, however, rather failure of respecting these extra duties leading to abuse of right by the other party. Here again, relationship thinking is a key concept and may then go beyond purposive or teleological interpretation. This is the idea of risk acceptance and re-emphasises that the determination of rights and duties under a professional contract cannot be fully fixed at the time of the acceptance of an offer and is therefore not a matter of original intent either. It follows that there is considerable risk taking by both parties when entering any contractual (or other) relationship,34 especially among professionals. 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. As already mentioned, there is in such cases some need for assessing the adverse effect overall, even requiring hardship before relief can be considered. It is another aspect of risk acceptance and suggests that in professional dealings the situation must become substantially more difficult for the claimant overall before being able to seek relief under the particular contract only. 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 contracting party, 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. The notion of hardship, often referred to as a requirement for contractual adjustment in the case of a change of circumstances, may itself suggest this overall approach also, although seldom so defined. It may concern a more general principle that operates whenever professionals seek relief or want to be excused from performance. Again, relationship thinking comes in: what is objectively the need of the other party in this relationship? It has already been said that, under a more objective contract law approach, parties may also face pressing external ethical, social and efficiency standards in the implementation of the agreement, but again notably depending on the effect on the type of parties and it remains a matter of private law recourse between them, not public policy intervention which suggests regulation or fines.35 It was also noted that some of these considerations may be less relevant among professionals than in their relationships
34 For professionals it is often balanced by their entering into a multitude of similar contracts, some of them cancelling out or balancing these risks in hedging strategies. In the financial sphere, set-off and netting tools express this risk balancing more clearly, see Vol 3, ch 1, ss 2.6.5–2.6.6, but the principle of risk diversion is a much broader one and greatly important in all professional dealings. 35 See also n 33 above and accompanying text.
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with consumers or other weaker parties. On the other hand, notions of efficiency may be more important for them. This 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 the contract, but it may be significant in all more liberal interpretation techniques, especially in professional dealings.
1.1.6 A New Model of Contract Law among Professionals? Modern Contract Theory The modern professional contract is perceived in this book as a legal framework in which rights and duties continuously arise and are extinguished between the parties. This may be particularly demonstrable in duration contracts. Offer and acceptance, intent and consensus are here not considered to be the true source of contract; conduct and detrimental reliance are. Special undertakings mingle with non-intentional duties of disclosure, negotiation, care, co-operation, and renegotiation, although themselves conditioned by relationship thinking. The framework is dynamic, although there is rigour and discipline in matters of text interpretation whilst non-intentional duties are not readily assumed (except those derived from public policy).36 During the contract period, however defined, rights and obligations thus arise and disappear all the time, regardless therefore of the will or intent of each of the parties and their consensus. As such there is no fundamental difference between the pre-contractual, contractual and post-contractual phases, although in each phase more specific extra-intentional duties may become relevant such as negotiation and disclosure duties in the pre-contractual phase, co-operation in the contractual phase, and renegotiation in the post-contractual phase, again always subject to relationship thinking. Given proper relationship thinking, it was already shown as relevant that at least in professional dealings reliance on conduct must be accompanied by detriment, the relying party putting its money on the table. The pre-contractual disclosure and negotiation duties are likely also to be more limited, while care and co-operation duties in the contractual phase, and renegotiation duties in the post-contractual phase (mainly induced by changes in circumstances) may be more limited also. It does not mean, however, that party autonomy is completely debased, but it must be seen in context and is much objectivated. In particular parties retain the initiative and party autonomy in contract is then foremost the fuse that creates the relationship even if hemmed in by (a) the need for parties to show an investment in the contract before they can claim thereunder—hence the requirement that the reliance is detrimental—and by (b) these various extra-intentional duties or considerations. Rather the contract and the choices parties have made in this regard constitute the true risk management tool unless the redistribution of risk achieved in this manner becomes manifestly unreasonable short of which the risks fall where they fall. Its meaning is further determined by the objective purpose of the contract but may still be curtailed by pressing considerations 36
See n 31 above.
PART I GENERAL 27
of justice, social peace and for professionals especially efficiency. It may similarly be limited by public policy, such as competition law and other public order considerations, as we have seen. In the above described ways, more objective non-intentional considerations have started everywhere to play a 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. It was explained as a matter of abstraction and independence from any original intent.37 The need for more protection became obvious in respect of weaker parties such as workers, tenants and consumers, later also small investors. This current of adjustment now operates more generally in the entire law of contract, but, upon a proper analysis, differently in relation to consumers and between professionals. Again, in common law it is reminiscent of the operation of fiduciary duties, largely limited to situations of dependency, which long existed in it. In civil law, the notion of good faith started to encapsulate this trend for consumers and then also moved into the area of pre- and post-contractual relationships as we have seen, although crucially often still with a shortage of relationship thinking so that professional dealings were treated similarly. It can only be repeated that, in terms of these dealings, there is a difference and consumer protection should not automatically carry over into the professional sphere on the back of the type of contract it may concern. Note in this connection that when we talk about objectivation, for consumers it came increasingly through public policy. In professional dealings, it came from the perspective of risk management, which required less fluidity in the interpretation of contractual terms once risks were allocated. In either case will or intent were de-emphasised, although for very different reasons and in very different ways. In civil law, all may now be encapsulated in the good faith notion, once properly understood as a liberal interpretation technique; see also the next section for normative interpretation. It allowed for these non-intentional considerations to supplement and in appropriate cases even to vary the contractual content. On the other hand, literal interpretation may now also follow. More generally, it serves to connect ever changing fact situations with ever changing norms when, it was submitted, all traditional sources of law become relevant. As we have seen, good faith interpretation may also be closely connected with considerations of justice, social peace and efficiency, or even public policy and public order considerations. In transnational dealings, fundamental and general principle, custom and practices may confirm this approach for professionals within the context of the modern law merchant or transnational lex mercatoria, it is the view and framework of this book. For professional dealings it is in this way possible to detect a new framework or new model of contract and put the emphasis more generally on: (a) justified expectations, reasonable but detrimental reliance, a commencing of performance as manifestation of the binding force of the contract and the source of
37 See for this issue of abstraction and independence reinforced by fiduciary duties the text above in s 1.1.4 and also the operation of agency, referred to in ss 3.1.2 and 3.1.3 below.
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(b)
(c) (d)
(e) (f)
any cause of action thereunder (requiring a modicum of investment on the part of the claimant); duties of disclosure, investigation and loyalty or care and co-operation, and of negotiation and renegotiation but only in appropriate circumstances, potentially different in the various contract phases; the objectively contractual purpose and the roadmap laid down by the parties, suggesting at the same time a literal interpretation of texts; respect for the specific provisions concerning risk management and a limitation of the defences to and excuses of performance unless the situation becomes manifestly untenable or the contract itself provides otherwise; recognition of pressing considerations of justice, social peace and especially efficiency where obtaining between professionals; as well as acceptance of relevant public policy and public order requirements.
In all these aspects, relationship thinking completes the picture, confirming a different regime for professionals. Together this may be considered the essence of modern contract law or the general part of contract concerning professional dealings. Again, it will be clear that in this more modern model, nineteenth-century anthropomorphic ideas of will and intent are de-emphasised and that even in civil law there is an element of abstraction or independence of the contract away from the original intent. It was already said that the road map is more an instruction manual where it is also not commonly asked what the author had in mind. Again party autonomy is likely to acquire a more objective and impersonal gloss,38 but then also an enhanced status as an autonomous source of law, at least t ransnationally as part of the modern lex mercatoria. That is the other side of this coin and is increasingly demonstrable in international dealings supported by the different sources of law which obtain in this legal order. Although it is sometimes argued that, as a consequence, contract as we knew it may be dead, exactly because of the more modest role of the parties’ intent in view of social pressures, this may be seriously overstated.39 Especially in 38 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 approach that acknowledges the non-intentional aspects of contract formation and operation, civil law often called the normative approach, see the next section, there is another type of objectivity in the sense that psychological meaning of declarations is no longer the aim but other more objective 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. 39 See G Gilmore, The Death of Contract (Columbus, OH, 1974): see also J Gordley, The Philosophical Origins of Modern Contract Doctrine (Oxford, 1991) and in England, H Collins, The Law of Contract, 4th edn (London, 2003) 1ff. It often pits a liberal nineteenth-century approach against a more social or dirigiste twentieth-century approach supported by considerable legislative (regulatory) and judicial intervention, now often under good faith cover in civil law countries. 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 World War II, 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 de-emphasising the classical notions of intent and will is in professional dealings 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 even standard terms the personal element in the formation and enforcement of contracts becomes less important and the environment in which the contract must operate much more so.
PART I GENERAL 29
terms of initiative, definition of objective, and risk allocation, party autonomy remains key, even if intent is here still interpreted according to the reasonable person standard in the business concerned. It may include, as already submitted, the right of at least professional parties to set behavioural standards or even eliminate adjustment possibilities except in extreme cases when unforeseen results become manifestly unreasonable for one of the parties to bear. It follows that the contract text remains important, even more so between professionals—it is their roadmap and basic risk management tool, at least in respect of all that can be foreseen. But it also follows from this autonomy that in terms of unforeseen risk, unless parties have provided otherwise in hardship or similar clauses, the consequences are likely to fall where they fall and there will be little protection under the law unless the situation becomes manifestly unbearable, which may not be the case so soon between professionals whose overall position would then have to be taken into account and not merely the one under the particular contract. At least transnationally, it was already said, that party autonomy becomes here more objective and may then also be more autonomous, not subject any longer to it being licensed as such by statute or allowed to operate by a state, potentially with debilitating effect, although it remains subject to public policy and public order confines in appropriate cases,40 themselves likely to be increasingly transnationalised in international transactions as transnational minimum standards. This greater objectivity, followed by more autonomy, should be cherished albeit at the expense of older intent and will theories, which, from this perspective, only served to give states greater justification to interfere with contracts. It can only be repeated that in this approach relationship thinking or thinking in context is central and may even affect notions of mistake, force majeure and change of circumstances, as we have seen. It also follows that professionals may be more literally bound by the terms of their contract, especially if they organised it as a roadmap of what they planned to do and as risk management tool, leading to a large degree of risk acceptance of the consequences 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 sooner be deemed implied. This is of special consequence if force majeure or a change of circumstance is invoked. It limits the impact of these notions in professional dealings as it may also limit the concept of mistake; see further section 1.4.5 below. Whatever the new contract model that so emerges, it can be said negatively that modern contract theory is unlikely to support any single contract view or any singlevalue theory of contract, such as traditional offer and acceptance or consensus notions, promise-based theories, the notion of will or even the notion of party autonomy unadulterated. Instead, it is likely to accept different paradigms, insights and values
40 As already noted above in n 14, it may even allow party autonomy to move 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 particularly consumers, to buy them free and clear of such interests; see more particularly ch 2, s 1.10 below. This is perceived here as an extremely important aspect of party autonomy which confirms that both in contract and movable property it is a prime risk management tool.
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(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. Thus professionals may rely more on a reinvigorated but also more objective notion of party autonomy, at least in the details of their relationship and in the standards they wish to set between themselves (subject to a literal interpretation of the terms), while consumers may rely more on objective law protections against overbearing counterparties (in which the terms of the contract may not be taken literally). Spot or duration contracts may also make a difference, the latter implying a measure of long-term co-operation or partnership. Thus the nature of the contract also comes in, but not necessarily in terms of the old types. At least for professional dealings, modern contract theory does not seek to introduce either a different concept of behaviour, efficiency or value and is not censorious. It is, however, aware of social values, also in professional dealings, especially when larger parts of society become affected, for example in competition matters. Such a pre- occupation may even result from the use of standard contracts, characterised above as an organisation technique, see section 1.1.5, or when one particular contract through its size and impact affects a whole community in terms of employment consequences (but also in terms of the benefits it brings). Environmental issues and constraints on the right to contract and on its contents may also arise. These issues may then no longer be merely issues between private parties; they become regulatory and fines or licences may be imposed. The effect and impact of social values (and public policy) have of course become all the clearer in consumer dealings, even though the remedies are often still private: damages or the termination of the contract or both. Modern contract theory is not necessarily based on pure rationality either, but, while rejecting a psychological attitude and accepting more objective standards, it does assume that the contract makes some objective sense and modern contract theory will in this connection take into account especially what is normal, including how professional participants normally may be assumed to react, the contractual environment, and life’s experiences. While doing so, legal formalism is increasingly abandoned. Even a written text is put in context and all legal reasoning concerning contract (interpretation and supplementation or even derogation) becomes a normative exercise also for professionals,41 even if leading to literal interpretation of contractual texts as we have seen. In professional dealings, it strives always to be more objective. The contract could not be a prime risk management tool otherwise.
41 Cf also MA Eisenberg, ‘The Emergence of Dynamic Contract Law’ (2000) 88 California Law Review 1743, 1747. See earlier also S Macauley, ‘Non-contractual Relationships in Business: A Preliminary Study’ (1963) 28 American Sociological Review 55 and ‘Contract Law and Contract Techniques; Past, Present and Future’ [1967] Wisconsin Law Review 805; PS Atiyah, The Rise and Fall of Freedom of Contract (Oxford, 1979) and Essays on Contract (Oxford, 1986); RA Hillman, ‘The Crisis in Modern Contract Theory’ (1988–89) 67 Texas Law Review 103 and The Richness of Contract Law: an Analysis and Critique of Contemporary Theories of Contract Law (Kluwer, 1996); 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 (ed), Good Faith in Contract and Property Law (Oxford, 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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Finally, while modern contract theory allows for different risks and expectations to enter into the equation, even if it may favour a strict and literal interpretation if that was in the nature of the relationship of the parties and their contract, therefore especially between professionals laying down a roadmap and engaging in a risk management arrangement, it is increasingly sensitive to models of statutory or case law outliving their usefulness or proving beside the point in the evolution of the factual situation under the contract. Life is not considered basically repetitive nor the law a matter of technique in its application. 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-out intellectual concepts (such as will theories) or rigid system thinking,42 although, as we shall see in section 1.2.3 below, some of this may also be seen in common law. Modern contract theory may then also remain contentious in common law doctrinal thinking.
1.1.7 Modern Contract Theory and the Normative Interpretation Technique in Civil Law It has already been said that in civil law, the normative interpretation technique is in modern times meant to cover at least some of this newer ground and—short of constant legislative amendments, which is an unrealistic prospect—to provide at least some movement in the established codification framework or contract model through more advanced interpretation techniques. It was already said also that at least in professional dealings it may in contract then be cast in terms of the good faith notion as a liberal interpretation tool, not as some absolute standard of protection as may be more likely in consumer dealings. It allows newer fact situations to be related to newer normativity as found in the sources of law that legal texts, especially legislation in civil law, may have tried to eliminate. As we have seen, this approach still has some way to go in civil law especially in terms of relationship thinking and a dynamic concept of contract law. Even in situations of dependency, it is still somewhat removed from the duties of care and co-operation operating in common law countries as fiduciary duties. It should be realised that the term ‘normative’ does not mean here a high moral tone per se43 and a concern mainly with the idea of justice or (re)distribution—although it may be the result—but, as noted, it may go into social peace and efficiency considerations just as much if sufficiently pressing. The study of this extended type of interpretation behind which modern contract theory unfolds then becomes a matter
42
For a summary of this discussion see Vol 1, ch 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 entering the law when sufficiently pressing. Normative interpretation could then also simply relate to rationality or common sense as a supporting source of contract law, but always with proper respect for relationship thinking. 43
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of ontological hermeneutics: see also Volume 1, chapter 1, section 1.2.13. Indeed, it has been submitted all along that at least in professional dealings in truth it concerns here the revival of the traditional sources of law which civil law codification had sought to eliminate or subjugate: fundamental principle, custom and practices, general principle and a more autonomous but also more objective notion of party autonomy. This should be clearer, it is submitted, in the operation of the modern lex mercatoria for transnational commercial and financial dealings where it may also imply the acceptance of substantive extra-intentional normativity in contracts, as we have also seen, whilst these dealings remain also subject to public policy, which transnationally may mean international minimum standards as they develop. The normative approach in its fullest sense is thus more than a 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 of the text at the same time, and it may then properly be asked whether interpretation is here still the right terminology, as this newer approach in appropriate cases may mean at the same time more substantial judicial freedom or control even if in professional transactions the scope for adjustment may generally be more limited unless public policy so demands. Suggesting merely interpretation is, however, especially in civil law often still the only acceptable way to achieve a measure of updating and to create a more responsive law in individual cases, not least in contract law, hence also the good faith notion. In the perception of this book, again, it means in truth the reintroduction of the autonomous force of other sources of law besides the statutory texts, especially fundamental and general principle and custom and practices. It also puts party autonomy at another level. At least in international arbitrations, one may assume that parties in their arbitration clause have implicitly agreed to this more modern normative, expansive or dynamic view and may favour it, even if they have still opted for a national law (which would then have to find its place among the other applicable legal sources in international transactions) again subject always to a narrower and even more literal interpretation when the professional contract is perceived as a roadmap or risk management tool. It is for the parties or at least one of them to argue in their submissions, but, if they do, they may speak to a more receptive audience, in this case international arbitrators. This was much of the subject of Volume 1, chapter 2. It has been said before that the civil law development in these matters is not at an end, especially in terms of relationship thinking and in the reintroduction of other sources of law in contract besides statute. To repeat, in the civil law of contract, the good faith notion, if properly understood, may be seen as the modern catalyst of this normative approach in professional dealings. It is more factual, should be less intellectual or systematic and more practical, and may create very necessary flexibility and a better framework for professional dealings in particular. There are indeed signs in some civil law countries that in this manner the risk division by professional parties is increasingly accepted in a more literal way. At least in the Netherlands, in contract, modern case law has been moving forward since 2007.44 It confirms that the good faith 44
See n 4 above also for Germany.
PART I GENERAL 33
notion itself may require a literal interpretation of the commercial contract in which justified reliance plays a major role, especially if the contract is negotiated by outside law firms. It shows increasing awareness of the impact of the nature of the relationship of the parties applied in a casuistic/incremental manner. There may then also arise greater sensitivity to dependency considerations. In this connection, reference has been made to changes in the practices and views of the contracting community even in common law academia.45 That may suggest a new paradigm, which, however, still needs better articulation, particularly in civil law. In countries such as Germany, Austria, Switzerland and the Netherlands, the normative interpretation technique is now indeed closely associated with the good faith notion in the interpretation and supplementation of contracts. Again, good faith may acquire here a specific meaning as an interpretation tool, not any longer merely the opposite of bad faith and all interpretation is then governed by it. In appropriate cases, this may then also lead to contractual supplementation on the basis of duties of care and co-operation, duties of disclosure, and of negotiation or renegotiation duties, even if less likely in the professional sphere. In pressing cases adjustment may even be considered on the basis of what is more just, or promotes social peace better, or is more efficient, the latter especially between business partners. What is fairer and more reasonable may thus also be considered, but, it is submitted, in professional dealings only if, in objective terms, hardship would otherwise result or, as the UCC in the US puts it, the result would be manifestly unreasonable. Again this is relationship thinking but even then, as noted before, it would require the overall position of the harmed party to be considered rather than only its position under the particular contract. The good faith notion as an expression of social movement might then also emphasise what may be required in a social sense or is morally demanded in an advanced society. That is public policy, but this still needs expression in terms of rights and duties between particular contracting parties only. Private law at least amongst professionals is not regulatory nor meant to reform society per se; but if the public interest becomes engaged, it may punish certain behaviour as is clear in competition law. So may other public order considerations, also amongst professionals, which often reflect changing societal values and have sought notably to protect consumers better. Consumer law has thus become highly regulatory, although the public interest remains here often expressed in private law terms, even if there is a strong risk redistribution element. Properly considered, this is not then any longer a good faith issue between the parties. To repeat, in professional dealings, civil law is here only at its beginning and as we shall see there remains much confusion on the subject of good faith in contract, not least also in the DCFR. In Germany, in particular, an attitude of adjustment has long played a role, however, starting in the case of profound changes of circumstances, as we shall see, although proper distinctions in terms of relationship thinking may still not be properly made.46 It can only be repeated that the notion of good faith can mean many things (see section 1.3.4 below) and does not always give more rights to affected parties, even if it is often still used in an imprecise generic sense, as such favoured by 45 46
R Brownsword, Law of Contract: Themes for the Twenty-first Century, 2nd edn (Oxford, 2003) 89. See ss 1.3.14 and 1.4.5 below.
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many civil law commentators. It still causes confusion and may be one reason why traditional common law still avoids the concept, as we shall also see and has other means (see s ection 1.3.6 below). In the meantime, even in modern good faith-imbued civil law, older offer and acceptance notions remain 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 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, but also on conduct and reliance, and almost puts the latter at the centre, but then lapses into traditional offer and acceptance language (Articles II-4:201ff) and still looks in Article II-4:205 for one fixed moment of contract conclusion. So does the 2011 text of the EU Expert Group, which concentrated on the sale of goods, followed by the draft EU Regulation on the subject (CESL) in the same year, now withdrawn. As just mentioned, in common law, the normative interpretation technique in the above sense remains less well developed or understood in England, but it would be incorrect to say that it does not exist.47 It has already been said that English contract law has tools other than good faith, which may be much clearer and effective; see again the discussion in section 1.3.6 below. First there is acceptance of the concept of reasonable expectations or reliance, which is especially relevant in the area of contract formation if the reliance was detrimental, meaning that the party claiming a cause of action must have invested in the deal. 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. In such cases, there appears suddenly some use of the notion of intent but, as in matters of offer and acceptance, it is not the same as in civil law, exactly because it is not a matter of psychological will but rather what a contract means to a reasonable addressee in the business concerned.48 In situations of dependency, there are fiduciary duties, an important instance of relationship thinking, although it is also trade dependent. Finally, other external sources of law, such as custom and practice, operate more freely and appear to be less curtailed, at least in commerce and finance, while equity cuts out excess. Together, these common law concepts and attitudes approximate the notion of good faith or a more normative approach in civil law but may often go well beyond it. They are likely to be more precise. It is therefore not true, as often surmised by civil law theorists, that English c ontract 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 needs the good faith notion much less because it has long used different notions and techniques that may come very close to achieving 47 See Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, 912, referring to the reasonable man approach, with a preference for contextual interpretation over 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 (again no emphasis on intent or the will of the parties). 48 Attorney General of Belize v Belize Telecom Ltd [2009] 1 WLR 1988.
PART I GENERAL 35
the same results and, in relationship thinking and fiduciary duties, may well go beyond the civil law and is then often more sophisticated. But perhaps it may be equally important to repeat that contract in common law is itself a more objective concept less tied to parties’ intent and consensus notions. In professional dealings it is then also much less concerned with fault or blame, much more with risk attribution in a more objective sense. Again, this also has to do with tradition: the English law of contract emerged from commerce. It is true that the notions of offer and acceptance and much intent language were later imported from the European Continent but only during the nineteenth century as already noted whilst the related notion of consensus remained underdeveloped. There are good reasons for this, at least in professional dealings, as we shall see throughout. This being said, as we shall also see, the notion of good faith itself is ever more clearly enunciated in contract law in the US, where normative interpretation is strong but often related to a search for underlying (objective) policies,49 not intent; see further sections 1.3.6–1.3.7 below. In this environment, the old terminology of contract law is becoming less and less satisfactory, especially in civil law, but common law also needs updating as modern contract theory suggests everywhere that the traditionally established contract models are largely out of date, especially in professional dealings, now ever more impacted by further standardisation and even the smart contract, see section 1.1.10 below. These modern trends will be discussed in greater detail below and, where possible, traced through comparative and transnational law.
1.1.8 The Contribution of Law and Economics It is of interest to see what modern thinking in the US, especially in ‘law and economics’, has contributed to the discussion on modern contract law. It may be less than one might think or may have hoped for. First there is the question of contract or party autonomy being an independent source of law, not a licensed notion, operating among the other sources of law in the modern lex mercatoria. This poses the question at the same time of other balancing forces, especially public policy but also notions of justice, social peace and efficiency, the latter being of special interest in business transactions. But it also raises the question of the model that is best used to explain and simplify what is happening and to contribute to a better understanding and operation of modern contracting in the professional sphere, therefore in business transactions which are now often transnational in content, if not also in structure even when in the event the transaction happens to be local. Indeed, the contract model that is used or maintained here, is itself an issue—in business together with the stronger gravitation towards efficiency—and cannot be presumed to uncritically pre-exist. It was already said that rather than concentrating on a contractual interpretation from within, American realism had already concentrated on policy rather than on texts.50 49
cf also Eisenberg (n 41) 1747. Cf also A Schwartz and R Scott, ‘Contract Theory and the Limits of Contract Law’ (2003) 113 Yale LJ, 541ff, R Scott, ‘The Case for Formalism in Relational Contracts’ (1999) 94 North Western University LR 847 and earlier ‘Conflict and Cooperation in Long-Term Contracts’ (1987) 75 Cal LR 2005. 50
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Above, the view was expressed, that in such an approach relationship thinking, the detrimental reliance notion, the accent on investment in the contract as the precondition for claiming thereunder, and the distribution/management of risk may also become of special interest. In business dealings, especially the promotion of efficiency may then be an objective standard and risk distribution, resource allocation and transaction costs, like the costs of lawyers and enforcement,51 become other key elements.52 Again, such contracts are unlikely to be intent-based in the traditional sense, if only because in a corporate environment only outsiders like a law firm might truly know what is in it. To enhance predictability, the notion of intent and the connected notion of blame when it comes to performance or the lack thereof will then be limited, it was submitted, at least in commerce and finance, to situations where the contract makes clear choices, and defences and excuses will be curtailed in a strict interpretation of texts. This will reflect established business practices in that community. Good faith may even require it where the contract is expressed as a road map and risk management tool. To repeat, one can say that these limitations favour efficiency whilst enhancing predictability. It may also advance the most competent actors and better or more efficient forms of cooperation. It follows that at least amongst professionals, efficiency in terms of economic exchanges leading to a better allocation of resources and to a greater economic benefit created by enhanced co-operation and subsequent distribution of the gains between the parties may trump subtler notions of justice except if manifest unreasonableness results like demonstrated by the use of the good faith concept in the UCC ( Section 1-302(b)), a situation unlikely to result soon between informed parties in proper relationship thinking. Efficiency itself could even become an objective justification for contractual liability, probably increasingly expressed in smart contracts as a further form of standardisation between professionals. In terms of promotion of social peace, the other red line may be the contract being socially or economically destructive. Monopolisation and other market abuse may be an example but also the use of standard terms as an organisation tool by a contractor may have limits, obvious for consumers, but even between professionals, more in particular if it manifests a dominant position. The extent or reach of extra-contractual disclosure, co-operation and re-negotiation duties may also be considered and measured from an efficiency point of view.53 Public policy may further impact on the contract content, not only contracts in restraint of trade but also those with other illicit objectives, like fraud or other forms of market manipulation or abuse. Environmental protection was already mentioned in this connection. Thus policy and cost issues imposed themselves, also in professional dealings, more in particular of interest in a law and economics analysis. It was already said that at all times, professional parties will have to be careful with whom they contract. At least in common law, entering into long term relationships may have a lot of downsides that cannot be foreseen but will not lead to an excuse 51 The notion of transactions costs is by no means fully clear, see Douglass W Allen, ‘Transaction Costs’, in Encyclopaedia of Law and Economics (Edward Elgar, 1999) 893. 52 See for an early discussion, J Berman, ‘Excuse for Non-performance in the Light of Contract Practices in International Trade’ (1963) 63 Columbia LR 1413. 53 See for the recognition of implied cooperation duties even in professional contracts, the Supreme Court of South Australia in Alstom Ltd v Yokogawa Australia (No 7), SASC 49 (2012).
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(of force majeure or changed circumstances) unless the contract itself so provides or otherwise only in exceptional circumstances. Such an approach may indeed align with the more modern ‘law and economics’ analysis of contract law and support the view that this approach (which may in terms of sources of law be supported by custom and general principle), can withstand a ‘law and economics’ analysis, where efficiency consideration are paramount. However, the haul of new ideas remains limited,54 and even Posner complained about the lack of progress.55 On the other hand, empirical research has more recently questioned some of the basic ‘law and economics’ tenets in contract law.56 One idea here is that if parties have not expressed their intentions clearly, the default rule for the courts is the one that maximises the value of the transaction, even if it may be hard for judges to judge it and pin it down.57 Another is the notion of ‘efficient reliance’ in such situations.58 This notion is fact specific but it can be demonstrated that the courts have paid some attention to it although, here again, theory and practice often remain wedded to the idea of intent, which is then still preferred as the real basis of the contract. Rightly or wrongly, that often still seems the bigger issue even in modern case law in the US. It may be noted in this connection that there is then often no proper relationship thinking either: professional and consumer contracts are hardly distinguished. The common law tradition may explain it better where the commercial contract was the original model all along. Contract performance is another area of ‘law and economics’ interest and becomes then a question of incentives: is it more efficient or less costly not to perform? Would this be a complete defence? This connects with the question of defences and excuses. Are we perhaps drifting towards a form of strict liability in professional dealings?59 In the meantime, the measure of damages and the question whether it is different when intentions are not clearly expressed or when extra contractual duties impose themselves remains unresolved although, again, it is recognised that a tort-like approach may sometimes be more appropriate, in particular in pre-contractual situations.60 At the theoretical level, the difference is that in the first case damages are based on the 54 D Faber, ‘Contract Law and Modern Economic Theory’ (1983) 78 Northwestern University Law Review 304. 55 EA Posner, ‘Economic Analysis of Contract Law After Three Decades: Success or Failure’ (2003) 112 Yale Law Journal 829 with a riposte by RC Craswell, ‘In that Case, What is the Question? Economics and the Demands of Contract Theory’ (2003) 112 Yale Law Journal 904. 56 Eg the idea that in standard contracts an ‘informed minority’ of term-conscious buyers is enough to discipline suppliers, see Y Bakos, F Marotta-Wurgler and DR Trossen, ‘Does Anyone Read the Fine Print? Testing a Law and Economics Approach to Standard Form Contracts’, NYU Law and Economics Research Paper No 09-40 (2009); Y Feldman and D Teichman, ‘Are All Contractual Obligations Created Equal?’ (2011) 100 Georgetown Law Journal 6, critique on empirical grounds the assumption that parties may be expected to perform their contractual duties if, and only if, the legal price of breach (damages) is higher than the cost of performance. 57 I Ayres and R Gertner, ‘Filing Gaps in Incomplete Contracts: An Economic Theory of Default Rules’ (1989) 99 Yale Law Journal 87, 91–93. 58 R Craswell, ‘Offer, Acceptance, and Efficient Reliance’ (1996) 48 Stanford Law Review 481 and earlier CJ Goetz and RE Scott, ‘Enforcing Promises: An Examination of the Basis of Contract (1980) 89 Yale Law Journal 1261. 59 See R Craswell, ‘Contract Remedies, Renegotiation, and the Theory of Efficient Breach’ (1988) 61 Southern California Law Review 629. 60 See Craswell (n 58) 499ff. see also G Gilmore, The Death of Contract (Columbus, OH, 1974) 87–89 and PS Atiyah, The Rise and Fall of Freedom of Contract (Oxford, 1979) 1–7. See for the French attitude to pre-contractual liability text at n 217 below.
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full performance of the contract (the monetary equivalent of specific performance, potentially resulting in expectation damages), in the latter case damages are paid to the extent necessary in order to restore the pre-contractual situation. Indeed, some inventive writing has been produced in the area of pre-contractual duties, where the accent may then be on caution and on incentives to gather the right information.61 However, one could also put the emphasis on strategic behaviour, in particular the exploitation of delays. The possibility of expectation damages may then be a further discouragement to bargaining.62 The research confirms here the need for a limitation of pre-contractual disclosure and negotiation duties in the professional sphere. There is also some newer literature in the area of standard terms, their binding force and its extent,63 but the fact that they are basically an organisation technique of suppliers is mostly still overlooked. Game theory may do a little more when there is a strategic element, but it has the problem that new equilibria are difficult to nail down in terms of practical guidance for change and this approach soon becomes unmanageable and legally unhelpful. What is perhaps more striking is that in particular the risk management undercurrent and bias in professional dealings remains largely unexplored in these newer ‘law and economics’ approaches. The choices to be made are obviously efficiency driven but dependent on each party’s evaluations, while the bigger issue is that much of what might happen during the contract period is barely foreseeable, as are the information and transaction costs. How the consequences are divided in terms of (objective) disclosure, (re)negotiation, and co-operation duties remains a question of default rules, which are often less than clear and in constant evolution, viz the pre-contractual and post-contractual regime, the impact of the notion of good faith and change of circumstances where again there seems to be little ‘law and economics’ guidance.64 Remedies and the measure of damages have caught the attention, but appear to be secondary, or rather only interesting in order better to force compliance with the contractual duties as they may evolve during the contract period. Civil law has contributed little to this discussion. As mentioned, in contract law it follows the traditional consensus idea, which is anthropomorphic, and generally still uses the older offer and acceptance terminology, now in language largely derived from the Vienna Convention, which sometimes allows conduct and reliance as an a lternative 61 See R Craswell, ‘Precontractual Investigation as an Optimal Precaution Problem’ (1988) 17 Journal of Legal Studies 401. 62 A Schwarz and RE Scott, ‘Precontractual Liability and Preliminary Agreements’ (2007) 120 Harvard Law Review 662. 63 VC Plaut and RP Bartlett, “Blind Consent, a Social Psychological Investigation of Non-Readership of Click-Through Agreements”, www.springerlink.com; F Marotta-Wurgler and R Tayor, ‘Set in Stone? Change and Innovation in Consumer Standard Form Contracts’ (2013) 88 New York University Law Review 240; F Marotta-Wurgler, ‘Are “Pay Now, Terms Later” Contracts Worse for Buyers? Evidence from Software License Agreements’ (2009) 38(2) Journal of Legal Studies 309; JE Murray, ‘The Dubious Status of the Rolling Contract Formation Theory’ (2012) 50 Duquesne Law Review 35; RA Hillman, ‘Rolling Contracts’ (2002) 71 Fordham Law Review 744; AW Katz, ‘Standard Form Contracts’ ssrn.com (1998); MA Eisenberg, ‘Text Anxiety’ (1986) 59 Southern California Law Review 305. 64 Craswell (n 58) 489 suggests that neither differences in risk preferences nor differences in belief about the market have any obvious implications for the law’s choice of default rules. For this it would be necessary to identify the point at which the parties’ risk aversion differed by the greatest amount, again hardly a manageable concept.
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(especially of acceptance) but even then does not spell out the details, in particular whether this reliance must be considered reasonable or whether it must also be detrimental. It is no surprise that under the circumstances the DCFR does not contribute either. It sticks to the Vienna Convention’s approach to contract formation; in typical codification fashion it is the legislator or state that makes the choices here. How they do so and on what basis is not a matter for investigation.
1.1.9 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. Much is an extension of traditional offer and acceptance thinking and does not go beyond it. It has not created great new perceptions and at least at the theoretical level has not created truly new complications either, for example as to when the contract is concluded, under which law, and with what kind of consumer or in terms of other protections under 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 used to do. In common law terms, this is a Statute of Frauds issue. As we shall see, under it, even sales contracts for small values may still require a document. For these contractual formalities see also section 1.2.8 below. The more formal issue then is: what is a document? 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. That also raises the issue whether an e-mail or internet communication might be sufficient. There is the obviously 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 (such as 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 but may not so far have acquired the attention they deserve. 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.65 65 The status of documents may be all the more an issue where they are considered negotiable instruments (such as bills of exchange or cheques) or documents of title (such as bills of lading). This will be discussed below in chapter 2, part II and may not be an immediate issue in e-commerce. 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 are largely non-existent now and are in any event represented by security entitlements so that pure electronic settlement can result. This development will be discussed in chapter 2, part III below.
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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 such as 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.66 The EU E-commerce Directive puts special emphasis on 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 regulation and regulated industries (such as financial services), and with protections of certain groups such as 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 for them. 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 (Article 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 its domestic regime (as the service is in that respect normally located at its place, see the country of origin approach in Article 3 E-commerce Directive), while consumers and workers may always invoke the protection of their own laws (Articles 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 i nformation 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 66 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 Context of Electronic Commerce in 1999. UNCITRAL concluded a Model Law on Electronic Commerce in 1996.
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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. In the EU subsequently the issue of dispute resolution obtained a great deal of attention in further promoting a digital single or internal market where Germany and France are so far dominant. It published in 2016 a Digital Agenda for Europe which laid down a strategy by 2020 and highlighted this online dispute resolution (ODR) issue which it had already broached earlier in a Regulation.67
1.1.10 The Smart Contract A newer phenomenon is the operation of the smart contract which is sometimes said to be neither smart nor a contract at all. At least, it is likely not a contract in the more traditional sense. It is in truth a computer programme that is accepted by all participants. The idea is that the programme enforces instructions built into the code. One could also say that it is a computerised transaction protocol that executes the terms of a standard arrangement. It is sometimes compared to a vending machine or ATM which executes instructions entered automatically and checks the implementation which cannot be challenged. As such it might allow complete computerisation of the contract formation and enforcement process. One could also say that it is the extreme of a commercial contract being seen as a standardised roadmap and instruction sheet, where one should also not ask what the drafters might have intended. Much of this discussion tends to go back to the notion of intent which in this book in professional dealings was never considered to go to the binding force of a contract, which depends on conduct and reliance or here on instructions whose implementation becomes wholly automatic and can be instantaneously checked. There can be no argument, it is what it is, one participates or one does not. At most the organiser bears responsibility for the proper functioning of the program, see also the discussion in s ection 1.1.5 above where, however, the organiser was itself also a party, which would not here be the case, and for the appropriateness of the instruction code. If all can live with it and the system works (in a fashion), there is no way out. A smart contract may thus be defined as an automatable agreement, whose essence is the automation and self-execution of a pre-set conditional action plan in terms of enforceability and enforcement that can be checked instantly. The idea is that if something happens or is activated, then there is an automated follow up or sequence. 67 See COM (2011) 794 final which was followed in 2013 by Regulation (EU) No 524/2013 of the European Parliament and the Council on online dispute resolution for consumer disputes OJL 165(1) (2013). It established in each Member State an online dispute resolution facility that was not meant, however, to eclipse the right to access the judicial system. ODR contact points with at least two ODR advisors must be established in each Member State in cooperation with the EU Comission. The facility is limited to consumers resident in the WEU and traders established in the EU. The latter must make customers aware of this facility and provide a link to it. In 2015, it was followed by an implementing Regulation (EU) 2015/1051, under which the EU created the Online Dispute Resolution Platform that is maintained by the EU Commission for Member States. After the UK leaves, it will no longer apply to it as it is no longer a Member State whilst its consumers do no longer have residency in the EU.
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The easiest example is the supply of an asset which engenders payment. A special feature may be that a car bought on credit, will not start if payments are not up to date upon electronic checking with the bank. ‘Automatable’ means in this connection automated by computer. ‘Enforceable’ means (self) execution via a tamper-proof execution. Again, there is no room for adjustment or adaptation. Once a participant enters the scheme, it is the way it is. Should there be room for disagreement, the system will explain itself. There may still be some recourse but likely only outside this framework. The practical significance is that smart contracts may allow for the transposition of contractual obligations into a digital distributed ledger for which the blockchain may be used. By having access to a (large) number of accounts, it may indeed provide the ultimate in standardisation. The provisions are complied with and enforced by means of automatic updates to each user’s account. It may even lead to a transfer of assets according to the terms of the smart contract as soon as an event—outside the blockchain or within—triggers the application of the terms. Thus sophisticated systems may provide for automatic transactions to take place in the ledger in response to specific corporate or market events like crediting a dividend or coupon payment, issuing and reacting to margin calls, or optimising the use of collateral. A smart contract may automatically allow to recalculate exposures with reference to agreed external data sources in order eg to adjust variation margin. In this manner. interoperable derivative and collateral ledgers would automatically allow the contract to call additional collateral units to asset ledgers. In the nature of all contracts for differences, on maturity dates, a net obligation would be computed by the smart contract, and a payment instruction automatically generated in the cash ledger, effectuating regular payments or closing out the deal. Based on Ethereum’s public blockchain (which is a permissionless platform in which everyone can participate), developers have been able to simulate in this way a full life cycle of derivatives and their execution through smart contracts. Their work gives a good indication as to how a future blockchain-based framework might operate, see Volume 3, chapter 1, section 2.6.12. For derivatives where this facility may become most effective, this may be best demonstrated by a simple call option. A key challenge is that financial smart contracts need some mechanism to refer to market and reference data external to the blockchain or similar ledger in order to get the prices or valuations of the underlying assets, because so far, there are no market data publishers that are capable of reliably pushing data on to the blockchain. Developers have been able, however, to build a mock price feed that randomly and periodically mutates the values of popular financial symbols (S&P 500), with the smart contracts accessing the price feed for margin calculation and option exercises. In public blockchains, market data access through so-called o racles has a centralising effect: reputed centralised authorities push price information on to the blockchain, although it may render the entire system vulnerable where oracles lack in resilience. In private blockchains, standard market and reference data interfaces could be defined and then plugged into industry-standard feeds by identifiable and accountable network participants. This reduces vulnerability and would complete the standardisation. In a securitisation, see Volume 3, chapter 1, section 2.5.12 the implementation of a solution based on smart contracts and blockchain or similar ledgers could also result in significant efficiency gains, first at the stage of loan origination but then also throughout
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the entire securitisation lifecycle. A borrower could activate a loan agreement in the form of a smart contract by transmitting the necessary input to a blockchain (principal amount, repayment schedule, credit score, income verification, tax records etc). The lender/originator would validate the smart contract by placing it on the blockchain in the form of a digital token that is owned by it and contains in cryptographic form all input information and loan data. As a smart contract, the loan would have access to the borrower’s cash account so that payments would be made automatically in accordance with the repayment schedule. If the borrower defaults on a repayment, the smart contract could automatically engage a special default servicer which would take over the recovery process and the repayment history would be imprinted on the loan token and recorded on the ledger, which would be updated accordingly. This information would be available to all downstream participants upon a securitisation, which could vastly reduce downstream costs of due diligence. Downstream participants, including investors, could easily follow a loan or pool of loans from issuance through to maturity, be alerted of modifications, and adjust servicing behaviour. Smart contracts of this nature substantially remove the subjective elements in contract conclusion and operation. In doing so, they are trying to eliminate legal sophistry, hiding behind local laws and their peculiarities, and mean to eliminate intermediaries including lawyers. In this connection, it was already pointed out that the common law of contract is not intent based in its formation and that in its operation, even when clear choices are made by the parties, intent and blame are still of modest importance, reflected in the limitation of the defences and excuses (unless the contract provides otherwise). The essence is that the common law does not rebalance the risks which parties took. It was also pointed out that in consumer dealings this may now be different and that this is more especially reflected in the civil law of contract that was always more anthropomorphic, in modern language consumer oriented, but still applied to all. But even in civil law, contract standardisation is here an important issue that may now increasingly point in a different direction. It was already mentioned above in section 1.1.5 in connection with standard terms in adhesion contracts, where the central role of the organiser was also noted and his responsibility for making such an organisational approach work for all participants who may be in a situation of dependency. The essence is that the terms must be normal (taking into account the nature of the scheme and its objectives) and fair (taking into account proper relationship thinking). Intent and blame in contract formation and operation are then reduced in importance, even in civil law, in exchange for protection of another nature. That reflects more readily the situation in the common law of contract that is on the whole more commercial as we have seen but will use relationship thinking still to make here proper distinctions and define the protections. If properly considered, it leads to a form of approximation between civil and common law when standardisation becomes an efficiency objective and economic need or even necessity. Above it was suggested that the smart contract is the ultimate in standardisation and suggests the further (or even complete) elimination of subjective elements, notably intent and blame from these contracts in their formation and operation. There is a definite shift from participants to scheme or code. But it does not
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discharge the organisers or operators completely and as already mentioned they retain a responsibility for the proper functioning of the system they create in this manner and its fair and balanced operation between all participants. In particular nobody should be able to tamper with the rules and manipulate their application. The (decentralised) ledger is there to make that impossible, nobody can interfere. Even if broken into or hacked, this decentralised nature means that assets are technically not lost, although Ethereum contentiously has tried to retrieve and redirect monies in such situations by changing the rules or code. It may be the consequence of an organisation technique for which the organisers continue to bear prime responsibility and which they must make work for all, but it undermines confidence in the framework. On the other hand, it should also be realised that deficiencies in the code when known to the better informed may be used by them to disadvantage the others, another reason perhaps for the system to correct itself on occasion. All the same, it is clear that if the smart contract has been properly put into place, there is in principle no way back and participants must realise that their participation means that they conform to and accept what follows. That applies to sellers and buyers, banks or other intermediaries or markets and clients. Nobody can claim an exceptional status merely on the basis of personal circumstances or individual considerations, the idea is that no law can help them and circumstances are irrelevant. It may mean that the absence of disposition rights in underlying assets or monies, even because of a bankruptcy of the creditor, may prove irrelevant or less effective. Payment under guarantees must follow also, even if there may have been fraud or other circumstances that mitigate against it. Even so, participants or users may still have to exercise due care in the selection of others when making use of the smart contract facility and in the proper explanation of the scheme which may be opaque and is not necessarily right for everyone, especially for consumers and small investors or even students entering into student loans, but counterparties may hardly be known or identifiable. Here one sees a distinction between organisers and users, which two functions tend to blend in standard contracts. Whilst in smart contracts, the organisation may be legally self-contained in its own code, it follows that the user dealing with others through the system still operates here under an applicable law, which should be transnationalised even then, fiduciary duties being the core, but could still be purely domestic, in the EU determined under Rome I. Regulatory concerns may then also arise, followed by concern for privacy, especially of weaker parties. Internet dealing and e-commerce may provide here some guidance. In the EU, as we have seen in the previous section, the emphasis is here on proper disclosure of sellers and their products and on the buyer being able to cancel the transaction during a short period. It concerns the E-commerce Directive of 2000, see also Volume 3, Chapter 2, sections 3.6.7, supported by the EU Consumer Rights Directive of 2011. For fintech, other regulatory concerns may surface, so far more in particular for crowd funding and its participants in the capital markets, see Volume 3, Chapter 2, section 1.1.18. The upshot is that participants may not be without recourse against each other following the operation and enforcement of smart contracts but it does not concern the smart contract itself whilst at least between professionals the choices so made may limit their rights at the same time.
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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 or the consensus is 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 theme. Although civil law is often considered 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 one 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 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 obligation or pactum nudum which could not be legally enforced, although for some of them the Praetor later gave an action in the ius honorarium or praetorian law. The recognised contracts and some variations or extensions thereof are referred to in the Digests (D.2.14.7), which form part of the compilation of the Roman Emperor Justinian in the sixth century AD in Byzantium (see Volume I, chapter 1, section 1.2.3), but even then there was no one singular framework. Only the ius commune, which was the law developed on the West European Continent on the basis of this Roman law and which largely prevailed in this area until the time of the great European private law codifications of the nineteenth century as we have seen in Volume 1, chapter 1, section 1.2.4, managed to create a more coherent approach, especially 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 or require any particular form or formalities and was a corrective, not the basis of the validity of the contract itself, which was founded in the exchange of promises themselves.68 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).69 Especially in commerce, there was a growing need for parties to consider each other’s 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 c ombined 68 See nn 14 and 30 above for the requirement of a commencing of performance in the older law of sales in France. 69 Decretales of Pope Gregory IX of 1234 in the Liber Extra added to the Corpus Iuris Canonici, Lib I, Tit XXXV, Cap I.
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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 breakthrough had already been achieved in the fourteenth century, at the time of the greatest jurists of those days, Bartolus and Baldus,70 when Roman law was reinterpreted 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.71 As just mentioned, the natural law school of Grotius and Pufendorf72 in the seventeenth to eighteenth centuries completed the theoretical framework of the law of contract based on consensus as we know it today in civil law, even though at first it was still expressed as an exchange of compatible promises (much like common law still does for executory contracts as we shall see).73 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,74 the consensus notion entered the French Codes in the early nineteenth century after the other great French jurist, Pothier, in the eighteenth century, had more precisely formulated the notion of offer and acceptance in the context of a meeting of minds or consensus.75 The emphasis on the will of the parties in this connection came later and dates from the nineteenth century, as such associated in particular with von Savigny in Germany.76 In the Romantic era, it put the parties’ creative powers at the centre of the contractual rights and obligations and introduced a more psychological approach into contract formation and interpretation. The contract became intent or rather will-based.77 70 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 1, s 1.2.4. 71 Seen as early as 1283 the Coutumes de Beauvais, Cap 34, Arts 998ff. 72 See Vol 1, s 1.2.6. 73 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 more clearly his Inleidinge, or RW Lee (trl), Jurisprudence of Holland (1953) III 10, where he noted that by contract we mean a voluntary act whereby one party 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. 74 Les lois civiles dans leur ordre naturel, livre I Introduction (Paris, 1777). The key insight was here that promises are merely conditional until acceptance. 75 Traité des obligations, no 4, see also W Evans, A Treatise on the Law of Obligations or Contract by M Pothier (London, 1806). Only in the nineteenth century was this development completed and offer and acceptance were made the key elements in the formation of contracts in civil law codifications. The role of acceptance had already been identified by Bartolus, however, in connection with the use of agents: Commentaria D.15.4.1.2. It has been argued that the emphasis henceforth on the consensus deprived the new contract law from the moral imperative of keeping promises, see J Gordley, ‘Contract, property and will—the civil law and common law tradition’ in H Scheiber (ed), The State and Freedom of Contract (Stanford, 1998), 82. It also deemphasises the cause element and need for a commencement of performance at least in sales, see n 68 above On the European Continent it gave the opening for and led later to will theories. Even in England there was an impact on early writers on contract, see nn 88ff below. 76 See n 26 above. 77 In France, Art 1188 CC, modified in 2016 as part of the revision of the French contract law and dealing with interpretation again insists that the contract is interpreted according to the joint intention of the parties rather than on the basis of the literal meaning of the text. If the intention is not clear, there follows a reasonable person approach. The necessary distinction between the professional and the consumer contract is not made.
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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. But from the beginning there were problems with the concept. First, the requirement of acceptance remained less clear when there was only one party committing itself.78 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 to this day. German and Dutch law maintain that the offer remains open for a reasonable time and during that time may not be withdrawn at will by the offeror 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 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.79 In France,80 this liability may be based on tort rather than on contract.81 Another traditional issue is the time of the acceptance, which becomes vital when all rights and obligations are considered to 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.82 In common law, it is normally the moment the offeree dispatches the acceptance,83 the postal service being here considered the agent of the offeror, but reliance may still move the date. The 1980 CISG 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 Principles and PECL and of the DCFR (DCFR, Article II-4:206) and of the EU Expert Group (Article 34). In all this, it must be remembered that offer and acceptance in this specific formalised sense only concerns 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, although this leaves open the question what is major or minor. 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—in common law it was borrowed in the nineteenth century from Scottish and probably 78 French law still reflects this in Art 1108 CC, which only requires the party that gives an undertaking to consent. So does s 516 of the German Civil Code (BGB) for gifts in Germany. More modern Codes, like the Dutch Code of 1992, always require acceptance in some form (Art 6.217(1) CC). So too 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 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 his will, but, even in contract, duties and rights may derive from non-intentional obligations in the pre-contractual, contractual or post-contractual contract phases as we have seen. 79 See Cour de Cass, Civ, 10 May 1972 [1972] Bull Civ III 214. 80 J Ghestin, Traité de droit civil, les obligations, le contrat: formation 2nd edn (Paris, 1988) 229ff. 81 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 exchange and 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 US now makes an exception for merchants if they spell this out in writing, see s 2-205 UCC but limited to a contract for the sale of goods. Reliance on an offer may, however, bring the moment of the conclusion of the contract forward. 82 See s 130 BGB. 83 Ever since Adams v Lindsell (1818) 106 ER 250.
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also German law, as we shall see in section 1.1.2 below, but the reliance notion or offer and acceptance through conduct was also developed in this connection although it is now more fundamental in common law as we shall see. But even in civil law, from a practical point of view, it may be doubted whether the official offer and acceptance model remains intact. It has already been more generally questioned in section 1.1.4 above and is indeed more fundamentally challenged in modern contract theory, see section 1.1.6 above, which puts conduct and (detrimental) reliance at the centre and makes offer and acceptance a sub-category of it. It also means that rights and obligations may emerge and terminate at any time during the contract period. In this vein, even in terms of will theory, the other party may now often rely on what it reasonably thinks the first party meant. Even so, in civil law, the contract remains intent based. In common law, as we shall see, the situation may be different at least in professional dealings. Where in civil law contracts imply consensus, built on offer and acceptance in terms of the parties’ intent, like some common platform, it suggests congruent or overlapping desires of the parties as expressed by them. This is not much different in common law but civil law also requires a meeting of minds concerning the contractual content and each party’s contractual rights and obligations. Mere declarations or exchanges of promises in that sense are then not enough; that is the difference with common law, which here uses rather the consideration notion of a more objective formal exchange and bargain or in modern times the notion of conduct and detrimental reliance instead. It should be realised that when consensus becomes the basis of the rights and obligations of the parties in this manner, as it did in civil law, it is logical to look for the parties’ shared or common intent in every aspect of the contract: formation, interpretation, performance, defences and excuses. This may by itself suggest some measure of objectivity but it remains a problem and continues to accentuate an anthropomorphic attitude, where intent determines the binding force of contract and the contractual rights and obligations arising. Especially 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 all contracts. A more objective way of interpreting the consensus was thus called for short of concluding that most contracts might be void ab initio or could suffer from mistake as a valid defence virtually at the option of either party.84 Even in civil law, that was subsequently better handled through the reasonable reliance notion but there is still considerable tension, which does not emerge to the same extent in the common law of contract. The same personal element arises in the excuses, notably in the notion of force majeure, where in civil law the question becomes who is to blame rather than who bears the risk of one party’s inability to perform. It has already been pointed out that in modern business or corporate dealings it is all the clearer that the psychological approach to interpretation can hardly suffice, if only 84 It is perhaps not surprising that Pothier started to view mistake as the most important defect that could occur in a contract, see Evans, n 75 above at 1.1.3.1 par 17. It received at that time little interest in English law, see n 93 below, and still does not have the same importance as we shall see.
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because the person who signs the agreement is unlikely to know much of its details and merely uses its authority or power of commitment, while 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 assessment becomes more difficult. What some (successive) negotiators, who often operate in teams, really want or intended 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. At least in professional dealings, the contract text thus resumes its function as the major guide, subject to a high degree of literal interpretation, especially if meant as a roadmap or risk management tool as we have seen. Blame, or rather the lack of it, does not then enter into the excuses either unless introduced in the contract text itself. Even so, there remains substantial tension in these matters in civil law. Civil law students always ask: what did parties intend and, in the case of non-performance, who is to blame, rather than who bears the risk. But it has already been mentioned that even in civil law, non-intentional duties entered the picture in terms of disclosure and negotiation duties in the pre-contractual phase, duties of care and co-operation in the contractual (performance) phase, and duties to renegotiate in the post-contractual phase. These considerations helped to some extent to sideline the notion of consensus in a psychological sense also. Civil law may even allow 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. 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, as we have seen in section 1.1.4 above, but it was also noted before that this development in civil law is by no means at an end. Intent and reliance often remain two opposite poles, in which the former remains largely dominant. It was suggested earlier in section 1.1.6 above that a new model of contract law may be needed, more particularly in civil law, in which for professional dealings the intent-based nature of contract needs to be reconsidered more fundamentally and the emphasis needs to shift to (detrimental) reliance and risk management while relationship thinking needs to acquire much greater prominence and the notion of fault takes a backseat. This may acquire a more explicit meaning in standard terms or ultimately in the smart contract.
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. In section 1.1.6 above, it was said that especially in civil law it may be questioned whether the present anthropomorphic model still fits commercial contracts. The common law of contract is also subject to modern pressures in respect of its basic model, but this is probably true to some lesser extent in commerce and finance as it emerged exactly from commercial dealings. It was already said that the common
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law may not have much of a model but only attaches (some) legal consequences to certain fact situations which together may add up to a binding contract. At the more intellectual level, even the traditional concept of consideration and exchange and bargain is under some challenge as we shall see. It has always been difficult to explain the concept and case law concerning it, not least also academically, but the common law is largely unconcerned with deeper thought or systemic thinking in this area too and was in any event always more ad hoc and practical but probably also more circumspect. Again, it does not concern itself much with a legal model of contract formation and looks at facts, in this case exchange and bargain and will allocate certain rights and duties if proper consideration is given, or in more modern times when there was detrimental reliance, meaning that the relevant party invoking the (commercial contract) must have invested in it to claim its benefit, especially expectation damages. That makes commercial sense and is the simple line followed in this book. First, in common law, although a mere exchange of promises may be considered sufficient consideration, see the next section, the literal approach to declarations of this nature is still preferred where there is a text, at least in commerce and finance, especially in England. This approach, which, again, strictly speaking does not depend on intent and avoids the consensus concept altogether, goes back to an earlier phase in civil law when the mere exchange of such declarations also formed the basis of the contract as we have seen. In common law this formal notion of contract formation is traditionally supported by the old parol evidence rule, which eliminates in interpretation all contemporary and earlier evidence against any writing intended by the parties as a final expression of their agreement (see again the next section) and finds a counterpart in the literal interpretation of statutory instruments,85 although the contract may still be supplemented and sometimes even corrected by implying conditions as we shall also see. This is still the preferred way of handling construction or interpretation in common law, at least in professional dealings (see further the discussion in section 1.2.4 below), which were the true starting point. Indeed, the common law of contract was always more concerned with risk and its management than with intent or even the purpose of the agreement. As already noted in section 1.1.1 above, this approach is supplemented and fundamentally supported by a regard for the differences that may result from the nature of the relationship between the parties, the type of deal, and dependency and reliance notions, while equity would cut out excess. In this manner, common law may come closer than would at first appear to the normative approach to contract and its interpretation where they have obtained a foothold in civil law, in the latter especially by expanding the good faith notion; see section 1.1.7 above. Weaker parties may be protected in this manner and the contract in respect of them may even be adjusted.86 It is the area of duties of care or fiduciary duties and sets professional dealings (where there is a lesser need for protection) apart notably from consumer contracts. The resulting
85 See Lord Denning, The Discipline of the Law (London, 1979) 11ff and his comments in Bulmer v Bollinger [1974] Ch 401 and Vol 1, ch 1, s 1.3.3. 86 See Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd, n 1 above.
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relationship thinking has a long history in the common law as we have seen in section 1.1.1 above. Also otherwise, there remain considerable differences between common and civil law, not only therefore with respect to consensus and the parties’ intent in the formation and interpretation of contract. It also affects the operation of the defences against a contract’s validity, see section 1.4.2 below. They have long been noted.87 Even the excuses are differently handled in the common law of contract as we have already seen and especially in professional dealings there is less room for either, see further section 1.4.4 below. But also in consumer dealings, there is no similar emphasis on consensus or a meeting of minds and the parties’ intent relates always to the individual promises and declarations only.88 Again, it is the more objective doctrine of consideration, which is based on the notion of exchange and bargain (or sometimes the notion of sufficient reason) that still provides the main basis for the validity of contracts and their binding force in common law. Intent does not go to formation, but rather, as already noted in section 1.1.4 above, to the interpretation of the risk management provisions in the contract when clear choices have been made by the parties. In contract formation, the key remains 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 where consideration may be assumed. These mutual promises must be seriously meant,89 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 was until modern times denied altogether in common law by important American writers like Williston,90 and often it is still 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 the declarations overlap sufficiently and there is consideration whilst the formal prerequisites for the formation of the contract also exist. In modern times, this is largely encapsulated in the more formal ritual of offer and acceptance, which terminology itself only became current in common law in the course of the nineteenth century. It began to be used in England as of the 1820s, for which
87
See early Roscoe Pound, ‘Liberty of Contract’ (1909) 18 Yale Law Journal 451. Chitty, however, from the first edition of A Practical Treatise on the Law of Contracts not under Seal, 3 (1826) noted the need for mutual assent, probably under the influence of Pothier, more so after the second edition of 1834 (p 10). 89 See Dalrymple v Dalrymple (1811) 2 Hag Con 54, 105. 90 1 Williston on Contracts (Boston 1957) s 21. The highly esteemed US 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 239 F 976 (1917). In this view, it did not make the least difference whether a promisor actually intended the meaning that the law would impose on its words. Even though many might now find this an overstatement, it is very useful for a proper understanding of the common law of contract and where it comes from. It still holds true especially in the professional contract, more so perhaps than in the modern consumer contract which is more anthropomorphic. It leads to the sharper distinction, here followed, between intent or a meeting of the mind (a) in the formation of the contract, where it is not relevant, (b) in the interpretation of riskmanagement clauses when parties have made a clear choice, where it becomes relevant but only when the text is not clear or imcomplete and is even then objectivated, while (c) it may be different again in the defences and excuses. 88
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there may also have been Scottish and continental European influence as already mentioned. In commerce, it was first used in equity.91 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 on a meeting of the minds or the consensus. Again, these declarations must be intended by the party making them but that goes for each one individually. Objective 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. This 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, although there may still need to be a beginning of performance for any party to have a cause of action against the other as we shall see, especially if the aim is to claim expectation damages. To repeat, 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. Offer and acceptance language does not change this and in common law does not pretend to encompass a full legal contract formation model. It is largely directed towards establishing the time as of which an obligation arises but it is not the source of it. It has already been said that where choices are being made, they may give rise to a search for intent when they must be explained but only in an objectivated manner if the wording is not sufficiently clear, which means in the way that is understood in the international market place by the peer group. It was already said that the exchange and bargain aspect is best seen as a factual event to which the law ascribes legal force, sanctifies and enforces the resulting obligations, but only if the claimant has put his money on the table. In this view, detrimental reliance expresses the same idea, which means that without it, there will be no cause of action. That makes every sense in commerce and excludes especially expectation damages for breach of a promise without some economic input of the claimant. There may still be some recovery of cost by the latter as we shall see, but rather as a matter of negligence on the part of the defendant. At the theoretical level, the central role of exchange or bargain, supported by consideration, if only between two individual formal promises (rather than as a physical quid pro quo), leads to a different approach to interpretation or construction as we shall see further in section 1.2.4 below. There is not necessarily a common platform between the parties as in the notion of consensus of civil law.92 The emphasis is not
91 Earlier, in England, the notion of offer and acceptance was commonly used in marriage contracts to demonstrate consent, where it was naturally needed. It was, however, also known in Chancery, see the early cases of Moor v Hart (1683) 1 Vern 201 and Ayliffe v Tracey (1722) 2 P Wms 65, but it was only after Adams v Lindsell (1818) 1B&Ald 681 that it gained more general traction, also at law. It was never clearly explained where it came from (probably from equity as articulated by Lord Eldon in the previous year in Kennedy v Lee (1817) 3 Mer 441). It is well known that equity also looked at continental practices and at the ius commune for inspiration, see Vol 1, ch 1, s 1.3.1, perhaps in this connection also at the development of the offer and acceptance notion by Pothier, n 75 above. 92 cf also Catherine Valcke, ‘Contractual Interpretation at Common and Civil Law: An Exercise in Comparative Legal Rhetoric’ in JW Neyers, R Bronaugh and S Pitel (eds), Exploring Contract Law (Oxford, 2009) 77.
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therefore on what parties intended but on what they said (or made others rely on). This has a direct effect on the defences connected with the inducement of the contract. Misrepresentation, the use of pressure, or the exertion of undue influence, even mistake,93 are not directly relevant and only lead to (some) relief in equity, see the discussion in section 1.4 below. 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.94 It follows that there is no coherent idea of defences to a demand for performance, in the sense of a failure of consensus or effect on intent. Nor, as we have already seen, is there much subjectivity in the excuses where notably lack of blame does not exculpate the non-performing party unless a force majeure clause to the effect (or a change of circumstances clause) has been entered into the contract.
1.2.3 The Development of the Consideration Notion in Common Law. The Modern Alternative of Detrimental Reliance As has been shown, in common law the consideration notion still plays an important role in contract formation. It was already said that it is not always easy to explain and text books have the tendency to become convoluted once sight is lost of the 93 Indeed mistake was not at first a major issue in the common law of contract as it had become for Pothier in France, see n 84 above. Later there was influence on the common law developments also from von Savigny, but it did not lead to a concept of contract based on consensus, avoided by the failure thereof. It is sometimes said that the doctrine of consideration proved too strong, see W Swain, ‘The Changing Nature of the Doctrine of Consideration, 1750–1850’ (2005) 26 Journal of Legal History 47, 57. It also affected the attitude to interpretation, which again could not easily be based on the notion of consensus or intent either, unless the contract itself made clear choices in terms of roadmap and risk management. Of interest may in this connection also be the dwindling importance of juries in contractual issues after the begining of the nineteenth century, see also the text at n 99 below. As for mistake, a jury could technically find that there was no contract proper. As we shall see in s 1.4.1 below, equity eventually took over in a somewhat more comprehensive manner. This required the powers of the jury to be limited first, which in turn led to a sharper distinction between points of fact and points of law even in common law, the latter becoming the preserve of the judiciary, see s 1.2.3 below. A related development was the reduced influence of the forms of action which were ultimately abolished by the middle of the nineteenth Century, see also s 1.2.3 below. This allowed the equitable remedies of rescission to develop further. 94 For the contractual requirement of an agreement, see, eg, GH Treitel, The Law of Contract, 13th edn (London, 2011) ch 2 (and its heading), under strong German influence. In this sense, it may sometimes also be used in the US as in s 2-204 UCC. On the other hand, in common law, a distinction is rather made between agreements and contracts in the sense that agreements can be without consideration and are then not binding or exist only in equity (as in the creation of a trust), while contracts are either under seal or based on consideration and as such are always binding at law. In the US, 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 US, 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). In this approach, 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. It may be made by the delivery of the required performance or the making of a counter-promise. Acceptance by performance may operate as a counter-promise. 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).
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economic rationale. Historically it was used in particular to develop modern contract law out of the law of torts (the writs of assumpsit or debt) and by the middle of the eighteenth century provided 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, at least in commerce. That was done by requiring some economic balance in the exchange, at first even a measure of equivalence in the sense of there being some just bargain or price (iustum pretium).95 In this connection, it should not be forgotten that originally the English royal courts were largely concerned with land matters and sometimes with torts endangering the peace. Only gradually did other torts become actionable, ultimately even breaches of promises, but it took 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), in the common law of contract the remedies still retain a close affiliation with the law of torts from which they derive.96 The further developments of the law of contract may have been affected in this connection by the commercial law being integrated into the common law in the eighteenth century which covered also the law of torts.97 There were two other developments. First the impact of the forms of actions and their formalism and narrow application dwindled and they were abolished by the middle of the nineteenth century (although not necessarily the thinking behind them). This left more room for a more abstract concept of contract to evolve. The other development was the removal of a jury from much of contract law. The power of juries was not until that time clearly defined: the pleadings would establish the issue, judges would give directions, and a jury verdict would follow. It was difficult to overturn. As even Lord Mansfield found out, especially mercantile juries could be very unruly.98 95 See R Wooddeson, A Systematical View of the Laws of England (1792) 415. However, WS Holdsworth, History of English Law 8 (London, 1926) 17 argues that courts never attempted to adjudicate upon the adequacy of consideration. Yet, until the full development of the consideration notion, 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 requirement of consideration, which 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. 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 (Boston, MA, 1992) 536. M Horwitz, ‘History of Contract Laws’ (1974) 87 Harvard Law Review 917, 936 argues that the modern will theory as of the end of the eighteenth century dethroned the equitable idea of contract, which had favoured exchange and bargain, and accepted a market-oriented attitude, which started to allow at the same time for expectation damages and did do away with consideration altogether for negotiable instruments. The acceptance of the caveat emptor notion is here seen as a development going in the same direction, associated as it is with the operation of modern markets, which were thought to be able to determine the fairness and true value of exchanges of this nature. Yet it was already submitted that the will of the parties was never the sole or even prime factor in the common law of the professional contract and is not even so today. 96 See also n 31 above. 97 See Vol 1, ch 1, s 1.3.1. 98 Hollingworth v Tattersall (1778), see J Oldham, 1 The Mansfield Manuscripts, 332–333 (1992), and J Oldman, The Varied Life of the Self-Informing Jury (London, 2005). See further MS Arnold, ‘Law and fact in the medieval jury trial out of sight out of mind’ (1974) 18 Am J of Legal History 267 and Swain, n 93 above, referring also to Holt CJ in Ash v Ash, (1696) Holt 701 at 702 and later Butler J in Appleton v Sweetapple, 3 Doug 137 at 140 (1792).
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The means to reduce jury influence was a sharper distinction between fact and law, even in common law, the latter being reserved to the courts. Juries were thus confined to deciding points of fact only, which allowed a more abstract contract law to develop. It eventually also had its effect on the law of precedent, which equally contributed to the development of a more abstract legal environment,99 see further also Volume I, chapter 1, section 1.3.2. Again, in this evolution of contract law, first in commerce, there was never much room for the parties’ intent as the source for the binding force of contracts, 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 sufficient consideration.100 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.101 Yet after the eighteenth century, at least the exchange of mere promises could provide sufficient consideration,102 in which context the notion of equivalency or a just price was abandoned together with, as it seems, the important notion of reliance used earlier.103 The development of the purely executory contract as a contract based on an exchange of (formal) promises was thus achieved in common law.104 It left open the questions whether there should still be a commencing of performance as a signal of commitment in the consideration tradition and whether without it mere expectation damages could be claimed, that is even without any investment on the part of the claimant.105 It has already been said that in common law the more incidental approach to determining contractual rights and duties always prevented any abstract theory of intent or consensus from developing.106 Rather, in commerce, commitment or investment
99 See again n 93 above. See for the subsequent development of precedent in common law, also N Duxbury, The Nature and Authority of Precedent (CUP, 2008) and GJ Postema, ‘Law’s System: The Necessity of System in Common Law’ (2013) UNC Legal Studies Research Paper No 2324438. 100 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. 101 See Holdsworth (n 95) 45, and further also Vol 1, ch 1, s 1.1.3. 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, 2009) 50 and AS Gold, ‘Consideration and the Morality of Promising’ in ibid at 115. 102 Section 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 is sought by the promisor in exchange for his promise and is given by the promisee in exchange for that promise.’ 103 See Holdsworth (n 95) 2ff. 104 Thus Story considered the extent of the contractual obligation dependent upon the conveyance of individual desires; in the US that was also the idea of Holmes. See W Story, A Treatise of the Law of Contract not under Seal (Boston, MA, 1844) 4, and OW Holmes Jr, The Common Law, 1st edn (Boston, MA, 1881, 58th printing) 293–94. 105 It may be recalled in this connection that this was also a requirement in early French contract law, see A Esmein, Etudes sur les contrats dans le très ancien droit français (Paris, 1883), supplementing notions of exchange of promises (rather than consensus) in the natural law school; see n 64 above. 106 See eg AG Chloros, ‘Comparative Aspects of the Intention to Create Legal Relations in Contract’ (1959) 33 Tulane Law Review 606, 611, but cf also for the modern struggle with intent in the common law of contract, G McMeel, The Construction of Contracts: Interpretation, Implementation and Rectification 2nd edn (Oxford, 2011), and the search for an objective standard of intent in England in this connection.
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and risk management were the key concepts and concerns. Crucially, this also left room for a strong reawakening of the reliance notion in modern times. Reasonable or justifiable reliance on the declaration or acts of the other party, which also had to be detrimental—the notion of investment—now supplements, or may even have replaced, the more traditional emphasis on the exchange of formal promises in the consideration tradition. Reliance of this nature mostly goes together with conduct and not only declarations. This return of the equitable reliance notion in the form of promissory estoppel may be traced back to developments in the US, where, since the 1930s, the importance of detrimental reliance on an offer (or promissory estoppel) had been stressed to create contractual rights and duties besides the exchange or bargain notion,107 and is now widely accepted and may well have overtaken the consideration notion, also in England, although not the idea of investment behind it. Thus if there is a justified and detrimental 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 to seek adequate funding may be sufficient, but the mere hiring of a lawyer, for example, may not be enough. Indeed, in England, Professor Atiyah has suggested that, in order to assume the binding force of a contract, detrimental reliance and a commencing of performance is always the true key to the validity of the contract and necessary before any enforcement action can be based on it.108 The promise-based notion of contract is then abandoned altogether. This more radical proposition, which in the common law perception remains tort related, may also lead to a curtailment of expectation damages in favour of restitutionary or direct damages only. It was submitted before that this may be more appropriate, especially in professional dealings, when there is no clear breach of promise, but rather breach of other (additional) non-intentional duties within the contract, such as disclosure or co-operation duties.109 This approach has not found full acceptance in common law so far, but it shows a modern reorientation in the common law and it is useful in a transnational context.110 In the previous sections, the emphasis on conduct and reliance in this manner was already noted as the better approach, also in civil law. Offer and acceptance then become a sub-category. It is submitted that this is a development well under way in professional dealings and therefore likely to be one of the main features of transnational contract law in the professional sphere. Certainly, if there has been detrimental reliance, even more so a commencing of performance in justifiable reliance on the declarations or actions of others (taking into
107 In the US, the modern reliance doctrine may be traced to LL Fuller and WR Perdue, ‘The Reliance Interests in Contract Damages’ (1936) 46 Yale Law Journal 52, 73. 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. 108 PS Atiyah, ‘Contracts, Promises and the Law of Obligations’ (1978) LQR 193: see also PS Atiyah, The Rise and Fall of Freedom of Contract (Oxford, 1979) reviewed by C Fried in (1980) 93 Harvard Law Review 1858 and PS Atiyah, Promises, Morals and Law (Oxford, 1981) 202–15, critically reviewed by J Raz in (1982) 95 Harvard Law Review 916. The idea here is indeed that promising itself is not a creation of the law but that the law will enforce a promise if the counterparty has effectively committed itself—the notion of detriment or investment—which is then ultimately translated in the measure of (expectation) damages upon breach. 109 See also the comment in n 31. 110 See also n 30 above and accompanying text.
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account also proper relationship thinking), it may be right to assume a binding legal relationship. Still the offer itself continues to play an important role, also in the reliance theory. It is foremost a question of initiative, but as a model, the ritual of offer and acceptance is becoming out of date, also in common law, while the more formal notion of consideration becomes less relevant as well. All is reliance, investment and risk management, at least in commerce and finance, but it takes time before this is fully realised and properly expressed in legal texts and case law. In the meantime, the UCC in the US to some extent follows 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 commencing of performance (see sections 2-204 and 2-206 UCC). This was achieved at the expense of traditional consideration requirement, the lack of which under section 2-205 UCC also no longer stands in the way 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 no longer makes reference to consideration (except indirectly in section 2-205), the notion is not abandoned, only de-emphasised. In particular, it does not mean that contracting in the US is becoming mere intent based or purely consensual, see also the reference to the notion of ‘agreement’ in n 94 above. In England, since 1975, the abolition of the consideration notion altogether has been advocated by the Law Commission (Working Paper No 61).111 But again, it is important to appreciate in this connection that this would do away with the inconveniences of the doctrine, but would not replace the notion of an exchange of promises or bargain with the continental idea of a consensus or a meeting of minds leading to a more comprehensive interpretation technique in that manner.112 The 1980 CISG (Vienna Convention) largely accepts the civil law notion of intent but uses the formal offer and acceptance language of common law.113 It notably does not require consideration (or causa)114 but still allows offers to be withdrawn before an acceptance is dispatched unless the offeree acted in reasonable reliance upon the offer, in which connection it does not dwell on pre-contractual negotiation duties (Article 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, and the US was willing to do so when ratifying the 1980 Vienna Convention. This is clearly the trend, at least in international sales, although again it is not necessarily the prelude to acceptance
111 See also Lord Wright, ‘Ought the Doctrine of Consideration to be Abolished?’ (1936) 49 Harvard Law Review 1225; AG Chloros, ‘The Doctrine of Consideration and the Reform of the Law of Contract’ (1968) 17 ICLQ 137; and PS Atiyah, ‘Consideration: A Restatement’ in Essays on Contract (Oxford, 1986) 179. 112 See the early Dalrymple case, n 89 above. 113 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). 114 It does not appear that it may be reintroduced through application of a national law pursuant to applicable conflicts 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.
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of an intent-based and consensual approach and contract model elsewhere. It could also mean a more staunch advance of the conduct and (detrimental) reliance notion. The requirements of consideration are also absent from the UNIDROIT Principles for International Commercial Contracts, from the PECL and from the DCFR, which, as already mentioned, still put the consensus of the parties at the centre ‘to be determined from [each] party’s statements or conduct as reasonably understood by the other party’ (Article II-4:102). These models follow the offer and acceptance language of the Vienna Convention, which historically derived from civil law. Again, the direction shown here is towards the intent-based concept of contracting: see also its Article 8. There is some reliance language but no further elucidation of the concept (or of proper relationship thinking in this context). The key notion remains intent in the anthropomorphic nineteenth century Continental European fashion. It may well be that in international transactions the more traditional requirements of consideration have lapsed altogether, even in contracts chosen by the parties to be the law of a common law country, but again this may be limited to its inconveniences, notably offers not being binding and releases or price reductions not being legally enforceable (see further section 1.2.5 below) and does not necessarily mean its replacement by the notion of intent and consensus, it could be detrimental reliance instead. 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 in international commercial contracts, at least if it leads to an invalid agreement while there are no other main 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.115 Again, intent may then be considered the more dominant notion, but it could also have been (detrimental) reliance. The future direction is not clear, either in terms of a consensus and an intent-based approach or in terms of a reliance-, investment-, and risk management-based approach, but especially in international commerce and finance, it was submitted, the emphasis is likely to be on these latter features. It may be different for consumer contracts where anthropomorphic notions of intent and consensus may remain more vivid, particularly in the civil law thinking on contract, although it may even fit in the common law concerning consumer dealings. But proper relationship thinking still sets professional dealings apart and a different approach is likely to be retained in the common law. It has been argued that it would also be the starting point for the transnationalisation of contract law in the professional sphere.116
115 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 Parties of English Law in a Civil Law Contract in Commerce and Finance Truly Mean?’ in M Andenas and D Fairgrieve (eds), Tom Bingham and the Transformation of the Law: A Liber Amicorum (Oxford, 2009) 619. 116 As a curiosity it may be noted that in the DCFR there is one reference to detrimental reliance, unexpectedly in the definition of the good faith notion in s I-1:103, see n 164 below for the text.
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1.2.4 Contracts: Construction and Remedies in Civil and Common Law. The Parol Evidence Rule As we have seen, in common law the ambivalence towards the notion of contractual intent prevented a more conceptual approach of consensus and failures of consensus and therefore of contractual validity from developing. There is no single concept. Rather, it was noted, the common law reacts to certain facts as exchange and bargain and then attaches legal consequences when there is consideration or in more modern times detrimental reliance. It was noted also that an important consequence is that there is no clear-cut approach to contract interpretation or construction either and it remains more casuistic. An important aspect is that although lack of disclosure, 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 the contract, 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 primarily seen as defences against a request for performance—not as issues of contractual validity per se—and result in a fractured system of relief, largely depending on factual situations, and may notably not lead to voidness with automatic restitution or title return under a sales agreement considered to have failed. It was already said that 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, for example where there was misrepresentation or abuse in the demands for enforcement, although it may sometimes also be so in France. Fair dealing may lead here also to notions of unjust enrichment and restitution remedies.117 As a consequence, not only the approach to validity and interpretation, but also the system of common law remedies is different from civil law; they are more incidental, based on the practical requirements of the case at hand and may not be purely contractual—again it would suggest that contracting is still a narrower concept in common law. Analytically it may be best to divide the discussion on the common law of contract construction into three parts as already suggested before: (a) formation issues in contract and formation defects and problems (defences) being separately considered, construction not being intent based in that context; (b) risk management and distribution issues, construction in this context being based on an interpretation of what parties intended, but being literal when clearly expressed in a text or otherwise determined by industry perceptions; and (c) the excuses of performance, these issues again being separately considered and not on the basis merely of anthropomorphic and personal notions of blame or fault, which are also intent related. 117 Thus 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 was already said that this 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 n 31 above.
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Again, in common law, there is no single concept in construction in contract law and there is ambivalence with regard to the notion of intent. It suggests, nevertheless, that in particular under (b) in terms of risk management, notions of intent remain important under the common law of contract, but in commercial dealings they also assume proper relationship thinking. It means that the approach is different and not primarily psychological. Thus the contract text, if a roadmap and risk management tool, is given a strict interpretation in professional dealings even if lack of clarity and gaps may still be dealt with through implied conditions. Somewhat inconsistently, construction would appear to swing here from the objective or literal approach to the subjective or psychological approach in gap filling, but these implied terms are also more objectively handled, especially when reasonableness, ways of dealing, or custom are invoked in this manner. While it has allowed ‘reasonable man’ considerations to be implied (assuming always that parties have not expressed themselves better), further tied to the type of business concerned and its perceptions, this is to avoid fantasies about what the parties might have thought or intended.118 To repeat, the more limited role of intent in contract formation and interpretation means that when it comes to contract implementation, defences and excuses are limited accordingly except, in the case of the latter when the contract itself deals with them and defines them. It was already said in section 1.1.4 above that, arguments such as: ‘I did not mean it, I cannot help it, I am not to blame, it is not my fault’ do not go far in the common law of contract concerning professional dealings. It is more compatible with the anthropomorphic consumer law ethos in civil law. Again, there may still be room for implied terms if there are gaps in the contract text or if it does not state enough to have meaning. In extreme cases, it may then even make allowance for notions of force majeure or hardship in the case of changed circumstances, especially in duration contracts, but it remains exceptional and they will only be deemed implied in pressing cases.119 It has already been noted in section 1.1.7 above—see further section 1.3.7 below— that this more modern use of implied terms of reasonableness and fairness120 may compare with what in civil law is the normative approach to the validity and interpretation of contracts, often operating behind the good faith notion. So do the reliance and dependency concepts, which in proper cases have a similar effect in common law. Still, implying conditions remains a narrow facility in common law.121 The approach to 118 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 largely intact and remains the starting point in contract, see s 1.1.6 above at n 47. In Attorney General of Belize v Belize Telecom Ltd [2009] 1 WLR 1988, which deals more properly with implied conditions, the emphasis (again per Lord Hoffmann) was on what the instrument meant to the reasonable addressee. The attitude remained, however, also that if parties did not expressly provide for an alternative, the loss still lies where it falls. Nothing is to be adjusted. Only if the contract must mean some more in order to make sense may a term be implied. 119 See Taylor v Caldwell (1863) 3 B&S 826, (1863) 32 LJQB 164. 120 See for English law Bankline v Arthur Capel [1918] AC 435 and Metropolitan Water Board v Dick [1918] AC 119. 121 Implied terms do not operate as a general counterbalance or independent source of contractual rights and duties or amount to a validity test of the contract, see the House of Lords in 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.
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intent, the impact of relationship thinking, and the literal interpretation technique of contract texts, all suggest a more business-like attitude and avoid especially the danger in civil law that implied consumer protections waft over into the professional sphere on the tails of contract types. The English attitude was highlighted in England by Lord Reid:122 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 and that still allows some room for flexibility, but the old parol evidence rule underpins here also a restrictive and objective attitude.123 It does not allow any contradictory contemporary or earlier evidence (and in the opinion of 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, 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.124 In common law, there is also little room at the theoretical level for the introduction of more general equitable principles to balance the contractual autonomy.125 It has already been pointed out that equity itself presents in the common law system a fairly precise set of incidental remedial rules and is certainly not a general source of supplementary law as good faith or reasonableness and fairness increasingly are in civil law. It limits itself generally to averting excess in individual cases only. As discussed in Volume 1, chapter 1, section 1.3.1, equity is no general counterbalance or independent source of rights and duties and does not amount to a test of the validity of the contract or a facilitator of the interpretation process.126 Thus the normative approach to contract interpretation, implying a balancing of intent by notions of good faith, remains largely a civil law facility and does not find its parallel in equity unless there is clear excess or abuse, but rather in the common law itself in the different ways here explained: the nature of the relationship of the parties, dependency, implied terms, and especially reliance or sometimes the acceptance of extra-contractual duties derived from other autonomous sources of law.
122
Davis Contractors v Farnham [1956] 2 All ER 145. It is now mostly seen as a rule of construction and not one of evidence. 124 Some of this may in England derive from the Karen Oltmann case [1976] 2 Lloyd’s Rep 708 (QB). Art 8 CISG 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) PECL, which also allows a contract to be proved by any means, including witnesses, see equally DCFR, Art II-1:106(1). 125 The doctrine of consideration may sometimes still do, see also text at n 134 below. 126 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. 123
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In England, following relationship thinking, notions of protection of weaker parties, especially against onerous terms, thus gained ground early.127 It fitted and was done on the basis of a better developed framework, notably of fiduciary duties, which made the proper distinctions between types of parties.128 There may also be supporting customary law, which in the civil law of contract is only accepted as a source of law in the interpretation (in contract especially behind the notion of good faith.
1.2.5 The Practical Significance of the Consideration Requirement in Common Law In common law, the concept of consideration is sometimes thought to highlight and to give expression to the dynamic role of contract and to the continuing ability of the contracting parties to signal their intentions and plan their business or life without (too much) interference from other notions, principles or imperatives.129 It is then closely aligned with the offer and acceptance process but even then not with notions of consensus as the basis for the binding force of the contract and contractual liability. As everywhere else, party autonomy (and more in particular the roadmap and division of risk between the parties that it implies) is an important aspect of contracting, especially in contracts between professionals, more clearly in duration contracts, but as we have seen the initiative of the parties is not or no longer always the only source of the binding force of contracts and of their content and the parties’ rights and duties are not merely determined by party autonomy alone, which in any event should not be viewed subjectively: see particularly the discussion in section 1.1.4 above. As noted before, there may now be pre-contractual disclosure and negotiation duties, contractual co-operation duties or duties of care, and post-contractual renegotiation duties, none of which can be reduced to the parties’ intent proper. There are other supplementary sources of contractual rights and obligations. Reliance, dependency, implied terms and the nature of the relationship have already been mentioned. In common law, they operate besides the consideration requirement although the notion of consideration may itself sometimes also stand for good sense, even if not necessarily amounting to good faith and similar objective notions of contracting in a civil law sense as we have seen.
127 See Parker v Smith Eastern Railway Co [1877] 2 CDP 416 and Hood v Anchor Line (Henderson Brothers) Ltd [1918] AC 837. 128 In England in more recent times, consumer protections have mostly been left to statutory intervention but see still 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. 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 if it had developed a better relationship thinking approach. This also applies to the use of standard terms in contract; only in Switzerland is it still felt to be satisfactorily dealt with under general legal principles, including the normative approach to interpretation. 129 See C Fried, Contract as Promise: A Theory of Contractual Obligation (Cambridge, MA, 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.
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It may be repeated in this connection that in civil law party autonomy as such is no longer an independent source of law. In codification theory it is the state that allows it to operate but only in the manner it prescribes even if the good faith notion may now help to interpret, supplement and sometimes even vary the contractual terms while reintroducing the traditional sources of law which codification had meant to eject. Although in modern times accompanied and perhaps outflanked by the detrimental reliance notion as we have seen, in common law, there survives the idea that in matters of contract formation and enforceability only consideration matters.130 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 are sufficiently similar and congruous in a formal sense). This continues to be the fundamental importance of the consideration requirement and still one of the main conceptual differences from civil law, although in modern times consideration itself is often of little consequence. To put it another way: normally it is there, why otherwise contract? Few are in the business of making gifts even if it is true that co-operation rather than exchange may also be the objective of contracting. Still, in the common law of the professional contract it would be assumed to be for commercial gain. An important point to recall in this connection is that the notion of consideration in the traditional sense no longer requires equivalence between the value of the mutual promises or a fair price as we have seen. It is now left entirely to the parties to determine what is proper consideration and it can thus easily be provided. In the US 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); it may not be illusory or fictitious; often it is no more than the exchange of promises of whatever value, although there must be some. If we translate this in detrimental reliance or a beginning of contractual performance on the part of the claimant, the investment in the contract need not be considerable before a cause if action arises but it must be real. 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 having it witnessed by two persons. 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 US, in states like New York and California, this circumvention route was eventually blocked—see also section 2-203 UCC—but not in England. However, there are still a number of practical consequences that cannot be ignored. The requirement of consideration remains particularly relevant in that offers without consideration of the offeree are not legally binding until validly accepted. Again, detrimental reliance by the offeree may cure the problem.131 Other examples of the residual importance of consideration are in contractual amendments. Although they can now 130
See R Unger, ‘Intent to Create Legal Relationships’ (1956) 19 MLR 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. See for the situation in the US, MA Eisenberg, ‘The Revocation of Offers’ [2004] Wisconsin Law Review 271. 131
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be freely entered into without giving additional consideration, that is not necessarily so if a discharge, release, rescission or novation is intended. It follows that 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 project.132 Surety contracts or guarantees may also still fail for lack of consideration, as may contracts that impose only a unilateral obligation, such as those that reward services after performance or where a contract debtor is given the option not to perform. 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. Contracts to perform a moral or religious duty, such as refraining from smoking or going to church, may also fail for lack of consideration even if money is offered. The moral or religious duty itself is not then considered proper counter-value. 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 to give 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 contract operating besides or completing modern notions of offer and acceptance has sometimes been compared to the civil law notion of causa. It may be that both are more objective notions but it should be doubted whether there is here a true analogy. The civil law notion of causa has several meanings (cf Articles 1108, 1131 and 1133 of the French Civil Code (old CC)) but requires a contract essentially to make some sense, be rational, be seriously intended, and have some meaning. We have already seen that originally it was primarily meant to overcome formalism although it 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.133 That seems to bring it closer to the consideration requirement in some of its earlier 132 See also M Chen-Wishart, ‘Consideration: Practical Benefit and the Emperor’s New Clothes’ in J Beatson and D Friedmann, Good Faith and Fault in Contract Law (Oxford, 1995) 123. 133 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 to be 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 such as abuse or exploitation. That is also the gist of German case law under s 138(2) BGB.
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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 also be similar, but there are increasingly other tools available to make adjustments, such as 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 Dutch Civil Code of 1992 and earlier the German Civil Code (BGB) of 1900. The normative contract interpretation or good faith facility discussed above in section 1.1.6 can now cover the same ground if necessary. In civil law countries that retained the notion, notably France, it was used mainly to avoid contracts that were clearly immoral or that concerned gambling, but even in France the requirement was dropped after much debate in the revision of the law of contract in 2016. It always stood for a 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 of 1992. In any event, it has already been noted that the Dutch CC no longer uses causa language and limits itself to the notion of illegality in this connection. However, as just mentioned, French law in particular maintained the notion, which therefore retained residual importance until 2016, possibly also because the notion of good faith was 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, while in common law, the notion of exchange and bargain with the consideration requirement became basic for the formation of all contracts (except if under seal). Although the notion of the causa may well have had an early influence in England and may have contributed there to the consideration requirement in its emphasis on circumstance, seriousness and reasons for a promise,134 in civil law the notion of causa never acquired anything near the central role consideration did in the common law of contract and these two concepts should therefore not be equated as they sometimes were in legal scholarship. Finally, a brief further comment on the history of these concepts of consideration and causa may be useful. It confirms among other things that they have by no means the same significance or origin. In England, the doctrine of consideration was first formulated within the development of the writ of indebitatus assumpsit, as we have seen, 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.135 The notion of causa in civil law developed, on the other hand, in the ius commune, which under scholastic influence looked for a cause in all legal acts. It is therefore much
134 See AWB Simpson, A History of the Common Law of Contract: The Rise of the Action of Assumpsit (Oxford, 1975) 199. 135 It was virtually abandoned by Lord Mansfield in the eighteenth century in favour of a much more continental approach, as we have already seen, but it did not persist: see n 101 above.
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older than the notion of consideration and believed to have first been formulated as a general contractual requirement in the fourteenth century by Baldus.136 It was combined with his then new view on the binding effect of the promise, which was itself inspired by the requirements of commercial practice and Canon law as discussed above.137 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’ interests, as was indeed also notable in the early consideration requirement in common law as we have seen. Grotius, while developing the consensus notion, retained the notion of causa, requiring a reasonable cause for a contract to be binding.138 It also remained popular in eighteenth-century France.139 From there it entered the French CC (Articles 1108, 1131 and 1133) and continued to be strongly defended by more modern French authors such as Capitant.140 French law required 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), which required a valid cause only at the time of the conclusion of the contract.141 Again, corrections of this sort to the parties’ intent may in civil law now increasingly be 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 end of the nineteenth century, the causa requirement was no longer considered necessary by German scholars. They increasingly depended on will theories rather than on internal contractual logic or virtue. To repeat, the will then operated only by state fiat, subject to the requirements of the codification while party autonomy was no longer an autonomous source of law. In these circumstances, the concept of causa lost much of its meaning and need and it was no longer retained in the 136 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. 137 See s 1.2.1 above. 138 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 (Oxford, 1991) 162ff. A well-known protagonist of the will was von Savigny, 3 System des heutigen römischen Rechts (Berlin, 1840) 258, against R von Jhering, Zweck im Recht, 3rd edn (Leipzig, 1898), who continued to emphasise the purposes for which people contract and the reasons the objective law enforces their commitments, see also n 24 above. L Duguit in France followed but went further: Les transformations générales du droit privé depuis le Code Napoléon, 2nd edn (Paris, 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. 139 See Pothier, Traité des obligations, no 42, who limited it to an ‘honest cause’. 140 H Capitant, De la cause des obligations (Paris, 1928). M Planiol, Traité elémentaire de droit civil 2 (Paris, 1949) 291 proved critical of the cause concept, however. 141 See HR, 6 January 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 [1937] NJ 433. In the Netherlands, the cause notion was particularly 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] (Leiden, 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 phrased in terms of illegality). 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 (Dordrecht, 1998) 239.
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German BGB of 1900, while public order concerns with the contract were expressed differently, primarily through notions of invalidity or illegality in more specific cases. Additionally, the good faith notion in contract was increasingly used to introduce normative and moral elements at least in private (consumer) dealings. As just mentioned, even the French did do away with the concept in 2016 although the Belgians plan to retain it in the present revision of their Civil Code. The fact that fairness notions are less accepted as correctives in the common law of the commercial contract and in some civil law countries may have favoured the survival of the more objective consideration doctrine in countries of the common law and the more objective causa notion in countries like France, but in different ways: the consideration requirement was used to keep out these more abstract notions of fairness and the causa as a way to introduce them. 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, more particularly in civil law, although in the end it has always proved an impractical criterion for contract validity or adjustment.142 The above 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 custom or general principle of a mandatory nature expanding on such principles. It could also be achieved through the notion of good faith, which, as we have seen,143 in professional dealings may now often substitute 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 otherwise of the transnational order itself. Note in this connection, however, also Article II-7:301 DCFR, which only refers back to the mandatory laws of EU Member States. It was suggested before that it would be clearer to recognise these traditional sources of law as operating directly in the transnational commercial and financial legal order and not merely behind the facade of good faith in interpretation of local laws and contract only, and to determine their hierarchy; see Volume 1, chapter 1, section 1.4.14.
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 may still have to be verified. As far as directors or managers are concerned, particularly in the corporate sphere they may operate outside their authority or ultra vires, but it has long been established 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 assuming there are no obvious reasons to doubt it. 142 143
See, eg, O Schachter, ‘Just Prices in World Markets’ (1975) 69 AJIL 101. See Vol 1, ch 1, s 1.4.3.
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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.144 However, at the same time this posed the question of the legality of all payments made to local authorities under similar contracts. In England, this subsequently gave rise to much litigation and many restitution claims where local authorities had already collected under these swaps. The argument of ultra vires was also used in the US 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 different and one has to look at the powers and capacity of acting trustees but 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 as owners of the trust fund at law. It is relevant, however, in terms of their own capacity as natural or legal persons. Especially in the latter case, ultra vires arguments may no longer apply either for the reasons just mentioned. Lack of capacity should be clearly 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 cannot therefore transfer valid title. That goes for all non-owners of assets, although buyers may be protected because of their bona fides, at least if there is delivery, which is especially relevant in respect of chattels in civil law. That will not normally cover lack of capacity to contract for a sale: it is a different issue, see for the consequences 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 required until 1980 all contracts with a value in excess of 50 French francs to be expressed in writing. The amount is now set by decree and can therefore be more easily updated. 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, but never applied to commercial contracts. Even in non-commercial contracts, its impact has been reduced in France by allowing a beginning of written evidence to be sufficient. Also recordings are 144
Hazell v Hammersmith and Fulham London Borough Council and ors [1991] 1 All ER 545.
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now accepted as sufficient evidence of a contract with a value in excess of the required amount. 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 English Act dates from 1677 and requires a written document in a number of cases. The most important ones 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 US, under Article 2 of the UCC (section 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. 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. The requirement of a document for a sales contract in respect of real estate is fairly common on the other hand and has now also been introduced in the Netherlands in 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, still 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 is commonly considered to guard against light-heartedness but may 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 of intangible assets. This is so in the Netherlands and in France. Equitable assignments in England do not, and it goes for all assignments in the US (except in the case of an assignment under Article 9 where non-possessory collateral must be described unless there are other forms of control, section 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 what is 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 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, to be aware of the different possibilities.
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1.2.9 Other Aspects of Contractual Validity: Definiteness As to the requirement of definiteness, traditionally it may be said that most c ontract laws require some specificity as to a contract’s object. Even French law after the 2016 amendments retains the requirement explicitly, Articles 1114 and 1128(3) new. 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 (the proprietary aspect of a sale therefore), it has a much more important role and translates there in the requirement (or not) of identification and specificity of the underlying asset, which may render ineffective all transfers of assets which are future or appear in bulk (or both). It also raises the issue of sufficient disposition rights in them: see the discussions in chapter 2 below. Under Article 2 UCC in the US, 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 enforcement is limited by what is said, while 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 or CISG 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 CISG also suggests other material elements, such as payment, quality, and 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.145 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, therefore again on the proprietary aspects of the sale. Indeed this then 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 identification and specificity requirements are not of a similarly important nature, while under more modern property law, classes of assets may now also be transferred and 145 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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individual assets need no longer be identified, although especially in civil law countries, this may remain exceptional and therefore seriously problematic, see chapter 2, section 1.1.3 below.
1.3 The Normative Interpretation Technique in Practice: The Civil Law Notion of Good Faith, the Common Law Alternatives, Liberal Interpretation and the Role of Other Sources of Private Law 1.3.1 The Modern Normative Approach and the Concept of Dynamic Contract Law Interpretation or the notion of contractual construction has already been mentioned several times before and modern contract theory, which has a considerable bearing on the subject, was introduced in section 1.1.5 above. The more modern approach is in civil law countries sometimes also referred to as the normative interpretation technique (see also section 1.1.7 above), then mostly associated with the operation of good faith in contract.146 In that context, it may acquire a special meaning or significance. Good faith may then no longer be the mere opposite of bad faith, as we have seen but becomes largely an interpretation technique, at least in the commercial sphere, although there remains much confusion on the subject (see, eg, Article I.-1:103 cf Article III.-1:103 DCFR, and further section 1.6.4 below). Following the discussion of the modern civil and common law approaches to contract and their development in the previous sections, this important subject now needs to be revisited in some greater detail. In the codification countries of the civil law, in modern times, it poses more
146 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 or purchaser in the ordinary course of business of commoditised products might be able to ignore upon a sale and purchase: see s 9-320 UCC. There it is largely a question of knowledge. That is also relevant for the concept of the holder in due course of bills of exchange or promissory notes. In these situations, it concerns the important issue of transactional and payment finality, which is a proprietary issue; see also the discussion in ch 2, ss 1.4.5ff below. Like in the case of contractual good faith, one question remains whether bona fides of a transferee or payee in this regard is of a more subjective or objective nature. In other words: may buyers depend on their lack of knowledge or is what they 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 buyers, at least not in real estate transactions. They have constructive notice, but it may be notably different for chattels and intangible assets under Art 9 UCC, where there is no search duty for buyers in the ordinary course of business in respect of filed charges or liens. 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 adverse interests unless it amounts to abuse of right or fraud. Again, it is the idea of transactional and payment finality, but it is a newer concept that has not yet found more general expression, even by G Gilmore, ‘The Commercial Doctrine of Good Faith Purchase’ (1957) 63 Yale Law Journal 1057. 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. As we shall see in ch 2, acquisitive prescription has no significance in common law countries.
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particularly (but not only) the question of the relevance of other (competing) sources of law in business transactions, perhaps especially so at the transnational level (see Volume 1, chapter 1, section 1.4.3), a subject which the modern common law cannot truly avoid either. All contracts, like all other legal relationships, need a measure of interpretation, whether they are informally or formally expressed. In contract, 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. However, even if there are declarations or there is a text, words by themselves may not be clear147 and in any event derive their true meaning from their context or, in the case of contracts, from the types or nature of the parties, from their objectives, or type of dealings, and from the environment in which they mean to operate; in this book it leads to a different contract law for consumer and professional transactions. That is relationship thinking. In day-to-day life, the determination of the rights and duties of the parties under the contract becomes the prime issue and the progression of the contract until its natural end 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 or should be the exception, much to be avoided, and rather suggests a contract’s failure. It only provides the ultimate test in terms of allocation of a contract’s consequences which was already earlier identified as an imperfect art. It cannot be the sole object or even prime objective of the law of contract, which is above all to make life easier and better in all of our daily endeavours through co-operation rather than conflict. In international transactions, conflicts should not derive merely from differences in local laws either, unless fundamental policies are involved, which are in any event likely to become more uniform in globalising professional dealings.148 How much interpretational freedom judges or even arbitrators have when applying rules to factual situation, whilst potentially recasting them, was earlier identified as an institutional and in many countries, for the judges, even a constitutional issue: see further the discussion in section 1.3.5 below. This freedom cannot be unlimited but in the normative approach has acquired a different dimension because of ever faster social and economic change, although arbitrators in particular remain here primarily dependent on the representations or submissions of the parties; they are not judges or authorised spokespersons for any law unless perhaps the public interest becomes seriously engaged (see Volume I, chapter 2, section 1.1.10). In practice, the text of the
147 A concern also well known in the US, see Justice Traynor in Pacific Gas & Electric v GW Thomas Drayage & Rigging Co 442 P2d 641 (Cal 1968). 148 This is an important and contentious subject that begins to distinguish between the law in action and the law in litigation: see for this discussion Vol 1, ch 1, s 1.4.17. It means that law, at least if it is not absolutely mandatory as a governmental command or public order requirement, is default rule (or directory law) and as such only guidance and even in litigation is likely to be 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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agreement but also the offer and acceptance that precede it and, in a more modern approach, the broader notion of conduct and (detrimental) reliance will be considered first and foremost, but it must now also be accepted that other more objective considerations may enter and expand or ultimately even correct the original intent, promises or expectations. To repeat, especially in transnational commerce and finance, other sources of law are to be considered in this regards as there are fundamental principle, custom and practices, treaty law (if existing), general principle besides party autonomy. Other considerations may be pressing notions of justice, social peace and efficiency, it was already said several times also. There is also public policy. We have seen that these more objective notions impose now potentially pre-contractual disclosure and negotiation duties, contractual co-operation duties, and post-contractual renegotiation duties, there may be others, even if perhaps they are less urgent in professional dealings; again that is the consequence of relationship thinking. Thus there are or may be important non-intentional/non-consensual or objective considerations in contract, its formation and operation, see section 1.1.4 above. In this connection, it has also been noted that even the parties’ autonomy, although a central building block, both in contract and movable property (see for a summary also Volume 1, chapter 1, section 1.1.7) is likely to be explained at least in modern transnational law or the modern lex mercatoria in a more independent or objective manner. It was already mentioned that this may become clearer especially in the corporate professional sphere where many people or teams are involved and the existence of psychological intent in terms of the parties’ consensus was always less real. It was submitted that transnationally, this more objective approach to party autonomy may be especially important as it enhances its status and legitimacy as an independent source of law and eliminates the earlier anthropomorphic features and excessive governmental concern about their manifestation, leading in civil law to party autonomy having lost its independence and its operation nationally having become subject to government licence in the codes. It should be recalled in this connection that in pre-codification times, there was no need for such licence. The limit was only in public policy, in those days expressed in terms of justa causa, see section 1.2.6 above. It 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 even absolutely fixed at the time of acceptance of an offer. It was said, however, that at least in professional duration contracts, the contract text is likely to be interpreted literally and that the contractual rights and duties are often defined by risk acceptance in respect of developing eventualities within the scope of the contract unless this becomes manifestly unreasonable taking properly into account relationship thinking. Defences and excuses also become objective and are limited accordingly. The ascertainable objective purpose of the agreement may also play a role in this connection, more particularly the idea behind purposive and teleological interpretation. It has already been posited several times that a more objective concept of good faith may increasingly be apt to express and support similar notions or attitudes, especially in civil law, where good faith then stands for a liberal interpretation technique reintroducing all traditional sources of law, in particular fundamental and
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general principle, custom and practices, at least in the context of interpretation, and is then not merely the opposite of bad faith, consideration of justice, social peace and efficiency also enter. Importantly, proper relationship thinking also becomes part of it. Here Article I.-1:103(1) DCFR, while referring to the relationship between the parties may be of interest, but it is relevant only in connection with its narrow notion of good faith, still as the opposite of bad faith and the requirement of openness of parties in their dealings. Public policy or order should remain separate although are often also identified with this good faith or normative approach, but it is then no longer strictly private law. It may still be national, even in transnational relationships to the extent they come in conduct and effect on shore in the particular country, see further the discussion in Volume 1, chapter 1, section 2.2.6 following. An altogether more modern model of contract was proposed—see section 1.1.6 above—which generally puts the emphasis on justified expectations determined by conduct, detrimental reliance or a commencing of performance, duties of care and co-operation, of disclosure where appropriate and necessary, of investigation and loyalty, sometimes of renegotiation, and on what objectively can be marked as the contract’s purpose. Again, it should immediately be added that in professional dealings the emphasis is likely to be on roadmap, risk distribution and management, and efficiency, including a large degree of risk acceptance of subsequent external events unless becoming manifestly unreasonable for the professional debtor in his business overall. In this connection in civil law, good faith, once properly understood, may also require a considerable degree of literal interpretation of the contractual text. Again, this was earlier identified as a typical expression of relationship thinking.149 As we have seen in sections 1.1.5 and 1.1.6 above, modern contract theory increasingly supports this and maintains as a consequence a dynamic concept of contract law, which then also becomes the modern test in litigation, supported in civil law by the normative interpretation technique.150 It was submitted that this insight is of fundamental importance in transnational dealings between professionals, therefore in the modern lex mercatoria, and may go 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 or public policy and public order considerations.151 In civil law, the development of the good faith concept has here proven to be of great importance, but it has not resolved these issues and, as we shall see, there is hardly any unanimity on what it stands for. The introduction of an altogether dynamic notion of contract, which would be its focus, itself remains contentious, especially in Europe, also in the common law of the English variety, to which case law testifies.
149
See n 4 above for the situation in civil law countries. In n 43 above, it was 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 more common in the positivist tradition. Extralegal objectives, not only as urgent moral, but also as sociological or economic considerations, may then 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 also in s 1.3.4 below, this does not then always mean the moral high ground per se and good faith interpretation can be entirely pragmatic or common sensical. 151 They were previously discussed also in connection with statutory interpretation in Vol 1, ch 1, s 1.3.3. 150
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1.3.2 Roman Law, Ius Commune, Nineteenth-century Thinking, and the Modern Revival of Multiple Sources of Contract Law in Civil Law Behind the Good Faith Notion It would appear that Roman law and the ius commune did not develop a coherent approach to contract interpretation in this (or any other) connection (see also the discussion in Volume I, chapter 1, section 1.2.13), although as we have seen, it accepted many sources of law and also managed to develop a more general notion of contract. As far as interpretation was concerned, in the course of time it abandoned a restrictive construction of the wording of the contract in favour of greater flexibility, 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 no fundamental new beginning, although it started to focus also on the role of the aequitas.152 This may still 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,153 which led to interpretation in a more subjective manner, as we have seen, in which consensus of the parties and the moment of contract formation moved to the centre and offer and acceptance became the key. In its focus on the creative force of the individual, will theories encouraged in this manner the anthropomorphic attitude to contract and all other forms of co-operation, even though the notion of consensus implied at least to some extent a joint will, which was then perhaps more objective and came, as we have seen, eventually also to include a feature of reliance on what a party could truly believe the other’s intention was. All the same, the emphasis in contract interpretation was on finding the presumed intent of the parties as crystallised at the moment of the formation of the contract, which was connected to the moment of the formal acceptance of the offer. It has already been said that corporate activity always sat uneasily with this emphasis on the will in an anthropomorphic sense. Moreover, more objective notions of conduct 152 See for this potential supplementation of the parties’ rights and duties by notions of fairness in the ius commune R Zimmermann, The Law of Obligations (Boston, MA, 1992) 548, 621ff and 807. 153 See n 26 above. It has already been noted that the subjective interpretation technique was in its consequences untenable, and was from the first tempered by a more literal interpretation based on declarations. Hence 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, at times, 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 while in cases of doubt or incompleteness even in the declaration or literal interpretation method, there would still be a search for the parties’ true intent. It was later followed by a more objective or normative approach to interpretation of the contractual rights and obligations of the parties, as we have seen. It meant an objectivity of a different sort, much guided by the reliance and good faith concept in civil law as we shall see. Note for the more objective as against subjective notion of contract also n 38 above and accompanying text. Traditional common law also shows these problems: 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 rather 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 clearly proved undesirable and was balanced by the reasonable person approach, dfifferent for different trades, but it only suggests that it has never been easy to find a single more convincing approach to interpretation anywhere. Ultimately in common law, traditional pragmatism continued to prevail in an atmosphere of restraint and caution. In business, there was no tendency towards an approximation of consumer protection.
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and reliance, dependency, justified expectations, duties of disclosure, co-operation and renegotiation, and the increasing emphasis on the nature of the relationship of the parties also started to operate in more objective sense even in civil law besides party autonomy, therefore also in the corporate sphere, where risk acceptance beyond the risk management function became a more central theme. Again, pressing considerations of justice, social peace and efficiency also played a role as did in appropriate cases public policy often expressed in regulation, but if properly understood only subject to relationship thinking. It was also said that civil law in particular has here still some way to go for which it may increasingly use the good faith concept. Even in a more personal setting, particularly in labour and consumer dealings, there was from early on already some more objective normative impulse in the protection of weaker parties regardless of the (clear) wording of the contract. This may now also find expression in notions of protection of investors against their brokers or other financial intermediaries, marked further by notions of dependency and may go for all consumer law but, again, in civil law this type of relationship thinking is by no means fully developed as we have also seen and there is in particular still an inclination to extend consumer protections of this and any other kind to all under similar types of contracts, therefore even to professional (corporate) dealings.154 Although in civil law, the use of the good faith notion thus became indicative of a more normative and therefore more objective approach to interpretation, it was noted before that there is no uniformity in its precise scope and extent and in any event the attitude should be different for consumer and professional dealings. Rather, it was submitted before that at least in professional dealings good faith if properly understood reintroduces into civil law contract interpretation the other traditional sources of law which the codification effort had tried to eliminate. What it may then in particular purport to do is to allow the norm from whatever source to respond and be tailored to the facts or allow for a selection of the facts that will relate them better to the appropriate norm or 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, particularly important in a fast moving society. Again this is an important institutional or structural issue, which in dispute resolution concerns the power of judges and arbitrators, especially the former. The latter depend on and are more limited by the submissions of the parties in this connection. 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 or arbitrators (although again potentially quite different for either).155
154
See also the comment in n 4 above. See for this discussion also Vol 1, ch 1, s 1.4.18 and Vol 1, ch 2, s 1.1.10 and text at n 151 above. Summarising the foregoing and allowing for differences between various countries, it may be said that in civil law, the evolving normative approach to contract interpretation in professional dealings (see s 1.1.7 above) may ultimately align with modern contract theory (see ss 1.1.4 and 1.1.5 above) and achieve in particular the following: 155
(a) As to the formation of the contract, it may still use 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 as it is perceived to be in the particular situation or in commerce in the particular trade or business. Ultimately offer and
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Again, what happens here when properly considered is that other sources of law, such as fundamental principle, now sometimes human rights or public order related (in the latter case especially to combat abuse, including anti-competitive behaviour) revive behind this notion of good faith or in the normative interpretation approach, and overtake the codification text and its system thinking, including extreme will notions, which 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 a source of law (no longer depending on statutory licence, but probably in a more objective manner). To repeat, good faith then stands not only for institutional change in terms of the power of the judiciary in the interpretation process and its approach to construction, but rather for the revival of these independent sources of law. Most importantly, in this context it may even stand for the recognition of different legal orders in which these sources of law may play out (differently), such as the transnational commercial and financial legal 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, the nature of the parties and the legal environment of their dealings lead to this and the modern good faith notion may respond. For professionals, efficiency considerations and cost benefit
(b)
(c)
(d)
(e)
(f)
acceptance may become a sub-category of conduct and reliance. In business, it may require this reliance to be detrimental, suggesting a need for investment before a claim can be made under the contract. It distinguishes in this connection increasingly between the pre-contractual, contractual and post- contractual phase of the contract. At the time of formation, in the pre-contractual phase, it may then 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 not merely emanate from the parties’ intent or party autonomy and emerge continuously during the contract period. But there will also be relationship thinking: pre-contractual duties may thus be less relevant in business than in consumer dealings; in the performance phase, special co-operation duties may similarly emerge besides the contract and in the postcontractual phase special renegotiation duties. Again this is balanced by relationship thinking. In doing so, the normative approach to contract interpretation may increasingly 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, that means in commerce, in the trade or business concerned. In considering the broader environment in which the contract must operate, it may then also consider the moral, social and economic context of the contract, if sufficiently pressing, more clearly in contracts with illicit purposes, in gaming contracts and contracts in restraint of trade, which may then even protect third parties against anti-competitive behaviour. In extreme circumstances, it may even correct the express language of the agreement, especially when clear hardship or manifest unreasonableness results. Alternatively, the notion of abuse of rights (exceptio doli) in seeking strict performance may be used but may amount to similar relief, always taking into account proper relationship thinking and in commerce and finance the business environment. The normative approach to contract interpretation, when properly adopted and while seeking to take into account also the nature of the professional or other relationship between the parties, may thus lead to a higher degree of risk acceptance for professionals. This is an approach which may be aided by the fact that in corporate dealings an anthropomorphic idea of will and intent is hardly realistic any longer. Good faith in respect of professionals may then become a narrowing rather than expanding concept and lead, eg, to literal interpretation of their contract, especially if expressed as roadmap or in terms of risk management and risk acceptance. It has already been said that good faith does not therefore always give more rights; it may give fewer which may for professionals also mean fewer pre-contractual disclosure and negotiation duties, contractual co-operation duties, and post-contractual renegotiation duties. The normative approach is then also likely to have a fundamental impact on the defences and excuses, which are more likely to be narrowly construed in respect of professionals unless the contract itself suggests otherwise.
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analysis may point in a similar direction. Civil law, if it wishes to, can progress much further in this way but is in a timid phase in which academia hides behind nationalistic system thinking and extreme legal positivism, thus creating considerable tension. As mentioned in the first Volume, even the German Academic Council is exasperated by this “positieves Norm und Applikationswissen” [positivist norm and application thinking] that is not interested in interdisciplinary and empirical research and ignores transnationalisation.156 In matters of interpretation or construction, common law generally remains more circumspect. As we have seen in section 1.1.6 above and will see further in particular in section 1.3.7 below, at least for professionals it depends largely on a literal interpretation of the parties’ declarations, supported in that respect by the parol evidence rule, although it was also pointed out before that it has other tools to reach acceptable results. It is relevant in this connection that common law never systematically monopolised the scene or eliminated the various other sources of law altogether, even if non-state law such as custom became less dispositive, but it retained more force in commerce.157 Also from this point of view, the practice of the common law needed the notion of good faith less. These other sources of law, especially custom or practices, could even be transnational, although in international transactions again in England transnational custom may remain particularly suspect. Indeed, it may be observed that the English legal profession remains less impressed with legal transnationalisation currents than, for example, the French. Also, the Americans are less parochial. It suggests extreme nationalism, an often mistaken idea, and veneration of the notion of certainty behind borders (see Volume 1, chapter 1, section 1.1.7). It is odd because the common law has ample means to recognise, for example, international custom and practices while its legal profession stands to gain greatly from a more open attitude in this respect, enabling it better to protect the international commercial and financial business sector and its flows, where it also has the English language on its side as well as the fact that the common law was in essence always more commerce oriented and often more practical.
1.3.3 Interpretation and 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 sections 119, 226, 819 BGB), in France in Articles 1134 and 1135 (old) CC, since 2016 more generally accepted in 156
See Vol 1, ch 1, n 51. It has already been noted that common law also uses a more objective notion of party autonomy (which may at the same time reinforce its status as independent source of law), see s 1.1.4 above; it is stronger therefore in common law countries. Moreover, equity continues to operate in the 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 1, ch1, s 1.3.3. However, at least the status of custom and industry practices was less affected in commerce and finance, while even in respect of party autonomy as an independent source of law, there is no doctrinaire attitude , see Vol 1, ch 1, s 1.4.8. 157
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all phases of the contract under Article 1104 (new), 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, it is not commonly a defined term and in its modern version good faith has very much proven to be a multifaceted notion, not therefore at all of one kind, and plays many roles, now also beyond these statutory references in contract, and operates in principle in all inter-party relationships although potentially in very different ways, again that is relationship thinking. It was already said several times that as such it is not then merely the opposite of bad faith but acquires another function and potentially many other meanings, see further section 1.3.4 below. Upon a proper analysis its main function is, it was submitted, as a (more liberal) interpretation tool, at least in professional dealings, through which (a) facts and law can be better related and (b) all other sources of law return, through which it sometimes stands for fundamental principle and may then become the opposite of bad faith, which appears to remain the view of the DCFR. But good faith as interpretation tool may also refer to custom, general principle and enhanced (or more objective) notions of party autonomy. It is then seen as absolutely mandatory, only where it appeals to fundamental principle. As an interpretation tool, pressing notions of justice and social peace or similar values may also figure, as well as, in appropriate cases, the notion of efficiency and cost/benefit analysis. It may then even appeal to notions of public policy as previously mentioned. The above mentioned statutory references show that good faith was traditionally more especially important as an interpretation tool in the performance of contracts but figured perhaps in all inter-relational situations. It was already said that in this connection, it acquired early on special relevance in respect of weaker parties as an expression of relationship thinking, like workers, later becoming important for consumer protection more generally and later still for the protection of smaller investors against brokers. This is reminiscent of fiduciary duties in common law. It also entered the area of excuses when, for example, force majeure or especially hardship because of changed circumstances were invoked or where demanding punctual performance would become unconscionable or an abuse of right, although arguably again of lesser significance in professional dealings. But it was also said that per contract type this quickly spilled over into professional dealings in the civil law unitary approach which still makes insufficient distinction for lack of relationship thinking. Good faith may then also play a role in the avoidance of the contract for reasons of misrepresentation or mistake, but even in these cases a large dose of risk acceptance should increasingly be deemed implied for professionals as was shown before, again a consequence of proper relationship thinking and credibility in the operation of the good faith concept in civil law. In the newer approach, to start with the formation of contract, reliance rather than intent suggests itself here as a new departure. Good faith may then also lead to precontractual disclosure and negotiation duties, contractual co-operation duties, and post-contractual renegotiation duties.158 In many civil law countries, the good faith 158 In fact, Article 1337 of the 1943 Italian CC already referred to pre-contractual good faith In Germany since 2002, concepts of pre-contractual (s 311(2) and (3) BGB) and other accessory duties extending to the postcontractual 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 through extensive amendment of the contract law in the BGB.
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notion was borrowed to this effect from interpretation where, as just mentioned, it more traditionally operates. In other countries, the negligence concept is here still preferred, especially in France although it may be less clear after the 2016 amendments. This has already been discussed in greater detail before and will be further discussed below, although these notions may again have lesser force in the professional sphere where, given proper relationship thinking, exactly the notion of good faith itself may require a more restrictive interpretation of these duties and even a literal interpretation of the parties’ contract text as their roadmap and risk allocation document as already mentioned several times before. To repeat, it suggests that good faith should be considered as a liberal interpretation facility rather than some higher normativity per se. At least in the professional sphere, it is not truly a new independent source of law in its own right. This is still not reflected in the new (2002) sections of the BGB nor in the 2008–09 DCFR as an academic model for an EU codification in the traditional sense, nor is it in the French CC as amended in 2016. The good faith notion in professional dealing, if properly understood, means protection under the various sources of law it reintroduces only against manifestly unreasonable consequences measured by the standards of these professionals themselves. This touches on major societal (changes in) values. Public order or public policy whether or not expressed in regulation may support this further but may also impose more severe standards, especially in situations of market abuse, including anti-competitive behaviour, fraud, money laundering and corruption. Here enters the public interest and we leave mere considerations of private law or the balance of interests between the parties to the contract behind. It may no longer be a good faith issue proper although there may be overlap. This is only to repeat that 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 may make, in this connection, even some distinction on the basis of the nature of the relationship between the parties, relationship thinking is not yet fully developed in these countries, which bears the considerable and demonstrable risk that newer consumer protection notions spill over into the commercial sphere. In non-Germanic civil law countries, in the area of contract, it may on the other hand remain less clear how far the concept of good faith goes. Indeed, French law is here traditionally more reserved than German law and may remain so even after the 2016 revisions of contract law.159 It was pointed out before, in note 4 above, that the 2002 German amendments were partly inspired and necessitated by the 1999 EU Directive on Consumer Sales and Guarantees, which only served to further favour a consumer law ethos, supported by a CISG overhang with its anthropomorphic formation section. It must be said that in France some of this ended up in its Code Consomation after the 2016 amendments, suggesting therefore a clearer distinction between consumer and professional dealings, also supported by the Code Monetaire and Financier for professional financial services, but the ethos of the general part of contract in the French CC remains anthropomorphic; probably even more so after the 2016 a mendments with their repeated references to the will of the parties, s upported 159
See for more recent Dutch case law, however, also nn 4 and 43 above.
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by a good faith notion that remained undefined but was perceived as mandatory, an expression of public policy much in a consumer law sense. In the civil law of contract, there are special reasons for the more modern good faith notion to stand for a liberal interpretation technique. The main problem is that the old statutory contract framework, based largely on the anthropomorphic notion of a private deal between two individuals motivated by their psychological intent or will, no longer suffices.160 Again, that is clear in particular in the corporate or governmental world of major contracts signed by senior people unaware of the details, and often negotiated in different parts by different people who may hardly be aware of each other, while the text may come from outside lawyers who are probably the only ones who understand it but are not a party. Perhaps even more importantly, in terms of legal texts and system thinking, situations or factual configurations more generally have become too different or incongruent still to be covered by the same preconceived contract types or models of the older codes as society moves ever faster and in more different directions. It may be said that in a formal sense, fact and norm are drifting further apart from each other all the time. It may then also be said that good faith interpretation tries to fill that widening gap. A third issue may be 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, such as, 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 a special aspect of this issue, already referred to in the context of modern contract theory in sections 1.1.6 and 1.1.7 above. We now also have so called smart contracts, see section 1.1.10 above. It may imply special duties of care and responsibility for the organising entity. Again, the introduction of this type of legal normativity can be expressed through the good faith concept as a matter of fundamental principle in terms of values, but also in terms of the effective operation of the international market place and its evolving customs and practices. In summary, more objective considerations in terms of pre-contractual 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 have also seen. Custom and general principle may then also have to be considered. Again, it shows that there are conceivably many contractual rights and duties that do not find their origin in the will or intent of the parties. In fact, social values and routines have greatly changed and continue to do so all the time, also affecting contracting and its meaning and extent, even if values may be less urgent in professional dealings where nevertheless issues of efficiency, effects on larger groups or on market behaviour (especially if there is anti-competitive or abusive activity), and cost/benefit analysis in the 160 The term ‘good faith’ (or Treu und Glauben) still suggests this personal subjective element and may therefore strictly speaking no longer be a good term. The key is the normative or more objective approach in which it is now increasingly subsumed. For this reason, the new Dutch Civil Code avoids the term and refers to ‘reasonableness and fairness’ instead. This terminology risks, however, a weakening of the concept in that it expresses to a lesser extent a sense of urgency or pressing need.
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construction and enforcement of a contract may have become important issues. This should be seen against the background of greater risk acceptance particularly by professionals to which, in the DCFR, a reference is made merely in connection with a change of circumstances in Article III-1:110(3)(c), mistake in Article II-7:201(2)(b), and, more indirectly, force majeure in Article III-3:104(2); it is still not fundamental to it. Again, this demonstrates in particular a lack of relationship thinking, which the good faith notion as expressed in the DCFR was still not able to grasp. As it has proved impossible so far to provide for a newer coherent set of contract rules or indeed for an updated contract model altogether, at least in the professional sphere (see section 1.1.6 above), the pressures appear to be the same everywhere. For civil law, especially in Northern Europe, it may indeed be argued that the stress caused in the system of contract law in this manner has so far largely been absorbed by the notion of good faith in the formation and enforcement of contracts. Hence the liberal interpretation technique in respect of ever older and incomplete statutory texts but it does not mean judicial discretion as is often believed, rather, as we have seen, the reintroduction of the other traditional sources of law that codification had meant to eliminate, in particular fundamental principle, customary law, general principle, and party autonomy as another independent source of law (although still subject to public policy and public order considerations but not to a public licence). It is clearly connected with the impact of modern contract theory and the normative approach, and the revival of many sources of law, suppressed by codification thinking. To repeat, this allows considerations to be taken into account that may go far beyond the parties’ intent and now even beyond the statutory texts, a development by no means completed in civil law, see again the discussion in section 1.1.4 above.
1.3.4 Good Faith as a Multifaceted Notion The notion of good faith in its prime function, here identified first as better relating ever newer fact situations to the ever older norm and even in tailoring that older norm to the newer facts (themselves being selected on the basis of their relevance in relation to the chosen or rephrased norm) may not have changed fundamentally over time, but as the distance between fact and norm may now often be greater, there may be more to bridge. At least in civil law, that is—it is submitted—what the good faith or normative approach in essence must do and achieve with its sensitivity to the other traditional sources of law and in the process to extra intentional or non-consensual duties in the various contract phases and to pressing ethical, social and economic considerations as well as to relationship thinking. To repeat, it is or has become in this regard the foremost (liberal) interpretation tool, at least in contract in professional dealings and in any other relationships where parties exercise or claim rights. But it was also said that it does not mean greater judicial discretion: the void is filled by the other sources of law. These other more traditional sources of law thus revive behind the good faith notion, notably fundamental and general principle, custom and practices, and a more objectivated notion of party autonomy (and the contractual text), which codification had sought to eliminate in civil law as independent legal sources.
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Good faith may thus supplement or even correct statutory contract law (as well as the contract itself when the other sources of law are higher than party autonomy). To this end, at least in practice, in the northern European civil law countries, the old good faith (interpretation) notion has been stretched to what is now also called the normative interpretation technique in order to provide the (statutory) cover, —see for the special importance in transnational law Volume 1, chapter 1, section 1.4.3 and further also section 1.3.6 below. Good faith has in the process become a much more dynamic concept, not merely the opposite of bad faith, as we have seen and, if properly understood, has in contract evolved in fact into a modern facility of destruction, change and regeneration of legal norms or rules. It could potentially also discount globalisation and transnationalisation of the law in international business cases. On the factual side it allowed for a much more selective and discriminating approach to differing fact situations and differing relationships, while on the norm side it is comfortable with many sources of law. It then also serves as the basis for more judicial intervention (see, for the institutional consequences, section 1.3.5 below) and has, even in civil law, ultimately confirmed the courts in an (informal) rule-formulating function, although restraint is commonly pleaded and hemmed in by the other sources of law and in arbitration by the pleadings of the parties. Again, at least in the law of contract, good faith is as such at once a destructive and a regenerating or norm-renewing force, which also liberates us from intellectual prejudice or laziness while applying outdated or deficient models or rules which exclude from consideration newer situations and/or newer (value) contexts whilst declaring them legally irrelevant or ignoring them altogether. It has been pointed out before that this is a well-identified danger in all system thinking, particularly relevant therefore in civil law codification countries,161 the reason perhaps why good faith is a particularly strong and very necessary concept there, even if its true role may still not be fully understood. Earlier the irrelevance of pre-contractual behaviour was a potent example of system insufficiency, only remedied in case law by good faith notions, now often, as in Germany since 2002, incorporated in the prevailing codes through statutory amendment (although, surprisingly, not in the new Dutch Civil Code of 1992). Indeed, good faith has obtained a multifaceted character. When properly considered, it is sometimes norm (derived from whatever legal source),162 sometimes fact.163 It is sometimes judicial discretion and sometimes judicial limitation. It may be legal 161 See Vol 1, ch 1, 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. 162 It was already said that it is tempting to consider good faith itself as a source of law but this is not the preferred approach in this book, which views good faith as the facility to seek out the traditional sources of law to supplement and where appropriate correct the existing normative framework at least in commerce and finance. It suggests at the same time that good faith does not mean unlimited judicial discretion. 163 The traditional sharp Kantian distinction between fact and norm, although from a logical point of view perhaps more correct and sometimes still defended, see K Larenz, Methodenlehre der Rechtswissenschaft, 5th edn (Berlin, 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; see further also the discussion in Vol 1, ch 1, s 1.2.13 relating to the meaning of legal texts. In common law countries, it may much earlier have been reflected in the maxim of equity: ‘equity considers done what should be done’.
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principle, but often it refers to a more precise legal rule once the particular fact situation is known. 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 reasonable care or efficiency). 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 per situation (Konkretisierung). Taking into account proper relationship thinking, 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 then also looks at the nature of legal relationships of the parties and their special interests and sometimes at the nature of their deal or its market environment and their particular features. Dependency and reliance notions may figure large. It may even bring in third parties involved in the same project or protect whole groups, such as consumers under standard agreements or even professionals when contracting is used as an organisation tool by one of them. In doing so, it may look for fairness, particularly in consumer and small company cases, and for what makes sense and is practical or efficient in business cases. In this connection, it may even introduce cost/benefit analysis. On the fact side, it is attention to the individual case and its own distinctive features and types of parties or their markets. On the norm side, it is a quest for modernisation, refinement, social and economic awareness, and practical needs which may lead to newer rules if they can be found in the other sources of law, especially fundamental principle, custom, and general principle as we have seen throughout. Good faith of this nature 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 contract interpretation and thus restrict or confine relief. In business dealings, it favours depersonification of contract law and limits the traditional anthropomorphic idea of contract.164 Altogether it
164 Many definitions of good faith have been attempted but the multifaceted nature of good faith is seldom sufficiently recognised, the reason why most definitions fail. Zimmerman and Whittaker, Good Faith in Contract Law (Cambridge, 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.’ However, the key is that good faith is not necessarily addressed to conduct alone and does not float in a vacuum. 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 good faith is here still seen against the background of its opposite: bad faith, although the resulting high moral tone is combined with some more profane market criterion (fair dealing) to achieve a more objective standard. Social values are omitted, but in referring to the ‘relationship’ in question, there may be a beginning of relationship thinking, although it is more the respect for the relationship that is meant here, not its driving force and the DCFR did not break with the unitary approach either: the same rules of good faith apply in principle to consumers and professionals, see also text following n 3 above.
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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 further challenge to the nineteenth-century will theory and to the notion of each party’s psychological intent. It underpins at the same time a more objective notion of party autonomy, at least in professional dealings. So far, it must be said in this connection, that the formulation of particular new rules in this manner 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) such as 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 expressed in specific provisions of the BGB: sections 241(2), 280, 311(2), (3) and 313. Within these functions, there is a further effort to distinguish classes of cases (Fallgruppen), such as, a) in the supplementation function, the development of precontractual 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, b) in the correction function, the emphasis on estoppel, abuse of rights and individual co-operation duties, and on the manner in which the rights were acquired or are invoked as in the case of standard terms.165 German academics often talk in this connection of the inner system (Binnensystematik) of the good faith notion, referring in particular to reliance, 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, moving at times well beyond mere interpretation. 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 often more inventive and less formal than German legal scholarship: see also Volume 1, chapter 1, section 1.2.13. 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 ethos. The clear impression remains that the drafters had no real idea of what good faith truly was and how it operated; hence also the problems with its definitions and the idea that the concept is always mandatory, a confusion between the moral or redistributive and the interpretational aspects. See for the UCC, s 1.3.7, text following n 196 below. See for its definition in the UCC, s 1-201(b)(20). 165 See the major commentary of Palandt, Bürgerliches Gesetzbuch (Munich, 2012), 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, see also the discussion in s 1.1.7 above. The first three functions appeared 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 Fallgruppen are created by following or distinguishing precedent. They identify as such more a method of judicial activity than clear rules. Only a few clear notions developed such as the abuse of rights (exceptio doli) and the concept of clean hands, contributory misbehaviour and of lack of co-operation. Also the loss of a right to
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But it is exactly the flexibility good faith brings, its dynamism, and its access to other sources of private law and relationship thinking, that should be treasured and, it was submitted, 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 flexibility in this regard, may often be better than a wrong rule or no rule at all. But it should always be understood that any resulting discretion is not freedom and is in truth tied to the scrutiny of the other sources of law, which in the view here presented now often operate behind the modern good faith notion itself, see more particularly section 1.1.7 above. It must be stressed also, that so far there is here no question of a different legal framework, as equity, for example, once provided (and to a limited extent still does) in common law countries, albeit giving relief only in individual specific cases, not under a general overarching idea of fairness. Rather the good faith notion presents for most an elaboration and refinement (like the notion of estoppel or abuse of rights) or an amplification (and sometimes) curtailment of formally existing contractual or other legal rules or concepts and their application. But even in this more modest sense, it has still 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 although this development is in no way complete and has further to go for professional dealings as distinguished from consumer dealings—again the issue of proper relationship thinking. However, as we have seen, in civil law countries, modern contract theory, as explained in section 1.1.6 above, and a dynamic notion of contract law are hardly accepted in all their aspects and a psychological approach to parties’ intent is not abandoned. In case of doubt, the cry still goes out: ‘What did the parties mean?’, but it is at that stage seldom clear. Formal notions of offer and acceptance and a fixed moment of contract formation also remain vivid, certainly in Germany Again, will theories remain much alive and there are serious problems with the introduction of greater relationship thinking. It was already pointed out that in civil law not all domestic legal systems react the same way. Again, French law, notwithstanding the generality of the formula of Articles 1134 and 1135 (old) CC, remains more hesitant as to the concept of good faith altogether. 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 be disregarded on the basis of good faith and that has been constantly confirmed.166 Equity (équité) is not seen here as an independent source of law either, although in other contexts it may be.167 In any event, in their approach to good performance became accepted if there were contrary conduct or declarations on which the other party could rely as an excuse. Another development was the loss of rights when not invoked in a timely manner (Verwirkung). All are of limited application. It is altogether not a large or even novel crop. 166 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 R Demogue, 6 Traité des obligations en général (Paris, 1931) 9. This author was in many respects more perceptive in these aspects than the more recent French writers. 167 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 of 12 May 1914 [1918–19] s 1.41.
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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 such as 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 instances of unequal bargaining power or the need to protect weaker parties, create special co-operation and loyalty duties, or distil sub-duties. These are all more recent developments. Increasingly, information duties are now accepted under the heading of good faith more generally even in France and this is now better expressed in Articles 1104 and 1112 CC, which make it clear, however, that no expectation damages may be claimed in the case of breach of pre-contractual duties under the good faith heading, so that a negligence approach would appear to continue to prevail.168 It may be fair to say that French law on the whole still prefers to rely on other more specific concepts to define or redefine the parties’ rights and duties. They are abus de droit but also bonnes moeurs, fraude, erreur or enrichissement sans cause, even the notion of causa, or impossibilité économique, all rejected at the time, however, to redress the impact of changed circumstances, but often used instead of a broader good faith notion in other contexts.169 Until the changes of 2016, good faith was therefore hardly an overarching contract notion in France.170 Particularly the abuse notion had been progressively developed instead, although it was becoming more embedded in the good faith notion, therefore as a matter of interpretation. Pre-contractual duties on the other hand were often still presented in terms of negligence, again until 2016 when it became a good faith matter but without recourse to expectation damages. The French attitude deserves attention because of its (on the surface) deviant attitude within the civil law tradition, the traditional French approach still tending 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. Another important point in this connection and a contributing factor is 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, again therefore merely the opposite of bad faith.171 It remained undefined in 2016. On the face of it, there is therefore still little normative value in it of a more general nature, although a similar approach in the UCC in the US (section 1-201(a)(20) UCC) has gradually found a more objective and therefore normative direction regardless.172 168 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. 169 See M Paniol and G Ripert, Traité pratique de droit civil français 6 (Paris, 1930) no 394; Demogue (n 167) no 632, and J Bonnecasse, Précis de droit civil (Paris, 1933) no 134. 170 The lower courts in France normally still opt for literal interpretation of what is considered the parties’ intent. There is here no relationship thinking. 171 See Y Loussouarn, ‘Rapport de synthèse’ in Travaux de l’Association Henri Capitant, xliii, année 1992 (1994). 172 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 adjustment in the case of a change of circumstances under Art 6.258 CC is now 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 have seen: see Arts 6.2 and 6.248(2) CC respectively.
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It has already been noted that the DCFR, following the PECL and UNIDROIT Contract Principles, refers to ‘good faith and fair dealing’ to underline the objectivity of the notion, although it remains unclear what the standard (which is always deemed to be absolutely mandatory and from which parties cannot therefore deviate) truly is. Unlike in the PECL and UNIDROIT Contract Principles, there is a definition but in the text of Article I.-1:103(2) the opposite of bad faith is still suggested. Finally, in the Netherlands in Article 3.12 of their new Code, there is a statutory indication of how the good faith notion is to be construed. Under it, 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, conceivably even international ones, might revive behind the notion, certainly when relationship thinking becomes more dominant and the special status and needs of the international professional community are recognised.173 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 and its operation both on the fact and the norm side and its sometimes high tone, as well as the flexibility and judicial discretion it may suggest, have induced some sense of unease in many, also in civil law. There is 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, too much concern for moral, social and economic considerations, and too much judicial creativity as may be seen in pre-contractual, performance and post-contractual duties. 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 in particular suffers. There is also the idea that there may not be sufficient democratic legitimacy for such an approach. This latter issue has already been discussed more generally in Volume 1, sections 1.1.8 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 person 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 technique.174 Any other attitude was considered at variance with the codification idea 173
See for more recent Dutch case law, n 4 above. 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, ch 1, s 1.2.5), Art 5 of the French CC specifically abrogated any rule-making power of judges, while 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. 174
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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, which came into the legislative function much later.175 Yet in practice, the courts always had 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 even if they pretended to cover all eventualities (see Volume 1, chapter 1, section 1.2.13). Yet in many civil law countries, at the conceptual level, even a measure of discretion to allow for adjustments to smooth out minor problems did not fit the system very well. There is obvious tension here but practical needs make it unlikely that the modern tide can be turned and they explain why good faith as a dynamic, correcting and renewing force in the formation and application of contract law in particular is tolerated and not likely to go away. One can also see it as the other side of the codification (and system thinking) coin. 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 and unusual fact situations (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 put in the judiciary here, its strength and traditions but also its worldliness and, at least in private law, its ability to distinguish according to the parties’ relationship, their type of deal, and its context. This 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. But system building by the judiciary under the good faith cover may in particular have to be feared and would not seem its task; legal sophistry may also be mistrusted. This may explain the modern preference in international commerce for arbitration; it was posited in Volume 1, chapter 2 that international arbitrators are not judges and remain in principle dependent on the representations of the parties also in the use of the good faith concept. There is for them no independent authority to apply whatever law. They are not the spokespersons for any law and must limit themselves to solve the disputes of fact and law that have arisen between the parties as they or their experts define them, and no others. They do not have any autonomous powers to explain and clarify the applicable law. For them, all must be pleaded as fact. The limitations in the judiciary in terms of experience especially on the fact side 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 also clad in the more modern argument that judges lack sufficient democratic legitimacy to be so empowered, but it was pointed out in Volume 1, chapter 1, section 1.2.13, that historically there was little democratic back-up for private law formation altogether, also in codification countries, while in 175 See for the original function of the Cour de Cassation in this connection, Vol 1, ch 1, n 241. Only in S witzerland, under the well-known Art 1 of its Civil Code, is there officially judicial rule-making power if the law is silent, but this facility is (correctly) used with great restraint.
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common law, which was formed by the courts, the issue never arose or could be posed in this manner. On the other hand, it was pointed out also 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 a sad day indeed. But it was also suggested that good faith itself is better not considered a source of law in its own right; it finds its limit in the traditional sources of law, in particular fundamental and general principle, custom and practices and party autonomy. As far as democracy goes, customary law and party autonomy could be seen in this connection as the ultimate in bottom-up participatory law formation, at least in the international marketplace and therefore superior in their legitimacy to formal legislation or even treaty law. As such, good faith in relying on these sources is not then an undemocratic and therefore illegitimate law-making facility per se. More to the point is probably the lack of a proper definition of the role of the judiciary in modern society, whose powers are in dispute resolution used constantly to expand private (and other) law on the basis of practical need in the absence of much help from often confused and insufficiently responsive legislatures. At the practical level, in civil law countries there appears no longer to be a great objection to this 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 practise restraint, are seen to do so, and can reasonably explain their actions in terms of rules, precedent or on the basis of different fact situations, while 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 and keep greater control over the arguments and procedure, they can choose arbitration instead as indeed they now often do. To conclude, in terms of this book, one essential consideration is that the discretion good faith suggests in the mind of many is in truth not there. The other sources of law that codification eliminated return and judges operate under them while redefining their importance, be they fundamental principle, custom and practices, general principle, or the modern objectivated form of party autonomy, at least in professional dealings, and this is likely to be demonstrated in international dealings particularly at the level of the transnational lex mercatoria.
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 1, chapter 1, section 1.4.17, the concept of (nationalistic) 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 perception is that the development towards a newer
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c ontract model (see also section 1.1.6 above) heralds a more fundamental shift from norm to fact in civil law, 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, on the other hand, it reintroduces respect for other, non-statutory autonomous sources of law, which may conceivably be transnational, in commerce especially customary law. If this is correct, then there result some important areas of convergence with the traditional common law approach, more particularly in contract law, which in England was always more factual, developed (through case law) from situation to situation on the basis of practical need, and always respected other sources of private law beyond statute. In these terms, in civil law, the real issue in modern times becomes the failure of the codification approach and intellectual model itself and its exclusive system thinking, which had meant to cover alone, in a statist top-down and national manner, the whole field and pretended to have all answers for the present, past and future. In international cases, private international law was then the conduit to the appropriate domestic legal system or rather each national system had its own conflict of laws rules in this regard to determine to what extent it would accept the application of foreign rules in international cases handled by its courts. The application of foreign law was thus subject to this type of licence and it needed to be pleaded as fact. It was always a domestic law and there was no true transnational law at all. The question thus arises whether the good faith concept or normative interpretation technique with its sensitivity to facts and other sources of law can contribute to the law’s transnationalisation at the same time, at least in international business dealings, notably in reviving the other sources of law. As has been noted before and will be further discussed in the next section, common law has many other ways to achieve a flexibility and level of protection that good faith may now provide at least in the civil law of contract. In fact, it has already been 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 the abandonment in civil law of rigid system thinking, its claim to exclusivity and completeness, and the traditional emphasis on the norm side. Facts and other sources of law are rediscovered. It is the end of legal positivism and formalism in that sense. Proper attention to changing values and to public order and public policy issues must also be considered. Law is then no longer merely a system of pre-existing static and statist rules, but develops in its application pursuant to the continuous discourse in society or in the communities it serves. 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 failure of relationship thinking while (mostly) applying to consumer and professional dealings alike. This was also true for the European sales law in CESL. There can be little doubt that in the civil law of contract, under pressure of factual developments, the notion of good faith is potentially a 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 may seem unstructured, and legal certainty in terms
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of law as technique, although not necessarily legal predictability (the two having been fundamentally distinguished in Volume 1, chapter 1, section 1.1.8) may have suffered. It was pointed out that civil law often remains highly ambivalent in these matters. German and Dutch law retain their strong codification ethos but see on the other hand all legal relationships as conditioned by good faith. It would follow that they acquire their specific legal meaning only in that context. This means in truth respect for facts, potentially covered by rules from various autonomous sources of law. These reappear in the context of a liberal interpretation technique, at least in contract, it was already said several times, although neither German nor Dutch legal scholarship analyse this trend this way. In practice, in these countries, at least in contract law, the notion of good faith increasingly folds into the normative approach to the interpretation of the contract, as we have seen in section 1.1.7 above, even if this trend is not complete in terms of modern contract theory and relationship thinking; in particular the thinking appears to remain system based in the formal statutory manner. Thus, especially in Germany, there continues the urge to find renewed system also in the use of the good faith concept.176 This is then explained as perfecting the old system, which in this way is believed to remain intact, to retain its monopoly and completeness, and to provide all answers. As to the other aspect—the re-emergence of other autonomous sources of law— there remains a similar ambiguity in civil law, of which the DCFR, again mainly for systemic reasons, is the latest demonstration. In Volume 1, chapter 1, section 1.4, these different sources have already been discussed more extensively and were summarised above in section 1.1.3. Again, it concerns here notably fundamental principle, now sometimes human rights or public order related,177 general legal principle, which may 176
See the discussion in s 1.3.4 above. See n 11 above. The DCFR pays attention to (the horizontal effect of) human rights notions in Art I-1:102(b), see also Vol 1, ch 1, s 1.4.5, but only to the extent appearing in official instruments and then merely as a matter of interpretation of the DCFR 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 rewritten between 2008 and 2009, which shows that not much serious thought had been given to these 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 mention in the text for their horizontal application, only derive from Member State laws and were only given a meaning in interpretation. Beyond this, the drafters declare in Art II-7:301(a) the law of Member States prevailing if a contract infringes a fundamental principle recognised by them. There appears here to be a reference to general principle in terms of public order requirements. Again this is done with reference to national legislation in Member States. There are fundamental principles beyond it and they may be autonomous. In the 2008 Introduction, the drafters seemed to think that these principles had largely to do 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, while the model of society is primarily a regulatory issue. Subsequently, the drafters confused fundamental principle with the law’s objectives (no 22), but it concerns here rather 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 fundamental principles before the main text but their status in law is still not clear. The underlying principles refer merely to the system. The overriding ones would be autonomous, but there is an explanation only as to how they have found (some) expression in the text. It is also 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”’. 177
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go beyond those underlying the national systems,178 and then of course also custom and practices,179 and probably a more autonomous notion of party autonomy, which may at the same time be more objective180 and may even operate in the creation of newer movable property structures and interests subject to a better protection of the commercial flows.181 It was pointed out repeatedly 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 1 as the essence of the development of the modern law merchant or 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 transnational normativity may revive in respect of international business dealings, therefore even in international agreements between professionals, But the result is that each country would have an own concept of transnational law and there would still be no unity transnationally. Good faith may nevertheless provide an important bridge, not only to the more factual approach of common law, which also remains more practical in the acceptance of various sources of law, but, most importantly, also to the transnationalisation of private law in civil law countries especially through the recognition of multiple sources of law and bottom up law formation within the modern lex mercatoria. It was left to others to decide but as far as the present text is concerned, the idea is that the DCFR decides these issues and that there are no principles or values beyond it. It may be recalled in this connection 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 or similar policy concerns. The DCFR drafters’ view is typical consumer thinking. The basic problem is then again lack of relationship thinking, but also confusion between fundamental and general principles while there is no clarity on what a modern system of private law is based, how it operates, how it relates to the public interest, and what transnationalisation means here. Ultimately it is a failure of insight into the place and function of modern codification, into its competition with other sources of law, and its relationship to the public interest. Especially when there are extra-statutory fundamental principles or rules, either underlying or overriding, these issues can no longer be ignored. Or, to put it in another way, if the autonomous status of fundamental principle is to be recognised, the entire idea of codification in this manner is at an end. That is clearly not the idea of the drafters of the DCFR and explains their ambivalence. But it is at variance with the case law of the ECJ itself—see its Mangold and Audiolux cases—and there are many others in which the role of fundamental principle as overriding is fully established: see further again Vol 1, chapter 1, s 1.4.6. 178 See n 13 above. Although it was said that the DCFR 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. 179 See n 12 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. 180 See n 14 above. In the DCFR, in Art II-1:102, party autonomy is still 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 among themselves, as they may under s 1-302(b) UCC, although good faith even if connected with fair dealing is still not a clearly defined concept even though the DCFR makes an effort unlike the prior sets of Principles. What kind of standard is required is therefore unclear and is likely to give rise to very different interpretations. 181 See Ch 2 below.
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1.3.7 Good Faith in Common Law. Alternatives. Equity Distinguished It has already been pointed out several times, initially in sections 1.1.4 and 1.1.6, that common law started in contract in commerce and always maintained a more literal interpretation of the declarations of the parties and was more fact based. It put in that context also greater emphasis on their relationship and would notably allow for special duties but mainly in the case of dependency. From that perspective it needed the notion of good faith much less than civil law, although it also had to find a way for contract interpretation to become more reflective of social and economic needs. Also, it could not avoid the process of better relating the facts to the existing norms. It helped that common law never committed to systemic thinking and did not like generalities nor general principles, and did not need good faith notions to revert to facts and better consider them either. Not pretending to any deeper thought, it also accepted multiple sources of law so that their revival did not immediately depend on a liberal interpretation technique under the good faith label or otherwise (ch 2, s. 1.10 below). Common law can therefore afford to take a more cautious view of the good faith principle, which is clear particularly in England182 although it may now be somewhat different in the US but it remains typical that the common law everywhere does not use good faith as an overarching concept in the same manner as civil law does, even in the US. In England in more recent case law the notion was recognised more openly but only incrementally to the way English law was developing.183 This is particularly clear for pre-contractual and post-contractual situations, as we shall see in section 1.3.12 below. Again, 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 (to the extent 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,184 although it was 182 See 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 A Musy, ‘The Good Faith Principle in Contract Law and the Precontractual Duty to Disclose: Comparative Analysis of New Differences in Legal Cultures’ (2001) 1 Global Jurist Advances 1, and J Stapleton, ‘Good Faith in Private Law’ (1999) 52 Current Legal Problems 1. 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, 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. 183 Interestingly, reference was made to comparative and European law, see Legatt J in Yam Seng Pte Ltd v International Trade Corporation Ltd, [2013] EWHC 111 (QB). 184 See for English case law on implied conditions also n 120 above. The good faith concept has always been more independently acknowledged in insurance contracts (which are uberrimae fidei). In that case, it is principally used, however, to protect the insurer and, through it, the scales are often loaded against the insured, as under it the insurer may repudiate a policy, even on the basis of failure by the insured to disclose technically relevant but minor facts that would not have made any difference to the insurer’s underwriting decision: see Container Transport Inc v Oceanus Mutual Underwriting [1984] 1 Lloyd’s Rep 47. However, in Berkeley Community Villages Ltd and Another v Pullen and Others, [2007] EWHC 1330 (CH), the term ‘utmost good faith’ was used as an express term in a contract in a broader commercial setting, but was in such cases deemed to require no more than reasonable commercial standards of fair dealing.and faithfulness to the agreed common purpose and consistency with justified expectations. A restrictive interpretation (of similar language) remains common, TSG Building Services Plc v South Anglia Housing Ltd, [2013] EWHC 1151 (TCC).
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already mentioned also that the closer one comes to consumer law, the more room there may be for greater judicial intervention in terms of extra protection but that could also be equitable, sharpening the fiduciary duties and cutting out excess. The English attitude towards the good faith notion was criticised by Steyn LJ in his 1991 Royal Bank of Scotland law lecture at Oxford,185 but excepting cases of ‘fraud’, which often lead to redress in tort, it is not likely that good faith notions will soon be used as a general implementing, supplementing or correcting force in respect of contractual terms in England in professional dealings and even for the rest only through specific legislation such as in the Unfair Contract Terms Act of 1977 or in implementing EU consumer law Directives. Upon a proper analysis, it is unlikely to be different in the US. 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 have seen before,186 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 1, chapter 1, section 1.3.1—it guards more generally mainly against excess, in the case of weaker parties often within the framework of fiduciary duties. Equity adjustment is used by judges only as a last resort, as correction in individual cases, except in areas entirely covered by it, such as trusts, agency, company and bankruptcy law. Moreover, the notions of equity are often entirely fixed, certainly also when used in contract law (as, for example, in the concepts of rescission and specific performance). In any event, its rules are incidental and mostly remedial. Essentially, equity in this sense could often do with some good faith or normative flexibility. However, the renewing forces identified in the previous section in civil law in this connection, notwithstanding all their contradictions and ambivalences, may operate equally in common law but are not called ‘equity’ and also not ‘good faith’. As such For an earlier 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. See for a general and fundamental rejection of the notion of good faith, at least in the commercial sphere, Lord Ackner in Walford v Miles, n 189 below. It has been more broadly repeated that there is no general doctrine of good faith in English contract law, see Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd [2013] EWCA Civ 200, Greenclose Ltd v National Westminster Bank Plc [2014] EWHC 1156, cf also Interfoto n 1 above and context is greatly important. There is only incidental relief under different mechanisms as here explained; they tend to be more precise especially in commercial dealings. This is not changed in recent case law, in fact the cases of Yam Seng Pte Ltd v International Trade Corporation Ltd, see n 183 above and MSC Mediterranean Shipping Co v Cottonex Anstalt [2015] EWHC (also Leggatt J) repeating no more than the general requirements of honesty and fidelity to the parties’ bargain as implied conditions, see further Bristol Groundschool Ltd v Intelligent Data Capture Ltd and Or [2014] EWHC 2145 (Ch). False information is a case in point, although professionals will know how to deal with sales talk and similar presentations, again the issue of relationship thinking; it may be different in consumer dealings and situations of dependency pursuant to fiduciary duties. It is not different in Canada where the term ‘operational’ good faith has been used in this regard, see Bhasin v Hrynew, 2014 SCC 71. It is then the opposite of bad faith and not a general interpretational or other concept concerning the meaning and performance of a contract and not itself a source of law in terms of rights and obligations. Again other, often better directed, doctrines may be used in this connection in common law countries. 185 186
The Role of Good Faith and Fair Dealing in Contract Law: A Hair-Shirt Philosophy? See text following n 127 above.
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they often remain in essence unidentified. As we have seen, English law reflects more particularly on the nature of the relationship between the parties.187 It also accepts extra-contractual duties easily, especially in situations of dependency, even if breach of fiduciary duty or tort liability rather than contractual liability results.188 Again, from these perspectives, there is in common law less need for the good faith notion or something equivalent to provide greater flexibility. It also uses the reliance notion, as we have seen, to determine the existence of the contract and the rights or duties of the parties thereunder, again often leading to tort liability,189 but importantly reliance also became a consideration substitute when detrimental. Also noted previously was the greater receptiveness in common law, at least in commerce, to other legal sources such as custom, and also the greater role of a more objective notion of party autonomy, at least in the professional sphere. Again, together this may well result in relief similar to what may be obtained under the civil law of contract through the notion of good faith but may sometimes give more, especially in situations of dependency. It also pushes the common law into the direction of a more normative interpretation technique, but always in the context of relationship thinking with a bias in common law countries in favour of a literal interpretation of contractual terms, especially in professional dealings as further demonstrated by the old parol evidence rule (see section 1.2.4 above), which avoids extraneous evidence in the determination of the content of written documents. It seems that professional parties are left more fundamentally to their 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 professional contract, especially when the contractual text is on its face clear. There is simply greater respect for party autonomy in business under the common law and the law will not easily redistribute risk if the professional parties have not done so in their contract. Common law’s resort (sometimes) to implied terms, especially of reasonableness, has already been mentioned also.190 As far as these implied terms are concerned, the technique of gap filling is an old one also in England.191 In the common law of contract it is then often but exceptionally based on some presumed intent of the parties (which itself is not enough to result in a contract as noted before but may still entail a risk management choice), although commonly construed in a more objective manner,
187
See Bingham LJ in Interfoto v Stiletto [1989] 1 QB 433, 439 and the comments at n 1 above. Fiduciary duties are products of the law of equity, often 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 some fiduciary relationship before the fiduciary duties can emerge and they apply therefore only in special circumstances, again especially cklear in situations of dependency, 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 and elaborated regime of protection. Thus these fiduciary duties can go beyond mere fairness and honesty as is clearly shown in the relationship between the investment broker and its client where they acquire a protection function for the latter: see more particularly s 3.1.4 below. 189 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 direct costs of consultants hired in reliance on a deal. 190 See also Lord Hoffmann in n 47 above. 191 See The Moorcock (1889) 14 PD 64. 188
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as we have seen,192 and sometimes subjected to the requirement of reasonableness.193 These implied terms might in appropriate cases even concern the fairness of the transaction itself.194 Yet again, especially in the professional sphere, there will be caution and restraint, except in cases of excess. It is submitted that this is on the whole the better attitude. Also in terms of pre-contractual duties and a duty to negotiate in good faith, English law exercises this restraint in professional dealings where commonly no weaker party needs special protection.195 In the US, on the other hand, in the UCC, probably 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, as already mentioned, the concept has gradually acquired a more normative or objective meaning (see section 1-201(19) (old)), while section 1-201(a)(20) (new) now adds after ‘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, and this is now repeated in its newer versions (section 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 (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, although importantly 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, such as for the sale of goods in sections 2-603 and 2-615, but it remains exceptional in the common law of contract 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.196 192
Hirji Mulji v Cheong SS Co [1926] AC 497, 510. Shell UK Ltd v Lostock Garages Ltd [1976] 1 WLR 1187. 194 Bankline v Arthur Capel [1918] AC 435 and Metropolitan Waterboard v Dick [1918] AC 119. 195 See Walford v Miles (n 189). 196 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. For a case that could more readily be explained as covering a pre-contractual situation, see Teacher’s Ins & Annuity Assn v Butler 626 F Supp 1229 (SDNY 1986) in which a developer refused to close a loan deal while 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 193
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On the other hand, in the US, 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 mean the observance of reasonable commercial standards of fair dealing, although good faith remained a matter of performance and enforcement of the contract only. As we have just seen, this is now the more general UCC approach.197 It follows that in the interpretation of the contract, the normative approach is increasingly followed in the US. It may make a difference even in professional dealings, rendering them subject more especially to notions of abuse of rights. This may even affect liquidated damages clauses when payments thereunder are used to excuse specific performance while prioritising other projects that are more lucrative, regardless of the adequacy of the damages. Australia and New Zealand have also abandoned the narrow common law approach in this area. More limited notions of foreseeability and reasonableness may, however, still be found in most legal systems as possible correctives to the defaulting party’s 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 sphere 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, while in that sphere, even in civil law, increasingly the good faith notions may be applied more restrictively, especially when the contract is a roadmap and risk allocation, which may also affect the interpretation of the wording of agreements and their adjustment, even in the case of hardship.198
1.3.8 EU Notion of Good Faith It is of interest in this connection that the notion of good faith has also appeared at EU level. In Council Directive (93/13/EEC of 5 April 1993) on Unfair Consumer Contract Terms (not amplified in this regard by Directive 2011/83/EU on consumer rights, especially covering the information duties of professional providers and the right of included in a bank’s commitment letter. The court therefore rejected the borrower’s argument as a pretext for getting out of the deal, also taking 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. 197 In this connection it may be noted, however, that in the US, for example, employees are not per se protected under employment contracts without a duration clause and courts have held them terminable at will, regardless of 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). 198 See for the Netherlands, the more recent case law cited in nn 4 and 43 above.
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withdrawal of consumers), there is an important reference to it. Under Article 3(1), terms of contracts not individually negotiated 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 importantly under the Directive requires an overall evaluation of the interests involved, while, 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 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 such as 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. While 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 for finding the Community meaning.199 In any event, as good faith is in most Member States undefined and still varies widely in its impact, as we have seen, it is of interest to see how the European Court interprets the concept. In the context of the Directive, it seems then likely that the emphasis is put on any imbalance and is left at that. It means that, following the normative or teleological approach, maintaining a proper balance is here a substantive element of the good faith requirement itself and not an additional requirement for protection under the Directive. What this bears out is the relationship-oriented approach, giving the concept of good faith 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. 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 (see also section 3.2.4 below). 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 regarding fiduciary duties. 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 199 See W van Gerven, ‘The ECJ Case-law as a Means of Unification of Private Law?’ in Hartkamp et al (n 142) 91 and 102.
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terms of practices and usages. Article 17 was 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, unaffected in this regard by the further amended version effective since January 2015.
1.3.9 Good Faith and Sources of Contract Law in the CISG, UNIDROIT and European Contract Principles. The DCFR The term ‘good faith’ figures in Article 7(1) of the 1980 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). It derives from Article 31 of the Vienna Convention on the Law of Treaties 1969. The notion remains undefined and it cannot be certain that it is now a transnationalised concept and not therefore referred back for its meaning to domestic law under the supplementation section of Article 7(2), even though that would undermine the Convention dramatically in its ambition to produce uniform law. See for a more extensive discussion of Article 7, section 2.3.5 below and also Volume 1, chapter 1, section 1.4.15. Other sources of law or at least other considerations are also mentioned, but in a haphazard and uncoordinated manner, such as 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 as we shall see and suggest system thinking in the codification manner assuming intellectual unity which may not be there) and ultimately domestic law resulting under the applicable rules of private international law, see further again Volume 1, chapter 1, section 1.4.15. To repeat, the reference to private international law in the supplementation of the CISG, followed by the PECL but not by the UNIDROIT Principles (which followed the Hague Conventions in this respect) nor by the DCFR (which means to cover the subject in full), although not objectionable in principle as the residual rule in the transnationalisation process of private law (see Volume 1, chapter 1, sections 1.4.14 and 3.1.2), is likely to destroy any usefulness of uniform rules as all these texts lack clear definitions, not only in the area of good faith and reasonableness, so that any dispute on general principles or even coverage may descend into a search for domestic laws (potentially relevant also in matters of good faith and reasonableness or related concepts). As interpretation can often hardly be distinguished from supplementation (recognised in the case of contracts where interpretation and supplementation are no longer separated under the PECL and DCFR), that would affect interpretation also. It was already said that this would destroy any ambition to a uniform regime. As for custom, it does not figure in Article 7 CISG as a source of law at all. In Article 9 practices are mentioned but only as implied contract terms in the English manner. This approach remains clumsy because it does not capture the CISG in its relationship with other sources of law, borne out in Article 4, which leaves alone all custom proper,
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and is critiqued 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 Article 12 which goes into documentation). This even seems to apply to the good faith provision in Article 7, which would therefore appear not to be mandatory either. The UNIDROIT Contract Principles and PECL also struggle with the various sources of law and present no clear views either, see again Volume 1, chapter 1, section 1.4.15. In this connection, the UNIDROIT Principles in Article 1.6 do not refer to good faith in its own interpretation, but the PECL do: see Article 1:106 (where there is also the combination with fair dealing, see further 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 appear to remain here implied conditions in the CISG manner)—see respectively Article 4.8 (but only in matters of supplementation of the contract) and Article 5:102. Neither the concept of good faith nor the one of fair dealing are defined in these Principles, and the standard of conduct to which they refer is wholly unclear. Again, in typical unitary fashion, there is no reference to the nature of the relationship of the parties either and therefore no distinction between professional and consumer dealings. The DCFR in Article I-1:102 refers to good faith and fair dealing while dealing with its own interpretation (apparently also in respect of non-contractual issues), and mentions also human rights (only by way of concession as we have seen), uniformity of application, and legal certainty, but no other fundamental principle, nor general principle or custom. For supplementation of its rules, 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.200 Thus, as noted before, party autonomy operates by government licence only (Article II-1:102 DCFR) and custom or practices are only recognised as implied contractual conditions (Article II-1:104). Neither are independent sources of law. The DCFR follows here the UNIDROIT Principles and PECL and the typical codification approach, which ignores these sources of law unless specifically recognised and authorised by it. The DCFR also reverts to codification orthodoxy in matters of interpretation of the contracts concluded under it (Article 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, see Article II-1:104).201 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. Even then it does not imply relationship thinking but strictly speaking only suggests respect for the
200
See for the DCFR references especially nn 178–180 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 them. This is the anthropomorphic approach, see Art II-8:101. Only subsequently may regard be had to the negotiations, conduct, nature and purpose of the contract (not the type of parties), and good faith and fair dealing. There is no longer a special paragraph for contract supplementation. 201
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c reated relationship. The 2008 text had referred to an ‘objective standard of conduct’, no more.202 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 its operational meaning truly are remains wholly unclear. There is the additional of the reference to fair dealing, but what that means in different markets is a matter of conjecture. To repeat, the problem is that it is still mostly perceived as the opposite of bad faith, but good faith is a term of art that covers many more things as we have seen. Any starting point in bad faith colours the definition and also suggests its mandatory nature but it has already been said before that this is not or no longer perceptive and probably a mistake, see also the next section.
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 while 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 for professionals, to which these Principles were limited. This would be unacceptable to common law lawyers, and should also be to those of the civil law. Again, it is in its generality an inexplicable provision, which does not appreciate the multifaceted 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, but truly foremost a liberal interpretation technique in commerce and finance, reintroducing, it was submitted all along, the traditional sources of law which codification had sought to eliminate. It was followed, however, in Article 1.201 of the PECL, which also cover consumer transactions but do not make here proper distinctions either. As such, it can hardly be perceived as an established principle of commercial contract law as it pretends to be. It has no basis in, nor was it supported by, a proper comparative analysis of domestic laws under the UNIDROIT Principles or PECL. Again it shows an overriding consumer protection attitude and lack of relationship thinking. Interestingly the UNIDROIT Principles seek to distinguish (mandatory) good faith from reasonableness (Article 5.2) without, however, indicating the dividing line. The terminology is here quite unstable and what must in this connection be considered 202 The differences between the 2008 and 2009 text show that the drafters 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 known, 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 one. That sounds more like bona fides in the law of property.
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mandatory under these Principles or not is particularly unclear: see also the discussion in section 1.6.3 below.203 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 so204 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,205 except (in these Principles) those on surprising (standard) terms that must be expressly accepted by the offeree (Article 2.19), and those that limit the parties’ freedom with respect to exemption clauses and agreements to pay fixed sums for non-performance (Articles 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 effect of standard terms and exemption clauses borders on the manifestly unreasonable (as between them).206 The European Principles (PECL) 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. 203 There are many other concepts in the UNIDROIT Principles said to be based on or derived from the rinciple of good faith, like those in Art 2.4(2)(b) (revocation of the offer), Art 2.16 (duty of confidentiality), p 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 (Irvington, NY, 1997) 136ff. 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) while 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. 204 See Bonell (n 204) 149. See also O Lando and H Beale (eds), The Principles of European Contract Law, prepared by the Commission on European Contract Law (1995). 205 It then 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 of the Best Contractual Practice in the Americas’ (1998) 46 American Journal of Comparative Law 151, 154, 173, who appears somewhat naïve in his references to objective standards of brotherly care amongst professionals. 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 in professional dealings. 206 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 have seen, 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 nonmandatory 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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The DCFR moves on from here and declared in the 2008 version of its Article I-1:102 on party autonomy that 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 while 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. This includes professionals, who apparently cannot even set standards among themselves, which, again, the UCC allows in its section 1-302, unless that becomes manifestly unreasonable. In Article II-3:301(2) DCFR 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 that for pre-contractual disclosure duties and post-contractual negotiation duties, the good faith notion is not used any longer, which would suggest that this was done to allow for the variation of these duties by contract. For the DCFR, this also begs the question 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, through the reference to usages and practices, which themselves must be reasonable (see section II-1:104), the notion becomes circular under the definition of reasonableness in section I-1:104, whilst the nature of the relationship of the parties does not appear to play a role here either. 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 (especially in the nature of redistribution), 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 among themselves. It would appear that for professionals, good faith notions are mandatory only in exceptional circumstances and must even then be assumed with restraint. In any event, it has already been suggested that good faith is not itself truly a source of law but only reactivates those sources such as fundamental and general principle, custom and practices, which were excluded as autonomous legal sources in codification thinking. Indeed, the accent should rather be on liberal interpretation and the reintroduction of these other sources of law and their hierarchy in that context. It has already been noted also that the UNIDROIT Principles and PECL, 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, 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, and a generally censorious attitude. In this vein, in the Netherlands, the concept of good faith has 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 (Article 6(2) CC), also if they are themselves mandatory, it would seem. Again, if the notion appealed to a higher principle, that would be understandable, but often it does not or at least may not do so sufficiently. It is in any event curious for a
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concept that in the mind of many remains inherently vague. It would appear to transfer extraordinary powers to the judiciary (see also the discussion in section 1.3.5 above) and leaves great scope for supervision of contractual content and even for consumer protection notions entering professional dealings as we have seen. In this book the multifaceted nature of the notion of good faith is continuously being stressed; see section 1.3.4 above. Again, at least in professional dealings, good faith is here considered foremost an interpretation tool that relates the norm to the facts and may reformulate both in that context. That was identified as its most fundamental objective in modern contract law. In doing so, it also reintroduces the other more traditional sources of law in interpretation and relationship thinking. As such it is better not considered as an independent source of law but rather as an institutional or structural tool that may indeed not itself be subject to party autonomy and as such modifiable but the foreseeable result may be. The ultimate effect of a contract thus always remains a matter of normative or good faith assessment and interpretation. But again, that is not to say that parties are not able to have an influence on how their contract is interpreted barring fundamental principle and mandatory custom or relevant public policy or public order considerations. Beyond these mandatory features, professional parties are perfectly capable of agreeing that their contract shall be interpreted literally or narrowly, even though the effect will still depend on the circumstances of the dispute when it arises while the limit may be in what becomes manifestly unreasonable for them in their circumstances. Proper relationship thinking and the concept of substantial risk acceptance complete the picture.
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 or good faith 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, especially in professional dealings, as has already been 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 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 pre-contractual information duties among professionals. This has also already been mentioned several times, and it is of considerable significance. In the common law, there is in any event first the consideration requirement, which does not easily allow for rights or duties to arise before the conclusion of the contract. It follows that pre-contractual obligations do not readily arise and when they do so, they result primarily under tort law, fraud being an obvious case. However, they may
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also result from situations of dependency, therefore as fiduciary duties. In this connection, to distinguish between the type of parties was always more likely in common law, as we have seen, and it is also sensitive to the notion of risk acceptance. This makes a difference especially in professional dealings, where at least in England parties are expected to look after themselves and make the appropriate enquiries and subsequent arrangements. The law will not help them out if they do not do so. A similar attitude obtains in the US where the UCC, being concerned with commerce, does not therefore entertain in the pre-contractual phase a general good faith duty in terms of disclosure either. For pre-contractual disclosure, even the DCFR exceptionally refers here in business dealings to commercial practice as a reference point (Article II-3:101(2)), although this does not apply to pre-contractual negotiation duties—see the next section. In Germany, where, following von Jhering, reference is now commonly made to culpa in contrahendo, sections 311(2), 241 and 280(1) BGB (since 2002) deal with precontractual duties but do not make a distinction between professional and other dealings. Earlier it had been much more difficult to construe them. It required an aggressive use of the good faith notion, then used outside the area of interpretation proper.207 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 in civil law either, and in any event may function differently in different relationships and transactions. Nevertheless, Article 5.101 PECL 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’. Again, in professional dealings this may be less than perceptive and consensus thinking of this nature may not be conclusive. It still confirms a strong anthropomorphic streak in civil law; commercial needs and perceptions may require otherwise. Indeed, another attitude may follow from the division of tasks and risks envisaged in the contract as a matter of risk acceptance. See 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). That is progress, but it is limited. More importantly, 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. This is also the case in the areas of mistake, force majeure or change of circumstances. That is also sometimes considered in EU thinking, see section 1.3.8 above, and may be another manifestation 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. 207
See also the comment at n 165 above.
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Again, this does not find any general expression in the DCFR and related texts, but it is submitted that the special (commercial) nature of business relationships may curtail the legal notion of mistake, negligent misrepresentation or error, and the possibility of avoiding the contract on that basis more fundamentally: see for these notions also section 1.4.2 below. Although parties may be deceived in their expectations, that is hardly a ground for rescission among professionals, and clearly if no expectation was raised by the counterparty beyond mere sales talk. Professionals normally have the ability and means to accept 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. As mentioned, the DCFR in Article II-7:201(2)(b) introduces here at least some measure of risk acceptance in the case of mistake, which may conceivably leave room for some distinction on the basis of the nature of the parties. In other words, the risk is normally for the professional party making the mistake or having misjudged the situation, why should it be for the other except (perhaps) if both parties were mistaken 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 given 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. Rebalancing is a notion that makes sense mainly in the relationship between consumer and professional, assuming always the original balance can be established. By seeing it as a major issue in change of circumstances situations, the UNIDROIT Principles, which require renegotiations in such circumstances without even requiring great harm, seem mistaken (Article 6.2.2). The professional nature of the (business) relationship may also limit protest p eriods, 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 such as 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. Even in such cases, the more normal remedy may still be damages, not repossession. 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.208 Thus for professionals, as we shall see, the law may want to cut down endless minor arguments concerning misbehaviour, negligent performance, and even force majeure exceptions to the more obvious cases, and also limit the rebalancing of the contract when situations change, as these parties are used to risk taking and often make it their business, whilst they have the contract to allocate
208
See, eg, Lord Denning in Esso Petroleum v Mardon [1976] 2 All ER 5, 16.
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the foreseeable risks between them, short of which the chips fall where they fall, again excepting extreme circumstances which may also obtain in respect of the unforeseeable risks. In short, for the courts (or arbitrators) to intervene in the professional sphere, things must be pretty bad. Notably, as will be discussed below, that remains the attitude of the English courts, whose contract law derived from professional dealings, and it may make better sense in that context. It disfavours litigation at the same time and limits it to the more obvious cases of major changes where relief may be justified. In business, a stricter attitude may also mean that in agency cases, an agency might be more readily assumed than would otherwise be the case and that apparent authority among professionals could even be assumed upon the mere declaration of the agent itself (eg employees), certainly if the principal has taken that risk. In civil law, the normative interpretation technique or good faith considerations should, if properly understood and handled, lead to the same conclusions, which again often come down to proper relationship thinking. The 1980 CISG 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 laws under the applicable conflicts rules.
1.3.12 Practical Effects of Good Faith or Normative Thinking: Pre-contractual Negotiation Duties, Contractual 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 thus giving rise to a legal action when these duties are broken. These are therefore precontractual duties quite apart from information duties that may precede the conclusion of a contract, which were discussed in the previous section. Again, in common law, they should be expected to be narrower, and tort or fiduciary duty based, because of the concept of consideration, which makes it difficult to make such duties contractual unless there was detrimental reliance. Mere expectation of a favourable conclusion of contract negotiations does not give legal rights: see again the generally more restrictive attitude confirmed by Lord Ackner in England in Walford v Miles,209 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, however, 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, indeed, remains the English position. 209
[1992] 2 WLR 174: see also n 189 above.
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Again the key is that the justification for protection may be less obvious in c ommercial or professional cases, and reliance may not then so readily be justified either. It was already said repeatedly that even in civil law the normative interpretation technique or good faith considerations if properly understood should also make the proper distinctions, here 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. It was submitted that the overall position or effect on their business also counts here, and complaints in respect of a single contract where negotiations failed may, from an overall point of view, be less justified. If (detrimental) reliance issues arise, 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 (expectation damages). If one takes the element of professionalism into the equation, common and civil law may thus be less different here than is sometimes believed. The better view would always appear, however, to be that between professionals such negotiation duties depend much on the circumstances and cannot simply be assumed.210 For others the issue of dependency may also arise. 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)211 or the construction of collateral contracts (eg, an implied contract to negotiate, or justified reliance on an undertaking not to negotiate with others)212 may also result in some pre-contractual negotiation duty in English law, 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.213 This, however, removes only one barrier to the acceptance of contractual remedies in the pre-contractual phase. 210 See on this subject also S van Erp, ‘The Pre-contractual Stage’ in Hartkamp et al (eds) (n 142) 201, who signals here a diverging rather than converging tendency between civil and common law. 211 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 damages claim based on detrimental reliance leading to the formation of a contract. Again, the difference between contract 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 as expectation damages. 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 loss of the deal, HR, 18 June 1982 [1983] NJ 723 (Plas/Valburg, which concerned a case of local government and planning (mis)behaviour). The liability in the second phase is sometimes based in tort. There is as yet no case awarding damages for 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. 212 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, while even express or implied agreements to negotiate may fail on similar grounds: cf also Courtney & Fairbairn Ltd v Tolaini Brothers (Hotels) Ltd [1975] 1 WLR 297. 213 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.
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German and Dutch law, on the other hand, are increasingly categorical in the imposition of pre-contractual negotiation duties (even though not expressed in the new Dutch Civil Code) and hold that late withdrawal from negotiations may impose heavy contractual liability, including damages for lost profits under the contract, therefore expectation damages.214 That is also borne 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 II-3:101(2) for pre-contractual disclosure duties). Since there is no contract yet, this might not be an issue (although an initial Memorandum of Understanding could contain specific language to the effect) but the more pertinent question is whether in the case of professional dealings, there should be such a duty at all. In any event, the notion of risk acceptance is important here too, but not in the DCFR. Negotiation in good faith in any event poses serious questions as to when the duty is exhausted, therefore even if it results from a contractual renegotiation duty. Nobody can be required to negotiate for ever. If there is no good chance of a prompt conclusion with an agreement on all major points, each party should be able to abandon the effort, and professional parties probably sooner. The alternative is that objective market conditions would fill the voids. They may not exist or be readily and indisputably available or lead to a loss under the contract to start with. To allow for a claim for expectation damages if a party did not want to continue under these circumstances would appear irrational. 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.215 The consequence appeared to be a tort action requiring fault or bad faith with a limitation of damages to those actually suffered, therefore excluding the loss of the deal.216 Since 2016 Article 1112 CC (new) brings the issue under the good faith standard, but expectation damages are notably excluded. In the professional sphere, it was always believed that there was less reason for this liability.217 In the US, as we have seen, there is still no general duty to negotiate in good faith or to continue negotiations in that manner once they have seriously started—cf also Restatement (Second) of Contract, section 205. Section 1-304 UCC does not extend to pre- contractual situations either. The courts are, however, divided, and it appears to depend much on the circumstances.218 Also in the implementation of the contract, the duties of professionals among themselves may be less obvious than their duties in respect of non-professional parties. This may also affect the invocation of any abuse of rights. In civil law terms,
214 HR 15 November 1957 [1958] NJ 67 and 15 February 1991 [1991] NJ 493, and ss 311(2), (3) and 241(2) BGB (new). 215 See Cour de Cass, 20 March 1972 [1973] JCP 2.17542. 216 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. 217 J Ghestin, La Formation du contrat (Paris, 1993) n 330. 218 See EA Farnsworth, ‘Precontractual Liability and Preliminary Agreements: Fair Dealings and Failed Negotiations’ (1987) 87 Columbia Law Review 217.
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the requirements of good faith implementation should then be fewer and may be less onerous for professionals, as submitted all along. Closer adherence to the wording of the contract may thus be appropriate, clearer under the good faith reference in section 1-304 (1-203 old) UCC in the US. But this is not to deny that there are co-operation duties that may even extend to all involved in the same project, even 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 demand that there is a minimum of willingness on the part of all 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 could be seen as another instance of risk acceptance or as an efficiency issue.
1.3.13 Practical Effects of Good Faith or Normative Thinking: The Status of Commercial Letters of Intent. ‘Best and Reasonable Endeavour’ Clauses The binding force of letters of intent is an area of the law closely related to negotiation duties in pre-contractual situations. The general attitude of rougher justice which may flow from the normative approach in the professional sphere, even against the more traditional rules of contract law, in the interest of (a) the flow of commerce or (b) the greater clarity 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 often preludes to a professional 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, it is clear that 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. Again, the professional sphere, however, parties are left to their own devices to a greater extent and should not so readily 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 commencing of performance of which the other party knew, it may not be bound at all. ‘Best and reasonable endeavour’ clauses are not uncommon in contracts, but their meaning is often also obscure. It is one thing to say that it depends on the circumstances, therefore on the facts, but in civil law countries, good faith is likely to be
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invoked to further fill in the meaning. The clause may otherwise fail for lack of clarity. That is certainly a risk in England where the clause may be differently explained and more narrowly interpreted in professional dealings, although it is mostly not held to be a priori so uncertain as to be incapable of giving rise to any legally binding obligation even though it might be difficult to determine whether there was a breach and what the remedy is.219
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 may also need to be considered from the good faith or normative point of view. In civil law, we commonly see here more specific statutory texts, which might still be varied in their interpretation, however, depending especially on the nature of the parties. Good faith could fulfil that role, so could the notion of risk acceptance. In the 1980 CISG, the force majeure exemption in Article 79 is widely drawn, fairly subjective and therefore generous, one reason why the Convention is usually excluded by professional parties. It notably 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 burdens220—although in such cases Article 79 leaves wholly open what must be done next; 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 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 (the impediment thus having been discounted), which for the professional dealings that the Convention covers would seem key, but it is not at the heart of the Convention language and a matter of interpretation. 219 In 2012 the Court of Appeal in London decided a case in this area, stating that such a clause was not so uncertain as to be incapable of giving rise to a legally binding obligation, even though it might be difficult to determine whether there had been a breach of it as long as the object of the endeavour could be ascertained with sufficient certainty. The best endeavour might even require some cost to be incurred and the mere fact that there are or will be costs does not discharge the duty, see Jet2.com Ltd v Blackpool Airport Ltd [2012] EWCA Civ 417. In Emirates Trading Agency v Prime Mineral Exports Private Ltd [2014] EWHC 2104, a clause calling for ‘friendly discussions’ was also deemed enforceable in principle and required fair, honest, and genuine discussions to resolve the dispute, although no more. Where discretion is given to one party eg to close out certain transactions, there may also be an implied duty of honesty, good faith, and genuineness and the need to avoid arbitrariness, capriciousness, perversity and irrationality, Socimer International Bank Ltd v Standard Bank London Ltd [2008] EWCA Civ 116, Euroption Strategic Fund Ltd v Skandinaviska Ensdkilda Banken AG [2012] EWHC 584 (Comm). 220 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 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 among professionals.
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The UNIDROIT Principles, the PECL and the DCFR have very similar language for force majeure taken from Article 79 of the CISG. 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 a change of circumstances. The UNIDROIT Principles tie this relief to the equilibrium of the contract and do not require an excessive burden, again difficult to explain for professional dealings for which these rules were written. The PECL appear here less generous even though also applicable to consumers: see Article 6.1.1.1, which requires an excessively onerous effect while there is also a reference to risk acceptance. The DCFR operates similarly (see its Article III-1:110) but uses abuse of rights language while tying the relief to an exceptional change of circumstances making performance so onerous that it would be manifestly unreasonable to require it.221 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 that the DCFR in its post-contractual renegotiation language in Article III-1:110 does not track the pre-contractual language of Article II-3:301, which is cast in a much more peremptory manner, as we have seen, and does not refer to good faith in this connection either. Again, in the professional sphere, such a duty to renegotiate or a duty to continue agreements beyond their termination date should not quickly be assumed. There must therefore be some form of serious hardship, however defined,222 while 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 1.1.6 above. Some misery under one contract of which there may be thousands is no excuse and any adjustment might be very detrimental to the other party who may have only one such contract and depends on it. Other problems may emerge in renegotiations: 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
221 It is curious in that it introduced new language while 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 PECL 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. 222 Factors likely to be taken into account to determine whether serious 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, 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 such as, eg, poor performance generally or lack of co-operation, of credibility, and of creditworthiness so that there 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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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 reasonably be 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 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 more 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, relief is limited in professional dealings. Renegotiations may sometimes be demanded if a situation of hardship arises but even this is less likely between professionals. It also means that renegotiations may be discontinued sooner 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.223
1.4 Performance of the Contract, Defences, Default, Excuses, Termination 1.4.1 Performance in Kind/Specific Performance A contract is made with a view to performance of its terms, even if it may be subject to and supplemented by extra-intentional conditions. When one of the parties is not performing, the question arises as to what can or must be done. Court action or other forms of adjudication are the natural response in all modern societies if attempts at a settlement fail but what may or could courts, in particular, be asked to do when accessed in such situations? Even if the plaintiff ’s default argument is accepted, what should the relief be and how could the judgment be enforced if there is no voluntary compliance with the decision? It is simplest in money judgments: normally there 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 its monetary claim against the proceeds of this sale. This is on the whole efficient, at least in countries where courts and public authorities are well equipped to deal with enforcement and collection, but
223 It may be recalled in this connection that under German case law, notions of good faith (or Treu und Glauben) became to be 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 World War I but the relief is now codified in s 313 BGB, see further s 1.4.6 below. Also in the Netherlands, this is now statutory law, see Art 6.258 CC but seems to be seldom successfully invoked. Neither refers to good faith directly nor 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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even in more developed countries there may still be problems and money is not always the issue. A money judgment is the obvious answer when the claim is for payment of goods delivered or services rendered. However, if the claim is for the delivery of the goods or services themselves, there may not be a request for a money judgment (covering damages), but rather for a demand for performance instead. 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 (as under Article 9 UCC in the US) backed by statute: see more particularly chapter 2, sections 1.2.4 and 1.3.4 below. This is property law, but in common law, the term ‘specific performance’ is mostly used in connection with the performance of contractual obligations (to give or to do). Here, 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 in such cases developed gradually. Pothier224 allowed specific performance very clearly, yet the French Code Civil was generally silent on the possibility and its implementation, notwithstanding the text of Article 1142 CC (as against Articles 1184(2) and 1610 CC). French legal practice has always been in favour of it,225 and it was confirmed in the 2016 amendments, see Articles 1217 and 1221 CC (new), except when the costs are disproportionate. 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 in its generality against its own Roman-Dutch roots and Germanic principle, although in line with the older Roman law. The general facility of specific performance was, however, reintroduced in the Netherlands by statute in 1932.226 When a judicial order for specific performance is used, penalties of some sort are the only possibility for 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 224
Traité des obligations, No 156. See earlier, especially, R Demogue, Traité des obligations en général 6 (Paris, 1931) No 139. 226 See for the history also HFWD Fisher, De Geschiedenis van de Reele Executie bij Koop [History of Specific Performance in Sales] (Haarlem, 1934). 225
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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 US but not in pure contract cases. Rather they are connected with contracts in restraint of trade or with malice in tort. In common law the remedy is contempt of court, under which courts will only subsequently set administrative fines or may then even order imprisonment for an unwilling judgment debtor. The superior courts have broad discretion here 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 also leaves them broad 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 N etherlands. 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.227 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, more quickly and efficiently 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 for these reasons and indeed normally equally restricted to situations where it is the best and most efficient answer. In fact, when a sales contract is for the delivery of some commodity at a certain price, the purchasers under the contract will often be happy to be released from their contract while claiming damages for the delay by the non-performing seller and for any higher price they may have to pay elsewhere. For them, it will normally be the cleanest and most efficient solution. Often they will have to purchase the goods elsewhere anyway because of the immediate needs of their production facilities to operate or to cover their trading commitments. On the other hand, if they want a unique object, for example a manufacturing tool, their remedy may 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, immediate 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 still be necessary. But if this service is highly personal or depends on other factors such as good spirit or proper inspiration, as in the case of the services of a barman,
227 See also MA Eisenberg, ‘Actual and Virtual Specific Performance, the Theory of Efficient Breach, and the Indifference Principle in Contract Law’ (2005) 93 California Law Review 977.
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singer or portrait painter, there is a limit to what can be asked in kind and such an order 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 and inspiration may return. 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, such as 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 the estate, which will probably claim force majeure. German law is clear in always allowing performance in kind (section 241(1) BGB). That confirms the civil law’s basic approach, but in the elaboration the German Code of Civil Procedure (CCP) sets out a number of scenarios and indeed differentiates between a number of basic cases for claims other than monetary claims (sections 883ff CCP). Appropriation by a bailiff of a specific chattel owed under a judgment or execution title is dealt with in section 883 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 of such a third party, see section 887 CCP. Sections 888 and 890 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 while being ordered to refrain from doing something or to allow others to take some action. These penalties may be imprisonment or fines which, again, in Germany, go to the state. The result may also be the conversion of a judgment in kind into a monetary judgment. In France, the Civil Code is older and the regime less precise. Moreover, there were contradictions. Article 1184(2) CC allowed an order for performance in all bilateral contracts, but Article 1142 suggested 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. As already mentioned, case law has much refined this system. Under Articles 1143 and 1144 CC, the courts could give preliminary restraining orders or order others to do the act on which the first party defaulted if the performance is sufficiently impersonal. The new law after 2016 is more specific. The already-mentioned astreinte backs up the system228 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
228
See in modern times, Cour de Cass Civ, 20 October 1959 [1959] D 537.
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it is too inconvenient or does not hold out a realistic prospect of success,229 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 in any event always discretion and it depends on the circumstances whether it will be granted with categories of cases developed 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, modern statutory law both in England and the US 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 US, in sales, specific performance is more 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 sales 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 under commercial pressure, common and civil law have greatly converged in the matter of performance remedies in kind, in civil law at the theoretical level the discretionary element is lacking while 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 1980 CISG has a curious provision in this respect in Article 28. It refers back to the lex fori (see for the details section 2.3.4 below).
1.4.2 Lack of Consensus in Civil Law and Defences to Performance in Common Law: 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, lack of formality, especially in terms of documentation
229
Ryan v Mutual Tontine Westminster Chambers Association [1983] 1 Ch 116.
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(Statute of Frauds), lack of capacity, illegality, fraudulent or innocent misrepresentation, mistake, duress or undue influence, and unconscionability (in the US) are usually mentioned as defences against any demand for performance. In civil law, fraud, duress or undue influence, misrepresentation (although here mostly not considered a special category), and mistake are on the other hand commonly connected with a lack of consensus and therefore result strictly speaking not in some valid defence to a claim for performance, but rather in voidness or more likely in voidability of the contract as a whole at the option of the affected party as a natural consequence of this failure of consent Thus it may be said that in civil law, these are formation issues rather than defences, which are performance issues.230 In common law, where the consensus notion is not at the heart of the contract, as we have seen, there is no conceptual clarity in these matters and the courts (in equity) developed a patchwork of remedies centring on rescission. This is a technical term geared precisely 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 nature and consequences of these defences are likely to be more complex and varied, although in principle all of them may potentially discharge the party concerned from its contractual obligations. Specific performance—in any event never a right as just noted—is not then granted. The contract itself may even 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 this connection it is also of interest that in civil law, invalidity and illegality are commonly distinguished. Invalidity is normally connected with the lack of consent and goes therefore to the heart of the existence of the contract. Illegality on the other hand is normally connected with a statutory prohibition or public order constraint. In common law, invalidity and illegality are often interchangeable notions and usually result from moral or public order consideration and may then also result from impediments such as anti-competitive behaviour. Again, they result in defences against a demand for performance. In civil law, the notion of an improper causa (where still existing, see section 1.2.6 above) may sometimes also be used to avoid these illicit contracts. There is another particular common law aspect not found in civil law in the same manner. Common law adheres in the case of invalidity or illegality to the old rule ex dolo malo or ex turpi causa non oritur actio, meaning that no one can derive an action from their own misbehaviour. Under an invalid or illegal 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 abandoned their illegal objective. If the invalidity is based on less
230 In the civil law system, fraud and duress may invalidate all voluntary legal acts while mistake is then more particularly believed a contractual issue.
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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 and hence invalid in principle, 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, cf in Germany section 817 BGB and in the Netherlands (the more flexible) Article 6.211 CC (referring to reasonableness), and is not, as in common law, a matter of contract law. As regards misrepresentation, this is perhaps a better known common law defence. It can be fraudulent, innocent or (in England) negligent. To repeat, the situation is here different from the one in civil law where misrepresentation (at least if fraudulent) goes to the heart of the consensus in terms of fraud as defined, makes the contract voidable at the behest of the affected party, and is not merely a performance issue or defence against a performance request, but the situation is also otherwise different. Foremost, ‘representation’ in this sense 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 shortcomings, including misrepresentations, would give rise to a breach of contract or a default on the part of the seller (the watch was not gold as stated but only golden, etc) and be pursued in that context. The remedy for misrepresentation in the above sense (unless fraudulent) is, on the other hand, rather ‘rescission’ of the contract. To repeat: this is a technical term developed in equity and is a defence against a demand for performance, not technically a breach of contract. Unlike what it suggests, it is not avoidance of the contract per se either. In appropriate cases, it may lead to it at the option of the harmed party and then results in sales in voidable title, but it still depends on the circumstances. Thus if this defence is invoked, the consequences must still be considered further 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, of which there are many. There is no breach of contract proper; the contract said nothing, but there was probably reliance on the seller’s representations. 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 may be in the realm of sales talk and should be recognised as such so that no remedial action may be justified at all. 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, although there may still be duties of care and disclosure implied depending on the type of counterparty. Again, that is relationship thinking. 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 no such intent, there may still be no more than 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.
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In common law, in all cases, the point of departure is the position of the person who makes a representation (about quality or otherwise), 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 in practice limited. Even in the case of fraudulent misrepresentation, a setting aside of the contract is not automatically available either but still depends on the circumstances. In any event, a judicial order restoring the old situation will only be given if that is still possible or meaningful. In typical equity fashion, the factual situation is always decisive for the type and meaning of the remedy. For example, if the delivered asset is consumed or a service already rendered on the basis of false premises, the rescission order will not be given at all. Damages may then be the only available alternative, again as an equitable remedy. It has already been said that in equity, there is always a measure of judicial discretion and no absolute right of the harmed party. Most importantly, in the sale of goods, movable property will never be restored to the damaged party if a bona fide third party buys from a person with voidable title. This party is specifically protected: see section 23 of the Sale of Goods Act in the UK and section 2-403 of the UCC in the US. In civil law, on the other hand, if the misrepresentation resulted in a lack of consensus, avoidance of the contract becomes an option for the harmed party and is then likely to be fully effective, even in a proprietary sense. Thus even property returns in principle if the damaged party so wants, still subject, however, to the protection of bona fide third party purchasers of chattels but not of other assets, assuming (in most systems) that these purchasers acquired physical possession or at least a sufficient measure of control. In abstract systems of title transfer such as the German one (see chapter 2, section 1.5.7 below), any automatic return of the assets is unlikely, however, even from the purchaser except in the case of fraud. In other legal systems, such a return possibility upon a failed sales agreement (for whatever reason) is also becoming less favoured, especially in the case of commoditised products, an issue that will be discussed in greater detail in section 2.1.7 below in connection with the notion of finality. In common law, it was always exceptional, much as in Germany, and given as a matter of right only in the case of pure fraud when an automatic return of the assets at least by the buyer may be ordered through a specific performance remedy assuming the asset still exists or has not been resold: see also chapter 2, section 1.4.6 below. As just mentioned, in common law the possibility of rescission is limited especially if the misrepresentation is innocent, a situation in civil law may amount to ‘error’, which, however, again goes to the consensus requirement and voidability of the contract, not to the duty to perform. It may therefore not be automatically equated with innocent misrepresentation in common law, quite apart from the fact that if such a representation is made in the formal contract itself, it is in common law treated differently; breach of contract would result—it was already mentioned. As will be shown, the comparison between ‘error’ in civil law and ‘mistake’ in common law presents also problems. They are not the same either. Even in common law, the English term ‘mistake’ must be clearly distinguished from innocent misrepresentation, although there are borderline cases. Mistake is a different concept and concerns some defect in the declarations by one of the parties at the time of the offer and acceptance rather than the making (fraudulently or innocently) of a
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misleading representation on which the other relied and not reflected in the contract itself. 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 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’ for the whole lot and a misunderstanding may result which is nobody’s fault. This would be (mutual) mistake in common law. It concerns contract formation and the contract could be void. If, on the other hand, a statement is made separately from the contractual text, eg that a gold watch is offered that proves to be only imitation gold, then this is not part of the contract formation proper, there is (extra-contractual) 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: the declarations do not sufficiently overlap. 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 essential in matters of formation of contract as we have seen). There is no contract. For mistake in this common law sense, which therefore is not a matter of intent proper, civil law seems not to have a true equivalent. It is usually distinguished from error or seen as only a special instance of it. Moreover, while in civil law misrepresentation if it can be characterised as fraud and error normally lead to forms of voidability at the affected party’s request for lack of consensus, in common law, mistake leads in principle to a void contract at law. Only then any property transferred reverts. The risk of appreciation or depreciation is in the meantime with the seller. Another peculiarity is that even if the contract stands at law because the mistake is not believed sufficiently relevant, equity may still give a rescission remedy depending on the circumstances and may in any event refuse specific performance of the contract. Thus certain forms of mistake are considered less fundamental and then lead only to voidability in equity. It is often difficult to draw precise lines. Unilateral mistake, a mistake not involving the other party, will seldom give rise to a remedy at law (or even in equity); it is the mistaken party’s own risk. The latter thought to offer a gold-plated watch, but in the event it was pure gold.231 US law is often simpler than English law. So is civil law at least in those cases where there may be a lack of consensus, more clearly if there is fraud, although it may still ask which party should reasonably bear the risk in the case of a mistake (in a common law sense). Importantly, in this connection blame is likely to play a role in civil law, relevant if the non-complaining party could not help it. It is not his fault that the complaining party made a mistake. Thus the normative interpretation technique may still find a valid contract if the mistake was unilateral and not attributable to the other party. As already suggested in section 1.3.11 above, professionals in particular may not have much of a defence. In other words, their mistakes should normally be their own problem and risk as the other party cannot help it either. In any event, the fact that mere expectations were disappointed is not enough. At least in sales, caveat emptor remains the basic rule. 231
Solle v Butcher [1950] 1 KB 671, 693.
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On the other hand, if parties have been clearly talking about different things, there may not be a contract. A mutual mistake of this kind could also be seen as tantamount to a rejection of an offer and would result in voidness of the contract or rather in no contract at all. Here common and civil law may come together. Some forms of mistake in this sense (especially those as to the subject matter) may in civil law lead to the contract not having a proper object with avoidance on that basis, as 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.232 But the legal consequence may still be different: there is mistake and voidness in common law if there is a misunderstanding about the contracting counterparty; in civil law this is more likely to be error, leading only to voidability, unless indeed there was no object. In common law, mistake may even concern the possibility of performing the contract, which may be characterised as 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 a basis for claims for damages, cf section 311a BGB in Germany. This does notably not obtain in cases where an estimate of cost is given which is subsequently overrun. 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 the term ‘force’ chiefly as psychological coercion or economic pressure preventing the conclusion of a valid agreement for lack of consensus. In common law (equity), this is primarily covered by economic duress233 or possibly undue influence. It is not necessarily limited to abuse of a position of trust or of the circumstances as it often is in civil law. But 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), supported by the rescission possibility in appropriate cases. In modern civil law, avoidance upon the petition of the affected party is also the rule rather than voidness: see Article 3.44 CC in the Netherlands and section 123(1) BGB in Germany. It has already been mentioned that the 1980 CISG excludes matters of validity in this sense from its scope (Article 4). That concerns, in the context of that Convention, all matters relating to consensus and its failures; the impact of illegality, misrepresentation, mistake and duress or undue influence is not covered. On the other hand they receive broad attention in the UNIDROIT Contract Principles, PECL and DCFR, as we shall see in section 1.6.8 below, which substantially follow civil law thinking in this area. 232 Raffles v Wichelhaus (1864) 2 HC 906. See for a discussion of mistake under common law also HG Beale, Chitty on Contracts (London, 2012) 5.001 in England, and Restatement (Second) of Contracts (1980), s 379 in the US. 233 See Mocatta J in Northern Ocean Shipping Co Ltd v Hyundai Construction Co Ltd [1978] 3 All ER 1170. In the US, the concept is more readily used than in England, see 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 US, there appears to be a preference for expanding the economic duress notion at the expense of the notion of undue influence. Economic duress, on the other hand, should be distinguished from unconscionability, which lies in the performance of the contract, although economic duress is normally also presented as a(nother) defence to performance and not as a formation issue.
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1.4.3 Excuses of Performance and the Meaning of Conditions and Warranties, Covenants and Representations As we have seen, in common law, the contract is in essence based on an exchange of (formal) promises under the consideration requirement of exchange and bargain. They must be sufficiently congruous to lead to a contract in which context declarations are of prime significance; detrimental reliance on conduct may complete this picture. Normally, 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. As we shall see, at least in professional dealings, this is in truth the only real excuse available in respect of non-performance in common law unless the contract itself specifically states otherwise. The parties in their contract can do so notably by introducing a force majeure clause or other excuses, eg in a change of circumstances or hardship clause. Defences should be well distinguished here and were discussed in the previous section. It follows that in common law, in respect of conditions, notably force majeure cannot normally be pleaded as an excuse by one party under pressure, certainly not while requiring the other party still to perform, unless again it was a contractual term. Warranties are different and non-compliance with them does not excuse the other party. The distinction between conditions and warranties is thus important. Whether a promise is a condition in the above sense remains a matter of interpretation. Short of other dispositions in the contract, performance of the major contractual terms by the one party is in this manner in common law always a constructive or implied condition of performance by the other. Again, especially lack of payment discharges the other party from any further performance. Americans do not distinguish between conditions and warranties in precisely the same way but look here at the conditionality of the contract or at what may condition it. 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 and is a precondition for the latter’s (further) performance duty. In the US, 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 implied conditions of this nature being attached to them. Again, whether there is a failure of condition in this sense is a matter of interpretation. Notably payment is conditional on the other party’s performance, which, in this reasoning, is a condition precedent to the payor’s own performance. An interesting example may clarify the point and can be found 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 the latter cannot deliver by the appointed date. The promissor operated on a best effort basis only as to the date of delivery although he must still deliver as soon as possible thereafter while the other party must still pay upon the later delivery,
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although not now. Normally, however, failure of the promisor to deliver leads to late delivery, especially relevant in the case of perishable goods, and to a situation of breach of an essential contract term. The other party is excused from payment, as the main term of the contract is not performed in a timely manner. That party may also have a claim for damages. 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 no force majeure excuse leading to the repudiation of the contract and to a discharge of the other party upon breach, whatever the reason. Payment obligations are usually considered in that category. It means that in a common law sense, all terms in a civil law contract are warranties and not conditions unless reinforced by a guarantee or being payment.234 In civil law, this means that breaches are normally only followed by a sanction if the promisor can be blamed for non-performance.235 A situation of force majeure (or possibly of changed circumstances) is then usually sufficient excuse except again when there is a guarantee or payment.236 This is quite a difference in approach. Again, it may be explained by the English contract having been developed first in commerce where it is seen primarily as roadmap and risk management tool. In common law, all main terms of the contract (conditions) are thus guaranteed in a civil law sense unless weakened by a force majeure clause or other excuses which need in that case to be specially included in the contract. It shows that both systems come from opposite directions, the reason being that the common law of contract was always more
234 In civil law, default if considered sufficiently serious is, however, often also construed as a rescinding c ondition 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 issue is more fundamental in the structure of the traditional common law of contract and there is here a difference in emphasis clear especially as to the impact of force majeure on the obligation of the defaulting party. 235 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. Monetary and guaranteed obligations are never discharged. In the more subjective view, on the other hand, the debtor need only foresee or do what may reasonably be expected 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). It has already been said that such an approach is less feasible in business dealings. Art 79 does contain a reference to risk acceptance, which at least in professional dealings might put the excuse on a more objective footing, although nothing is clear. 236 Thus, blame becomes the key in situations of non-performance. It means that if the debtor is to be blamed more, he will be liable for damages while 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 consider himself liberated (at least if not claiming performance by the other party) while 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 whatever is their loss on the deal and the expenses. That may come about 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 it 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 the risk allocation question, that is to say the question who bears the burden even if neither party is at fault and is an important issue that cannot be ignored.
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geared to professional dealings where there is less room for excuses and blame is less of a consideration. It asks itself more readily why the other party should be stuck with the detrimental consequences. Somebody has to bear the consequences, never mind the blame, and it is at least among professionals more logical that it is the party that 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. The law will not redistribute the risk if the parties have not been able to do so in their contract, except perhaps in extreme circumstances. It is true that, if in civil law the promisor is not to blame for non-performance, the other party will not need to pay, but this party defends with an exception (not therefore an excuse in the common law sense) against any claim to perform on its part, notably payment; there is no need to ask for avoidance of the contract proper. If this party suffers harm, there may even be a need for the defaulting party still to contribute, which is more likely when the force majeure was due to personal or internal rather than external factors. But 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. It is in this connection also of interest that 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 66ff of the Vienna Convention; see more particularly section 2.1.9 below. It means normally that the seller who has not yet (physically) delivered remains liable for all that happens to the asset even if it could not be helped (eg the deterioration of perishable goods). In countries such as 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 contract, 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 always remains an important issue even when there are valid excuses such as force majeure: who picks up the bill? Again, it means that even if force majeure may be an excuse for non-performance, in civil law it still does not automatically discharge the non-performing party in full.237 As a point of departure, the CISG in Article 25 here uses first 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
237 Indeed, the excuses, the latter even if valid as 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, but it may be so even if there is force majeure and therefore in principle no blame in civil law. Thus, although the counterparty may be excused its own performance because the first party is not performing an essential part of the contract, there may still be room for a claim for expenses and the loss of the deal. However, especially if the performance was conditioned by an external factor as in a sale, eg by the timely prior supply of the goods by third parties 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 perhaps the buyer was forced to buy replacement goods at a higher price; again it is a matter of determining the risk and a question of interpretation. The same may be the case if delivery is rendered absolutely impossible by outside events such as acts of nature (or God). The chips may then also fall where they fall.
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c ircumstances would not have foreseen such a result.238 It does not strictly speaking entail a conditionality in the above sense; see also Articles 45ff and 60ff. A more precise set of remedies against default is defined here, which may ultimately result in avoidance of the contract by the aggrieved party (Articles 49 and 64), who would then also be discharged (but may still have a claim for damages (Articles 45(2) and 61(2)). That is more like the old common law approach, as we shall see, except that it is more subjective. Subjectivity is also borne out by the force majeure clause of Article 79, never mind its reference to risk acceptance. It is the subjectivity in the concept of performance or lack thereof and in the excuses that is one of the principal reasons why the CISG is commonly rejected by the trading community as we shall see and has not been ratified in the UK. Especially in view of where English law comes from, and for a professional commercial setting, that is not surprising. However, even in civil law, subjectivity may still raise the issue of who bears the risk, as we have just seen. The UNIDROIT Principles, PECL and DCFR follow the CISG approach (see section 1.6.8 below) and in the matter of excuses they largely accept civil law thinking too (see section 1.3.14 above). This is more surprising for the UNIDROIT Principles, which were meant for professional dealings only, and shows a lack of background understanding and knowledge. Finally, to avoid misunderstandings and clarify terminology, it may be useful briefly to discuss the relationship between conditions precedent, representations and warranties, and covenants, particularly common in financial documentation governed by English or US (State) law. There is here an important difference in the use of the terms. Conditions precedent in this context normally require that certain documents are produced by a prospective borrower, such as 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 was noted in the case of default, while the representations and warranties themselves may be declared conditions precedent. Examples may be the truthfulness of financial statements, absence of major events affecting the borrower’s credit, such as 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.
238 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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Representations and warranties are in finance concerned with the past; covenants with the future. Under covenants, prospective borrowers promise to refrain from certain actions, maintain certain financial ratios 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 principal 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 have seen. In section 1.4.2 above, a number of common defences were identified in this connection, which could protect against a claim for performance, such as invalidity or illegality, misrepresentation and mistake. They concern the nature and binding force of the contract or its performance. It suggests that there is something wrong with it or with the rights and obligations that are flowing from it. There are here also substantial differences in the details of common and civil law as we have also seen. In section 1.4.3 above, the conditions of performance were discussed and also the excuses. Under common law, in bilateral contracts, not meeting the basic terms or conditions of the contract may excuse the promisee from performing and even allow the latter to terminate the contract and still claim damages. In common law, traditionally force majeure is not an excuse for non-performance of such a contractual condition unless specifically entered into the contract. The same may go for a change in circumstances unless there was a hardship clause in the contract. But 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 promisor, even if there was a force majeure situation (unless the contract specifically provides otherwise). Again, the common law of contract, at least in commerce, is first concerned with risk. Its allocation and management go to the heart of the common law commercial contract, its formation, operation, interpretation and performance, as we have seen. Civil law, on the other hand, first asks in all these matters what was intended and who is most to blame. That is a very different point of departure and more subjective, although civil law cannot avoid the question of risk either and may still have to allocate it to the promisor even if claiming force majeure, especially if it results from internal factors, such as illness or other personal circumstances, but there may be no damages or (extra) cash payments, as we have seen. 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 valid defences or
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excuses, or alternatively with any performance in kind or specific performance, which may be accompanied by penalties ordered by the courts, although, technically, in common law, breach is not only concerned with indefensible or inexcusable part performance or non-performance or with defective performance, but also covers changed circumstances and their consequences. Again, the structure 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 (section 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 changed circumstances, are now covered in the BGB and may also result in damages. This is in essence also the French approach for bilateral contracts (Article 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 it is no longer so under its new Code of 1992. On the matter of guarantees or conditions, modern civil law increasingly converges with common law as already explained in the previous section, at least in commercial dealings, although not borne out so far in texts such as the CISG, DCFR and CESL. 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 matter of expectation damages presents yet another issue. In contract they are normally allowed upon non-excusable breach, but when the breach concerns pre-contractual duties, special contractual co-operation duties, or post-contractual renegotiation duties, none of which are promise based, one might ask whether damages in tort are not the better remedy. 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 CISG, showed this. In the US, 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.
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After the goods are accepted, under the UCC, they may still be returned or amages claimed in respect of them by a revocation of the acceptance of the goods d if defects that were difficult to discover emerge and/or a seller’s promised repairs are not executed in a timely manner. A buyer may also organise cover and thus replace the goods with others and 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 10 days of delivery) or 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 CISG also has an elaborate system of remedies, although 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 have already seen, or avoidance of the contract, but only if the breach is fundamental, with the possibility always of claiming damages depending on the circumstances. It is a situation often hard to establish, and the reason for much uncertainty and criticism as has already been mentioned. It is a key notion, however, as short of it the remedies are much weaker. It has already been said that technically speaking, the CISG abandons in this connection 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) but it is only loosely defined (Articles 25 and 26). It remains, like negligence elsewhere, a matter of determination per case in light of all the circumstances,239 and remains substantially subjective: see also the previous section and section 2.3.6 below. So is the related concept of force majeure in Article 79. Again, together they form the major criticisms of the Convention and the basic reason why professionals usually exclude its application (another is the buyer’s unilateral right to reduce the price under Article 50). This is consumer law. See for the approach of the UNIDROIT Principles, PECL and DCFR, section 1.6.8 below.
239
See, for the concept of fundamental breach in England, n 238 above.
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1.4.5 The Excuses of Force Majeure and Change of Circumstances The subject of excuses such as force majeure and change of circumstances has already been introduced in section 1.3.14 in the context of the normative interpretation of contracts and the renegotiation duties that may be implied or imposed in such cases— less likely, it was suggested there, in professional dealings as a matter of relationship thinking. It was further mentioned in the context of excuses under common law and the differences with civil law in sections 1.4.3 and 1.4.4 above. This is a difficult subject because of its case specificity which allows little room for a more systematic rule based approach. 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 US 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 do their consequences, in which connection causality and foreseeability may remain an important issue as well. 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. They may now include governmental action or actes du prince. That will often be regulation; competition law may play here a special role. Internal excuses remain more problematic because of their subjectivity. In any event, as we have seen, 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 then also excused from performing but in appropriate cases may still have a claim for performance or damages as a matter of risk allocation as we have also seen. In civil law, the concept of force majeure operates much more broadly and particularly alleviates the imputation of blame, which, as noted before, is at the heart of a claim for performance or damages (or both) in civil law, unless the contract either explicitly or implicitly introduces a guarantee of performance. In civil law, a guarantee of performance is now sometimes deemed implied, especially for the performance of payment obligations as we have seen and could also affect other fundamental terms of the contract, especially in professional dealings, but this is a matter of interpretation and remains then more exceptional. Again, upon a proper analysis, common law protects foremost the wording and objective of the contract in the way it is being expressed and therefore more objectively the risk allocation that was so achieved. The parol evidence rule is another expression of this, as is the common law’s formal approach to contract formation in which intent
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and consensus play more modest roles. A more literal interpretation approach follows, at least for professional dealings as we have seen also. Thus force majeure affecting a party’s ability to perform is here exceptional and a narrow excuse and not traditionally deemed implied 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, to repeat, the question of who bears the risk rather than the blame is more prominent and relevant. Even force majeure thinking cannot avoid the question of who bears the consequences either, as was also noted especially when personal circumstances are involved. It is true, nevertheless, that through implied conditions, notions of reliance and cooperation, and through distinctions on the basis of the nature and experiences of the parties, greater flexibility is now often also achieved in this area in common law, not unlike the flexibility obtaining in many civil law countries under the broader notion of good faith. This may concern especially external circumstances that make performance impossible or very difficult, but still the situation is not the same, even in the US where the notion of good faith has acquired more substance (see section 1.3.7 above). Especially, in professional dealings common law remains even less inclined to excuse performance (of conditions) on the basis of internal or personal circumstances, however much unforeseen, and lets the defaulting party continue to carry the risk under the circumstances. In England, except for acts of God and later governmental intervention often through regulation, it therefore 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,240 and the strict rule was watered down only by creating exceptions through implying (sometimes) terms of reasonableness, which are still subject to relationship thinking as we have seen, therefore likely to be less prevalent among professionals.241 Nevertheless, force majeure 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 still limited largely to what are now considered consumer cases.242 In the absence of a force majeure excuse, a theory of frustration developed in E ngland nevertheless for non-performing debtors. They may sometimes be discharged when a (usually outside) event (beyond acts of God) supervenes, 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 that it would be unjust to hold the disadvantaged party to the literal sense
240 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, including to 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). 241 See Taylor v Caldwell (1863) 3 B& S 826, LJ 32 QB 164. 242 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.
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of the contractual stipulations in the new circumstances. In these situations, there is no adaptation facility and the contract is ended.243 In the common law tradition, even section 2-615 UCC in the US 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 then also lead to a valid excuse under the UCC. Again, being only excuses, neither results in an adjustment of the agreement without a particular clause to the effect in the agreement itself. Even in France, 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 (acte du prince). Thus in France, the excuse of force majeure still required an unforeseeable and irresistible event unconnected with the party that must perform, therefore absolute impossibility. This is the objective approach, even in France now mostly thought too severe, however, and restricted to socalled result contracts. These are contracts where a certain result is the objective, such as 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. On the other hand, after 2016, the amended CC in Article 1195 now contains a provision for unforeseen circumstances (imprevision). As already mentioned, the CISG 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, only tempered by some risk acceptance language if the reference to the impediment may be so construed. Internal and external circumstances are not distinguished. Article 79(5) provides 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 in principle. The Convention notably does not contain any special provisions allowing for an adaptation of the contractual terms in the case of changed circumstances, but relief could still follow under Article 79, even though no procedure has been laid down. Again, the flaws in this approach have led to professional parties usually excluding the Convention. The language of Article 79 is too subjective and imprecise, as is the notion of fundamental breach of Article 25. It has already been said that the DCFR in Europe,
243 Except where there is a contractual clause or statutory law to the contrary. 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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the UNIDROIT Principles and the PECL essentially follow the CISG in this approach. So does the CESL. All these newer texts now introduce a different regime for change of circumstances and split it out of force majeure.
1.4.6 Change of Circumstances, Frustration and Economic Impossibility. Development in Civil and Common Law Modern legal facilities or requirements of adaptation can best be seen as risk allocation and may then also cover situations where there are unforeseen circumstances other than force majeure or frustration proper. Again, it may be useful to distinguish here in terms of external or internal impediments (more apparent in common than in civil law as we have already seen). The latter are often 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 to miscalculation or lack of perception. In terms of a change of circumstances, the condition is often that the readjustment relief will be granted only 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, also in terms of what may be deemed excessive. 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 and definition.244 It has already been said that even in traditional civil law, the force majeure excuse is more generally irrelevant in respect of payment and guaranteed obligations or often also in 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. At least the risk remains with the defaulting party even if force majeure is accepted to exist. 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 such as incapacity may, however, still 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. In sales contracts, pure acts of god or theft may 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 its 244 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.
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manufacturing facility substantially intact after fire or if there is ready access to a market of replacement goods, so that the seller 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 a more subjective (or economic) rather than a more absolute use of the concept of impossibility.245 That would seem to be accepted also in the CISG, although not necessarily in common law. The concept of passing of risk in sales agreements is a special feature here, see section 1.4.3 above and more in particular section 2.1.9 below, typical for sales agreements and connected with the handling of goods in transit to the buyer. Importantly, it suggests also that regardless of force majeure, the party who must perform might not always be excused. This is no less an issue in all other types of contracts where there is usually no such special provision for the passing of risk. It has already been noted before that most legal systems now accept some form of the 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 above, and ‘impracticability’ in the US (normally of an economic nature instead of absolute ‘impossibility’ in section 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. As we have seen, in civil law, the notion of force majeure was further developed within the normative interpretation method,246 which tends to consider in more detail the circumstances and facts of each case and might be more lenient to the weaker than to the professional defaulter. Blame plays here an important role. The force majeure and good faith concepts thus become connected: see also section 1.3.14 above.247 But relationship thinking should then also enter the picture as well as the idea that the overall economic effect on the professional debtor needs to be considered rather than merely the effect under 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. In the more 245
See also n 236 above. It showed among other things 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. 247 The sometimes close connection with mistake should also be noted, especially where it concerns circumstances already existing at the time of the conclusion of the agreement and which could have been known. 246
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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 normally 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 in exceptional cases. The question then is first what kind of hardship is necessary to qualify and subsequently what is the type of relief. Under Article 79 CISG 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 (requiring an impediment beyond the control of the party and that could not reasonably be expected to have been taken into 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 conflict 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, earlier identified mainly as a consumer notion. For professionals, it is a situation of disincentive for which the traditional excuses may not be the proper answer. There might not then be a discharge of either party but rather a need for renegotiation of the contract.248 Of course, renegotiation
248 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 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 maintain 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 may be deemed at an end although the bills still need to be settled and therefore the burdens of the termination allocated. As just mentioned, it is possible to make a more fundamental distinction here 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 roadmap 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.
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may also be desirable in cases of force majeure or economic hardship, but they are possibly more appropriate in the situation just mentioned and may have more success. But from a legal point of view it complicates 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 in this respect there developed early on 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.249 In a general way, the clausula goes back to the writings
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 question is here whether this new classification in terms of task or performance is useful, may present greater clarity in contractual interpretation, and may provide new insights into how these clauses should be handled. It is not unexpected in this connection to assume 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 supply, engineering, management and similar points of view. The 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 not necessarily be the case for both parties or for both in equal measure or at the same time, especially prior to realisation. It may concern external events but different developments could also present themselves 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 be the same at all. 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 need 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. 249 See also R Feenstra, ‘Impossibilitas and Clausula Rebus Sic Stantibus’ in A Watson (ed), Daube Noster: Essays in Legal History for David Daube (Edinburgh, 1974) 81. In the Netherlands the clausula approach was never entirely accepted before 1806 and abandoned thereafter, but often provided 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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of Baldus in the fourteenth century,250 and the doctrine remained popular until the nineteenth century, when the parties’ intent became more sacrosanct in civil law.251 Under it, at least one of the parties might 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. Judges would probably also have the option of early termination with or without awarding (some) damages, but in purely professional contracts, the parties themselves must ultimately come to a solution themselves. A judge or arbitrators may give some guidance but it is not for them to rewrite 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 face the impossibility of quantifying the risk at the time the contract was concluded or 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 even affect the payment duty 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 refloating of the contract are novel departures. They were not fully unknown in the ius commune, as we have seen, but they ultimately became unfashionable there. In modern times, the problem has particularly arisen in 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 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 having become more flexible but the law in other 250
Commentaria ad D.12.4.8. See the Prussian Allgemeines Landrecht I, 5 s 378 (1794); O Fritze, ‘Clausula Rebus Sic Stantibus’ (1900) 17 Archiv für bürgerliches Recht 20. 251
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major countries remaining more rigid. The liberal German case-law approach, which emerged at the time of German hyperinflation in the 1920s, was first based on a disturbance of the contractual basis or purpose and relief 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 (2002) 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 have seen, 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 in the case of a severe change of circumstances It is not commonly done, even though the force majeure concept itself was broadened into economic impossibility or frustration in exceptional circumstances such as in the Coronation cases, as we have seen.252 In England, it was held in Chandler v Webster, however,253 that the risk of changed circumstances and any 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 into account also costs),254 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 under the law 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, at least in professional dealings.255 This is indeed the more rational approach where the contract is a roadmap and serves as a risk-distribution instrument between professionals. The lesser need for legal protection 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 constraint, 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. It is likely to supersede any other statutory or treaty regime. In the US, the situation in fact seems little different. In continental Europe, on the other hand, a consumer protection mentality may well spill over into the professional sphere and confuse the issues. 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 when 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 suffer greatly because its costs are in dollars and neither party may complain. It may be very different for another competing European airline company, which may have bought similar airliners in Europe in euros and may thus be incurring an enormous 252
Krell v Henry [1903] 2 KB 740. Chandler v Webster [1904] 1 KB 493. 254 Fibrosa v Fairburn [1943] AC 32, borne out by the 1943 Law Reform (Frustrated Contracts Act). 255 See Treitel, above n 94, 943. 253
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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 and 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 before that when contracts are cast foremost in terms of a roadmap and risk management, there is in fact very little room for good faith adjustments and it may even mean a narrowing of concepts, requiring a more literal interpretation of the contract text. That is what risk, risk division and management 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 be plain at all. 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 may be self-serving and soon lead into nationalistic considerations (of innate social balance and its disturbance), which can hardly have any relevance as to how international commerce and finance develops and which may in any event only have a weak contact with the case in hand. 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
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may be accepted only too willingly, international market forces may in such cases still be fought by what are portrayed as high-minded domestic cultural, social or economic 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 has already been raised in its generality 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 noted, 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 Störung) der Geschäftsgrundlage 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 possible when adaptation in this manner 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.256 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. In France, in a ‘Projet de reforme du droit des contrats’ of 2008, a statutory approach to the subject was also proposed and its Article 135 introduced a formula with emphasis on the enforcement of the contract being ‘excessivement onereuse pour un partie qui n’avait pas accepté d’en assumer le risque’. The issue is therefore one of an excessive burden of which the risk was not accepted. If renegotiations fail, the judge may either adapt the contract or terminate it on conditions the judge may determine. It suggests a fundamental change in attitude in France, where case law so far had not favoured the concept of change of circumstances. Note the limitation of the hardship to the performance of the contract and not to an overall disastrous effect on the contract debtor. There is also no distinction between professional and other dealings—again 256
HR 19 May 1967 [1967] NJ 261.
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the unitary approach. The consultation period ended on 30 April 2015 without much business support, especially because of the perceived judicial discretion. Much is left to interpretation. An avant-projet was presented in the Autumn of 2015 and passed in 2016, for unforeseen circumstances reflected in a new Article 1195. The reason why the objective law often remains 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. Again, it is clear that in essence the parties’ original intent is sought to be reinstated on good faith grounds, however expressed, in the face of undiscounted intervening events. Yet what was intended, or what good faith or fairness require, is unavoidably geared to individual factual situations and to the type and level of risk that was accepted. It was submitted before that in professional dealings the level is likely to be high and that this is the true issue. It means that the original intent is relevant in this aspect only. The original balance of the contract, even if it could be determined, is less important. Risk acceptance means that a change in that balance must be endured. This balance can never be stable and depends on the evolution of the factual situation, especially clear in duration contracts. If we look at the literature, Rabel saw the multiplicity of obligations as the major obstacle to formulating general principles of adjustment.257 Corbin258 stated: ‘We 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’. Meijers259 formulated some general characteristics: the change in circumstances must have been unforeseeable, 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 except for the emphasis on the excessive burden. More importantly they 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 the authority to terminate or adapt the agreement. The DCFR approach in Article III-1:110 was already discussed in section 1.3.14 and may be somewhat 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 here is precisely beyond having the power to terminate the agreement and allocate the burdens. It would appear to 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; parties of necessity must be heavily involved in refloating their contract so as to provide a realistic future for it. 257
E Rabel, Das Recht des Warenkaufs (Berlin, 1936) i, 157. Corbin on Contracts (New York, 1951) s 1322 at 256. 259 EM Meijers, ‘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. 258
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The conclusion is that, especially in the professional sphere, the rebalancing effort remains exceptional and, failing this (upon a bona fide effort which in the commercial sphere may be limited) normal performance or, in appropriate cases, termination (with or without damages depending on the degree of force majeure or blame in a civil law sense or otherwise risk acceptance) must be the normal answer. Where emphasis is put on an excessive burden or unconscionability, which seems appropriate at least in the professional sphere, it has already been said before in sections 1.1.4 and 1.3.14 that regard must be had to the overall financial position of the party invoking the relief 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 earlier 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.
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 and at least in business dealings that would appear the more sensible approach. 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 damages 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, while 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. Even 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 then be a 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 law or specific case law, the situation in terms of renegotiation is probably not much different from the one where
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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 different attitude and is more demanding in pre-contractual situations as mentioned in section 1.3.14 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. These considerations may determine when continuation of the negotiations can no longer be sensibly required and either termination or continuation 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, as has been noted before, that in the case of hardship adjustments, the prevailing market conditions are important but may not be fully determinative and adjustment could be spaced over a longer period. This 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.
1.4.10 How to Secure Contractual Rights and Obligations in Common and Civil Law? As a summary, it may be useful finally to restate and compare how contractual rights and obligations may be secured in common and civil law and also what a contractual choice of law may achieve in this connection. In business, it was submitted that it is probably easiest to view a contract primarily as road map and risk management tool, clearer in duration contracts which may cover a contractual relationship that is planned to continue for some time. Multiple delivery of commodities, semi-finished or finished products spring to mind but also construction contracts. There may be all kinds of other partnerships where parties mean to co-operate longer term in the projects they choose to do together. All may involve complex dealings and substantial risks. That is what a contract text attempts to sort out. Entering into relationship of this nature or any other always entails a lot of risk. Some may be foreseeable and others not. As for foreseeable risks, the other party may default (or not pay) and there may be other such risks in the project: it may cost more, subcontractors may be late, the economics may not work out, there were misjudgements in the planning, etc. The contract can deal with these risks, meaning that one party may be able to move the burden to the other. That may well be discounted in the price. This is risk management. If such a contractual distribution of risk cannot be achieved, the chips will fall where they fall assuming that none of the parties is at fault or contributed otherwise to the debacle. It was the deal. The alternative would have been not to enter the contractual relationship at all. It was a matter of judgement.
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Different is the situation for unforeseeable risk, assuming that they can be properly distinguished and there may here obviously be an area of doubt. For such unforeseen risks there is commonly the concept of force majeure. Changes of circumstances, which cause serious hardship, may lead to relief also. This is often referred to as frustration in common law (or the clausula rebus sic stantibus in civil law) or sometimes impracticability (in the US). This is in common law terminology the area of excuses of which at least in common law non-performance of a main condition of the contract is the foremost or perhaps the only type, unless the contract states otherwise. That is in civil law the exceptio non adimpleti contractus. There is here a considerable difference between civil law and common law. In the former, the excuses of force majeure or hardship covering unforeseen risk derive from the law. In the common law, they only derive from a contractual clause to the effect. That means that in common law the chips also fall where they fall in the case of unforeseen risks unless otherwise provided for by the parties in their contract. That is to say that the other party will accept or share these risks only upon consent. That is different in civil law where the law helps the affected party and implicitly moves the consequence of non-performance or some of it to the other party, unless there is a guarantee of performance or indemnity. In civil law, payment can also not be excused in this manner as anyone would find some impediment. To translate this into common law perceptions: all conditions of a common law contract are considered guaranteed in civil law terms unless the contract states otherwise. If we may take Article 79 of the CISG as a standard text for force majeure, it is notable for the use of the term ‘impediment’ beyond a party’s control that could not reasonably be expected to have been taken into account at the time of the conclusion of the contract and which the affected party could not have avoided or overcome. The idea is that contract performance is suspended during the period of force majeure whilst the other party has to live with this. This suspension might become permanent if the impediment endures. If on the other hand we take Article 6.111 of the European Principles of Contract Law (PECL) as a well-known text for change of circumstances, it refers to a situation in which performance of the contract may become excessively onerous because of a change of circumstances. In such cases the court may terminate the contract at a date and upon terms pot be determined by it, it may adapt the contract to redistribute the losses or gains resulting from the change of circumstances. A renegotiation duty may be implied and the court may award damages if such renegotiation is refused or broken off contrary to good faith. It is clear that force majeure and frustration may here overlap. Again, common law does not provide these excuses under the general law—the notion of frustration remained also underdeveloped short of a hardship clause in the contract as we have seen—in which connection it may be noted that the CISG adopted the civil law approach, therefore even for professional sales agreements which it covers. That is so at least for the force majeure concept that could, however, also cover changes of circumstances. In all legal systems, it is necessary to be precise and spell out in the contract what parties want or do not want. However, the contract text should not become unduly complicated, which creates risks in itself, but the situation is such that the common law contract will be longer and more detailed. It will be more of a roadmap and risk management tool, with which the law does not interfere to the same extent or provide
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protection as civil law does. The underlying notion in civil law is foremost one of blame even if not immediately so expressed. ‘It is not my fault, I could not help it’ becomes the real excuse and the law will accept and support it. It was posited throughout that this suggests an anthropomorphic notion of contract performance that may be associated in more modern times with a consumer law attitude. It underlines the history of contract law which emerged in civil law in dealings between individuals, but it is unsuitable for business dealings. The common law of contract on the other hand originated in commercial law, in those days also between individuals but they were merchants or professionals in more modern terminology. This underlines at the same time the nature of a contract as risk management tool in common law. Without it, the chips fall where they fall. There is no automatic redistribution of that party’s problem and, except with its consent, it should not become the other party’s problem, as that party could most certainly not help it either. That is understandable in commerce. So much for excuses. But in common law there are also defences against requests for performance. They are different from the civil law as we have seen and should be well distinguished. In civil law, it concerns the basis of contract and its formation or validity. Was there a good contract in the first place? In civil law this goes directly to intent and consensus and is a formation issue rather than a defence. Here the civil law attitude is ‘I did not mean it’, again an anthropomorphic notion. Since the common law contract is not directly intent based, the defences are performance issues and much narrower and incidental, again understandable between merchants or in professional dealings. They are equitable and dependent on the situation and the facts of the case. That is rescission, which does not mean avoidance or invalidation per se as the term may suggest. It all depends on the circumstances where the equity judge has great discretion, resulting rather in a patchwork of relief. The most importance instances are fraudulent or negligent misrepresentation which concerns declarations not in the contract text but on which there was reliance. If defined in the contract, not respecting the quality requirement results in breach of contract if the quality delivered is lower. Rather in the equitable defences, the issue is in how far one party has been bamboozled by the other into the contract itself, beyond mere and recognisable sales talk. Another defence may be mutual mistake, which is a situation where the mutual declarations of the parties do not appear sufficiently to overlap. Civil law does not seem to have a true equivalent. But there is more. The non-intent based nature of the contract that depends for its validity on exchange and bargain in the consideration mode in common law, or, in more modern terms, on conduct and detrimental reliance underlines that there is no cause of action at all if the party seeking relief has not put its own money on the table. That may be a peppercorn but there must be a beginning of implementation. Without it, expectation damages in particular cannot be obtained for breach of contract by the other party. Even price concessions are not enforceable unless there has been detrimental reliance by the beneficiaries. This touches on the role of party autonomy and its status in civil and common law. It is stronger in the latter. There is here first a fundamental issue: as we have seen, the civil law has only one official source which is legislation and a contract is only valid to the extent it is validated by the code, it is a licensed concept subject to conditions
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quite apart from the fact that it is further hemmed in by public order or public policy considerations. Although that is also true in common law, party autonomy is not itself licensed and is therefore stronger, it may even be used in equity to move into the formation of property rights as we shall see and will be further discussed in the next chapter. It is at the same time less subjective, again intent is less important in its operation except when it comes to clear choices made by the parties in terms of roadmap and risk management, but even then in the interpretation the reasonable man approach will prevail. To repeat, the common law is more aware—especially in corporate dealing which in commerce and finance is now the norm—that the person signing an agreement has the authority but is often unaware of the precise terms; that the details may be negotiated by different departments which may hardly communicate; and the final text is produced by outside law firms who are really the only ones who know what was agreed but are not a party. These are realities which the civil law has greater difficulties to digest. When it comes to securing performance, other complicating issues may arise: extra contractual duties may emerge in the pre-contractual, contractual and post-contractual phases which may supplement or even correct the contractual rights and duties. Precontractual disclosure and negotiation duties were mentioned as well as contractual duties of care and co-operation, and post-contractual renegotiation duties. Relationship thinking is here important and in professional dealings these duties may be less relevant, especially clear in common law, but if these duties are broken there is the further question what damage can be claimed, especially expectation damages. It may be less likely in common law, the situation is more akin to breach of fiduciary duty or negligence. In civil law, at least of the German type, it may be considered foremost a breach of contract which may open the way to claiming more. This may also touch on the contribution of good faith concept, relevant especially in civil law. It was submitted that it is largely a liberal interpretation technique through which in contract the sources of other law, discarded by the code as sole legal source, come back in interpretation. This may be fundamental principle, but needs not be and good faith is by no means always a higher norm, as such absolutely mandatory. Parties could even set standards as they may do in the US under the UCC unless the result becomes manifestly unreasonable, less likely in professional dealings. Again, relationship thinking becomes fundamental. But it was said that the civil law is here only at the beginning, contract types being traditionally more important than types of relationships which means that consumer protection per contract type often wafts over to professional dealings, in this book considered to be a great weakness in the civil law of contract again underlining its anthropomorphic nature. In the same way, it has introduced the pre-contractual, contractual and post-contractual extras duties normally in consumer law terms for all and does not appreciate that good faith in professional dealings may mean less extra rights or even a more literal interpretation of the contract text as road map and risk management tool. It was explained also that the common law needs good faith much less because it has other means: relationship thinking, fiduciary duties, reliance notions, implied conditions, and sometime the notion of natural justice. But in one other important respect both the common and civil law face a similar challenge: all legal systems have difficulty relating established norms to ever changing incongruous fact situations.
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In civil law, good faith will help out at least in contract whilst reintroducing the traditional sources of law besides legislation which codification had attempted to eliminate. In common law this challenge is not different, but the solution is not similarly handled. What helps in common law is that it was always more fact related, it works more on the fact than norm side, civil law is the opposite especially in its systematic approach on the norm side and has therefore further to go. It was noted that greater sensitivity for fact may increasingly result in a good faith approach to contract law issues, but like in r elationship thinking and renewed respect for different sources of law, civil law has further to go. Another difference between civil and common law when it comes to contract performance is the type of recourse when there is a breach and no proper defence or excuse. Is there performance in kind or only damages? The common law rule means damages unless inadequate or meaningless in the situation; the civil law means performance in kind, but in practice damages will often be claimed instead as easier and cleaner. In any event, if the other party does not supply spare parts in time, alternatives must rapidly be found and the claim will only be damages for higher cost and/or lower available quality. Finally, in view of the foregoing, it may be considered what the meaning is of a contractual choice of law in this area, eg of Swiss or English law, between two contract parties from France and Italy. What law do parties move into, what are they moving out of? Is legal transnationalisation avoided in this manner altogether? The first aspect to remember is that parties can only choose another law in matters at their free disposition. That means they cannot change fundamental principle/mandatory rules, including property and regulatory or tax laws. Even in contract, they are not in charge of determining their own capacity or in control of the validity of their agreement. The area of law preserved for them is in fact limited to issues that are directory, meaning subject to default rules which limit the effectiveness of a choice of law quite considerably. It may even be asked whether in the area of defences and excuses there is freedom, hardly when it comes to contractual validity issues and peremptory law. There is then also the issue what parties truly meant in such a clause especially if they are coming from a civil law background. Did they mean to opt for all particularities of a law they hardly knew, eg the English principle of consideration and way of contract formation with the limitation of defences and excuses, the emphasis on damages rather than performance in kind? In the case of price concessions, do they realise that they may not be enforceable without further consideration? They may still think of force majeure as an implied term. What about frustration or hardship? Is the good faith concept mandatory between them, and if so could it really be superseded by another approach through a choice of a different law, like English law? Can parties in this way opt out of the mandatory parts of the modern lex mercatoria in their international transactions and ignore international minimum standards? Are there overriding issues of justice, social peace and efficiency in international dealings which cannot so be ignored or circumvented either? Rather, does participating in international dealings now mean acceptance of its ground rules which a choice of some domestic law can hardly change? Even party autonomy and such a choice of laws is
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embedded in a framework that for international transactions is now hardly domestic any longer, except perhaps in respect of domestic public policy in aspects of such transactions which in conduct and effect can still be demonstrably located on a national territory. Even then it was submitted that in a globalizing environment they may be increasingly superseded by international minimum standards.
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 or in modern times perhaps detrimental reliance. In particular, it tended to leave third-party beneficiaries unprotected if they had not given any or had not relied at all. Their benefit was then no more than a gift that could not be enforced by them. For third-party beneficiaries, only later was it understood that the issue was not the gift, but foremost 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 and its relevance arise as to him and it was conceivable that it would be deemed implicit, like in guarantees and letters of credit. 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 by definition have third-party effect, even if, as is normally the case, they originate in contract, like in a sale followed by a transfer of title, in the sense that they must be respected by others, and the latter not. The issue is whether and when a contractual clause can have an effect on third parties either under the law of obligations or under property law. Another aspect of this discussion concerns the liquidity aspect of assets and the effect on them of contractual arrangements, see further chapter 2, part I, section 1.1.3, of which the survival of the rental agreement upon a sale of a property with full discharge of the seller is an important example as we shall see. This may also become clear in respect of, for example, contractual transfer prohibitions concerning some underlying assets. Yet even where such contractual provisions work against third parties, as 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, a third party right is not truly created, rather one is being withheld, although one could still say that there was a third-party effect of the contractual prohibition. In truth, it concerns the proprietary effect of the assignment. Probably more importantly, the issue
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of third-party effect is not always proprietary, although proprietary rights of course have third party effect per se. The question is whether there are other situations. It may be said that neither the original common law approach nor the civil law attitude led to great elucidation in this area. 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, as already noted, in practice there have arisen a number of situations in which a contract has an effect on outsiders, which may be on both the rights and obligation (or duty) sides, although it is more common to be only on the former. It is therefore more common that a contract gives something to third parties (who then become third-party beneficiaries) rather than taking something away from them. It all depends on the circumstances, but they are all exceptional and can often not be usefully compared and there seems to be hardly any clarifying principle. In any event, whatever the result, it does not mean that the relevant 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 through their relationship with (one of) the contract parties, even if this may concern only some aspects of that contract. It is usually situation specific. In the more obvious case of third-party beneficiaries under a contractual clause by which parties give a benefit to outsiders, they may become parties once they become aware of the benefit (assuming also that consideration is given or can be construed to have been given by them in traditional common law). Parties can in this manner create rights for others, which the latter may enforce against them under the original contract in the manner discussed below. Again, it is more difficult to create duties for outsiders in this way unless these duties are very closely related to the benefit (as, for example, 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 or direct contract parties (the precise manner in which and the extent of which still need then be considered), there could more generally be tort or even proprietary actions, which direct contract parties might have against outsiders in connection with or flowing from their contract and its existence. First, all outsiders may have some duty of respect regarding contracts that they have not concluded, but that is not then a matter under the contract itself. It is in fact similar to all people having to respect property rights, indeed contractual rights may be considered proprietary, in the sense that they must be respected by all. 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, at least as long as they do not interfere with the rights of others. The defence is in tort (as are all proprietary defences in common law). 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 the agreement and (sometimes) ask for punitive damages, notably in the case of contracts in restraint of trade, for the effect they have on others.
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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 or if public policy dictates otherwise. 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 adverse supply agreements with competitors, even if concluded in defiance of a contractual obligation of the supplier vis-à-vis the complaining party not to do so. 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 while defaulting in his supply duties to the other party, the latter may be liable in tort to the reimbursing party while 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 give C a direct action under the contract against A. But a tort action of C against A is not inconceivable eg when B is bankrupt and cannot pay or will otherwise not do so. In any event, 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. This is of relevance especially in supply chains and it may well be that the law will develop here further. 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, these being duties to respect these contracts, not to interfere with them, or to make the performance under them more difficult or more expensive. There are therefore no indirect contract parties created as in the case of third-party beneficiaries. Reference was made already to proprietary rights in which connection it may be relevant how contracts may change them (for example in a transfer of title) 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, such as sales agreements, acquire third-party effect in their consequences, especially those under legal regimes such as the French and English, which do not require further acts, such as delivery, for the transfer of title in chattels. This also applies to situations in which intangible assets such as 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, although, as already mentioned, it is not the contractual aspects that matter here but rather the proprietary consequences. Even in assignments, we now normally distinguish between the contractual and transfer aspects. Therefore, the contract parties do not act or defend on the basis of the contractual terms, but rather on the basis of a proprietary action or expectation or in tort and the duties of the third parties vis-à-vis the new owner or assignee are again not contractual in nature.
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Another situation is the one concerning restrictive covenants connected with the use of property, especially land. Particularly in common law, such 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 the original restrictive agreement and may not even have known of them. Here, the counterparty will act or defend against the new owner on the basis of the old contract or covenants. New owners thus become parties to the old covenants and take over the contractual duties in their capacity of new owners, therefore even without their specific acceptance. Again, in chapter 2, part I, section 1.1.4, this will be explained as an issue of liquidity. 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), the former owner being discharged at the same time. 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, see for the situation in common law chapter 2, sections 1.1.4 and 1.2.1. These are of a special type, the so-called iura in re aliena, limited by the relevant civil law codes, and indeed proprietary rights as such to be enforceable against all. Again, the defence is not then in contract but is that of a proprietary right. In some civil law countries, mere contractual covenants may now be entered into land registers as well, thereby acquiring (some similar) in rem or at least third-party effect. It may be asked whether the defence would subsequently still be in contract, which then makes the new owners parties. Even without such registration, under modern civil law, a new owner may sometimes be considered to commit a tort while 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 this would not then be an action based on contract either. 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, who would then be considered a succeeding party. Again, it is an example of a contractual right being exercised against third parties but in a proprietary manner. In respect of chattels such prohibitions no longer have any proprietary effect, at least not against bona fide purchasers (and is then a question of prior knowledge in the transferee) although it could be argued that it should never be so. Of course, there is still a breach of contract, conceivably requiring damages. At issue here is again the important question of liquidity of assets—see chapter 2, section 1.5.5 below. It will be noted later that in respect of trade receivables in the US, section 2-210 of the UCC no longer gives assignment restrictions in respect of trade receivables 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 a property (cf section 566 BGB), therefore also if they were not original parties to the relevant contracts. It should be remembered that 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
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under pre-existing contracts as third-party successors in the property, therefore in their capacity as (new) owners.260 Although the old contract here has 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—but again it is better seen as an issue of liquidity of the underlying asset. As new owners voluntarily enter into the property, one could also argue that they take that risk and implicitly accept this state of affairs and therefore enter the prior lease contracts as willing parties in their quality or capacity as new owners. An important further aspect here is that the previous owner is discharged and does not therefore even remain guarantor of the new owner’s 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.261 To reemphasise, in these cases of restrictive covenants and rental agreements in real estate, one may explain the situation by the need to further promote liquidity (transferability). If the old owners of real estate were to be held to the existing covenants and rental agreements while 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 short of 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 then obtain a blocking vote in respect of the sale of all tenanted property. This would obviously be undesirable.262
260 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 such as heirs or shareholders upon dissolution of companies automatically succeed to 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 thirdparty rights and duties that will not be further discussed here. 261 Rights transfer more easily with the property but one may still ask which rights they are. Rights of access spring to mind but are not necessarily included short of a servitude; at issue is the basic distinction in civil law between proprietary and obligatory rights. Better examples are previous agreements with neighbours not to build certain structures or not to increase their height. It is mostly assumed at issue here are rights that cannot independently exist apart from their object. It may still be possible that the acquirer of the property surrenders these rights but may remain liable for any connected obligations, cf in the Netherlands Art 6.251 CC and HR 6 April 2012, LJN BV 6727. The right that potentially transfers with the property cannot be highly personal. The underlying agreement itself may exclude the passing of the right. Other situations may be where there are rights to collect contributions for the common parts or where there are rights to reimbursement of damages caused earlier by neighbours in the property. 262 It may be noted in this connection that assignment restrictions limit the liquidity of receivables and are for exactly the same reason now increasingly becoming ignored in their proprietary effect. It is another solution, not feasible in the case of a rental agreement, but which still explains the hesitancy with regard to the acceptance of the effect of covenants that go with land (or other assets). The alternative would be to ignore these arrangements. Transfer or termination of the third party effect seem to be the two alternatives to protect the liquidity of the underlying assets.
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The class of successor-owners presents one important and clear first cluster of situations in which the contract itself may be extended to others (rather than tort actions being engendered by it), here primarily the obligation side of these contracts (although in the case of rental agreements also the benefits), a circumstance normally discounted in the purchase price of the asset, although a good existing rental agreement may also enhance an asset’s value. In a similar vein, it is now not uncommon to find under other statutory law the requirement of a business branch or division upon a sale to honour the employment contracts entered into by previous owners. Sometimes one may also acquire a direct 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 from an ordinary third-party beneficiary 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, who receives an equitable proprietary right. 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. At issue here are particularly the trustees, their creditors and even their successors in interest who knew of the beneficiary’s prior rights or acquired 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 a benefit more directly to a third party. The term third-party beneficiary is then 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. Here, consideration may be required for him to benefit as was long the case in England. The donee beneficiary thus has a problem in directly enforcing his right. More normal is that one of the contract parties wants the other party to pay the beneficiary in lieu of himself because this party owes the beneficiary something on account of another arrangement. That is the normal situation of creditor beneficiaries and in that case becomes the justification and the consideration. 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 also the facility to refuse third-party benefits. These situations of third-party benefit might thus still be 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. These third-party rights may then also be distinguished according to whether they need acceptance by the third-party beneficiaries to bring them into the contract. It would not always seem to be necessary, for example in the case of child support. It is still possible to repudiate them, however.
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The rights so granted to third parties are likely to be contractual, which means that in one form or another they become maintainable against the original parties under the original contract even if it might require some further steps: 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 under their terms. If they are issued in irrevocable form, they cannot be withdrawn. Here the consideration, if needed, will derive from the whole of the arrangement which, economically speaking, is likely to be tripartite. In the case of subordination clauses in loan or bond documentation, it is that new creditors in an agreement with their debtor allow older (often unidentified) creditors to take precedence over them in recovery. This is also best seen as a third-party benefit for the latter, but again the issue of consideration may then play a role in common law countries. What was the benefit to the junior creditor making this concession to senior ones? It probably got a higher reward. But what is the consideration of the beneficiaries? The idea is that older creditors will not be worse off and diluted in their recovery. For them it is maintenance of the status quo. Again, the consideration is likely to be the whole arrangement: only with this benefit are the borrowers willing to arrange further funding or continue the present funding. Subordination of this nature is very common and highly important in finance and is often also an element in securitisation involving mezzanine financing in terms of credit enhancement; see also Volume 3, chapter 1, section 2.5.1. There are other instances. Child maintenance clauses are common in marriage contracts and divorce settlements. They may give children direct rights against the paying parent. Consideration here is the parental obligation. Exemption clauses exonerating parties vis-à-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 also become third-party beneficiaries even without clear prior acceptance of that position and again without consideration as to them. 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 his having explicitly or indirectly accepted the benefit. If the third party did know from the outset (as in tripartite arrangements), it may be argued that it became a direct, rather than indirect, party to the agreement. 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 has already been mentioned if there is such a clause under the contract but there may also be some preconditions to the benefit arising. Otherwise duties cannot be imposed on other persons in this manner. Only benefits can be so given.
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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 US, an approach also adopted in the UNIDROIT (Ottawa) C onvention on International Financial Leasing of 1988 (see Volume 3, 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 swaps, 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 also connect other swaps between the same parties in terms of close-out netting upon an event of default (or cross-default) under one of them (see also Volume 3, 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 3, 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 (cf section 311(3) (new) BGB). It would follow that there may also be quasi-contractual obligations. Yet in other situations already mentioned above for supply chains, default in one contract may seriously affect the performance under the next one in the chain, but a tort action rather than a contractual action might be the answer for the participant who was not a party to the first one but was hurt under the second agreement, although it could conceivably be different if the non performing party was well aware of the chain. 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
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different from 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 section 3.1.5 below) although the original agent is likely to remain the guarantor of any obligations accepted by him vis-à-vis the third party. It is for the third party a question of credit risk. A principal may in this way also have to accept the contracts concluded by his 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 such as 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. Both the normative or reliance approach to interpretation may more readily support the rights or even duties of third parties under a pre-existing contract between others but this has not produced greatly new insights or the identification of new or more precise clusters either. Needs and circumstances have so far dictated their emergence and operation.
1.5.2 Development of Contractual Third-Party Rights and Duties in Civil Law As we have seen, traditionally in civil law, the concern for third-party rights and duties under a contract was closely connected with the distinction between the law of property
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and the law of obligations. The essence is then the third-party effect of contractual clauses; in the meantime, the reference here to proprietary effect may confuse more than it reveals. It has already been said that it is the third-party effect itself that matters. Roman law did not yet 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 but, as we shall see in the next Chapter, it took the ius commune to arrive at a clearer understanding. 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 (cf Inst II.9.5). The contractual bond was too formal and too ritually created for it to cover outsiders, and, in the equally rigid system of Roman law actions, there was no clear form of redress or action. In fact, for most contracts there was no action at all, as we have seen, 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 substantive 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). That was all the ius commune, in its further development of the Roman law on the subject, had to go by.263 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.264 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. Others, notably Pothier, stuck to the original maxim (alteri stipulari non potest).265 The French Civil Code of 1804 followed him in this respect and therefore retained a restrictive attitude to third-party benefits (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 263 264 265
See also R Zimmermann, The Law of Obligations (Cape Town, 1990) 41. De Iure Belli ac Pacis, II, Cap XI, s 18. Traité des obligations, Nos 54ff.
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(Article 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 now assumes that there is also a benefit for the party negotiating the concession if it derives some moral profit from the transaction266 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).267 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 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.268 This is now also the French approach.269 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, however, accepted in France),270 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.271 Article 6.110 of the PECL 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 Articles II–9:301/303). It may be noted that only the third-party beneficiary notion is here covered, not other forms of the privity conundrum. 266
See J Ghestin, Traité de droit civil, les obligations (Paris, 1992), nos 835ff. 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, 1994) 237. 268 See further H Heinrichs, Münchener Kommentar zum Bürgerlichen Gesetzbuch, vol 2, Schuldrecht, Allgemeiner Teil, 2nd edn (Munich, 1985) 1003ff. 269 See Ghestin (n 267) nos 843, 853. 270 See Cour de Cass, 21 June 1988 [1988] Semaine Juridique, (ed) G, II.21125. 271 See for Germany RGH, 25 November 1911, RGHZ 77, 317 (1911) and for the Netherlands HR 12 January 1979 [1979] NJ 362. 267
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1.5.3 The Situation in Common Law and the Developments in the US and England In common law of the English variety, the doctrine of privity disallowing any thirdparty beneficiary to claim under the contract was connected with the doctrine of consideration, as we have seen, but was in its strictest form of relatively recent origin and was only formulated by Lord Haldane in Dunlop Pneumatic Tyre Co v Selfridge & Co in 1915.272 It remained contested, particularly by Lord Denning,273 but was reconfirmed by the House of Lords in Scruttons Ltd v Midland Silicones Ltd.274 In its most rigid form it has proved inconvenient and is not followed in the US. Even in the UK, there were many exceptions. The negative effects are now reduced through statute. In England there were 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 (hire- purchaser or lessee). Any undertakings of the supplier to the finance company or lessor could then still be relied upon by the customer.275 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 company without a direct contractual relationship. At issue here are 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.276 272
Dunlop Pneumatic Tyre Co v Selfridge & Co [1915] AC 847. 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. 274 Scruttons Ltd v Midland Silicones Ltd [1962] AC 446. 275 See also Treitel, above n 94, 617. 276 See as the classic case Shanklin Pier v Detel Products Ltd [1951] 2 KB 854, 856. 273 See
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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.277 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.278 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 have already seen, if a true gift were meant, the beneficiary would be unlikely to be able to claim for want of consideration. That was also true in the US, where the beneficiary is then called a ‘donee beneficiary’. If the benefit were meant, however, for C to fulfil an obligation A had towards him, there would obviously be 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, even if he agreed to the substitute performance. It was an important difference from the situation on the Continent and in the US, and one only recently remedied in England by legislation. Naturally, in appropriate cases 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 individual or direct right. Also the party having negotiated the third party benefit 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.279 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, such as 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,280 who thereby obtains an enforceable action but in equity and not under the contract directly. Also exemption or exoneration clauses may provide examples of situations where there may be a truly enforceable third-party benefit, also in England, by using either the notion of an implied contract or that of agency.281 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, as 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 clarification and 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.
277
Charnock v Liverpool Corpn [1968] 1 WLR 1498. Independent Broadcasting Authority v EMI Electronics [1980] 14 Building Law Reports 1. 279 See Treitel (n 94) 627. 280 See Les Affrêteurs Réunis Société v Walford [1919] AC 801. 281 See Treitel (n 94) 626. 278 See
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Legislation has now been passed in England to bring this about in 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 US has long been different ever since the leading New York case of Lawrence v Fox,282 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. Also in the US, we are here 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 still insist on the original performance, while he may no less be able to sue under the contract to receive his benefit.
1.6 The UNIDROIT and European Principles of Contract Law. The Vienna Convention and UCC Compared. The Draft Common Frame of Reference in the EU and the Draft EU Regulation on a Common European Sales Law 1.6.1 Unification of Contract Law. Academic Texts and the EU Activity in this Area The unification of private law transborder 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 1, section 1.4.21 and 282 Lawrence v Fox 20 NY 268 (1859), see also Restatement (Second) of Contracts, s 302. See further MA Eisenberg, ‘Third Party Beneficiaries’ (1992) 92 Columbia Law Review 1358. See for donee beneficiaries and their right to claim the benefit, Seaver v Ransom 120 NE 639 (NY 1918).
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were based on treaty law. They resulted ultimately in the 1980 CISG as the most important achievement, but it was even then only a partial codification, even in the contractual aspects whilst it did not cover the transfer of title at all, which is a sale’s main objective. It had been preceded by the 1964 Hague Conventions. The text of the CISG is still considered important, even though several trading nations such as the UK and Portugal did not ratify it and commercial practice commonly excludes its application for the reasons that were mentioned earlier and will be revisited shortly. The Convention itself will be more extensively discussed below in section 2.3. As from 1994, UNIDROIT started to publish a broader project in its Principles for International Commercial Contracts as a general part of contract law for all commercial dealings. It is not a text that was ever presented or meant for ratification and it never had an official status. Separately, a private group of academics issued in 1995 the Principles of European Contract Law or PECL as a draft for an eventual codification of EU contract law. It had no official status either, even though the activity was subsidised by the EU. Both projects were followed later by text for certain contract types. 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, see again Volume 1, chapter 1, section 1.4.21.283 The Draft Common Frame of Reference or DCFR, already mentioned several times, is the main result; it remains an academic project as well and was never an EU text either. The general part on contract law is basically derived from the PECL.284 Not surprisingly in view of the EU’s professed interest in consumer matters, the DCFR, like the PECL earlier, found inspiration mainly in consumer law, which was indeed the professed interest of the
283 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. This virtually amounted to all the traditional areas of civil law codification. The 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 did not prove 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. In the event, in early 2008 the group of researchers produced the Draft Common Frame of Reference (DCFR), which still 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 lip service 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. 284 See C von Bar, E Clive and H Schulte-Noelke, Principles, definitions and model rules of European private law: Draft Common frame of refenrece (DCFR) (De Gruyter Berlin, 2009) 10.
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Acquis Group,285 one of the driving forces behind the DCFR.286 It is demonstrated by the strong protection and prescriptive overtones in the text, but it is also evident from the continuation of an anthropomorphic attitude in contract law still based on intent and will theories and in movable property law on physicality and individualisation of assets in the nineteenth century civil law perceptions and models, based on relationships between individuals without a business objective. Clear distinctions according to types of parties are seldom made and as a consequence there is an on the whole undesirable spill-over effect of this consumer approach into commerce and finance as the DCFR’s aim still appears to remain a unitary approach and system for private law, in principle the same for all, therefore for consumer and professional dealings alike, even though occasionally some distinctions are made in the text. This unitary approach was earlier identified as the consequence of a lack of relationship thinking and in modern private law texts of this nature a serious shortcoming. Although the good faith notion might redress this situation to some extent, it is in this respect only at the beginning of this development in civil law, see further section 1.6.2 below. If efficiency or other compelling reasons that require new rules to be imposed more generally EU-wide could nevertheless now be identified and formulated, this would still raise the important question of EU jurisdiction but also of objective, method, and efficacy. In particular, should the civil law codification methodology be adopted, again the same for consumer and professional dealings in the unitary approach, and then also supersede the operation and further development of the modern lex mercatoria and its different sources of law as a bottom-up process of private law formation in the transnational commercial and financial legal order described above, at least in the EU for cross-border professional dealings? And if so, why? And could it succeed? It would break legal transnationalisation and put cross-border professional dealings within the EU above its reach. It may be recalled in this connection that in the perspective of this book, at the transnational or cross-border business level, the modern lex mercatoria applies and is perceived as a hierarchy of norms deriving from different sources of law of which a treaty or similar EU text would only be one in respect of professional dealings and would still have to find its place amongst the others, especially fundamental principle, custom and practices, general principle, and party autonomy. This tracks Article 38(1) of the Statute of the International Court of Justice, supplemented by Article 53 of the Vienna Convention on the Law of Treaties, in the approach to international or here rather transnational (private) law; see Volume 1, chapter 1, section 1.4.5. Presumably the main purpose behind the present EU effort is merely to eliminate some clearly nationalistic
285 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 project, see n 283 above. There was a difference between the Acquis group and the DCFR Study Group in the sense that the former worked in the manner of a restatement and did not mean to bring substantial legal modification. The latter aimed at better solutions with the possibility of reaching beyond the common principles of the national legal orders of Member States. In the event, the text of the DCFR was extremely conventional, in the consumer mould, in property virtually a complete reflection of German law and its model. 286 See also C Twigg-Flesner, The Europeanisation of Contract Law (Routledge, 2013).
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and historical overtones in existing codifications and so reduce (some) transaction costs, the result of which effort would subsequently also be extended to common law jurisdictions in all activity within the EU whether consumer or professional. A pertinent question in this connection is whether—whatever the true needs in a fast-moving environment may be—such a statutory text could ever do more than provide a common denominator based on an extrapolation of existing texts and past experiences in so far as academia has been able to study, understand, and summarise them. A further pertinent question here is whether abstract system thinking of whatever quality in the civil law codification manner should be maintained. The DCFR text shows that especially in Europe, in civil law countries, there has been little forward movement or a proper rethinking in private law during the last generation. Notably interdisciplinary, empirical and transnationalisation studies have been few and are commonly ignored. There is little knowledge of modern commerce and finance. At the practical level, the EU is for this purpose considered one jurisdiction or a state and there would no longer be any activity within it that could be defined as transnational, activating thereby the other sources of law in the modern lex mercatoria, in particular fundamental principle, custom, general principle and party autonomy. They would again become irrelevant even in commerce and finance unless the DCFR text allowed them to operate and the unitary approach towards consumer and professional dealings would continue. To the extent this may be considered uncomfortable, it should be realised that, as real estate is excluded, there would still be a different system for it and therefore in private law in any event two systems of property law now operating side by side in the same country. This may make sense on the surface, but how that would work in civil law countries that believe in system thinking and its unity may be a greater mystery. As EU jurisdiction is so far limited to the promotion of the internal market and therefore to cross-border activity within the EU, there would in any event result two systems: one remaining purely domestic for transactions within Member States and another (EU codified system) for cross-border transactions within the EU only.287 There would thus arise several types of domestic law: one at the Member State level for purely local
287 Reference is here made more specifically to the discussion on EU jurisdiction in Vol 1, ch 1, s 1.4.21. It should be noted in this connection that there is no general provision in the EU Founding Treaties giving the EU jurisdiction in private law formation, 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 Art 114 TFEU. This is hardly obvious in connection with private law unification. See further S Vogenauer and S Weatherill (eds), The Harmonisation of European Contract Law (Oxford, 2006); G Alpa and M Andenas, Fundamenti del diritto private europeo (Milan, 2005), and J Mance, ‘Is Europe Aiming to Civilize the Common Law?’ (2007) 18 European Business Law Review 77. 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. The ECJ is indulgent in these matters and accepts EU competences 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 Case 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 Case 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. It does not act as a proper constitutional court and protect Member States and its citizens against the central pull of the EU.
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transactions within Member States and one at the level of the EU for transborder transactions between Member States. It was already said that real estate would always be local. Efficiency is often used as the major argument, an issue more extensively discussed in section 1.1.8 above, here in the sense that a common legal framework of a statutory nature would promote transborder activity in the EU and reduce transaction costs, but this is hardly borne out in the US, where private law remains State law in a vastly more integrated economy, although sometimes helped by uniform law. Even within the UK there are wildly different systems of law whilst there is a perfectly functioning single market. In the US, the UCC is by far the most important example but it remains State law. Perhaps more importantly, it never meant to drive out other sources of law in a general fashion, as we have seen, and to monopolise the field as civil law codification thinking did and the DCFR continues to do: see section 1-103 UCC. Rather in the UCC, the common law, equity, custom, law merchant and party autonomy are not only recognised as independent sources of law besides the UCC text, but their further development in commerce and finance is actively encouraged. That would appear to be the correct approach but is totally alien to the DCFR endeavour or method, which is an uncritical continuation of the nineteenth-century civil law codification model as a statist, top-down consumer oriented or anthropomorphic private law formation facility that claims superiority for itself while pretending to be intellectually complete and having all the answers even without any serious empirical research. It still presumes to overrule all other law. Again, it pushes out the transnational modern lex mercatoria or law merchant and EU codification of this nature would attempt to continue to do so (even though the various sources of law come back through interpretation all the time as we have seen). In the area of public policy it knows little of transnationalised minimum standards. Whatever the pretence, in commerce and finance, the DCFR—should it ever become the European approach for interstate commercial and financial transactions—also raises the question why it excludes large trading nations such as the US, Japan, China, Russia, India and Brazil from the unification effort, all countries that may also have an interest in this process of legal transnationalisation or unification, at least for international or cross-border professional dealings. Especially ignoring American legal sophistication and its experiences is hard to explain. It is a fortress Europe mentality which benefits no one. At the most, the effort should be limited to consumer dealings and even then it may be asked whether an EU approach makes sense for what remains largely localised dealing, but there is also the more formal point whether the EU has sufficient jurisdiction even in this more limited area, largely associated with consumer law, where EU Directives only operate, to promote the internal market, not consumers’ protection per se. There is also a problem with quality. The major qualitative problem with these European projects is that civil law is hardly advanced in its modern manifestation, at least in respect of professional dealings. Increased efficiency and sophistication is much more likely to come—it is submitted throughout—from moving towards a more flexible, dynamic concept of private law arising bottom-up out of multiple legal sources than from some updated but old-fashioned texts in the classical civil law
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codification mode, which is notably failing everywhere to accommodate modern financial products, but has much deeper problems with modern contract and movable property law in the professional sphere as explained in this and the next chapter. It is significant in this regard that nobody is asking for this project in Europe, not even after much prodding. The Collateral Directive in finance (see Volume 3, chapter 1, section 1.1.8 and chapter 2, section 4.1.5) was an exception, was wanted by the financial services industry, and is indeed sophisticated and inspired. It was therefore generally welcomed in finance as important progress. Yet it also demonstrated that projects of this nature could not truly be incorporated into the system of the civil codes in Germany and the Netherlands, which only showed how much behind they were. The text was added as exception. It is submitted that for professional dealings, industry initiative is always the way forward (unless public policy and order dictates otherwise) and is notably missing in respect of a project like the DCFR. Quite besides this civil law codification ethos, its system thinking and its lack of following in transnational professional dealings, the further question was already raised whether treaty law or similar formalistic law formation at the international level proves to be sufficiently flexible as it is very hard to change.288 The EU for its Members has of course the more flexible device of its Directives or even Regulations, of which in this area the draft Regulation concerning a Common European Sales Law (CESL) was an important example, always assuming of course the legitimacy of EU jurisdiction in this area of formation of private law, which, as already said, is generally lacking and is in any event limited to transborder dealings within the EU. 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 first and 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 it would limit its scope. In section 1.3.8, this point has already been 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, but free movement would prevail over other protections if Article 114 TFEU is the jurisdictional base for the effort.289 Rather, the only true and credible basis for unification of private law EU-wide, would be an amendment to the Founding Treaties which would also have to go into the method of such a unification effort. It is unlikely that there is any unanimity on this within between Member States in the foreseeable future. 288 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. 289 The issue has arisen in long-distance selling in respect of the right of the buyer to cancel the contract and the matter of the state of the goods and cost of the return, see Case C-205/07 Gijsbrecht/Santurel, ECJ, 16 December 2008, Jur I-9947. The promotion of the internal market on which consumer Directives are normally based may require continuous consideration of this basic principle, if necessary against the protection of the consumer, and a balance must be struck. Cancellation without cost may therefore not always be the proper remedy. Especially further-going local rules in this respect in the country of the consumer under minimum Directives may not square with the operation of the internal market, but neither may the consumer protection of the Directives themselves. At least in the interpretation of them, the higher principle of the promotion of the internal market must also be considered.
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1.6.2 The Unitary Codification Approach To repeat, a key issue is whether this type of unification effort in private law should affect both purely local and transborder activities within the EU, and whether in addition a unitary system that does not distinguish between consumer and business dealings is at all feasible. This needs further consideration. The former issue mainly concerns the operation of other sources of law besides statutory texts in the modern lex mercatoria which does not accept the civil law codification ethos. The latter issue concerns, in essence, relationship thinking, which has always been better understood and developed in common law.290 The advent of the good faith concepts in civil law now opens a window for similar perspectives, but, as we have seen in section 1.3 above, there is still a long way to go. A different approach to the sources of law and to consumer and professional law would follow but is clearly not considered in the texts of the PECL and DCFR, nor in the modern codification adjustments in Germany, France and the Netherlands. Again in this book, revival of the traditional sources of law and relationship thinking are the central themes in modern private law, including commercial and financial law. In this regard, the continuing search for a unitary system of the statutory type for all relationships demonstrates lack of progress in civil law thinking. To repeat, on the back of defining contract types in general, this approach means similar treatment and protection for all types of parties unless specific exceptions are made. Consumer protection ideas thus soon move over into professional dealings so that even professional law becomes similarly prescriptive in its core.291 The development of the modern good faith notion in civil law was here considered only to be at the beginning and in the context of unification of private law further clarification will be needed, both in terms of the sources of law and relationship thinking. It was noted before that the more practical common law has an advantage, as far as relationship thinking is concerned, much helped by the development of the equitable fiduciary duties, to which the civil law is only now awakening.292 It was already noted that even now separate treatment of professionals has sometimes been important and may be spotted in international dealings, of which the international sale of goods as developed in the 1980 CISG is perhaps still the best example, even if it maintained a nineteenth century anthropomorphic model, especially in its formation section, p erformance and excuses. In this older vein, the UNIDROIT Principles of Contract Law were also meant primarily for international commercial contracts—in fact they were confined to professional dealings. The PECL, on the other hand, cover both professional and consumer dealings and adhere to the unitary approach, although
290
See s 1.1.1 above. It is well known in this connection that in Germany, in business dealings, there is a practice of opting for Swiss law in order to escape the grip of the German law on standard conditions. 292 In s 1.3.7 above it was 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. 291
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the fact that both sets are very similar is confirmation that the UNIDROIT Principles also sustained a consumer orientation. That was unperceptive. The unitary approach is also followed in the DCFR, more understandable in that case (as it was for the PECL) since it covers all dealings, but a mistake nevertheless. Another issue is, however, that international financial dealings may well now exceed these trade related approaches in importance and intellectual depth. As in the perspective of these texts—which remain statist, positivist (law as technique) and fixed in the past—other sources of law are excluded even in cross-border dealings, the unitary statutory approach would be propelled in this singular manner throughout the EU and all contract and other private law becomes subservient to it. It was said already that the process of the more practice-oriented, informal transnationalisation of commercial and financial law as a dynamic force in the modern lex mercatoria, in which texts of this nature are only one source and must find a place among the others, would then be blighted, at least within the EU, for no obvious reason. To repeat, progress at EU level would strongly suggests the need—at least transnationally, therefore in international or cross-border transactions, whether or not within the EU— first to distinguish clearly between professional and consumer dealings. Subsequently, it should be considered whether codification in this manner or similar law formation attempts from above, seeking to exclude all other sources of law, are still appropriate for professionals even in transborder transactions unless the business community itself asks for it. It was submitted earlier in Volume 1, chapter 1, section 1.1.10 that all professional dealings, even if on occasion purely domestic, increasingly conform to the international practice and therefore are covered by the modern law merchant or lex mercatoria and its different legal sources of which again the statutory texts would only be one. In fact, it was argued that all commercial and financial dealings are now best placed in the transnational commercial and financial legal order with its own private law, see Volume 1, chapter 1, section 1.5. Consumer law would remain in essence the law of each Member State, even though subject to EU harmonisation to protect the internal market. The end result of the present projects, particularly the DCFR, is in fact an updated BGB, much as the euro was an upgraded Deutschmark, now considered to operate at the EU level for all as if it were a domestic market where consumer protection needs dominate. If maintained, it would monopolise the field in the EU also for professional dealings and consider them all local transactions that need supervision, but it is unlikely to work well. It shows, as so much EU activity does, that there is no forwardlooking perspective beyond some vague idea of a greater universe guided by government and imbued with consumer protection notions as if they come for free; in this world, markets are suspect; there is a censorious attitude that uncritically favours state intervention in private law formation far beyond what public order and public policy would appear to require, especially in business. Pushed by academia in Europe, which is isolated from the real world and from the dynamics of commerce and finance in particular, it shows the deep decline of private law in Europe in the last two generations, manifested by a lack of innovation and an unwillingness or inability to reinvent itself.
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Below the details of the two sets of Contract Principles and of the DCFR will be discussed in greater detail in the area of contract law,293 followed by a brief discussion of the 2011 proposals for CESL as a DCFR carve-out, now withdrawn in anticipation of new e-commerce texts. A more detailed discussion of the international sale of goods and the Vienna Convention will follow in section 2. The proprietary coverage of the DCFR will be discussed in the next chapter.
293 For a rough comparative guide, the following references to the Vienna Convention (CISG), UNIDROIT Principles (UP), European Principles (PECL) and Art 2 UCC, as divided by subject, may be useful:
Offer and acceptance (formation): Arts 14 and 18 CISG; Arts 2.1, 2.2 and 2.6 UP; Arts 2.101, 2.201, 2.204 and 2.205 PECL; ss 2-204(1) and 2-206 UCC; Arts II-4:101, II-4:201, II-4:204, II-4:205 DCFR. Bargain, consideration and causa: Arts 14, 18, 23 and 29(1) CISG; Art 3.2 UP; Art 2.101 PECL; ss 2-205 and 2-209 UCC; Art II:4:101(a) DCFR. Reliance or conduct: Arts 8, 16(2)(b), and 18(1) CISG; 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) PECL; 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) CISG; Art 2.2 UP; Arts 2.103 and 2.201(1)(b) PECL; s 2-204(3) UCC; Arts II:4:103, II:4:201(1)(b) DCFR. Capacity, legality and validity: Art 4 CISG; Art 3.1 UP; and Arts 4.101 and 15.101 PECL; Art II-7:101 DCFR. Formalities, parol evidence: Arts 11, 12, and 24 CISG; Arts 1.2 and 2.17 UP; Arts 2.101(2) and 2.105 PECL; ss 2-201 and 2-202 UCC; Art II-1:107, and Art II-4:104 DCFR. Binding nature of offer: Art 16 CISG; Art 2.4 UP; Art 2.202 PECL; s 2-205 UCC; Art II-4:202 DCFR. Time of contract: Arts 18(2) and 23 CISG; Art 2.6(2) UP; Art 2.205 PECL; s 2-204(2) UCC; Art II-4:205 DCFR. Pre-contractual and post-contractual duties: Arts 2.15 and 6.2.1 UP; Arts 2.301 and 6.111 PECL; Arts II3:301 and III-1:110 DCFR. Contractual co-operation duties: Art 5.3 UP; Art 1.202 PECL; s 2-311(3) UCC; Art III-1:104 DCFR. Specific performance: Art 28 CISG; Art 7.2.2 UP; Art 9.102 PECL; s 2-716(1) UCC; Arts II-3:101 and II-3:302 DCFR. Defences and failure of consensus: Arts 3.5, 3.6, 3.8 and 3.9 UP; Arts 4.103(1)(a)(ii), 4.104, 4.107 and 4.108 PECL; Arts II-7:201, II-7:202, II-7:205, II-7:206, II-7:207 DCFR. Excuses and force majeure: Art 79 CISG; Art 7.1.7 UP; Art 8.108 PECL; Art III-3:104 DCFR. Privity: Art 6.110 (third-party beneficiary) PECL; Art III-3:104 DCFR. Interpretation: Arts 7(1) (of the Convention), 8 CISG (only of statements of the parties); Arts 1.6 (of Principles) and 4.1 (of common intention), UP; Arts 1.106 (of the Principles) and 5.101 PECL (of common intention); ss 1-102 (of the Code) and 2-301ff (of sales contracts) UCC; Art I-1:102 (of DCFR), Art I-8:101 (of common intention) DCFR. Concept of good faith: Art 7 CISG (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 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) PECL; 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 CISG; 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
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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 are defined, but the use of these notions may imply some 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 as in international commercial arbitrations; see also Volume 1, chapter 1, section 1.1.10. More generally, the operation of the transnational commercial and financial legal order needs consideration which means that in its modern lex mercatoria as the applicable law, principles such as these of UNIDROIT need to find their place among other sources of law obtaining in that order, see also Volume 1, chapter 1, section 1.4.15. In typical codification thinking, the UNIDROIT Principles do not, however, consider other sources of law to operate besides them and are not therefore an acknowledgement of the modern lex mercatoria even though it is mentioned in the text, as we shall see, without any clarity in the use of this term. Rather the UNIDROIT Principles seek to replace it in an exclusively academic approach in the manner of the old-fashioned civil law codifications, at least to the extent parties have opted for its application. If not, it is hoped that it may serve as guide or some soft law, whose status then becomes unclear. Perhaps it should be repeated in this connection that although these Principles are referred to as the UNIDROIT Principles, they derive from this no special status in law. of statements, probably) and 6.111 (change of circumstances, probably) PECL; 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) and (2) (definition and mandatory nature), II-9:102 (pre-contractual statements, probably) III-9:401ff (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 15.101 PECL, 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 10ff and Statement of (nonbinding) Principles before the text. Party autonomy: Art 6 CISG; Arts 1.1 and 1.5 UP; Art 1.102 (not an independent source of law) PECL; s 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) CISG; 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) PECL; 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; Art II-1:104 and Art II-9:101 (as implied contractual term only), II-8:102(1)(f) (in contract interpretation only) DCFR. General principles: Art 7(2) (supplementation of Convention) CISG; 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) CISG; Art 1.4 (in connection with mandatory rules) UP; Arts 1.103 (in connection with mandatory rules) and 1.106(2) (supplementation of the Principles) PECL; 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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They are no more than the product of a UNIDROIT committee and as such have at best persuasive force in terms of a restatement. Their authority is hardly in their academic pedigree and content either. Their legitimacy, if any in terms of the modern lex mercatoria, could only derive from their reflection of international fundamental principles or values or transnational public order requirements, from their restatement of transnational custom and practices or general principle, and from the ability of the international legal practice to recognise itself in the results and to accept their guidance. Thus short of their being imposed by statute or similar statist instruments like treaties or being chosen as the applicable law by the parties (when they still have to find their place among the other sources of law operating at the transnational level which might be higher), only the international marketplace can decide their ultimate fate. It means that international trade and commerce themselves have the last word, except in transnational fundamental principles or in matters of transnational public order, while domestic public policies, in particular regulation but also local public order requirements to the extent the relevant transaction in conduct and effect still comes demonstrably on shore in the particular country, can also not be ignored: see Volume 1, chapter 1 sections 2.2.6ff. In this vein 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’. It was already said that this does not present a clear view. It is further 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 conflict of laws rules or to gaps in domestic law, not to atavistic or parochial domestic laws being superseded per se in cross-border transactions between professionals. It is further hoped that the Principles may serve as a model for national or international legislators. It is likely that that was the real ambition. They are also seen as interpreting and supplementing uniform law instruments, in which connection the CISG particularly springs to mind, of which it would then become the general contract law part. But it is obvious that the Principles cannot determine their own status short of being chosen by the parties and even then the other sources of law cannot be ignored if higher. Again, there is here no clear concept of different autonomous sources of law operating and of their relationship or hierarchy among each other in the modern lex mercatoria approach as explored in Volume 1, chapter 1, notwithstanding the reference to the lex mercatoria in the Preamble as just mentioned. It is not known or considered how it works and what the place of a text of this nature within it is. Thus 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 subject to the proper law of the contract and are not autonomous sources of law (Article 1.8), and party autonomy also operates merely by permission of the Principles (Articles 1.1 and 1.5). Again, this is typical civil law thinking, concentrating on legislation as the sole legitimate source of law in the strictest statist civil law codification manner. It would thus appear that in the mind of the drafters the reference to the lex mercatoria simply means its substantial replacement by the new text. Nevertheless, when Article 1.4
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mentions mandatory rules, it would seem that they could only come from other sources of law such as fundamental legal principle, public order considerations or mandatory custom; the Principles do not have the authority to create them, but they may recognise them and could even postpone themselves. This is, however, not what follows: whatever their origin—national, international or supranational—these mandatory rules apply in the perspective of the Principles in cross-border dealings not directly but only in accordance with the rules of private international law (Article 1.4).294 In terms of their own rules, according to the Principles, the most important one that cannot be excluded is the duty to act in accordance with good faith and fair dealing in international trade (Article 1.7(2)). It is considered absolutely mandatory; for another mandatory rule within these Principles, see Article 3.19 on validity. There is a definition neither of good faith and fair dealings nor of international trade That is to say first that we still do not know whether we have here in international dealings a transnationalised concept of good faith or not, or what it means: is it simply the opposite of bad faith as its mandatory nature would suggest, or does it stand for a liberal interpretation technique that reintroduces the other sources of law in professional dealings, when it would by no means always present mandatory law? (See the discussion in section 1.3 above.) Again, it should be doubted whether Principles of this nature can declare rules mandatory. They can at best recognise them as such and postpone themselves. As for good faith, it was earlier observed that good faith is not always a mandatory concept (see section 1.3.10 above) and has many functions: see further sections 1.3.1 and 1.3.4 above. The Principles are not aware of or ignore its multifaceted nature. It creates obvious problems, also where reference is sometimes made to related notions such as acting in bad faith, resorting to manifestly unreasonable behaviour, taking excessive advantage, or reasonableness. But the essence is that the drafters did not appreciate the revival of multiple autonomous sources of law behind this notion of good faith itself, which, it was submitted, stands in truth for a liberal interpretation technique which at least in professional dealings reintroduces all other traditional sources of law that legislative texts have tried to eliminate. 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 (they may even be the expression of transnational public order), and that there is also ius cogens in international trade that does not depend on incorporation or recognition in Principles of this nature and which they cannot supersede either. They concern mainly fundamentals such as the binding force of agreements itself (pacta sunt servanda), the liability for one’s own actions and probably some other fundamental principles (such as standards of care in the case of dependency) discussed in greater detail in Volume 1, chapter 1, section 1.4. They therefore cover primarily the legal infrastructure of contract and 294 It is apparently not considered that these mandatory rules strictly speaking are not private and often more likely to apply directly as règles d’application immédiate (cf also Art 9 EU Regulation on the Law Applicable to Contractual Obligations, Rome I), certainly when regulatory, and not as a matter of private international law. It is further 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 and shows again the absence of any clear view in these matters.
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issues of capacity, not the contractual content, although there is also the issue of market abuse and anti-competitive behaviour where fundamental principles or public order requirements are likely to be more corrective. In transnational dispute resolution, there are fundamental principles of due process. Otherwise, it was concluded in Volume 1, chapter 1, section 3.1.2 that at least in the professional sphere, there are few fundamental principles of a private law nature concerning the contents of transactions but there may still be pressing moral values or notions of justice, social peace and efficiency in the way rights are subsequently exercised. Even in the area of good faith as a behavioural norm only, professional participants would still be able to set standards unless manifestly unreasonable. That is at least the UCC approach (cf section 1-302(a)) as we have seen. The Principles in respect of the mandatory force of the good faith concept are here unspecific and their absolutely mandatory nature confirms consumer law thinking, which is indeed more particularly concerned with contractual content and may test it on the basis of fairness. This use of the concept of good faith would be far too broad and lacks that kind of authority in professional dealings. Again, it demonstrates the danger of consumer law thinking drifting into professional relationships. A censorious approach of this nature—if that is meant by the reference to a mandatory notion of good faith, if not then also becoming the expression of public order—is in its generality largely untenable in international commercial transactions and therefore not truly understandable in the UNIDROIT Principles, which are meant for professional dealings only. 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 again (a) where fundamental (international) principle is at work (which supports in particular the contractual infra structure but may also refer to deeper correcting values), (b) where notions of (international) public order operate (notably when fraudulent or monopolistic or abusive tactics have been used), and perhaps also (c) where there is mandatory custom as there may well be in proprietary matters, (d) when manifest unreasonableness, unfairness or unconscionability result considering the type of parties, less likely therefore in professional dealings, or (e) where contracting is used as an organisation technique affecting multiple relationships and thereby larger groups, although this is again more relevant in relation to consumers under standard contract terms and less between professionals even if in these Principles no proper distinction is made in this connection either, see Article 2.20.295 Again, the effect of regulation is a separate issue and not on the whole a good faith matter.
295 In the UNIDROIT Principles, other examples 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 (notably in so far as they refer back to how contracts derive their binding force) 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, although probably less in respect of the former especially when public policy becomes involved, eg for competition reasons.
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Beyond this, 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 generally as a mandatory concept is then unhelpful or even misleading. Notably it could not go so far that professional parties substantially lose control of their transaction, which must be limited to pressing moral or societal values, public policy or public order considerations only, not merely to good faith as an undefined concept. In this connection it has been pointed out from the beginning that relationship thinking itself may de-emphasise good faith notions in the sense of more protection in professional dealings. It may support party autonomy better. Relationship thinking of this nature may also de-emphasise concepts of capacity, mistake, misrepresentation, force majeure and frustration or hardship in terms of defences and excuses, unless in professional dealings the contract states otherwise as we have seen. Again, this is not reflected in the UNIDROIT Principles even if they pretend to be for professional dealings only.296 The consumer-oriented nature of the UNIDROIT Principles may in particular be demonstrated in 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, while there need not even be severe financial consequences (Article 6.2). This is especially difficult to understand for professional dealings, where questions of contractual balance are in any event harder to establish and may be less relevant. This again suggests consumer thinking. One may then also wonder whether this rule is equally considered good faith related and therefore mandatory. 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 among professionals. The question is why? Who needs protection here against what? Pointing in another direction, may 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. As bad faith is also undefined, it may introduce another subjective element. Upon proper analysis, it is not necessarily the opposite of good faith, which, it was submitted, may have acquired a much broader meaning and scope. One instance is highlighted: one party entering into or continuing negotiations while intending not to make an agreement. This can happen when this party wants to
296 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 readily 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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prevent the counterparty dealing with competitors or seeks confidential or proprietary information. It 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. It is not clear. In any event, it should be repeated that the authority of the drafters of the Principles to formulate mandatory rules is questionable unless they are demonstrably reflective of fundamental principle, public order or mandatory international commercial practice. Finally, it may be repeated that even if these Principles are meant for business dealings only, the basic attitude of the drafters appears to remain anthropomorphic, therefore derived from and tied to personal dealings and experiences only in the nineteenth century mode. 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 to reflect international commercial practice. This anthropomorphic attitude again suggests a consumer mentality. In a similar vein, formal offer and acceptance notions remain at the heart of contract formation. Conduct and reliance and risk acceptance are not central to this intent- and will-based notion of contract. It follows that the defences and excuses, including force majeure, are also subjective. For the latter, this was already confirmed in the CISG and it is not surprising that it is maintained in these Principles but it undermined the credibility of the CISG from an early stage as discussed above in section 1.4.5 (see further also section 2.3 below) and makes these Principles also less suitable for business dealings for which they were specifically designed. One gets the feeling that the drafters did not really understand what was going on or what they were doing and never stepped back to consider it. To conclude: it cannot be avoided that this attitude seriously weakens the UNIDROIT Principles. For all their focus on commercial contracts, the risk-taking dynamics of international trade and commerce seems to have eluded the drafters and hardly found a reflection in the text. They presented principally an academic effort on the basis of a trade-off in domestic thought concerning consumer or smaller business protection steeped in the tradition of black letter rules and a more recent ethos of governmental intervention with a censorious undercurrent in the thinking, which goes well beyond legitimate public policy and public order concerns. 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, in international dealings more in particular from the perspective of the modern law merchant or lex mercatoria, and therefore be embedded in the totality of the law that prevails in that sphere between professionals, among which rules of this nature are only one of the pertinent sources of law. They may be considered general principle but then have to yield to other rules that may be considered higher. There are also public policy or public order requirements to consider, operating within fundamental principle or without, either of a national or transnational character. This goes back to the discussion of the hierarchy of norms within the modern lex mercatoria; see Volume 1, chapter 1, section 1.4.14 and for public policy Volume 1, chapter 1, sections 2.2.6ff.
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1.6.4 The Principles of European Contract Law (PECL) The consumer-oriented attitude of the UNIDROIT Principles is also adopted by the PECL, 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 (domestic) private dealings is built into these Principles themselves, which in the civil law codification ethos confirms here also a unitary approach for all, no less undermining their credibility. Again, it suggests a fatal lack of relationship thinking, which would affect especially duration contracts between professionals. To repeat, in the professional sphere, any rules concerning international dealings find their ultimate justification in their reflection of internationalised fundamental principle, industry custom and practices, general principle, and of a (transnationalised) notion of party autonomy (whether or not supported or corrected by public order and public policy in appropriate cases). The rules concerning consumer contracts, on the other hand, basically find their justification in domestic perceptions and public policy. That in neither set of Principles (UNIDROIT and PECL) the needs and requirements of commerce are fundamentally evaluated is proven by the fact that the texts are largely the same, confirming the unitary approach in both. There are a number of differences in the details but they appear to have little to do with the distinction between professional and consumer dealings. First, there is an important difference in their interpretation or supplementation, as we shall see in section 1.6.6 below. Furthermore, according to Article 1.101 of the PECL (not here in a Preamble as in the UNIDROIT Principles), the European Principles 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 (d) when the applicable law does not provide a rule.297 Especially in the last two cases, one may ask where the authority of these Principles comes from. It would have to be international principle or practice. The reference to the lex mercatoria could also be understood in this manner, but it is far from clear and would, from the point of view of these Principles, have to be chosen by the parties first. This suggests at the same time that even the legal infrastructure of 297 This reference in the PECL to the European Communities could mean a reference to the EU legal order in which case, for the applicability of the Principles, both parties would seem to have to be resident in the EU in order to be subject to it (just as 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 they were also to become law. If, however, the European Principles were to be considered in the nature of an EU contract code, they could still be relevant to outsiders 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 they are no less consumer oriented than the PECL. That is what academic lawyers now usually know best. There is also the question of authority and legitimacy. In both sets, the sources of law are narrowed to the written text only, again something academic lawyers can best trace, but there is much more as we have seen, especially in international commercial and financial transactions.
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the applicable law and the principles on which it is based are at the free disposition of the parties. This view is borne out by the fact that the PECL maintain a system similar to the UNIDROIT Principles in respect of the possibility of exclusion of the Principles by the parties and the derogation by them from their provisions. This derogation may not affect any mandatory PECL rule (Article 1.102(2)), but it raises the question again whether PECL can declare some of its rules mandatory unless they state transnational fundamental principle, potentially including public order considerations, or implement mandatory customary law and general principle. As regards mandatory law, more generally, the PECL follow the UNIDROIT Principles, also in allowing mandatory rules of national, supranational and international law to prevail pursuant to the relevant rules of private international law, again without considering the possibility of their direct applicability and other more objective standards of appropriateness or justice (Article 1.103).298 Clearly, at issue are first and foremost domestic public policy and public order notions or governmental interests, in respect of which the PECL need to determine first which ones are relevant in international transactions when the issue of their direct application arises. Beyond this there should be concern for other basic values, which may be increasingly transnationalised as minimum standards in international professional dealings as we have seen. The mandatory rules in the PECL themselves also track the language of the UNIDROIT Principles, especially on good faith and fair dealing and the parties’ mandatory duties in this respect (Article 1.201). The PECL which, as just mentioned, also cover consumer contracts, are narrower in that they do not refer here to international trade. These Principles are not therefore set primarily in an international context but only an EU one, regardless, apparently, of the reference to the lex mercatoria, a reference dropped in the DCFR, which has no concern on the subject as we shall see. The idea is clearly that the EU is one territorial area or internal market within which there are no longer cross-border dealings that justify an international regime and where the codification ethos excluding all other sources of law prevails unhindered. Again it raises the issue of jurisdiction or authority so to legislate, which in the EU as we have seen is in practice at best limited to transborder activity, see also the next session and Volume I, chapter 1, section 1.4.21 above. As to the relevance of other sources of law in this context, the PECL again follow in Article 1.105 the UNIDROIT Principles for the impact of custom, relying on implied terms subject to reasonableness, although the text may be slightly more objective. A new element introduced by the PECL (Article 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. 298 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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Although the circularity is curious (but followed in the DCFR), 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. Unlike the CISG (Article 4), the possibility of the operation of custom beyond implied contract terms is not considered. This also tracks the UNIDROIT Principles, where, since they are limited to business dealings, it was even stranger. Article 1.305, describing imputed knowledge of the parties, remains substantially based on personal dealings; again modern business transactions seem not to figure. In matters of capacity (Article 4.101), mistake and misrepresentation (Article 4.103), pre-contractual disclosure duties (Article 2.301, although cast in more objective terms), individual negotiation of unfair contract terms (Article 4.110), pre- and postcontractual renegotiation duties (Articles 2.301(2) and 6.111), the approaches of the UNIDROIT Principles are substantially followed also (except for any pre-contractual duties with which it did not deal, see section 1.6.3 above). The idea is that contracts remain intent or will-based and anthropomorphic. There is little room for reliance and risk-acceptance notions. Everything tends towards subjectivity, including the notion of good faith, breach and force majeure. Again these Principles are essentially derived from non-professional dealings. Unlike in the UNIDROIT Principles, in the PECL, absence of good faith further creates liability for broken-off negotiations, while 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 as we have seen. One would rather 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 (Article 4.103(2)). That is some progress: the UNIDROIT Principles prevented a party from invoking mistake in the event of its own gross negligence but also when it took the risk (Article 3.5(2)). The PECL 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 (Article 4.118). In the professional sphere one would have expected the possibility of exclusion also of the notion of excessive benefit and the right to avoid unfair terms not individually negotiated. Again, in a more perceptive approach, good faith limitations would be different in the case of professional dealings and less restrictive.
1.6.5 The Draft Common Frame of Reference The DCFR has already been referred to extensively throughout the text of this chapter. What has been said so far may be briefly summarised as follows. First, the DCFR, which means to apply in principle to both domestic and crossborder dealings within the EU, regardless of there being no original jurisdiction in
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the EU concerning the latter) and assumes here the existence of one territory, maintains the old-fashioned civil law codification approach in which legislation takes centre stage and system thinking accompanies it. Private law is a governmental text, statist and static, formulated by academics, valid until official amendment, and to be interpreted as a self-contained 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 abandoned. It follows, however, that private law remains imposed and not found, and its application a technique of text interpretation, basically connected with forms of logic, all entirely in the civil law positivist tradition. Other sources of law are excluded, at least that is the idea. In the typical civil law codification fashion, justice, social peace and efficiency are assumed to follow automatically. There is no need for interdisciplinary studies and empirical research. Transnationalisation through a bottom-up process of law formation is irrelevant. There is a unitary approach which is consumer oriented. The modern lex mercatoria is sidelined and no longer applies to cross-border professional dealings within the EU. It follows that any other sources of law are only accepted to the extent specifically incorporated in the text.299 Fundamental principle is generally ignored. In the latest 2009 text in a kind of Preamble (nn 10–22), the drafters only try to demonstrate how much of fundamental principle 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 to the extent recognised by governmental instruments and only in the interpretation of the DCFR itself (Article I-1:102(2)).300 So not even then do they form an autonomous source of law. Article II-2:101 also contains specific wording as to discrimination, but again only as a statutory concession in interpretation and only in contract law. The new Introduction of 2009, which at last discovered fundamental principle, struggles mightily with this topic but leaves it to others to decide any overriding impact, clearly unaware of the EU case law in the area of fundamental principle, or even the text of the EU treaties themselves: see Volume 1, chapter 1, section 1.4.5. It means that the drafters themselves stick to the codification ethos, which does not allow higher principle to prevail. Other principles of this nature are left to Member States in a curious passage in the law of contract (Article II-7:301) which refers here indeed to fundamental principles and may allow an amalgam of them to operate in the manner of a public order r equirement at EU level, but only if Member State imposed; infringement then
299
See nn 10–14 above. This is the so-called horizontal effect of human rights and related to or a reflection of the modern idea of constitutionalisation, see Vol 1, ch 1, s 1.4.5 and n 9 above. It is a limited concept, however, human rights normally being maintained against states and their institutions and not against private persons, but there may be analogy in all situations where power is exerted. For example, due process protections operate against the state judiciary but could in arbitrations then also be considered to extend to these private proceedings. More importantly, the impact of human rights operates here as a DCFR concession although under the DCFR these human rights are themselves still dependent on legislative instruments of Member States. The idea that fundamental principle can only come in through the horizontal effect of government action, is in itself a severe limitation and still suggests, as the DCFR does throughout, that values are only relevant to the extent they are state recognised. The same conclusion applies to the reference to fundamental principles in contract interpretation under Art II-7:301(a), see further also Vol 1, ch 1, s 1.4.5. 300
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leads to a void agreement.301 At least that would seem to be the idea. It may be noted that nothing of this is repeated in the text of the Study Group and in the CESL, to be discussed below. Custom or industry practices remain merely implied contract terms here (cf Articles II-1:104, II-4:205(3) and II-9:101) or appear in interpretation (Article II-8:101(1)(f)). They are therefore dealt with mainly in a contractual context only, while party autonomy also operates merely by government licence (Article II-1:102). They are not autonomous sources of law. Again, language akin to Article 4 CISG is omitted, which suggested, at least for custom, its existence beyond implied contractual terms. This traditional codification approach means to monopolise the scene and pretends to contain in itself the solution to all problems, now at the EU level. In this vein, general principles have no autonomous status either but only come in to the extent they underlie the DCFR itself (Article I-1:102(1) and (4)). This is pure system thinking. It is of interest in this connection, but not surprising, that any reference to the lex mercatoria, which at least figured in both the UNIDROIT Principles and PECL as we have seen, was deleted. This only confirms that there is no place for other sources of law, even in interpretation, unless specifically allowed. It is to be noted that the proposal for a European sales law (CESL, now withdrawn), based on but lifted out of the DCFR as we shall see in section 1.6.13 below, limited itself to cross-border dealings in the EU—it was a consequence of EU jurisdiction being based on the promotion of the internal market under Article 114 TFEU. Article 114 TFEU is here implicitly explained as giving the EU not only jurisdiction to legislate in this area, but also authority to outlaw other sources of law and to adopt a narrow traditional codification approach. The result was, however, two different sales laws: one for domestic sales and another for cross-border sales within the EU. Beyond the EU, it becomes a matter of the traditional private international law or conflicts rules or perhaps only then a matter of the modern lex mercatoria as transnational private law for all international professional dealings in the international flows. Although good faith allows for a way out in principle and may now be a facade for the introduction of fundamental and general principle, custom and practices, at least in interpretation, as is maintained throughout, see more in particular Volume 1, chapter 1, section 1.4.3, in the DCFR it is only defined narrowly and in moral terms (Article I-1:103) although the connection with fair dealing would appear to suggest a more objective and also more down-to-earth market element. Social considerations or values are not mentioned. According to Article I.1:103(2), the concept remains behavioural—the opposite of bad faith—and therefore remains limited and confusing. Notably, good faith’s multifaceted character and impact on the technique of interpretation more generally is not considered (see also section 1.3.4 above), again especially clear in its being declared of a mandatory nature (Article II-3:301 and Article III-1:103(2)). This follows the UNIDROIT Contract Principles and PECL also, 301 It could be seen as an extraordinary admission that fundamental principles in the EU only work at national level, are Member State imposed and work at EU level merely as general principle. There is here nothing of overriding European principle (or values or culture) and one could ask why, if there is nothing of this sort, a codification project of this nature can be conceived at the European level. It becomes at best some efficiency tool.
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but can be true only, it was submitted, when good faith refers to fundamental principle, public order requirements, or mandatory custom: see also the discussion in section 1.3.10 above. The DCFR may be mainly concerned with the moral high ground and generally a more uplifting life, but it must be doubted whether in respect of business that justifies a more prescriptive and admonishing, censorious or correcting kind of attitude, short of fraud and abuse. The impression remains that the drafters lacked a clear view and were merely well intentioned. There is a separate reference to reasonableness in Article I-1:104, which suggests a different concept, although hardly defined either. The importance would appear to be that it is not mandatory per se, but again relationship thinking is absent. Although in the reference to the ‘relationship in question’, the good faith definition may itself introduce a beginning of relationship thinking, it was already said that it is expressed in terms of respect for it in moral terms rather than as the driving force behind a much broader concept of good faith. The further 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) and II-9:101(2)(c) (terms of contract). For pre-contractual disclosure duties there is, however, now instead a reference to good commercial practices for professional dealings in Article II-3:101(2) while in the context of a change of circumstances, there is rather a reference to what is reasonable and equitable (the latter term not being defined) in Article III-1:110. Whatever the meaning, the mandatory good faith language is avoided here. That is new and may suggest more flexibility but also confirms the myopic view of good faith itself. There is also an interesting difference between pre-contractual and post-contractual negotiation duties, only the former now being mandatorily governed by good faith. It suggests that parties may agree otherwise in a post-contractual hardship clause, and even exclude the adjustment possibility. It is less clear why this could not be done also in the pre-contractual phase, at least among professionals, in some disclaimer or waiver document. To repeat, the standards of good faith which the DCFR maintains, whatever they may be, apply in essence similarly, therefore to consumer and business alike. That is the unitary approach. They have a strong consumer flavour, as they had in the PECL. Indeed it was observed before—even for the UNIDROIT Principles—that the consequence of the unitary approach and absence of proper relationship thinking is a spill-over effect of mandatory consumer protection thinking into the professional sphere while this law remains anthropomorphic and statist in concept. Again, the reason is lack of relationship thinking, which is in civil law still in its infancy. Only in some specific instances does the DCFR make a formal distinction between consumer and business dealings, but this confirms also that it is not fundamental to its thinking. Rather, in the codification manner, the DCFR defines types of contract not types of relationship and formulates seven types (sale of goods, services, rental agreements, contractual agency, loan agreements, distribution agreements, guarantees). It has been pointed out several times before that this attitude has serious adverse consequences for the credibility of the whole project. The thesis of this book is that, in international dealings, even within the EU, the distinction between professional and
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consumer dealings can no longer be ignored and is fundamental. The former are subject to immanent law formation, at least at the cross-border or transnational level, and codification in the traditional civil law model is for them no longer an appropriate method of law formation and application. It may still be appropriate for consumers, but it has already been questioned whether creating consumer protection of this nature at the EU level is at this moment the way forward even for them. There are still important issues of different needs (and costs) per country here, as the discussion about the consumer law Directives has shown, and there is also the matter of subsidiarity. Again, this consumer approach continues to support an anthropomorphic attitude to the law in the area of contract generally (also in movable property law as we shall see), with continued emphasis on intent in terms of old-fashioned will theories, offer and acceptance language, and protection of the individual. Also here, the DCFR follows the PECL closely, see Articles II-401ff. It has all become less suitable in professional dealings where in modern contract theory (see section 1.1.4 above), conduct and reliance,302 risk acceptance (in the DCFR only referred to in the case of mistake and change of circumstances),303 and the place of any particular contract in the overall business of a corporate participant need further to be considered in terms of defences or relief against performance, particularly therefore in the areas of mistake and misrepresentation, force majeure and change of circumstances (see more particularly sections 1.3.11–1.3.14 above).304
1.6.6 Interpretation and Supplementation in the Principles and the DCFR. Sources of Commercial and Financial Law, Hierarchy, and Lex Mercatoria Compared The discussion on the issues of interpretation and supplementation was started in section 1.3.9 above, to which reference is made. As noted before, 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 (see further also section 2.3.7 below and Volume 1, chapter 1, section 1.4.15), there only applicable to
302 Conduct and reliance are only referred to incidentally, see Arts II-4:101, II-4:204 and II-8:102 (conduct) and II-4:202(3) (reliance). On the other hand, reliance might even suggest a contribution or at least a commencing of performance, see s 1.1.6 above; cf also the unexpected reference in Art I-1:103(2) in the good faith definition. Again, the key is that conduct and reliance is here basically an alternative to offer and acceptance rather than the central theme in contract formation, of which offer and acceptance is then only a sub-category. 303 See Arts II-7:201(2)(b) and III-1:110(3)(c), but again the concept is not central to the DCFR. 304 Although the project is very German, an early critical article appeared in Germany, see W Ernst, ‘Der “Common Frame of Reference” aus juristischer Sicht’ (2008) 208 Archiv fur die civilistische Praxis 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 DCFR, H Eidenmüller, F Faust, HC Grigoleit, N Jansen, G Wagner and R Zimmermann, ‘Der Gemeinsame Referenzrahmen fur das Europaische Privatrecht’ (2008) 63 Juristenzeitung 529. The impression is given that these authors did not find the result German enough. 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. Here the consumer ethos appears uncritically accepted.
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international sales agreements in respect of movable tangible assets. The 2011 Expert Group Project and draft EU Regulation on CESL (sections 1.6.12 and 1.6.13 below) reverted to the sale of goods, but with a more comprehensive text, mainly for consumers and small businesses as we shall see. It has already been pointed out repeatedly and was discussed notably in Volume 1, chapter 1 , section 1.4, that ultimately we are here concerned with the question of other sources of law, at least in respect of cross-border dealings, which sources the Vienna Convention (Article 7), both sets of Contract Principles (respectively Articles 1.6 and 1:106), and the DCFR (Article I-1:102) consider in the context of interpretation and supplementation of these texts and even then in an uncoordinated fashion. The first three documents make reference to good faith, uniformity, international character, and the general principles underlying them, and the Vienna Convention and PECL additionally to domestic laws through conflict of laws rules where there are gaps. The DCFR omits first the reference to the international character—aiming at creating one law for what it considers essentially an EU domestic market—and further only retains the references to uniformity and good faith, and for the rest introduces a new reference to certainty. It was earlier explained that in its generality, this is an unsuitable addition: see Volume 1, chapter 1, section 1.1.8. The issue is rather predictability, as will be discussed further shortly, and transactional and payment finality, of supreme importance especially in international sales, to which the development and operation of the old documents of title and negotiable instruments always testified. It is a proprietary issue. On the other hand, the text of the Expert Group in Article 1 only asks for it to be interpreted and developed autonomously and in accordance with its objectives and the principles underlying it. Issues within its scope but not expressly settled by it are also to be settled in this manner, therefore without recourse to national laws either. This text was also in the CESL (Article 4). It confirms the tendency to see these texts in terms of national codifications even though the CESL only was meant to apply to cross-border dealings (within the EU). It has already been said also that custom and industry practices are not mentioned as an independent source of law in this context in the Vienna Convention or in either set of Principles and the DCFR, but are only considered as implied contract conditions, while the operation of party autonomy is also by statutory (treaty) licence only. That was also the approach in the text of the Expert Group and in the CESL. The status of other custom was expressly not considered in the CISG, Article 4; there is nothing similar in the other texts, which thus ignore custom (beyond contract terms) altogether, the typical codification attitude. Indeed, both sets of Principles and the DCFR are unanimous in allowing the effect of custom, then referred to as ‘usages’ and ‘practices’ (following the Vienna Convention, Article 9) 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 is followed by Article 5.2 of the UNIDROIT Principles, although not similarly repeated in Article 6.102 PECL, which use in Article 1.105(2) somewhat more robust language in the sense that parties are bound by any 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 could then also extend to non-contractual issues: see further also the language in the text of the Expert Group
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(Article 65) and in the CESL (Article 67). But it is not clear. Both sets of Principles and the DCFR require application of these usages and practices not to be unreasonable. It has already been questioned whether that is appropriate in the professional sphere; there should be no correction of the adverse results unless manifest, therefore in extreme cases. Again a test of content is generally only appropriate in consumer dealings. The requirement is in any event circular as Article I-1:104 in the definition of reasonableness itself refers back to relevant usages and practices. This is also the case in the text of the Expert Group and in the CESL (Article 4 and Article 5 respectively). More importantly perhaps, there is in all of these interpretational paragraphs no order or hierarchy and probably not even a clear insight into what was meant. The recognition of various sources of law and their rank was earlier identified as key in the concept of the modern lex mercatoria. At least it was still referred to in both sets of Principles but no longer in the DCFR, although it always remained undefined as we have seen in the previous sections. The DCFR (as earlier both sets of Principles) claims here exclusive application for itself, although it may still be fundamentally questioned whether, if becoming law, it has the power to exclude other competing legal sources, at least in cross-border professional dealings. The text of the Expert Group and the Draft EU Regulation (CESL) equally monopolised the law formation function at EU level for sales or at least attempted to do so. It can only be repeated that the authority that Article 114 TFEU may give to legislate in this area on the basis of the promotion of the internal market, which may itself still be questioned, does not at the same time confer authority to eliminate all other sources of law unless a specific case can be made that that is also demanded by the operation of the internal market, but it is hard to see in this connection that discarding the modern lex mercatoria is now also necessary to achieve that effect. It follows that in this codification approach, the freedom to contract is formulated as mere favour, see respectively Article 7 and Article 1, also derived from the DCFR and earlier the UNIDROIT Principles and the PECL. It has been noted before that there is thus no true party autonomy. This is traditional codification thinking, but again it should be questioned whether these texts can determine their own (superior) rank, at least in cross-border professional dealings. Article 114 TFEU would hardly appear to go this far. It was already said that they can only postpone themselves. Following what was mentioned about the hierarchy of norms within the modern lex mercatoria in Volume 1, chapter 1, sections 1.4.14 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 (if any) would then follow and subsequently mandatory general principle, party autonomy, directory custom, and their own directory rules followed by directory general principle. Regulatory rules of domestic law and domestic public order requirements are outside this hierarchy (unless they take the form of fundamental principle between private parties),to be considered separately. Article 1:103 of the PECL expressed this in an inadequate way as we have seen. No such reference is retained in the DCFR, although there may still be some considerable confusion in Article II-7:301: see the discussion in section 1.6.5 above. Whatever the shortcomings in this regard in the texts of the CISG, in both sets of Contract Principles, and in the DCFR, we also see that the good faith notion itself may be and often is used as the vehicle to (re)introduce other sources of law; see especially
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section 1.3.9 above. It is not clear whether these texts were aware of this; it is unlikely. In section 1.6.5 above, it has already been noted that there remain considerable problems with regard to what good faith is or does: merely the opposite of bad faith and then absolutely mandatory, or a liberal interpretation technique reintroducing the other sources of law, only those relying on fundamental principle being mandatory, while professionals may even then set standards unless becoming manifestly unreasonable. Doubts may also exist with regard to the concept of certainty, which is held in high regard in the DCFR as already mentioned (see Article I-1:102(3)(c)) where it is presented as a major interpretation tool in the interpretation of the DCFR itself, but rests on a misunderstanding of what a dynamic modern private law is or can be. Unconsciously, this cry for certainty may result from and be an answer to the subjective intent- and will-based perspective of contract formation that still pervades these texts, became also the direction of the Vienna Convention, and is likely to be the true cause of it being mistrusted in business. By showing a better understanding of the modern lex mercatoria and of modern contract theory, which are both more objective as we have seen in section 1.1.4 above, much of this unease might have disappeared and it would have been greatly more convincing. Indeed, the accent should always have been on predictability instead and on the much narrower concept of finality in transactional matters including payments: see Volume 1, chapter 1, section 1.1.7 and chapter 2, section 1.10.2 below. In the text of the Expert Group, the reference to certainty was deleted from the interpretation clause—see respectively Article 1 and Article 4—but it came back in Article 1(2) of the Draft Sales Regulation (CESL), now in terms of objective. Again, transaction and payment finality is by far the more important issue, particularly in international sales, it is also much easier to establish but this vital importance was not identified by either the DCFR or the CESL. De-emphasising intent altogether is indeed another way of approaching these issues of certainty and predictability. In other words, there are other ways of dealing with ‘certainty’, also in a dynamic legal environment, which are much more perceptive, but again they were not within the perspective of the drafters of these texts, the Vienna Convention included. This is the reason why, it is submitted, at least in the professional sphere these attempts have received little respect.
1.6.7 Approach to Contract Formation: Consensus, Reliance, and Exchange Notions, Capacity, Formalities and Specificity Generally in the area of formation, both sets of Contract Principles, the DCFR (which follows the PECL) and the CISG or Vienna Convention should be studied especially in the following areas: (a) the matching declarations of offer and acceptance in terms of the consensus notion, their continued relevance in international trade, the place of intent or the alternative in terms of the notion of exchange or bargain, or consideration as a source of the binding force of contracts and any cause of action based on it; (b) the importance of conduct and reliance in this connection, the latter being detrimental or showing a commencing of execution; (c) the need for the definiteness of the
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offer, its binding nature, the importance of dispatch and receipt of offers and acceptances; (d) the time of contract and its continuing relevance; (e) the impact of nonintentional considerations, rights and duties, in particular the relevance of implied conditions, disclosure, (re)negotiation and co-operation duties; and (f) formalities and parol evidence. Attention to the nature of the agreement and especially to the difference in the relationship between the parties and the notion of risk acceptance are other key issues. Subsequently there is the extent and impact of defences and excuses to consider as well as questions of interpretation and the role of good faith and custom. It has already been said repeatedly that both sets of Principles and the DCFR remain dominated by the concepts of will or intent and consensus,305 rather than conduct, (detrimental) reliance and risk acceptance. This has an important effect on the defences as we have seen and is closely connected to notions of blame in the excuses and their subjective nature. In section 1.1.4 above, this was summarised as a typical civil law codification approach which could be summarised in one sentence: ‘I did not mean it, I cannot help it, I am not to blame’. The common law attitude, which derives from commerce, was identified as being different and greatly less accommodating in principle, although relationship thinking may save the consumer but not the businessman. Risk management and otherwise risk acceptance are here the central themes in contract formation and implementation. Again, the civil law attitude remains in the nineteenth-century anthropomorphic mode of contracting and also directs offer and acceptance,306 being in essence still perceived as acts based on personal dealings in a kind of mating dance.307 It results in a fixed moment of contract formation, 305 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 3.4ff 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 probably too broadly formulated for commerce, 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 drafters, never mind that these Principles were meant for commercial contracts. The PECL 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 also covering professional dealings. Thus the DCFR, in Arts II-4:101ff, 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 also retains here the consensus idea and the parties’ intention, leading to an anthropomorphic notion of contract. Even reliance itself is not a concept much favoured, but appears in Art 16(2)(b) CISG and Art 2.1.4(2)(b) UNIDROIT Principles in connection with the withdrawal of an offer, 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) PECL, although only in connection with the possibility to revoke an offer, and Arts 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) PECL, and Arts II-4:102, II-4:204 and II-8:102 DCFR, cf also s 2-206(2) UCC. 306 The rules are derived from the CISG (Arts 14ff), therefore from the sale of goods, but were extended to all types of contracts in the UNIDROIT Principles and PECL (ch 2) and thus also introduced for duration contracts of all types, a substantially different world, see also DCFR, Arts II-401ff. 307 Both sets of Principles and the DCFR are of interest in that, while avoiding consensus language as the Vienna Convention also does, Art 5.101 PECL, Art 4.1 UNIDROIT Principles and Art II-8:101 DCFR on interpretation of the contract continue to 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 may inject some objectivity or even the concept of reliance.
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cf Article II-4:205 DCFR, an approach copied in this aspect also in the common law and CISG. The notion of a gradual build-up and decline in rights and duties, some of which may be non-intentional such as duties of care and co-operation, disclosure and (further) negotiation, and a dynamic concept of contract remain underdeveloped here. All three texts closely follow each other in this regard and are clearly inspired by the compromises reached within the formation rules of Part II of the 1980 CISG (Articles 14 and 18) and in the earlier Hague Sales Conventions concluded more than two generations ago in language that dates from the 1930s and which succumbed to the nineteenth century intent and will approaches prevailing in those days on the European Continent. They consider conduct and reliance only as a subsidiary way to form a contract rather than the main notion, of which offer and acceptance would be a mere subset. This is old sales language, in fact mostly geared to spot sales of individual items (one bicycle, one shirt, etc) between individuals, extended by the Principles and DCFR to all types of contracts and brought into its general part even in respect of duration contracts or, for sales, long-term sales agreements with a large service and technology content. The 2011 Expert Group text, and the Draft EU Sales Regulation (CESL) adopted the same language (Article 34 and Article 35 respectively), as we shall see, but it is at variance with modern contract theory and practical realities in business transactions. No less important in this connection is that the notion of risk acceptance only appears in the DCFR in connection with mistake and change of circumstances, and also in the force majeure clause in all four texts, albeit in a different language. So it is in the relevant text of the Expert Group and the Draft EU Sales Regulation (CESL). The result is a subjective approach all through, again in its generality unsuitable for business. The Vienna Convention (Articles 14 and 29(1)), both sets of Principles (Article 3.2 UNIDROIT Principles and Article 2-101 European Principles) and the DCFR Article II-4:101) all implicitly rejected the more objective notion of consideration in a common law sense and also of causa in a civil law sense (more clearly Article 3.2 of the UNIDROIT Principles). So do the text of the Expert Group and the Draft EU Sales Regulation (CESL). Offers are, however, not binding unless they say so or are reasonably relied upon (Article 16(2) Vienna Convention, Article 2.4(2)(b) UNIDROIT Principles and Article 2.202(3) PECL, see also Article II-4:202(3) DCFR). Note that reliance needs not here be detrimental and that it does not necessarily lead to a contract.308 The idea seems to be that if the offeree is at least incurring some cost in reasonable reliance on the offer, it cannot be withdrawn at will. This should be distinguished from acceptance by conduct.309 It shows, however, that, unlike in most of civil law, offers are
308 But one may notice an interesting curiosity in this connection in the text. In Art I-1:103(2) DCFR, a main example is given of acting contrary to good faith (as the opposite of bad faith in the perception of the DCFR). It is ‘for a party to act inconsistently with that party’s prior statements or conduct when the other party has reasonably relied on them to that other party’s detriment’. So here detriment is necessary. One wonders about its more general requirement in the context of reliance. 309 Nevertheless, as regards offer and acceptance, the Vienna Convention (Arts 14 and 18) largely assumed the formal common law terminology and concepts of offer and acceptance except that acceptance, if not by conduct or in the manner 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
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not binding per se, even for a reasonable period, except if so stated or when there has been such reasonable reliance (as in the case of subcontractors’ quotes enabling a main contractor to make a final offer). That is also the approach of the UCC (section 2-205). Again, 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), followed in Article II-4:103 DCFR.310 Under the CISG, 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 (Article 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 (Article 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 PECL, which do not cover mere sales contracts only, 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) PECL and also Articles II-4:101 and II-4:103(1)(a) DCFR.311 Under the Contract Principles, there is no need for documentation (Article 1.2 UNIDROIT Principles and Article 2.101(2) PECL, followed in Article 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 (Article 12) as the US has done. There is no parol evidence rule. The UCC continues to require documentation for sales contracts in excess of $500 and has retained the parol evidence rule but ties it to intent (see sections 2-201 and 2-202 UCC). On capacity all are silent. Finally, one might consider how the system of the Vienna Convention, and especially of both sets of Principles and the DCFR, applies to some common formation complications, such as to cash sales especially for consumers (where Article II-4:211 DCFR, following the PECL, asks for the appropriate adaptations of the offer and acceptance common law rule (motivated at least to some extent by the need to lock in consideration and thus the binding force of the contract as early as possible and reduce the incidence of non-binding offers). The Contract Principles, in Art 2.6(2) UNIDROIT Principles, Art 2.205(1) PECL and DCFR Art II-4:205(1) respectively, follow this approach, allowing alternatively also for acceptance by other conduct reaching the offeror (Arts 2.1 UNIDROIT Principles, 2.102 PECL, II-4:102 and II-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 need then only be reasonable, not detrimental, see text 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 PECL, but, as already mentioned, the offer may be revoked until acceptance unless reasonably relied upon. This is also the approach of the Expert Group and CESL. 310 Like the UCC in the US for the sale of goods, the Vienna Convention dispensed with the traditional common law distinction between so-called unilateral and bilateral contracts for formation purposes, the first ones being dependent for their effect on full performance (and notice thereof instead of mere acceptance) as 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, II-4:201, II-4:204, and II-4:205. 311 The issues of disclosure and negotiation duties at the formation stage were dealt with in s 1.3.11 above.
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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.
1.6.8 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 still be some reference to it in Article 3.2 and still more in the PECL, Article 5.101 and in Article II-8:101 DCFR. Yet it is the key idea and follows from the basic approach that sees contracts, even in the professional sphere, as intent based, which, erroneously and unnecessarily, it was submitted, leads to a basic flaw in the whole contractual set-up, which remains here anthropomorphic even in professional dealings. It is clear in particular that the more objective common law notions of consideration and matching individual promises are not followed although this approach was still close to the natural law concept of contracting which, at least in the old French law of sales, could also include a commencing of performance, see the discussion in section 1.1.5 above. In these texts, the more objective approach of the modern lex mercatoria, resulting from its different legal sources and modern contract theory, which also shows sensitivity to the notion that a party must invest in a professional contract before it can claim thereunder, is also ignored. From this there flows a more conceptual, but also more subjective approach to the defences as we have seen. This subjectivity follows through in the concept of fundamental breach and in the excuses, such as force majeure, and in the remedies concerning breach as a matter of blame, which again is much less relevant in the common law of contract relative to the excuses as we shall see in the next section. Indeed as noted this generally more subjective approach still remains dominant in the minds of many and is the one adopted also in the text of the Expert Group and CESL. Thus the common law fragmented case law and equity approach underlying the defences, and in particular the notion of rescission, is substantially abandoned here (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 or will, with the subsequent avoidance of the contract should the consensus have been undermined in the particular circumstances of the case. Threat or force, error and fraud remain then the major defences and lead to the avoidance or voidability of the contract. In civil law, invalidity in this sense also tends to be retroactive so that the earlier effects of the contract will be undone. In common law countries, this is (mostly) not the case 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
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a default in international sales in section 2.1.10 below; rather it is covered by the rules on unjust enrichment under the DCFR (Article II-7:212(2)), where it is a personal action only. This is in the German tradition. The CISG, according to its Article 4, is not concerned with validity in this sense. Like the CISG, the texts of the Expert Group and CESL do not deal with proprietary issues but they deal with restitution in the case of contract avoidance or termination (see Articles 172ff CESL) and again follow the German lead here, which was earlier also adopted by the DCFR. In both sets of Principles and the DCFR,312 all defences lead to voidability in the civil law manner. Avoidance (in whole or in part, see respectively Article 3.16 UNIDROIT Principles, Article 4.116 PECL and Article II-7:212 DCFR) not voidness is, however, the normal remedy in all cases, therefore leaving the initiative to the adversely affected party even in the case of fraud and threat. It is further noteworthy that the issue of risk acceptance, especially in the case of mistake, is not dealt with in a relationship manner, although, as already mentioned, there is some reference to risk acceptance in the later texts: see Article II-7:201(2)(b) DCFR, followed by the Expert Group and the CESL (Article 48(2)). In this set-up, the affected party may always confirm the arrangement (respectively Articles 3.12 UNIDROIT Principles, 4.114 PECL and II-7:211 DCFR) or may, in the case of mistake and gross disparity, also seek adaptation of the contract (respectively Articles 3.10 and 3.13 UNIDROIT Principles, 4.105 and 4.109(2) PECL and II-7:203, II-7:207 DCFR). Avoidance may be accompanied by a claim for restitution and damages (respectively Articles 3.17 and 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 Articles 3.20 and 4.118(2) and II-7:215),313 which again raises the question of their meaning in professional dealings in p articular.
312 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 II-7:101(2) DCFR, although in the last version of the PECL there is a chapter (15) on illegality, which ties in to fundamental principle and has its counterpart in Art II-7:301 DCFR, referring here to the law of Member States apparently as a kind of amalgam. As just mentioned, the texts 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 PECL, 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) PECL, and Art II-7:201(1)(a)(iii) DCFR. Inaccuracy is mentioned in Art 4.104 PECL and Art II-7:202 DCFR. 313 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 PECL and DCFR seem to deal better with the issue of professionality. As already mentioned in s 1.6.2 above, under the PECL, 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 also from invoking mistake in the event of its own gross negligence (Art 3.5(2)(a)). The PECL 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 Art II-7:201 DCFR, which tracks the PECL language.
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To repeat, the common law rescission notion, with its broad inherent judicial discretionary element depending on the facts and circumstances, including the type of parties, does not operate in a similar manner. Under the Principles and DCFR, 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 PECL, 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, which only covered international sales.314 In the DCFR, the concept is generalised for all contract law and expressed in Article II-3:502. That is also the approach of the Expert Group and the CESL (Article 87), although they limit themselves again to sales. If the breach is less than fundamental, notice fixing an additional time may be given after which the breach becomes fundamental in language also derived from the CISG. 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, but the concept remains too subjective to be workable especially in professional dealings.315 So is the related concept of force majeure of Article 79 (Article 88 CESL), the main reason why professionals usually exclude the application of the Vienna Convention (another reason being the unilateral right of the buyer to reduce the price under Article 50, cf Article 120 CESL). Again, it is the subjectivity of the overall approach, which in commerce distinguishes the civil and common law of contract. The CISG also adheres to this subjectivity, compounded by its intent- or will-based notion of contract, and to the related concept of blame in the excuses, all to the detriment of its credibility in business, it was submitted. Again, it is the consequence of unitary anthropomorphic thinking in civil law which spills over to the corporate professional sphere. It may be recalled that in the common law of contract, will and blame are very differently handled. All major contract conditions are only excused by non-performance of the other party. They are guaranteed in a civil law sense and force majeure is no excuse, even less a change of circumstances, unless the relative concepts are introduced and defined in the contract itself as risk management tools. They are not normally implied and the objective law will not normally redistribute the risk between professional parties. Intent and blame are not fundamental and contract formation does not depend on the one and excuses do not depend on the other. Texts are important and literally interpreted where the contract is perceived as a roadmap and risk management tool. The excuses of force majeure and
314
See also O Lando, ‘Non-performance (Breach) of Contracts’ in Hartkamp et al (eds) (n 142) 333. See for the concept of fundamental breach in the CISG, its subjectivity and therefore inappropriateness, M Bridge, ‘Avoidance for Fundamental Breach under the UN Convention on Contracts for the International Sale of Goods’ (2010) 59 ICLQ 911. 315
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change of circumstances were dealt with more extensively in sections 1.3.14 and 1.4.5ff above. Again, they are perceived in this book as operating fundamentally differently in professional dealings, a view which the DCFR could only incidentally accommodate. Both sets of Principles and the DCFR further 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, see respectively Articles 7.2.2, 9.102 and II-3:302, and also section 1.4.1 above. This is followed by the Expert Group and the CESL. It does not preclude damages while in bilateral agreements the other party may also withhold performance until the first party starts or continues to perform, see respectively Articles 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 dictated otherwise (Article 7.2.4). It was noted before that the Vienna Convention refers back to the lex fori (Article 28) on this point. Besides this option of specific performance, whether or not combined with damages and/or the temporary withholding of individual performance, in the case of a fundamental breach, the aggrieved party has the 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 in civil law, although it remains a matter of interpretation. Payment is as such virtually never excused either, as we have seen in section 1.4.6 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 Articles II-9:301ff DCFR. No other instances of inroads into the privity of contract are specifically covered in this connection.
1.6.11 The Nature and Impact of the PECL and DCFR On the general nature of the new texts, there are other points to be made. Although the term ‘principles’ was used at first, what has in fact emerged in all these texts are sets of precise rules. At least for professionals, it may be doubted whether this is needed at this juncture. Indeed, if a text is wanted, 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, not at this stage any more precise language except if commercial practice asked for it or public policy requires it. At least for professionals, the emphasis
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is on the sources of law in the transnational commercial and financial order. The commercial and financial practice itself, case law, or perhaps even arbitral awards at the transnational level should be given ample room to develop these sources and notions further on the basis of practical experience and need, while determining their contours and validity in an empirical manner. For many, the idea remains nevertheless full codification,316 that is their uncritical mindset, while there is an attempt to extend this approach also to common law countries in order for this law to operate at EU level, therefore even in the international markets so far operating from London. That this is considered at all, even in England, is due to a strong positivist strand in English academic thinking, which is also moving towards a belief in private law texts and rules through legislation at the expense of fact (and common law, equity, market practices or custom), an attitude popular in England in circles around the Law Commission, but it would likely be deeply resented in other circles and probably by the public at large. In any event, the traditionally different common law attitude would immediately become clear again in the interpretation in the courts in England, or after Brexit in countries like Ireland, Malta and Cyprus, which are unlikely to give up their more pragmatic approach and tradition. It would create extra stress in the system if this newer approach were to be adopted and prevail in the European Court of Justice (ECJ) which would likely become the ultimate umpire. More importantly, it has already been said that for texts of this nature to have any real meaning in terms of quality, at least in professional dealings, they must for their credibility show both direction and inspiration (unless barred by public order or policy) and be clear, concise and flexible, while the international practice, dynamics and needs must be recognisable in them and be seen to be properly advanced, again unless there are clear (policy) reasons for it to be otherwise. Thus new ways must be shown, old ways discarded and above all, in professional dealings, a view of the needs of international commerce and finance presented; see also the discussion in Volume 1, chapter 1, sections 1.1.6 and 1.1.7. This is about the law of tomorrow, not about the law of yesterday. It may be added that the difference between the US and Europe in this regard is that the various chapters or Articles of the UCC were adopted with alacrity by business in the US. The reasons were participation, quality and realism. That cannot so far be claimed for these texts in Europe. To make an effort of this nature credible, it can only be repeated that first the methodology in terms of top-down or bottom-up law formation and the sources of law must be made clear. Subsequently, there must be relationship thinking and an understanding of the dynamism in modern contract law for professionals as distinguished from consumer dealings and the unitary approach must be fundamentally reconsidered. Intent and will-based perceptions of the professional contract, its subjective features and notions of blame should be de-emphasised, including the effect on the notions of fundamental breach and force majeure. If there still has to be codification, even for professional dealings, the case should be proven for which a forward-moving perspective must be presented. Subsequently the relationship with, and effect of, public policy and
316
See for the jurisdictional aspects, Vol 1, ch 2, s 1.4.2.
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order in Member States should also be clarified. In the absence of clear insights into these issues, at least for the professional sphere, it may be far better to wait until commercial and financial practice asks for help unless public policy requires otherwise. The DCFR as it now stands is not a text fit to direct the international marketplace in Europe. The same applied to the CESL as we shall see, no matter its narrower scope.
1.6.12 The 2011 Project of the Expert Group on European Contract Law Whatever the pros and cons, in April 2010, the EU Commission set up a special group, now under its direct authority, called the Expert Group on a Common Frame of Reference in the Area of European Contract Law, limited therefore to assistance in the development of a future EU contract law instrument. It has already been referred to several times before. In the summer of 2011 this Expert Group came with yet another text. It dealt with the general part of contract law, in the event elaborated for only one contract type: the sale of goods and related services. It remains substantially inspired by the 1980 Vienna Convention, at the time conceived for professional dealings only, but in the meantime incorporated in the general (formation) and sales sections of the DCFR, as we have seen, thus extending much of it also to consumers (in which unitary form the CISG earlier already found its way into the BGB in 2002). The Expert Group used the DCFR’s relevant parts in this regard. The result was presented as a feasibility study on European Contract Law for consumers and business, covering therefore both business to business (B2B) and business to consumer (B2C) dealings. Notwithstanding its short gestation period, it was said to be the result of stakeholders’ and practitioners’ feedback. In truth, it was one more attempt by well-meaning scholars to arrive at yet another text better to convince, now mainly in an area limited to the contractual side of the sale of goods. However, it showed all the same problems, such as the confusion between consumer and professional sales and the conceptual limitation to (spot) sales of individual assets instead of conceptualising, at least for professionals, long-term supply agreements with large service elements (regardless of some lip service in Article 3), computer programs and similar modern technological features, and the effect of flows of assets in constant transformation in the international sphere with its newer supply and distribution chains. There was no better relationship thinking nor were there other sources of law. All was codification thinking and methodology where the contract remained intent and will-based, with the subjectivity that follows. The references to fundamental principles in the DCFR, confused as they were, were eliminated but that also meant even less sensitivity to extraneous, more objective considerations whilst on the other hand maintaining a censorious public policy attitude. There were also all the more traditional and now well-known shortcomings derived from the CISG itself already mentioned before and to be discussed more extensively in the next Part of this Chapter, especially in the area of fundamental breach (Article 90), force majeure (Article 91) and unilateral sales price reduction (Article 122). It has already been said repeatedly that the rules in these areas are too subjective and anthropomorphic to be workable in professional dealings, the reason why
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rofessionals normally exclude the application of the Vienna Convention, motivated p further by the subjectivity that follows from the intent- and will-based approach to contracting. It is hard to see how these texts could better serve smaller companies if the bigger ones reject them. A special (uniform) overlay of consumer protection was extra. In essence, there is here a double dip as the general part of the contract itself was already basically a consumer document following the unitary approach in the UNIDROIT Contract Principles, PECL and DCFR, meaning the same rules for all unless exceptions were made. Further rules of special protection for consumers were inserted, notably in the area of pre-contractual duties, but also in interpretation (Article 64), and were advertised as an important new feature of the project. Given its tenor and progeny, this project remained thus in essence a consumer law document and was more especially drafted as such. It would have been better to limit it altogether to consumer sales, although there might even be less need for it in that area as they are usually not transborder. If we consider the details, it may indeed be noted that in Article 1 the alternative sources of law are eliminated. There is thus no longer any place for the modern transnational lex mercatoria in cross-border sales transactions, even for professional dealings in transborder sales within the EU, nor it may be added, for custom and market practices and general principles derived from more advanced thinking in the laws of Member States (Article 1(2)) as objective sources of law. As in the earlier texts, custom merely operates by licence in the nature of implied contractual conditions (cf also Articles 57 and 65). Again, the reference to it having to be reasonable is no less confusing and in fact improper—see Volume 1, chapter 1, section 1.4.7. It is also circular. There is no concept of basic values either, even for consumers, unless specifically so expressed. There is the good faith concept at large, but its meaning remains unclear in the sense already discussed for the DCFR, while there is no realisation that it may require a literal interpretation of the contract when dealing with risk acceptance in the professional sphere unless the result becomes manifestly untenable. The offer and acceptance language, also derived from the CISG, further shows and confirms the intent- and will-based subjective approach to contracting, in fact the well-known consumer model. Although the sale of goods was the major contract contemplated in the text of the Expert Group, property law and the proprietary consequences of a sale were not covered as befits a project that only deals with contract law. However, if one truly believes in a sales text of this nature, it could only be of real importance if the whole field was covered in all its major aspects, title transfer being the main aim of the whole exercise in sales, and should then also cover floating charges and reservation of title in these assets, and payments. Equally the key issue of transactional and payment finality was ignored—it is also a proprietary issue. As it is, the project remains truncated; the draft only requires the seller to transfer ownership (Article 94(1)(b)). All the rest remains local law. The idea, therefore, that this type of law is uniform is a fallacy. Even on the contractual side, it is not complete, for example in the important areas of illegality and of representation and capacity, and it does not pretend to be so. But the major problem
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is the lack of a proper insight into the dynamics of modern contract law, the fixation of the contractual content at the time of the conclusion of the agreement, whenever that may be (Article 29), and the old-fashioned intent and offer and acceptance language (Articles 30ff), still based on the sale of a single asset. Again, it demonstrates an out-of-touch approach. Then again, there is the unclear attitude to the role of good faith (Article 8), reasonableness (Article 4), and pre-contractual and post-contractual co-operation duties (Articles 23 and 89 respectively) in the sense of the dirigiste or censorious and supervision approach in respect of content, here also in professional dealings, and no less the confusion of what is in this connection mandatory, even as to the contractual infrastructure itself (cf Articles 7 and 64). Why the Expert Group continued substantially with the CISG approach that had been rejected by professional practice and was never accepted by important trading nations like the UK and Portugal is a mystery. The answer is probably that the drafters were never fed anything else and could not think anew. The text meant to contribute to the economic recovery in the EU after the crisis of 2008 and was also concerned with transaction costs. The first aim was mere hubris but undoubtedly the reduction of transaction cost is an important issue, and it is not wrong that this whole area is reviewed from this perspective, therefore from the point of efficiency. However, the simple truth is that, quite apart from the issue of EU authority, which does not sufficiently exist in this area of EU codification of private law—nor generally in the consumer area either, see Volume 1, chapter 1, section 1.4.21—business would have proposed the project itself a long time ago if it saw important savings here. An Expert Group of this nature can hardly have an idea of what is needed in this respect, nor of what is required in regenerating the EU economy. In any event, progress cannot be achieved on the basis of antiquated texts as proposed; business rightly fears the limitations in such state-imposed academic models which endlessly regurgitate the past but have no concept of what is needed now or in the future. Again, in the US, which is a far more integrated market, the need for federal private law has not been felt. Even the UCC remains State law and there are differences between the States, which also do not adopt amendments simultaneously. More importantly, this Code was never imposed from above but was a private initiative and remains so in its amendments. It accepts the traditional other sources of law, especially custom and equity, as operating besides it; it favours them as we have seen. Rigorous system thinking is alien to it. Will and intent are de-emphasised in favour of an altogether more objective approach to contracting. In areas of good faith, parties can set the standards unless they become manifestly unreasonable in their application. That is the right attitude, at least for business dealings. It is true that there is federal consumer law, especially in the area of payments, but it is limited as, given the concept of proportionality and subsidiarity, it should also be in the EU. In summary, one may say that what still appears to characterise the EU approach in private law formation is: (a) its unquestioned concept of the supremacy of the statist legislative approach and the subordination thereto of all other sources of law, including those based on fundamental principle and values even in cross-border activity within the EU;
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(b) the assumption that in areas where the EU has sufficient jurisdiction to legislate in the area of private law, it is also able to push out or subordinate all other sources of law, and that this is a good thing;317 (c) the will- and intent-based subjective approach to contracting supplemented by the subjective nature of the concept of fundamental breach and force majeure in the area of excuses supported by the notion of blame; (d) the lack of relationship thinking and the confirmation of a unitary approach that is ignorant of social diversity and the (legitimate) needs of different groups; and (e) a consumer protection ethos with a censorious attitude to all private dealings and a suspicion of market forces well beyond normal public policy and public order concerns. It was earlier said that this civil law approach in contract is still defined by the cry: ‘I cannot help it, it is not my fault, I am not to blame’ whenever there are contractual problems. This anthropomorphic attitude remains the model also of the DCFR and its progeny. It is accompanied by an uncritical acceptance of the old civil law codification model, a lack of interest in methodology, and an absence of any serious empirical research. In the European positivist tradition, the intellectual system is all, by definition reflects reality, provides the correct answers if properly applied, and cannot be questioned. Facts must conform and are otherwise irrelevant.
1.6.13 The 2011 EU Draft Regulation on a Common European Sales Law (CESL) In the meantime, little suggests that diversity of private law is an important impediment to trade in the EU. It is a fallacy to think that especially SMEs would trade much more cross-border if there was uniform sales law. Tax, regulation, language and other impediments such as lack of physical facilities and credit risk of distant clients are much more likely to limit them. In any event, most SMEs do not want a larger radius for their activities as it would expose them to far greater risk. They are small because they want to be and are profitable in that way. International adventure in order to grow larger is seldom in their best interest. If, nevertheless, they wish to make the jump, private law variety will seldom be their major concern or problem and a uniform sales law of this limited type, whatever its merits, would do very little for them in the bigger picture of different laws. A partial codification may in fact create more trouble in determining the alternatives. 317 If there has to be private law codification in the EU, countries being asked to give up their own private law traditions, the founding treaties themselves should have spoken to it and state on these issues, giving each Member State a prior say. The Lisbon Treaties notably did not cover these issues. There is therefore no proper EU authority and it should not be fabricated on the basis of doubtful arguments or the use of hyperbole, see also Vol 1, s 1.4.19. This being said, if a truly modern commercial law could be produced that takes care of all different constituencies, it should not be rejected out of hand. In the US, the UCC was in that category and often enlightened. In Europe, we are unfortunately not in this position. It has already been said that at the academic level these exercises show the deep decline of the study of private law in Europe, especially in commerce and finance, over two generations and at the political level they show an EU further arrogating to itself dubious competences seriously detrimental to its already battered image in this regard.
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It has already been said that in major areas of sales, especially in the property aspects, there will not be a uniform law even after these EU initiatives. That would also very much concern the issue of the use of these assets as security for payment as well as transactional and payment finality. The most important aspects of a sale therefore remain uncovered and SMEs would still have to make many enquiries. Transaction costs might even be increased. This being said, it was already admitted that it is not wrong to consider the question of transaction costs for dealings within the larger EU area. It is also a fact that different laws and the traditional private international or conflicts of laws approach splits the international flows often in unsuspecting ways also in the EU, and this needs to concern us greatly but quite apart from the issues of quality and methodology, the present EU approach is not going to reduce these problems, only the modern lex mercatoria approach with its multiple sources of law and relationship thinking does. It may well be that better insights may eventually recommend an EU approach in this area, but we are not there yet and if legislation were going to help it will have to be much more along the UCC approach than civil law codification. In October 2011, the EU Commission nevertheless came up with a DCFR carve-out in the area of the sale of goods, in the form of a draft Regulation concerning crossborder sales, the substance of the proposal being derived from the Expert Group text discussed in the previous section. That was the CESL. In its introduction, the EU Commission talked about billions of euros lost in trade between Member States because of the differences in private law. This is delusional and a gross over-sell to support a jurisdiction in this area that the EU may not sufficiently have under Article 114 TFEU. Similar fantasies surfaced in arguing that consumers do not deal cross-border because they do not know the legal regime. The simple fact is that no consumer in whatever country ever knows it. In a free market, it has never stopped anyone from transborder shopping if the price is better on the other side. The text of the Regulation itself was short with 16 Articles mainly dealing with definitions, the scope and field of application, and the future review of the Regulation. It was preceded by a Preamble of 37 indents, and followed by two Annexes: one concerning the details of the sales law itself (186 Articles and two short Appendices), and the other concerning a standard information form, summarising the key consumer protections. The reference to the CESL normally means a reference to the Appendix text, but that was not the entire picture. Under Article 1.1 of the draft Regulation, the scope and field of application of the Regulation was confined in several ways. It concerns here: (a) transactions for the sale of goods, supply of digital content or related services as defined in Article 2(j), (k) and (m), other mixed-purpose contracts being excluded as are all contracts that defer payments for consumers (Article 6), (b) these transactions being cross-border in the EU as defined in Article 4(2) and (3),318 which ties in with the limited jurisdiction the Commission claims in this area of private law formation under Article 114 TFEU,
318 The definition of a cross-border contract under Art 4 is different for contracts between traders and contracts between a trader and a consumer. In the former, only one party needs to have its habitual residence in the EU, in the latter, the contract is cross-border if the address of the consumer, or the delivery or billing address are in a country other than that of the trader while at least one of these countries must be in the EU.
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(c) the parties to the transaction having agreed to the application of the CESL Articles 3 and 8, which agreement in the case of a contract with a consumer must be explicit (Article 8(2)), meaning that a reference in standard terms is not sufficient. Article 7 further stated that the CESL could be used only if the seller of the goods or supplier of digital content is a trader, while the sale, or digital equipment and related services contracts must be concluded between traders or a trader and consumer (Article 4). A trader is here someone acting in its trade, business, craft, or profession (Article 2(e)); a consumer is any natural person acting outside of them (Article 2(f)). If all parties are traders, there must be at least one SME, which means someone employing fewer than 250 people, having a turnover not exceeding EUR 50 million equivalent (or a balance sheet total not exceeding EUR 43 million equivalent). It may thus be seen that the CESL did not apply when all parties are consumers or when the sales are between professionals who are of larger size. The latter are covered by the Vienna Convention if parties come from ratifying states, but there is a twist: SMEs would also come under the Vienna Convention and the CESL choice would then have to be construed for them as an opt-out from the Vienna Convention under its Article 6. It was said earlier that dealings between professionals are often repeat business and longer-term contracts for the supply of commodities or semi-finish products, not infrequently cross-border. The sales contract with consumers is normally of a different nature and usually concerns only the sale of one asset, paid for immediately so that the contract is promptly terminated except for guarantees of quality and service if any, and mostly domestic. The latter situation seemed to remain essentially the perspective of the CESL but it is mainly in duration contracts that most legal problems arise and they may easily surface in the business between a trader and smaller SME, either as seller or buyer. Here again, the CESL appears not to make the proper distinctions. It would have been better and simpler to limit itself to these consumer sales only. That proved essentially the focus as the further feature of CESL was that contracts between traders and consumers were subject to a comprehensive set of consumer protections (Article 1(3)). The agreement of the consumer to the CESL meant, however, that the consumer was deemed to lose any better protection of its home state, which, under Article 6(2) of the Rome I Regulation, would otherwise be guaranteed. While an agreement to the contrary is not valid under the Rome I Regulation, it was considered valid if the CESL were chosen in which respect the Regulation could therefore have been seen as an amendment to Rome I. More important may be that the CESL adhered to the fiction that it was still national law, see Preamble 9, and that opting for it was therefore not a choice of (another) law under Rome I (Article 2, subject to its limitations in consumer dealings under Article 6)).319 It subsequently assumed that Rome I was not amended—Preambles 10–12—especially by invoking the lack of any conflict
319 See for these problems more particularly HP Mansel, ‘Der Verordnungsvorschlag für ein gemeinsames Europäisches Kaufrecht (2012) 28 Wert-papier-Mitteilungen.
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of laws after an opt-in, but the consequence was all the same the loss of the benefit of Article 6(2) of the Rome I Regulation.320 There was here a degree of legal sophistry that never convinced. The consequence would indeed have been a kind of domestication of international sales law, made ready for consumers and SMEs in their cross-border activity within the EU, still with a different law, however, for completely domestic sales, while the proprietary consequences also remained determined by local laws. Most importantly, the cross-border sales activity, even within the EU, presents a different world, traditionally intertwined with other important arrangements in terms of shipping documents, payment, transportation and insurance. These common arrangements were here largely ignored although Articles 93 and 94 dealt with some core ideas.321 They are at least in part covered by EU Directive 2011/83/EU for dealings between professionals and consumers (see its Preamble 27), which Directive is therefore probably more important in the specific cross-border aspects of these sales to which EU jurisdiction is confined. It is only to show that there may be other and more effective ways properly to deal with true consumer concerns in this area. On the other hand, the introduction of the concept of trader, SME and consumer may have suggested the introduction of a form of relationship thinking in the law of sales in Europe, a key concept for contract law overall in this book. But this is deceptive. It has already been said before that there was here a double dip. Indeed some special consumer protections were introduced and summarised in Annex 2 in terms of rights before signing of the contract, rights after signing of the contract, and what can be done when products are faulty or not delivered as agreed, while there was also the protection against unfair contract terms, but the general part of contract law itself had followed consumer law. The fact that the project was to be limited to consumer sales (B2C) and to those B2B sales involving small SMEs could have made this more tenable but it was a political choice and not the product of any fundamental insight that sets professional contracts apart as a matter of relationship thinking. As dealings between traders (except with small SMEs) were outside the CESL, the more objective modern lex mercatoria development in Europe would not appear to have been greatly hindered by this project,
320 More generally, private international law specialists may object to this approach. It ignores the normal conflicts rule, which first appoints a law of a Member State and only subsequently determines the applicable law on the basis of what this Member State may have agreed to in Conventions or EU Regulations. It is nevertheless also the CISG approach (Art 1), see the comment in Vol 1, ch 1, s 2.3.1. There is a further complication, in that the opt-in is itself contractual but not covered by CESL and therefore still subject to ordinary conflict of laws notions applying in each relevant Member State, see also C Harvey and M Schillig, ‘Conclusion of Contract’ in S Vogenauer and G Dannemann (eds), The Common European Sales Law in Context: Interactions with English and German Law (Oxford, OUP (forthcoming 2013). See further also H Eidenmueller, ‘What can be wrong with an Option? An optional European Sales Law as Regulatory Tool’, SSRN.com. Here the market test in respect of options of this nature is stressed and its defects in terms of regulatory competition explained. There is also attention to the lack of substantive quality and to the danger that the project will be made appealing regardless and prove to be very harmful. 321 See further also M Heidemann, Does International Trade Need a Doctrine of Transnational Law? Some Thoughts at the Launch of a European Contract Law (Heidelberg, 2012) 2.4.1.
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as it would be by the DCFR, but it was not a good signal. It remains a fact that this sales carve-out from the DCFR was seen by many as a first step in the latter’s progress especially towards a general part of contract law for all, DCFR style, which, it has been submitted all along, would be severely detrimental to the further development of professional law in the EU. In this connection, it may well be remembered that the objective was always political. Nothing of this was ever a practical initiative. This being the case, the modest quality of the effort, its parochial methodology, and its dangers for participants became entirely secondary and in the minds of its promoters probably even irrelevant. As already mentioned several times, the draft regulation concerning CESL received little support and was withdrawn in December 2014. Further texts concentrating on e-commerce were promised instead but have not so far emerged. It is likely that the entire DCFR has been put on the backburner and is discredited, but it is not beyond all possibilities that it may be revived after Brexit in the mistaken belief that projects of this nature promote crossborder dealings within the EU.
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, although the concept of what a good is, has become less clear and has become composite: an amalgam of physical movable assets, information, software and technology. A sale, whether domestic or international, is the principal means of effecting a transfer of ownership or title in such 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 in the sales agreement 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 asset being sold or on quantity in the case of commodities and on price is therefore the minimum one expects to find in a sales agreement. That is the contractual aspect. Further formalities may follow to achieve the proprietary aspects of the sale in terms of title transfer, which will be mainly dealt with in the next chapter. For international sales, with which we shall be here mostly concerned, the minimum contractual requirements for the formation of a sales agreement are confirmed in Article 14ff of the 1980 Vienna Convention on the International Sale of Goods or CISG, which is a leading text covering international sales, to be discussed more fully below in section 2.3 and which has already been mentioned several times before.322 It is limited to international sales (as defined) but is only a partial codification concerning itself mainly with the contractual 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 sales contract itself (see also the list in Article 19(3)). The CISG concerns itself therefore with default rules or directory law, therefore with issues which are normally dealt with by the parties in their contract, 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.
322 The Vienna Convention referred to in this context is the UN Convention on Contracts for the I nternational 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 the CISG. An authoritative commentary is by J Honnold, Uniform Law for International Sales, 4th edn with HM Flechtner (Deventer, 2009).
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Given, however, the fact that even in this area of default rules, the Convention is only a partial codification, its importance should not be overstated. As we shall see the commercial practice has largely opted out of the Convention because it was never asked for by them and remained largely an intellectual effort based on nineteenth century anthropomorphic insights in what deals of this nature legally mean, and show on the whole a consumer mentality to risk distribution and management. It followed that the text is still addressing the sale of individualised final products and was not geared to the sale of classes of assets in transformation from commodity to end product, therefore to bulk transfers of future assets in repeat transactions extending over long periods. There was also no connect either with transportation and insurance issues which are so important in international sales, the CISG still being based on the delivery (of individualised, mainly consumer assets) ex works. What probably more fundamentally undermined its relevance was that the CISG did 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, such as the binding force of the agreement and its defects or defences (in cases of mistake and the like) or other aspects of validity (Article 4) and any disclosure, negotiation and special performance duties. Again, it did not deal with the transfer of title and the important issue of finality of the transaction and payment. Coverage of all these areas would have made the Convention much more significant. Here the UNIDROIT Principles and European Contract Law Principles (PECL or ‘European Principles’) for the contractual aspects and now also the DCFR even in respect of title transfer could acquire additional significance, the latter two in Europe perhaps in terms of general principle or even customary law within the modern lex mercatoria. In section 1.6.13, reference was also made in this connection to the 2011 EU Draft Regulation on a Common European Sales Law (CESL). It was a carve-out from the DCFR and dealt with many aspects of what is commonly considered the general part of contract, but unlike the DCFR, it did not deal with the transfer of title and transactional and payment finality either and thus reverted to the limited approach of the CISG as partial codification only, albeit with a fuller contractual regime. It did not convince and was withdrawn in December 2014. The Vienna Convention covers, however, some aspects of the general law of contract as applied to sales, in particular aspects of contract formation like offer and acceptance (referred to as ‘formation’ in Part II), an area of the law that concerns the contractual infrastructure and therefore does not merely embody default rules or matters at the free disposition of the parties barring their total exclusion of the Convention. Coverage of these aspects was criticised from early on and led in 1939 to a split into two texts, formation issues being separated out in what became the 1964 Hague Conventions as precursors of the Vienna Convention, which brought them together again. As noted before, the language used still suggests a subjective will- and intent-based approach (see Article 8), in the nineteenth century anthropomorphic tradition which we now associate with consumer law. It is in its subjectivity, also maintained in the notion of fundamental breach and force majeure as we shall see which further contributed to the lack of confidence in the text among practitioners, not only in England, the UK never having been a signatory. This formation regime of the CISG became nevertheless much of a standard and was followed in the UNIDROIT, European Contract Principles
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(PECL) and the DCFR as model for the formation of all contracts. From there it entered into the text of the EU Expert Group in 2011 and the CESL project of the same year: see sections 1.6.12 and 1.6.13 above. In the CESL, this approach—in the Vienna Convention only meant for professional dealings—was largely used for cross-border consumer sales, professional sales being covered only if one of the parties was an SME. This followed the civil law unitary tradition, which does not sufficiently distinguish between professional and other dealings in its approach to contracting and lacked relationship thinking in its core as we have seen throughout this chapter. But it could also be argued that since the CISG had remained anthropomorphic in its approach even in professional dealings, the shift to consumer law was easy to achieve and that this approach might work there better. Again, the Vienna Convention does not cover any proprietary consequences of the sale (Article 4) nor the issue of transactional and payment finality, especially important in international sales as noted before. The passing of title itself, the manner in which this is done, the moment at which the buyer becomes the new owner, and the position of bona fide purchasers upon delivery in the case of a defective contract or a lack of capacity in the seller, are therefore not covered by the Convention. Neither were they in the CESL and earlier in the text of the EU Expert Group. They are covered in the DCFR, which aims at full codification and then also deals with title transfer more generally in its Book VIII on property law as we shall see in chapter 2, section 1.11 below. Many domestic sales laws, especially in countries that require delivery for the title transfer to be complete, do not deal with these aspects in the context of the law of sales 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 important issue (as well as the protection of bona fide purchasers) will be discussed more fully in chapter 2 below. 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 form and/or some measure of publicity to achieve the transfer of title. Without it, ownership cannot transfer in these countries whatever the contract may say in this regard. Creating proprietary rights in the sense of acknowledging a new owner is not truly a matter of party autonomy but rather a matter of objective law. The law of other countries such as 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 (although it may be deferred by common agreement). This might suggest that the title transfer is a contractual matter, but this is misleading. At least in France, and in countries like Italy following its
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example in this respect, title transfers here only because the objective property law so determines and there is no true party autonomy in the creation of proprietary rights in this manner either. Thus even in countries such as France, where title transfers upon conclusion of the sales agreement, the proprietary consequences of the sale do not strictly speaking flow from the sales agreement itself. Again, whether or not the transfer of title follows is a matter of the objective law, no less so than in countries requiring delivery even if the moment of transfer of title is a different one. So are the formalities of the transfer, no formal act of delivery being required, although it is sometimes still 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). As we shall see below in chapter 2, section 1.4, common law is here more flexible and also leaves the modalities of the title transfer (therefore how it is done) more to the parties. This is probably the result of the fact that the common law was never prone to clear distinctions in these matters or too much critical analysis. Probably more importantly, the common law is comfortable with a larger degree of party autonomy in proprietary matters, especially in equity as we have seen in Volume 1, chapter 1, section 1.1.6 and as will be revisited in chapter 2, sections 1.3.8 and 1.10 below. These differences in the law of title transfer in the various countries were one reason why the 1980 Vienna Convention explicitly excluded the proprietary aspects of the sale from its scope (Article 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 the proprietary and finality aspects of an international sales transaction. These rules normally refer to the lex situs, that is the law of the location of the assets, which may create problems in international sales when the contract requires transportation of the goods cross-border, which will often be the case. The laws of the country of origin and of the country of destination might then both qualify as applicable and, short of legal transnationalisation, a choice will have to be made under the objective (private international) law. In fact, the situation is likely to be more complicated and there may in such cases be some adjustment of the law of origin in the country of destination, particularly important in the case of security interests or other asset back-up in financial transactions, which may otherwise be incompatible and dysfunctional in the destination country, see chapter 2, section 1.8.3 below. Indeed, transnationalisation of the ownership concept in movables, if commoditised and meant to trade crossborder or serve as asset back-up in international financings, may well provide here a new angle and better way forward. This may increasingly result in transnationalised ownership and proprietary concepts no longer affected by domestic rules, as happened earlier with negotiable instruments, in modern times especially manifested in the eurobond, see Volume 1, chapter 1, section 3.2.3. The ultimate objective would be the creation and operation of floating charges in the international commercial flows. These aspects will be more fully discussed in chapter 2, section 1.8 and will be s ummarised in section 2.1.7 below. As will be shown, they are also of importance in international
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finance, and may then take the form of (conditional or temporary) sales such as repo financing and finance leasing, leading to the international transfer of goods acquiring here a different function and not remaining merely a mercantile facility. This is an important evolution, not considered in the CISG or CESL and will be discussed more extensively in Volume 3, chapter 1. As far as the more traditional mercantile sales contract itself is concerned, both domestically and internationally, it has already been said that the quantity and price are the minimum terms one expects the parties to agree, 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. Then there are the time, place, currency and manner of the payment. Commonly, the sales contract will also detail some excuses, such as 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 and supply industries, and may need adjustment in the case of unforeseen circumstances (see also section 1.4.7 above). This may acquire special, more restricted, 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 (sales price) protections in the case of default—it may thus 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 attempt to provide for an automatic return of title to the seller if under applicable law it has already passed to the buyer. Reservation of title will reinforce this remedy in the nature of a sales price protection device. There may also be a liquidated damages clause, particularly if damages are difficult to assess—a method usually upheld if the agreed amounts do not prove disproportionate.
2.1.2 The Minimum Requirements of the Sales Agreement: Special Features and Risks of International Sales As we have seen, it is not uncommon to introduce special description and protection clauses into the international 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 a return of the asset upon non-payment, or to define the damages in the case of 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 mercantile sales agreement to be binding were steadily reduced. As mentioned in the previous section, they now centre on the identification and quantity of the goods sold, the price, and (at least) the intention to transfer ownership, as confirmed for international sales in Article 14 of the Vienna Convention.
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Yet in modern sales agreements, at least those of the international type, even the price need no longer be fully settled, see Article 55 of the Vienna Convention,323 while the intention to transfer ownership may be considered implied. Absence of these and other obvious sales terms, such as 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 considered supplementary or directory in nature and apply only if the parties have made no further arrangements themselves. In international sales in terms of the modern lex mercatoria as presented in this book, fundamental and general legal principles as well as custom and practices would also enter the determination of these standards within the hierarchy of norms in which party autonomy and domestic laws equally have their place in the manner explained more fully in Volume 1, chapter 1, sections 1.4.14 and 3.1.2. These standards may also still 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 its own arrangements, except perhaps in larger countries where substantial distances may have to be covered. However, this is more likely to be different in international sales, which, when properly understood, acquire here distinctive features as transportation and insurance become substantive issues while additional risks, organisational problems and payment complications may also be encountered, so that this type of international 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, safe or effective. It makes it more difficult to consider the international sale on a stand-alone basis (as is usually possible for sales domestically). It is a serious issue in respect of the CISG which still is based on and supports a domestic approach. There may be further complications, such as the formalities to attend to at borders (and the delays they may create), and special risks, such as 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 arrange to be done by others, aided if necessary by their own (informal) domestic dispute-settlement arrangements or courts.324 These details cannot habitually be left
323 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 standard 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. 324 It was noted in s 1.6.13 above that the EU sales carve-out from the DCFR in the CESL saw the sale of goods in the EU as a domestic sale at that level, in principle the same for consumers and professionals, which conforms to the civil law unitary tradition, but it also ignores the special nature of cross-border sales within the EU.
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to the greater informality and co-operative spirit that may prevail in the performance phase between parties to a sale purely domestically. To these 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 while parties may be less well known to each other and at any rate likely to be in different jurisdictions. 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 a choice of a domestic forum and the applicable law, or rather 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). However, there may also be problems for the parties in the arrangement details on the spot (completion or management risk) and access to the judicial system 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. This is especially the case now that application in international dealings of a national law through traditional conflict of laws rules may no longer be sufficiently credible in view of the fact that much of the sale may be virtual and ever more difficult to locate. In any event, international sales as part of supply and distribution chains operate in different countries so that, in the older conflict of laws approach, in the proprietary aspects different laws of different countries may apply to different parts of the transaction, with further differences in the laws applying to the contractual aspects. In other words, it does no longer make sense legally to break international transactions up in domestic pieces in the hope that the different local laws that become so applicable per piece still make for a rational legal regime for the transaction as a whole. Transnational law in the form of the modern lex mercatoria may then start to figure as a matter of efficiency. It is a question of necessity to retain rationality and efficiency, not a matter of choice or preference any longer. Traditionally, parties were also exposed to tariffs or other import or even export restrictions as already mentioned. They have become less important after the various GATT (General Agreement on Tariffs and Trade) liberalisation rounds; see Volume 3, chapter 2, section 2.2. More important are different regulatory standards, most obvious in health and safety, which may inhibit transborder movement, in the EU largely overcome through the operation of the internal market. Parties remain also 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 proper delivery and payment. Another kind of political risk
The result is that we would have within the EU domestic sales and cross-border sales, the latter now perceived as another type of domestic sale without consideration therefore of the special incidents and concerns connected with cross-border activity.
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derives from subsequent governmental interference in the deal, the most immediate 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 other more politically inspired import restrictions and other forms of regulation or legitimate health and safety or security concerns as already mentioned. Some of these events when occurring may qualify as a force majeure excuse although not necessarily all—it depends on the definition of this concept under applicable law and much may be known or foreseeable—but even that does not solve all problems, especially the immediate practical problems when the goods are already in transit. They need to be managed. If there is a delay in payment as a consequence of these complications, there may also be extra currency risk for a party who contracted in a foreign currency. This highlights the illiquidity risk attaching to goods in transit, which means that they must be financed and, if there are complications, 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 and currency risk).325 It has already been noted that the CESL, although largely made for cross-border consumer and small business sales within the EU, did not take these special issues and risks much into account either, but this different environment was also not reflected in the Vienna Convention even though it only focused on international professional sales. In particular, its definition of the internationality of sales agreements is not directly related to these different needs and risks, but merely to the parties’ residing in different countries (Article 1). It has already been noted also that under the Convention international sales are still considered sales ‘ex works’ if nothing else is intimated by the parties in the contract (Article 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 (Articles 57 and 58). Although the Vienna Convention focused on international sales, curiously, this is all still in the domestic sales law and consumer tradition. As the Vienna Convention does not address these various risks and concerns, it may well be considered to reflect a narrower and perhaps less realistic notion or model of an international sale as already suggested. As previously mentioned, it is in any event only a partial codification, mainly concerned with issues that professional parties will normally settle among themselves in their contract text. Another aspect already noted is that it is not much aware of modern contract theory either, the result being an intentand will-based anthropomorphic attitude to contracting, compounded by subjective notions of fundamental breach and force majeure and the unilateral right of the buyer to reduce the price (Articles 25, 79 and 50). Again, it suggests a consumer law approach for professionals. Altogether, this may explain the limited impact of the Convention and the well-known lack of confidence among practitioners in what it was trying to achieve. Although ratified by many countries, but notably not by the UK and Portugal, the application of the Vienna Convention is often excluded by professional parties. Although frequently presented as a major achievement, when properly considered it 325 See n 275 above for a quick guide to the corresponding and supplementary provisions in the UNIDROIT and European Principles, DCFR and Art 2 UCC.
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does not represent the progress that was expected from it and was in many respects a missed opportunity and disappointment. The project was always too academic and even then not very good. Much of it is conceptually 80 years old!
2.1.3 Legal Risk in International Sales Whatever the basic approach, attitudes and shortcomings of the Vienna Convention or CISG, it follows from the foregoing that parties seeking to deal with the various needs and special 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 contract, there is the need and opportunity for them to divide the tasks and provide a roadmap for performance and a risk management scenario, certainly in sales contracts of longer duration. This is necessary to minimise misunderstandings between the parties on the interpretation, but also to gain some insight into the types of legal issues that may arise later and their possible solutions, either under the terms of the contract, under domestic default rules (including treaty law like the CISG) or under transnational law in terms of the modern law merchant or lex mercatoria. There are also mandatory laws, whether of public or private nature, which are not at the free disposition of the parties and cannot therefore be avoided by the parties through contractual disposition or a choice of law clause or even by the modern law merchant, although they may become part of it through fundamental p rinciple, mandatory custom or general principle elaborating on it. They largely concern the key proprietary, finality and regulatory aspects of the transaction as well as the contractual infrastructure rules mainly dealing with validity and capacity. There are also the non-consensual pre-contractual, contractual and post-contractual duties. They may not be capable of variation by the parties at will, although lawyers will explain their impact and may structure around them, increasingly using the sources of law prevailing in the modern lex mercatoria also aware of the gravitation of public policy from national to international minimum standards. Legal risk then also highlights the concern for the capacity and authority of the parties to contract and from the outset especially for the validity and legality of their agreement and the formalities and finality of the transfer. Besides a legal preoccupation with the ancillary arrangements, especially transportation, insurance, payment and taxation, as already mentioned, there will then also be concern with 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 force majeure or change of circumstances clause). Again, it is the impact of public policy and signifies political risk or the risk of further governmental intervention. Its cost may then also be redistributed, at least to the extent some of this can be foreseen. In that sense political and legal risk are closely related. The contract may even make the continued validity of the agreement dependent on the absence of such intervention. Nevertheless, the same governmental action may seek to abrogate such clauses, the
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effect of which on the international transaction then also needs to be established or predicted. In case parties should not be able to clear any differences or complications that may arise subsequently, this raises the question of the eventual access to the judicial process, therefore questions of jurisdiction, available remedies and the applicable law. It is another aspect of legal risk. 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 to the extent the issues are at the free disposition of the parties, which law might then also be the modern lex mercatoria. Even if it is not, it was submitted that national laws so chosen must still be put in the context and hierarchy of all transnational sources of law within the modern lex mercatoria, that now operate in international business world or more properly in the modern transnational commercial and financial legal order. This was much the subject of the discussion in Volume 1, chapter 1. 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 subsequent foreign governmental intervention in terms of new legislation of a private or public law or regulatory nature or other action, and the effect of foreign adjudicatory jurisdiction need also to be considered in an international sale. There may even be the issue of their retroactive effect or the administrative legality and proportionality. Another aspect of this is 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. Again, this all goes well beyond the Vienna Convention and its more limited ambition. It has already been said that in truth it was never much more than a variation on the domestic sales approach with little obvious awareness of the intricate nature of the international sale and its many ancillary problems and arrangements, including the concern for legal risk in a more modern world where the international flows are now larger than the GDPs of the largest countries or EU as a whole. Even where the Convention applies, in terms of clarification much must therefore still be done by writing full agreements setting out as much of the deal as possible. This also avoids reliance on unknown or unfamiliar directory or default rules of various legal systems that may otherwise become applicable to supplement the Vienna Convention under its Article 7. Standardisation of international contract types in the area of sales may help here too, but, as has been said earlier, especially in the capacity and validity aspects of the contract, its proprietary, finality, and public policy effects, there is a limit to party autonomy and to what the parties may agree in a binding manner in this way. Long-form contracts in the common law style are now normal everywhere 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 transaction. This historical burden often makes these agreements even longer and over-complex, while they still cannot see into the future and cover every eventuality. Nevertheless, as risk management tools, they are often better than the short forms which prevailed in the continental
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European tradition, now increasingly abandoned in international transactions there also, although again it leaves everywhere the question of mandatory laws of a public and private law nature, whose application cannot be avoided by inserting other rules, although their effects might still be redistributed between the parties and customary law may also help. To provide clarity in the legal issues that remain at the free disposition of the parties, in these contracts a choice of a domestic law and choice of forum clause are still common. In Volume 1, chapter 1, section 1.1.7, it has already been said that the certainty that may be expected from choosing some domestic law could be of low quality and such a choice could therefore be increasingly undesirable in its consequences as domestic law is seldom written for international transactions. In any event, the other sources of law in the modern lex mercatoria may be higher and will then prevail, domestic laws thus becoming the residual rule, which even then figures as part of the transnational law meaning that it is shorn from its typical domestic features, see again the discussion in Volume 1, chapter 1, section 1.4.14. This leaves unresolved the question of how far mandatory policy rules of other countries connected with the transaction may be avoided and such rules of the chosen system prevail. This is particularly relevant as these policy rules usually derive from the need to police certain deals for their conduct and effect in the country formulating such (regulatory) rules; they may have no relevance if executed elsewhere or in as far as these deals take place somewhere else: see for these problems more particularly Volume 1, chapter 1, sections 2.2.6–2.2.9.326 They may increasingly be replaced by transnational minimum standards, for example in competition law or environmental and financial regulation. There may now also be transnational standards against market abuse, money laundering and corruption rendering transnational contracts invalid. It was already said before that even to the extent international transactions come on shore in conduct or effect in a particular country, globalisation may increasingly mean that local standards may give way to transnationalised standards at least for countries who claim the benefits of globalisation at the same time. That is an issue that may favour international arbitration in particular, because of a greater neutrality than may be expected in local courts when it comes to balancing conflicting governmental and other public policy or public order considerations in international transactions as we have seen. Not only the choice of an applicable domestic law, but also the choice of a domestic forum is not without complications as it may result in jurisdiction in countries that have little relation with the case. Their courts may therefore not take it, and there may in any event be hardly any assets in that country so that recognition and execution of
326 It has already been said repeatedly that 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 Art 9 of the 2008 EU Regulation on the Law Applicable to Contractual Obligations and in the US ss 401ff Restatement (Third) of Foreign Relations Law 1986. International arbitration panels will no less be forced to balance conflicting governmental interests and are probably better able than domestic courts to do so neutrally.
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the resulting judgment elsewhere becomes necessary, leading to further proceedings and cost. Such a choice of forum may thus prevent action in the most suitable forum from the point of view of the claimant. A contractual non-exclusive jurisdiction election clause may eliminate the danger of (a) the appointed court not taking the case as there may be others that are also competent, or of (b) another more suitable venue being excluded. The importance is to realise that applicable law and jurisdiction clauses may increase the risks in international transactions and must be considered with the greatest care, probably more so than is at present usually the case. Where no law is or can be chosen by the parties, traditional private international law rules still obtain in the absence of uniform law (such as the 1980 Vienna Convention, which, however, does not cover many areas of an international sale as we have seen). However, these conflicts rules, habitually only identify national laws, hardly ever written for international transactions, and may be increasingly artificial and uncertain themselves, another subject of Volume 1. They may also show great gaps. In fact, it has already been said that the preponderance of whatever domestic laws resulting under them may prove ever more objectionable in international transactions and may impose a certainty that is unsuitable and destructive, while the more proper law may not be a contractually chosen national law either in areas where parties still have that freedom but be the transnational lex mercatoria and its hierarchy of norms from different legal sources, including treaty law, even though also subject to higher principle and practice. Especially international commercial arbitrators may be more sensitive to these concepts when properly pleaded and an arbitration clause may make a great difference here. In any event, in terms of public policy in respect of conduct and effect on the territory of the relevant state claiming a governmental interest, usually in terms of regulation, traditional conflicts law had no answer. Yet the lex mercatoria is deferential to such policies or governmental interests (see also Volume 1, chapter 1, section 1.5.6) and must respect the sovereign and its demands in its own territory, although as was already pointed out international arbitrators may be more objective than national courts can be and may try to balance these interests if coming from different countries and conflicting in international transactions when determining the consequences for the relationship between the parties. The issue of whether transnational law or the new lex mercatoria itself can be chosen in areas at the free disposition of the parties, and what it means, was more fully discussed in Volume 1, chapter 1, sections 2.2.9 and 3.3.3 and such a choice is now increasingly accepted. As objectively applicable law, in international sales of commoditised products, it might even affect the title and its transfer as well as the issue of transactional and payment finality. Legal fragmentation and globalisation of markets do not go together and the markets themselves may no longer accept the former and enforce change while creating their own transnational legal frameworks. Indeed, it has been submitted all along that rather than looking for a particular domestic law to apply, in a globalised professional legal order, modern parties must learn to work with the modern law merchant or lex mercatoria instead, including its hierarchy of norms from different legal sources, among which international custom may figure large but also party autonomy. Domestic law thus becomes the residual rule. Again, this new law still implies a deferential attitude to domestic mandatory regulatory and public
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order considerations albeit that transnational minimum standards may increasingly supersede them in countries that are part of globalisation. 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 still tend to break up the international transaction into domestic parts in the hope that these parts add up to some credible legal regime for the international transaction as a whole. These opinions may even 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 ignored. In any event, the closer the legal risk comes to political risk, the more these legal opinions are likely to be tentative or inconclusive. But especially lack of understanding of the international scene and a continuing confinement to domestic legal orders, which are the only ones most lawyers know and still experience, may make these opinions a great deal less reliable than they should be, often now only 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 is that 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 (such as letters of credit), while an easy facility to on-sell the goods may become very valuable to reduce liquidity risk, which facility 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. It means that each of the parties will attempt to reduce its risks through these arrangements. Market conditions or practice and otherwise bargaining power will 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. Indeed the objective law, either of a transnational or domestic nature, may not add
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much to this, although it usually deals with the passing of risk (unless parties want it otherwise) and it could conceivably also clarify the different trade terms or deal with the essence of letters of credit as the UCC in the US does or even introduce a force majeure or change of circumstance legal regime, redistributing the risk of the parties by law, which was found earlier to be less suitable in international professional dealings. This being said, under the contract, the risk of safe arrival and deterioration of the goods while in transit will normally remain with the seller until physical delivery (quality risk): see Articles 66ff of the Vienna Convention. It means that it will 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; 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). The buyer 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, under which payment is usually made subject to the handing over of the documents (bill of lading if issued) only, therefore only to prove that the goods were properly shipped but not 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 immediate payment under a letter of credit is still 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 repayment in whole or in part to the debtor/buyer himself: see more particularly the discussion in Volume 3, chapter 1, section 3.3. The letter of credit therefore has, in the first instance, the effect of transferring the payment or credit risk of the buyer to a bank that is likely to have a 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 or abstraction (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 the terms of the letters of credit, it may be agreed that the buyer may still insists on a certificate of quality or confirms 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 and is a facility much discouraged in 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.
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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 clause or a reservation of title. 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 in the traditional conflicts of laws approaches leading to application of national laws only, while 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, as just mentioned, 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. The liquidity risk may be mitigated by the seller while 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, therefore long 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 more traditionally to discount (upon acceptance) a bill of exchange drawn on the buyer, a technique now outdated in most countries327 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. This used to be the case in France and Belgium under Article 1690 CC and became the case in the Netherlands328 under Article 3.94 CC (new), particularly inhibiting bulk assignments of future receivables, although for financial transactions it was alleviated in France by an amendment in 1980 and in the Netherlands in 2004: see Volume 3, chapter 1, sections 1.2.1 and 1.3.5.
2.1.5 International Sales as Contracts between Professionals. Effect on the 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
327 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. 328 It did not mean, however, that the bill of exchange practice was reviving in the Netherlands.
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sale and its risks, likely and able to make the special transportation, insurance and payment arrangements necessary in this connection and regulars or experts in doing so to make a profit, and are aware of special industry customs or practices to this end. One should always look out for these customs or practices (which are here not distinguished), especially 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 and supports the operation of the modern lex mercatoria of which they form an important source of law, see in particular Volume 1, chapter 1, section 1.4.8. 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 (Article 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 a 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 (such as receivables), which does not exclude, however, the possibility that they are also commonly traded under transnational law, the whole Eurobond market may be the example. But international sales could, on the other hand, technically still cover finance sales which are conditional or temporary sales of assets for funding purposes (see Volume 3, chapter 1, section 1.1.5) and could involve whole classes of inventory. One may wonder whether that was indeed the idea behind the Vienna Convention. Again, the types of sales outside the scope of the Vienna Convention may still be the subject of international sales contracts, as indeed consumer sales, transfers of receivables and the rendering cross-border of related services may also 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. Meant here primarily is the international commodity trade. As for international sales, the feature of cross-border delivery appears to be the principal aspect of these sales as commonly understood. It was already said that this aspect is often not directly relevant in purely contractual terms. In the Vienna Convention (Article 1), the internationality of the (sales) contract is, as already mentioned also, in the contractual aspects 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 assets329 or to the other complications that are likely to arise in an international sale in connection with title transfer. As we have already seen, the proprietary aspects are excluded from the Vienna Convention (Article 4(2)), which limits the requirement of delivery to a duty only to
329 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.
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hand over the assets physically, no more. It means that the Vienna Convention, which only deals with contractual issues, 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 not the main legal issue. The problem is, however, that the true nature and meaning 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 referred to if not systematically covered (cf Articles 31 and 32, mentioned earlier). From this point, the buyer will arrange further shipment and insurance (usually pursuant to a FOB term), although he may in this respect also rely on the seller (the CIF term). It depends on the contract which trade term is used in this respect and it is not part of the Convention. 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, 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), and aspect that finds some recognition in the Vienna Convention, cf Articles 85ff of the Vienna Convention. It should be recalled in this connection 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.330 The earlier 1964 Hague Uniform Sales Conventions (Article 1(a) of both) also used this additional criterion, as already noted. 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 a rbitration takes place in an unrelated country, cf French Decrees n 80-345 and n 81-500 now followed by Decree n 2011-48, which in Article 1504 simply states that an arbitration is international when international trade interests are at stake, cf also Article 1(3) of the UNCITRAL Model Arbitration Law, now accepted in several common law countries, including some States of the US, Scotland and some east European countries including Russia. This may lead to the application of some additional or
330 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 (Paris, 1969) 617.
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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. This is the discussion in Volume 1, chapter 2. 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 former increasingly internationalised even if the relevant sale may not have any international aspects at all: see for this approach, Volume 1, chapter 1, section 1.1.10. There is here no need to define internationality and the unity of the legal framework is maintained at a transnational level. 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 1, this is the approach preferred in this book in which internationality is therefore a function of and included in commerciality or professionality. To repeat what has already been said in Volume 1, chapter 1, section 3.1.1, the consequences of a transaction being in the internationalised professional sphere are (a) the increasing likelihood of the existence of transnational legal concepts in a unifying transborder development suggesting the existence of a distinct legal order (from which the new lex mercatoria emerges); (b) the resulting impact of fundamental legal and general principle and the emergence of own custom or practices therein; (c) the reduced impact of directory and even mandatory or policy rules of a local nature if only marginally impacting on the international 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 among professionals in terms of disclosure, time to protest, undoing of transactions and the invocation of all kinds of legal exceptions, such as force majeure, hardship or even negligent behaviour of the other party. It was posited above that only in more explicit and obvious cases is relief likely to be granted and that between professionals, the contract is foremost to be seen as a roadmap 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 1.3.11–1.3.14 above. This then also applies to international sales if properly understood. It may then even imply an individual distinct ownership concept and ownership transfer regime with an individual notion of transaction and payment finality under transnational law; see further chapter 2, section 1.10 below.
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
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such terms should be qualified as an exchange or barter rather than a sale, although the differences between the two are not great in every legal system. In international sales this is not an issue in itself but concern shifts to the agreed currency (of payment) being fully convertible and freely transferable: see also Volume 3, chapter 1, section 3.3.3. The key is that, unless parties have agreed otherwise, 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 may mean that there is no payment proper. This 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 their popularity. Banks then take over the currency risk, which they are often better able to handle if only through informal clearing and set-off, likely 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. Especially in long-term agreements, this gives the seller at least some protection against devaluation.331 Judgments were usually expressed in local currency but when it comes to judgments from the national courts, even in common law countries like England, these may now be expressed in foreign currencies.332 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.333 Any devaluation loss may be claimable if the debtor is unwilling to pay or causes delays during which devaluations take place.334 In Germany, it appears that the currency
331 See also CM Schmitthoff, Export Trade: The Law and Practice of International Trade, 9th edn (London, 1990) 224. One of the most authoritative treatises on the subject is by FA Mann, The Legal Aspects of Money, 4th edn (Oxford, 1982). 332 cf for the UK, Miliangos v George Frank (Textiles) Ltd [1975] 3 All ER 801, reversing earlier English case law on the matter. 333 cf in France Tribunal de la Seine, 18 December 1967, GP.2.108 (1968). 334 cf for the Netherlands, HR, 8 December 1972 [1973] NJ 377.
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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.335
2.1.7 The Transfer of Title in International Sales. Finality Issues Transfer of title as a proprietary concept will be more properly the subject of chapter 2, section 1.4 below. It has already been mentioned that 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 especially of eurobonds (see Volume 1, chapter 1, section 3.2.3). The European Court of Human Rights in Strasbourg also developed a distinct internationalised ownership concept: see Volume 1, chapter 1, 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 as we shall see in the next chapter. Traditionally, however, the applicable domestic law is considered to determine the issue of how and whether title had been transferred. In international sales, this law was in principle the lex situs of the asset as we have seen. It is the general proprietary conflicts rule, but under considerable pressure in international sales under where goods are likely to be in constant transformation in production chains and the also are likely to move from one country to another. Under the old rule, the applicable law could still be either the law of the country of origin or that of the country of destination. This issue will be covered 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. The essence is that 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 may require some further explanation. In section 2.1.1 above it has already been 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
335 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 P Oertmann, Kommentar zum BGB, s 244, Anm 3 (Berlin, 1984–1990).
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and also the one adopted in the US 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 while 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, while France even now adopts a more restricted concept of a reservation of title, especially in the extension of the protection into replacement goods and proceeds and in the entitlement to overvalue: see more particularly Volume 3, chapter 1, 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. That may be the case when a good moves between Germany and France or indeed between Germany and the US where under the UCC the reservation of title is a security interest, the impact of which in capital goods may be much reduced for lack of registration if a finance statement was not filed in the US. The consequence is that the rank of the foreign interest is only just above common creditors. It follows, on the other hand, that goods subject to such an interest moving from the US 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 it in the US. For further detail, again, reference may be made to chapter 2, section 1.8 below. In the area of finality, there are also problems in international sales. It was explained above in Volume 1, chapter 1, section 1.1.7 what is at stake here and in chapter 2 below the issue will be extensively revisited. It concerns first the protection of the buyer if
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upon delivery of the asset, it appears that there was an insufficient disposition right in the seller or that the contract failed. In the former case it is now common to protect the bona fide purchaser; in the latter case the delivery may be considered a different legal act that is separate from the underlying sales agreement, the disappearance of which does not then affect the earlier transfer of title. That is the German abstract system of title transfer. These are the two major prongs of what is called transactional finality (see further chapter 2, section 1.4 below) but for neither is there unanimity and short of transnationalisation, there may be considerable differences in the laws of different countries leading to the possibility of conflicts of laws when assets move to another country as part of the deal. If physical possession is required for this type of finality, which at least for bona fide purchasers is often the case, the law of the buyer in possession is likely to apply. For payments there may be similar finality concerns and again the payee, having collected, may find a similar kind of protection in his own law against faulty payment instructions as we shall see.
2.1.8 Conform Delivery and the Passing of Risk in International Sales Another subject that needs particular attention in sales of goods 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 this connection and its relevance. 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 requires merchantability, the essence of which is that the asset must be ‘fit for purpose’ for which it is ordinarily used and as such safe; compare also section 31 together with section 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 (Article 35(2)(a)), a more general warranty having been thought to be incompatible with 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 thinks rather 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 responsible for the goods’ fitness for any particular (other) purpose if the buyer relies on the seller’s skill and judgement 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, cf also section 2-315 UCC). As part of the conform delivery, they must also be properly packaged in the 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
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there was no express or implied guarantee of delivery. Thus, even if the seller is in a force majeure situation, in these circumstances 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 as well as one of conform delivery is commonly deemed implied and they may be seen as a condition of the sales agreement. This is a matter of interpretation, although any such implied guarantee could still be counterbalanced by a more explicit force majeure clause in the contract, as we have seen. For sales, this is further affected by the notion of the passing of risk discussed below and in the next section. As we have seen also, in civil law the starting position is in principle 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, often 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 for commodity goods. Differences may here also emerge between professional and consumer sales, in the sense that these guarantees may now more readily be deemed to exist for consumers even in commodity sales. This is proper relationship thinking. In Germany, fitness for the agreed purpose upon delivery is a primary duty under the contract (Hauptleistungspflicht, cf section 433 BGB), although not necessarily supported by an implied guarantee. Only in the case of guarantees (see also section 460 BGB) must it 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. The question is then for how long? Even if there are special quality undertakings, other factors, such as the buyer’s noncompliance with his own investigation duties or 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 the sale of goods, 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 (again 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? Under modern law, this risk now normally passes at the moment the physical possession is transferred 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
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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).336 That may have to do with the fact that force majeure is no legal excuse in common law at all, as we have seen. Although the passing of risk is normally associated with the unavoidable deterioration over time of the assets, most often seen in perishable products such as foods and vegetables while still in the hands of the seller, it may also cover other extraneous events. They may be s theft or acts of God (casus fortuitus) such as fire, flood or earthquake affecting the goods before physical delivery. It introduces another layer of exposure, 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 as that party will normally be liable for the consequences vis-à-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. An expansive notion of 336 The Principles of European Law concerning Sales (as compiled at Utrecht University in 2004) contain in 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: when the buyer takes over, in accordance with the contract, the goods or the document representing them, or 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 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. 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
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force majeure means that the seller in possession remains liable for all such events pending physical delivery. Where at least in civil law the risk in the case of a sale is now commonly connected with physical possession, even after the transfer of such physical possession, this moment may still be delayed, however, 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 a 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 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 (Article 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 (Article 7(2) Vienna Convention). Physical possession would not appear to make any difference here but again one may ask how this affects the risk for outside events, such as acts of God and the like. May these risks then also be shifted back retroactively to the seller, regardless of who was holding the property at the time of these events? Where default (retroactively) dissolves the contract, as is still the situation in France, this could easily be accepted. Where the rescission of the agreement is only ex nunc, as 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.
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
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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 existing 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, in the former country at least for speciality or identified goods. It means that the buyer is exposed if something happens to the goods after title has passed regardless therefore of whether he physically received the goods and is in charge of them (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) has the risk regardless of possession pending delivery (periculum emptoris), which is also expressed in the maxim caveat emptor: see in France Article 1138 (old) CC retained in Articles 1196 (new), 1351 and 1583 CC assuming goods are individualised, and in England section 20(1) of the Sale of Goods Act 1979. It meant in Germany (which traditionally requires delivery for title transfer), that until (legal) delivery, the old owner (the seller) had the risk (periculum venditoris). However, for Germany and the Netherlands, it was already noted that 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 US, 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.337 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 have seen; the UCC still 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 UCC) but adjusted the common law approach to the passing of risk as just mentioned. 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 (Article 69). 337 Only Dutch law under its old Code had a system where the risk was for the buyer while 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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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 protected for longer, especially when there are implied guarantees, while 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 information and inspection duties here, 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 its own technological capabilities and investigation facilities. This may still be different in the sale of speciality 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, such as 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 have already been made to domestic laws concerning the passing of risk in the sale of goods: see more particularly Article 1138 (old) CC now Art 1196 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 US. Although all use the concept of the passing of risk in the case of a sale of goods, they often select, as we have seen, different moments and may also maintain different definitions of force majeure and different approaches to the subject of nonconform 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 US), and tempered by a case-by-case approach which allows for little conceptualisation and drawing of lines. In Germany, under its Code of 1900, the emphasis remained on speciality 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 kind, more on contractual definition, on information rights and duties and on disclosure in order 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 speciality goods,
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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 in the seller was necessary, which was considered to come close to a situation of fraud (for which there was an actio empti) Ultimately, however, 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 essentially still presents the system of the French CC (Article 1644 old), which at least in professional sales assumes that the seller always has knowledge of the defects until proved otherwise.338 Except for the timing of the risk transfer, it is also the system of the BGB (section 437).339 In France, the law in this area traditionally centres on ordinary default, hidden defects (vices cachées, Articles 1641ff old CC), and mistake (erreur, Article 1109 old CC), each with a different set of consequences, redress, statutes of limitations and actions.340 For commodities, the Cour de Cassation341 increasingly shifted the transfer of the risk, as noted before, to the moment of identification, which is likely to be the moment of delivery.342
338
See Cour de Cass, 30 October 1962 [1962] Bull Civ I 457 and 27 November 1972 [1972] Bull Civ IV 282. See further B Windscheid and T Kipp (eds), 2 Lehrbuch des Pandektenrechts (Frankfurt am Main, 1906) 660; M Kaser, Römisches Privatrecht, 14th edn (Munich, 1986) 193; F de Zulueta, The Roman Law of Sale (Oxford, 1945) 31; and R Zimmermann, The Law of Obligations (Cape Town, 1990) 281. 340 See J Ghestin, Conformité et garanties dans la vente (Produits mobiliers) (Paris, 1983). 341 See Cour de Cass, 8 July 1981 [1981] Bull Civ IV 316. 342 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 speciality 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 (old) 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 339
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In Germany, the starting point as we have seen 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 often determine the (non-)conform delivery issues.343 German law no longer distinguishes between a default action (sections 323ff 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 p hysical 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 section 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 (section 121 BGB), but for a default action under section 323 BGB it is three years (section 195 BGB) and for the action pursuant to sections 437ff BGB it is only two years after delivery, except again in the case of fraud (section 438(3) BGB), when it is three years (section 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 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. It was already mentioned that 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.344
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 kind 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. 343
See s 434 BGB. The new Dutch Code 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 that could not be detected before and were 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 344
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English law, on the other hand, traditionally depends 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, as we have seen, the Sale of Goods Act also contains statutory provisions concerning quality with implied terms of merchantability and fitness (see sections 13–15) while 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 as elsewhere plays 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, such as 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 uncooperative in this process (see section 20(2)).345 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. 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 purpose, 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 inspecting 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.346 If there is fault, an action for damages may follow. 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 aspects 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. 345
Sterns Ltd v Vickers Ltd [1923] 1 KB 78. 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 (Harlow, 1995) 185. 346 See
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In the US 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 US 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 delivered to the buyer. Where a sales contract attempts to state the manner of termination upon (a significant) 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 was otherwise still required in some countries such as France (Article 1184 old 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 significant or ‘fundamental’ in the terms of Article 25, cf also Article 6.265 of the new Dutch CC. It makes the sale itself conditional upon substantial performance by the buyer. That is now also the system in France, Articles 1178 and 1226 CC. 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 as regards 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 (Article 4(2)). The preliminary question is therefore whether rescission may have proprietary consequences or is merely a contractual issue. A specific clause in the contract may attempt to clarify the situation, 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
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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. More generally, it may have to be considered whether the rescission of the contract might be retroactive to its beginning and void all transfers. This is less likely. At least in civil law, rescission upon default is not the same as a rescission resulting from lack of intent, as in the case of threat, mistake or fraud.347 The issue of the automatic return of title (or not), at least in respect of the unpaid assets, and the so-called proprietary or in rem effect of the rescission of the sales contract, at least to that extent, 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, however, that the applicable bankruptcy law may not accept it, as with section 365(e) of the US Bankruptcy Code of 1978 as amended, or maintains exceptions, as traditionally in France under the theory of apparent solvency. It should also be considered in this connection that the applicable bankruptcy law could be different from the lex situs as it will normally be the bankruptcy law of the bankruptcy forum, which, under applicable jurisdiction rules, may be in another country. This could mean that, if appearance of creditworthiness 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 3, chapter 1, section 1.1.10. Examples are, in France, the acceptance of the reservation of title in
347 An important related aspect is whether the automatic return may completely obliterate 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 often concluded that it therefore has no proprietary effect at all, although as a consequence of the rescission the parties must still reimburse each other as far as possible for the adverse effects of the contract while existing. As mentioned before, the express conditionality inserted in a sales agreement still has, in rem or proprietary effect under Dutch law however, leading to a revindication right even in a bankruptcy of the seller (lex commissoria expressa of Art 3.84(4) CC), although this is not considered 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 re-transfers, the effects of the earlier transfer cannot be fully negated. A good example is the re-transfer 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 the position they would have been in if the transfer had never taken place. The reclaiming right of Art 7.39 of the Dutch CC, although often also considered in rem, is not retroactive either. It does not mean, however, that the acquirer of the goods from an interim owner is fully protected and his bona fides is required for the transfer to stand. It suggests that the acquirer should not reasonably have expected that a reclaiming right could be exercised, see also 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 3, ch 1, s 1.2.3.
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bankruptcy since 1980348 and in England the elimination of the comparable doctrine of reputed ownership in the Insolvency Acts of 1985 and 1986.349 In Germany particularly, there is the problem of the power of the bankrupt to re-transfer 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
348 For unpaid sellers in a bankruptcy of the buyer, the inhibiting factor for the actual return of the asset may not be the impossibility of the bankrupt seller to retransfer title itself, which is likely to be automatic in the French system, where title transfer does not depend on delivery (always assuming the goods are not converted or comingled in the meantime). In that country this results 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, at the same time avoiding any need for judicial intervention and a supporting judgment under Art 1184 old CC. Rather, the problem is the possession of the goods by the bankrupt debtor as this still inhibits 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. In France, 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 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 bankruptcy decree, cf Cour de Cass, 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 Vol 3, ch 1, s 1.1.9. A more general exception is now made in France if these rights were supported by a reservation of title. This results from 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 G Ripert and R Roblot (eds), Droit commercial 2, 16th edn (Paris, 1992), nos 3142, 3148ff. 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. 349 England (but not the US) 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 US 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, I Fletcher, The Law of Insolvency, 2nd edn (London, 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 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 3, 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.
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chapter 2, section 1.4.6 below). This is again particularly important in the bankruptcy of the buyer who is then no longer capable of executing such a re-transfer, even if he would want to co-operate, the exception in Germany being the reservation of title.350 It should be noted that modern reorganisation-oriented bankruptcy laws may postpone any unilateral action of the seller in this regard: see for France Articles 33 and 47 of the Bankruptcy Act 1984, now Articles L 611-1 and L 621-40 Code de Commerce (CdeCom), and further section 362 of the US Bankruptcy Code. The Dutch Bankruptcy Act, even though not so oriented, now allows a two-month delay of all individual execution action upon bankruptcy (Article 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),351 but may sometimes be implicit in the applicable law and then results upon a default under the sales agreement from the operation of that law itself (lex commissoria tacita), as is still the case in France (Articles 1184, 1610 and 1654 CC) and as used to be the case under the former Dutch Civil Code (Article 1302 CC old, but cf Article 6.269 CC new).352 350 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 still requires, strictly speaking, a form of re-transfer 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 3, 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). 351 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 and Roblot (eds) (n 348) 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 old CC, now Art 1196 which suggest that a delay can be agreed. This at least appears to be the way the French often look at reservation of title (see also Vol 3, 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 overall, especially valuable in a bankruptcy of the buyer in possession, see J Ghestin and B Desche, Traité des contrats, la vente (Paris, 1990) No 600 and Cour de Cass, 20 November 1979 [1980] 33 Revue Trimestrielle de Droit Commercial 43, Note Breitenstein. In other words, payment is then a condition precedent for the title transfer rather than non-payment being a condition subsequent under which the title transfer is undone. 352 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 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 UCC (Art 9) in the US, the reservation of title is now entirely equated with a security interest (ss 9-102(2) and 9-202), like all conditional sales of movable assets in that country, as is the contractual retention
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Even then the true meaning of the proprietary effect of the rescission of the sales agreement (which could also result from other causes such as 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 the 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 (Article 6.269) 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.353 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 (Articles 115 and 121) and reinforced in 1994 (Article 59 of the Law of 10 June). In the US, 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
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 in the same direction, see Vol 3, 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 3, ch 1, s 2.1. 353
See also n 348 above.
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value to the buyer, thus excluding any automatic return of title or appropriation right (see section 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 while 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 (Articles 62ff) as a consequence of its lack of coverage of proprietary issues (Article 4).
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, cf also section 2-703(a) UCC in the US. 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 (section 322 BGB) and now also in the Netherlands (Article 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 England 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 US, 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.
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The retention right is not otherwise in the nature of re-transferring title, certainly not to the seller, 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 US, these rights convert automatically into perfected security interests, for example where the bill of lading is retained by the seller (see section 2-505 UCC). Elsewhere they may 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 US, there is, however, a statutory reclaiming or appropriation right for 10 days after receipt of the goods if bought on credit while 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. Cash sales in any event give 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 (Article 1184 old CC, cf Arts 1178 and 1226 new), 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 after the due date, referred to in Articles 7.39ff 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.
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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, it has already been said that 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 (proprietary) 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. Retention rights, be they statutory or merely contractual, by their very nature restrain any subsequent commercial activity in the goods. From a practical point of view, the 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 create their own problems, costs and risks. 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 of assets, especially in foreign destinations. Certainly in international sales, letters of credit may therefore be more effective, while 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. Where in international sales personal guarantees are preferred, 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 received uniform use and application worldwide, also reflected in Article 5 UCC: see further Volume 3, chapter 1, section 3.3.17.
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 to complete and often involve intermediaries unavoidably creates special complications, dangers and costs, but also opportunities. As it often requires the goods to be shipped and handled by third parties as agents
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who have no other interest than being compensated for their services, this results at the same time in some safe harbour for the goods while in transit and provides a safeguard against manipulation by either party during the period between the conclusion of the sale and the ultimate delivery of the goods. More importantly, 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 rights of the original seller who has lost physical possession and control. The bill of lading itself and its proprietary function will be discussed more extensively in chapter 2, part II below. Bills of lading also allow 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 buyers reasonable certainty that they will receive the goods without complication upon presentation of the bill to the carrier, which will give them the confidence to pay immediately when the bill is presented to them, even if the goods are effectively delivered later by the carrier. 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, and was used long before the development of the letter of credit which, as we shall see in Volume 3, 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 traditionally facilitated the process further by providing so-called collection facilities under which they received the documents for the buyer while at the same time making the payment to the seller; see for these arrangements further Volume 3, chapter 1, section 3.3.7. The problem was that this payment could be made at the bank in the country of the buyer so that there could still be problems for the seller in receiving this money in its own country as will normally be the objective. This problem was subsequently substantially solved through the development of so-called documentary letters of credit tied to the bill of lading where transportation by ship takes place. 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 buyer there, 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 the latter on the basis of contractual remedies (such as those for non-conform delivery, potentially 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 it or its bank need not pay until a proper certificate of arrival and/or quality has been presented, the seller will in the first instance remain
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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 the seller even under a documentary letter of credit, as one of the documents that must then be presented for payment is precisely the certificate of arrival and/or the quality certificate. 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 the 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 it can to protect and save the assets in its possession from whatever risk may occur and not use these risks and their management to the advantage of either party to the sale and handle, protect and deliver the goods as best as it 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 as well as 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. 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 the first instance between the carrier or the warehouse and the last holder of the bill. This provides liquidity for whomever 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 also confer or imply further powers: the warehousing or transportation agreement gives 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. Alternatively the warehouse or carrier may be seen as the agent of the buyer so that the delivery and
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title transfer are completed when the goods are handed over to them. Under a letter of credit, the payment by the bank is likely to 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, see also part III below, 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). The principle of independence or abstraction operates here 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 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 (nor that 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. Again 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 and one 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 in principle 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, they still perform a contractual duty for the seller, effect 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 while accepting the credit or payment risk in connection with the counterparties this agent chooses.
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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, it has already been said that some document may emerge, if only as receipts, as the bill of lading or warehouse receipt originally were, when a seller physically delivered its goods at the appointed place, such as the ship’s rail or the warehouse, and received these documents in return. These documents subsequently developed into so-called documents of title, from a legal point of view incorporating the goods into the document. This allowed full use to be made of the intermediaries’ safe harbour function and these documents subsequently started to provide great flexibility in any resale and payment arrangements if they became 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 have seen. 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) while 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 the latter 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. As already mentioned, 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, as 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 On the payment side, the intervention of intermediaries holding the goods against the issue of documents of title such as bills of lading may thus give the seller additional
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security as the seller is unlikely to hand over the documents issued by these intermediaries to the buyer or its 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, in the first case because, even though the buyer arranges the transportation, the seller when receiving the bill of lading upon loading is here the buyer’s agent; 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 manner354 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 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 2.1.2ff below. In the US, the UCC explicitly recognises that the seller retains a proprietary interest in the goods if the latter retains the bill for payment (section 2-401). In this system, if payment against documents is agreed, the bill of lading issued to the seller gives him a perfected 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. Again, 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 3, 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 of 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 3, chapter 1, sections 3.3.8ff. Upon such payment, the paying bank may itself acquire vis-à-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 then 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 the latter has received the bill of lading from his bank.
354
Explicitly so s 2-505 UCC in the US.
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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 safety and liquidity aspects in the underlying assets, 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 (see chapter 2, section 2.2), may also become negotiable by adding the words ‘to order’ to the beneficiary/payee355 or by making the instrument payable to bearer, hence 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 2, section 2.1. 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, eg, 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.356 Conversely, bearer paper can be made into order paper through endorsement to an identified person by the holder. We shall be concerned here only with bills of exchange, often also called drafts, which are or used to be the more important in international trade; promissory notes remain particularly common within the US. 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. 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 355 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 US or on the European Continent. 356 This used not to be possible in France before the law of 8 February 1922.
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sales credit period. It means in fact that the drawer, if marked himself 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). As we have seen, the letter of credit, on the other hand, normally achieves payment upon presentation of the documents by the seller to a paying bank in its own country. It has as a consequence become more common. It may be combined, however, with a bill of exchange, which 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 3, 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 3, 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 assignment, now 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 3, chapter 1, section 2.3) and has rendered the discounting of bills of exchange to raise finance less efficient.
2.3 The Uniform International Sales Laws. The Vienna Convention or CISG 2.3.1 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
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substantive parts of the law of sales, and subsequently in the already much mentioned 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 1, chapter 1, section 1.4.20. But the idea of a uniform sales law originally emerged in UNIDROIT (Institut 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 see again Volume I, chapter 1, section 1.4.20. In 1928 Professor Ernst Rabel from Berlin, later at the University of Michigan in Ann Arbor, proposed a project on international sales. It led to a first draft in 1935, while 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 more formal structure). After 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). UNIDROIT being in a period of suspension after World War II, these projects were agreed in special Diplomatic Conferences at the Hague in 1951 and 1964, which, however, were attended by only a small number of countries. They were ratified by only 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).357 Because of their limited acceptance, the Hague Conventions were increasingly seen as not representative of the views of the world community at large and especially not of the needs of lesser developed countries. Once UNCITRAL adopted the project, it moved quickly and with a much broader range of participants. It presented a first draft 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 countries. They approved the final text after five weeks of deliberations. 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 (Article 2). The civil or commercial nature of 357 The International Sales of Goods Convention had been UNIDROIT’s major project. The tribulations of UNIDROIT after World War II have already been mentioned in Vol 1, ch 1, s 1.4.20. Although created under the League of Nations, it is not now a UN body but rather a private think tank. When 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 also Vol 1, ch 1, s 1.4.20.
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the sale is otherwise not considered (Article 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 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 (Article 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. It was already said that he 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—cf 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, while as to substance, the emphasis is on the one time sale of individualised tangible movable 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’ (cf 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. Another main differences between the Hague and Vienna Conventions are in a narrower concept of uniform law under the latter. It notably allows the application of conflicts rules where the Convention itself is silent (but only after applying its general principles, Article 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 (international) custom as source of law, apparently in order better to protect the unwary (professional!) in international trade. 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 (Articles 61 and 64); gives the defaulter some possibilities to remedy any failure of performance even after delivery (Article 48), especially if the price is paid (Articles 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 (Article 71); allows avoidance in the case of anticipatory breach only upon notice of the intention to invoke this remedy (Article 72(2)); enhances the buyer’s rights unilaterally to reduce the price upon (alleged) non-conform delivery (Article 50, often seen as excessive); allows inspection by the buyer within a short period after delivery rather than promptly (Article 38(1)) and refers in the absence of a price to the market conditions rather than
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to prices generally charged by the seller (Article 55). The notice periods are generally more flexible than in the Hague Conventions and the Vienna Convention never requires prompt answers. Finally, there were 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 (Articles 31 and 60), while the passing of risk was no longer immediately tied to it (Articles 66ff), 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 (Articles 2 and 3). It creates problems with services and technology directly connected with the goods supplied. 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 to the impact of custom, nor 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 Part II). Areas notably not covered by the Vienna Convention (and earlier the Hague Conventions) are: (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 such as illegal purposes; (b) capacity and proper authority, including agency, or the consequences of lack thereof; (c) pre-contractual rights and duties; (d) interpretation, supplementation and 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; (f) issues of transactional and payment finality, and (g) 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 (Article 5), the Vienna Convention does not apply to a 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 therefore excluded is
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the typical contractual infrastructure, such as questions of capacity, binding force or consensus and the interpretation of the contract, defences, pre- and post-contractual duties, but also the proprietary and finality consequences of a sale and any payment thereunder. These aspects are not likely to be covered by the contract itself either, certainly not if not themselves of a contractual nature, like the transfer and ownership aspects. A Convention also covering these areas would have been much more important. As for the contractual infrastructure, the UNIDROIT and EU Principles attempt 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 so far they are not meant as a binding set of rules (but could, as was argued above, still figure as general principle under the modern lex mercatoria). The 2008–09 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. It was followed by the CESL as an official EU proposal and DCFR carve-out, already discussed in section 1.6.13 above, but it did not cover title and finality issues either. 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 (Part II), on the time and place of delivery (Articles 31 and 33), conform (physical) delivery (Article 35), transfer of risk (Article 69(1)), payment (Article 57), default (Articles 45 and 61), damages (Article 74), force majeure (Article 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 (Articles 85 and 86). Parties may certainly also continue to cover these aspects in the contract itself (Article 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 Article 9) do not provide sufficient guidance themselves, which is usually only the case in oral contracts. They must be considered rare in i nternational sales. This all obviously reduces the importance of the Convention, but there are more deep-seated problems, which have led to many standard industry contracts excluding its application altogether. Above, the problems were identified as the subjective or anthropomorphic notion of contract, suggesting the old intent- and will-based model, associated with consumer law thinking, and a concept of sales that remains tied to an individual asset rather than to a repeat sale of a whole class of commoditised assets, which may also include a significant service element and technology or software features. The subjective notion of fundamental breach and force majeure, as well as the unilateral right of the buyer to reduce the price, are further significant drawbacks that undermined confidence in the Convention as we have already seen and as will be discussed further below. The US and most EU countries, with the notable exceptions of the UK and P ortugal, have ratified the Vienna Convention. The UK was represented on the UNCITRAL
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working group at the time but remains one of the most important commercial nations not so far to have accepted the Convention, although it ratified the earlier Hague Sales Conventions (but with the reservation that parties had to make a reference to them in their contract). Rather than the drawbacks just mentioned, the principal reason for the UK’s abstention so far may be that given by the Law Society of England and Wales. It is concerned about the diminishing role of English law within the international trade arena that might result.358 This argument is an odd one. It could be argued with equal force that any form of transnationalisation of English commercial law would enhance its status and attraction, assuming of course that the text had sufficient merit, 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 from which its practitioners would profit more than most others. See also the discussion on this point in Volume 1, chapter 1, section 1.1.3 in fine. The real problem is the Convention´s anthropomorphic nineteenth century will bias, which in more modern times is associated with consumer law. 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 worldwide 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. Like these earlier Conventions, the succeeding Vienna Convention is different from the English approach in a number of important aspects, notably in the absence of the concept of consideration but unlike the Hague Conventions also 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, see section 2.3.7 below. These would certainly be new features in countries like England, although less so in commercial law in the US (see section 1-103 UCC, which in any event allows a liberal interpretation of the s tatutory text). In the approach to interpretation and in its detail, the US in Article 2 of the UCC may be somewhat closer to the Convention. Perhaps for this reason, the US has not shown a similar resistance and has 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. It is a matter of transaction costs. Moreover, considerable uncertainties and undesirable consequences may result from the applicable choice of law rules or even from a contractual choice of domestic notions: see further Volume 1, chapter 1, section 2.2.9. Most importantly, domestic laws tend to ignore the character and dynamics of international sales: see more particularly Volume 1, chapter 1, section 1.1.6 and sections 1.4 and 1.5 for the development of a transnational legal order and lex mercatoria and its dynamics to accommodate modern needs. But it has already been said that the Vienna Convention is based on 358 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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domestic notions and hardly represents a transnationalised model for international sales. It ignores especially the importance of the ancillary arrangements in transportation, insurance and payment which make the international sale typical. Moreover, it is only a very partial codification and may as such raise as many questions as it solves especially in the area of the transfer of title and its finality. There will also remain diversity in its interpretation and certainly in its supplementation where, on the one hand, reference may be made to widely varying good faith notions and, on the other, even to private international law rules: see more particularly sections 2.3.6 and 2.3.7 below. Transaction costs thus appear hardly reduced. But overriding this is the fact that international commercial practice is not happy with the text for the reasons stated. In section 2.3.7 it will be argued that uniform treaty law can only flourish and its true meaning can only become apparent within the context of the hierarchy of norms of the whole lex mercatoria: see for its sources and their hierarchy Volume 1, chapter 1, sections 1.4.14 and 3.1.2. It renders the application of the Convention subject to higher fundamental principle, established custom and practice, and general principles, which at the same time would allow for a more natural evolution of its text and meaning.
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 be set aside in whole or in part by the parties. Article 6 of the Vienna Convention, following Article 3 of the Hague Sales Convention (ULIS), 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 (Articles 12 and 96) as the US has done). Note however that to deviate, both parties must be in agreement even though it may be implied, eg by deviating in the contract d from the main provisions. In this connection, it may be noted that the provisions of the Convention are hardly sufficiently related to fundamental values or public order to be mandatory. They are not redistributive either, but it may still be asked whether parties may change the rules of contract formation (offer and acceptance) thus indirectly determining the conditions for validity of their agreement and may also change the rules on interpretation and supplementation of the Convention itself, short of the parties eliminating the application of the entire Convention under Article 6. Earlier, an important 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. It potentially meant a form of control of the content of these agreements. This never became the accepted view, which remains based on the classical notion of contracts, in essence therefore on party autonomy in formation, coverage and interpretation.
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Corrections could, however, still be conceivable on the basis of fundamental legal principles or mandatory custom and public order notions. They could indeed be identified as overriding in the context of the lex mercatoria—see Volume 1, chapter 1, sections 1.4.13 and 3.1.2—but this idea found expression in neither the Hague nor Vienna Conventions, which did not cover this ground, unless one considers the interpretation and supplementation language in Article 7 of the Vienna Convention a move in that direction, especially the requirement that the Convention be interpreted in the light of ‘the observance of good faith in international trade’; see further section 2.3.7 below. In international sales, any overriding principles of this nature should be of an international character unless of a domestic regulatory or public order nature (see Volume 1, chapter 1, sections 2.2.6ff) assuming always there is, in such situations, in terms of conduct and effect, a sufficient domestic contact with the case. Thus domestic considerations still enter the picture and could also be a bar to enforcement of any adverse foreign or arbitral decisions in domestic recognition and execution proceedings in the country in question. It was earlier said that overriding principles may sometimes also be covered by the concept of good faith or abuse of rights. Domestically this is known especially in legal systems such as those of the German and Dutch where in pressing cases they may even lead to amendment of 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. It is inconceivable that they play no role at all in the application of the Vienna Convention, which again does not stand alone and must in terms of the international lex mercatoria find its place among the other applicable sources of law and their hierarchy, and may also be corrected by relevant public order considerations, either at the national or transnational level. All the same, in the end, the liberal attitude of the Hague Conventions and implicitly also of the Vienna Convention towards party autonomy was made uncontroversial, probably helped by its limited scope. As just mentioned, in the Convention good faith is only referred to in connection with the interpretation of the Convention itself and is then promoted for international trade: see Article 7(1). It is not clear how mandatory it is; under Article 6 it can conceivably be eliminated or the standards defined. The Convention does not deal with the interpretation and/or adaptation of the sales contracts concluded under it, so the issue is not considered in that context. The UNIDROIT and European Principles, which cover contract law more generally and also the matter of contractual interpretation, seem here to adopt a different attitude to good faith, in any event not limited to acceptance of overriding international fundamental principles and public order requirements alone. Rather, as noted before in section 1.6.5, good faith, although in essence undefined, came to be seen as absolutely mandatory under these Principles and introduces a generally censorious attitude to contract and party autonomy derived from consumer law, transposed to the professional sphere, and may then go far beyond fundamental principle and public order requirements. So it is in the DCFR. The CESL, as we have seen in section 1.6.13 above, was basically made for consumer sales, although B2B dealings with SMEs were also covered, and followed
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this approach then also. This contrasts notably with section 1-302 UCC, which allows professionals to set good faith standards between themselves unless becoming manifestly unreasonable. Indeed, the approach adopted in both sets of Principles, the DCFR, and also the CESL, was identified earlier as largely the result of a personal-dealing and consumer-oriented attitude, even where these Principles (especially the UNIDROIT ones) or DCFR mean to operate also in the international business sphere. This was always bound seriously to undermine the credibility of these various sets of rules in international trade even if mainly taking place within the EU. One may in particular think of the operation of the international marketplace in London.
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 countries. 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 (Article 95), as the US has done. For the application of the Convention 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 the discussion in Volume 1, chapter 1, section 2.3.1. Thus only if the parties are not both from Contracting States is there the operation of more traditional conflicts rules and the Convention then only applies if the forum’s conflicts rules lead to the applicability of the law of a Contracting State (again, under Article 95 Contracting States may opt out of this provision). 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 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. 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 conflicts 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 US has done. Article 6, on the other hand, allows the parties expressly to exclude application of the Convention as we have seen in the previous section, even if they both come from a Contracting State, or risk the applicability of the Convention under the prevailing
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conflicts 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 Article 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 more particularly be 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 while 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 be. If, on the other hand, the buyer were an Englishman (therefore someone from a nonContracting State) on a visit to 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) while under Article 1.1(b) the Convention would apply as a matter of German law, this being the law of the seller 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 Article 4). As we have seen, the earlier Hague Conventions still required this cross-border movement of the asset even though they did not cover proprietary aspects either, but this approach is now abandoned.
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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. In the following, its major topics, most of which were already highlighted before, will be briefly revisited. As regards formation, the focus is on offer and acceptance. Here the Convention largely adopts common law terminology, concepts and practices, but one should not be misled. The direction of the Convention is towards the more subjective consensus approach of civil law and its intent- and nineteenth century anthropomorphic w ill-based notion of contracting (see also its Article 8), not the more objective consideration or detrimental reliance approach of common law to contract formation, which was abandoned. Like the UCC in the US, the Convention further dispenses with the common law distinction between unilateral and bilateral contracts, the former under traditional common law being dependent on full performance for their effect (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, which are not relevant here. As to the details, the acceptance (if not by conduct or in the manner 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 (Article 18(2)). On the other hand, unlike the situation in civil law, offers are not binding per se, even for a reasonable time (Article 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 US (section 2-205)), or has been reasonably relied upon (as for 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. This is also the approach of the UCC in the US, which requires as the minimum for validity of a sales contract the agreement on quantity. It need not even be accurately stated either, although recovery is limited by what is said, while 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 section 2-201). Under the Convention, additional terms that 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 (Article 19(3)). It was already noted several times that the Convention did away not only with the requirement of consideration but also with that of 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
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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 would then likely be curbed by notions of good faith or public policy, although these notions remain underdeveloped in the Vienna Convention. Good faith is only mentioned in Article 7(1) in the context of the interpretation of the Convention itself, as already noted, and supposedly has a different meaning here. It may more properly stand for normative interpretation of the text: 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) 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 is more likely that in international transactions these requirements (of consideration or causa) have lapsed altogether: see also section 1.2.6 above, although that would not necessarily be so ion the modern lex mercatoria.as it is perceived in this book.
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 normally occurs at the same time, although strictly speaking it is at the moment the buyer takes over the goods (Article 69(1)), which could be later. In trade terms, like FOB and CIF, parties often agree, however, to a different regime concerning risk transfer altogether: see section 2.3.11 below. Under them, the risk passes when the goods pass the ship’s rail and is entirely independent of the transfer of title or possession. In any event, 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 2, section 1.4. 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
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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 (Article 57), unlike notably under French law (insisting on the place of the debtor, Article 1247(3) CC) and the time is upon physical delivery (Article 58), all unless agreed otherwise.359 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 Articles 25 and 26) or if that party has set an additional time for performance and the other party has not taken advantage of it. See for the subjectivity of this notion of fundamental breach and the problems it causes in professional dealings also section 1.6.9 above.360 The basic idea is that a fundamental breach results if one of the parties is substantially deprived of what it is entitled to expect under the contract, but anyone can claim this, thus putting the other party on the defensive. As far as the text is concerned, reasonable expectation does not enter here. There is some objectivation later and a reference is made to the reasonable person of the same kind in the same circumstances not having been able to foresee this, but the burden of proof readily falls on the defending party accused of the breach. It is one of the main criticisms of the Convention as we have seen. To this effect, it does not require judicial intervention and discharges the creditor (either seller or buyer as the case may be) from its own obligations and does not rule out any claim for damages 359 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 did, see Art 1591 CC, 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, as for telephone companies a generally applicable telephone charging scale. Art 1591 CC 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. 360 See in particular M Bridge, ‘Avoidance for Fundamental Breach under The UN Convention on Contracts for the International Sale of Goods’ (2010) ICLQ 911.
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under Articles 74–77. These may include a loss of profit or incidental (for example, enforcement cost) and often consequential damages, 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. It maintains a more diffuse criterion than civil law, which commonly ties foreseeability 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, one other reason why the Convention is often considered unsuitable for professional dealings. It did not figure in the Hague Conventions but was asked for by developing countries, which felt that their buyers were better protected in this manner. It is another 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 while the seller was still at risk, he will, however, be excused from paying damages (see Article 79). As to default, under the Convention, parties may also act in anticipation of a breach to preserve their positions (the anticipatory breach of Articles 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 have seen, 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,
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the c ontractual obligation of the other party did not ripen unless there was a failure to co-operate or a 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. In common law, conditions thus automatically discharged a promisor without resort to the notion of breach proper and any right to cure, while 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 (Article 25) and remains, like negligence, a matter of determination per case in view of all the circumstances. It has already been said that the international business community finds this concept too subjective to be workable in professional dealings, another important reason why it usually excludes the application of the Convention. The subject of force majeure is always a difficult one and concerns first its definition 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 its obligations if it proves that the failure was due to an impediment beyond its control and that it 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 and subjective definition, also disliked by professionals. Article 79(5) 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 while 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, Article 82). It may mean the return of all that has been supplied under the contract, but not as a 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 either, although the excuse of change of circumstances could be read into Article 79. But there is no procedure indicated here to deal with the effects in terms of renegotiation or adjustment of the contractual terms. As regards the passing of risk of deteriorating or lost goods and its relationship to the concept of force majeure, the basic rules were explained above in sections 2.1.8 and 2.1.9.361 361
In summary these were the following: 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 be from other ancillary obligations such as servicing the goods). 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, such as 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
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Under the modern law of sales, unless the contract states otherwise, the 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, cf 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 (Article 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 (Articles 66ff) acquires a more particular significance for goods. 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, in international sales 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 (Article 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 Article 7(2)).
have been given. 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 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. 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. 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). The seller, while 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 while not insuring them properly either.
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2.3.7 Supplementation and Interpretation of the Vienna Convention The Vienna Convention 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 of private international law.
It may be observed first that a provision on interpretation and supplementation of the Convention rather than of contracts concluded thereunder is less usual or may even be inconvenient and in any event not absolutely dispositive, if not also confusing. It may suggest that this interpretation and supplementation foremost concerns the Contracting States. The Vienna Convention on Treaty Law of 1961 deals with treaty interpretation in that sense. The effect and impact of other sources of public international law, as mentioned in Article 38(1) of the Statute of the International Court of Justice should then also be considered, treaty law being only one of them. This is not the idea behind Article 7, however, which only appears to address the private sales law implications between parties covered by this Convention. The status of the Convention as treaty law binding on Contracting States and their duties of implementation are not considered further here. It may be noted in this connection that in the proposals for an EU Regulation concerning a CESL (see section 1.6.13 above), these two aspects of Conventions or similar instruments of this type were separated. As far as its substance is concerned, it has already been noted that the Convention is written in the civil law codification mode, therefore as a text produced by government and meant to be the only or decisive source of private law in the area it covers unless it specifically allows others to operate. The effect and impact of other sources of private law are thus ignored but can probably not be sidelined by a Convention of this nature; strictly speaking, the Convention cannot decide its own place among these other sources of private law operating at the transnational level and they may be higher (or mandatory). To believe otherwise suggests a superior rule giving treaty law of this nature absolute priority in this regard but no such rule would appear to exist. Article 4 seems to recognise that, even though Article 7 is confused as we shall see. Its separation of interpretation and supplementation itself may also be subject to criticism. In a more normative approach, this would not seem to be necessary or even desirable. In the traditional attitude to code interpretation in civil law, the distinction was uncommon and is for contract interpretation not maintained in the PECL, DCFR and CESL. Applying on its face greatly differing criteria to interpretation and supplementation, as Article 7 does, is in any event puzzling. This was also not the approach in the earlier Hague Conventions and is in this way not even maintained by the DCFR in respect of its own interpretation and supplementation (Article I-1:102).
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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). The matters expressly covered, in essence, all concern the rights and obligations arising from the sales agreement, cf also Article 4, including the in personam remedies and excuses, but notably not matters of validity of the contract or of any custom and the proprietary, finality and enforcement aspects of the sales agreement. The reference in Article 7(2) concerning contract supplementation to private international law as the last resort was notably absent from the Hague Conventions, cf Article 2 of the Hague Sales Convention, which only accepted conflict references in specific cases (Articles 16, 38(4) and 89). It has already been noted that the Hague Conventions also did not distinguish between interpretation and supplementation and Article 17 of the Sales Convention required all matters in principle covered by the Convention to be decided generally 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 attitude to codification, which assumes completeness in the areas of the law it covers. Gap filling or supplementation then become a matter of interpretation of its system. In the area of uniform law, this approach would appear to allowed for a liberal interpretation of that law and of its scope. The Hague Conventions were in essence uniform law friendly and internationalist. All the same, they were not specific as to the applicability of other sources of law, such as 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, conflict of laws 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, never mind the other sources of private law. This became the view in the Vienna Convention, at least in the case of supplementation or gap filling of the Convention. But the reference to private international law in matters in principle covered by the Convention undermines the reference to general principles itself. It signified an important shift in the nature of the argument and in the Vienna Convention the uniform-law-friendly attitude of the Hague Conventions seems to have been abandoned. In this environment, the general principles to which reference is made in Article 7(2) may now probably only be the general principles on which the Convention is based in a narrower, more literal sense. They would not include fundamental principles or general principles in the trade and its custom or practices. As regards these general principles, in this narrower systemic sense, it is generally unclear, however, what they are and any party invoking them must then prove them on the basis of its own analysis.362 In any event, there is now a great deal of scope for 362 These principles must be distilled from the underlying approach of the Convention in its material provisions, which is not easy. J Honnold, Uniform Law for International Sales, 2nd edn (Deventer, 1990) 129ff saw
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the application of domestic laws even in definitional matters, with which the Convention does not greatly concern itself. Again, these general principles are not or no longer the fundamental principles of the law, customary practices or even general principles common to most commercial legal systems discussed earlier in Volume 1, chapter 1, section 1.4 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 thereby excluded however. As was noted in section 2.3.3 above, their effect depends on the applicability of other sources of the law which the Vienna Convention (and earlier the Hague Conventions) cannot regulate or control, again more fully discussed in Volume 1, chapter 1, section 1.4. Again there is no superior rule to that effect. The Convention itself recognises in its Article 4 that at least the validity of custom or usages is not ultimately governed by the Convention itself. The exclusion of usage in Article 4 has been explained, however, 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) also to applicable domestic law including the validity of these usages itself. It follows that all usages or custom is then seen as essentially a domestic law phenomenon and that considerations of domestic public policy of the country of the applicable law (and good faith in the Netherlands) always prevails over them. This would be a strange and undesirable result in international sales law, at least if it is meant to be transnationalised by treaty or otherwise. It is of interest in this connection that Article 7(2) of the Convention does not itself make a reference to (international) custom or usage in terms of its own supplementation, as one would have expected and Article 4 may have suggested. 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, as will be discussed in the next section.363 It has already been noted that it is indeed 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
a general principle of reliance (on conduct), eg 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 nevertheless suggests 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. 363 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.’ It confirms the intent- or will-based approach to contract formation and interpretation. 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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duties of the parties in Article 4 makes clear. Articles 8 and 9, limited to the meaning of statements, conduct and usages, are relevant in that context (see more particularly section 2.3.6 below) but would appear only partly to cover the contract interpretation. The result may be further confusion in the Convention, not only therefore between Convention and contract interpretation, as there is in the distinction between interpretation and supplementation more generally. It is clear that a Convention of this nature aims at a more objective legal regime or policy objective overall while 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 are in this regard. In any event it only covers default rules (except for Article 12), which can be superseded by the contractual text signalling that policy is not the issue. One would at least have expected Article 7(2) of the Convention to refer (before the rules of private international law) to its international character (and in that manner perhaps implicitly also to the international commercial and financial legal order and its custom and usages) and to the need for uniformity, as the Convention does in Article 7(1) in the context of interpretation, where therefore (correctly, it is submitted) a distinct legal order is suggested. However, this omission may have no ultimate relevance as these considerations, it was argued, may intervene anyway at the transnational level, also therefore in Article 7(2). As a minimum they would suggest at that level the continuing relevance of sources of private law extraneous to the Convention to which it may still be subordinated (both in supplementation and interpretation of its international sales provisions). To repeat, upon a proper analysis, in international business dealings, 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 1, chapter 1, section 1.4.14, 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 in its supplementation language. 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 attitudes of the Vienna Convention might only be understood from the point of view of a general wariness among the drafters of the Convention of 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. In this connection, it may also be considered that when it comes to supplementation or gap filling, in the internationalist lex mercatoria approach, transnationalised notions of good faith may also play a role, even if in the Convention only mentioned in Article 7(1) in connection with its interpretation and is not defined. In the approach of this book, this confirms the reintroduction of these sources of law in that context, therefore behind the notion of good faith. This is certainly so where good faith appeals to fundamental principle but also if appealing only to more common or general legal principle and even custom or practices. Again, in a lex mercatoria approach based on a
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hierarchy of norms, this would be clear. Good faith is here an interpretation technique, not an independent source of law. In any event, in respect of the Convention more narrowly, the reference to good faith in Article 7(1) dealing with the Convention’s interpretation (which again is very differently handled for no obvious reason) is still likely to have a distinct meaning overall and may refer foremost to a normative interpretation (and then also supplementation) of the text. Thus the Vienna Convention would not deny the relevance and operation of other sources of law, at least in interpretation and, it would appear, then also not in respect of supplementation of the Convention itself. At least fundamental or general principle and custom cannot then simply be ignored. 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 domestic law remaining the residual rule among the sources of law and rules of the modern lex mercatoria. But in giving it a special 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. In any event it narrows the scope of the uniform law. It has already been said that it then also applies to the terminology used in the Convention, which on the whole lacks definitional clarity.364 Even the good faith concept of section 7(1) could then be controlled by it. 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 is a discretionary element (see Volume 1, chapter 1, section 1.4.14). 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. To summarise, in a proper transnationalist approach, the appropriate reference for both 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. The references to internationality and uniformity, then suggest indeed that the Convention operates in a distinct legal order and that its provisions operate at that level, 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 Principles, DCFR and CESL. This being the starting point, it follows and should have been made clear that other sources of law remain unimpeded in the transnational commercial and financial legal order so that fundamental principle, customs as they develop therein as well as general 364 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 for EU courts the rules of the 2008 EU Regulation on the Law Applicable to Contractual Obligations, see s 2.3.7 below.
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principles common to most modern commercial and financial law remain unaffected (besides party autonomy, which is clearly respected in the Convention and supersedes it (see Article 6)). They are all transnationalised and present a hierarchy, although the private law so applicable would still be subject to public order considerations of a domestic nature when there is demonstrable conduct and effect of an international transaction in a particular country even though public order requirements themselves may increasingly also acquire an international character as transnational minimum standards in international commerce and finance. The observance of good faith could be added—as it was for interpretation in Article 7(1)365—but, in the view of this book then primarily confirms the operation of these multiple sources of law. Again, it is more properly an issue of interpretation (and supplementation) of the contracts concluded under the Convention, therefore an issue of party autonomy, its operation, its meaning and extent.366 This suggests indeed a normative interpretation method and in that context more particularly a reference to fundamental legal principle and related public order requirements,367 as well as to custom and practices and general principles,
365 The reference to good faith interpretation of this international Convention may well have been a somewhat strange compromise with its origin in the Vienna Convention on the Law of Treaties of 1969, Art 31, but as already mentioned above in the text, 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. 366 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 still be introduced in this manner through the conflicts 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 and in that context also to fundamental principle or public order, 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. 367 In Vol 1, 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;
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notwithstanding the intent-based tenor of the Convention; see further also the discussion in the next section. Private international law would only come in if no objective legal regime could otherwise be found in the hierarchy of norms, assuming always that the resulting domestic law is residual and itself then becomes part of the transnational law. Again, the essence is that good faith here remains a liberal interpretation technique and is not a source of law proper. It has been observed several times before that the issue of public order or public policy under state law and its prevalence in international transactions is another issue that cannot, strictly speaking, be settled by traditional private international law either and is normally also outside the reach of the modern transnational law merchant (see Volume 1, chapter 1, section 2.2.6). Although it may (sometimes) enter the modern lex mercatoria as fundamental principle, for example in the protection of weaker parties or the prevention of market abuse, it is more properly a matter of competency 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. Again, it 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, although it was noted throughout that in particular in regulatory action concerning competition, the environment and financial stability, in order to be effective these public policy considerations may become increasingly transnationalised as international minimum standards. It follows that while it is likely that the Vienna Convention itself, in its approach to interpretation and supplementation, certainly also of the sales agreements concluded thereunder, assumes its own superiority and may even impose 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.368 It might merely reflect the prevailing attitudes during the formative period of the Convention, which was largely in the first half of the twentieth century when the relationship of the
(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. 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) also fundamental principles of environmental protection developing. As these are public order or even human rights related, they are as such not less mandatory. 368 See for the English literal and purposive approaches to statutory interpretation, Vol 1, 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 against modern contract theory; see also s 1.4.4 above for a summary.
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professional contract and the nation of intent was insufficiently understood as it is still in civil law in professional dealings. The formula of Article 7 of the Vienna Convention may (unfortunately) now be found in all UNCITRAL Conventions, albeit with some variations: see further Volume 1, chapter 1, section 1.4.15. It may also be found in the PECL (Article 1.106) and even in the UNIDROIT Leasing and Factoring Conventions of 1988, 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 in the more traditional sense may be entirely inappropriate as they cover mainly proprietary issues. It is not, however, the approach of the UNIDROIT Principles (Article 1.6), which revert here to the approach of the Hague Sales Conventions. They seem, therefore, more favourably disposed towards transnationalisation, without, however, drawing the logical conclusions in terms of the modern lex mercatoria and its operation as we have seen in section 1.6.6 above. Unlike the Convention, 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 and CESL.
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 noted 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. Nevertheless, the contractual interpretation and supplementation is an issue that in principle is covered by the Convention in view of the reference in Article 4 to its covering 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 of the contractual terms, 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 mentioned in the previous section. As a matter covered by the Convention, the contract interpretation rules must for the rest 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 as we have seen, and otherwise to the law applicable by virtue of private international law. It may be noted in this connection that somewhat surprisingly, there is in Article 7(2) no reference to good faith (only in respect of the interpretation of the Convention as we have seen). There is in any event no concept of good faith defined at the Convention level; it is not a general principle on which the Convention is based either. It is thus likely that short of accepting that the concept is itself transnationalised as suggested in the
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previous section, the reference to national laws may lead to major variations even in the applicable good faith notions when used to interpret and supplement contracts concluded under the Convention and in any other sources of law or relationship thinking which might (or might not) be introduced in this manner.369 As already mentioned, Article 8370 contains a 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 the parties’ will or to intent, but if it cannot be determined whether the other party knew or could have known of the true intent, it allows a reasonable understanding. Rather than referring here to good faith, 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 still be introduced but is likely to look very different in different Contracting States. It is clear that Article 8 does do away with the common law parol evidence rule, and implicitly thus also with a generally more objective approach to contract interpretation, which did not allow any contradictory contemporary or earlier evidence against any writing intended by the parties as a final expression of their agreement; cf also section 2-202 UCC and section 1.2.4 above. A similar rule also existed in France for noncommercial contracts in excess of 50 francs: see Article 1341 CC. It reconfirms a more subjective approach all round. In this vein, only an express statement that earlier evidence is not to be used would have such an effect and would be upheld under Article 6. Article 9 deals more particularly 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 Conventions; see also its Article 4. Sensitivity to accepted practices and custom was earlier identified as being particularly important in international trade; see also Volume 1, chapter 1, 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, custom is a major cornerstone of the notion and operation of the lex mercatoria although by no means the only one. Strictly speaking, in its operative articles the Vienna Convention avoids any reference to custom but uses the terms ‘usages’ and ‘practices’ instead (Articles 4, 8 and 9). This is
369 Although even under Art 7(1) the meaning of good faith as an undefined term could still be subject to the supplementation language of Art 7(2) and its reference to domestic law, as discussed in the previous section with respect to the interpretation and supplementation of the Convention itself, this problem might be alleviated if it is seen as a liberal interpretation technique within the lex mercatoria, confirming the revival of other sources of law and their hierarchy, including notably fundamental and general principle, custom and practice. However, there could still be more doubt with respect to the interpretation and supplementation of contracts concluded under the Convention, although the lex mercatoria and its hierarchy of all relevant legal sources should apply, here as well, in terms of the objective law applicable to the contract. 370 See n 364 for the texts of Arts 8 and 9.
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in the civil law tradition of suspicion of custom as an independent source of law, to some extent now even 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 individual 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. The UNIDROIT Principles maintain only the latter requirement (Article 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 superimpose 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 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. 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 may be able to override it all the more. 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 and prevail over the Convention terms. To repeat, this could be so especially where within the context of the lex mercatoria, custom impacts on international sales. It would as such only be subject to fundamental principle or public order imperatives operating in the international legal order itself of which there are few. It may also 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. Nothing of this denies that domestic policy considerations (governmental interests and local public order imperatives) may still find recognition in the international legal order if there is material conduct and effect of the international transaction on the territory of the relevant state: see more particularly Volume 1, sections 2.2.6ff, although transnational minimum standards may increasingly take over in the international flow of goods where the international sale of goods is an important operational facility it may correct the application of the modern lex mercatoria in appropriate cases.
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2.3.9 Supplementation of the Vienna Convention: Private International Law and the EU Regulation on the Law Applicable to Contractual Obligations As mentioned before, in international sales, the 2008 EU Regulation on the Law Applicable to Contractual Obligations (Rome I) replacing the earlier 1980 EU Rome Convention on the same subject371 must, now the Vienna Convention is widely accepted (although not in the UK and Portugal), increasingly be seen as a sequel to it within the EU in areas of the law of the sale of goods which the Vienna Convention does not cover (Article 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 (Article 7(2)). It should be realised of course that the scope of the EU Regulation is much wider than sales and embraces all situations where judges in the EU are confronted with a choice between the contractual obligations laws of different countries (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
371 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 10 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 did not need to 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, amended in 2014, 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). 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, also did not prejudice any other conflict 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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of these Principles (Article 1.106). However, as posited all along, it should always be borne in mind that in the view presented in this book 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 treaty law, and common legal notions are likely to precede the search for a domestic law through conflicts rules (see for a summary section 2.3.14 below).372 The applicability of the Regulation is dependent on a forum in a Member State being faced with a choice between the laws of different countries, which need not be EU Member States (Article 1), although the Convention does not spell out when such a choice may legitimately have to be made. It is left to the forum seised to decide. The Convention may apply even within one country with different legal systems such as 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). Rather, its application depends on a case being brought before a court in a Member State. This being the case, the Regulation does not even apply in an international arbitration, also not one with its seat in a Member State. More generally, international arbitrations are now mostly thought subject to their own conflicts rules, which are not necessarily derived from the seat of the tribunal. That would not prevent the application of the rules of the Regulation 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 Regulation itself. When properly pleaded by one of the parties (or where international arbitrators have autonomous law finding powers as in procedural matters), international arbitrators may accept the application of the modern lex mercatoria instead: see Volume 1, chapter 2, section 1.2. The Preamble of the C onvention may even allow courts in Member States to do the same. The Regulation does not apply in status matters, family matters (relationship and property aspects), negotiable instruments, typical company matters (such as creation, capacity, organisation and winding up), arbitration, agency, and trust matters and in matters of evidence and procedure (Article 1(2)). Again, the lex fori determines 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 appear to apply to assignments, although Article 14, especially in its second paragraph, still leaves some considerable doubt in the matter. It depends very much on whether
372 Other more specific conflicts rules appeared in the 1998 Settlement Finality Directive 98/26/EC [1998] OJ L166/45 (Art 9(2)) and in 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 (Art 9), and in the 2000 Directive 2000/35/EC combating late payment in commercial transactions [2000] OJ L200 (Art 4) 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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one considers the transfer of claims to be a proprietary matter; see more particularly chapter 2, section 1.9.3 below.373 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.374 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 5.375
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 (Rome I). First, there is the law chosen by the parties, for the whole or part of the contract (Article 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 (Article 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 in respect of conduct and effect outside the affected state. 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 this respect different applicable laws for severable parts of the contract. In the
373 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. 374 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. 375 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 US and the UK.
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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 party376 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 (Article 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, or a list approach, also mentioning 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 place where 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): see Article 5. Special rules also apply to consumer contracts (Article 6), which are contracts regarding the supply of goods or products to a person outside his trade or profession, cf 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 the country of the seller 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 consumer protection 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 (Article 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 (Article 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; cf also Articles 5(1) and 19 in fine of the EU Regulation of 2002, just mentioned, for the assumption of jurisdiction in employment matters.377 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 traditional
376 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). 377 See for a comment also CGJ Morse, ‘Consumer Contracts, Employment Contracts and the Rome Convention’ (1992) 41 ICLQ 1.
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c onflicts approach of hard and fast rules determining the applicability of a legal system regardless of effect and consequence is in a number of aspects softened or amended (see also Volume 1, chapter 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 probably 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, cf Article 21. It still introduces a subjective element however.378 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. Article 9(1) refers here to political, social and economic issues, normally therefore regulation or competition issues: see for the discussion of Article 9 more particularly Volume 1, chapter 1, 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 these rules in international situations is 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 purely rule oriented here. 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 mandatory rules. As mentioned before, the application of the rules of any other country may always be refused on the basis of public policy (Article 21) if there is manifest incompatibility. In fact, it is rare for courts to give precedence to foreign mandatory rules. In modern times this facility was particularly formulated in the Netherlands.379 It suggested an 378
See further the discussion in Vol 1, ch 1, ss 1.4.14/15. 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’. 379
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informal bilateralism which, even in the Netherlands, in practice did not result in much precedence being given to foreign mandatory rules. There is apparently a clear bias for a legal 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 earlier under the EU Brussels Convention of 1968, now superseded by the EU Regulation of 2002 (Brussels I amended in 2014). It makes the nonapplication of the Regulation to arbitrations conducted in the EU all the more relevant as international arbitration may present a more objective forum in these matters. In this connection, special 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 the rule otherwise applicable must 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 Volume 1, 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’s ordre public rules, regulatory provisions are normally considered absolutely mandatory (unless they say otherwise), 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 rules are at the free disposition of the parties enabling the latter to substitute another rule in their contract 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 can hardly be covered in the contract itself and are therefore in that sense not at the free disposition of the parties either. A contractual choice of law may in these areas thus also be ineffective, although that is now not the general opinion. 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 investor 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.380 It was mooted above that in international contracts, the 380 See Vol 1, ch 1, 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 M Andenas and D Fairgrieve (eds), Tom Bingham and the Transformation of the Law: A Liber Amicorum (Oxford, 2009) 619.
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restrictions flowing from the consideration requirement may have lapsed altogether.381 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. Again, 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 barring transnationalisation. Yet especially where assets move between countries and in receivable financing, a choice of law by the parties may increasingly be accepted in the transfer or proprietary and finality aspects of the transaction as we shall see in chapter 2, section 1 below. In financial instruments such as eurobonds, the choice of law by issuers made and reflected on the document is sometimes thought also to govern these aspects, therefore 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, but again the final word is here more likely to be with transnational custom or market practices, therefore with transnationalisation (see also Volume 1, chapter 1, section 3.2.3).382 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, it was already noted that especially in the case of assignments (Article 14), there is much different opinion (see chapter 2, section 1.9 below) and here again contractual freedom to appoint the relevant (domestic) property law is often advocated (see also Volume 3, 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, cf also Article 20 of the Regulation. It has already been 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 EU Regulation (Rome I) which may, however, still serve as a model for international arbitrators in terms of general principle.
381 This ignores for the moment the fact that in this book the contract law of the modern lex mercatoria is likely to require detrimental reliance or a commencing of performance by the party invoking the contract, see ss 1.1.5 and 1.2.3 above, but it does not accept the typical consideration complications and limitations, see also s 1.2.5 above. 382 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 such as ships and aeroplanes). The consequence is then rather the application of transnational 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 the relevant custodian or intermediary (see also ch 2, s 3.2.2 below). Here again, transnationalisation of the applicable proprietary regime may recommend itself, as customs of the international marketplace, much like negotiable instruments originally, evolved under the older transnational lex mercatoria.
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The ultimate danger is of course that the selection of a domestic law may prove to have been entirely unsuitable or does not lead to a proper solution at all, not only in proprietary matters. 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, transnational custom and practices and transnational general principles if developed in the relevant area in the international marketplace being higher (see Volume 1, chapter 1, section 1.4.13), so that its possible harm might be more limited. Where in international cases the lex mercatoria concept and its hierarchy of 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 to any disputes at all. It could easily be a confusing and disturbing factor; see also Volume 1, chapter 1, 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 (Articles 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 automatically apply, for example under trade terms in the area of the passing of risk (Articles 66ff). 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 or delivery 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, while 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.
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The FOB term dates from the early eighteenth century and the CIF term from the late eighteenth century, each the product of their own situation: the FOB term was logical when the buyer or its agent sailed with the ship or sent its 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 transportation arrangement or, more likely, the seller availed itself of the opportunity to ship its own goods before any sale and received a bill of lading which the seller could negotiate later once a proper buyer was found. This gave sellers a great advantage as they could thus sell their goods CIF, while they were already sailing or even upon their arrival, directly in the international markets, in this manner eliminating their dependence on the visiting buyer and its 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, while the CIF term is international and 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. The seller 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 itself 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. This is 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 its cost. In fact, this variant is so widely used that it is sometimes thought to be the more normal FOB arrangement. Under it, it in essence remains the buyer’s duty to nominate the vessel, but the seller may be given full powers to do so as an agent acting for the buyer while providing additional services to the buyer in terms of collecting the shipping documents and putting these at the buyer’s disposal. As the seller 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
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ocuments and therefore remains in a very strong position vis-à-vis its buyer, especially d 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.383 Tendering documents is then the essential duty of the seller. If so 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 kinds 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. 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), such as the English and French, title passes immediately as we saw. In systems that require delivery for title transfer, such as 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 in systems requiring delivery, the title therefore normally passes at the ship’s rail. If a bill of lading is also issued, title may only pass upon the handing over of 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
383
Arnhold Karberg & Co v Blythe, Green, Jourdain & Co [1915] 2 KB 379, 388.
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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 a special meaning here. 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 of 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, such as 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 2011 (8th edition). They also cover a considerable number of other trade terms such as ‘ex works’, ‘free on rail’, ‘free on truck’, ‘arrival or ex ship’, ‘ex quay’, ‘delivered at frontier’ or ‘delivered duty paid’ (DDP), etc. In the 2011 version they were reduced in number from 13 to 11, with four deleted
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altogether and two new ones added. It shows that they are not entirely stable although the main ones are: ex works, FOB, C&F, CIF, free alongside ship (FAS), and DDP. There are others: free carrier, carriage paid to, carriage and insurance paid to, delivered at terminal, and delivered at place. The Incoterms are sometimes still thought not to have the force of law by themselves. They may, however, have acquired the status of industry custom although 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. It would have made sales under these Conventions more international. It was said earlier that positioning the international sale of goods together with the transport, insurance and payment condition components is the key to its proper understanding but is much missed, also in the Vienna Convention. In the US, 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. One has to be aware of some differences between the US and European practices in this area, even where these terms are codified—especially relevant for the FOB term, which in the US 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 have a bearing on the place of the transfer of risk (normally at the port of loading) in situations where none of the parties can be blamed for lack of performance, 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 (such as DDP) upon unloading, while 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 its 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. At the beginning of the previous section it was already doubted whether the interpretation and supplementation provisions of Article 7 of the Vienna Convention still apply, including the reference to a national law under the private international law supplementation language of Article 7(2). This may be all the more problematic where the Incoterms have not been made explicitly applicable to the contract. The question has arisen whether in this c ontext
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the Incoterms, if not expressly made applicable to FOB and CIF references, at least in Europe, may be deemed to apply customarily, at least therefore in respect of these two most common trade terms. The Incoterms themselves (see 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.384 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 c onsidered customary. As a minimum, the Incoterms may thus have some explanatory, supporting or persuasive effect and serve as a guide, especially when there is no substantial statutory or 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.385 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 may not determine all issues, which in the UK is also the approach taken to the interpretation of the Hague-Visby Rules.386 Where the law of a State of the US 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 and 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 US. The question is finally left as to whether conflicts may arise between 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. The Incoterms then figure either if explicitly made applicable or as custom/trade practice. 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 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 (Article 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) have a bearing on
384 Under the Hague Sales Convention Art 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. 385 See C Schmitthoff, The Law and Practice of International Trade, 10th edn (London, 2000) 7ff. 386 See Stag Line v Foscolo Mango & Co Ltd [1932] AC 328.
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or refer to other aspects of substantive law, they should prevail as contractual terms but may still be amplified by the precise wording of the Vienna Convention, unless clearly meant to operate otherwise. An example may exist in Article 67(2) requiring clear identification of the goods for the passing of risk, which may not strictly be necessary under the trade terms. They 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 of 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).
2.3.13 The Vienna Convention and the ICC Model International Sale Contract. The 2004 Principles of European Law: Sales As has been pointed out many times before, 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 but it does not deal with the law applicable in the areas it does not cover. In the traditional view, the additional law is then to be found through the application of the relevant conflicts of law rules leading to the application of some national law. It was submitted instead that the applicable rules are best found and explained in the context of the modern transnational lex mercatoria with its different legal sources and 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 the applicable rules within that context as some general principle or prevailing practice. Within the ICC, an effort has 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 the 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 of private law in Europe.
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2.3.14 The Law Merchant Concerning International Sales As explained more fully in Volume 1, chapter 1, section 1.4.15 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 rules of application,387 and does not stand alone. In this hierarchy of norms affecting international sales, the Convention and the general principles on which it is based are not of the highest order and may be eclipsed by fundamental international mandatory principle388 and even by customary law, certainly if mandatory, which in sales may be rare, but it may also be so in its directory provisions if customary law maintains itself regardless of the impact of the Convention. These directory provisions of the Convention may of course also be overridden by the contractual terms as a matter of party autonomy. This is important especially in the context of the Convention’s interpretation or supplementation, regardless of its more muddled Article 7, and is relevant also in 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 contract itself will precede the terms of the default rules of the Convention, but the Convention itself precedes the application of common legal principles (not of a fundamental nature), which. in the lex mercatoria approach, may, however, still supplement it even if not directly underlying the Convention itself. Again, fundamental principle and mandatory custom will prevail over it, as will be all other custom that maintains itself regardless of the Convention. Where the Convention does not apply under its own terms, it may still figure as a model as part of the general principles of the modern lex mercatoria. These general principles may even be found in international sets of Principles such as the UNIDROIT and the European Principles (PECL) in so far as they are properly focused on professional dealings, and now perhaps in the DCFR and CESL. It has already been noted that on the whole they do not whatever they say. They could, however, also express accepted practice or custom, although it was submitted before that their true problem is their subjective approach to contract formation and implementation and the absence in them of modern contract theory. The ICC Model and the Principles of European Law: Sales, referred to in the previous section, may also play a role within the modern lex mercatoria, again either as accepted practices/custom or general principle. It has been pointed out that in the transnational legal order, the conflict of laws rules and the ensuing application of a domestic law come as the lowest set of rules, which only apply when no solution is found under all higher norms, regardless therefore of what Article 7(2) of the Vienna Convention says. Even then, the conflicts rules may be so subsidiary that judges or arbitrators have discretion as to the fitting in of 387 It was pointed out in Vol 1, 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. 388 See for a collection of these principles n 368 above.
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the domestic laws so becoming applicable. In any event, they figure then as transnational law in the international commercial and financial legal order, become part of the modern lex mercatoria and are adjusted to make sense in that context. As we have seen, there may also be 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 1, chapter 1, sections 2.2.6, 2.2.7 and 2.2.8). Local public order requirements may have to be dealt with in a similar manner. They may increasingly be replaced by international minimum standards. Again, this may all be clearer in international commercial arbitrations, especially if these issues are properly raised and pleaded by one of the parties or arbitrators have autonomous powers to invoke them: see Volume 1, chapter 2, sections 1.1.10 and 1.2.5. In this approach, the sales 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 conflicts rules. Regardless of the precise wording of its Articles 7 and 9 (see sections 2.3.7–2.3.8 above), in this hierarchy (which in terms of sources of law cannot be predetermined by the Convention), the Vienna Convention, the Incoterms, the UNIDROIT and European Principles and others, and the EU Regulation on the Law Applicable to Contractual Obligations (Rome I) each play a role in their allotted places as written norms. They will be subject to their own applicability rules and their own provisions concerning their interpretation and implementation except that the norms from other layers of the modern law merchant or lex mercatoria override their effect if higher. Unless fundamental principle or public order or public policy requirements, the relevant rules cannot say much about their own ranking. All are a source of law in their own right whose relationship is given by the dictates of the legal order in which they operate. For the modern lex mercatoria and its hierarchy of sources of law this is the transnational commercial and financial legal order. In it, rules may postpone themselves explicitly, eg by making them subject to custom and party autonomy. It has already been said that in this connection, a reference to good faith and usage in the contractual interpretation of international (sales) agreements might also mean a reference and form of postponement to these other extra-contractual norms (which probably would apply anyway) when higher. Besides the internal contractual elements such as the wording of the agreement, the intent of the parties, when they have made clear choices, their conduct, the nature and purpose of their contract, and the nature of their relationship, they co-determine the contractual rights and duties under which the partiers operate vis-à-vis each other. The details of this approach were explained in Volume 1 and need not be repeated here. The key is the decentralisation in law formation and the diversity in the sources of the applicable law and their hierarchy, perceived in this book as the essence of the modern lex mercatoria covering the private law aspects of all international professional dealings.
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2.3.15 The EU Efforts in the Area of the Law Concerning the Sale of Goods In October 2011, the EU entered the field of the sale of goods as a carve-out from the DCFR, earlier presented as a kind of draft for a European Civil Code. This EU project, usually referred to as the CESL, had taken the form of a proposal for an EU Regulation and was limited to cross-border sales within the EU. It mainly applied to consumer sales in the EU and has been discussed in section 1.6.13 above to which reference is made. It met with much criticism and was withdrawn in December 2014. In essence, it had all the flaws of the Vienna Convention, including a generally subjective intent- and will-based anthropomorphic approach to contract formation and interpretation coupled with an extra layer of consumer protection. Its effect would have been to create two types of sales law in the EU: one for purely domestic sales and another (only partially codified) for cross-border sales within the EU (which would need to be opted into by parties to operate) which are then seen as another form of domestic sale, now at EU level. Proprietary and finality issues were not covered. The typical problems connected with cross-border sales, particularly, but not only, in terms of transportation and payment risk, were also not further considered. They may, however, be the subject of other consumer Directives, such as Directive 2011/83/EU on Consumer Rights, which also covers some aspects of transportation services for goods (but only to guard against excessive fees and hidden costs).
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Part III Contractual Agency 3.1 The General Notion of Agency 3.1.1 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 was 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 the persons or entities engaging them. This is the legal meaning of agency and has a long history in international sales where it is very common, but agency also has an important application in other areas. The position of intermediaries of this nature is primarily determined by the contractual arrangements under which they operate, which are different, for example, in a warehousing or transportation agreement concerned with the handling of goods by others or in a letter of credit concerned with the handling of payments by banks. These contracts might indeed imply or explicitly confer special powers, which may lead to agency, which then supplements these contracts. Thus 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 of the seller at the same time in systems requiring delivery for the transfer of title to pass full ownership. Thus the warehouse may become an agent for the seller in that it accomplishes this legal act of delivery. 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, however, it should be noted that 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 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 the latter’s payment obligation to the seller.
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What happens in these cases is therefore that intermediaries effect legal acts or obtain discharges for others, here either seller or buyer as the case may be, to complete the sale and payment without achieving any benefit themselves (except a right to be paid for their services) or incurring any duties of their own under the original contract, although they may incur rights and obligations under the supplementary agency agreement (but only as agents), which may be embedded in the first one but are legally quite distinct. In its effects, the agency even needs to be separated, as we shall see, from the agency agreement under which it was created, the true reason being that the agent so appointed, while committing, benefiting, or releasing his client (or principal) under the relevant agreement, transacts with a party under that agreement who may not himself be a party to the agency. This is also referred to as the issue of independence or abstraction. An important theoretical issue in this connection is whether agency must always be considered unilateral or is still considered bilateral. Between agent and principal, this may be relevant as to the special duties that the agent may owe the principal and which may not derive from the agency agreement (the internal relationship) alone. This is clear for the fiduciary duties under common law, which seek to avoid any conflict of interest between principal and agent, as we shall see, this being important especially when the agent has some discretion in choosing counterparties or in undisclosed agencies. The agency is more likely to be truly unilateral 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. Especially the third-party effect may be different from what the agency agreement envisaged or prescribed. This is a very important issue in agency. 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 agency arrangements (the internal relationship) and are not necessarily affected by them. In other words, in modern agency, independence means that the third party may assume apparent authority of the agent. The principal takes that risk although there is an element of good faith in the sense of reasonable reliance as far as the third party is concerned. As may be seen, the issue of independence is thus 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 the same view here, however, 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 affects the principal while the appearance of authority relates to the third party’s perception, although it may also be said that the one (apparent authority) presupposes the other (independence). To repeat, 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. In summary, there are three relationships which require attention in this connection: (a) the one between principal and agent, which is at the same time at the origin of the ensuing transaction or legal act (such as delivery) with a third party—this is the agency agreement or internal relationship; (b) the relationship between the agent and the third party which achieves the transaction or other legal act (this relationship is
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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, but it also means that this relationship has a meaning if the agency is undisclosed to the third party or indirect as we shall see; and (c) the relationship between the principal and the third party which results from the transaction or other legal act, or 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 (but again not necessarily in an undisclosed agency). Looking back over the examples already given, they may serve to show the internal and external relationship in a disclosed (embedded) agency: 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, such as the act of delivery achieving the title transfer between seller and buyer (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). The disclosed agent falls out of this aspect of the transaction. 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, the broker acts in his own name (also called indirect agency) or, in common law, the broker 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. As just mentioned, the situation may be different if the agent acts in his own name (in civil law: indirect agency) or when the agency is not disclosed (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 is likely to acquire his own liability for performance vis-à-vis the third party and may even become jointly and severally liable with his principal vis-à-vis the third party in respect of performance upon disclosure of the agency later, as will be discussed more extensively in section 3.1.5 below. Another issue is here what rights the undisclosed or indirect principal obtains in the assets which the agent may so acquire in his own name 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 still be important conceptual differences between civil and common law. With this background in mind, it may first be obvious that agency functions are often embedded in or result from other relationships as in carrier agreements or in letters of credit, as we have already seen, or in service agreements, but they may of course also be more direct and figure as the main objective of a contractual relationship, then called a mandate in civil law. This is likely to happen when a power of attorney is given, which could even be unilaterally arranged so that there may not be any underlying contractual relationship with the agent proper, and therefore no duties of the latter either but only a right to act as agent. If the agent (or attorney) acts, however, there are likely also to be duties and there may then be an implied acceptance. In brokerage, on the other hand, there may be a clear contractual agency: the broker is required to buy or
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sell assets, especially commodities or investment securities on behalf of his client, often on specified conditions in terms of volume, quality, time and price. Even so, agency is here only the result of the brokerage arrangement, and legally quite separate—as already mentioned—which may also produce other rights and duties, but unlike in the embedded cases of agency, it is more at the centre of it. Instead of the term ‘agent’ or ‘agency’, under civil law the term ‘representative’ with ‘power of representation’ or ‘authority’ is also used. These types of agents, operating as pure middlemen earning a commission but not incurring their 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, such as sole distributors, some franchising agents and licensees. Securities brokers, if dealing from their own inventories, are no longer pure agents for their clients either. 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 need to be made. Agency relationships, even fully disclosed ones, 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 thus be asked to make the necessary shipping arrangements for his principal with whomever and on the terms the agent thinks best. Investment securities brokers are usually given similar facilities while 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 its 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 the 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 individual 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, thus as indirect agents, but doing so internally only for the account and risk of the principal. 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 (cf 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 some influence on the UNIDROIT Agency Convention of 1983 and through it also on the European Contract Principles (PECL), which now have a special section on agency (Articles 3.301ff). As we shall see, these texts tend to prolong the
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possibility of misuse that is inherent notably 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 and power, not (yet) sufficiently balanced by fiduciary duties towards the principal and by tracing powers of the latter in the underlying assets. This may still be the cause of serious abuse.
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-à-vis his principal or client, first under common law, need to be considered in more detail. While 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 the agent 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 we shall see. 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 this connection. 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, however, and assumes that this person acquires and exercises power or authority or obtains sufficient control to represent and, if necessary, to bind the principal vis-à-vis third parties and vice versa in the arrangements the agent makes on the principal’s behalf. In these arrangements, the agent may have been given greater or lesser powers and freedom by the 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, the agent may be allowed (and may have been particularly chosen) to exercise a certain discretion depending on his expertise for which the agent will be rewarded accordingly. An investment securities broker will indeed normally have freedom to choose the counterparty in a traditional investment securities transaction. This type of agent is unlikely to ever disclose this counterparty as there is no need. While acting with the broker of the counterparty the agent may not know who the latter is and may even have been given the right to initiate these deals in a discretionary account, so that the agent is free to engage in continuous transactions, which he finds of benefit for the principal. As expert the agent may also acquire a position as protector of the principal whom the agent 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 considered the following: (a) The agent creates direct legal relationships between the principal and the third party while 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. On the other hand, the agent’s liability vis-à-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 rights the agent obtains, duties the agent performs or liabilities the agent incurs for his principal may be of any nature: they can be contractual or pre-contractual (if the agent negotiates) 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) 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 already noted, that is the risk of the principal who uses agents although the third party must show a measure of good faith in his reliance. (d) Although the principal has this risk, special protections are developed to avoid conflicts of interest between the agent and the principal, particularly relevant in undisclosed or indirect agencies but also in direct agencies where the agent is given a measure of discretion. Problems may easily arise when the agent also operates for his own account in the same goods when only a limited number of them are available to buy at lower prices. 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 and the principal relies in this respect on the agent’s loyalty and care. There may be other duties. In common law, they are well developed and imply 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,389 a notion only abandoned by the
389
D.45.1.38.17 and D.45.1.26.2.
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natural law school of Grotius and his followers.390 Under Roman law it was, however, possible to use intermediaries to acquire property.391 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, cf 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.392 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 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 mentioned before, 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 of 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 the 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.
390 De Iure Belli ac Pacis, Lib II, Cap XI, s 18. Grotius depersonalised the contractual bond except where clearly highly personal. 391 See D.41.1.13 pr. 392 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).
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This notion of reliance of this nature is closely connected with (a) the principle of publicity, which underlies the normal form of agency under which the principal is disclosed by the agent in the transactions he concludes on the former’s behalf, cf 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) of Agency in the US and what was said about the normative approach to contract in section 1.1.7 above. It is important to appreciate that the normative interpretation approach in contract 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 to 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.393 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, such as titles, letterheads, visiting cards and premises, even 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.394 Where modern agencies continue to operate in commerce, they are normally de-personalised by large commercial entities which make agency their professional business, such as shipping agents and investment banks as securities brokers and investment managers. It tends further to support the notion of independence: the third party relies on the agent and need not fear the effects of any principal disowning the agent. 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 is likely to have apparent authority vis-à-vis third parties in some matters more 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, it has already been noted 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 such as the granting of a power of attorney, but rather from general legal principles. It has already been mentioned that creating power or authority in this sense is therefore often seen as a separate unilateral act of the principal addressed to a third party, even though this party is not 393
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. 394
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necessarily identified by the principal but might be chosen by the agent. It should be considered that, as far as the agent is concerned, his power is likely still to be bilateral in respect of the principal but to entail special duties, which may not be derived from the underlying agency agreement either but rather from the agency concept itself. Any underlying agency agreement 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 so 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 fully dispositive 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 this connection in Germany by P Laband.395 In common law, a similar approach was taken by Corbin.396 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 especially as far as the fiduciary duties are concerned, while there also remain important differences in the undisclosed or indirect agency concept, especially in liability of the agent and the proprietary effects, as we have already seen.397 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 even if the English became in general particularly comfortable with agents of all sorts (and their cost) in commerce and finance. The differences in fiduciary duties and in the consequences of undisclosed agency are connected with subsequent developments in common law in which agency became closely related to the trust, while in equity agency and trustee duties became comparable, although they are by no means the same, as we shall also see. 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 395 P Laband, ‘Die Stellvertreter bei dem Abschlu von Rechtsgeschäften nach dem allgemeinen Handelsgesetzbuch’ (1866) 10 Zeitschrift für das gesammte Handelsrecht 183ff. 396 A Corbin, ‘Comment’ (1925) 34 Yale Law Journal 788, 794. 397 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 (St Paul, MN, 1991). See further Fridman’s Law of Agency, 7th edn (Toronto, 1996).
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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.398 It follows that 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 the principal’s risk, whatever comes of it, assuming that the third party acts reasonably in his reliance, while the agent, at least in common law, must comply with his fiduciary duties vis-à-vis the principal and support the latter as best he can, postponing his own interests, even though 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 he knew, is often not accepted in modern legal systems such as those of the Netherlands and Germany. It follows that, where the agent holds himself out in that capacity but acts without proper authority while 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; cf also Article 3.70 of the 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 own authority, 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.
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 398
See Learned Hand J in the US case of Kidd v Thomas A Edison 239 F 405 (1917).
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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-à-vis the third party) from the process. Equally in matters of retention rights of the third party/ seller vis-à-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 vis-à-vis the third party (and vice versa) under any contract that the agent concludes. The principal thus acquires or surrenders directly any proprietary right that may accrue or be divested through his agent, while the agent himself does not normally acquire any rights or incur any duties in this respect. The agent 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 equitable and require the agent to protect the 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 the agent 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 when 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 the latter acts in his own name while the agency remains undisclosed, to possibly benefit from the transaction under circumstances which remain generally undefined, a situation which must be considered unsatisfactory and will be further discussed in the next section. The common law fiduciary duties are particularly important in trusts,399 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.400 The 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.401 They could also 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
399
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. 401 See the Australian case of Hospital Products Ltd v US Surgical Corpn (1984) 156 CLR 41, 96–97. 400
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may require the fiduciary (here the agent) to act with greater care than the agent would use in his own dealings.402 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 the Markets in Financial Instruments Directive (MiFID), which is more demanding (see Volume 3, chapter 2, sections 3.5.5ff.). They may not 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 may 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, and might not so readily 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. This type of relationship thinking is implicit in common law. But even in common law, some fiduciary relationships are more intense than others. The facts are important.403 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) of Contracts (see section 1.3.7 above), the fiduciary duties are objective requirements, while 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.404 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 even where the good faith notion is accepted in the performance of the contract, as it now is under Article 2 UCC in the US. Another point is 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. Trusts as Alternative in Common Law It has already been mentioned that there may be some form of agency even if it is not disclosed at all, while no indication is given or conduct established by the principal 402 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. 403 See Frankfurter J in the US Supreme Court case of SEC v Cheney Corp 318 US 80, 85 (1942). 404 See also the Canadian Supreme Court case of Cansons Enterprises Ltd v Boughton & Co (1991) 85 DLR (4th) 129, 154.
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either, leading to reliance by the third party on apparent authority of an agent. In fact, these forms are very common. Certain agents, such as brokers or commission agents (‘commissionaires’ in civil law) who buy or sell goods for a principal may thus act in their own name upon the undisclosed instructions of a principal who gives them possession of his goods or access to his accounts. Particularly in civil law, this often gives rise to difficult questions about the relationship (if any) between the third party and the principal, but also about the rights the principal has in the assets so acquired. The question then arises whether there was any agency at all. In common law, on the other hand, some form of privity is still assumed between the undisclosed principal and the third party, thus establishing a type of agency, which gives the agent rights in the assets at the same time. The justification for 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 and bargain principle’ rather than on the parties’ intent or ‘will’ (see section 1.2.4 above).405 However, even in common law, it is considered an exception to the traditionally strict rule of privity (see section 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, and is not then 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. The third party 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.406 The main difference from the normal (disclosed) agency is then 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 the agent did not provide any consideration) and may not even automatically drop out after disclosure if the third party has a continuing interest in the agent being so bound.407 It is a matter of credit risk. Through mere disclosure of the agency, the principal becomes, directly entitled to the benefits of and assets acquired by the agency 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 as 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 such as 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. 405
See also W Müller-Freienfels, ‘The Undisclosed Principal’ (1953) 16 MLR 299. See also Reynolds (n 399) 414ff. 407 See for a leading case (Privy Council) in this area, Siu Yin Kwan v Eastern Insurance Co Ltd [1994] 2 WLR 370. 406
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In the meantime, it remains somewhat unclear, even in common law jurisdictions (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. In common law jurisdictions (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 the principal incur liability directly (he has no action against the third party, and the third party has none 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 the agent may legally transfer title in the assets to a 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. In the securities brokerage industry, the trust characterisation is uncommon and not easily presumed to have been created, even in discretionary portfolios, although there may still be a constructive trust for tracing purposes. The differences are material in the sense just mentioned. But even if there is a mere agency, the connection with the trust remains close, as particularly expressed 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. On the other hand, in civil law, the agency idea remains 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, as we have seen, puts the emphasis here rather on the concept of the ‘exchange and 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 the principal has no direct liability to the third party either. In fact, the trust construction in common law comes closer to
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this civil law notion of indirect agency than the undisclosed agency, with the important difference, however, that the common law undisclosed principal still has in such cases the rights and protections of a trust beneficiary and the advantage of the benefits being separated from the person of the trustee. In civil law the principal has (in principle) only a personal claim on his agent for the benefits which are not then considered separated. This seriously exposes the principal in a bankruptcy of the agent.
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 as undisclosed agent, does not in civil law on the face of it create a direct relationship between the principal and the third party, this has never been satisfactory. 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 from experience 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 has been at the heart of the notion of agency ever since Grotius insisted on it.408 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 they have passed from the third party and are sufficiently identified, but this may still depend on specific statutory authorisation. Short of such an authorisation, 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 another problem here in cases where it is required, as agency under German law is limited to legal acts (Rechtsgeschäfte). Also the Einigung suggests a transfer to the undisclosed agent personally (section 164 BGB). 408 See further for Germany, KH Schramm, Münchener Kommentar zum Bürgerlichen Gesetzbuch 1 Allgemeiner Teil, 3rd edn (Munich, 1993) Fünfter Titel, s 164, nos 42ff, 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.
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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).409 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 not fully 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 while at least any property rights accrue directly to the principal.410 In the Netherlands, on the other hand, there is still no direct tie admitted between principal and third party in indirect agencies. Under Article 3.110 CC, property rights accrue to the principal if passed to the agent, but merely on the basis of the internal relationship. 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 the agent’s own name. However that may be, the principal appears at least protected in its proprietary rights against its agent if the latter has executed the transaction with the third party but not yet with the 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 give some protection if sufficiently separated out in a client account, although there are still serious doubts in this area too, as we shall see). Importantly, it does not extend to contractual rights which the agent still has against the third party, particularly for delivery or payment in a transaction which is not yet in
409
See also German Supreme Court, 11 June 1920, 99 RGZ, 208 (1920). 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 rapports du commettant et du commissionairs avec les tiers’ in J Hamel (ed), Le contrat de commission (Paris, 1949) 163, but this approach was not followed, see Ripert and Roblot (n 349) 682. In Belgium there was support from W van Gerven, Algemeen Deel (Antwerp, 1969) 494–97 and L Simont, ‘Le Problème de representation dans le contrat de commission sur marchandises’ (1956) Jurisprudence commerciale de Bruxelles 129. Belgian case law accepts the proprietary link but not the obligatory link: see Cour de Cass Belge, 9 December 1999, Pas I, 1669 (1999): see for a criticism, E Dirix, Liber Amicorum Jacques Herbots (Antwerp, 2002) 97. 410
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the stage of performance. In Germany, creditors of the undisclosed agent still have full recourse to all assets acquired by the undisclosed agent. 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 noted. Title may as a rule not shoot through, however, but will remain with the agent for as short a period as possible. It must be remembered that this only applies to truly undisclosed agency and not to open or direct 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 7.421 CC (in the context of the contract of mandate but also applicable outside it, see Article 7.424 CC). The principal 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, it 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 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, part 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 yields 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 agency411 that becomes disclosed after the agent 411 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 (London, 1989) 996.
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has acted. As we have seen, in general, the possibility of the agent dropping out of the transaction is restricted when the third party relied on him personally or on the defences such as set-off, 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.412 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 10 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 system413 as a compromise between common and civil law. It gives the Dutch implementation some wider importance. This approach has also appeared in Articles 3.301ff of the PECL but was not retained in the DCFR—see the few references to indirect agency in Articles II-6:106 and IVD-1:102(e). Because it leaves major issues unresolved, this approach seems unsuitable, particularly for the commodity and investment securities brokerage business when, while 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,
412 Especially in the US 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 Reynolds (n 399) 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. 413 See [1983] Uniform Law Review 164ff 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 J Basedow et al (eds), Festschrift für Ulrich Drobnig zum siebzigsten Geburtstag (Tübingen, 1998) 45. This approach was fundamentally challenged by LD van Setten, De Commissionair in Effecten [The Investment Securities Broker], (Dissertation, Utrecht, 1998), in favour of a pure agency construction seen here as the underlying idea of Arts 7.420 and 7.421 of the Dutch 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 as 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, while the principal was sufficiently solvent. In this view, the agent upon disclosure became a mere guarantor of contractual obligations which it entered into, much along common law lines, while 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.
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is a broader civil law problem, increasingly respected, but also by no means completely. This is particularly important as regards 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.414 The particular problems arising in connection with indirect agency in the investment services industry are discussed more fully in Volume 3, 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 is 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 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 conflict of interests. The undisclosed agent, like any other acting in his own name, has greater independence in civil law vis-à-vis his principal, and is traditionally more likely to be allowed to compete with him, although in modern securities and investor 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 now succeeded by the Market in Financial Instruments Directive (MiFID) (see Volume 3, chapter 2, section 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 such as the UK Financial Services Act 1986, replaced by the Financial Services and Markets
414 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, 2 July 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] (Deventer, 1998). In continental legal writing, the difference between agency and trust is little understood and so 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-à-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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Act 2000, and in the US much earlier under the Securities Exchange Act 1934 and its many amendments in the US. 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 direct or 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. 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 from paying the original creditor and receiving a discharge, cf Article 7.423 CC. The true factor collects, however, in his own name and for its own account and is not an agent: see more particularly Volume 3, chapter 2, sections 2.3.1ff.
3.2 International Aspects of Agency 3.2.1 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 E ngland liable for the obligations of a foreign principal, who in turn could not himself be sued or sue in England. 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.415 In the US there had always been an unwillingness to recognise foreign general powers to the discharge of local agents.416 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 (such as 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). 415
Teheran-Europe Co Ltd v ST Belton (Tractors) Ltd [1968] 2 QB 545. Von Wedel v McGrath 180 F 2d 716 (1950).
416 See
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In the traditional conflict of laws approach, all three may conceivably be covered by different domestic laws. This of course complicates matters considerably even if there were a consensus on the conflict rules in each instance. Another aspect to consider is whether the granting of the authority itself as a legal act separate from, although initiated by, 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. This then raises the further question of what domestic law covers this aspect. 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). It has already been said that this is then generally considered 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. Indeed, 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 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 in the traditional conflict of laws approach, 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 his (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 the agent’s own law as is likely in a disclosed agency. If the agent does not, his law may have to be considered in these areas also. Bona fide acquisition of chattels by the agent for the 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 or situs of the relevant chattels. These seem the most commonsensical and expedient solutions if one still adheres to the private international law approach searching for the application of some national law in these matters. It would 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 vis-à-vis both the principal and particularly the third party. Another approach altogether would be to consider the agency transnationalised when principal and third party are in different countries and to view the legal nature
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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, see further section 3.2.3 below. According to the pre-eminent author in this field, Ernst Rabel,417 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.418 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 should 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 particularly concerns itself with the role of the agent vis-à-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 N etherlands. It is valid for a period of five years and is automatically renewed for states that have not denounced it (Article 26). It refers to international agencies, which term itself remains undefined (Article 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 417
E Rabel, ‘Vertretungsmacht für obligatorische Rechtsgeschäfte’ (1929) 3 RabelsZeitung 807. See for the various alternatives and their supporters, HLE Verhagen, Agency in International Law (The Hague, 1995) 66ff. 418
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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 types 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 domestic 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 laws approach in this area. Particularly agencies operating in the family, corporate, and perhaps also banking and securities (the securities broker or ‘commissionaire’) areas do not seem to fit. Proprietary aspects such as the direct acquisition of tangible assets by the third party if the agent, even if undisclosed or indirect, acquires them, the good faith acquisition of movables by an agent, the consequences of set-off, and retention rights are not 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 his business establishment there or if the agent has acted at an exchange or auction or has no business establishment at all (which suggests that he is not a professional). There is no distinction made here between creation and effect, cf 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, while 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
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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 Article 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 (Article 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, cf 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 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 (Article 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 costs 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.419 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 Article 8(c)), investor 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 (Article 18), but this appears not to cover the securities business, except, according to the Official Report, 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. 419 See, however, also Verhagen, ibid, 152, 161, 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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An exemption may also be made for insurance and the exercise of public functions, but no other (Article 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 (Article 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 study custom and market practice and develop common principles which may be found in this connection in domestic laws in order to interpret and supplement the agency structure 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 Volume 1, chapter 1, section 3.1.1). In this approach a domestic law selected on the basis of the prevailing conflict of laws 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 PECL and DCFR do not appear adequate or 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 but the result is rather more confusion.
3.2.4 The EU Commercial Agents 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 agents,420 420
[1986] OJ L382/17.
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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. The Directive is, strictly speaking, not concerned with the legal consequences of agency at all and particularly not its third-party aspect or even with the fiduciary duties of the agent towards his principal. As such, it does not truly have a place in the present discussion but may still 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. Under Articles 3(1) and 4(1), parties must act here in good faith, which is then an EU concept; see also section 1.3.9 above. 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 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 conflict 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 means 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; cf 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 while 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
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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—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 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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2 Transnational Movable Property Law Part I Ownership, Possession and Limited, Future, Conditional or Temporary Proprietary Rights in Chattels and Intangible Assets 1.1 Introduction 1.1.1 The Notion of Property Law Property law is best understood in terms of the various legal structures under which assets are held, used and protected, therefore from the perspective of the user, income and enjoyment rights that may operate in these assets even in respect of third parties who were not involved in their creation or transfer. What assets and what rights do we mean exactly, and in respect of which assets can such rights be given or claimed, particularly when split-off and transferred to others by the original owner (who has them all in principle) as rights more limited than full ownership? When and how do they become proprietary, why, and what exactly does that mean, or when do they remain merely contractual and why? Can they be further split-up by transferees and redistributed to others, how and when? When are these transfers final and what does that mean? This requires first some idea of what assets are and how they may become the object of user, income and enjoyment rights in this sense. Land and chattels or physical movable assets are the most obvious examples but assets may also be monetary or could be other types of claims, in fact all that has economic value may then be considered an asset, see further section 1.1.5 below, although, in some legal systems as we shall see, the asset status of intangible assets, even monetary claims like receivables, is sometimes still questioned. This suggests a physical aspect which legally confuses and raises in particular the further question to what extent rights of this nature may only attach to specific, identified and individualised existing assets for them to become proprietary. Or can proprietary rights, in a more modern environment, also attach to classes of assets, physical or intangible, now often commingled with services and software, upon mere description of the asset or asset class in the relevant document, while within such a class legally there may then also be asset substitution, eg when these goods are in transformation as part of a production process whilst they are physically succeeded or replaced by others. This is relevant especially when the user, income and enjoyment right means to be a security for debt when upon a sale of the underlying assets these security interests
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may turn into receivables or proceeds. Rights in regard of assets in transformation or in future assets might thus be included and transferred prospectively, while the original security interest in these assets shifts into their replacement with maintenance of their original rank. This is at the heart of floating charges as a form of asset-backed financing. The changing nature of the underlying assets is the essence of the problems that exist in many legal systems in respect of the validity and effectiveness of these security interests or charges, see further Volume 3, chapter 1, section 2.2. In fact, it is in modern times this issue of identification, individualisation and existence of the underlying assets that has moved to the centre of the discussions concerning property rights, including security interests and finance sales as we shall see, at least in respect of movable assets used or produced and sold in the professional sphere. The nature of assets is therefore closely connected with the kind of proprietary legal framework we have or must move to and it may be in need of fundamental rethinking as the basic cornerstone of property rights. These rights and the way they are exercised and protected may themselves also have to be reconsidered in their meaning and expanded in their operation, especially in international c ommerce and finance as we shall also see. This may seem a merely technical concern but proves to be essential and arises in respect of the modern flows of goods, services, software, technology and other information, and of receivables, money or proceeds, and proves to present a major intellectual challenge in legal thinking as to how these flows can or should now be c aptured especially in any proprietary sense, not in the least also in their transformation, see the discussion in section 1.1.5 below, more urgent upon the globalisation of these flows through international production, and distribution chains. If, as will be submitted shortly, the issues of liquidity and finality, and ultimately of risk management, are at the heart of the meaning and s ignificance of modern proprietary rights in professional dealings, any formal or intrinsic requirement of the asset in terms of identification, individualisation and existence is a major hindrance to the further development of property law into a more dynamic force in international business. This discussion was started in Volume 1, c hapter 1, section 1.1.6 and will now be continued. Once we know what assets legally are, either in individualised form or in more modern perceptions of their flows as classes of present or future assets in movement and transformation, commingled when necessary with services, technology and information captured mainly in the contractual descriptions that is likely to be at the origin of each proprietary right, we should then acquire some better idea of what legal structures we are speaking of in terms of their movement towards proprietary status, therefore of the types of user, enjoyment and income rights, including security interests or charges, that may be exerted in respect of these assets and legally claimed by the beneficiaries or interest holders as proprietary, and what that really means. The essence of rights being proprietary is that they are maintainable against everyone or, in more modern approaches as we shall see, at least against certain classes of third parties not involved in the creation or transfer of these rights. Even without any form of privity, these third parties must then respect these interests, their creation and transfer, and leave them alone. Indeed it is the facility to enforce these rights against all the world that is traditionally considered the essence of proprietary rights, even if in more modern times this may be limited to certain classes of third parties as we shall see.
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But it still remains to be determined what this third party effect truly means or implies. It is particularly relevant in a bankruptcy when the proprietary right holders may be able to maintain their claims against a bankrupt debtor and his bankruptcy trustee, thus ignoring the bankruptcy and its liquidation, reorganisation and distribution process in respect of assets so encumbered. Here the right of ownership as the most complete (in civil law terminology) user, enjoyment and income right to exploit and dispose of one’s asset springs to mind first. It means that we can defend the ownership right in our car against all comers. But there are also more limited and therefore less complete user, enjoyment or income rights that I may subsequently create in assets, which may also become proprietary and therefore maintainable against all outsiders, such as life interests or usufructs, forms of leases (in real estate), rights of way (also in real estate), and security interests of which mortgages are prime examples in land. These involve more limited interests of other people in the owner’s assets and if becoming proprietary in civil law terminology are rights in other people’s property or iura in re aliena and must then be no less respected by all, therefore not only by the owner who granted or transferred these rights or his s uccessor. It means that even if the owner sells the property, these rights in the asset remain intact, with the important side benefit that the erstwhile owner is discharged of any duties under such a proprietary right. As we shall see, this has substantial benefits in terms of liquidity and risk management of the asset. Thus, if I lend a friend some money and take a mortgage over his house as my security, that mortgage is my proprietary right, which I may defend against everyone, even against the owner’s bankruptcy trustee or new owners should my friend sell the property for which he would not need my consent. Such a sale does not interfere with my risk management. The importance for the erstwhile owner is that he can sell the property regardless of the charge he allowed to arise in it. That is liquidity.1 Importantly, it discharges the former owner at the same time from any duties under this proprietary right, eg to look after the property. Another example: there may be rights of way created for me over my neighbour’s land to provide ready access to my own property. If proprietary, these rights are easements or, in civil law, servitudes maintainable against everybody. That means that, even if the property of my neighbour is sold, my rights over his land are not affected. My former neighbour is discharged at the same time and the duty to give access passes to his successor in the property. Again, proprietary rights so passing to purchasers mean that the obligation passes with the underlying assets so that their liquidity remains ensured. My neighbour can sell the property regardless of the charge he created in it, without which he would have difficulty to sell the property as he would still be liable to provide the right of way. This can be demonstrated and would be the case if the right of way had remained merely contractual. Practically that would require the underlying asset to remain in
1 However, the former owner is not discharged from the loan payments to me unless otherwise agreed. The loan itself is contractual and will not transfer to the new owner of the house (even if he knew of its existence and got the house at a discount because of the mortgage), although to avoid these issues, it is normal, as a practical matter, for the loan to be re-paid off out of the proceeds of the sale and the mortgage cancelled at the moment of the transfer of the property, but that is for the moment a detail.
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the control of the party granting the contractual user, income or enjoyment right in the asset (here the right of way to me) as without control of the asset, especially upon a sale of the property, performance of the contractual duties to let me pass could not remain assured. The new neighbour has no duty to me because he is not a party to the contract and it does not concern a proprietary right that passes with the property. The contractual duty to provide access cannot be unilaterally transferred with the property without consent of me as the beneficiary and subsequently of the new owner, who might not even know of my right and may in any event not be willing to continue it. It follows that, unless I agree (which will depend on the new owner’s willingness to afford similar access or on me being paid off by the seller), the property cannot be sold because the seller could no longer perform under the contract and provide me with my right of way. Hence no liquidity in the underlying asset and that is in a market economy highly undesirable. The ultimate question then is how modern law reacts against that conundrum. In civil law, the main example of this problem is presented in the lease of apartments, which lease in most civil law countries is contractual, not proprietary as it is likely to be in common law. As we shall see, that has required an exception to be made in the sense that by statute, eg. section 566 Civil Code (BGB) in Germany, any new owner must respect the lease contract and the old owner is discharged. This means that the rental agreement exceptionally acquires proprietary features. It has a long history and was earlier identified as an important inroad into the concept of privity of contract: see chapter 1, section 1.5.1 above. It is not a question of rental protection (as is often thought by students) but is motivated by the need for liquidity in the underlying asset which could otherwise not easily be sold by the owner. For similar reasons, as we shall see, in some civil law countries a contractual right of way of a neighbour may now sometimes be deemed to transfer with the property at least if the transferee knew of this duty to provide access before he bought the property (and could discount it in the price). As will be shown, this gives an important clue as to how contractual user, enjoyment, and income rights in underlying assets may start working against third party transferees in the property and thus become proprietary. The essence is then the prior knowledge, not merely publicity, which cannot truly be equated with it as we shall see in section 1.1.3 below. Again this is inspired by the need of liquidity in the underlying assets. Importantly, it is the reason why contractual user, income and enjoyment rights of all sorts tend towards proprietary status especially it is submitted when operating in the professional sphere. Although in this book the discussion of proprietary rights is primarily concerned with the creation, operation, transfer and protection of all rights in respect of (legally qualifying) assets (or classes thereof) in terms of user, enjoyment and income rights, proprietary rights proper are thus a more limited class of these rights and concerns the potential third party effect and the liquidity issue. Traditionally they cover more specifically defined legal structures in terms of use, enjoyment and income such as ownership, usufructs, servitudes and security interests. That is in civil law also referred to as the numerus clausus of proprietary rights. Other user, enjoyment and income rights then remain merely contractual, therefore maintainable only against the counterparty, usually the one who granted these rights. Again, they cannot be maintained against their successors in interest; that is privity.
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Given, however, a more dynamic notion of proprietary rights—as already proposed in Volume 1, chapter 1, section 1.1.6 for professionals among themselves—in which prior or sometimes even constructive knowledge of contractual user, enjoyment or income rights in the acquirer or transferee plays an important role, these user, enjoyment and income rights may thus acquire some third party effect or proprietary status, at least in respect of some classes of third parties, viz those who can or should know of these prior rights. Importantly, transforming these contractual rights into rights with some third-party effect, depending on prior knowledge in the third party, suggests or results at the same time in a form of party autonomy in the creation of proprietary rights. When, why and how this can happen, how therefore this notion of prior knowledge must be handled, is a key theme in this book, and the reason why the discussion is here not confined to the more traditional narrow class of proprietary rights (or numerus clausus). Again, it is the issue of liquidity, transaction and payment finality, and ultimately of risk management that becomes central to the discussion as we shall see. In the previous chapter we noted the importance of contract as risk management tool between professionals. Here we see the proprietary component in the international marketplace. All types of user, enjoyment and income rights in respect of underlying assets are then in principle considered for their potential proprietary effect and for the nature and extent of that effect should it arise. Thus all kind of rights with regard to underlying assets may be created through party autonomy and could potentially become effective against certain classes of third parties (who are therefore not involved in the creation or trandsfer process) especially those who know or in the case of professional insiders who should know. Notably in floating charges, the insiders, especially other banks and major suppliers, who should realise (because they avail themselves of these facilities) or do know that there are or might be such contractual rights before they acquire the property or a security interest or similar charge in them, may as a consequence have a search duty as part of their due diligence. Crucially, this duty does not then extend to the buyers in the ordinary course of business of commoditised products. The ordinary flows are free of them, especially relevant for consumers in their purchases. It follows that the proprietary system is here not or no longer set in concrete as is often still assumed to be the case in civil law, the reason for this civil law approach being that third-party effect can only be given in limited situations as a matter of public order or societal routine and standardisation with which there is sufficient familiarity. That is the numerus clausus. Such an approach does not distinguish and the proprietary right operates against all third parties or none—that is the weakness in this way of thinking. Thus even those who know of contractual user, enjoyment or income rights in the property are not then affected if they buy the underlying assets regardless. But it has already been shown that in respect of contractual rental agreements and rights of way in land, this approach is under pressure even in civil law. Especially among professionals, this proprietary system may be or may have to become more fluid, in which connection indeed prior knowledge in a (professional) transferee of pre-existing contractual user, enjoyment and income rights in the property becomes a key issue. Again, this means and allows for a form of party autonomy in the creation of proprietary rights in the professional sphere.
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This may be coming to a head more particularly in respect of the international flows of assets. It is submitted that expanded party autonomy in the creation of user, enjoyment and income rights in assets that may acquire third party effect in this manner is a key feature of the transnationalisation process of proprietary rights that operate in these flows. Thus party autonomy in the creation of these rights, which may acquire third party effect, becomes an important facility among professional operators especially in international finance, their knowledge of such prior rights being assumed or deemed constructive amongst them and respect of these rights being demanded. Crucially it does not affect the buyer of these assets in the ordinary course of business, therefore in respect of those commoditised in the ordinary flows. It means that proprietary rights are here not cut off at the level of their creation but at the level of their operation. Thus the international flows are free from them except in respect of the professional insiders; only they have a search duty. Especially when it leads to newer forms of asset-backed financing, it becomes a matter of competition between creditors and the optimal use of resources and to repeat an issue of a) risk management in which b) liquidity figures large and c) transactional and payment finality is another key issue that is directly connected as we shall see. These are then the essential issues in property law and its meaning in professional dealings in the international flows. Focusing on these issues is the reason why in more modern systems, user, enjoyment and income rights by their very nature assume expansion towards proprietary rights at least in the professional sphere. In principle they are, however, still contractual (or obligatory) and we should not get ahead of the present situation, although even now this finds particular expression in equity in common law countries which gives operations in these countries a great advantage. In civil law, lawyers must be aware of these newer trends, which are likely to have a profound effect on their perceptions and understanding of the meaning and operation of proprietary rights. They are not then systematically limited and do no longer merely concern individualised assets either but could also cover classes of assets including future assets or assets in their flow or transformation, meaning replacement assets. In this newer approach, the rights so created depend on their description in the contract and of the assets these rights concern. To repeat, the public at large may ignore them when acquiring (income, user and enjoyment rights) in these assets, but not the insiders. This is in itself a public policy issue but also a market necessity. The flows must be free of charges as far as the general public is concerned. Nobody would dare to buy anything otherwise. Against the background of what was said about contract law in the professional sphere in these international flows, which in the previous chapter was also identified as risk management tool, this picture is supported in this manner and further amplified in movable property law. It is not then truly about mine and thine, as children fight about a doll and consumers may argue about the ownership of a bike or laptop. The picture in the professional sphere becomes wholly different: we are no longer interested in individualised specific assets which are only bound to lose value and thereby their proprietary relevance once they reach the consumer. In the professional sphere, we are interested foremost in assets or more likely classes of them that are in transformation and movement from commodity to finished product and ultimately to payment in the supply and distribution chains and acquire greater value in each phase which needs protection and better use as collateral. That is efficiency, legally supported
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by the demands of risk management, liquidity, and finality. The search for greater efficiency in this manner is an essential component of professional dealings in the international flows and puts proprietary rights in a special light. To resume a line of thinking already started in the previous chapter: consumers buy a pint of milk to consume, and that is the end of the sale and of the asset. The professional buys a pint of milk to make something more out of it, cheese, yoghurt or whatever. For contract, it was submitted that this has a profound effect on the model used; for the consumer, it dwells on intent and blame in its formation and implementation. Beyond a basic health concern, its meaning is otherwise determined and defined by the defences and excuses: ‘I did not mean it, I cannot help it, it is not my fault,’ if somehow we do not want the pint any longer. Whether ownership passes or stays where it was, the asset will disappear promptly and proprietary rights become irrelevant beyond who can consume. Here, we have limited proprietary rights determined by publicly known standards, so that everyone knows or should know who has got what and who can drink the milk. It is submitted that in the professional sphere this is fundamentally different. Here contractually there are no quick defences against the duty to perform and the duty to take or to deliver is not quickly excused either, the contract is a road map and risk management tool and needs to be read and implemented as such as we have seen. The asset needs to meet the specific quality standards set out in the contract to improve its value and/or to obtain funding used as collateral to finance its further progression in the production and distribution chain. That is where the value is. Once the asset comes to rest and is identified as an individual asset, it is entering the world of the consumer (eg as a piece of cheese) and loses its value and legal meaning. There is no greater destruction of value than under the Christmas tree when all legal or proprietary meaning and protection lapses at the same time. The issue is that in civil law we still treat all assets in this (individualised and physical) way (Bestimmtheitsprinzip in German). Movable property law is here consumer law as contract law is also perceived to be, and in civil law that remains the standard model even in commercial and financial dealings. It is its essence and applies in a unitary system then to all assets and their use, but it is a system meant mainly to deal with the aftermath of the Christmas tree extravaganza, where the children fight about the spoils. Common law is very different and started from the professional perspective as we have seen. Contract and movable property were in essence commercial law concepts. Here the contract was always primarily a road map and risk management tool and had to be read literally rather like an instruction manual, where we also do not ask what the intent of the writer was to determine meaning. The essence is that there are few defences (only in equity) and no excuses except if incorporated in the text itself as force majeure or hardship clauses. In equity, there developed a supporting system of proprietary rights that deals with assets in transformation, often as a class. There is no need for indivualisation and setting aside until much later when the assets are full formed and the finished products come to rest, usually as consumer products, likely to lose their value and to become legally insignificant at the moment of unpacking. Rather there is a form of party autonomy amongst professional participants in the creation of proprietary rights operative amongst them to underscore the risk management nature, the emphasis further being on liquidity, and on transactional and payment finality,
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hence especially the floating charges, finance sales, and recognition of economic property rights in trust structures with their segregation facility. Again, this approach or model results from movable property having developed in common law first in commercial law, like the law of contract did, both much refined through equity. It is a different world that can deal with different needs and a commercial perspective; it is suitable for international trade and finance and recognises the force and nature of the international flows. Notably it is not consumer law. It is no less important in this connection to appreciate—it is a separate point that may easily confuse, however—that in these international flows contractual rights, even if still merely obligatory, have themselves a proprietary aspect in that they are ordinary assets at the same time and may in law be considered as property, at least if they have economic value, see again section 1.1.5 below. They are no less to be respected by all and in principle transferable as such—easiest to understand for monetary claims or receivables, but it concerns in principle all existing contractual user, enjoyment and income rights in whatever asset which may be defended as such in tort. They may be transferred in o wnership or even as usufruct or security interests. In the realm of property rights, this is the law of assignment. Thus there may be further contractual user, income and enjoyment rights created in the rights some of which may even acquire third party effect between professionals. We could even create contractual income right or a usufruct in a usufruct. The essence is that a merely contractual claim can be transferred or given as security or as a benefit in any other way, either proprietarily or contractually.2 Thus, all kind of user, enjoyment or income rights may be created in respect of underlying assets, which rights are themselves no less assets for the transferee even if merely contractual. We can freely create these and upon such a creation even assign them, meaning transfer them as any other asset. If we mean the subsequent user, enjoyment or income rights to become proprietary, there may be further formalities, however, different probably for outright or security assignments or conditional transfers. All the same, we may create or transfer a usufruct in our receivables or other contractual claims, as such to be respected by the whole world; we may also use these receivables or other rights as security for our debt. We might create rights in them that only affect certain classes of third parties (those in the know as we have seen) or we might want them to remain merely contractual. The beneficiaries may subsequently also be able to transfer either the usufruct they received itself or the security interest, the latter at least together with the underlying debt it ensures (to which it may be considered ancillary). The same may happen to charges that only work against some third parties or insiders as we have seen.3 If they are merely contractual, we can still 2 Thus also the beneficiary of a contractual right of way may transfer it with his land as if it were property and will probably do so. This right of way after transfer by the beneficiary will still expire with the original contract under which it was given. Note that the neighbouring owner who granted the right and is now under an obligation cannot transfer this duty without the beneficiaries consent—hence the liquidity problem as explained unless such a right starts to run with the land, meaning it becomes proprietary. 3 This being said it should be appreciated that a contract itself is not an asset in this sense because it contains rights and obligations and is not transferable as such, only the rights under it are (unless they are highly personal). The former are assets, the latter liabilities. The essence is that assets, even if mere claims, can be transferred to third parties without consent of the counterparty in the contract, at least if monetary or not otherwise highly personal;
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assign them, which assignment also needs to be respected by all (although not then the underlying contractual right which only works against the counterparty).
1.1.2 The Difference between Contractual and Proprietary Rights The difference between user, income and enjoyment rights in underlying assets or asset classes being merely contractual or becoming proprietary emerges especially upon the transfer of commercial and income streams. To repeat, the basic starting point is that if any rights earlier granted therein by the owner (meaning by the one who has all user, income and enjoyment rights in them, thus the most complete right) were proprietary, the successor/new owner or transferee of (the rights in) the underlying assets is bound by and takes subject to these rights, eg an earlier usufruct or security interest. If they were only contractual, the successor or new owner (assignee) of the assets may ignore them in principle, even if he knew of them, unless, in a more modern approach, this knowledge itself may open up the system of proprietary rights, as we have already seen in the previous section, and of which again in common law countries there are important examples in equity. As noted, the importance of proprietary (income, user and enjoyment) rights is that they can be maintained against all the world (or at least against some classes of third parties which are those not party to the original transaction), therefore in principle against any or at least certain intruders. Yet it remains to be determined what the consequences truly are. First, a proprietary interest implies an element of segregation although it does not fully define it, but it is of special importance and easiest to demonstrate in a bankruptcy. Thus if I have a usufruct in the underlying assets, I can ignore the owner and his bankruptcy until my right expires. Similarly, it means that if my bicycle is in my friend’s shed, it is not part of his estate but is segregated. I can simply take it away upon his bankruptcy, relying on my right of ownership. It also means that if my friend gave me a security interest in his own bicycle or a similar charge to protect the return of any money I may have lent him, I may take the bicycle from him if the money is not returned in time (thus taking physical possession or ‘repossessing’ the bike unless there were more senior security interests belonging to others) and execute my security or my charge, meaning selling the bike in principle or, depending on the nature of my right, even appropriating it, quite separate from any bankruptcy of my friend. In the case of an execution sale I then only return to the bankrupt estate the overvalue for more junior security interest holders or ultimately the common creditors, obligations can only be transferred with consent of the counterparty unless closely connected like an arbitration obligation, it is a question of credit risk, see sections 1.1.4 and 1.5.5 below. That contracts are not only assets, means that they are not transferable as such, exactly because of the attendant obligations, which creates considerable problems especially in finance. The traditional hedge like options, futures and swaps are contracts and thus not transferable as such. To protect profits or limit losses thereunder, opposite transactions must be entered into. In professional dealings, this has led to the emergence of central counterparties (CCPs), which will be explained in greater detail in Vol 3, ch 1, s 2.6. The American way around this in contracts for the sale of goods is to allow a transfer of the contract but the erstwhile obligor/transferor under it remains a guarantor for the obligations (S 2-210 UCC).
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even if in modern reorganisation statutes these (self-help) rights may now be c urtailed or suspended for some time or even modified upon insolvency. The same goes for monetary claims or receivables assigned to me even if only as security although a security interest here normally means that I may collect and need not organise an execution sale. Upon a bankruptcy of the assignor whom I have lent money against this security, I may thus request payment from the debtors directly to me under these receivables or claims. I may already have negotiated a right to receive all interest p ayments and repayment of principal in respect of these claims anyway. In civil law, this right to pursue the interest in or rights to the asset is also called the droit de suite, a consequence of the proprietary interest operating against all the world including bankrupts, therefore regardless even of who controls the asset. To repeat, it also follows that if proprietary interest holders, like owners, subsequently sell or assign their interest, any limited proprietary right in or to the asset can be maintained against any successor who will be a junior proprietary interest holder, even if the new owner acquires the fuller ownership interest or title. So if my friend sold his bicycle in which he gave me a security interest or gave another security interest to someone else, my security interest being older would still prevail against the new owner or later security interest holder (unless perhaps there was a bona fide purchaser who obtained physical possession of the asset, which would not change the basic rule but provide a defence against it as we shall see). As my proprietary rights may be maintained against all the world, that thus means it can be maintained against all junior interest holders including, in a bankruptcy, all more junior secured creditors as well as the common creditors of the bankrupt, who only have a contractual or other obligatory right. Junior means here in essence any proprietary interest in the asset that was created later. In civil law, this is referred to as the preferential right or droit de préférence of those who may exert proprietary rights and suggests their ranking in the order of time. On the other hand, I must respect all senior proprietary interests in the same assets for similar reasons. This also applies to monetary claims as underlying assets. Again, although much of their value may be lost because of failings of the debtor in his bankruptcy, I can still give the claim as security to others while all other existing security interests therein remain valid according to their rank. Although in this book the emphasis is rather on liquidity, transactional and payment finality, and ultimately risk management, these two rights—the droit de suite and droit de préférence—are traditionally believed to be the clearest benefits and consequences of rights being proprietary and to demonstrate best their nature and impact.4 Even though it is a typical civil law analysis, it is sometimes borrowed and used also in common law to demonstrate the point, although it should be realised that the distinctions in this respect in common law are less sharp and never reached the same level of abstraction. For both systems, it may thus be said that any user and enjoyment or 4 Sometimes, the right to exclude and the matter of governance are mentioned as the key aspects of roprietary rights, especially in modern law and economics, see eg TW Merrill and HE Smith, Property. The Oxford p Introductions to US Law (Oxford, 2010) 6, but these notions are not clear especially in respect of secured interests and seem to refer more to non-legal popular perceptions and moral perspectives.
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income right that may be created in (other people’s) assets, and cannot be defined in terms of narrower proprietary structures,5 are in principle contractual or obligatory.6 Even though, as already noted, equity in common law countries started to provide greater flexibility, purely obligatory rights in or to other people’s assets are not protected against all the world and do not give a special status in this connection.7 This means in essence that contractual rights or claims even user, income and enjoyment rights in respect of underlying assets are normally not respected in a bankruptcy of the owner of the asset. They are only enforceable against the contractual counterparty or counterparties, usually the transferor, and there is no droit de suite or droit de préférence. There are here no senior or junior rights, only competing interest holders or common creditors. They all have equal rank even if they are created earlier. Commonly that is the lowest rank in a bankruptcy. It follows that, however these rights may be expressed, there is no segregation or right to an asset, only a competing claim for damages in a bankruptcy liquidation and distribution. Borrowing a bicycle may serve as a 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 this is only a competing claim in the bankruptcy. On the other hand, creditors with a security interest in the bike rank higher and can hold on or claim the asset. If I was given a usufruct, I would also be able to keep the bike until the end of the term (although it would still be subject to any older security interests). The fact that I might have possession as borrower of the asset does not give me a similar status. Possession, at least in civil law, is not itself a proprietary right as we shall see although in common law it is so in respect of chattels and may give some further protection as a matter of bailment but not in terms of a contractual user right. Again, we note here key differences between proprietary and contractual user, enjoyment and income rights, in fact between proprietary and obligatory rights altogether, potentially differently expressed and organised in civil and common law. As mentioned, this distinction remains fundamental in civil law (see further section 1.2.1 below) although the difference was only gradually understood and the types of user,
5 We shall see later that although the appearances and details may be quite different, in the economic consequences the common and civil law of property achieves similar objectives and they are in that sense not as different as may at first appear. That is not surprising in economic systems that operate in similar ways, but it also shows that the law can go about these matters in very different ways and it is not without consequence in modern commerce and finance. As we shall see, in professional dealings this concerns especially equitable proprietary rights, like trusts, conditional and temporary rights or finance sales, and floating charges. 6 In civil law (as in common law), proprietary rights proper might still be filled out contractually in expansive ways, so that, eg, a proprietary right of way or servitude might be expanded by contract into a duty of the neighbour not to obstruct or to build on the land. How far contractual expansions of proprietary rights are possible (and may then be filed and remain proprietary when created in land) remains a matter of discussion, especially in civil law because of its overriding numerus clausus ethos. 7 But it should be realised all the same as already discussed in the previous section, that even obligatory rights are not to be interfered with by others and have as such a proprietary aspect, although the result is usually an action in tort, not property law. Note that in common law as we shall see proprietary rights are also defended or reclaimed in tort whilst in civil law any resulting holdership of the relevant proprietary right of an owner in respect of the underlying asset is also defended in tort against third party intruders as we shall see.
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enjoyment and income rights that functioned as proprietary were only empirically identified in seventeenth-century legal scholarship in Germany as we shall see. Roman law had played with these ideas, but (surprisingly) had not been able to provide full clarity in this regard. Neither did the common law manage to do so and even today its concept of proprietary and obligatory rights is more hazy, with equity presenting some middle ground as already mentioned, especially (but not only) clear in trust structures, floating charges and conditional or temporary ownership rights especially in finance sales. Thus in common law countries, in equity—given less abstract (but also more practical) thinking in this regard—the distinction between proprietary and contractual rights in assets is less sharp, demonstrated especially in respect of all those who knew of contractual interest in the assets when they acquired the underlying property and they cannot then ignore them. It was already said in the previous section that this may give us some clearer idea as to whether and when user, enjoyment or income rights that are normally created by contract may also become proprietary, therefore what the substantive criterion is for these rights acquiring third-party effect. This was identified as prior knowledge in the transferee. It raises among other things the important question of party autonomy in the creation of proprietary rights, the question therefore in how far interested parties can influence this conversion towards a proprietary right outside the well-known and objectively defined class of such rights which can be used but not freely created (the numerus clausus of proprietary rights in many legal systems). It was demonstrated that in a more modern world, contractual passage rights may provide an apt example even in civil law countries as they may become increasingly enforceable against all who knew of them before they acquired an interest in the property. In such cases, these contractual rights may acquire (some) proprietary effect. This facility may in civil law still be limited to rights of passage over one’s land, but prior knowledge of other people’s contractual or other obligatory rights in the acquirer of an asset may become a more extended concept. This puts more generally the emphasis on knowledge (although in the case of rented property by statute the former owner is discharged and the new owner bound even without knowing as was already noted). Again, this has long been the essence of equitable proprietary interests in common law countries, extolled by statute in Article 9 of the Uniform Commercial Code (UCC) in the US, and it is seen in this book as a modern way forward also in civil law and, by way of extrapolation or analogy, an important aspect in the transnationalisation of the law of movable property in their international flows. Thus new and specially tailored security interests or conditional or finance sales might be created by the parties that may become operative against professional third parties who are insiders in business such as other banks and suppliers upon mere description by the parties of the right and assets covered by them, but importantly they leave the (unaware) public unaffected. They can buy cars and any other consumer or commoditised goods without worrying about such charges in them, even if they suspect that there may be some or could have searched a register. The essence is, as already mentioned in the previous section, that they have no search duty and these charges are irrelevant for them. As we shall see, this may go further than the bona fide protection in the law of the acquisition of movable property in civil law, notably in that
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it does not require physical possession or similar control, and not even bona fide per se (and also extends to land and intangible assets). This more balanced approach may be economically beneficial because of the greater flexibility it provides and because it may in this way be more responsive to practical needs, especially in terms of modern risk management, note floating charges and finance sales, as we have already seen, but there is also an important liquidity aspect noted throughout and ultimately also the issue of transactional and payment finality as already mentioned and as will be discussed further below. This is a most important issue and fundamental insight, in principle alien to the tradition of civil law except perhaps increasingly in respect of contractual rights of way, whilst it also had to make an exception for rental agreements (where prior knowledge is not, however, relevant as we have already seen—that is statutory law or public policy). In fact, as we shall also see, the numerus clausus idea in civil law stood always on much shallower ground than often assumed and is expressed as such in few codifications, although it is certainly mostly implied but probably less understood. Hence again the idea in this chapter that we should first look at all user, enjoyment and income rights in respect of all assets or asset classes and only subsequently determine how they progress or to what extent they have progressed to proprietary status in the circumstances. There are not necessarily fixed notions here and it can be demonstrated that there is increasing flexibility, at least in professional dealings, particularly in international finance. Indeed, it will be argued below that in transnational law concerning professional dealings, we are likely to see the development of a class of rights in between proprietary and contractual rights as earlier in equity in common law countries, where party autonomy becomes important in property law and feasible in the creation of proprietary rights. Movable property law thus becomes a potent risk management tool and liquidity sustaining facility. But again, for ordinary people these rights or charges are cut off at the level of their operation—it was already mentioned. Thus we can all buy what we like, free of these interests—they only affect the insiders—again, this is a further f eature of the liquidity of assets and a matter of transactional finality for them. It follows that even though the proprietary right moves with the assets (releasing the original transferor of his duties at the same time), only a small class of insiders not party to the transaction is affected and third party buyers of commoditised assets may ignore these rights altogether. The ordinary commercial flows are free (so are the originators, who are released from their obligations in respect of these assets). Again, this is public policy; nobody would dare to buy anything without it and it becomes another aspect of liquidity. So much the student should clearly understand. The question remains nevertheless which user, enjoyment and income rights qualify outright as proprietary and which ones remain in principle merely obligatory, even if we admit that prior knowledge in the transferee (which may be implied or constructive but only for insiders) has increasingly something to do with it and party autonomy is here in the ascendancy in the creation of rights which may at least be effective against some classes of insiders, not party to the transaction, thus supplementing the more traditional proprietary rights. So far, there appears to be no underlying scheme or grand idea why certain of these rights became fully proprietary and others not. It is hard to
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explain and it has already been said that it looks more like historical accident. It must have reflected pressing needs and general perceptions,8 not in essence much different in common and civil law, even if they came out quite differently in the details which are very differently expressed, with the overhang at law of the feudal system in land and of equity in movable property in common law countries. It also has to do with established routines and standardisation, on which society depends to a great extent, but which are shifting all the time. To see property rights as being static, as the numerus clausus idea does (and now even by some in ‘law and economics’, see further the discussion in section 1.3.9 below) is not to understand this state of affairs and in particular hinders the need for risk management in a world in which risk is typically not standard. Finally, it may also be observed in this connection that where at least in civil law in contract law we have the good faith concept to move us forward, there is commonly no such open norm in the law of property in civil law. But we may still depend on more liberal interpretation techniques of which the good faith notion was considered the carrier in contract in civil law. In movable property law, liberal interpretation is the means to reintroduce the other sources of law besides statutes, where especially customary law may become important transnationally as expression of the needs in this regard of commerce and finance. This affects not only the type of proprietary rights and how they are created, operated and defended or move from the contractual to the proprietary realm, but, as we have already seen, it may also impact on the type of asset which may be the object of these user, income and enjoyment rights. It was noted that this asset range may require a vast extension and move from individualised and specified existing assets, notably goods, into classes of assets, the notion of bulk, assets in full transformation or future assets in their flow, as well as to extended notions of intangible assets that move from monetary claims to intellectual property rights, goodwill, and perhaps even services, at least to the extent associated with a particular business or incorporated therein or in its assets, see further section 1.1.5 below. There is then also the important issue of proprietary rights shifting into replacement assets or them being maintained after transformation along the production and distribution line.
1.1.3 Proprietary Rights and the Role of Publicity. Prior Knowledge in the Transferee Distinguished In more modern times, publicity has often been construed as the reason why some rights can be exerted against the whole world, thus becoming proprietary, and not others. Physical possession is then considered a form of publicity also, that suggests ownership, but it can be wholly constructive, at least in civil law as we shall see, and
8 See also nn 24, 44 and 52 below. It should be noted also that proprietary rights and contractual rights often go together. If, eg, I lend my car to A, at the end of the agreed period I may reclaim my car either on the basis of my ownership (or repossession) right or alternatively under the contract. This shows at the same time that the nature of proprietary rights as compared to that of the contractual right is foremost one of dimension. Once the person against whom I wish to maintain my proprietary right is identified, the action becomes also a personal one, just as in contract or tort, although in civil law the nature and conditions of the action are still likely to be different.
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in common law, it is bailment, well distinguished from ownership and says therefore nothing about it. That publicity is at the heart of proprietary rights is in its generality a doubtful proposition, even if, as already demonstrated in the previous section, in equity, prior actual knowledge of a (contractual) right of others may increasingly have third party consequences, although still cut off by the protection of the ordinary commercial flows and the concept of transactional finality. Rather, it is the notion of standardisation or routine which publicity sustains but is not the cause of proprietary effect. It is one thing that those who actually know of a prior right in assets must respect it, but in the view that publicity underpins all proprietary rights, knowledge is 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 in respect of the few officially admitted proprietary rights replaced by a formalised concept of publicity that is formal and lacks intrinsic strength. The truth is further that, especially in respect of chattels and intangible assets, there is commonly no publicity at all to support proprietary rights in these assets, which undeniably exist, while the physical possession or holding of the asset can be misleading as to its ownership—there may be mere holdership or detention.9 Who is to say that the shirt I wear is mine? There is certainly an owner somewhere although others may have no way to spot him or her beyond what I tell them. This is now different for registered land holdings but it remains basically true for all chattels and intangible assets. It may be recalled in this connection that before the nineteenth century, there used not to be any publicity even in respect of land holdings, but property rights in land undoubtedly existed. In this connection, it should be noted further that even publishing contractual user, enjoyment or income rights, for example in newspapers, does not make them proprietary. Were it otherwise, these rights would become entitled to proprietary protection at the mere election of the publishing party, which would become especially relevant in a bankruptcy of any counterparty in whose assets it had some interest. This would be untenable. Where on the other hand it is accepted that prior knowledge of the interest is increasingly important in a modern system of protection, this does not suggest publicity itself as the source of proprietary rights, but rather (more negatively) only the protection of all bona fide purchasers who have no actual knowledge of prior interests which they otherwise would have to respect. Again, in more modern times this absence of relevant knowledge is imputed in all those who buy commoditised products in the ordinary 9 Only in respect of (some non-possessory) security interests in movable assets, may there be some exceptions in view of filing requirements, but it was already said that they do not normally impose search duties in respect of the ordinary flow of commoditised assets, which may be presumed to be free and clear of such interests, so that the value of this kind of publicity may well be questioned: see also s 1.7.7 below. They are therefore quite different from real estate security interests such as mortgages, which are also filed and cannot be ignored. For movable property, filing of an interest of this nature is generally only a facility that enables other lenders or suppliers extending credit better to know who is ahead of them. Indeed, there are usually no search duties for purchasers of the underlying assets, especially if they are commodities sold to the public at large. It is also noteworthy that at least within the EU, the Collateral Directive dispenses explicitly with all publicity requirements in respect of the use of investment securities as collateral as we shall see.
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course of business. It can only be reiterated that this was always a key idea in common law countries in respect of equitable proprietary rights and, it was posited, also an important way forward in civil law, more readily so in transnational law. Again, it is not an issue of publicity, certainly not in the sense of constructive knowledge, which, it was already said, is at most imputed amongst the insiders, like other banks or suppliers. Only they have a search duty and may have to do more, but the general public does not have it even if in respect of certain chattels and charges in them there may now be a register. These registers operate in this respect very differently from land registers. The latter create constructive knowledge in all, the former at best in the insiders. To repeat, there appears to be no clear underlying principle from which the traditional proprietary rights would appear to have emerged, at least in civil law, even if one admits that standardisation, routines and then also publicity might have something to do with it, but none would appear to be dispositive. There are in civil law at the formal level traditionally no other proprietary rights than the few conventional ones already mentioned, never mind publicity or other rationalisations. Although there is pressure on this system in the manner indicated, the numerus clausus of proprietary rights remains at least in theory strictly adhered to in civil law. As we shall see, it extends in civil law also to the forms in which these rights can be held and exerted: ownership, possession or detention.10 More practically, property or ownership is foremost an instinctive concept in terms of ‘mine and thine’, easily understood by all, not least by children, but it is true that this basic concept, now believed to have even a human rights connotation, always created considerable difficulties in the way it was legally expressed. In section 1.3.9 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 any fundamental new insights either. In section 1.3.10 some other theories will be discussed against the background of the approach of this book. In section 1.10, a summary of where we are or may be heading will be attempted. In section 1.11, finally, it will be considered what the Draft Common Frame of Reference (DCFR), since 2009 informally proposed as a model for an EU-wide codification, makes of modern property law in movable assets, including intangible claims. It will be shown that both in its emphasis on the objective existence, identification, and individualisation of the assets and in its adherence to the formal numerus clausus, it remains stuck in older nineteenth-century civil law perceptions and does not present a forward-moving picture. It remains anthropomorphic, meaning stuck in consumer law notions, and can notably not deal with modern finance and newer forms of asset backed funding. It confirms that codification thinking in civil law is consumer law. 10 This is accepted even in countries like France where the delivery requirement for the transfer of ownership of chattels and for the creation and transfer of the other more limited proprietary rights therein (except pledges) was deleted in the Civil Code of 1804 so that this transfer is achieved through the mere contract (‘par l’effet des obligations’: Art 711 CC). This could suggest that parties may have more freedom to create whatever proprietary right they like in chattels with full third-party effect. This was earlier indeed the attitude of the French Cour de Cassation, never overruled, but it is not truly the modern French approach. See for the original approach, Cour de Cass, 13 February 1834, s 1.205 (1834), but for the modern attitude, J Ghestin and B Desche, Traité des contrats, la vente (Paris, 1991) no 612, which makes clear that the transfer of ownership follows from the operation of the law and not of the contract.
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In common law, the distinctions in this respect are less clear cut as already mentioned, allowing for a more flexible and dynamic response to practical needs and greater party autonomy in the creation of proprietary rights, which again ultimately goes to risk management. At least in equity, there developed indeed a middle class between proprietary and contractual user, enjoyment or income rights, as we have seen, which at the same time led to an important degree of party autonomy in proprietary rights’ creation. 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 floating charges as modern non-possessory security interests in chattels and intangible assets, and in assignments. This flexibility in terms of party autonomy proved also relevant for the modern set-off and netting rights as we shall see, which create important preferences in bankruptcy. At least in floating charges, there appeared subsequently a more formalised notion of constructive knowledge in the sense that insiders such as banks and major suppliers were supposed to have had it. It is less clear whether these interests can be expanded from there.11 However that may be, the essence is always that the ordinary commercial flows are free from such interests. Buyers in the ordinary course of business are protected,12 again it is an issue of liquidity and finality for them and a policy issue. These are essential elements in this very different approach, geared to better risk management, just like the modern professional contract is, see the discussion in the previous chapter, and this attitude is thus also extended into property. It will be discussed more fully below in section 1.3.1. At least in trusts, conditional ownership forms, and floating charges, there followed the possibility of specific performance and bankruptcy protection, underlining further the proprietary status of these equitable proprietary interests, a facility therefore to pursue these contractual rights in the property against all third-party owners 11 As already mentioned in Vol 1, 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 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 3, ch 1, s 1.5.2. Perhaps contractual arrangements rather than unilateral action make a difference here. 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 recognising equitable servitudes, at least in chattels, and they are in any event cut off by the bona fide purchaser protection principle: see for a rare discussion, Z Chaffee, ‘Equitable Servitudes on Chattels’ (1928) 41 Harvard Law Review 945 and ‘The Music Goes Round and Round: Equitable Servitudes and Chattels’ (1956) 69 Harvard Law Review 1250. 12 As noted before in the text, this is a substantial broadening of the civil law notion that protects bona fide purchasers of chattels only, provided, moreover, that they obtain physical possession of the underlying asset at the same time, not an equity requirement either. In respect of assets traded in the ordinary course of business, in equity all purchasers may be protected even regardless of knowledge or physical possession. Bona fides is no longer necessary for adverse interests to be cut out. Protection against such adverse interests becomes then primarily a matter of finality and the protection of the ordinary course of business or liquidity of the underlying assets: see also s 1.4.6 below.
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who knew of the interest before they acquired the property. This progression into bankruptcy protection against all insolvents and their (secured) creditors who knew (constructively in the case of insiders) of these user, enjoyment or income rights before they acquired the relevant interests (unless probably in an execution sale) is then the real test and makes these rights truly proprietary (creating bankruptcy resistance at the same time). Although there is not always full clarity in these aspects, even in common law bankruptcy (see section 1.3.6 below), again, it may be assumed that at least in formal trusts, in conditional and temporary ownership forms or finance sales, and in floating charges, there is no doubt. The consequence is that on the one hand there results a proper duality of ownership and the beneficiaries are thus proprietarily protected against their rights being squandered by trustees or formal owners of the assets. On the other hand, all third parties who acquired interests in the underlying assets from these people, knowing full well of the arrangements, were not protected. Tracing of the beneficiaries’ interest in the proceeds or replacement assets became an essential sequel and further protection in equity against adverse action by trustees and similar intermediaries or formal owners as we shall see. Again, the essence is that party autonomy translates here in better risk management in which legally proprietary rights are cut off, not at the level of their creation but rather at the level of their operation. This has given the common law greater flexibility and sophistication, especially valuable in modern finance, without creating any great uncertainty. It has already been posited also that this presents a way forward also in terms of the new lex mercatoria as transnational law in international professional dealings, especially relevant in international finance, and in civil law more generally (see also Volume 1, chapter 1, section 1.1.9). 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 nature.13 The foregoing should give us some idea of what is at stake. 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 such as chattels and intangible claims. Subsequently we shall consider how these rights, especially if proprietary, operate both in civil and common law countries. But we shall also increasingly have to consider when these rights, even if contractual in origin, may be enforced against third parties that knew 13 For the importance in finance, see also s 1.1.10 below. Thus it may well be that, in a finance lease, the lessee, although only given a type of user right in the lease asset contractually, may now maintain it against all who knew of it while acquiring the property from the lessor. This then also implies a segregation right against the lessor and all its successors in their bankruptcy. Similarly, in repo financing the repo seller may retain a proprietary retrieval right in the sold asset or even in its replacement if it concerns fungible assets. Again, this suggests that even when the assets are sold by the repo purchaser, the reclaiming right remains potentially alive in any replacement goods while a later bankruptcy may be ignored by the repo seller, although the proprietary remedies in this regard are in practice superseded by the full bilateral set-off and netting facility, see Vol 3, ch.1, s 4.2.4. They remain relevant, however, especially in a reservation of title, where the purchaser may be protected against a bankruptcy of the seller so that upon a proper tender of the purchase price he still obtains the full ownership never mind the loss of the seller’s disposition right because of his intervening bankruptcy. These are important examples of new thinking in the area of proprietary rights and show the impact of the emergence of new financial products with specific needs and requirements in this respect: see in particular the discussion in Vol 3, ch 1, parts II and IV.
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or as professionals could be supposed to know of them so that these rights become semi-proprietary or enforceable against them, therefore only against certain classes of actors. It may be clear from the foregoing that it is in particular the comparative study 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. Thus the notion of knowledge of the third party of any of these rights when acquiring the underlying assets but also the possibility to freely describe by contract what they cover,14 the shifting of these interests in replacement assets, and the requirements of the ordinary course of business, meaning the protection of the commercial and financial flows against these interests, may prove to be key elements in the further development especially of modern financial law in respect of asset-based funding in civil law but even more powerfully at the transnational level where party autonomy is likely to function as an autonomous source of law within the modern lex mercatoria. It will be argued in section 1.3.8 below that intellectually or in terms of academic analysis or model, we may find here an approximation between the common and civil law of property, at least for movable assets, and also a true model for a transnational approach in international transactions. It is an approach which, importantly, also looks to and supports the finality of such transactions, probably even more than national law does, which may not to the same extent be a product of market forces. It leaves the vital question of the public interest in terms of public policy and order that may impact on these newer structures and who will be the spokespersons for the public in this regard transnationally and formulate the rules. To repeat, the protection of the ordinary flows against these interests is in fact a vital public policy but who are the proper spokespersons for this new order?
1.1.4 Proprietary Rights as Risk Management Tools. The Liquidity of Assets and the Finality of Transactions. The Transferability of Contracts In the foregoing, party autonomy in the creation of proprietary rights was identified as a major risk management tool. In this way it becomes possible to use assets, or classes of them, to back up and obtain funding in all kind of ways and to achieve flexibly. This limits the exposure of lenders. So far, floating charges were presented as the most important financial instruments to manage risk. It will be shown later how temporary and conditional ownership rights may also be used, in so-called finance sales, especially in finance leases and repos. Of course, the traditional mortgage and the pledge also used to do so, but they often did not have the flexibility that proper risk management requires. Again this depends on a measure of party autonomy, also in the types of assets these instruments cover, or classes of them, if necessary in their transformation; it is 14 In contract, everywhere there is freedom in principle in describing the relevant user, income and enjoyment right in any way parties wish to create and transfer them to each other. That freedom is maintained in equity in the creation of the proprietary right, but it is not so maintained in civil law. As already mentioned in s 1.1.1 above, it limits the proprietary consequences to existing assets that are specific, identified, and individualised.
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then for parties to decide, depending on the type of risk they seek to protect. The trust, especially its constructive trust variant, may operate here in support especially as a most significant tool for the segregation of assets. In this book, proprietary rights are particularly considered from this risk management perspective, hence the emphasis on party autonomy in this area subject to the protection of the ordinary commercial flows. There is another aspect to modern proprietary rights, already highlighted also, and that is the key issue of protecting the liquidity of assets which are used in this risk management process, where all kind of user, income and enjoyment rights may be created by the parties. While knowledge of prior user, enjoyment and income rights may increasingly force the transferee to respect a-typical rights, this may at the same time discharge the transferor from the connected obligations. Both then go with the asset and it promotes their liquidity. This was discussed in respect of the rental agreement in the context of privity of contract in chapter 1, section 1.5.1 above and this discussion was resumed in the previous sections for contractual rights of way and for the survival of the rental agreement in a sale. It showed that liquidity of the underlying asset is served by any prior user, income and enjoyment rights in respect of an asset being transferred with the property, discharging the transferor who granted these rights at the same time. In this sense, there is a need for them to become proprietary and that is met by accepting that prior knowledge in the transferee transfers the obligations together with the rights. It was thus shown that the liquidity requirement is one important reason why user, income and enjoyment rights in assets all tend towards them becoming proprietary. The need for liquidity and its promotion is also at the heart of the protection of third parties who buy these assets in the ordinary course of business. That is finality which is thus closely connected. This extends in this approach also to claims and their use as assets. Finality is therefore the sequence of liquidity, two essential features of assets and their risk management in this book. That may not solve all problems, especially not when the rights do not concern other assets and their movement, but are the asset itself. It was already said in s ection 1.1.1 that all rights may achieve asset status even though they are not physical. In such cases, the issue is also their transferability itself or the creation of user, enjoyment and income rights therein. They could be a contractual income right rather than a proprietary usufruct or life interest. In practice, the issue is relevant for futures and swaps. They are difficult to transfer because of the obligations attached to them. Again, the traditional rule is that rights can be transferred or assigned (except if they are highly personal) but obligations out of the same contract (unless very closely connected, see section 1.5.5 below) cannot be. Again we cannot transfer contracts without consent of the counterparty. Thus assets can be transferred, not liabilities—it is an issue already raised at the end of section 1.1.1—unless they go with the asset, which in swaps and futures is hardly the case. So if we want to get out of a future or a swap contract altogether, when we want to realise a profit or limit a loss, we need either the counterparties’ consent, which may be costly to obtain and they have a veto, or we must engage in an opposite transaction, to neutralise our exposure. This is the subject of Volume 3, chapter 1, section 2.6.6. It means that the economic exposure or market risk in these assets in neutralised (but the counterparty risk doubled until settlement). As we shall see in Volume 3, chapter 2, section 2.6.6, the interposition of Central Counterparties
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(CCPs) may help in this regard. They close-out the opposite positions in bilateral netting, but it does not change the fact that these contracts are not liquid in principle, only the rights under them are, assuming they can be sufficiently separated out (and are not highly personal). The same applies to portfolios of receivables: related duties remain with the assignor. This remains an important impediment in securitisations. Transfer could be facilitated by expressing these monetary claims in promissory notes which are negotiable instruments if expressed to bearer or order, see part II below. This would still not extend to duties or connected obligation, however, although especially in Eurobonds, which are important examples of promissory notes, market practice allowed a whole legal framework to be incorporated, see Volume 1, chapter 1, section 3.2.3, which transfers with the bond. This was never achieved in respect of futures and swaps, where as we shall see, standardisation has become an important issue, but more in connection with clearing rather than affecting the mode of transfer itself (see Volume 3, chapter 1, section 2.6.5). The fact remains therefore that in respect of contractual positions there is no easy liquidity. That is different for proprietary rights and obligations which move with the underlying asset although not otherwise either: we cannot separate a proprietary right of way (servitude) or the u sufruct from the assets they concern. That is different for contractual rights that concede similar user, enjoyment and income benefits, unless as we have seen, in a more modern perception the transferee of the underlying assets knew of them. A particular, statutory, way of facilitating the transfer of a contractual position and therefore their liquidity is shown in Section 2-210 of the UCC in the US, where a sales agreement becomes transferrable in principle but the obligor remains a guarantor of the obligations. So, if I am obliged to buy raw materials from a supplier, I can transfer the contract to any third party of my choice, who takes over the rights and obligations under the contract, but I remain the guarantor of the obligations, notably of payment vis a vis the supplier. This is advanced thinking and an important departure in the area of contract liquidity. Again, one must distinguish between intangible rights themselves and how obligations or rights of others in them may move with the underlying asset, even if itself a claim. Thus, there may be one question as to whether one can assign a portfolio of receivables, another whether if they are assigned, any user, enjoyment and income rights created in such a portfolio, even though contractual, move with them. If they are merely the latter, that would still be exceptional but may then increasingly depend on knowledge in the transferee. The transferor may thus be discharged of any connected obligations or at most would become a guarantor. A usufruct as a proprietary right in the portfolio would still be different and would continue in the portfolio even if the transferee did not know of it and the former owner would be discharged as a matter of law.
1.1.5 Types of Assets. Claims Traditionally chattels are considered tangible movable assets, such as cars, machinery, other equipment, clothes, foodstuffs or utensils, in common law often referred
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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 US sometimes simply an ‘account’. There are others: A bank has monetary claims on its borrowers for the return of principal and payment of interest. Depositors have monetary claims on their banks. There are of course many other types of claims, monetary or not, in contract, tort or unjust enrichment (restitution). In civil law terminology, they are all obligatory or personal, which means that they can be maintained only against the counterparty. It was already pointed out, however, that there may also be proprietary claims, like a usufruct.15 As mentioned earlier, monetary claims and their asset status need some further attention also, as they are a source of easy confusion. In civil law terminology, a monetary claim is a personal right against a counterparty that can only be enforced through a personal or in personam action. It was already said in sections 1.1.1 and 1.1.4 above that this is only the internal aspect. As it should be clearly understood that a monetary claim of this nature is at the same time also an asset, just like any other, with likely economic value, it can be the object of an ownership right if sufficiently specific or adequately described and can be defended against the whole world, as already demonstrated in the previous sections. It can therefore be maintained against all intruders, in principle through the same proprietary or in rem actions (although in many countries the protection is here only in tort as we shall see). That is the external aspect. All personal or obligatory claims—not only monetary claims—therefore have a proprietary aspect also and may as such be owned, defended and transferred or given as security or in usufruct. To put it simply: someone always owns the contractual right (the same goes for tort and unjust enrichment claims). In this connection, one could argue nonetheless that it is hardly possible to steal a monetary or other claim, but one can induce someone else’s debtor to redirect the interest payments to oneself as well as the ultimate repayment of principal, amounting to a similar improper act of appropriation. It makes no difference that the claim arising from an underlying relationship may be affected when this relationship, for example a contract, changes, is transferred, is questioned or collapses; this also concerns the claim, but that is no different from any other asset that loses its value. The foregoing is a simple insight still giving trouble in many legal systems. In this connection, particularly in respect of monetary claims, it may be pointed out that in order to promote their alienability or liquidity, modern receivables are 15 Especially in most civil law countries, a claim may be proprietary (or real), like a revindication of property claim under an ownership right, which can therefore be maintained against the whole world and may be transferred as such. This should not confuse and involves a different concept. When invoked, even these proprietary claims are directed against specific persons or entities and thus become personal in that sense (like claims for reinstatement or damages for infringement) but they remain distinct and give more power: they are, as we have seen, also preferential and may be pursued against any later interest holder in the asset: see also the comment in n 4 above. They are considered a different category and are not then claims in the more ordinary (obligatory) sense.
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increasingly acquiring an independent status that separates them automatically from the legal relationship out of which they arise and they may in this way be obtaining a status that is not then so far removed from the old negotiable instruments, long since treated as chattels or being chattelised. It was already mentioned in section 1.1.4 above and is an important prop for claiming full asset status. Section 2-210 UCC in the US supports this important development, as we have seen and which will be discussed later in section 1.5.4 below and also affects the status and (third-party) effect of any contractual assignment restrictions. Thus the modern receivable increasingly approaches the nature of the promissory note. This is a highly significant development and, it is submitted, another major modern insight, again motivated by the need for liquidity of assets, including claims particularly when monetary. But it was also noted that there remain impediments in respect of connected obligations and, as we shall see, also with the set-off and perhaps other defences against payment. Moreover, it was already noted also that the nature of this asset may still mean that any disposal, including the granting of more limited user, enjoyment and income rights in the asset, is effected in a different way (through assignment) and may be subject to different formalities, perhaps notification to the debtor and some individualised documentation. Unless transnationalised, it depends on the applicable law of assignment, which so far remains underdeveloped in many legal systems, one reason being that until recently claims were not considered an important asset class, see also section 1.1.8 below. Also the protection of the proprietary rights in claims may be organised differently. It was already said that there are unlikely to be revindication rights or possessory actions as we have in civil law in respect of chattels. Rather 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, if properly analysed, is not physical and can be entirely constructive. As we shall see, it is rather directed towards a sufficient measure of control. The fact that in civil law there are normally no possessory actions in respect of intangible assets may therefore seem inconsistent, but no system is perfect and especially the proprietary regime in intangibles developed in a haphazard way, also in civil law, and may still not be complete. It has already been said that the ownership action is also lacking—defences are in tort. Again, it will be more extensively discussed in section 1.5 below. More contentious is the idea that even a claim to services could be an asset in a legal sense (if they have economic value). It suggests that there are other intangible assets apart from claims.16 Indeed we speak of ‘selling’ legal or financial services. We may also ‘sell’ football players, presumably for their services. It would mean that we might then also give services as security for debt. Similarly, we might do so in respect of work in progress. So far the law does not appear to go this way and waits until goods or financial claims arise from the rendering of these services. Only then are they transferable and assignable or may be given as security, although, if we also allow future goods and claims to be so given (in security), it comes close to treating the underlying services as 16
For the asset status of goodwill, see s 1.1.6 below.
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legal assets or even whole contractual positions. Asset status may be easier to accept when services and goods are intermingled in the commercial flows. This suggests increasingly a composite nature of commercial assets in which information and technology will also figure. It suggests again that contractual description becomes the key issue, not the intrinsic condition of the asset. Again, 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 notion of ownership and of the other more limited proprietary rights that may coexist with it and are derived from it, regardless therefore of the nature of the underlying asset. The common law has no such ambition, particularly shown in the US in the UCC that deals with proprietary aspects per product, different therefore for sales, leases, investment securities, and security interests. However, although the m odern approach is indeed also to appreciate the proprietary aspect of claims (in fact of all rights) and thus to see them as assets like any other, and we may now also need a notion of composite assets, it may still be observed, for example, that even newly codified Dutch law presents here only some halfway house even in respect of m onetary claims and remains ambivalent.17 It was clearly influenced by German Pandectist thinking and codified law, which since 1900 in sections 90 and 903ff of the BGB only deals with the idea of ownership in respect of physical assets. This was thought to be closer to the everyday use of the ownership concept and also reintroduced a more physical concept of possession.18 Again, this is regressive thinking as possession, if properly understood, is not a physical concept in civil law at all. All is a matter of (models of) abstract rights and obligations or control over them and how they are expressed, enforced or protected. Nothing is ever physical in the law; it is ultimately all a matter of rights and obligations. In this vein, French law, following the teaching of Gaius, never made a fundamental distinction between physical and intangible assets; neither did earlier Dutch law in which ‘things’ could be tangible (corporeal) or intangible (incorporeal).19 That was also the view of Grotius.20 In civil law, modern legal doctrine remains divided on 17 Dutch law in its new Code of 1992 (not in the old one) is hesitant, avoids the use of the term ‘ownership’ in respect of intangibles, speaks rather of disposition rights (Art 3.84(1) CC) and restricts the limited proprietary rights, except for the usufruct and the security interests, to immovable and tangible movable assets only (Art 3.1 CC). Curiously, it does not define the most complete right that one can have in a claim at all. However, it is clear that the ownership concept is implicit in claims. They can as such be transferred (through assignment) whilst they are also (implicitly) made subject to possession (in the abstract civil law sense, as we shall see), acquisitive prescription (which depends on it), and even holdership notions. There is no proprietary or possessory action for intangibles, however, and the protection is in tort only (cf Art 3.125 CC). There is no bona fide purchaser protection either, in this case of the assignee who collects in good faith, unaware of better rights of others in the receivable or claim. In another 1992 innovation, notification was considered necessary for the validity of assignments; this was later found unpalatable in financing where a 2004 amendment led to its amendment, see Vol 3, ch 1, s 1.2.1. 18 See H Dernburg, System des Römischen Rechts, 8th edn (1911) I, 319 (Sokolowski) and B Windscheid, Lehrbuch des Pandektenrechts, 9th edn (1906) I, 856 (Kipp). 19 See Gaius, Institutes 2, 12–14, repeated in the Justinian Institutes 2, 2.1–3, although intangible assets were not at that time commonly considered objects of proprietary rights because there was nothing like a traditio in respect of them, and therefore no technique of transferring them or creating acquisitive prescription in them: see also s 1.4.1 below. 20 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
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the subject,21 it would seem unnecessarily so, and it is only bound to complicate for no obvious reason, with the unfortunate consequence that the reality of the composite nature of many modern assets becomes contentious and the need for the contractual description of such assets being sufficient becomes problematic. It must be admitted, however, that traditionally, intangibles also fit uneasily in the common law approach (although for different reasons as we shall see) and tend to have their own proprietary regime in which contractual, tort and restitution claims may be further distinguished while their transfer is then considered part of the law of contract, tort or restitution respectively. It is indication that the notion of an asset as such never received a great deal of attention in common law and in any event does not substantially figure therein as an intellectual concept.22 Investment securities held in a custodial system of securities entitlements presents newer concepts where transfers proper no longer take place upon a purchase and sale but rather creation or destruction of rights in security accounts held with brokers. It forces us to think very differently as to how these entitlements are protected in the case of a bankruptcy of the broker. At the request of the investor they may be mode immediately to another broker together with any back up there may be in the accounts of the broker with subcustodians or the main custodian. Intellectual or industrial property rights such as copyrights and patents or trademarks also fall into the category of intangible assets. They are not considered primarily contractual either, but rather proprietary, which means that they are protected and transferred like property rights, now often under special statutory laws. In bankruptcy, patent licenses and copy rights, although still considered executory contracts, commonly have a special status which amount to protection although trademark licenses may still be considered mere contracts, see Section 365(n) US Bankruptcy Code. A license is not protected in a bankruptcy of the licensee and cannot be part of an execution sale without consent of the licensor, Section 365 (c)(1). Important as they are, we shall not here be greatly concerned with them, although some further attention will be given to them while discussing the modern notion of assets more abstractly in section 1.10.2 below. It was already mentioned also that claims may sometimes be incorporated in documents and are then often treated as chattels. If expressed to order or in bearer form, they are then negotiable promissory notes, but it may also be so in respect of claims for journals and present opposite views, see KCG Reid, ‘Obligations and Property: Exploring the Border’ (1997) Acta Juridica 225, and GL Gretton, ‘Owning Rights and Things’ (1997) 8 Stellenbosch Law Review, Regstydskrif 176. 21 In German law, there is, on the other hand, a possibility of substituting the delivery requirement for hysical asset transfers by an assignment of the retrieval claim in chattels leading to a transfer of ownership, which p in Germany does not require notification to or co-operation of the holder: see s 398 BGB. Thus physical assets under third parties may be transferred by assigning the reclaiming right (see ss 931 and 870 BGB (which is limited to the transfer of legal possession but also implies a transfer of the underlying contract with the third party)), but they may also be transferred through delivery of possession under s 930 BGB at the option of a seller without physical possession of the asset (the traditio longa manu). 22 The discussion of what is an asset in this sense and how it can best be protected is for intangible claims not entirely alien to common law either: see the line of cases starting with Lumley v Gye (1853) 2 E&B 216. They show that the violation of a (contractual) right itself may lead to a tort action to protect the right as if it were an asset or piece of property: see further Lord Mcnaghten in Quinn v Leathem [1901] AC 495, 510 stating: ‘it is a violation of a legal right to interfere with contractual relations recognised by law if there be no sufficient justification for the interference’. See further also s 1.5.1 and n 224 below.
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the retrieval of goods when incorporated in documents of title, such as bills of lading or warehouse receipts, which, if issued to bearer or order, are then negotiable. Monetary claims or claims for payment may also be incorporated in documents, such as bills of exchange besides promissory notes. If issued to bearer or order they are also negotiable. All are then usually referred to as negotiable instruments. They are therefore documents of title concerning claims to money or other assets and are then treated more like chattels. Bank notes are promissory notes to bearer, issued by central banks, but they promise in times of paper currency or fiat money no more than the replacement with a new note. These documents and instruments will be discussed more extensively in Part II of this chapter. A key feature of all of them is that they are not only negotiable but that the claims contained in them (to underlying assets or payments) are also independent from the manner in which they have been acquired. It greatly enhances the value, liquidity or negotiability of these claims as it reduces the legal risk in them while the protection of bona fide purchasers enhances at the same time the finality of their transfer. To repeat, modern receivables are increasingly acquiring similar status; that is in any event the direction of the property law concerning them and a highly important modern development that will be further discussed in section 1.5 below. In the capital markets, promissory notes are called ‘bonds’ when representing loan principal. ‘Shares’, the other type of capital market instruments, represent participation entitlements in companies including rights to vote, to dividends, liquidation proceeds and information concerning the issuer and were traditionally also issued in negotiable (bearer or order) form and then often also treated more like chattels. Bonds and shares (or equities or stocks) are together usually referred to as (investment) securities, to be distinguished from securities that result from secured transactions as ways to secure an indebtedness. As already mentioned, modern times, investment securities have often abandoned their traditional negotiable form, are then dematerialised and held through bookentry systems organised by custodians. Clients have here securities accounts with their brokers/custodians much like balances in bank accounts. Although easier to handle, their proprietary structure has unavoidably become more uncertain: they will be discussed in part III.
1.1.6 Types of Movable Assets. The Requirement of Economic Value and Commerciability. Notions of Identity, Specificity and Definiteness and their Inherent Constraints. The Alternative of Adequate Description in the Contract Chattels or goods and intangibles or claims were and are in common law together normally referred to as personal property or personalty and sometimes as movable property, the latter being the normal civil law expression. In common law, tangible movable assets (chattels or goods) are also called choses in possession, and intangibles choses in action.23 Both are distinguished from real property or immovable property or 23
W Blackstone, Commentaries on the Laws of England 2 (1773) 384, 389.
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realty, which is land and the buildings on it. There may here be some cause for confusion since in common law (as in civil law) there is some movable property that is considered realty, such as chattels affixed to immovable property. There is (more typical for common law) also some immovable property that is treated as a chattel. These are the chattels real, which are estates in land (or types of ownership in land) for a limited number of years only, more properly called leaseholds or leases. In common law, the distinction between real and personal property in this sense is associated with the distinction between real and personal actions. The first exist in respect of land and the latter in respect of chattels and intangible assets, later superseded by tort actions. As has already been noted, this is fundamentally different in civil law where real actions are proprietary and personal actions are obligatory.24 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 (as distinguished from mere rental agreements) are therefore considered personal property even though estates in land. These are finer points, however, that should not blur the general picture. In both civil and common law, the traditional distinction is between land, movable tangible assets, and intangible assets. The difference is that civil law strives towards one unitary proprietary regime for all types of assets as we have seen (even though still having some difficulties with claims), while in common law there is in essence a different proprietary system in respect of each of them, for chattels and intangible monetary contract claims mainly under commercial law, where in respect of these claims, a further difference may still be maintained between contract, tort and restitution claims. In order for assets to be the object of proprietary rights in a private law sense, everywhere they must have a certain economic value and, at least in civil law since the nineteenth century, some specificity in the sense that they are at least identifiable.25 24 The terms ‘realty’ and ‘personalty’ derived in common law from the Roman actiones in rem and in personam, but these terms were then not properly understood; see for the early common law development in this direction, the thirteenth-century English authors like Bracton, partly probably because the distinction between proprietary and obligatory rights was not fully clarified in Roman law, see Yale (Eds), De Legibus et Consuetudinibus Regni Angliae (1922) 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 only through the writings of Bartolus, Grotius and Vinnius: see R Feenstra, ‘Real Rights and their Classification in the 17th Century’ [1982] Juridical Review, republished in R Feenstra, Legal Scholarship and Doctrines of Private Law, 13th–18th Centuries (Aldershot, 1996), 106: see also his Ius in Re, Presentation, University of Ghent, 1978. In common law, on the other hand, these Roman law actions led to an entirely different emphasis on the type of asset to be defended: land was defended by actions in rem and as a consequence came to be called real property, and chattels were defended by personal actions and were then called personal property. The ‘personal action’ to retrieve chattels was subsequently superseded by the old tort actions and true proprietary actions only remain possible in land law (even though land in common law terms cannot be owned—it belongs to the sovereign, there are only private estates in land). This situation in respect of chattels highlights an essential point in the common law in that the plaintiff does not have an absolute right to reclaim the asset but must mention its value and be satisfied with the payment of this value at the discretion of the defendant unless the asset is absolutely unique. In common law, the distinction between real and personal actions is therefore within the law of property and not between this law and the law of obligations, as became the civil law approach. 25 In the previous section, some doubts were expressed in respect of the asset status of services. Goodwill may here be mentioned as a particular area of doubt. It is the value that is commonly attributed to an enterprise beyond its immediate liquidation value and discounts a future income prospect that derives from the business as a whole. Even though the amount of goodwill can be economically established and is often mentioned separately
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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.26 The love one feels for someone, even if of the highest value to the lover, cannot legally be owned, although there may be some kind of love that can be sold. The air we breathe is for free, although when we catch it, it may be sold; it is the origin of the business of the balloon. Similarly, the regenerative powers of nature are there also free for all. 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 then concerns highly personal rights. It follows all the same that, while claiming damages, purely sentimental values are unlikely to be taken into account to any great degree. One may see here also the relationship between value and specificity or physical identification, eg when capturing air to sell it in a balloon. It suggests indeed that only identified and individualised physical assets that have been captured or are set aside are capable of being assets in a legal sense. But the latter are in other contexts narrowing legal notions as we have already seen. They may limit bulk transfers and also the transferability of future assets. They became nineteenth-century civil law confines that did exist in a similar (restrictive) way also in the common law but not in equity. Roman law had also been different.27 The consequence was the limitation or elimination of in the accounts of an acquiring company, goodwill is commonly considered not to have a separate asset status and can as such legally not be transferred separately but only together with the business and that would be automatic (leaving aside for the moment that a business itself cannot be transferred as a whole in many civil law countries either, but, like a library, requires transfer of all its parts separately). The value of goodwill (which could even be negative) is therefore derivative. So is its status and it may therefore probably still be best not to see it as an asset in a legal sense. The true significance is in the question whether goodwill can be given as security as French law (nantissement de fonds de commerce) would seem to suggest, see Vol 3, ch 1, s 1.3.1, n 89. It was a charge specially created by statute on an ongoing business, which, however, excluded inventory and accounts as being insufficiently specific, but could include equipment and other parts of a business, eg equipment leases. Again, it would appear that goodwill is not here construed as an asset in its own right but is transferable only (especially as security) as part of a business. That seems mostly the position. Equity in common law countries has here the advantage that it can transfer a business as a whole, including the goodwill, but even here goodwill appears not to have a separate asset status although in common law commentary it is often given the status of personal property. Yet following Lord Wilberforce in National Provincial Bank Ltd v Ainsworth [1965] AC 1175, 1247–48, property must be definable, identifiable, capable of assumption by third parties, and have some degree of permanence and stability, at least at law. The origin of movable property law in commercial law puts emphasis more generally on alienability or liquidity; goodwill as such is not alienable on its own, although in equity the distinctions may be more blurred. 26 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. 27 Roman law including the Justinian compilations, cf D 20.1.6, had been quite different and allowed proprietary rights, especially secured interests in classes of assets described in the contract. Possession was not necessary, see Antonius Negusantius de Fano, De Pignoris et Hypothecis (Lyon, 1549) and H Dernburg, Das Pfandrecht nach den Grundsaetzen des heutigen roemischen Rechts (1860). But in old French law, the security in movable assets became restricted to the possessory pledge of individual identified assets, see C Loyseau, Traicte du Deguerpissement (Paris, 1606), liv 3, cap.1 no 12 and Cinq livres du droit des offices, 325 (Paris, 1614), see also RJ Pothier, Traite de l’Hypotheque (1767) no 35, in Ouevres de Pothier IX (Paris, 1861). Via the French Code Civil, this became the nineteenth century norm in civil law codification countries, see VJM van Hoof, Generale Zekerheidsrechten in Historisch Perspectief [General security interests in an historical perspective] (Wolters Kluwer, 2015). Individualisation was subsequently extended to security in immovable assets, which could, however, remain non-possessory and usually was, although the French antichrese allowed also for a possessory security interests in immovables.
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non-possessory and especially floating charges in civil law. It is true that common law countries remained more pragmatic, but only in equity. It is being submitted throughout that monetary claims have economic value and are in a market economy assets in a legal sense, capable of proprietary protection. So may be other claims as we have seen. In modern times, there are other intangible rights that have acquired value because the law has given them legal status, mostly by statute, in particular the already-mentioned industrial and intellectual property rights. Yet intellectually, one could say that these assets, having value and being identifiable, were always objects of proprietary rights, even if intangible. 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, identity and specificity, these assets do not strictly speaking depend for their recognition, operation and transfer on a statute alone, although it may make it easier (and clearer). On the other hand, the extent to which these assets should remain freely available to the public is an important and much debated economic (and social) issue.28 What one owns and how one owns it, whether the property can be privately owned or only publicly or communally are thus important (legal) issues which do not distract, however, from the two essential features of legal ownership in terms of economic value and (at least some) identity/specificity of the underlying asset or the class, if only achieved in more modern approaches through contractual description. It is of course quite true that in this connection the extent of the property right and its modalities are also socially codetermined and are not an absolute given in themselves. Crucial as that insight is, it is not here the key element.29 28 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 (New York, 2001). In modern US legal theory, inspired by the ‘law and economics’ school of thought, more profound theories on the nature of proprietary rights developed in this connection, see eg BM Frischmann and MA Lemley, ‘Spillovers’ (2007) 107 Columbia Law Review 257, based on some important earlier economic writings, see the classic contributions of RH Coase, ‘The Problem of Social Costs’ (1960) 3 Journal of Law & Economics 1, 2–6 and of H Demsetz, ‘Towards a Theory of Property Rights’ (1967) 57 American Economic Review 347. See for more general recent observations on the evolution of modern property law, TW Merrill, ‘Introduction: The Demsetz Thesis and the Evolution of Property Rights’ (2002) 31 Journal of Legal Studies 331; S Banner, ‘Transitions between Property Regimes’ (2002) 31 Journal of Legal Studies 359; S Levmore, ‘Two Stories about the Evolution of Property Rights’ (2002) 31 Journal of Legal Studies 421; HE Smith, ‘Property and Property Rules’ (2004) 79 New York University Law Review 1719; and BM Frischmann, ‘An Economic Theory of Infrastructure and Commons Management’ (2005) 89 Minnesota Law Review 917. Demsetz defended the simple proposition accepted in this book that all that can be identified as having economic value creates and is object of property rights as a fact and as an unavoidable social phenomenon, especially clear when these economic values increase as they tend to do in modern times in intellectual discoveries and their application. It means that others are not to benefit freely from increasing value, which itself can be seen as an externality that may be internalised in property concepts, meaning exclusion, disposition and protection rights. This happens as a matter of efficient allocation if the benefits of internalisation of property rights exceeds the b enefits of keeping them externalised (free as social benefits). There may be strong reasons for internalising, although there may also be considerable benefits in keeping the benefits of innovation externalised. Here a policy decision will ultimately be made. It may be repeated that in this book, which largely takes the perspective of the evolution of modern financial products, the argument (and therefore the notion of property) is substantially cast in terms of risk management, liquidity, and finality especially clear in asset-backed financing, resulting in a balance between preferred and common creditors but also clear in terms of the shifting of risk to different asset classes of investors through financial engineering, which may throw yet another light on what is or should be proprietary. 29 It is a well-known fact that under modern law, no proprietary right is ever absolute and that social policies impact on all of them or, as the German Constitution (Basic Law) expresses it: ‘ownership creates social duties’
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To resume, adequate identification which is sufficiently specific is important and appeals to the notion of setting aside and segregation. They enable us to speak of owning a certain car and not cars generally or some car. However, although, as we shall see, we refer here normally to our ownership right in the car, this right only has meaning when it is exercised or asserted vis-à-vis others, and not in fact in the car itself, although it is exerted in respect of the car. This was for common law recognised as early as Bentham, later expanded by Hohfeld in the US.30 Especially for civil law, it has already been shown that the physical aspects are (in law) traditionally less important, possession even being an abstract concept, except laterally in the aspect of specificity but this was more particularly a nineteenth-century embellishment. It does not at first appear a great problem in respect of chattels, rather more so in respect of intangible claims, as we have also seen, although even they can be properly described and identified, often with reference to the debtor. Indeed, it has already been submitted that is not the physicality or the intrinsic nature of the asset but rather the reasonable description possibility that is the key in a modern rights-based system of proprietary rights, no longer constrained by physical notions or inherent qualities of the asset. Since the nineteenth century, civil law has a problem in this connection in that its intrinsic specificity requirements curtailed bulk transfers in respect of both categories of assets (chattels and intangible claims). There is, especially in civil law, then also a problem with future chattels or intangibles and the (prospective) ownership in them and its transfer.31 This notably affects the proprietary status of (s 14(2)). These duties are of a political nature and vary from time to time and from place to place. They will not be discussed here at this juncture as they are not essential to the basic concepts here explained, although the impact of societal values in the creation and operation of proprietary rights, certainly also at the transnational level, is far from being denied. In common law, the more philosophical aspects of this discussion received scant attention for a long time, but see more recently C Rotherham, Proprietary Remedies in Context (Oxford, 2002), JW Harris, Property and Justice (Oxford, 1996), earlier (with a strong civil law background) AM Honoré, ‘Ownership’ in AG Guest (ed), Oxford Essays in Jurisprudence (Oxford, 1961) 161, and further J Waldron, The Right to Private Property (Oxford, 1987). 30 See Wesley N Hohfeld, Fundamental Legal Conceptions as Applied in Judicial Reasoning (New Haven, CT, 1919 based on two earlier articles in the Yale Law Journal of 1913 and 1917), who remains significant, particularly in his demonstration that property is about rights and obligations and is nothing physical in law. See more recently in England JE Penner, ‘The “Bundle of Rights” Picture of Property’ (1996) 43 UCLA Law Review 711, and The Idea of Property in Law (Oxford, 1997); RB Grantham and CEF Rickett, ‘Property Rights as a Legally Significant Event’ (2003) CLJ 717, and L Murphy and T Nagel, The Myth of Ownership: Taxes and Justice (Oxford, 2002). See ss 3.1.9 and 3.1.10 below for some further discussion of the modern literature in the US beyond these references. Some of this will be familiar ground for civilian lawyers, who are more used to theoretical thought in their intellectual approach to property rights. 31 As we shall see in s 1.5.3 below, this may be less of an issue in Germany and in equity in common law jurisdictions. In this connection (in German terminology), tangible assets may be absolutely future, meaning that they are not at present existing, like next year’s crop or future claims for payment, or they may be relatively future in the sense that they do exist but are not yet owned or otherwise possessed or used by the party who wants to dispose of or otherwise transact in respect of them. In German legal thinking it is easier to dispose of the relatively future assets, as we shall see in s 1.4.5 below in connection with the disposition right. Although this distinction is not uncommon, it may well be asked whether it should truly be material in respect of ownership and transfer of future assets. The distinction is not greatly favoured in this book. The common law does not clearly distinguish in this manner either, although both notions are known. It is especially important for claims but the issue more generally arises in respect of after-acquired property, future receivables, a future judgment debt, payments expected but not yet received, shares in companies not yet in existence, an inheritance even from a living person, and expectancies dependent on a person exercising a power of appointment, a benefice to which someone may be appointed, the proceeds of an indemnity or insurance policy, moneys arising from contracts not yet entered into or from loans which have yet to be made. They can be transferred in equity but only under a contract to assign. Such an assignment becomes effective only upon the claim coming into existence and being acquired by the assignor. But future payments under an existing contract such as rental income
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assets in t ransformation and the shifting of the proprietary rights into the transformed products in a manufacturing and distribution process. Another observation to make in this connection is that in all assets, upon proper analysis, the issue is not normally the specificity or identification per se, but rather the disposition possibility and right in them for which sufficient identification would appear to be a precondition. The preoccupation with the disposition right in a typical physical sense is, however, also a nineteenth-century concern as we shall see in section 1.4.1 below and is then a problem again often associated with the transfer or disposition of future assets, assets in transformation, or assets in bulk. Even so, there is normally no problem on the contractual side: future assets can always be disposed of by contract regardless of their present or future state, as long as they can be reasonably described (so that the contract has a proper object). However, for a true transfer, therefore thirdparty effect of the transaction—it is mostly still assumed that they must be sufficiently set aside or identified while a transferor must have sufficient rights in them to transfer title or other interests. This still allows for considerable variation in the details as we shall see, but the modern trend must be that physicality is de-emphasised and that an adequate contractual description is sufficient and for the rest a proper degree of control for proprietary rights in these assets to be created, to operate, and to transfer. This control is commonly assumed when there are sufficient disposition rights in the asset.
1.1.7 Assets as Classes Identified Through Mere Description and the Proprietary Status of Assets in Transformation and Replacement Assets The issue and objective requirement of identification of the asset in order for it to become the object of a proprietary (user, enjoyment or income) right are traditionally clearer in legal systems that still require delivery of the asset for title transfer, such as Germany and the Netherlands in the case of chattels, although even in these countries this delivery need not be strictly physical, and can be constructive. However, they may be assigned, so may be receivables under existing contracts even if contingent upon performance of certain obligations by the assignor whilst the contract might still be prematurely terminated for breach. What is existing or future in this connection is not always easy to determine. All moneys outstanding to the credit of an assignor with a certain bank as well as proceeds from existing letters of credit are assignable, but the assignment of future dividends may be more difficult as a company is under no obligation to pay any, see also AG Guest, Guest on the Law of Assignment (London, 2012) 6ff, see further also the discussion in s. 1.5.6 below. As already mentioned, the issue is particularly important in floating charges when future inventory and receivables are included, and in securitisations or in receivable financing when respectively whole portfolios of loans, including the interest payable thereon and the prospective repayment of principal, and whole portfolios of receivables may be transferred, the latter out of existing business but not necessarily yet out of all existing contracts, see also the discussion in Vol 3, ch 1, ss 2.2, 2.3 and 2.5, and the High Court of Australia in Norman v Federal Commissioner of Taxation (1963) 109 CLR 9 and for the nature of the floating charge in England, Vol 3, ch 1, s 1.5.2. There remains in England—not in the US under Art 9 UCC—the issue as to what the floating charge is before an event of default or crystallisation occurs. This may also have to do with the future nature of the assets covered. It may then be assumed that there can be no (equitable) interest before crystallisation, manifested also by the fact that the company may still dispose of the assets and cash the receivables free of the charge until default. It would be merely an agreement to grant a charge in the future. In Evans v Rival Granite Quarries Ltd [1910] 2 KB 979, 999 an immediate proprietary equitable interest was accepted, however, subject to a licence to dispose of the property free and clear of the charge in the ordinary course of business. It expands the notion of what is a transferable future asset in this context. A (resulting) trust is here often assumed, see R Goode, Commercial Law, 4th edn (London, 2010) 724; see also Guest at 234ff.
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also emerge in systems that do not require delivery for ownership transfer of physical movables assets, such as those of France, Italy and England, where indeed at law the transfer of future assets cannot merely be constructive (non-physical) either. Again, it is a concern with physical realities that sits uneasily with a modern more abstract right- and obligations-based system of (proprietary) law including disposition powers or notions of control 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. Transfers of future assets may limit the prospective recovery rights of other creditors on the transferor too drastically. There may be transparency concerns as well. These are important policy issues but should not enter the discussion of the structure of the proprietary rights themselves. At the practical level, a valid transfer of future assets would require some kind of advance transfer facility or a constructive delivery concept which raises immediately the question whether an intervening bankruptcy of the seller might interfere with the validity of the transfer, thus whether the future asset could still be considered retroactively transferred when the asset emerges in the debtor’s possession after its bankruptcy. We shall see that in security transfers, especially in modern non-possessory floating charges to back up and secure some indebtedness (where accepted in law, which, as already noted, is not yet the case in many civil law countries), even now the notion of specificity and identification is relaxed so that future assets may be validly included, especially if they are assets in transformation in the production process or replacement assets and creditors so secured will claim their original rank in a bankruptcy. As such, these assets are then deemed to be sufficiently existing in a legal sense, identified, and included even if not yet in being at the time of an intervening bankruptcy. It means that the lien or charge is allowed validly (and automatically) to shift into these replacements whenever they appear or whatever they are, even after the bankruptcy of the debtor. That was in common law countries an early achievement in equity in its tracing and shifting facility, by no means generally followed in civil law countries, where this type of facility (except in Germany in respect of replacement assets) is often thought to need statutory intervention (as now in France, see Volume 3, chapter 1, section 1.3.1), exactly because remaining physical notions of identification and disposition rights do not allow this development under existing general principles of the civil law proprietary system while there may also be public order constraints already mentioned. As already noted also, closely related is here the possibility of a transfer of assets in bulk, such as libraries, inventories, portfolios of receivables and the like. It also applies to businesses if transferred separately from the company that owns them (when a share transfer would be sufficient). In these cases also, the true question is whether these assets can be transferred, or better whether they are sufficiently specific to have (in a civil law sense) any owner, possessor or user rights in them transferred in bulk, and how. Must there still be individual delivery? An alternative is to attach at least lists with all individual items, still a clumsy way of proceeding. In the case of (existing) assets in bulk, the more precise question is whether they can be legally transferred (into ownership or a security interest) in one legal act, for example (as in Germany) with reference
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to a certain (enclosed) place. The real issue is whether ownership in bulk can exist at all. If so, there must be some way of transferring it as such. Again this issue acquires special importance in floating charges where whole classes of present and future (replacement) assets may be included. But where it comes to assignments of receivables or other monetary claims in bulk, it is also an issue in securitisations and receivable financing. For their present status, these problems will be discussed in greater detail in sections 1.4.3 and 1.5.3 below. Suffice it to say for the moment that domestic laws may take different attitudes in the definition of chattels and intangibles and in the meaning they attach to the specificity and identification requirement, therefore to physical elements, to allow proprietary interests in them to create, operate, and be transferred, especially when the assets are not physical, future, or exist in bulk. The divide is here not necessarily between common and civil law, although common law again tends to be more practical and has in equity the better facilities, while even within one legal system the requirements may be different for ownership and more limited proprietary rights such as security interests. They may also be different depending on the type of underlying asset, different, for example, for chattels and claims, as in Germany, see section 1.5.3. They may not even always be clear.32 Particularly in respect of 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.33 It is doubtful whether a more favourable law can be chosen by the parties in these proprietary issues.
32 Thus in the most recent codified system, which in Europe is the Dutch one under its Civil Code of 1992, receivables must be identifiable in order to be transferred, but even here the exact requirements are sometimes unclear and are in any event not statutorily defined. In respect of claims, identification is foremost done with respect to an identified debtor, but this leaves a problem with respect to the proprietary status of future claims, see eg SCJJ Kortmann and NED Faber, ‘Bepaaldheidsvereiste by cessie en verpanding’ [Specificity requirement for assignments and security transfers of claims] (1998) Weekblad voor Privaatrecht, Notariaat en Registratie 6324, and ‘Een streng bepaaldheidsvereiste: geldend recht of “Wishful Thinking”’ [a strict specificity requirement: positive law or ‘wishful thinking’] (1999) Weekblad voor Privaatrecht, Notariaat en Registratie 6374. In this view, a sufficiently described claim on a certain debtor (even if only future) may be the object of ownership and may be transferred as such (through an assignment), but for secured interests to vest in it, the contract (or other legal relationship) out of which the claim arises must also be in existence. This may be more restrictive, see further Vol 3, ch 1, s 1.2.1. The main point to make here is that there is doubt, which the new codification only increased through a lack of proper analysis. French law has similar requirements for both the transfer and creation of security interests in receivables, as we shall see, but German and English law are more relaxed, especially important when in floating charges replacement goods are deemed included with a rank as of the original date of the security, see Vol 3, ch 1, ss 1.3, 1.4, 1.5 and 1.6. 33 In the case of assignments, new Dutch law introduced a notification requirement for their validity. In practice, this ruled out any bulk assignment, but an exception was made for the creation of a security interest in receivables for which there was a registration requirement instead, although the collection right and the collections did not even then accrue to the security assignee before the notification. Through a 2004 amendment assignments without notification are now generally valid if registered in a similar way as security assignments of claims, see Vol 3, ch 1, s 1.2.1. In the meantime, in countries like Belgium and in financing arrangements between professionals in countries like France, the requirement of notification for the validity of assignments was also deleted, exactly to make bulk assignments possible, see also Vol 3, 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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In section 1.1.1 above, it was already suggested that particularly in respect of the international flows of goods, which are now immense, larger than the GDP of the largest countries, this issue of individualisation of underlying assets may need reconsideration. The use of the word ‘flows’ itself suggests here that assets are considered in their movement and transformation rather than their final individualised resting state, which for most goods means consumption or their being thrown away after a short period of use. This ‘resting state’ was traditionally the starting point and may well remain the approach of national property or consumer law. It was often said in civil law doctrine in this connection that the law of obligations was the law of movement and the law of property was the law of resting. However, at least internationally, it is the flows that count, and movement or liquidity is the essence of these flows which constitutes their value and also suggest professional dealings. It means that legally in transnationalisation, the issue of proprietary rights responds to a very different environment, the legal result being very different also. Or to put it differently, the value is in these flows as flows and signifies adding more on a large scale, now normally in international supply and distribution chains. It was already said that when these assets come to rest and are individualised as finished products, they soon lose their value. There is no greater value destruction than buying new cars or in unpacking the presents under the Christmas tree. All is second hand thereafter and there is little value left. It is submitted that legally that affects their asset status which in this book was connected to economic value. For the assets in the flows as flows and their legal treatment, we must borrow more fundamentally the concept of classes of goods in transformation and movement, of which domestically the floating charge to the extent it could be incorporated in the relevant legal systems was the precursor in the area of asset-backed funding, Equity was the legal vehicle in common law countries, which at law could not make this shift and deal with these newer needs either. Again, reasonable description in the contract becomes the key here in terms of identification. There is no objective criterion left for what constitutes an asset, except economic value in the marketplace, and replacement assets either as goods, receivables, proceeds/cash balances may be included in the same title, which will be good against all who know of these arrangements or as professionals should know of them when acquiring them and thus have (putative) knowledge. It also allows for an asset’s composite nature; many are now an amalgam of goods, services, information and technology. It has already been said repeatedly that properly considered these flows are free of any proprietary rights when acquired for value by outsiders, notably buyers in the ordinary course of business or consumers, usually of commoditised products. These then are key concepts of property law in the modern lex mercatoria, which allows a large degree of party autonomy to structure and define these rights in an open system that can be maintained, however, only against certain classes of third parties, notably the professional insiders. The in rem right is then more limited but has not disappeared. The practical issue and essence of modern property law thus becomes how these rights are to be legally structured, created, operated, transferred, and protected as compared to what we now have in civil and common law. Again, in a market economy, liquidity, transactional and payment finality, and ultimately risk management become the focus of this type of property law which is meant to facilitate them.
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The public interest may further refine this newer approach, notably in the protection of the ordinary flows for consumers, when as far as these transnationalised flows are concerned, public order and public policy requirements may themselves be transnationalised, an issue further considered in section 1.3.10 below. To the extent these flows come demonstrably onshore in individual countries, local policies and values will remain relevant but only for conduct and effect in respect of these assets and the rights therein or thereto in the countries concerned, issues earlier discussed in Volume 1, chapter 1, section 2.2.6. However, it will be argued later also that the ever more virtual nature of many of these flows may make them increasingly difficult to locate, so that relevant local policies become also more difficult to identify. In this respect, we should also understand and it is repeated that in law all is about rights and obligations and there is nothing physical at all, nothing, in particular, territorial about them either, the effect of which may be shown also when risk in these flows is moved elsewhere through derivatives. Thus domestic policies and their effectiveness weaken upon globalisation with the creation of international supply and distribution networks. Hence the importance of the articulation of the public interest in international transactions at the transnational level. Those are the transnational minimum standards. It was submitted all along that it is a key issue that arises in the daily practice of the law in commercial and financial structuring and in the pursuit of the rights so created and is truly the greater challenge in the transnationalisation process of commercial and financial law. It comes to the fore in particular in dispute resolution, in the ordinary courts more particularly in bankruptcy cases, where rights in or to foreign financial products must be fitted in, their rank established, and the rights of buyers in the o rdinary course of business in the transnational flows determined. Local courts may be illequipped for this, but in particular in insolvency, have to deal with these issues. In international a rbitration it goes to the powers of international arbitrators, the law they find as a pplicable and their reasoning as we shall see, their awards impacting also on the domestic scene in terms of recognition and enforcement under the New York Convention potentially even in bankruptcy.34
1.1.8 Importance of the Law of Chattels and Intangibles in Civil and Common Law. Its Development alongside Land Law As mentioned before, we are concerned 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. The issue is in particular the promotion of risk management, liquidity, and transactional and payment finality in the international flow of goods, services, payments, information and technology. Introducing here a measure of party autonomy in the creation of proprietary rights means a dynamic movable property law. 34 See for this discussion Vol 1, ch 2, ss 2.3.3 and 2.4.3. An arbitral award may thus reinforce these foreign proprietary rights and facilitate their domestic recognition even in a bankruptcy.
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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 or land law and its development. That is also reflected in legal education. As long as real estate was the traditional store of value, this was understandable and it is true that well into the twentieth century the total value of chattels was modest. In a cash society, receivables were not major assets either. Deposits in banks and loans were small except for businesses. Documents of title and negotiable instruments (except for bank notes) were mostly commercial law specialties, while investment securities were few in number and not widely held. However, with the enormous increase of wealth in private hands and with the development of the consumer society and credit in which large corporations as well as individuals became active, the total value of tangible movable assets and intangible claims, especially receivables, corporate and consumer loans and deposits, and of investment securities, 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 importance of the law of property concerning chattels and intangibles has undergone a sea shift, including the law of modern financial instruments or legal structures based on these movable assets. Investment securities, for example, are now most important investment instruments, widely held. In modern countries, in business one need think further only of the non-possessory security interests such as floating charges in manufacturing equipment, inventory and receivables, purchase money protection through reservation of title of goods and hire-purchase, and of modern financing structures such as finance leases, repurchase agreements and factoring, which all take chattels or receivables (and the income, user and enjoyment rights in or to them) as their base. This is more particularly the subject of Volume 3, chapter 1. It was suggested that legally these assets must now be captured in their flows especially at the transnational level. All the same, the law of personal property still remains little studied in common law countries and is largely nineteenth-century in its thinking in civil law, also substantially neglected, a situation that requires urgent correction. In fact, it is undeniable that in a modern business environment land law is of relatively little interest, probably even less in international commerce and finance. From an international business law perspective, conflicts of laws do not habitually arise in connection with it either, as immovable assets are unlikely to have a great impact outside their own country unless it concerns the business of real estate development cross border. Succession apart, only where they are the subject of sales agreements under a foreign law or when they are used as security for foreign loans may 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 of land and cannot (in the common view) be varied by the parties, exactly because of the effect on third parties. It is what it is and that is usually the end of it for real estate. From a comparative law perspective, the feudal nature of real property in common law makes land law so different from the modern civil law in this area that
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comparing is hardly instructive either, but even between countries with fairly similar land law systems, like those of the common or civil law, comparative analysis is not greatly valuable beyond the general structure of property law. For chattels and intangibles that may now be quite different. Although often still considered to be covered by the lex situs also, there may be more flexibility in the applicable law for assets that habitually move between countries such as trucks, aircraft and ships, while for intangibles the situs is in any event much more difficult to establish. Indeed, the whole notion of situs could be challenged when we abandon a physical concept of movable property law. At least there may not be a fixed one, and if there is one it will not be for long. More importantly, these assets are at the core of businesses and are then likely to play a role also in international financings. Their status internationally is therefore more important to determine and comparative research into their legal status and nature more necessary. These issues will be dealt with at length in sections 1.8 and 1.9 below, for chattels and intangible claims respectively. It has already been said that we have to concern ourselves here in particular with the international flows as flows forcing the pace of the transnationalisation of the law concerning them. For these reasons, the law of real property is in this book referred to only where it is used as a model for the development of the law of property concerning chattels and intangibles. In common law, the trust concept was, for example, borrowed from land law and then also applied to chattels and intangible assets. So are the future or conditional and temporary ownership interests, which, as we shall see, appear as equitable interests in chattels. It may be repeated that the law of chattels and also of intangibles was in common law long neglected and mainly developed as part of the commercial law only, more particularly in connection with sales of goods and the transfer of ownership or the creation of security interests in them. In common law countries, this commercial law is in itself, however, no longer a different type of law, as we have seen in Volume 1, chapter 1, section 1.1.3. Yet it has probably retained a more separate status than in civil law. It also covers a broader field, including title and possessory (bailment) notions and related proprietary structures. As noted before, that is uncommon in civil law. The law of tangible assets remains in common law, however, determined by notions mainly of physical possession (seisin) as we shall see. For intangibles and their transfer, the development is (therefore) largely in equity, even if in modern times especially in the US the distinctions in this respect have become ever more blurred. Although land law was at one time also feudal on the European Continent, the law of chattels and intangibles was not affected. Like the situation in modern common law, their legal regime was, however, also much determined by physical possession (saisine or gewere) as we shall see. However, the feudal features of land law and the notion of saisine or gewere for chattels were abandoned early and modern civil law now largely maintains a unitary system of property law, which covers all types of assets along the Roman law model of proprietary rights and their protection as further developed on the Continent of Europe after the reception of Roman law from the twelfth century onwards, later with some additional rules per type of asset, especially intangibles as we have seen also. It became the system of the modern civil law codifications. New elements for land were the modern land registration facilities of the nineteenth and twentieth century, which made for a number of important changes in the area
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of transfer of ownership and the creation of other rights, especially (non-possessory) mortgages in immovables. For personal property, on the other hand, there followed increasing nineteenth-century emphasis on identification and specificity impeding transfers in bulk and especially transfers of future assets as we have seen, including future cash flows. For chattels (only), there developed the protection of bona fide purchasers, while the modern law of assignments was largely a new addition for intangibles, but, as we have seen already in section 1.1.5 above, it remained substantially underdeveloped. In common law, the situation is still very different. It has already been said that there are different proprietary regimes for each type of assets, different therefore for land, chattels and intangibles, while intangible claims may be further divided for this purpose into contractual, tort and restitution claims. As just mentioned, the basic land law notions still derive in common law from the feudal system with its particular estates in land, although in England, the feudal system itself had already been abolished in 1660, earlier therefore than in most other parts of Europe. The feudal concepts continued in land law as a historical accident and land law is as a consequence still based in England on the notion that the Crown is owner of all land so that at the theoretical level, there is still no private ownership in land. That is now merely a fiction; there is only a residual effect when there are no heirs. In such cases, the Crown takes the land by so-called escheat rather than as ultimate heir and successor. Yet in a technical sense, private ownership in land still does not officially exist in England, only a system of tenancies or estates in land. As mentioned, much earlier the notion of seisin or physical possession had indeed allowed private rights in land to develop based on its occupation and use or tenancy. Subsequently, these rights acquired a measure of independence and ultimately became as good as ownership rights that could be transferred and inherited. Thus private interests in land acquired a kind of entitlement status, but the ensuing system of tenure or various estates in land (such as the fee simple, the life interest, the estate for years or leasehold, the mortgage, and the easement) and the conditional or future interests, such as the reversionary interest and remainder (either vested or contingent depending on the conditions attached and the vesting of the interests thereunder) prevented a more conceptual ownership concept from developing and led to an incidental approach even with respect to the various interests that can now be created in land. Again, technically, outright private property of land does not exist in common law countries. This system was as such not suitable or necessary for chattels and intangible assets. Here again the notion of seisin or physical possession became the starting point but allowed a proper ownership notion to develop in chattels, although ownership remained in many respects the weaker right as we shall see.35 In fact, the notion of seisin 35 The notion of seisin or physical possession in a common law sense was thus decisive for the further development of land law into forms of private ownership entitlements (tenure or estates) and for the notion of the proprietary right of possession or bailment in chattels. It was itself Germanic or Saxon in origin (gewere); the notion found its expression in Art 3.125 of the so-called Saxon Mirror (Sachsenspiegel), a collection of Saxon laws by Eike von Repgau dating from the thirteenth century. The concept was older and apparently came to England via the Low Countries in the sixth and seventh centuries, when the earlier Roman law completely disappeared; see also FW Maitland, ‘The Seisin of Chattels’
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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 have seen, and by floating charges and notions of tracing. For intangibles, there were no such basic concepts at all and the common law concerning these assets remained as a consequence even more underdeveloped and subsequently mainly evolved in equity. In England, the feudal land law concepts were updated by statute in 1925 when all future interests in land became equitable and therefore subject to the protection of the bona fide purchaser of the legal interests, just as they are for chattels. The old law still applies under State law in the US (except in Louisiana). It is of some amusement that ancient European feudal concepts of land law, not even existing any longer in England, may still be and are sometimes litigated in the US, where there is technically also no ownership of real estate but only estates in land. Statutory rules concerning the sale of chattels or goods, including the transfer of ownership in them in a statutory manner, started to appear in England through the Sale of Goods Act 1893 (updated in 1979). In the US, similarly, some aspects of the proprietary law concerning chattels derive from statute, especially in the sale of goods, now through Article 2 UCC, accepted (with some minor modifications) in all states of the US. It is a further indication of the absence of any unitary law of property in these matters.
1.1.9 The Traditional Physical and Anthropomorphic Approach to Property Rights. Modern Perceptions Whatever the progress in the modern law of property may have been, it has already been demonstrated several times that everywhere this law retained important physical and anthropomorphic features, depending therefore on features human beings can see and physically handle. It was confirmed in the nineteenth century developments in the codification ethos on the European Continent and remains the situation today at many a national level. This is not now a good perspective as we see over and again (cf especially section 1.2.3 below) and has also retarded the development of a more modern property law especially in professional dealings, but it may not be unnatural in the consumer sphere.36 However, it was submitted that modern law is (1885) 1 LQR 324, and ‘The Mystery of the Seisin’ (1886) 2 LQR 481. It also prevailed in France (saisine), even for chattels, at least until the later reintroduction of Roman ideas through the reception of Roman law. 36 It was supported by the law of property’s origin in an agricultural society where land was all and as far as chattels were concerned, the interest went to cattle, a few beasts of burden, and some tools. Money was largely absent in such a society and much interchange was in the form of barter. Such a society thinks in a physical manner and sees all property in relationship to owners (even if tribal). Thus the emphasis is on what is mine, not primarily on how I exert my rights in respect of the property vis-à-vis others. It easily leads to an absolute notion of
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about rights and obligations only, not primarily about anything physical or personal. It means that in property law, the nature of the assets in respect of which these rights and obligations arise are not of prime importance, although they sometimes still affect the type of rights or obligations that emerge. So we commonly have no proprietary leases or servitudes in other than real estate. Although physical possession is normally at the heart of these older perceptions, it should be realised that even then it can never be a continuous requirement as nobody can travel about with all their belongings to retain their property rights where still considered depending on it. Physicality and individualisation of the asset is a primitive concept in property law. Similarly, in the law of contract, we have already seen in the previous chapter that the will or state of mind of contracting parties is also not or no longer directly relevant for the rights and obligations that emerge, at least not in professional dealings. In modern contract theory, it is all a matter of reliance and risk acceptance as discussed in chapter 1, section 1.1.5 above. Anthropomorphic notions are thus hardly helpful, either in contract or modern property law, and certainly not in international business, but these concepts remain nevertheless very strong in most people’s minds, legal scholars being no exception. Although it may be observed in this connection that the notion of intent was never to the same extent dominant in the common law of contract as it was in civil law, it was shown on the other hand that the physical anthropomorphic flavour of property law is still particularly clear in common law countries, notably at law in bailments, for our purposes thus particularly in the law of chattels, where physical possession or bailment remains the dominant title. Our continuing difficulties with bulk transfers, assignments of claims, and the transfer of future assets or classes of assets that may be subject to transformation, and with an adequate description being sufficient in terms of assets and structure, are a particular reminder of this more parochial state of affairs, which has not been avoided in modern civil law either. Although in civil law the notion of possession is not truly physical, as we shall see and was already mentioned, and possession is, upon proper analysis, not itself a proprietary right but rather demonstrates a way these rights are expressed and protected, in civil law the consequences of a more physical approach are nevertheless still particularly apparent in: (a) a strict specificity and identification requirement for assets to be capable of being owned and transferred, which impedes notably bulk transfer (as for libraries and businesses) or bulk assignment (eg of receivable portfolios); (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 only obtained in the future; (c) the concept of delivery as mainly a physical act (meaning the transfer of physical possession as a formal requirement for transfer of ownership), again with the ensuing difficulties in the transfer of future assets and intangibles or assets in bulk (even though civil law allowed legal or constructive notions of
wnership. Again in such an environment, there is little room for monetary or other claims as economic valuables o or of property as a more abstract concept such as ownership of future assets or entitlements.
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possession and delivery to develop, they remain in this connection a constant source of confusion and debate); (d) the problems connected with the proprietary status 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. Again, this is the result of anthropomorphic thinking, here manifested also in the civil law of property. Where there may be more ground for the consideration of the physical aspect is: (a) in the prima facie protection of physical possession as a matter of social peace in terms of respect for the status quo, which protection can only be temporary, however, until better rights are established and is then merely in tort, and (b) in the protection of the bona fide purchaser or perhaps even the purchaser in the ordinary course of business, although it may be considered that forms of constructive possession may be just as good as long as it is clear that the bona fide purchaser or purchaser in the ordinary course of business has sufficient disposition rights and can exercise control. In common law countries, in equity in terms of future and temporary interests and beneficial ownership rights, the law of property, including the law relating to chattels and intangible assets, became on the other hand increasingly less physical or anthropomorphic as we have seen. As a consequence, it became more flexible, as reflected in the equitable proprietary rights, which are based on a proper description of the asset (class) rather than on its physicality. Protection of bona fides and now more in particular of the transferee in the ordinary course of business against such charges is here also not limited to physical possessors.37 The law of assignments was then also able to develop better (in equity). Transfers of future assets and the automatic shift of title to the transferee as soon as the assets emerged in the (constructive) possession of the transferor (regardless of his bankruptcy) became possible as well. The automatic shooting-through of title in assets bought by an agent acting in its own name to the principal upon disclosure of the agency is another facet of a less physical and anthropomorphic approach to property in modern common law systems (in equity). As ‘equity’ was a facility that crucially passed it by, civil law is especially deficient in these areas. Yet in other areas, such as in the notions of seisin and strong protection of physical possession at law (even at the expense of the development of a proper notion of ownership in chattels), and in the absence of the protection of bona fide purchasers as a general concept at law (unlike in equity), the common law of property remains at law at least as atavistic as civil law, only balanced by its advance in equity. This is again connected with anthropomorphic notions that are therefore still pretty universal.
37 It has already been noted several times that in equity in common law jurisdictions, this protection is indeed not necessarily based on physical possession (see further ss 1.2.2 and 1.4.8–1.4.9 below), but follows rather from the very structure of the equitable rights, which are only protected if the successor of the legal interest had no prior knowledge of the equitable interests.
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Modern companies as major (unphysical) legal actors and dealings among p rofessionals as legal entities, especially in modern financial transactions and products, underline the need for and possibility of a more practical (that means here a more abstract) legal approach, even if clothed in a more intellectual (but also more radical) model that is not physical any longer but presents a framework of pure rights (and obligations), meant to help and support, and which finds in this manner ways to do so. We may revert here to the discussion in section 1.1.7 above and the identification therein of the international flows suggesting a new approach to assets and asset classes, presenting a particular challenge for a more modern property law system. This will be explored further, in sections 1.3.8, 1.3.10 and 1.10 below, first as a way of approximation between common and civil law and subsequently at the level of transnationalisation of the law applicable to movable assets.
1.1.10 The Need for New Financial Structures and their Effect on Modern Property Law The requirements of modern finance, especially in asset-backed and future commercial/cash flow-backed financing, are now making further demands on the system of property rights concerning movable assets, especially in civil law (see also Volume 1, chapter 1, section 3.2.2). Ultimately they may be articulated more particularly in the modern transnational law for international business. Even now, structures long developed in common law through equity can no longer be dispensed with on the European Continent, although this may still remain a particular challenge, especially after Brexit when London financial business is attracted to the Continent. It is the thesis of this book that there is a particular need in professional dealings of a financial nature at the international level, in particular as a matter of better risk management, liquidity, and transactional and payment finality. Legal transnationalisation in the international flows was submitted to be the answer. The dealings in these flows then become the centre of modern commercial law or the new lex mercatoria, which is perceived here as an expression of a new transnational legal order, therefore separate from the traditional domestic laws in this regard. This process of transnationalisation was substantially the subject of the discussion in Volume 1, chapter 1. This new transnational law functions as a particularly potent conduit for these newer insights and proprietary rights and structures, which chiefly derive from practical need, expressed increasingly in transnational custom and practices, and supported by general principles in the international marketplace, of which the Eurobond and its m arket was the early precursor and the swap market the more recent manifestation. As such, it is submitted, their status is to be respected also in domestic laws, ultimately even in domestic bankruptcies as a matter of the application of the modern lex mercatoria and its hierarchy of norms in international professional dealings unless still eclipsed by domestic public policy or public order considerations, which in countries that wish to enjoy the benefits of globalisation must lead to a trade-off and a narrowing concept of the national public order in particular as a bar to the recognition and operation of practices considered internationally appropriate and necessary.
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See for international finance arbitrations further the discussion in Volume 1, chapter 2, section 2.3.3. Domestic considerations of anti-competitive behaviour, market abuse, fraud and corruption would remain particular bars but such practices would at the same time most likely also be condemned in the transnational legal order itself, therefore as part of its own public order requirements or transnational minimum standards in the international marketplace. Thus property law becomes an important risk management tool in the professional sphere and moves also to the heart of financial structuring, especially in asset-backed financing of all kinds in these international flows, including those involving future cashflows, all upon an adequate description of the underlying asset or asset stream in the contract and of the type of user, income and enjoyment right therein. As we have seen, at the transnational level it suggests a large degree of party autonomy and requires an open system of proprietary rights subject to a strong protection of the ordinary flows of goods, services and money, therefore of bona fide purchasers and payees and of transactional and payment finality in the ordinary course of business, especially in respect of commoditised products including receivables. Asset liquidity is then promoted at the same time. This was earlier perceived as being the essence of the modern financial legal structuring practice, particularly in relation to asset-backed funding, as further discussed in respect of several modern financial instruments in Volume 3, chapter 1. Again, it is inspired substantially by the law of equity in common law terms. Such a dynamic law of movable property is, it was submitted, at the heart of new developments and of the transnationalisation of private law in the professional sphere, in which a new balance is being found between party autonomy, the rights of various classes of creditors, and the protection of the commercial flows in the creation and operation of these structures: see for a summary also Volume 1, chapter 1, section 1.1.6. Because of these modern demands, pressures and trends everywhere, the modern law of property may start lacking simplicity in its intellectual base. This discussion began in section 1.1.5 above in connection with legal asset status. This may be the consequence of abandoning the basic notions of physicality to the extent not already redressed by equity in common law countries, but it is particularly intriguing in the civil law, which was always more intellectual and unitary. At this juncture, it may no longer be capable of retaining a comprehensive approach, at least not in finance among professionals, ultimately not even domestically. It has already been noted in this connection that, while on the one hand asset classes are less confined and increasingly depend on the contractual description (monetary claims in particular increasingly needing inclusion), it is on the other hand their use and the particular (financial) facility in which they operate that may start making an important legal difference. It means more in particular that in professional dealings property law is becoming (financial) product specific in the manner as determined by the parties. To maintain the semblance of a unitary approach per country may even now create considerable problems, particularly in civil law countries as shown by the 1992 Dutch Civil Code, which is particularly weak in its approach to security interests (notably floating charges), newer interests such as conditional and temporary ownership rights resulting in finance in so-called finance sales (including finance leases and repos), bulk transfers, and assignments and substitution possibilities involving future assets and
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in agency notions. The notion of segregation backed up by constructive trusts is also missing. The same is true in the new Civil Code of Brazil of 2002. It is surprising how little the drafters of either Code were aware of more modern needs and trends in this respect, particularly in finance, and the drafters of the DCFR in Europe know no better. It shows the severe decline in civil law academic thinking in recent generations, which has also to do with basic unfamiliarity with, and therefore lack of confidence in, commerce and finance and more generally in the marketplace, especially as it operates at the transnational level. This is related to the uncertainty as to how the public interest can be expressed at that level. In the US, on the other hand, the UCC never aspired to a unitary approach and maintains quite different proprietary frameworks for sales, equipment leases, payments, investment securities and secured transactions, as we shall see, and can live with this. Again it is in the common law tradition, which in equity is more pragmatic and in any event less concerned with system and generalities, even in legislation. In this situation, in the US under the UCC the practical response has been simply to ignore property law as a general structure and to reach for ad hoc solutions. This is clear from Article 2A on equipment leases, Article 4A on payment transfers, Article 8 on investment security entitlements and Article 9 on secured transactions as further discussed in Volume 3.38 It is particularly clear in section 9-204 UCC where future cash flows are accepted as security for present and future debt through a simple description of these flows. It may mean that also in respect of intangible assets, including investment securities, information or data, and technology, different approaches may be favoured in this connection, ultimately of special relevance in the case of bankruptcy and the protection of these rights when given by a bankrupt originator or when controlled by a bankrupt estate. Are these rights purely contractual or something more? It would seem that modern property law as we know it in respect of chattels and intangible assets is on the one hand up against the haphazard way in which, especially in common law countries, it was put together, more latterly also in ‘equity’ and on the other hand against the narrow physical and anthropomorphic notions of ownership remaining in civil law and no less ‘at law’ in common law, although there at least it is free of all-pervading system thinking. It appears difficult to cut through these different approaches by devising a coherent new intellectual framework or model.39 In fact, one may hardly hope that in its details modern property law can retain intellectual clarity and rigour for the moment, although clearly it can be more properly understood and better explained. Some lines can be discovered; at least this is very much the purpose of the present discussion, which is inspired by the equity approach but may move well beyond it. Because of a lack of newer thinking over the last 50 years, the general or formal law of property has not progressed a great deal in either common or civil law, although the former was always ahead in the context of the promotion of business. There hangs a veil of intellectual impotence and practical foreboding over proprietary law in both the 38 cf also JH Sommer, ‘A Law of Financial Accounts: Modern Payment and Securities Transfer Law’ (1998) 53 The Business Lawyer 1181. 39 Reference is also made here to the literature cited in ss 1.1.5 above and 1.3.9 and 1.3.10 below, which has shown little tangible result in either the common or civil law of property.
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common and civil law, especially in respect of movable property, even if more so in civil law. This may be a contributory reason why property law is now often ignored at the academic level and few students show any mastery in the subject, but it is an aberration. Even if there are ups and downs in the modern international financial industry, this industry is now so crucial for all, that it is bound to expand further and will continue to need and find new ways which the law will have to support, proprietarily especially in ever newer forms of asset-backed funding, unless public order is vitally offended. It has already been said that it has become a question of proper risk management, transactional and payment finality and asset liquidity, which is legally handicapped, especially in civil law, for no clear reasons except systemic considerations still largely based on atavistic physical notions of property of medieval origin and an improper understanding of party autonomy and its reach in the law of property concerning movable assets including claims. Greater flexibility and imagination in the further development of proprietary rights will be necessary; this is pursued in section 1.10 below and for international finance especially in Volume 3, chapter 1, in which connection it was posited already that the common law approach in equity, with its larger scope for party autonomy in this area leading to a de facto open system of proprietary rights subject to a strong protection of the bona fide purchaser and the ordinary course of business or the commercial and financial flows, is likely to show greater promise and a better way forward. This was discussed and summarised earlier in Volume 1, chapter 1, section 1.1.7 as being at the heart of a dynamic modern lex mercatoria in property law, modern contract theory serving a similar purpose in modern transnational contract law, see also chapter 1, section 1.1.5 above. Thus, a more normative approach would appear necessary also in property law in order to facilitate its further development in response to modern needs especially in international finance.40 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 underlying assets and the types of these assets themselves, which to a large extent are immaterial and have become a distraction.41 As just mentioned, particular illustrations of this trend may
40 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 perhaps also makes it easier to understand how ethical, social and efficiency considerations enter into the development of modern property law, illustrating no less than in the law of obligations its in essence dynamic nature, although in property law these dynamics are not necessarily the same as in the law of obligations. 41 That is not to say that the type of asset should fully lose its importance, even physicality may still have some impact, see the discussion in s 1.1.9 above. The nature of assets remains important, eg in floating charges in respect of equipment, inventory and receivables. It also remains important to the extent assets are meant to trade (or are commoditised) when purchaser protection may be normal, even in respect of known charges in the asset or to the extent they are meant to serve as collateral, as receivables now normally do, which again would allow assignees to ignore charges or transfer restrictions in them. It was noted at n 17 above, that some proprietary rights such as easements and leases (where proprietary) are usually reserved for real estate. 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 approach, should be protected regardless of the type of asset, be they
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also be found in the US in the creation of investment security entitlements in Article 8 UCC (see section 8-503 and the Official Comment) and equipment lease interests of lessor and lessee in Article 2A UCC (see sections 2A-301 and 307). It was said in Volume 1, chapter 1, section 1.1.2 that in not responding properly, civil law is marginalising itself in international finance because it leaves too much legal risk on the table. To repeat, one essential feature in terms of risk management is the growing impact of party autonomy on property law and its indirect redistributive effect. It has already been mentioned several times before and concerns the power of parties to create new proprietary rights. Alternatively, it may also concern the right to choose the law applicable to the proprietary aspects of their transactions. In recent times, this latter possibility has become unexpectedly apparent in private international law where the transfer regime of assignments and the operation of book-entry entitlements system for modern investment securities holdings is now often left to a choice of a domestic law by the parties. See also the interpretation of Article 14 of the 2008 EU Regulation on the Law Applicable to Contractual Obligations and implementing case law (see also section 1.9.3 below)42 and Article 4.1 of the 2002 Hague Convention on the Law Applicable to Certain Rights in Respect of Securities held with an Intermediary (see also section 8-110(e) UCC, and section 3.2.2 below). In a similar vein, Article 5 of the 1985 Hague Convention on the Law Applicable to Trusts allows the settlor to determine the law applicable to the trust regardless of the situs of the trust assets: see section 1.6.6 below. The result is some flexibility although still limited to what is on offer under the domestic laws so chosen unless the choice of law by the parties may also be the lex mercatoria, or the latter may be deemed to apply in appropriate cases when parties have not made any choice at all. Upon a proper analysis, it could even be argued that a choice of a domestic law in international business transactions can only be made within the context of the hierarchy of norms of the modern lex mercatoria, very much the view of this book—see Volume 1, chapter 1, section 1.4.13. 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 nevertheless have seen first the evolution of the Eurobond and its markets and subsequently the development of the finance sales notion (with its conditional or temporary transfer) in leases, repos and in some forms of recourse receivable financing, even domestically (see Volume 3, chapter 1 for a discussion of these products). We may see it better in the reservation chattels or claims (and not only in equity). The same applies when this protection is extended to all transferees or assignees in the ordinary course of business, especially in commodity types of products and facilities. 42 Thus in Dutch case law, even in proprietary aspects of assignments, sometimes the law of the underlying claim and in other cases the law of the assignment have been upheld as applicable (following Art 12(1) and (2) of the 1980 Rome Convention on the Law Applicable to Contractual Obligations), now Art 14 of the 2008 EU Regulation on the same subject, rather than on the law of the debtor or that of the assignor. This allows for party autonomy and a contractual choice of law in proprietary matters. There are in the Netherlands three Supreme Court cases in this connection, the last two of which have elicited considerable international interest: see HR 17 April 1964 [1965] NJ 23; HR, 11 June 1993 [1993] NJ 776; and HR, 16 May 1997 [1997] RvdW 126, see further s 1.9.3 below.
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of title as sales price protection everywhere. Trust structures or constructive trusts also play an ever larger role as do in floating charges the notion of tracing and shifting liens in replacement goods allowing for the use of future cash flows to support debt upon the mere description of these flows. Party autonomy moves forward and the duality of ownership, split ownership rights, and rights in bulk or in future assets are all around us, upon a proper analysis also in civil law. But this development remains timid and is often still not sufficiently identified and put in context. Again, from the more academic and especially comparative law perspective, we are concerned here with the breakthrough of equitable proprietary rights into the civil law environment and the key protection of the commercial and financial flows against these ‘hidden’ interests as will be discussed more extensively below. Again, these proprietary rights are cut off at the level of their operation not at the level of their creation. It was submitted and will be further demonstrated in section 1.4 below that this development also culminates in a much better and stronger notion of transactional and payment finality at the transnational level, therefore in the international marketplace.
1.1.11 Comparative Law, Transnationalisation, and the DCFR It has already been said that immovable property is mostly not of great interest in comparative law or in international business. Even in the area of updating movable property law, comparative law analysis is also not dispositive, even if the common law approach to equitable proprietary rights was shown to be of considerable help and interest, (see further also section 1.3.7 below). This updating was identified earlier as a question of legally capturing especially the needs of a dynamic forward-moving process of financial innovation especially at the international level. If one leaves sharia financing to one side for the moment, social and cultural differences are not of great importance here, although they may still play a role in the way proprietary rights of whatever type are exercised, especially in respect of weaker parties, but this hardly figures in professional dealings and financings. A more dynamic approach to proprietary rights, which even in civil law ultimately forces open its traditionally closed system (or numerus clausus), moved by actual (or for professional insiders constructive) knowledge of prior interests before assets are acquired and subject to a better bona fide purchaser protection and ultimately the protection of the purchaser in the ordinary course of business or of the commercial and financial flows more generally, especially relevant for consumers, has on its face the disadvantage of greater instability. However, it must be asked whether the stability the old regime suggested, already seriously affected by the fracturing of the legal regime in international transactions under the old lex situs principle, is not dysfunctional and therefore the greater risk management problem. International commercial and cash flows must then be broken up and cannot be transferred and used as security as such. Only legal transnationalisation holds out the promise of better risk management, greater asset liquidity, and stronger transactional and payment finality. To repeat, any danger to transactional and payment finality or certainty in that sense is in this approach countered in particular by stronger bona fide purchaser protection
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or protection of the ordinary course of business. Another more sophisticated form of stability is thus created and has domestically long worked in common law countries. It was posited that this insight allows in fact for a quite simple extension of the traditional types of proprietary rights introducing a form of party autonomy as an effective risk management tool as is even now the underlying idea in equity. It would suggest that although a modern proprietary system may become more product specific and the result of market forces, it is not without some underlying coherent ideas in terms of: (a) an idea of what is legally an asset or asset class, based on economic value, for all practical purposes further defined by the parties, thus depending on mere description, there being no other intrinsic notion of what an asset needs to be in terms of physical existence and individualisation; the inclusion of intangibles, notably monetary claims; their increasing separation from the legal relationship out of which they arise as if they were promissory notes; (b) the expanded reach and protection of contractual user, enjoyment and income rights in respect of the underlying assets against (certain classes of) third p arties based on prior knowledge in those who acquire an interest in the underlying assets; (c) the resulting increasing role of party autonomy promoting better risk management through the creation of more diverse rights that originate in contract but may acquire proprietary protection in this manner against certain classes of third parties (professional insiders); (d) the shifting of these interests into replacement assets allowing for substitution of individual items and cover therefore an entire supply and distribution process with the original priority pro rata surviving into proceeds; (e) the protection of the ordinary course of business or the commercial and financial flows against any such interests, especially in respect of consumers; (f) the consequential enhancement of the risk management facilities in relation to these assets, asset liquidity, and transactional and payment finality; and (g) the reinforcement of the correction facilities under notions of public order, increasingly itself of a transnational nature in the form of transnational minimum standards, to guard in particular against market and other abuse. It has already been repeatedly suggested that in a responsive legal environment stability in a modern sense, therefore in a dynamic legal environment, whether in contract or movable property, must at least in professional dealings come principally from the participants themselves, from their discipline, and the way they commonly handle risk and structure their transactions. It must therefore come foremost from the structures they create, helped or propelled by modern technology, and from the manner in which they use them and want the ordinary course of business to proceed and be protected. It is subject to proper financial regulation or other public order requirements if necessary in respect of these products and their use and distribution, assuming that regulators have here the proper insights. In this area, there is no normativity beyond it. Private law ultimately is there to serve the interests of the participants unless there are clear public policy or public order reasons of a domestic or transnational nature why it should be otherwise and that may be less obvious in professional dealings. It was submitted that
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this support for industry practices and legitimate needs is in proprietary matters the prime focus of modern commercial and financial law, especially in an international context, therefore in the modern transnational law merchant or lex mercatoria. In Volume 1, chapter 1, 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 could be spotted in the development of the modern Eurobond and the trading, clearing and settlement practices in this market and the manner in which it is now held (as security entitlement in a dematerialised manner). Transnationalisation may also be seen in set-off and netting facilities under international swap and repo master agreements notwithstanding their references to local laws, especially the laws of England or New York, as a matter of selection by the parties, which choice is hardly decisive as the protection resulting from netting at the expense of common creditors is not at the free disposition of parties wishing to benefit. Thus, the transnational lex mercatoria takes over, especially in the largest markets, as the objective mandatory law corrected where appropriate by public policy considerations at that level. This theme will be further explored in section 1.10.2 below. Yet it is not unlikely that at the transnational level these proprietary rights will initially have a physical nature also, in which context notions of physical possession or control may even be reinforced. It may be the easier starting point. Ownership of d rilling rigs on the high sea, and similar installations offshore serve as an example. It may also be noted in the development of the Eurobond as a transnational negotiable instrument. Further sophistication may require a more intellectual elaboration, however, eg in more sophisticated security interests or finance sales (such as leases and repos) in which these assets are used, which could conceivably also come from treaty law.43 This has the great disadvantage, however, of territorial confinement to Contracting States and of bureaucratic compromise and rigidity for the future. Thus, true refinement continues to depend on financial structuring and academic thought and writing showing the future trends and better ways of legally progressing at the transnational level. What is needed is a development that suggests indeed flexibility in proprietary matters, again not unlike the one in equity in common law that came quite naturally out of daily practice and needs. In our example, it may indeed allow for nonpossessory security interests or finance leases in offshore rigs or repos in Eurobonds or similar assets to emerge, maintainable against all who know of them, can easily find out, or have been warned, especially other banks, financiers or suppliers. It may then also allow for future interests and trust-like structures, rights in future assets that shift into replacements, tracing notions etc. In the EU, in the financial sphere, some of this is supported by the Collateral Directive (see section 3.2.4 below) even if the implementation in domestic civil laws and their systems has created problems for obvious reasons. 43 The 2002 Hague Convention on the Law Applicable to Certain Rights in respect of Securities held with an Intermediary may spring to mind but it is only a conflict of laws Convention. The 2009 UNIDROIT Geneva Convention has a substantive law regime in this area, see s 3.2.4 below, but may be too intellectually complex and has so far not met with great acceptance.
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Again, in section 1.10 we will probe these newer insights and directions further. The DCFR in terms of its quality must be judged in particular on its approach to these issues. It will be discussed in section 1.11 and will be found to be seriously wanting, but it is first necessary to engage in a more profound comparative study in both civil and common law 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 situs has left (or is failing) us.
1.1.12 The Approach and Organisation of this Chapter In the following, we shall start with a description of the civil law of movable property as, ever since Roman times, it presents the more intellectual and in that sense the more conceptual and sophisticated legal approach. The manner in which this 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 contrasted with and critiqued through 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 readier contrast with the common law approach, which was always more practical but also more dispersed. It should be repeated that the civil law of property is in principle unitary and means to cover all types of assets under one proprietary regime, which is upon a proper analysis not truly physical but rights based notwithstanding many incidents to the contrary—which were discussed in section 1.1.9 above. It concentrates on abstract or purely legal notions of ownership, possession and holdership of the various recognised proprietary rights (largely ownership, usufructs, security interests and certain long leases and servitudes in land), therefore mostly regardless of the type of underlying assets (either immovable or movable property including claims, except for long leases and servitudes, which commonly only operate in land) which are the objects of these rights. However, especially in respect of intangible claims, as we have already seen, German and now also new Dutch law started to deviate and again became more physical, thus excluding them from the general proprietary regime. So does the DCFR as we shall see in section 1.11 below. This is seriously regressive. The common law system is, on the other hand, more down to earth, at least for movable property. It is for chattels still largely built around the physical holding, as we have seen, therefore around physical possession (bailment or seisin) of the asset but is incidental in the elaboration of the details. Traditionally, intangibles fit uneasily in common law also, exactly because they are not physical. They therefore tend to have their own proprietary regime in which contractual, tort and restitution claims may be further distinguished while their transfer is then considered part, respectively, of the law of contract, tort or restitution. This may look strange to civil lawyers. For land, there is a different common law proprietary regime altogether that remains in most
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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 extensively discussed here, but see also section 1.1.8 above. As a consequence, there is no unitary proprietary system in common law at all and the rules tend to be different depending on the type of asset. Whatever there is in common law, it is supplemented by an alternative system of proprietary rights in equity in the manner already indicated. Here, the common law shows the greater sophistication, in which it became largely product based. It 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. This is clear, for example, for trusts and conditional ownership rights in finance sales, 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 we have already seen in sections 1.1.5 and 1.1.10 and as will be discussed in greater detail below. In moving forward, it also leads to special requirements for information and data as well as technology protection. The blockchain or similar technology may introduce a whole new specter of facilities, conceivably of interest in the area of intangible movable assets registration and investment securities. The ultimate test is the status of these rights or facilities in bankruptcy. The first part of this chapter will deal mainly with these issues in both civil and common law. The law concerning these movable assets, including receivables, will subsequently be dealt with in the context of private international law and then finally in the context of the developing transnational law or the modern lex mercatoria. The second part of this 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 3, chapter 1 will deal more extensively with various assets when used in the context of financing or funding and will be largely product oriented. Volume 3, chapter 2 will deal with their regulation.
1.2 The Types of Proprietary Rights in Civil Law 1.2.1 The Difference between Proprietary and Obligatory Rights in Civil Law In proprietary matters, civil law in essence follows Roman law, although the conceptual framework deduced from it is more recent. 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 with a final chapter in the German Pandectist school (if for the moment one sidesteps its continuing relevance in South Africa and to a letter extent in Scotland). This occurred after an initial period in which, on the European Continent, property law often accepted feudal notions for land (as in England) and notions of seisin or gewere (physical holding) for persons in possession of chattels. The continental law in land and chattels was then much closer to what is still the English proprietary system for these assets, for chattels especially to the notion of bailment.
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But as already mentioned, 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, which also affected the property law concerning intangible assets, especially monetary claims. 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 reference has already been made in sections 1.1.2 and 1.1.6 above.44 This terminology also affected the common law much earlier as we have seen, 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) such as the rights derived from contract to receive an asset or payment or some other performance or damage claims derived from the commission of a tort, or unjust enrichment claims. They can only be enforced against the counterparty, grantor, transferor or debtor (that is their internal aspect), although, as we have also already seen in section 1.1.5 above, in terms of them being an asset of the creditor, and therefore an object of value, these rights may equally be defended against all the world and transferred in a manner to be respected by all. As such they are proprietary, at least for legal purposes. That is their external aspect. The difference between in re(m) or proprietary rights and ad rem or personal rights remains fundamental in civil law and has already been demonstrated above in the right of way. In civil law, this can be granted as a proprietary right by way of a servitude in the manner the objective law allows, but it can also be granted by contract as a purely contractual right in the manner the parties wish. In the first case, the beneficiary can maintain his 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 (but not separate from it) 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 44 The distinction is often traced to the Roman law distinction between real and personal actions (actiones in rem and in personam), but it is doubtful that this is correct as the situations giving rise to the actiones in rem are hardly the same as those that give rise to proprietary actions in modern civil law: see also Feenstra, n 24 above and G Pugliese, ‘Diritti Reali’ in Enciclopedia del Diritto (Milan, 1964) XIV, 755ff. The distinction was only articulated in the later ius commune, in the work of Hahn in Germany in the seventeenth century (see n 56 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 Roman Dutch Law) II, 1, 58 he used in the margin the terms ius in rem and ius in personam as the fundamental distinction and also incorporated among the real or proprietary rights the limited proprietary rights or iura in re aliena.
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who granted the right on the basis of his inability to protect the enjoyment if the right is not honoured by succeeding buyers of the land. It has a value, however, and can as such be transferred (assigned as a contractual right), perhaps even without the land it serves. However, even now, in more modern civil law as we have also seen, one may note on occasion some important, albeit incidental, approximation and it may be repeated that the beneficiary who has only a contractual right of way can maintain it increasingly against succeeding owners of the land if they knew of the existence of his 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 have seen in section 1.1.3 above, at the theoretical and practical level never used to be sufficient in itself to distinguish between proprietary and personal rights in civil law but may help to open up the system of proprietary rights to some extent in certain circumstances as here in respect of contractual rights of way. In common law countries, this is all easier.45 More importantly, in the law of equity, as noted, knowledge of beneficial rights in designated assets under specific legal structures, such as trusts, future interests and floating charges, when acquiring such assets subject to such charges or interests obliges the purchaser to respect such rights more broadly. There thus arises a middle category between proprietary and obligatory rights, as we have seen.46 We shall come across other instances below where, due to practical considerations, the civil law proprietary system allows other proprietary rights to appear. This has happened particularly in the area of security interests where new non-possessory securities were created in Germany in the nineteenth century through contract and case law, see for greater detail Volume 3, chapter 1, section 1.4. As noted before, it is also true in the area of conditional sales and proprietary rights used in financing (finance sales 45 In common law, because of its less conceptual approach, it may largely depend on the type of situation whether there are so-called covenants that run with the land (such as licences to pass), see in England, Tulk v Moxhay (1848) 2 Ph 774 and its aftermath, and those that run with goods (such as leases in aircraft): see Bristol Airport Plc v Powdrill [1990] Ch 774, and also S Gleeson, Personal Property Law (London, 1997) 21. It is clear that such covenants, when known to a buyer, cannot be ignored, certainly if characterised as equitable interests. In the case of land, they may still prevail even if unknown to a buyer, which is usually the case if they are part of a development plan and are meant, eg, to maintain the residential nature of the development, when there may be deemed to be constructive notice. They are especially enforced as such in the US. In chattels, covenants that restrict their resale are generally rejected for asset liquidity reasons, but they have long been upheld in France, see Cour de Cass, 20 April 1858, D.1.154 (1858). It requires that the original seller, buyer or a third party has a justified interest and that the restriction is limited in time, see Cour de Cass 24 January 1899, D.1.535 (1900); 23 March 1903, D.1.337 (1903); and 18 March 1903, D.1.126 (1905). The defendant need not have had knowledge of the original covenant before acquiring the asset, but in the case of chattels bona fides means that a subsequent transferee is considered full owner and need not return the asset. 46 Even now there are in civil law certain so-called qualitative obligations that may run with an asset and can be enforced against any subsequent owner and that is so regardless of the latter’s knowledge or any publication. They are especially rights of neighbours and tenants in real estate. In France, they are also referred to as rights propter rem. These may also concern an expanding class of rights that may be maintained against any owner of land or buildings and may again include rights of way, even if not expressed as a servitude but generally known or accepted; see more particularly ch 1, s 1.5.1 above on privity of contract.
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or reservation of title), where there still arise, however, at the theoretical level considerable problems in civil law and it often remains unclear how the duality in ownership, which thus follows, needs to be handled: see section 1.7.5 below. Where holdership is protected in a proprietary (possessory) manner, as it is in Germany, the underlying contractual claims (as in the case of custody, rental, etc) may also acquire a proprietary aspect for the holder, even if the latter merely holds pursuant to a contractual right (as in the case of a rental) rather than pursuant to a proprietary right (as in the case of a usufruct or pledge).
1.2.2 Nature and Structure of Proprietary Rights and their Special Manner of Protection in Civil Law. The Numerus Clausus Notion. Ownership, Possession and Detention In civil law, for all tangible assets, ordinary speech identifies the ownership right with the object of the right itself, therefore with the asset. Hence there are rights in things or (in civil law) iura in re, although, in a rights-based approach, this is strictly speaking an improper legal terminology. From a legal point of view, rights have a meaning only against other natural or legal persons, even if they are asserted in respect of certain assets as their object in terms of user, enjoyment or income right. Nevertheless, we normally speak of owning a piece of land or a car and not of having an ownership right in land or in a car, although it is legally more precise. This is clearer when we speak of life estates or, in civil law, usufructs or other more limited proprietary rights in tangible assets. Thus, we say that we have a usufruct or a security interest in a car, the real reason being probably that these are rights in the property of others (iura in re aliena). All the same, as we have seen, proprietary rights are often still thought to be rights in things as opposed to obligatory rights, which 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 has already been said that the key is not that proprietary rights represent rights in things (iura in re), whether or not tangible, but that they can be maintained against all the world (or in equity in common law countries at least against some classes of third parties). They therefore imply rights that must be respected other than by the person from whom the relevant assets were obtained and were therefore privy to the creation or transfer, therefore even without there being any special legal relationship with such parties in question (until someone violates the proprietary right). Again, to speak of rights in an asset is in this connection legally meaningless and confusing. We only have rights against others in respect of underlying assets as object of these rights. Ordinary speech is here better left to one side. 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 such as monetary claims. To repeat, all rights are intangible, whether or not they are proprietary; only the objects of rights
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may be tangible or intangible. We should not confuse the two. All related legal concepts are equally intangible, a question of legal ordering. Importantly, that applies also to the notion of possession which, at least in civil law terms, is not physical per se either and is often wholly constructive. In fact, land can barely be possessed in a physical manner. Holdership or detention is another form of constructive possession, where a holder holds an asset for someone else subject to an own (contractual) user right. In the meantime, most physical movable assets must be left alone for long periods, nobody can carry all of them around all the time. Control is here the better idea and is connected with the disposition right in the underlying asset. In fact, in civil law when properly understood, possession is, as we shall see, simply the appearance of ownership and the exercise of its indices whatever they may be, often a claim to proprietary user, income and enjoyment rights in the underlying assets, which includes the usufruct and security interests. As such control is merely a resultant or derivative notion, its meaning wholly depending on the situation and depends on what disposition right the possessor wants to exercise. Control is in fact inherent in it. In civil law countries that is probably the modern meaning of corpus, a term commonly used in this connection, see further the next section. Although for intangibles, such as receivables, the connection of the ownership right with the object and the issue of possession was always less obvious, this should not disturb us as it should now be clear that any physical connection is, at least in civil law if properly considered, legally largely irrelevant, although the intangible nature of the underlying asset seems to make the protection of the rights in or to them still more complicated in the minds of some as the indices or obvious manifestations of ownership or possession may be less clear in these assets. It is in truth wholly irrelevant if one accepts that these concepts and indices were never merely physical either. Again, it is all about rights and obligations and the whole framework of their manifestation and protection is abstract. This problem has already been traced above in German and Dutch law,47 and its discussion will be resumed in the next section. To repeat, in civil law, ownership (as the expression of the relevant proprietary right to an asset), 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 element, although as was acknowledged in section 1.1.9 above, there remain strong remnants of a more physical approach, also in civil law, but the protections or defences given in connection with each of these notions do not truly depend on it: see more particularly sections 1.2.4 and 1.2.5 below. This confirms that the model or system is in essence abstract and not about physicalities, except in the prima facie protection of the status quo as an issue of social peace and in civil law for chattels (only) in the protection of bona fide purchasers in physical possession, as we have also seen in section 1.1.9 above, but in the latter case probably also subject to erosion in favour of more abstract notions of control.
47
See text at nn 17 and 18 above.
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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 (such as ownership, usufruct or security interest, etc), therefore rather than the physical element itself. This is in general terms still different in common law as we shall see. Again, the civil law approach is here fundamentally more intellectual. However, even if the (physical) holding of an asset has no legal meaning per se, it still needs to be legally characterised first in terms of the relevant underlying proprietary right, such as ownership, usufruct, servitudes, some long leases, security interests etc, and subsequently in terms of ownership, possession or holdership (detention) of the type of proprietary right in question. It is another fundamental aspect of civil law that both these proprietary rights and the way in which they can be legally expressed and protected are limited. That is the idea of the numerus clausus or the closed system of proprietary rights in civil law. All the same, it has already been said that more modern (non-possessory in a p hysical sense) security interests crept in, especially in Germany and in the Netherlands, but the civil law of property still largely ignores in this connection floating charges and also conditional or temporary property rights as alternative asset-backed funding devices and their (way of) protection. They could, did, and are even now opening up the whole system, also in civil law, particularly in terms of finance sales and reservation of title in respect of movable property, although it remains as yet little understood. These finance sales may be expected increasingly to operate against professional insiders, now also in civil law, subject always to the protection of the ordinary commercial and financial flows in respect of outsiders, usually consumers, who may thus still acquire the assets free and clear of such interests (if bona fide or buying them in the ordinary course of business, at least for chattels, even if it may remain more problematic for intangibles) as we have already seen. This was earlier identified as the modern direction and trend particularly in international finance, although in civil law much behind and slow. It may mean a substantial opening up the numerus clausus, as already noted. The essence remains nevertheless to appreciate that in the traditional civil law view there is only a limited concept of what an asset is and there are still only certain underlying proprietary rights and equally only certain limited forms of expression and protection of these rights. In this matrix, we have, as we have seen, the ownership right as the most absolute right to an (identified underlying) asset whether tangible or intangible (meaning the bundle of all user, income and enjoyment rights in the underlying asset) but also the ownership expression of it (or the assertion of the right itself), as we have also for other proprietary rights, such as usufructs, servitudes and security interests. Alternatively, in civil law, these proprietary rights may be expressed through possession (defined here as the will to hold the right for oneself as if one were the owner, behaving as such, and asserting the disposition rights, assuming control, and resulting in the appearance of ownership), or holdership (defined here as the will to hold for another, subject to an own user right, which is usually merely contractual), giving rise to different protections or actions in each case. It should be obvious by now that we should not be thrown off by the fact that the underlying assets may be intangible, in
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t ransformation, or future, or part of a class of assets (appearing in bulk), even though that is still the view of many. It may bear repeating that in this system the holdership of a proprietary right itself may be the consequence of the granting of a mere contractual user, enjoyment or income right under a proprietary right concerning the underlying assets, for example under a usufruct of an intangible share portfolio. Thus, the owner of a usufruct may by contract transfer his income right thereunder to another. As a consequence, the beneficiary becomes the holder of the usufruct for that purpose. It gives the beneficiary a contractual action against the grantor (unless there is a sub-usufruct which would be a proprietary right). The key is that there results proprietary protection of the holder against any other, even if in many civil law countries that proprietary protection would have to be invoked by the legal possessor rather than by the holder (although not in Germany, as we shall see), who may, however, still protect his right against third parties in tort. This is to repeat that our language and terminology are here often imperfect and inadequate, and ordinary speech may confuse, especially when we speak in this connection of the ownership right itself and of ownership in terms of manifestation and legal protection of that ownership right. In this sense, one can be the owner of an ownership right as long as it is understood that we use two different notions here: one being the proprietary right itself and the other being its expression, protection and enforcement. Again, it is easier and more revealing when we speak of the ownership of a usufruct right or security interest. Instead of the proprietary right itself, we may here also refer to ‘title’. So we own title, possess it, meaning holding title (being then proprietary right in question) for ourself, or hold it for another. In civil law as we shall see, the legal transfer is often through or completed by delivery of possession of the proprietary right (with regard to underlying assets), clearest in respect of the right of ownership, which in this system, it is submitted, is again not physical per se but means only the demonstration of the end of the will to hold the right for oneself. This may be shown by the physical handing over of the asset but there are other ways and the delivery of possession or control in this sense may also be purely constructive (non-physical) when a declaration may suffice, notably when assets are and remain under third parties (the traditio longa manu). In some countries, such as France and Italy, the mere sales agreement is itself sufficient expression of the will no longer to hold the right to an asset for oneself, as we have already seen, and then transfers the property coterminously with the conclusion of the sales agreement, but still it was already shown that the title transfer remains a separate legal act, sometimes expressed as a transfer constituto possessorio, meaning, as we shall see, that the asset remains under the transferor for the time being. It should be realised that even holdership is in this system strictly speaking nonphysical, as there may be sub-holders. Again, properly considered all is expressed as a question of rights (and obligations) and not in physical terms. This is law, not physics, and that is the key. In civil law, it is therefore correct to view ownership of an asset in terms of ownership of a right, in fact of the fullest of all user, enjoyment and income rights in respect of an underlying asset as we have seen. Again, it is not at all impossible
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in this approach to view ownership in property as a bundle of intangible proprietary rights that may be subdivided in the limited proprietary rights such as usufructs, certain types of long leases or security interests, under which certain income, user or enjoyment rights may be split off by the owner in favour of others who thereby acquire more limited proprietary rights in other people’s assets (iura in re aliena) and may defend these more limited proprietary rights against all the world as owner, possessor or holder of that (sub-)right. As we have seen, even contractual user, enjoyment and income rights may be split off and given to a holder, whose position must be respected by any third party/transferees who knew of them when acquiring title. That was the idea that all contractual user, enjoyment and income rights gravitate towards proprietary status as a matter of liquidity and finality, see section 1.1.4 above. But in traditional civil law, the composition of this bundle of rights remains preordained and parties may (in principle) not split off proprietary rights at random. That is the numerus clausus. Nor can they manifest these rights in any other than the three manners indicated except by making them merely contractual. But to repeat, in a proper analysis, all rights and the way they are legally held are intangible, including the right of ownership itself, even in tangible assets, although this does not rule out the fact that the nature of these underlying assets and objects of these rights in terms of land, chattels or intangibles may still impact on the details of these rights, their p rotection and transfer especially when proprietary, but it is of lesser importance. Thus in civil law, the transfer of the intangible ownership rights in chattels is not normally through assignment as it is in the case of intangible assets.48 There may also still be delivery requirements, as we have seen, but they are not necessarily physical either and could be wholly constructive even for chattels as noted. For intangible assets, delivery may be completed with the assignment itself, although it is not uncommon to find that there is a further formal requirement, namely notification of the debtor. That was the traditional French approach, now alleviated for financial transactions (as we shall see later). It is sometimes seen as equal to the delivery requirement for chattels, especially in the Dutch Civil Code of 1992. It then suggests a form of publicity, which, however, mere notification to a debtor hardly is in practice. In any event, it has already been said in section 1.1.3 above that publicity itself does not create proprietary rights although it may sustain them. In the new Dutch Civil Code, the poorly considered introduction of this requirement created havoc and was promptly relaxed although not deleted, see Volume 3, Chapter 1, section 1.2.1. As to other differences, bona fide purchasers of (proprietary rights) in chattels are (mostly) considered the full owners—that is the important question of finality—but a similar rule does not (as yet) exist in civil law countries for intangible assets even if commoditised (and also not for land where land registers 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
48
See for Germany, however, also n 21 above.
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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 result from the conclusion of the transfer agreement. This is now Belgian law.49
1.2.3 The Traditional Proprietary Rights in Civil Law and the Way They are Held. The Notion of Possession Revisited. Common Law Compared It has already been mentioned that in civil law, in terms of proprietary rights, there is first the right of ownership as the most complete right, best expressed by Article 544 of the French CC and now also in Article VIII-1:202 DCFR. This weak definition means to say that the owner has all user, income and enjoyment rights of which in some preordained ways he can dispose in a proprietary manner or otherwise contractually. It followed that derived from ownership there are a number of limited proprietary rights such as usufructs, in some countries certain forms of long leases, easements or servitudes such as rights of way—the latter two being normally only in real estate— and security interests, such as mortgages in land and pledges or more modern nonpossessory security interests in chattels and intangibles. All others are in principle contractual. These derivative proprietary rights which operate in the assets of others (the iura in re aliena) automatically reintegrate into the ownership right upon the end of their term, which ownership right thus becomes full again while the (then) owner reacquires his full rights without any additional (re)transfer requirements.50 In this framework, the younger (proprietary) interest holders naturally take subject to the older (who can defend against the whole world including any juniors). 49 As we shall see in s 1.3 below, it is less easy to summarise the common law in this respect. Physical possession still plays a key role in the protection of the holder of chattels, much easier to defend than ownership, while both are traditionally the only proprietary rights in chattels under common law, expanded, however, by equitable proprietary rights, especially in the form of trust benefits, conditional and temporary rights, and floating charges. Yet delivery of possession (in this sense) is no longer a requirement for the transfer of ownership of chattels in England and they transfer through the mere sales agreement (unless otherwise agreed). Intangible assets are transferred through assignment without notification or other formalities (at least in equity). In the US under Art 2 UCC, delivery of possession is still necessary for the transfer of title in chattels (unless the parties agree otherwise). For assignments generally there are still considerable differences between the various states of the US in the formalities, as we shall see in s 1.5.3 below, but for the assignment of receivables there is now a special uniform regime under Art 9 UCC. But perhaps the more distinguishing feature is the de facto open system of proprietary rights in equity in common law countries in respect of all classes of assets, whether land, chattels or intangible claims, subject always to strict bona fide purchaser protection or the protection of the commercial flows in commoditised assets. 50 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-à-vis each other, much as they do in common law, and are defended separately until the end of their term. As such they must be respected by all, including the owner, even if the older interest holder, because he granted them. In German law, it is probably more precise to say that the key is here not the contract but rather the disposition (or Verfügung) by the owner in which no other person needs to be involved and which follows from the operation of the law. A disposition itself is not normally sufficient, however, to bring about these proprietary rights, their transfer or split. Except in countries such as France and Italy, as we have already seen, for the transfer of title in chattels (but not even there in respect of pledges), forms of delivery of the right in the asset are required, even though this delivery (of possession in the civil law abstract sense) may only be constructive: see s 1.4.2 below.
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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. So we may have a usufruct in a usufruct. It even applies when the underlying asset is itself merely a contractual user, income and enjoyment right because they are no less assets and we can have a usufruct or security interest in these rights. In this way, it is possible to have an ownership right, a usufruct and a security interest in the usufruct, all concerning the same underlying asset at the same time but for different interest holders.51 In this system, which was, as we have seen, first empirically identified in the ius commune,52 it remains, however, a debated issue how far possession (the will to hold the proprietary right in an asset for oneself) or even mere holdership or detention (the will to hold the proprietary right in an asset for another subject to one’s own user rights) in respect of these assets may also be considered a proprietary right.53 Unlike the approach of the old Austrian and former Dutch Civil Codes in the case of possession,54 it is better not to consider them so in civil law (it is different in common law) but indeed only to see them as ways in which proprietary rights (all of them) may manifest themselves and are protected and that may now be considered the better view. As already noted in section 1.2.2 above, it may in this connection necessary also be helpful and necessary to talk of ownership as one of the three possible expressions (therefore ownership, possession and holdership) of each proprietary right, signalling the most obvious manner in which a proprietary right is held 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 notion’s appearance or shadow (the intention to hold an asset for oneself as owner and to exercise the indices of ownership, therefor the necessary measure of control). Ownership and legal possession of a proprietary right in this sense usually go together and are normally not distinct, but give rise to 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. 51 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 becomes subject to a usufruct. 52 The identification of the limited number of proprietary rights maintainable against all was first achieved by Heinrich Hahn at the University of Helmstedt in Germany in 1639 on the basis of an empirical analysis which allowed them to be distinguished from obligatory or personal rights that could only be maintained against a counterparty; see also Feenstra, n 27 above. 53 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. 54 Another important aspect of the proprietary nature of these limited rights is that, like ownership, they can be transferred (often, however, only together with the asset as in the case of a servitude and, in the case of a pledge or mortgage, only with the indebtedness they insure) without the consent of anybody else, including notably the owner (of the ownership right) or any physical holder of the asset (even though the latter may have to be notified to protect the new situation). This confirms their independent proprietary status and distinguishes them further from contractual rights.
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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 it should be immediately realised that while in civil law there can only be one such owner of a right, there can be more possessors. 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 the latter’s possession, it does not do so in a legal sense and he will also keep his possessory remedies and defeat the thief because he has the older right. It is a prime manifestation of possession in civil law 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 now presents a somewhat different picture, which at first glance may confuse. Although in earlier drafts of the BGB the above system was maintained, in the end, following criticism from von Jhering55 and contrary to the Roman law tradition, section 854(1) BGB was redrafted and still seems to base possession on the physical holding of the asset in the nature of the old gewere or seisin notion. The DCFR follows this approach uncritically.56
55 Der Besitzwille (Jena, 1889) 212. See for a resonance in the Netherlands, n 71 below. It may be of interest in this connection to point out that von Jhering, in his support for the notion of legal possession (quite apart from physical holdership) with its own actions, sought foremost better to protect the ownership right, which, on the basis of physical possession or corpus (and its disturbance), may indeed be more easily defended, not only in civil law. But this is not the full story. Much non-physical possession also needs protection. In typical nineteenth-century fashion, the protection of possession had earlier been tied (in Germany) to the mere will to possess (Besitzwille or animus possedendi, see also text at n 68 below) and thus became a matter of protection of the will and an issue of mere intent. Von Jhering proved here more pragmatic but also less conceptual and reintroduced in the process an unclear anthropomorphic idea of property law. This will theory went against the earlier notion of von Savigny, who thought that the requirements of public order and peace were the basic reason why physical possession was protected, see Das Rechts des Besitzes (1804) 31, regardless of the fact that in contract he had pushed will theories, see ch 1, n 26 above. It is an important issue and relies on the prima facie state of affairs connected with a purely physical idea of possession, see also s 1.1.9 above, but did notably not explain the intricate Roman system of possessory protection and the use of a legal notion of (constructive) possession in this regard, which had the purpose of a dispositive protection of proprietary rights more generally, not of the prima facie need for respect of the status quo. It is to be noted, however, that when possession is defined as the will or intent to possess for oneself, this is not necessarily always a concession to nineteenth-century will theories. It may in truth be a more objective concept of control, see also the previous section. It should also be considered that when modern German law and the DCFR refer to control instead, this may appear a more objective wording but is in fact not different because this control is still perceived to depend on the state of mind of the possessor, all the more confusing when the terms ‘direct’ and ‘indirect’ are also used in this context. 56 It speaks in Art 8-1:205 of possession as being directly or indirectly physical. Especially the latter concept is confusing as indirect physical possession in this sense is not physical at all. The prime importance of physical possession is in terms of social peace (see s 1.1.7 above) in the sense that the physical possessor is primarily protected until someone pretends a better right. The DCFR uses the term ‘mere possession’ here, which is truly the factual physical possession (Art VIII-6:202) and even allows a form of self-help on the basis of physical
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Possession is here cast in terms of control (corpus),57 still seen, however, as something physical, not simply the result of disposition rights. Again, this was a backwards step and does not clarify. Yet the concept of legal or constructive possession was not abandoned: see section 872 BGB.58 It has already been said that this German system became curious because it tries to steer some middle course between old Saxon and Roman law, the one being based on physical realities, the other being rights based.59 The advantage is that it gives the mere holder possessory rights and thereby proprietary protection, but systematic confusion unavoidably results. For example, the transfer of title becomes in this manner systematically more complicated as delivery of possession seems to suggest a physical act. As noted before, this is problematic where the buyer already has the asset in his physical possession when the second sentence of Section 929 indeed deletes the requirement of delivery altogether (the traditio brevi manu), or where the asset remains with the seller when only a retrieval right is created in the buyer (the constitutum possessorium of section 930), or where the asset is in the hands of a third party when an assignment of the retrieval right is necessary (the traditio longa manu of section 931 BGB). In common law, on the other hand, we have, as we shall see, ownership and physical possession or bailment as the only proprietary rights in chattels at law, which operate as two distinct interests or titles at least in chattels and are each protected in their a ppearances, although even then confusion enters when the self-help is also given to protect against a detentor, see Art VIII-6:202(3). 57 The Roman corpus requirement was not meant to be purely literal and thus physical at least not in the later perceptions. To begin with, it never meant that the possessor must hold the asset physically all the time or that in respect of land each bit of soil must be possessed in a physical manner, but even in the Corpus Iuris, where the concept of possession was a legal and not a physical one, there continued a measure of confusion about the physicality of the concept, a confusion increased because the Corpus Iuris was a compilation of views of different authors and not one system. Thus in D.41.2.1.3, Ofilius and Nerva still maintain that possession is factual and not legal. This is reminiscent of the common law of bailment and the old Germanic gewere—hence the beginning of the confusion. But in Gaius 4.153 the position was clarified, and this was followed by the Justinian Institutes 4.15.5. The possibility to exercise control (or the relevant indicia of ownership connected with the disposition right) was probably always the key, see also the previous section, and this provided, especially in the Ius Commune as we shall see, for an easier protection facility as it was often simpler to show this control (which in the case of several possessors depended on the older control, relevant especially when a thief intervenes, meaning that possession and control in a legal sense was not lost) than the ownership right itself, which was likely to be more abstract and relied on acquisitive prescription. Another aspect of the protection of possession was the fact, also already mentioned, see s 1.1.9 above, that for reasons of public peace prima facie physical ownership was protected. Strictly speaking neither the legal concepts of possession nor holdership directly reflected this concern. 58 This is the Eigenbesitzer (the one who holds for himself), the other is legal holder or Fremdbesitzer (who holds for another). If the Eigenbesitzer or Fremdbesitzer has the property physically, he is the unmittelbare (immediate or direct) Besitzer (see s 854), otherwise the mittelbare (constructive, intermediate or indirect) Besitzer (see s 868). The Fremdbesitzer is normally unmittelbar (with physical possession) but even he can be mittelbar if there is a contractual subletting involved. In Germany, the relationship between the immediate or constructive possessors and holders or between holders is called the Besitzmittlungverhältnis and may derive from proprietary as well as contractual dispositions, as respectively in the case of usufructs and rental agreements. 59 Ambivalence about the nature of possession and the difference between it and holdership is widespread: see J Gordley, Foundations of Private Law: Property, Tort, Contract, Unjust Enrichment (Oxford, 2006) 64. Here the owner is thought to be free to do with the property as he pleases because (normally) he paid for it. The possessor is then ‘protected only so that the property will be used and is cared for by someone’. In this way, ownership and possession are not primarily cast in terms of protection but rather in terms of use (by the owner) and preservation (by the possessor). In civil law terms, this kind of possession reminds more of holdership (it is not the manifestation of ownership), albeit that the holder usually benefits from a contractual user right and has the position of holder only during an agreed period.
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own manner. 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 in principle limitless. It may well be that the main structures themselves such as trusts (as well as resulting trusts, constructive trusts and tracing notions), conditional and temporary ownership rights, and floating charges are now conventional and may not easily be augmented,60 but through them virtually any form of interest can be created. This may be seen in particular in the rights of trust beneficiaries and future (temporary or conditional) interest holders. As shown throughout, rather than limiting the number of proprietary rights, equity instead limits their effect and does not uphold these rights against bona fide third parties who acquire a legal interest (ownership or bailment) in these assets for value. So, in common law, the proprietary system is in principle open and proprietary rights can be created freely by contract (in equity), but the corollary is better protection for bona fide purchasers, even in respect of assets other than chattels. As we have seen this may even go as far as the protection of the ordinary course of business in respect of commoditised products and of finality in that context, in the latter case regardless therefore of any bona fides relevant especially for commoditised assets. It has already been said also that this is an important and understandable trade-off, which does not operate at law, therefore not against ownership and possession in respect of chattels, except where so provided by statute as in the Sale of Goods Act 1979 in the UK (see for this nemo dat rule more particularly section 1.4.9 below).61 Although the notion of ownership is universal and in civil society now even considered a human right, it should be noted and must be accepted that at least at the more theoretical level, common and civil law still present considerable differences in the manner proprietary rights are handled and expressed. Even where the terms are the same, such as ownership and possession, the student must understand that their meaning is quite distinct: common law has a much weaker notion of ownership in chattels, allows (unlike civil law) multiple ownership rights in them as we shall see, and sees possession, which in common law is the physical holding, as a concept from which a stronger prima facie protection is derived (in bailment) and which hardly allows of multiple possessors of the same asset (as civil law is used to doing). It follows that possession in this sense is a proprietary right by itself. In fact, it may be fair to say that apart from the equitable interests, the main difference between both systems is in the concept of possession. If within the EU a more uniform framework for the law of chattels and intangibles were ever considered, a fundamental choice must be made here: is it to be the more abstract Roman approach or,
60 As already mentioned in s 1.1.2 above, these are the three areas where equitable proprietary rights most commonly manifest themselves. It was also noted there that they may not be capable of being freely extended, see in particular n 11 above, but together these three structures may cover virtually every contractual configuration. 61 It may be noted in this respect that all conditional and temporary interests and trusts in land became equitable in England under the Law of Property Act 1925 and thereby subject to bona fide purchaser protection.
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for chattels, the more physical old Germanic approach, which is also still that of the common law (although notably not in equity). A middle course hardly seems possible as the faint-hearted German approach demonstrated earlier, even though the DCFR clearly opts for this German system without questioning it. It is hardly conceivable that it could ever have been introduced in England or after Brexit in other common law EU Members. It has already been said before that the above model of proprietary rights and their operation in civil law is nowhere fully implemented, see for example the G erman variations, but it is posited that it presents a powerful model for comparison and critique, also in assessing the value of the DCFR in this area. It was also acknowledged that the role and meaning of physical possession reappears at the transnational level, at least in the initial phase of transnationalisation of the law in this area,62 but it was also submitted that it was likely to be soon eclipsed by more abstract rights based notions.
1.2.4 The Way Proprietary Rights are Protected in Civil Law As we have seen in the previous section, the assertion of the various proprietary rights is in civil law foremost a matter of invoking their ownership. The shadow of it is possession: the will or disposition to hold the proprietary right in an asset for oneself as if one were the owner. Normally it means that in civil law ownership and possession of a proprietary right go together. This is not so in the case of theft. One can also hold a right of another for oneself in a bona fide manner, for example pursuant to a void sales agreement. Then there is the holdership by third parties: the will to hold the proprietary right for someone else subject to one’s own (contractual) user, income or enjoyment right. In the case of the proprietary ownership right, owning that right thus means the assertion of the right itself, as it would in the case of a usufruct or pledge. In this connection one normally finds in civil law a special proprietary action for the assertion of the ownership right. That is the revindicatio of Roman law and is tied to acquisitive prescription providing the proof of ownership: see for this concept, section 1.2.5 below. As for the iura in re aliena, that are the other more limited proprietary rights, they are normally proven by deriving unbroken from the full ownership right, during the required period also as a matter of acquisitive prescription. As to chattels, in civil law the proprietary rights in them may also be proven as being derived from a bona fide purchaser. Indeed, the proprietary claims in respect of these more limited proprietary rights may derive from bona fide possession of these rights as well as from their acquisitive prescription. It was already said that possession in this context means the assertion of control (or corpus in that sense) of the relevant proprietary right in the asset63 with the intent 62 See also s 1.1.11 above, where the examples of assets on the high seas and the Eurobond were used and the need for supplementary equitable rights was also noted. 63 See n 57 above.
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to hold it as owner (the animus domini)64 or, perhaps better, asserting the underlying proprietary right in the asset as if one were the owner of that right, making it a question of demonstrating the disposition 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; hence the idea of the appearance of ownership of the proprietary right in the possessor. More generally, reference is in this connection also made to the animus possedendi, which may therefore exist in respect of each proprietary right. In a perfect system, there would follow a special possessory action irrespective of the underlying proprietary right. In Roman law, that was the actio Publiciana.65 As discussed before, ownership and possession in this abstract civil law sense can also exist in relation to the proprietary rights in intangibles or claims (even user, income and enjoyment rights in the same underlying assets exercised by a holder of the original proprietary right with respect to the underlying asset), which rights are themselves assets of the holder, therefore the object of further proprietary rights, even though there may not exist revindication and possessory actions in respect of them in most civil law countries, particularly in Germany and the Netherlands, while these rights are then only protected in tort against third parties. But one could also say that the owner of these contractual rights is truly the holder of the original proprietary right of grantors in respect of the underlying assets, which again he may defend in tort (or in Germany whilst borrowing the possessory action from the possessor). Naturally, possession is here never physical either, as legally it never needs to be in civil law, as we have seen. It is all to repeat that, in a proprietary sense, obligatory rights are assets and therefore have a proprietary aspect (and protection) at the same time. Although proprietary protection is in that sense not an asset itself, it can be transferred with the right. 64 It is the combination of corpus and animus in this sense that held the key, see D.41.2.1.3 (Paulus). See also n 68 above for the view of von Jhering (n 59), with his emphasis on corpus. 65 Thus the possessory action was in Roman law the actio Publiciana, whilst the owner himself had the revindicatio, the strongest proprietary action of all, but not easy to bring because ownership had to be proven, often difficult where the prescriptive acquisition possibilities were still limited: see n 74 below. The actio Publiciana was not a general possessory action, however, but was given to any possessor whose acquisitive prescription period was still running as if it had been completed. In other situations interdicts were used to protect possession and were 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 greater emphasis on the proprietary action or revindicatio: see ss 985ff BGB. The advantage is that it awards permanent protection as opposed to the temporary protection of the possessory action based on an involuntary loss of possession only. The possessory action nevertheless allows the recovery of the asset, even out of the bankruptcy of the defendant, and if necessary also from holders who refuse to return the goods or from any others in physical possession without a better (usually the older) right to it. When ownership and possession in this sense are not in the same hands (the normal example being the situation of theft, or when goods are lost and found by someone else, or when the underlying arrangement under which ownership is obtained proves to be void), the owner, who, strictly speaking, never lost his legal possession, is faced with a competing possessor but revindicates the asset from the pretended owner, as possession is always subject to the better right of the lawful owner and older (rightful) possessor.
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Asset status arises legally when claims are formulated, for example in respect of damages claimed for infringement or in claims for repossession. It was already noted in this connection that such claims are always (in civil law terms) in personam,66 therefore against a specific defendant, although they do not thereby become merely obligatory. If proprietary in origin, they still give a reclaiming right against a bankrupt defendant, allowing the claimant to operate (in principle) quite separate from the bankruptcy or claim priority against all others under a security interest. In civil law, at least in the case of tangible property, proprietary rights can always be transferred to others temporarily. They become the holders or detentors, as we have seen, subject to the user, enjoyment or income rights that were given and normally will be handed the asset (mostly physically, although there may also be sub-holders) to enjoy it, but it depends on the arrangement which will normally be contractual. It is then so only according to a special relationship with the legal possessor, who does not thereby lose his legal possession. This is the situation particularly in the case of a warehouse or custody arrangement or a borrowing or hire-purchase agreement with the owner. The holder now holds the ownership right for the owner/possessor until the end of the contract and has income, user or enjoyment rights thereunder as the contract defines. Where there is a usufruct, the beneficiary has the asset as owner/ possessor of the usufruct and has the user, enjoyment and income rights as granted thereunder, but is holder at the same time for the owner/possessor in respect of the ownership right. In a similar manner, the detentor may hold the usufruct of an owner/ possessor and receive the benefits in the way the contract specifies. To that effect the usufruct is transferred to him and he can also create a sub-holder. At the end of the contractual terms these rights will automatically be reversed. Thus the holder holds the relevant proprietary right to the asset subject to his own income, user or enjoyment rights as defined by the contract, which may as valuable assets still be transferable to others as sub-holders. This is likely to be done, through assignment, transferring at the same time the underlying proprietary right for this limited purpose. There could even be created a sub-usufruct for him, which would lift him to the level of legal possessor of the right (until it or the usufruct expires). It could also exist in respect of intangible underlying assets, as in the case of a collection agent to whom receivables are transferred for collection purposes only. The key is always that these holdership arrangements and any surrender of 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 a status of their own vis-à-vis third parties, which they may be able to defend. It was already said that they do not normally do so through their own type of proprietary action, but only in tort (or in contract against the grantors), yet in c ountries such as Germany in the case of chattels they may defend in a possessory manner, subject always to the better rights of the owner and legal possessor. In this sense, they borrow the possessory action.
66
See also what was said on this subject in n 15 above.
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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 subholderships, and of legal possessors and owners.67 This may make a great deal of sense. 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 manifesting the animus possedendi. The result is two legal possessors, of which the older has the stronger right.68 Again, in this system there can only be one real owner, but there could be more than one possessor and also more than 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 (contract or tort), but in the law of property itself and should be clearly distinguished, although, again, at the practical level in most civil law countries the holder/detentor (except in Germany for chattels) and the owner of a claim normally 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 also does not affect any beneficiary of acquisitive prescription as we shall see in the next section.
67 In the Netherlands, especially HCF Schoordijk, ‘Enige opmerkingen over de bescherming van bezitters en houders [Some observations on the protection of possessors and holders] 1984’ in Assembled Works (Deventer, 1991) 447, invoking in support the English rather than the German approach. Similar views had been expressed earlier by JC Naber, ‘Het onredelijke der bezitsbescherming’ [The unreasonableness of the protection of possession] (1902) III Tijdschrift voor Privaatrecht, Notariaat en Fiscaalrecht 161. The only protection he proposed was that of the better right, much as in the English tradition: see later also JC van Oven, De bezitsbescherming en hare functies [The protection of possession and its functions] (Amsterdam, 1905) 199ff. Modern French law in Art 2282 CC as amended in 1977 appears to give holders similar strong rights. Yet the French Civil Code, having abandoned the requirement of delivery for title transfer in respect of chattels, is less concerned with the notion of possession and therefore also detention and their protection. It abandoned the actio Publiciana as a special possessory action. This lack of interest is also reflected in French legal treatises on the subject. It may be of some interest in this connection to consider the position of Grotius. In s II.3.4 of his Inleidinge tot de Hollandsche Rechtsgeleerdheid [Introduction to Roman Dutch Law] of 1631, he characterises ownership as the right to be re-established in physical possession (regardless of whether the present possessor was bona fide and acquired the property for value). The key emphasis is here on user rights. Their protection was considered a basic natural right, although in De Iure Belli ac Pacis II.2 and 3, Grotius emphasised the common nature of property but denied that individual ownership itself had a basis in natural law. It was only a matter of positive law (ius gentium), which meant that states could intrude on ownership rights through legislation (in more modern times eg to protect bona fide purchasers, etc). 68 It could be argued, however, that the first possessor having only constructive possession thus loses it and therefore also his position as a possessor. He only retains the possessory actions. From that point of view, the situation is not different from theft, which is what usually happens when a holder steps up to possession.
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To repeat, for each, the ownership, possession or holdership action, there are in rinciple different requirements, although this may not be fully expressed in all p 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 again the next section. The legal possessor, on the other hand, only asserts his better right, cf Article 3.125(2) Dutch CC. So does the holder if given proprietary protection. It means that in civil law, it is often easier to defend as possessor than as owner, which is one reason for the importance of the concept of possession in civil law. It is also of interest to see how ownership, possession and holdership in this sense are acquired and surrendered. The transfer of ownership results from the proper transfer of the underlying proprietary right, which includes surrender of legal possession by the previous owner, as a requirement of the transfer of title through delivery of (legal) possession of the asset, or, as in the case of chattels, in countries such as France and Italy, upon the mere conclusion of the sales agreement (unless delayed thereby)—see more particularly section 1.4.2 below. In civil law, the transfer of ownership may of course also result from bona fide acquisition in the case of chattels or from acquisitive prescription for all types of assets, which mostly also requires the transfer of physical possession. Transfer of legal possession of the relevant proprietary right to the asset will then go with it. Separated from ownership, possession may also be created spontaneously and autonomously through physical appropriation of the right, as in the case of theft, when an additional possessor starts operating. One could say that in such a case legal possession itself was not properly transferred. It is in any event the junior interest. It may also result from invalid transfer agreements when ownership proper is not passed. Interestingly, in Germany as already mentioned before, legal p ossession of chattels not in the physical possession of the owner may also pass through a ssignment of the retrieval right (section 870 BGB). It might suggest that in Germany possession itself is in truth some proprietary right. Transfer of holdership, on the other hand, results from contracts meaning to establish it, such as rental agreements or other types of contractual user, income and enjoyment rights. The consequence of this civil law system is, as we have seen, that the legal possessor, even though physically surrendering the asset, does not necessarily lose his possessory status but may legally retain the benefits, actions and defences accorded the possessor. 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, when the legal holder cannot reach them in tort. Again, it is important to appreciate that the holder, while losing the asset involuntarily, thereby does not lose his status as legal holder or its connected protections either. The benefits of legal possession in this sense, even if the possessor does not physically hold the asset, are: (a) the possessory protections which the possessor in the legal sense can raise against any 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; while (b) any acquisitive prescription running in favour of the legal possessor is not interrupted either unless legal
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possession is voluntarily surrendered. Again, in Germany, similar protection exists for the holder in respect of sub-holders, thieves or finders and their holders in the case of chattels, but there is no acquisitive prescription for the holder or Fremdbesitzer, unless he changes his position to legal possessor or Eigenbesitzer. This is the same as in other civil law countries.
1.2.5 The Acquisitive Prescription and its Importance in Civil Law. Difference with the Statute of Limitations and the Protection of Bona Fide Purchasers In civil law, the acquisitive prescription is of prime strategic importance as it allows any owner to prove his relevant proprietary right in an absolute, exclusive or ownership manner, which is the basis of his protection as owner of that right and as such the pivot of the entire system. As we have seen, this protection is at least in respect of physical assets afforded through the revindicatio and to mark the owner of a proprietary interest out as the sole title holder, it relies on this acquisitive prescription. In that sense, ownership of each proprietary right is exclusive and there can only be one owner of such a proprietary right (although like in the case of a usufruct, there might be a subusufruct in movable assets as we have seen). It results from bona fide legal possession, which in this context acquires a central place but may as such still be entirely constructive. The acquisitive prescription function, connected with legal possession, derives in civil law from the notion that in the end the law will follow the appearance of the right. This applies to all proprietary rights provided there was no mala fides. Acquisitive prescription in this sense should be clearly distinguished from the operation of the statute of limitations. This does not require bona fides but still a desire to hold the (relevant right in the underlying) asset for oneself while there must also be some manifestation. Thus even the retrieval action against a thief will eventually be time barred (traditionally after 30 years, although under modern law often sooner). That 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 openly demonstrated his claim to the property. In other words, in order eventually to become the owner under a statute of limitations, the thief must in this view at least openly deny the right of the original owner and underscore the desire to hold for himself and demonstrate control. To keep the asset hidden in the attic might not be enough.69 We have seen in the previous section that ownership, usufructs, easements or servitudes, and security interests may also be defended on the basis of the mere legal possession of these rights (on showing the better claim in this regard), or on the basis of their ownership, proven in turn with reference to the required time of bona fide legal possession, that is through acquisitive prescription.70 That shows the connection 69 The English Limitation Act 1980, s 4(5) now excludes all claims to ownership of claimants who acquired property in a criminal manner: see further n 100 below. 70 It was said in the previous section that the more limited proprietary rights or iura in re aliena are normally proven on the basis that they derive unbroken from the ownership right itself proven on the basis of acquisitive
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between both ways of protections. In fact, acquisitive prescription was at the origin of the abstract Roman notion of possession. Wherever there is a reference to possession in a civil law sense, it must be assumed that there is also a possibility of acquisitive prescription if this legal possession (the intent to hold the relevant proprietary right in the underlying asset for one self) was bona fide for some time, which bona fides itself may be presumed. Where, on the other hand, there is a problem with this possession in respect of intangible assets, as there is in Germany, the acquisitive prescription possibility may itself become subject to doubt too, but note that in civil law the concept applies in principle to all asset classes. In principle, under civil law, acquisitive prescription thus arises in principle in favour of any legal possessor, therefore in favour of anyone (a) who wants to hold the proprietary right to the asset for himself, (b) has control of the asset, even if only through a holder or detentor, or did not surrender it voluntarily (in the case of theft or loss), (c) is bona fide, which is usually presumed,71 and (d) has together with his bona fide predecessors fulfilled the required number of years (if there was a thief the chain is broken). In the case of tangible movable assets or chattels, 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, Article 3.99). In Germany it is 10 years for chattels under section 937(1) BGB. Importantly, the transferee does not need to have himself acquired the asset pursuant to a valid cause (usually pursuant to a contract of sale or exchange) or from a person with proper capacity and disposition rights, as long as he is not aware of any such defects in his purchase. Formalities need not be observed earlier in the chain either, so defects in delivery do not count. Again, there is clearly no need for physical possession in this system either. The acquisitive prescription for the required number of years thus covers all defects in the acquisition of the relevant proprietary right to assets including any invalidity of the underlying contract where required for the transfer, and any lack of capacity to transact in the transferor, any lack of disposition rights in him, and any deficiencies in the formalities. That is the general rule. It is true that under modern civil law, in many 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 still requires physical possession and mostly only applies in the case of an unknown lack of disposition rights in the seller of a chattel: see also section 1.4.8 below.72 Thus the contract of transfer itself needs to have been valid as should be the act of delivery. What concerns us then are any defects earlier
prescription, but in respect of chattels they may also derive from a bona fide purchaser. Indeed for chattels, the limited proprietary rights themselves may also be established not only through acquisitive prescription, but also through bona fide acquisition, which here need to be clearly distinguished. 71 Still there are some important differences. In countries like Germany (s 937(2) BGB) following Canon law and the teachings of Bartolus based thereon, the bona fides of the buyer must subsist during the entire prescription period. This was not the Roman law (C.7.31.1) and is not required in France (Art 2269 CC) nor in Dutch law (Art 3.118 CC), where bona fides is relevant only at the moment of acquisition. 72 For acquisition from a thief, there may still be a number of years for the real owner/possessor to show up.
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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), has paid good value and (in most countries) has obtained physical possession, although that may now develop more towards the more abstract notion of control as suggested earlier. Note, however, also that 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. This is the so-called abstract system of title transfer as we shall see. In France, on the other hand, the bona fide purchaser protection may even be immediate if there was no valid contract, assuming the buyer was not aware of this and not himself causing the invalidity, for example in the case of lack of capacity to contract in the transferor or in the case of illegality.73 This 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, the bona fide purchaser protection is rather seen as another way in which property is instantly acquired. As we shall see also, the immediate protection of bona fide acquisition of chattels in this manner came separately, in order to protect the ordinary flow of goods and derived from the practices in the commercial centres of Italy 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, to be distinguished from acquisitive prescription, which was mostly not instantaneous, but on the other hand not limited to the acquisition of chattels and did not require physical possession nor a valid contract as we have seen.74 It may be of interest to note here that acquisitive prescription in this sense is not a common law facility, which limits itself to statutes of limitation and sometimes to
73 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. 74 Under later Roman law, it appears that the acquisitive prescription (usucapio) foremost protected the bona fide buyer who had technically acquired the asset in the wrong manner, that is, without the proper formalities under the various methods of transfer designated under Roman law. It was otherwise difficult to invoke. The main problem for a wider use was in the res furtivae (Inst 2.6.2), which could not be obtained through acquisitive prescription. They were goods that were once stolen or embezzled or even goods that were earlier in the ownership chain transferred without a valid contract (Inst 4.1.6). They could never be retained, therefore, even by a bona fide possessor who himself had obtained the asset under a valid contract. There is no ownership, see also D41.3.33 (last sentence). These were at the same time impediments to the possessory action, the actio Publiciana: see D.6.2.7.16–17. In most cases, the acquisitive prescription did not therefore protect against lack of disposition rights or capacity for which in modern times it is effective and primarily meant. So it could rarely be invoked against the real owner (see also D.6.2.16–17), but it could still be of use against other possessors. D.6.1.24 notes, 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 also had the actio furti, which was more in the nature of 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 did its function become largely procedural in that invoking the prescription became the traditional way of proving and asserting ownership, which would entitle the owner to the revindicatio. As such it still remains important in civil law as we saw when an absolute rather than a better right has to be proven in ownership claims.
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bona fide purchaser protection, notably in the sale of goods but only by statutory disposition; see further section 1.3.5 below.
1.2.6 Proprietary Defences in Bankruptcy In bankruptcy, proprietary rights and their protection acquire a special meaning as they may give the beneficiary the right to ignore the bankruptcy and claim his interest directly from the bankruptcy trustee outside the distribution process, primarily as owner or security interest holder, or even as a beneficiary of a usufruct during its term, but the situation may be more varied. In bankruptcy, the general concept in civil law is that the debtor is liable with its entire estate for all his debts (see Article 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 3, chapter 1, section 1.1.1. An important distinction needs to be made here. Proprietary rights commonly 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, the creditor will then share equally with all other creditors in the collections (if not himself also a secured creditor or lien holder) and will, as an obligatory claim holder, not have a preference in respect of the proceeds of the attached assets nor a right to separately recover, unless there are also set-off rights as we shall see. It is true that in some countries, prior judgment creditors may benefit from judicial or judgment liens supporting their otherwise unsecured monetary judgment claims (especially in the US under State law). This then leads to proprietary interests of competing creditors and repossession rights in the order of time in respect of the assets to which these judgment liens attach, normally real estate of the debtor, still subject, therefore, to older proprietary interests, so that judgment liens have a low rank. They 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. Among the main civil law countries, only in Germany do mere attachments yield priority giving rise to attachment liens in the attached assets (see sections 804, 867 and 930 of the German Civil Procedure Code of 1877). This is an old Germanic rule which also prevailed in the Netherlands until the time of the codification when the French sharing approach was adopted. The preference for the attaching creditor, which cannot be created after a bankruptcy has been initiated, is, however, normally low as it must
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yield to older proprietary interests including security interests. This attachment lien is also accepted in many states of the US. It gives the attaching creditor a preference in the proceeds of the attached assets, always subject to senior proprietary interests. Again, this attachment lien does not extend to the creditor who opens bankruptcy proceedings. The essence is that competing creditors in a bankrupt estate will normally have to respect all third-party proprietary rights (and liens) in the bankrupt’s assets including earlier conventional or statutory security interests. Full ownership rights of third parties in assets held by the bankrupt debtor are the clearest example of their exceptional status in bankruptcy. It comes down to the retrieval of my bicycle in the shed of my friend who has gone bankrupt. In that case, the asset will be repossessed by me as rightful owner (through the revindicatio), although theories of apparent ownership of the debtor may still detract from my rights, especially if I voluntarily surrendered possession to my friend/the bankrupt debtor and his common creditors relied on the appearance of his ownership of my property while extending credit to him. However, this notion of apparent ownership, which may give mere creditors better rights, is being substantially weakened in modern law, see especially Volume 3, chapter 1, s ection 1.1.10. To what extent third parties may indeed claim better rights and repossess, especially if their proprietary rights are less than full ownership rights, as, for example, under a non-possessory reservation of title or other appropriation rights upon default or under a floating charge or finance sale, is an important theme throughout this book. It is rightly a matter of great practical but also intellectual interest. Especially in a bankruptcy of a mere holder of the assets, the result will depend on each country’s laws (normally the lex situs of the asset), but also on the special provisions of the applicable bankruptcy laws, which may change the normal rules, especially if a reorganisation in bankruptcy is considered. Repossession is an important protection and expression of a proprietary right. It suggests that the bankrupt has no proprietary rights in the assets and that his holdership of a proprietary right is not strong enough in this regard. On the other hand, if the third party has only a security interest in the assets, he will have to wait under applicable law until a default before he can repossess. Even then he might find that there are older security interest holders who take priority. The reason for and nature of the proprietary interest might be different. The owner may earlier have given the bankrupt a particular limited proprietary right, such as a usufruct. The bankruptcy trustee may continue to collect the income or also be able to sell such a usufruct, subject to the ultimate right of the owner to retrieve the assets at the end of the term. Alternatively, the bankrupt may have been given a user right by the owner making him a holder for the owner, eg, I lent my bicycle to my friend for him to use. This right may still have value for the estate. The estate as holder may then continue to use it until the end of the term, often subject to rights of repudiation of contracts by the bankruptcy trustee, important when the estate must pay for the use, which may no longer be valuable. If there is demonstrable damage for the owner, he may claim it as competing creditor. As we have already seen, common law distinguishes here less clearly. Not only does it not have a limitation of equitable proprietary rights, the definition and impact of proprietary rights are also less clear. This may make a difference notably in the
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ankruptcy of a holder (bailee) of the asset who is not the owner or when the asset is b alienated by a bailee to third parties and the owner wants to retrieve it. In common law, the owner has in principle only a personal (often contractual) retrieval right against the bankrupt physical possessor or bailee. The owner’s position is thus weak, also in a bankruptcy of the bailee, unless he may construe a right to immediate repossession, which may derive from the contract itself, which might reserve this facility explicitly should an event of default or a bankruptcy intervene.75 Under civil law, in such cases, the owner will in principle use his 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, such as contractual user rights, the rules concerning continuation or repudiation of executory contracts would apply as in the case of all other contractual relationships of a bankrupt. As we have seen, this may give rise to damages claims by the owner for lost revenue even upon a return of the asset, which are, h owever, only competing non-secured claims. In the meantime the bankruptcy trustee can hold on to its holdership if that is beneficial to the estate. It should, however, also be considered that in common law in respect of chattels, there is never an absolute right to recover the asset, not even upon an immediate repossession, as we shall see; the defendant may always pay damages instead, discretion in England now being vested in this regard in the courts. That does not necessarily make the owner/bailor a competing creditor, however. Yet, even where chattels are sold conditionally or where the title transfer is delayed as in a retention of title, their physical retrieval from a defaulting buyer in possession is problematic, also in the latter’s bankruptcy. Perhaps the interest of the seller in the sold but unpaid asset may still be characterised here as a constructive trust and may as such give a stronger recovery right.76
1.2.7 The Civil Law Relativity or Priority Principle in Respect of Proprietary Rights: The Difference from the Relativity of Obligatory Rights A final observation may be appropriate and helpful on the civil law notion of proprietary or absolute rights. It was explained earlier that civil law maintains a limited number of proprietary rights in which ownership operates as the fullest right and the others (such as usufructs, some long leases, servitudes and security interests) operate as derivative or limited proprietary rights in the assets of others (iura in re aliena). Although these rights in relation to the fullest right (ownership) may be more limited, they are not inferior to it during the period of their existence and no less absolute.
75 See for this right to immediate repossession s 1.3.2 below. There might also be some tracing rights suggesting an unjust enrichment or restitution remedy. 76 See s 1.3.6 below.
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There is no relativity here at all, but even the proprietary rights, however absolute in nature, in that they can be maintained against all the world,77 are relative vis-à-vis each other. This follows precisely from their absolute nature itself, in the sense that the older right prevails over the younger and is therefore the better right. There is therefore a ranking implicit among the various 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 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, while 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 underlying 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 a 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 1.1.2 to explain the traditional consequences of property rights. In this connection, the maxim prior tempore potior iure (‘first in time first in right’) is often used, very clearly in the case of senior and junior mortgages in real estate, but the concept applies more generally and this relativity or priority manifests itself also where several possessors of the same proprietary right surface (or holders where possessory protection also attaches to holdership). Proprietary or tort actions against thieves or finders will cut through this system.78 77 See for the modern social orientations and impact in the exercise of proprietary rights, n 29 above. Important as they are, they are not here further considered. 78 In civil law, the older possessory right may still be defeated in favour of a younger possessor with physical possession if it could be proven that the older possessor was not the true owner or rightful beneficiary of the proprietary right, as in the case of a thief who lost physical possession. This is another instance in which physical possession may still matter in civil law. It means that the younger possessor, who can claim this so-called ius tertii, may be able to hang on to the asset, except that in the case of involuntary surrender by the thief, he still has an action against his own thief. Only if the younger possessor was not a tortfeasor in this sense and all the more so if he was bona fide (with a valid contract), would he be fully protected as such. In Germany, on the other hand, the older possessor prevails and a reference to the ius tertii is not permitted. Only in the revindicatio may the defendant prove that the plaintiff is not the true owner. It is a normal consequence of the German emphasis on the revindication rather than on possessory actions. In a similar vein, a retentor or beneficiary of a possessory lien, for example a repairer of a watch, see also s 1.4.10 below, may retain the asset until payment as if he had a proprietary right and protect this even against older possessors. Also in the law of secured transactions there may be deviations from the principle that the older right prevails. Sometimes it is the younger, more specific, interest that prevails over the older, more general, as we shall see below in the context of floating charges. Thus a younger purchase money security interest or reservation of title in favour of a more recent supplier of an asset may defeat an older charge over a whole business.
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It is sometimes said79 that, where no delivery is required for ownership transfer in chattels, as in France upon a sale, there is a form of relativity (at least in chattels) of the ownership itself as upon a double sale the bona fide purchaser who acquires physical possession, even if he was the later buyer, acquires full title. Physical delivery is often still important here to establish the ownership vis-à-vis third parties. It suggests one ownership type between the original parties and a different one vis-à-vis others, so that there results a duality or relativity of the ownership concept. This view is now abandoned as in truth it concerns here only a special case of bona fide purchaser protection. There is no duality or relativity as the bona fide purchaser has obtained all rights to the asset and the rightful (first) owner has lost all upon physical delivery, while before this moment the first buyer has everything and the second buyer nothing. We shall revert to this in the context of the discussion of double sales in section 1.4.2 below. In a similar vein, however, the heading of section 16 of the UK Sale of Goods Act 1979 refers to the ‘Transfer of property between seller and buyer’. This is meaningless as between two parties such rights are always personal or obligatory. Proprietary status only arises in respect of third parties, 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, as we shall see, it is thus not unknown to civil law either, especially in the ranking of security interests. In civil law it is also known where the older possessory right prevails over the younger. 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 or counterparty.
1.3 The Types of Proprietary Rights in Common Law: The Practical Differences from Civil Law. Modern Functional Theories 1.3.1 Legal and Equitable Interests in Chattels We must now contrast the common law of personal property, first of chattels, with the civil law approach and then decide what differences there are in practice and evaluate any approximation which there is, or may be, between the two systems and what we may expect in the transnationalisation of property law in the international flows of goods, services, money, information and technology. Here, what are called equitable proprietary interests in common law countries were earlier identified as holding the middle ground and it was already said that they may be significant especially in any
79 See eg still U Drobnig, ‘Transfer of Property’ in A Hartkamp et al (eds), Towards a European Civil Code (Nijmegen, 1994) 353.
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transnationalisation of proprietary notions within the modern lex mercatoria: see for this also Volume 1, chapter 1, sections 1.1.6 and 3.2.2 and section 1.1.10 above, and further section 1.10 below. For the rest, for movable property, especially chattels, the main difference was already found to be in the notion of possession. In section 1.1.8 above it was observed that, in common law, the law of personal property is little studied. The focus has always been on land as it was considered to have the greater economic value, even though in the modern industrial and consumer society this may no longer be so. The fact that personal property tends to have a shorter lifespan, usually loses its value promptly, at least in the area of consumer goods, and turns over quickly is another reason why traditionally in common law it has not inspired much comprehensive legal thought. In terms of the sale of goods, the subject was relegated to an incident of commercial law. In any event, common law, being traditionally practitioners’ law, is interested in solutions rather than in concepts and has never looked much for a coherent system of legal rules for chattels and intangibles as we have seen throughout. It is not on the whole interested in the more theoretical aspects of this law either. As, however, in modern times the value and importance of chattels in terms of industrial equipment and stocks of commercial receivables, even of consumer holdings in investment securities, is very considerable as already noted in section 1.1.8 above, the law of chattels and intangibles has become much more relevant, if only from the point of view of their financing and the security that they can provide in this connection. As a consequence, the law in this area can no longer be ignored, underdeveloped as it may have become. 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 mentioned, as such it is traditionally considered part of the commercial law and within it principally an issue of the law of contract (and not of property). Even then, 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, it is for chattels covered by the law of bailment, which was developed not within the law of sales but rather in connection with lending and letting arrangements or custodial functions, often still under commercial law, however, but is as such much older than the sales contract. Thus in common law there was for chattels and intangibles never a comprehensive system of proprietary rights and their protection. As was also observed before, in all of this there is not even a unitary approach to proprietary issues. Common law differentiates according to the nature of the asset. There are as a consequence very substantial differences between the proprietary aspects of real estate (where formally ownership does not exist in a feudal system of land holdings), chattels, and intangibles and within chattels between different products or structures such as sales, leases and securities, and within intangibles even between contractual, tort and unjust enrichment claims. It is thus clear that common law never developed or even aspired to a unitary system of proprietary rights in the manner in which civil law did under the influence of Roman law and the ius commune. In fact, it did not even develop a clear conceptual distinction between proprietary and obligatory rights as we have seen. Although modern
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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,80 one should be careful not to assume from this usage of civil law terminology that common law has developed in a similar manner and now clearly distinguishes between proprietary and obligatory rights. It is not to say, of course, that proprietary rights and obligatory rights do not exist in separation in common law but they are not commonly considered in their fundamental difference. Common law was and is protection oriented and still looks primarily at the available remedies and remains less interested in substantive rights, abstract rules and concepts, or a property system or model and its functioning. It was already said that it remains largely indifferent to it. In this connection the maxims ubi remedium, ibi ius and ‘remedies precede rights’ are still commonly used and hold true in common law as in fact they also did in Roman law but not in the civil law of the codifications. As we have seen earlier,81 Roman law had an effect on early common law but very different from that on civil law. The distinction between the old Roman in rem and in personam actions on which the civil law developments were subsequently built led in common law at first to a split between the types of assets that could be the object of proprietary rights (the distinction between realty and personalty) rather than to a distinction between proprietary and obligatory rights, as was the later civil law development, of which it can now be safely said that the right comes before the remedy. In such a system, the distinction between proprietary rights and obligatory rights can develop and even become fundamental. That did not happen in common law.82 What was on the other hand a typical common law feature was the emergence of equity as additional support in the area of remedies where the common law itself proved inadequate. In the law of property, equity became of importance first in the area of land law when certain uses that were not within the traditional common law system of estates, such as custody arrangements in the case of absentee landlords, needed consideration and definition. As custodians to whom the estates were transferred were in possession and therefore in a very strong position at law (as a matter of seisin), the true owners needed better protection. They were then made beneficiaries with some proprietary protection, but only in equity, which offered less than full proprietary status. Yet it protected at least against intermediaries who did not want to return the property and especially against their alienation of the land to persons who were familiar with the arrangements. After the Statute of Uses of 1535, which sought to outlaw abuses of this facility especially when used to circumvent restrictions on the alienation of land, by will or contract, or to defraud creditors, ways were nevertheless found to strengthen them
80
See eg R Goode, Commercial Law, 4th edn (London, 2010) 28. See n 24 above. 82 See also G Samuel, ‘Property Notions in the Law of Obligations’ (1994) CLJ 524, 527, noting that the distinction is also not always so clear in civil law, and that hence civil lawyers should not feel superior in having developed the distinctions in this respect more clearly. 81
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under the new name of ‘trusts’. Both the trust and other rights such as future interests developed first in land law but were later introduced into the law of chattels also. They were then 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.83 Equity in this sense, although originally based on the King’s conscience (through his Chancellor in the Court of Chancery, in England, now the Chancery Division of the High Court) offered only incidental protection. Case law nevertheless subsequently allowed the development of a limited set of rules in certain areas, as indeed for assets in trusts and for future interests in chattels, assignments of proprietary rights in intangibles, client protection in agency, and equitable liens. Only in the law of trusts, bankruptcy and companies is there a fuller and more comprehensive equity system, made possible and now mostly supported by statute. As explained in Volume 1, chapter 1, section 1.3.1, equity itself was never a system and it does also not mean a general influx of good faith and reasonableness notions into common law. In fact, unlike modern civil law of the northern European variety, common law is on the whole averse to such a generalised approach and remains principally remedial.84 As for the true differences between common and civil law concerning chattels and intangibles, the first and perhaps most obvious difference is that common law distinguishes between ownership and possession (or bailment) as the only proprietary interests at law in chattels and uses these concepts in quite a different manner. Ownership and possession operate here side by side and are both indivisible (for chattels, not for land). That is to say, first, that the one cannot be expressed in the other, but more importantly that both proprietary rights in chattels are full. This means that at law there are no limited proprietary rights in chattels. Thus a life interest in a piece of jewellery cannot exist at law and is full ownership (at best subject to the right of the remainder in equity). Equally, possession cannot be conditional, even though again, there may be (some) protection in equity. Unlike in civil law, possession of chattels in the above sense is in common law a proprietary right governed by the law of bailment (which is often seen, however, as one particular form of possession, that of a temporary and voluntary nature only). Based on the physical notions of possession, it is often stronger than the ownership right itself, at least when the owner has voluntarily parted with physical possession. It has
83 Although it is argued in this book that the protection of equitable interests in this manner is owed to the knowledge of the (succeeding) owners in the assets, manifested in the protection of the bona fide purchaser of the legal interest, it is all the same true that this is not really the accepted underlying general principle and the law of equity is here more static and limits itself to specific situations, see more particularly n 11 and accompanying text above. 84 Nevertheless in the protection of equitable interests in chattels and intangibles, generally bona fide purchasers of assets held in trust or subject to hidden adverse equitable interests (such as equitable charges or conditional or temporary ownership rights) are protected. Civil law traditionally protects bona fide purchasers, but of chattels only (as statutes now do also in common law in the context of the sale of goods at law), see ss 1.5.8–1.5.9 below, but otherwise in civil law the good faith notion remains largely confined to the law of contract. It has already been observed that where bona fide purchaser protection is exceptional at law (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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already been said that there are no limited proprietary rights in chattels at law. Nevertheless there can be a pledge, but it should be understood that this requires the transfer of the physical possession which creates a bailment, therefore a new title, not a limited one. It follows that the pledge is defended as a bailment, not as a (limited) proprietary right as it is in civil law. To repeat, this type of possession in the common law sense is based on the simple physical holding of the assets (the old seisin) once surrendered by the owner and is not therefore a derivative right. Again, security interests are here proprietary because they are possessory, and are not separate proprietary rights. It follows that technically speaking there is no place at law for non-possessory security interests or charges which depended for their evolution on equity (hence the equitable floating charge). The non-possessory chattel mortgage still exists at law, however, and is here an exception. It is perceived as a conditional sale (at law) of specific existing property and is for private persons much confined by statute and depends for them on a form of publicity, see section 1.7.7 below and Volume 3, chapter 1, section 1.5.2. Only equity developed interests in chattels, which in civil law terminology could be more properly considered examples of limited proprietary interests. Indeed, in a trust, the economic interests are allowed to be legally separated from the ownership of the asset, but equitable rights need not operate behind a trust only. It was already said that in equity, different interests in time may operate side by side in chattels, such as equitable interests for years 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 in the professional sphere, equity concentrates here largely on three structures: (a) trust and trust-like structures including constructive and resulting trusts, tracing and tracking, (b) conditional and temporary ownership rights, and (c) floating charges. Whether or not this still implies limitation, it should be realised that these structures are highly flexible and can be filled in contractually in such a manner that virtually any right or structure may result. It shows, and was already demonstrated repeatedly, the importance of party autonomy in proprietary matters under which economic interests in this manner may be freely split off in equity. Although it leads to protection for the beneficiary only in tort, this is in fact in common law no different for ownership and possession of chattels as we shall see— another fundamental difference from civil law. However, on a proper analysis, these equitable interests should be seen as no less proprietary in nature, even though (in the manner of equitable relief) still cast more in terms of protection than in terms of substantive rights. It is true that they can be defended only against certain types or classes of third parties, notably against successors in the legal interests who had knowledge of the equitable ones at the time of the acquisition of the asset (or did not acquire the assets for value). These beneficial interests may therefore not be defended against all the world, but only against certain successors in interest (and the trustees themselves), who were not party to the original deal. Nevertheless there is here clearly third-party effect and only bona fide purchasers
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or purchasers in the ordinary business of commoditised products (for value) are protected against them. The result is in civil law terms a largely open system of proprietary rights in equity. Even proprietary rights similar to those in land were in equity explicitly allowed to operate also in chattels, like the future interests. On the other hand, in intangible assets, 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, but quite different from those in chattels and real estate. The concept of trusts and future interests in chattels will be discussed more extensively in section 1.6 below and floating charges in Volume 3, chapter 1, section 1.5.2. Here we are first concerned with the main outline of the law of chattels at law.
1.3.2 Ownership and Possession of Chattels in Common Law It was pointed out in the previous section that while common law operates with the notions of ownership and possession, legally they have a meaning which is quite distinct from those of their civil law equivalents. Ownership is a weak concept in common law, even for chattels, while technically it never developed for private parties in land under the feudal system of land holdings (which only knows tenure or estates)85 and had (at law) no meaning for intangible assets either. For chattels, the common law emphasis is on possession in a physical sense (bailment), therefore quite different from civil law, where this notion is based on the will or intent to hold the relevant proprietary right in an asset for oneself as owner (the animus domini or possedendi). As we have seen, it assumes some form of control of the underlying asset (the corpus) but not necessarily physical holding and is not itself a proprietary right but only a way in which such rights are expressed and defended. In common law, on the other hand, possession is not the mere manifestation of an underlying proprietary right but is itself 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 not considered bailment, for example when representatives, employees or servants handle the owner’s goods. In those cases, exceptionally a form of constructive possession (for the owner) emerges even in common law.86 As we shall see in section 1.3.5 below, there are some other instances of constructive possession in common law, but they are all exceptional.
85 At least for chattels, the common and civil law notions of ownership could have developed along similar Roman law lines. For common law, this was attempted early on by Bracton, De Legibus et Consuetudinibus Regni Angliae (see n 24) above. Their original similarity derived, however, rather from the Germanic concepts of gewere or seisin, later abandoned in civil law under Roman law influences, as we have seen in s 1.2.3 above. 86 In civil law, there would be no possession in this case at all as the possession would be imputed to the principal.
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Thus bailment results from a voluntary split between ownership and possession on the part of the owner and normally has a contractual arrangement at its origin. However, it remains clear that bailment itself does not derive from contract but rather from the physical handing over of possession and confers a distinct status. In this connection, it may be repeated that bailment existed long before a system of (underlying) contracts (of custody, hire, etc) properly evolved in common law and bailment may as a consequence exist without any valid contract (for example, in the case of a custody agreement without consideration). Bailment may be more usefully and better 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 countries than those of a holder vis-à-vis the owner/possessor in civil law. Nevertheless, in all cases where possession in this sense is transferred under a contract, the contractual rights so created for the beneficiary acquire in civil law terminology proprietary effect and protection under bailment, which in common law terms suggests an opening up of the proprietary system, even at law, although technically ownership and possession in this sense cannot be curtailed by contract and is what it is. The contractual position of the owner and the strong position of the possessor in such cases mean in common law that the owner often has not much more than a contractual retrieval right, except when the arrangement comes to an end or is legally interrupted. In those cases, there may be a right to immediate repossession (or a property right in replevin),87 which leads to another form of constructive possession in common law, but is probably better characterised as a mere retrieval right. Normally the bailee has the better defence position and will also act against third parties, even if he is not liable to the bailor for the loss of or damage to the asset within his duties of care.88 It is true, however, that the position of the owner in modern common law is here gradually reinforced. Whatever the (limited and exceptional) concept of constructive possession may mean in England in this context, there is then also a concept of ‘constructive delivery’ in cases in which possession must be delivered, see further section 1.3.5 below. That is no longer important for the sale of goods in England, which is now the subject of statutory law that no longer insists on delivery, but it remains necessary for gifts and bailments,
87 Against the bailee, the owner traditionally could defend only on the basis of his personal contract right (of rental, hire, custody or borrowing). He had no direct action against third parties either, even against any thief of his goods under a bailee, except through the latter unless he had an immediate right to repossession: United States of America and Republic of France v Dolfus Mieg & Cie SA and Bank of England [1952] 1 All ER 572, 584. In that case he could also recover damages or repairs in respect of his goods. Even then, this was in the nature of a tort action, true revindication rights in England existing merely in connection with real estate, while traditionally the defendant always had the option to pay damages instead of returning the asset. Naturally any recovery of damages from a third party by a bailee in excess of his own interest in the asset was kept in constructive trust for the bailor. The right of immediate repossession is now also presumed to exist if the bailee defaults under his contract with the bailor: see North Central Wagon and Finance Company v Graham [1950] 1 All ER 780. See also Vol 3, ch 1, n 256 for the situation in conditional sales before the UCC. 88 See Sir Richard Henn Collins in The Winkfield [1900–03] All ER 346 in 1902, confirming much older law: ‘As between the bailee and a stranger, possession gives title—and that is not a limited interest, but absolute and complete ownership’.
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including the creation of a pledge. Delivery of constructive possession is relevant in those cases when the goods effectively remain with another bailee. In such a situation, this bailee must consent to the title transfer as a matter of ‘attornment’, acknowledged in sections 28 and 29 of the Sale of Goods Act 1979. Again, this must be characterised as an exceptional situation and constructive delivery continues to have only limited importance in common law, very unlike civil law.89 In the previous section it was already 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 here derives its status solely from being physical. As just mentioned, it has no contractual basis, even if a contract is now normally at the origin of the bailment. As such it is not truly comparable to detention in civil law either. When in common law it is further said 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 legally often as good if not better, although other authors use the term ‘title’ only in connection with ownership.90 Ownership is in this context considered to be indefeasible. That means that it cannot be destroyed by the separation of possession. In that sense, it is the stronger right, but not the easier to defend. Possession, on the other hand, cannot survive its own transfer but moves on, leaving the erstwhile possessor with no proprietary right at all, although in the case of an involuntary dispossession he may still have a strong retrieval right as being the older (erstwhile) possessor. It could be seen as yet another instance of constructive possession, but again it is probably better to consider it a mere retrieval right (in tort) which may also exist against third parties unaware of the original dispossession and who obtained the assets lawfully.91 Even if defended on the basis of a better possessory right, it 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 said on equitable title, it is possible to be brief. As we have seen, 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 89 The idea of constructive delivery was also supported under the Statute of Frauds of 1677, which guarded against undocumented non-possessory interests in tangible assets. Under it, possession could replace the requirement of a document, again relevant mainly in respect of goods with custodians and bailees, when constructive delivery (subject to attornment) was sufficient: see for the Statute of Frauds also Vol 3, ch 1, s 1.5.2. 90 The common law terminology is not stable in this connection. Goode (n 80) 45, gives both the owner and possessor title. S Gleeson, Personal Property Law (London, 1997) 25, on the other hand, refers to title only in connection with ownership. Another difference in terminology concerns ‘possession’. Some, like Professor Goode, use it interchangeably with bailment. Others, like Mr Gleeson, distinguish between the two. 91 See Clayton v Le Roy [1911] 2 KB 1031, and earlier Lord Mansfield in Cooper v Chitty 1 Burr 20 KB (1756).
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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 noted before. Normally the more limited rights in chattels operate in equity quite independently from the legal interests of ownership and possession, although they may overlap, for example when a trust beneficiary also obtains the physical possession of the asset to enjoy the benefit fully. It is also said that they are impressed upon the property rather than created in it as one of the property rights.92 Other examples are future interests such as (sometimes) those of a buyer under a promise to sell or those under temporary or conditional title transfers, and those of the original mortgagor under a chattel mortgage (the equity of redemption).93 These equitable interests are interests freely created by the parties (or unilaterally by a settlor in trust or derive from the operation of the law as in the equity of r edemption)94 and are 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 (or in modern times even to buyers in the ordinary course of business of commoditised products regardless of their bona fides). They can therefore only be maintained in respect of some classes of third parties, especially those who knew of the arrangement or acquired the underlying asset for free as we have seen. It has already been said also that this is a trade-off and allows the common law system to accept an unlimited number of equitable proprietary rights while limiting their effect to those third parties that knew of them when acquiring the property. No delivery of possession is necessary for this protection of the bona fide purchaser.95 Even if (physical) possession remains with the beneficiary, the bona fide purchaser has good ownership title, although 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. Whilst it is exceptional in civil law, it is a general principle of equitable protection, all the
92 There have always been objections to the use of the term ‘equitable proprietary rights’, first because they do not operate against all the world but only against certain classes of legal or natural persons. F Maitland was in that category, see his Equity, Also the Forms of Action at Common Law: Two Courses of Lectures (1909), chapters 9–11. Another reason is that this terminology suggests a carve-out from the title at law; hence the newer idea that the equitable interest is printed or impressed on the property rather than carved out, see DKLR Holding Co (No 2) Ltd v Commissioner of Stamp Duty (1982) 149 CLR 431. Much of this is semantics. It has already been said that these equitable rights cover a middle ground between the law of obligations and the law of property and it is therefore admitted that they are not wholly proprietary in the traditional sense, but because of the notion of segregation they undoubtedly introduce, they are much less purely obligatory. The significant third-party effects of these rights, even if limited to only certain classes of third parties, would appear to justify the reference to them being proprietary, although their extent still depends on the circumstances (and the contract). 93 See also S Worthington, Proprietary Interests in Commercial Transactions (Oxford, 1996). 94 Earlier it was explained that there may be only some more specific types as these equitable proprietary rights mainly surface in the area of trusts (including constructive and resulting trusts and tracing), conditional and temporary ownership rights, and in floating charges. It is unclear whether new ones may be created all the time, see n 11 above, although in England the floating charge was created more recently in case law, see Vol 3, 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. 95 Thus, under equitable proprietary rights, possession need not be transferred at all. If it is, it 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 may give the beneficiaries additional protection.
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more interesting as at law it is also exceptional and is then mainly derived from statute (the Sale of Goods Act), as in the already mentioned case of the sale of goods: see further section 1.4.8 below. It was said before that this protection of bona fide purchasers with respect to equitable interests is not an exception but follows from the very structure of these equitable rights, which can only be maintained against those interest holders who knew of them before they acquired the property (or acquired it for free). It could still be said, however, that, strictly speaking, the protection of equitable interests in this manner is not proprietary either, but rather based on the bad faith of the buyer of the legal interest and on the beneficiary’s (tort) action to protect it. 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 3, chapter 1, section 1.5.2. Where it is believed that the equitable interest is in truth nothing more than the imprinting of an economic interest on the asset, which interest became protected in this manner, it may find an equivalent in civil law, for example in situations where an asset has been sold and has been paid for but has not yet been delivered in a system where delivery is required for title transfer. It might be possible to assume in such cases that in the intervening bankruptcy of the seller, the buyer is protected in a proprietary manner. This may be equivalent to the protection of an equitable interest in common law. We could also see here the notion of unjust enrichment turned into a constructive trust operating in civil law. In civil law terms, the protection would then be proprietary rather than in tort, but the practical difference is not great, as even in common law these (tort) actions can be maintained against a bankrupt (wrongful) title holder and are as such (in a civil law sense) more proprietary than personal in nature as already noted. We have also seen above, starting in section 1.1.2 that in modern civil law, a party knowing of a contractual right of way may have to respect its continuing existence when this party buys the land over which the right of way was given, even, therefore, in the absence of a servitude. Again this is similar to equitable protection of such a right (in common law terms) and makes it proprietary even in civil law countries, at least in respect of all who know of the right. As yet this is far from being a concept capable of generalisation in civil law, but would result in a close approximation of equitable proprietary rights notably in that they may affect certain third parties but not all. It was submitted that in the common law system, the result of these equitable rights, although often still cast in terms of protection rather than substantive right, is an ownership type and division that primarily functions between the parties to the original transaction and the insiders in these trades. Nevertheless, this has led some to conclude that these rights remain closer to a contractual arrangement, although they may be defended in tort against certain classes of third party/successors of the legal interest holder. It has already been pointed out above in section 1.1.2 that that is in the nature of all proprietary rights and it seems clearer to accept this, although it being equity, the consequence will be largely left to the equity judges in terms of restoration of the prior situation or damages. It substantially depends on the acts of situation. The prior
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situation may be restored more readily if there is demonstrable fraud or collusion in respect of land. Also, as between creditors of the trustee and the beneficiary, the proprietary characterisation is important and probably more apt, especially in bankruptcy, as the creditors’ recovery right in the assets in the case of the bankruptcy of either party (or both) cannot be varied by bankruptcy trustees repudiating the underlying arrangements as if they were only contractual. This is bankruptcy resistance, in civil law indeed considered a key proprietary issue. As far as these equitable interests go, it is therefore best and clearest 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, 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 older 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 have seen. In land, they became almost as strong as ownership rights, which in the feudal system remained, strictly speaking, vested in the Crown. In the common law of personal property, where the ownership notion could develop independently, it did so, but in a weak manner, as we have seen, because of the overriding importance of physical possession and its protection at the expense of a more abstract ownership notion. This possessory protection is traditionally obtained through the old tort actions in trespass, detinue, conversion, trover or replevin. Although these actions are tort actions, they are quite different from the modern tort of negligence or the civil law tort action, which is purely personal, therefore directed only against the tortfeasor. Although in common law the negligence action may also serve to protect an affected possessor, the special feature of the old possessory torts is that (in civil law terms) they have a proprietary effect, as they allow the asset to be pursued in the hands of anyone with a lesser right to it (especially in detinue). In England much of this protection has now become statutory.
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Even so, and as previously noted, under common law there never was an absolute right to retrieve personal property, not even at law. As such there are no revindicatory actions. Even under the old tort action of trespass against goods, the defendant always had the option to return the monetary value of the asset instead. In England, since 1854, the courts have acquired discretion in this area under statutory law. This discretion naturally weakens the position of the dispossessed plaintiff and of any owner (if different) in the bankruptcy of the wrongful possessor. Even in land law, ownership or revindicatory actions do not truly exist as there is technically still no ownership, but there are here full legal reclaiming rights, which for all practical purposes may be equated with a revindication, but they are even then technically still possession or seisin-connected. Although it is a generic term, the concept of bailment does not necessarily operate in a completely identical fashion in the various situations in which it arises. Nevertheless, in all instances it leaves the owner or bailor in a weak position. Thus in the bankruptcy of the bailee, the bailor cannot simply rely on his ownership right and retrieve the asset (subject to any payments for shortened use, as would most likely be the civil law approach). The bailment must be unwound first. Moreover, in the case of an involuntary dispossession of the bailee, it is in essence the latter who has the right and possibility to retrieve the asset from the thief, very different therefore from the situation in civil law where (except under modern German law) the owner (and legal possessor in a civil law sense) is the more likely party to pursue the asset and protect the dispossessed holder, who has a personal retrieval action against the tortfeasor only and none against the latter’s successor in interest. Only at the end of the bailment when the bailor obtains a right to immediate repossession,96 which he may also acquire during the bailment when its essential terms are violated by the bailee, may the bailor have the possibility of defending his rights against third parties directly himself. Here the underlying contract may exceptionally cut the bailment short, which otherwise operates independently from the contract from which it resulted. It follows that, even when the bailee goes bankrupt, the owner/bailor may not have a true retrieval right against him or his transferees. Constructive trust notions might still help him 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 while offering security for payment of the rentals. The difference is that at the end of the rental, the question of the proprietary protection of the owner will arise as a separate issue in common law, which is unlikely to be the case in civil law. Similar problems may arise where a bankrupt agent has client assets in his possession (which problem may be further aggravated for any lack of segregation).
96 See North Central Wagon and Finance Co v Graham [1950] 1 All ER 780, and United States of America and Republic of France v Dolfus Mieg & Cie and Bank of England [1952] 1 All ER 572, 584. See for the right to immediate repossession upon the voidness of the transfer in a sale contract induced by fraud in the US, Moore Equipment Co v Halferty 980 SW 2d 578 (1998). There was no protection of bona fide purchasers in that case, now often corrected by statutory intervention.
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Again, for chattels, the emphasis in common law is in the first instance on physical possession, more so than in civil law, which looks in the first place at ownership or otherwise at possession in the more theoretical civil law sense of legal control. While in civil law ownership is the fullest right, in a common law context, for chattels, the ownership notion is often seen as no more than what remains, taking into account the position of the physical possessor or even the equitable interest holders.97 There is therefore no absolute or fullest right and ownership itself is easily undermined through bailments. 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. Again, in civil law there is only one owner of the relevant underlying property right while there may be many possessors of these rights where the better right prevails, in common law there may be many owners of chattels who rank according to the strength of their ownership rights but there is likely to be only one possessor. To repeat, this 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.98 The weak feature is 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 need not be the will to hold for oneself as if one were the owner, therefore it need not be the animus domini or possedendi in a civil law sense. It is in principle purely physical and factual. Consequently, the following picture emerges. In common law, if O as owner has allowed P to take physical possession, both are considered to have a title in the property. O’s title is ownership. Being the best, it is indefeasible, which means that it can survive someone else taking physical possession; P’s title is possession or bailment.99 It is subordinate to that of O, whose right during the time of the bailment is protected only in contract, and is even weaker against anyone else, including someone who takes possession against P’s will. This latter person is then the possessor but has lesser or younger rights than P, while both must accept that O has the best right, even if 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, but without p ossession (if voluntarily surrendered) it is difficult to defend against third parties including the bailee or a thief from him. In this system, the thief (T) from P is possessor (but not a bailee, bailment being limited to a voluntary transfer of possession) and protected against anybody else except his victim, P, who continues to have a reclaiming right.100 That is also the position of 97 See Goode (n 80) 34ff and AP Bell, Modern Law of Personal Property in England and Ireland (London, 1989) ch 4. 98 See for the concept of possession in common law also DR Harris, ‘The Concept of Possession in English Law’ in A Guest (Ed), Oxford Essays in Jurisprudence (Oxford, 1961) 69 and further Bell (n 102) ch 3. 99 See also n 87 above, although the proprietary protection of the bailor was subsequently enhanced at least when he has a right to immediate repossession: see n 91 above and accompanying text. 100 Since as early as 1722, see Amory v Delamirie [1558–1774] All ER 121. The action is in tort (trespass). See also Clayton v Le Roy [1911] 2 KB 1031.
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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 is 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 England101 may any possessors following T or F invoke P or O’s better right (ius tertii) by way of defence against them and may prevail in this manner if P or O intervenes and supports them. In civil law, it would be possible and indeed normal for any defendant to invoke the owner’s right as a defence against anyone else claiming such ownership.102 Even in a conflict between two possessors, possessor and holder, or between holder and sub-holder, the ownership concept could thus intervene. The traditional common law approach is not interested in any such absolute rights but rather in relative rights, although through statutory adjustment, as just mentioned, in common law there is now some approximation.103
1.3.5 Constructive Possession and Delivery in Common Law. The Absence of Acquisitive Prescription. Statutes of Limitation We have already seen that in common law, the instances of constructive possession are exceptional and in fact only an expedient, used when, as in the case of the owner at the end of a bailment, a void may exist as to the reclaiming rights against third parties leading to a right of immediate repossession: see section 1.3.2 above. In this vein, it can also be argued that the bailee who loses his possession involuntarily retains it in a constructive sense, giving him an action for recovery against a thief. It has already been said that, in such cases, it may be better not to use the term ‘constructive possession’ 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-à-vis the lessor even if the assets have been transferred to a sub-lessee, at least for purposes of any stay of proceedings, which thus also affects a head lessee without actual possession.104 There is further a limited notion of possession without physical holdership where representatives, employees or servants manage assets, as already mentioned. It is indeed clear that common law never developed a more abstract notion of possession. It remains physical, that is its essence. Common law is in this connection not concerned with acquisitive prescription either or with the procedural or evidential function of possession, which contributed much to the development of the civil law approach and its abstract concept of possession: see section 1.2.5 above. There are
101 Under modern English law, bailees may invoke the rights of the true owner as a defence: see s 8(1) of the Torts (Interference with Goods) Act 1977 (the ius tertii of civil law: see n 78 above). 102 See s 1.2.7 above. 103 On the other hand, modern civil law is not always insensitive to the relativity concept either, so much part of common law as we have already seen in s 1.2.7 above. 104 Re Atlantic Computer Systems Plc [1990] BCC 859.
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statutes of limitations in common law and actions become barred as anywhere else (tort actions mostly in six years and others often after 30 years), but that is different from the concept of acquisitive prescription by a bona fide acquirer.105 In civil law, it is first a way in which ownership is acquired but beyond that also a procedural tool to prove full ownership and defend with the ownership action (revindicatio). Although originally in England delivery of possession was necessary for the transfer of title in chattels, that approach is now abandoned (see section 1.4.2 below) although it is still the rule in the US, subject to the parties’ right to agree otherwise. Delivery is also relevant for gifts or bailment, and always means physical possession (see section 2-401(2) UCC) while the concept of constructive possession or constructive delivery was not developed in this context either. See also section 1.3.2 above, where the concept of attornment was discussed, used when assets are left with another bailee when his consent is needed to complete the delivery. Common law clearly has had less need to distinguish between legal possession and physical holdership or between constructive and actual possession. Whether one holds for oneself or for someone else does not make any fundamental difference as far as protection goes. Neither is it necessary for the holder ever to rely on the owner for his defence, which is the traditional civil law approach. As mentioned earlier, only in modern German law did we see a similar move towards possessory protection for the holder going back to the older Germanic or Saxon notion of seisin or gewere. Nevertheless this does not fundamentally affect the role of possession within the general Roman law structure of German ownership law: see section 1.2.1 above.
1.3.6 The Situation in Bankruptcy The relative position of the owner and equitable interest holders vis-à-vis a bankrupt bailee or possessor is a less regular topic of discussion in bankruptcy treatises in common law countries, even in the context of the definition of the bankrupt’s estate. Is the possession of the non-owner, being a proprietary right, part of his bankrupt 105 See for the problem of the absence of acquisitive prescription and the question who may consider himself owner in common law jurisdictions after the statute of limitation has run (and the action of ejectment is no longer available), Pye v Graham [2003] 1 AC 419 (House of Lords). Although the English Limitation Act 1980 s 4(5) excludes all claims to ownership of claimants who acquired property in a criminal manner, since the English Real Property Limitation Act 1833, now replaced by the Limitation Act 1980, at least in land law the right of the original interest holder is otherwise at an end. There is a need for adverse possession, however, excluding in this way persons who hold the real estate pursuant to a contractual arrangement or hide their possession. The question in this case was what adverse possession requires. There must be an ‘intention to possess’, which is, however, considered a factual matter. It means a form of control that need not always be physical but usually will be. Again it shows English law’s natural instinct for a physical aspect. In this case it became clear that exercising grazing rights may be sufficient even without any warning to the (absentee) owner. Even so, the adverse possession must be open and clearly exercised (squatters, eg, are normally in that situation, although in England the Land Registration Act 2002 imposes much stricter conditions on squatters in terms of their adverse possession). The European Court of Human Rights in Strasbourg in its decision of 15 November 2005 (App no 44302/02), found, however, that this system of adverse possession may lead to a form of expropriation rendering the UK government liable for compensation. 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 virtual extinction of title in that context has not so far been contentious.
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estate and what are the retrieval possibilities of the owner? As for the latter, in so far as possession goes, it seems clear that even a seller under a reservation of title who surrendered possession has a weak position in the bankruptcy of his defaulting debtor and his retrieval right cannot be presumed to continue even though he is not paid.106 As for bailment being part of a bankrupt estate, section 436 of the UK Insolvency Act 1986, while defining the bankrupt’s property, does not mention 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 respected,107 including in a bankruptcy of the legal owner or bailee.108 Thus, it may have to be considered how not only ownership, but also equitable interests impact on a bailment in a bankruptcy of the bailee. Although in equity there may still not be full freedom in the creation of beneficial proprietary interests to be defended against all who knew of them, therefore even in their bankruptcies,109 nevertheless where they operate, their status in the bankruptcy of a counterparty must be 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, e njoyment
106 G Lightman and G Moss, The Law of Administrators and Receivers of Companies (London, 1986) 140, observe that even upon a reservation of title, once the seller has parted with possession, he normally has no satisfactory statutory remedy if the buyer becomes insolvent and defaults. Goode (n 85) 423 suggests that exceptionally in the case of the sale of goods upon rescission of the contract for reasons of default, the title re-vests in the seller, although not retrospectively, but the effect in bankruptcy of the buyer in possession remains unclear. As in the case of a failed sales agreement because of mistake or fraud, the buyer in possession might be considered the constructive trustee for the seller, and as such the seller may acquire a proprietary retrieval right as beneficiary under such a trust and this may also be effective in bankruptcy. At least this could be a respectable US view. Yet when there are no clear security interests or charges proper, the retrieval possibility upon bankruptcy of the physical possessor may be in doubt. In any event, in the US, under Art 9 UCC, reservations of title are now treated as security interests and no longer result in a retrieval right (which under earlier law was conceded), only in a disposition and set-off of the proceeds against the debt (sales price). 107 It is of interest that this problem is not a regular topic in treatises on bankruptcy in the UK: see, eg, the leading book by IF Fletcher, The Law of Insolvency (London, 1996) 187ff, 206 and 217. Section 283(1) of the UK Insolvency Act 1986 vests all property belonging to the bankrupt in the bankruptcy trustee, but s 436 defining the bankrupt’s property does not mention possession. It does not mean that mere possession of a bankrupt bailee has no relevance in his bankruptcy and is not included in the estate. The estate certainly also includes, at least in principle, the equitable interests or beneficial ownership rights of the bankrupt debtor even though eg on the basis of the provisions of the trust deed the benefits (before they are paid out) might not belong to the estate. Short of real remedies, which, in the case of chattels, are limited to situations where there are charges or security interests in the property, there is only a personal right to the return of the property (sometimes also referred to as a resale). Also the unpaid seller has no revindication right but must prove his better right in the circumstances which may not result in retrieval in a bankruptcy. The law in Scotland may well be different because of its Roman law origin and revindication rights in chattels. In the US, s 541(a) of the Bankruptcy Code includes in the estate all legal and equitable interests of the debtor and s 522 defines what is exempt. It covers possession as a legal interest but subject to the better rights of others. Whether such better rights may always be asserted against the bankruptcy trustee of a bailee may well remain doubtful. 108 In the US, The position of the trustee in bankruptcy is reinforced in the US under Sec. 544(a)(3) as he is given the status of lien creditor and bona fide purchaser of the bankrupt’s assets, but at least property held under expired leases is not part of the estate: see s 541(b)(2) of the Bankruptcy Code. See for special reclaiming rights in bankruptcy in the US also ch 1, s 2.1.10 above, and n 191 below. 109 See n 11 above.
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and income rights also become more widely protected, at least against s uccessors in the title who knew of them when acquiring it. In common law, this is a consequence of the openness of the proprietary system in equity. Even in a bailment itself, therefore at law, there are hints of an open proprietary system (in a civil law sense). When possession is surrendered pursuant to an underlying contract of custody, hire, etc, these underlying contractual rights acquire proprietary (possessory) protection (here strictly speaking without the balancing effect of bona fide purchaser protection, however) and may create conflicts with other (equitable) proprietary rights. It may thus be seen that in bankruptcies common law is generally more generous in the proprietary protection of rights of beneficiaries, either through the equitable ownership notions or through bailment, but it may create further conflicts as between various interest holders. At the same time it limits the rights of the owner and the latter’s creditors in the bankruptcy of these beneficiaries or bailees, although the way in which this is done may remain on the whole less clear.
1.3.7 Practical Differences between the Common and Civil Law Approaches to Proprietary Rights in Chattels What are the practical differences that result from the different attitudes of civil and common law in the area of proprietary rights in personal property? How serious are they? Functionally there is no great difference. The real issue is always the entitlement to the user, enjoyment and income rights in the underlying assets. In either system, they can be created freely but their legal manifestation and protection are distinct when arising under contract or operating as proprietary rights. In the latter case, their defence may be expected to be more complete and also manifests itself in the position of succeeding owners and in the bankruptcy of counterparties. That is (a) the right to pursue or droit de suite, earlier identified as a matter of liquidity as it discharges the transferee of his obligations at the same time, and (b) right of preference or droit de préférence, earlier identified as an issue of risk management in the underlying asset. These are proprietary notions or consequences both known in civil and common law, although more fundamental in the former. If operating as proprietary rights, so protected user, enjoyment and income rights are limited in number in civil law, exactly because of the benefits. That is different in common law, at least in its equity variant, which, instead of limiting the proprietary rights at the level of their creation, cuts off their effect at the level of the bona fide purchaser, therefore at the level of their operation, but there are other differences between the civil and common law in the approach to proprietary rights. Altogether these may be summarised as follows: (a) the continuing emphasis on physical possession in common law. It led to tenure or the estates in land, and to the notion of bailment at the expense of ownership rights in chattels, while at law proprietary rights in intangible assets could hardly develop at all; (b) the open nature of the proprietary system in common law. It made possible the proprietary protection of the equitable interests that may virtually be freely
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c reated subject to the protection of bona fide transferees and of the ordinary commercial and financial flows; (c) the defence of proprietary rights in common law through tort actions (rather than proprietary actions). It was based on the relative strength of the proprietary, possessory or equitable rights rather than on absolute rights; (d) the lack of specific performance in common law. Notably in the law of personal property, the plaintiff does not have an automatic right to retrieve the asset but may have to be content with its economic value; and finally, (e) there are different approaches to the transfer of proprietary rights and bona fide purchaser protection—see more particularly section 1.4 below. They also affect assignments: see section 1.5 below. It was shown that the most immediate practical difference is in the relatively weak position of the owner in the common law of chattels when 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: (a) situations where the bailee has transferred the property to someone else without the owner’s consent and (b) in a bankruptcy of the bailee. Then there are the equitable interests raising also the matter of (c) the status of beneficiaries of equitable interests in assets in the possession of a bailee especially in his bankruptcy. The issue always is: who has got what in such circumstances. The effect of voluntary dispossession is clear but may be remedied if the owner obtains an immediate right to repossession upon a breach of contract. Even so, it may be difficult to maintain against sub-bailees. It was also shown that the position in bankruptcy is not straightforward, which equally applies to the question whether bailments belong to the bankrupt estate of the bailee and what the consequences are for any equitable or other interests in the underlying assets. The fact that at a theoretical level the common law practises an open proprietary system in equity continues to raise legal issues exactly because the consequences were never thought through in a systematic fashion. Civil law is clearer but introduction into civil law of equitable rights leading to an opening of the proprietary system will undoubtedly create similar problems to overcome in civil law bankruptcies. Nevertheless, it was argued that in the professional sphere with greater need for newer risk management tools and more emphasis on liquidity of assets and transactional and payment finality, this is the way forward.
1.3.8 Approximation of the Common and Civil Law Systems of Proprietary Law in Chattels. General Emphasis on User, Enjoyment and Income Rights. The Unifying Impact of Modern Financial Structures and the Requirements of Modern Risk Management. The Need for and Effect of Legal Transnationalisation In the previous section five major differences were identified between the common law and civil law of property concerning chattels, and it may be of interest to see whether, at least at the theoretical level, there is some approximation.
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Foremost it may be said that civil law is slowly opening up its proprietary system, which was traditionally firmly closed, by: (a) recognising conditional and temporary ownership rights; (b) (perhaps) giving (as in Germany) possessory protection also to mere holders/ detentors of chattels, thereby reinforcing their position under a contract pursuant to which they acquired the use of an asset; (c) more generously protecting economic interests (the example given was the protection of the buyer who paid but had not yet received the asset in a system that requires delivery for title transfer); (d) allowing third-party effect of rights of way to the extent they are known or published, notably contractual rights of way, and allowing also more broadly so-called qualitative obligations (see section 1.2.1 above); and (e) adding to or varying (as we shall see in section 1.7.4 below) the preferential rights of secured and similar creditors in certain cases, leading ultimately also in civil law to some forms of shifting interests and floating charges, even into future assets, at least to the extent they are replacement assets and can as such be identified. Under (a) and (e), reservations of title were developed as sales price protections, often at first in case law, which subsequently resulted in the development in Germany of the proprietary expectancy or dingliche Anwartschaft. Also, especially in Germany, there developed the Sicherungsübereignung, equally through case law, first as a kind of conditional transfer of assets to raise funding without transferring possession although subsequently developed more as a priority right in proceeds, at least in a bankruptcy of the counterparty, as we shall see in greater detail in Volume 3, chapter 1, section 1.4.2. It could (in Germany) even be broadened and take the form of a floating charge. Under (b), it became possible to protect economic interests in terms of user, enjoyment and income rights for the holder in a proprietary manner when assets are transferred thereunder. Under the German approach possessory protection extends in such cases to the holder as well. Under (c) and (d), the best protection results for any user, enjoyment or income right under the principle that third parties must respect what they know in terms of these rights in underlying assets before they acquire them. It was suggested that this indeed is the underlying rule of equity in common law countries where these rights may thus be protected against all except bona fide purchasers or better purchasers in the ordinary course of business in respect of commodities. Covenants running with the land may also be protected, now sometimes even in civil law, again, especially when they can be known by succeeding owners.110 Differences deriving from the stronger protection of physical possession in common law are here becoming less relevant. It is true that also in civil law mere physical possession sometimes gives protection, but primarily in the sense that the law everywhere respects the physical status quo and the prima facie possessory situation. That was identified in section 1.1.9 above as an issue of social peace but it is never more than a starting point and not dispositive.111 Other areas where physical possession may still 110
See n 45 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). 111
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matter in civil law were also pointed out and especially concern the protection of bona fide purchasers who commonly need physical possession in civil law, but otherwise in civil law possession normally is a legal or constructive concept, in common law only exceptionally so, except again in equity. To that extent there is convergence. An important point of similarity in this connection is that for proprietary rights to vest, especially in civil law, they must be properly identified, which in the case of chattels may mean properly set aside in a physical manner. It is an issue of specificity in more modern law often closely connected with the disposition right, as we have seen in section 1.1.4 above. Indeed, in common law, specificity and identification are equally important issues at law, but again they are much less material (or physical) for equitable interests to arise and be protected. That allows for future interests and their transfer and also for ready transfers in bulk as we have seen. Also in this area, the civil law in its nineteenth-century shape has stayed behind and is now struggling. It is true, however, that in civil law the physical holding of an asset mostly means nothing in itself and needs to be characterised in law in order to determine its significance, first in terms of the proprietary right or contractual right on the basis of which the asset was obtained or is operated, while subsequently its significance must more particularly be determined in terms of its defence, which, if the right is proprietary, touches on its further characterisation in terms of ownership, possession and holdership of that right as explained above. It may, however, rightfully be asked in how far this triptych of ownership, possession and holdership of proprietary rights in assets remains relevant in the operation and defence of more modern economic interests when maintained against third parties that know of them in an equity sense, which also touches on the issue of specific performance. For these issues see in particular Volume 3, chapter 1, section 2.1. If the protection of economic interests that were known to subsequent owners of the underlying assets is a major way forward as suggested in this book, certainly also at the transnational level, it would appear that, since their defence is likely to be in tort, this civil law triptych and the specific performance that it implies may lose much of its relevance. In fact, it could also be said that the same applies already now to the defence of intangible assets in civil law, notably monetary claims. It would increasingly concern all modern asset-backed financial instruments or products that become bankruptcy resistant in ways that will be further discussed in Volume 3, 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. It is even considered a human right. As such it is hardly conceivable that ownership in movable assets is in practice very different wherever these assets go (traditionally important for ships, aeroplanes and cars or lories). Yet it was already said that the manner of the protection of such ownership against third parties claiming older rights or even younger more limited proprietary or contractual rights combined with (physical) possession (and also the manner of the transfer of ownership, as we shall see below in section 1.4) was always legally problematic and may still differ considerably. Again, the key often seems to be the different role physical possession plays at the legal level. The more it is de-emphasised, the more approximation there can be.
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It means that to make progress, it should be repeated that we must think here in legal, not in physical terms, thus in terms of a rights-based not a physical system. We should also not continue to confuse model and physical realities in what often still is an anthropomorphic approach to movable property: see the earlier discussion in section 1.1.9 above. If one thus shifts the emphasis from physical possession to user, income and enjoyment rights in pools of underlying assets, one may see a move and need in the direction of stronger proprietary status of these economic interests everywhere. In s ections 1.1.3 and 1.1.4 this was already explained as a matter of better risk management and more liquidity. 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) and the need to protect the ordinary course of business as a matter of the uninterrupted continuation of the commercial and financial flows and to achieve fi nality. While shifting the emphasis in this manner, it was submitted that a more modern system of proprietary rights can develop, at least among p rofessionals. Again, it admits of a large degree of party autonomy in the creation of proprietary rights in respect of all kinds of user, enjoyment and income rights, 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. For this approximation there is every room in the transnationalisation of property law in respect of movable assets operating in the professional sphere, that means in the international flows. There are many variations possible here in terms of more subjective or objective or even constructive knowledge such as we have in publication systems that assume a search duty as in the case of land but often not in the case of filing systems of security interests in movable assets, at least not under the UCC in the US where the buyers in the ordinary course of business, who may well know of the interest, are still protected and have no search duty. This is all closer to the common law (in equity) than to the present-day civil law system, especially in the development of equitable proprietary rights where the physical element has abated. Again one may think especially of trustlike structures, conditional and temporary ownership forms, and of floating charges but also of transfers of goods or assignments of intangibles in bulk or of transfers or assignment of future assets. There is in common law definitely greater and 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 have already been mentioned. The introduction in civil law of proprietary protection for both parties in a conditional transfer, as in the reservation of title, will be discussed more fully in section 1.7.3 below112 as another important example of approximation, notably in 112 See for arguments in favour of a more open system, JH Dalhuisen, “European Private Law: Moving from a Closed to an Open System of Proprietary Rights” (2001) 5 Edinburgh Law Review 1. See for proposals for a more fundamental modernisation of Dutch property law (concerning chattels and intangible assets), JH Dalhuisen, Zekerheid in roerende zaken en rechten [Security in Chattels and Intangible Assets] in Preadvies Vereeninging’ Handelsrecht (Kluwer, 2003). See further also S van Erp, ‘A Numerus Clausus of Property Rights as a Constitutive Element of a Future European Property Law’ (2003) Electronic Journal of Comparative Law 1 and in Belgium V Sagaert, ‘Het Goederenrecht als Open Systeem van Verbintenissen? Poging tot een Nieuwe Kwalificatie van Vermogensrechten’ (2005) Tijdschrift voor Privaatrecht 983.
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c onnection with finance leasing, repo financing and factoring, opening up the proprietary system of civil law, potentially even leading to trust-like structures. It confirms a shift, even in civil law, to a greater contractualisation of the proprietary notions and of the interests that may be so created in more professional dealings.113 The commercial and financial practice requires it. What is missing so far is an adequate intellectual framework and proper understanding in civil law that the sequel must be a better protection of bona fide purchasers or the ordinary course of business all round. A more modern civil law would then also have to develop a more adequate protection method in terms of fiduciary duties of primary interest holders such as legal owners/ possessors in the manner of trustees in common law and of court intervention adequately to protect the beneficiaries. The concept that split ownership rights of this nature and the strict enforcement of fiduciary duties may require or even depend on extra court protection and an interventionist judicial approach is so far also less well understood in civil law.114 On the other hand, the lack of conceptual clarity in common law as to the meaning of ownership and the overriding impact of the physical aspect of possession in the case of chattels often still give the common law an uncertain bias. Together with the lack of a clear division between proprietary and obligatory rights, this results, as we have seen, in the position of the owner or even equitable interest holders without physical possession being complex and frequently insufficiently clear in the bankruptcy of the physical possessor or in situations in which the latter is dispossessed by third parties. Also the law of segregation or constructive trust, tracking or tracing of client assets, although all notions well known in principle in common law countries, may in practice not always be as clear in result as one might 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 and intangible assets is still not fully stabilised in common law and remains incidental and remedial in equity. This is certainly also the case in respect of intangible assets and their transfer, even if one must accept that intellectual concepts, models or systems can never fully cover all day-to-day realities, not in civil law either. We lack the necessary insight and the concepts we have are mere abstract approximations that
113 See for German legal writing on this development in connection with trust-like structures, W Wiegand, ‘Die Entwicklung des Sachenrechts im Verhältnis zum Schuldrecht’ (1990) 190 Archiv fuer die Civilistische Praxis, 112, 131ff and his reference to the ‘Obligatorisierung der dinglichen Rechte’ or the ‘contractualisation of proprietary rights’. See also MJ Waal, ‘The Uniformity of Ownership, Numerus Clausus and the Reception of Trusts in South Africa’ (2000) Electronic Journal of Comparative Law, 1. 114 See H Coing, Die Treuhand kraft privaten Rechtsgeschäfts (Munich, 1973) and s 1.6.5 below. The existence of separate funds with a purpose as Sondervermögen or Treugut was known in Germanic law and they are still alive particularly in Germany and Switzerland. In France, in recent years there emerged proposals to introduce a fiducia concept in this connection by statute (Art 2061 CC), which ultimately resulted in statutory law in 2007, see more particularly Vol 3, ch 1, s 1.3.7. Floating charges were introduced in France by Ordonnance 2006-346 of 23 March 2006, see Vol 3, 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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depend for their usefulness on constant verification and testing, even if embodied in the positive law. In section 1.1.10 above, reference was made to the new needs and developments which derive especially from the dynamic requirements of modern financial law. In section 1.1.11 above, the role of transnationalisation and of the new commercial law or international law merchant or lex mercatoria was mentioned in this connection. International finance accelerates within that law the above-signalled trends. The modern lex mercatoria serves here as a conduit while newer financial dealings have created the dynamic environment in which this acceleration takes place and in which it becomes indispensable. It introduces at the transnational level more broadly an open, albeit fractured, system of proprietary rights in which for each financial structure these rights are likely to be individually determined. In this connection the different proprietary approaches under the different Articles of the UCC in the US have already been highlighted. This approach is not therefore asset specific but rather product specific. The operations in the Eurobond market and the swap markets, and the progress of finance sales in the repo and lease markets we mentioned in this connection as well as the increasing need and progress of the floating charge in international commercial flows. Indeed risk and risk management are now substantially at the forefront of these newer proprietary concepts, particularly relevant in the context of professional financial dealings. They are supplemented by the need for asset liquidity as we have seen in section 1.1.4 above and the requirements of transactional and payment finality. It is not therefore surprising that they receive increasingly attention in that context. Approximation between civil and common law is most relevant and urgent in these areas, but may still be wanting. Transnational law or the modern law merchant or lex mercatoria and its acceptance and recognition of general principles and custom or industry practices is likely to further them as an expression of the autonomous and spontaneous law-creating force of the international economic and financial legal order itself. A dynamic concept of movable property is the result in the transnationalisation process in the professional sphere besides an equally dynamic and important concept of modern contract law, discussed already in chapter 1 above. See also the discussion on both and summary in Volume 1, chapter 1, section 1.1.6. In this newer professional environment, trusts, beneficial ownerships, conditional and temporary transfers, bulk transfers and assignments even of future rights, floating charges including replacement assets, security entitlements and the way they can be used for financing, payments through credit transfers, finance leases, repos and forms of factoring and securitisations, should be accepted foremost as international structures that operate under their own transnational law operating in the professional sphere or the modern lex mercatoria and that leaves domestic laws well behind. It is for academia to articulate this trend, draw lines and formulate the applicable rules on the basis of the internationally established or developing principles and practices, accepting for the time being that this may not be done on the basis of a unitary, intellectually coherent system of proprietary rights in the traditional civil law manner. Nor 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
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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 accepted practice or custom. That is the true test of their significance and full demonstration of their proprietary nature: see also Volume 1, chapter 1, section 1.1.6 at note 65, Volume 1, chapter 2, section 2.3.3 and Volume 3, chapter 1, section 1.1.13.
1.3.9 Virtues and Pitfalls of the Numerus Clausus Notion. Modern Functional Approaches It has already been said in section 1.1.10 above that in modern academic writing, the proprietary concepts and laws have been neglected both in civil and common law except in the area of intellectual and technological property rights. However, in the more modern functional approaches in the US, especially in ‘law and economics’, there has been an interest in the civil law concept of the numerus clausus of proprietary rights. Some renewed civil law interest115 in this concept is also apparent but 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 as security alternatives in asset-backed financing, sometimes backed up by new legislation, at other times it is case law. 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 obtained third-party or proprietary effect. No doubt this was supported by needs although it did not go so 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 noted in section 1.1.2 above. In civil law, some pressure is now coming from the financial practice in respect of movable property to rethink at least some of this approach. 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. This was explained above first as a risk management necessity but also as a liquidity requirement. They suggest a propensity towards beneficial ownership notions and trust-like structures everywhere, at least in movable property in the professional sphere and therefore an open system of proprietary rights, cut off not in number (therefore at their creation) but at the level of the bona fide purchaser or the ordinary course of business as we saw (therefore at their operation).
115
See nn 112 and 113 above.
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Especially in the US, the concept of limitation of proprietary rights has nevertheless caught the attention of academics but in a different manner and has a lot to do with ‘law and economics’ fascination with standardisation.116 Here it is believed that the limitation to some pre-packaged alternatives is efficient and should as such be promoted from this perspective. This has become a popular theme, but it was always unclear how this could square with better risk management, as risk is hardly standardised, and with the need to promote asset liquidity. It may be a typical consumer law attitude. The first observation to make is that this discussion is often based on a poor understanding of the common law itself, because in these discussions it is assumed that it has a closed system of proprietary rights as well. Thus limitation is here understood to be the fundamental common law approach also, even though this notion and analysis was more in particular a product of eighteenth-century ius commune thinking on the European Continent and has in civil law much to do with the theoretical distinction between proprietary and contractual rights, which never became fully clear in common law, clearer perhaps in the operation of the equitable proprietary rights as we have seen. More important is that the operation of equitable proprietary rights and the openness they achieved in the proprietary system in common law jurisdictions are not then clearly spotted and studied in this discussion and their origin and significance, especially in terms of risk management between professional parties and liquidity promotion, may be barely understood. It confirms a widespread criticism of the US functional approaches to the effect that they have no clear understanding of how the positive law works and what it achieves or fails to achieve. Thus the limitation of proprietary rights to a small standardised number is here assumed not only without much understanding of the context in which it arose but also without much understanding of operation of equity in respect of chattels and intangible assets. It is also ignored that even in the law of bailment in respect of chattels,
116 TM Merrill and HE Smith, ‘Optimal Standardization in the Law of Property: The Numerus Clausus Principle’ (2000) 110 Yale Law Journal 1. See also H Hansmann and R Kraakman, ‘Property, Contract, and Verification: The Numerus Clausus Problem and The Divisibility of Rights’ (2002) 31 Journal of Legal Studies 373. See for common law writers on the subject of the numerus clausus earlier B Rudden, ‘Economic Theory v Property Law: The Numerus Clausus Problem’ in Oxford Essays in Jurisprudence, 3rd Series (Oxford, 1987) 239. See also A Fusaro, ‘The Numerus Clausus of Property Rights’ in E Cooke (ed), Modern Studies in Property Law, Vol 1 P roperty 2000 (Oxford, 2001) 307 and W Singer, ‘Democratic Estates: Property Law in a Free and Democratic Society’ (2008/2009) 94 Cornell Law Review 1009. See earlier for the idea of contractualisation of proprietary rights in common law, JH Langbein, ‘The Contractarian Basis of the Law of Trusts’ (1995) 105 Yale Law Journal 624. See for civil law, n 118 above. See further n 30 above for modern property theories, especially in the US. Even earlier the idea had already been expressed that proprietary interests in goods are, at least under the UCC, specifically limited in order to promote the free flow of goods, see JF Dolan, ‘The UCC Framework: Conveyancing Principles and Property Interests’ (1979) 59 Boston University Law Review 828. The conveyance is here considered limited to produce only the allowed proprietary rights identified as title, the special property interest of Art 2 UCC, the security interest, and the lien in terms of a retention right. This view suggests that the statutory law of Art 9 UCC changed the law of equity fundamentally so that these rights are cut off at the level of their creation and no longer at the level of the bona fide purchaser or purchasers in the ordinary course of business of commoditised products, therefore at the level of their operation, but this was always the older equity idea. It ignores the idea of liquidity, which proprietary rights seek to promote, see further the discussion in s 1.1.1 above.
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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, aided by equity, with its lack of clear lines was always more prone, which contractualisation, it is submitted, is there to the common law’s benefit as a necessary risk management tool in professional dealings and liquidity-promoting facility at the same time. Even though much of this is now hidden behind trusts and in the US also behind Article 9 UCC in funding operations, this does not change the basic picture and remains particularly relevant in the characterisation of repos, finance leases (outside Article 9 UCC) and forms of recourse factoring: see Volume 3, chapter 1, section 2.3.2. It is certainly wrong to conclude that in common law countries the proprietary system is now in practice closed. This has already been shown in the further development of floating charges in many common law countries and conditional or finance sales also. In any event, it was pointed out before that the trust and the operation of conditional ownership rights allow for almost any kind of proprietary facility in common law, 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. 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 countries and probably an important reason why in international finance common law centres like London, New York, Hong Kong and Singapore are all preferred as venues, although their laws do not necessarily reach all assets out of the jurisdiction, but within them all financial products are equitable in this sense. As already mentioned, one of the arguments used in this connection in US academia in support of a closed system of proprietary rights centres on the benefits of limitation and standardisation, which are assumed to reduce information cost. This is a favourite ‘law and economics’ theme, here present first in the form of the so-called optimal standardisation theory.117 It sees standardisation as supporting routine trading while emphasis is put on the communication function being facilitated by a set of pre-existing structures and rules or labels—thus very much the opposite of what was submitted above, that markets require greater flexibility in the operation of proprietary rights as a matter of risk management and asset liquidity. This theory thus comes down to information costs, the limitation of which is then presented as explanation for the numerus clausus over alternative views which are more legally normative, such as those based on network effective notice or publication/ knowledge theories which are more likely to open up the system. Note also that nothing much is said here about the quality of the labelling and of the information or communication itself. History is supposed to have been efficient.
117
See Merrill and Smith (n 116) and also Rudden (n 116) 253.
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The main point is that information processing costs are thought to be automatically reduced (in a mandatory fashion). As such the effect of proprietary rights is seen as an externality constrained by the numerus clausus idea. Yet, the advantages of choice, risk management, including bankruptcy protection, and asset liquidity are then similarly constrained, which could easily exceed the benefits of standardisation. This is not denied and so-called frustration costs are here admitted. In principle, in this approach, new proprietary rights may thus still be created if the frustration costs start to exceed the information costs of novelty in this area. Yet, it is not clear where the optimum standardisation point is. This being the case, the formulation of new proprietary rights is believed to be best left to a legislator, but where is it supposed to get its ideas from? 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 may soon be assumed between professionals who can handle due diligence and would indicate that a new proprietary right can establish itself through custom and practice, although only over time. This is not surprising in the terms of this book but it also suggests that the system is not closed at all and that little hangs by the principle.118 An approach that moves on from the optimal standardisation theory as support for the numerus clausus notion is the verification theory.119 The idea that the numerus clausus limits externalities is accepted, but not the optimum standardisation idea, which is not considered typical for proprietary rights. Nor are communication and information cost considered problematic. This theory insists rather that parties having rights in the same assets must be enabled to understand their relative position. This is identified as a ‘co-ordination problem’, yet another law and economics favourite, which assumes some notice of the situation and understanding of the relevant structures. In this view, parties must always be able to obtain an appreciation of their mutual rights, 118 In the meantime, it may well be asked why a similar approach should not be favoured also for contractual rights. They can also weigh heavily on an asset as, eg, assignment restrictions for receivables or contractual rights of way on liquidity of the underlying property over which these rights are given. Here the notion of modularity or standardisation may also step in, which assumes that many legal structures (proprietary as well as contractual) can be usefully pre-packaged, thus also in contract, and therefore be anticipated. The advantages of contractual boilerplate are often stressed in this connection, see H Smith, ‘Modularity in Contract: The Role of Boilerplate’, Law and Economics Workshop UC Berkeley January 2006, but their elective character is obvious and there is n othing mandatory about them nor can they normally be assumed to exist except perhaps in standard documentation around one central organiser/company. The theory suggests further that such legal structures operate and can be seen in isolation, even within one transaction, and that such transactions from a legal point of view can be split up into independent standard ‘building blocks’ that can be used in all types of agreements and may increasingly be expected to do so, again reducing information costs. It is a formalistic approach that would not appear to correspond with modern needs and structuring trends except where standard agreements are used as an organisation tool by enterprises eg in service contracts for consumers. But it concerns then the entire contract. As far as standardisation or modularity goes, as an example, dispute resolution and applicable law clauses spring first to mind. The choice of law clause is often considered, but whether such a choice of a domestic law makes sense in international transactions and is effective or efficient depends on many factors. Also its effect is not a given but depends entirely on the law so chosen, which could be anyone’s. In some areas like property such a contractual choice of law clause is mostly ineffective and in the traditional conflict of laws approach usually overruled by the mandatory lex situs. 119 See Hansmann and Kraakman (n 116).
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entitlements and duties, particularly before enforcement. So this co-ordination problem ultimately would appear to be narrowed down to an awareness of enforcement consequences, therefore to preferences or priorities especially in an insolvency. The argument then is that to simplify the system, a numerus clausus of proprietary rights may help but again it may be less of a problem in professional dealings. In this view, new proprietary rights are only justified if their marginal benefit exceeds the marginal verification costs (cost of giving notice and understanding the structure), although logically these costs can only be established in retrospect and depend on the very use of the new right (or new financial product) which, if widespread, would itself reduce these costs. It confirms, however, that new proprietary rights can still establish themselves over time, also therefore that the system is not closed. The verification theory 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 indeed enough business understanding of what this means. This may all have some significance, especially between various security interest holders in enforcement, especially in a bankruptcy, and may also promote some broader co-ordination between transacting parties. Clearly contractual organisation also becomes important and contract law can then be seen as solving at least some co-ordination and enforcement problems as well. 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 from this limitation of proprietary rights (in terms of publication or similar kind of advertising), at least not in respect of chattels, but comes first from the bona fide purchasers’ protection, for whom all of this is irrelevant, or better still from the protection of the ordinary course of business and the commercial and financial flows, which may ignore all these interests. This was earlier identified as the key issue of transactional and payment finality. Again, professionals should know the risk and also the general principles of ranking amongst themselves. That is why these charges should only affect them and there is no reason why they should not be free in principle to arrange these matters among themselves in any way they want; it is their choice and they may then also create new proprietary rights but only operating in that circle, that is to say only against a limited class of third parties being themselves in open competition for recovery rights. It follows that a numerus clausus of these proprietary charges among professionals would hardly appear to be necessary and efficient. To put it another way, regardless of the type of proprietary right, the verification cost is put on the user or organiser who must advise non-users (third parties) of any adverse interests. Among professional insiders, this becomes a matter of due diligence on their part and they should be aware of the dangers. In fact, they compete with each other in terms of risk management. Beyond this inner circle of competing banks and main suppliers, all are protected against such schemes because of their bona fides or purchases in the ordinary course of business. Especially in respect of chattels, the numerus clausus
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notion does not appear to make any difference to them and neither, therefore, does the regulation or limitation of proprietary rights. Still more support for the numerus clausus principle is highlighted in the anticommons theory.120 Anticommons are considered to arise when multiple owners of proprietary rights are endowed with a sufficient right to exclude others from, or hinder them in the use of a scarce resource while no one can overcome the hurdles to gain an effective right of use or enjoyment of the asset for themselves. The asset may thus be wasted through fragmentation in a ‘tragedy of the anticommons’. It is the mirror image of property held in common, which may become overused and depleted, giving rise to a ‘tragedy of the commons’, which could suggest forms of regulation.121 A numerus clausus of proprietary rights is then seen as a matter of simplification and limitation of the anticommons. In this vein, ranking of these rights is recognised as an important efficiency tool while contractual user, income and enjoyment rights would only concern certain clearly identified counterparties and may thus be ignored by others. It is in so far of interest that it recognises that in a modern proprietary system, the bona fide possessor (or buyer in the ordinary course of business) is likely ultimately to take all (although that would still leave the situation open in respect of intangible assets). It may also help that professional transacting parties as between themselves are able in their contract to limit the exercise of restrictions in respect of the use and transfer of the underlying assets and may thus allocate the assets’ use and enjoyment regardless of their respective proprietary rights and their fragmentation. Yet, this theory still seems to be somewhat remote from modern developments, which require and practise greater openness of the system and have also learnt to deal with competing rights (indeed especially through contractual devices, notions of ranking, and bona fide purchaser protection) in order to prevent the paralysis that is feared and of which in real life there is truly no sign except perhaps in the protection of intellectual and industrial property rights at the expense of further experimentation and innovation by others.122 Although in theory one can see that a limitation of proprietary rights may help in this connection, it is even now ever more diluted under modern commercial and financial pressures, which itself suggests that participants can live with and are not much bothered by the anticommons risks. It may be concluded that these newer theories first do not understand very well how the present system works, especially in common law countries from which a more
120 M Heller, ‘The Tragedy of the Anticommons: Property in the Transition from Marx to Markets’ (1998) 111 Harvard Law Review 621. 121 The traditional theory, first formulated by Garrett Hardin, ‘The Tragedy of the Commons’ (1968) 162 Science no 3859, 1243, thus holds regulation to be necessary because without it pollution and depletion of resources would naturally occur as individuals do not recognise the effects on others or are not interested. This was, however, contested by the 2009 Nobel prize-winning economist Elinor Ostrom who noted that people manage common resources reasonably well without regulation (which proved in any event often misdirected). Rules would develop over time, users being involved in this process and in the monitoring, provided entitlements were clear, individuals had a discernible interest in the benefits of maintaining the resources, maintenance duties were proportional to benefits, and adequate dispute resolution methods were available. It may be seen that this insight is closely related to the emergence of custom and practices, which may indeed favour different property rights besides purely private or public ownership. 122 See also the discussion in n 28 above.
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open system hails (in equity), and, second, do not provide a clear new insight into the reasons why some rights are proprietary and others remain contractual and why a limitation is needed and sustainable and how it can readily be applied and explained (let alone how such proprietary rights operate in the different legal systems and why there are these differences). Again, it should always be remembered that at least in professional dealings, movable property is foremost a risk management (and liquidity promotion) tool and as such an extension of contract which allocates the risks between the parties including those in the assets they use: see the discussion in section 1.3.8 above. In that context, standardisation may run its course and is not always the paramount consideration, the reason being that risk is hardly standardised in modern markets. Greater refinement and tailor-made arrangements are here often necessary, which again poses the issue of party autonomy in the creation and operation of proprietary rights where standardisation would hardly appear to be always efficient. Indeed it calls for a more dynamic concept of proprietary rights between professionals. The key is that the i nsiders know and follow each other and that the public can ignore it all.
1.3.10 The Effects of Globalisation and Transnationalisation on the Law of Movable Property. The Question of the Public Interest and its Representation at the Transnational Level This may be the place finally to revisit the subject of globalisation and its effect on property law more broadly, especially in professional dealings, in particular for movable property including claims or receivables, and briefly to consider also modern recent philosophical, sociological and economics writings on the subject in that light beyond the ones already mentioned in the previous section. The starting point in this book is that, when we think about property in a globalised context, we must first think not in terms of individualised assets but rather in terms of their flows. This discussion was begun in sections 1.1.2 and 1.1.7 above. We should not then think any longer of identification, specification and setting aside, but rather in terms of classes of assets that are in constant movement and transformation transnationally and are defined by their description. It is easiest to visualise this in the production process when classes of assets (including services, information and technology) may transform from commodities into manufactured goods and from them into receivables upon a sale and in proceeds upon payment, ultimately resulting in cash balances that are no more than claims against banks. In these flows, properly considered, these movements and transformations do not affect the title and especially not any security interests or similar rights that might be given in these assets nor their ranking or status as finance sales, except that proceeds may have to be shares by others who came later to contribute to the greater value of the asset, although lower in rank for their pro rata share. Individualisation comes here only at the end of a chain when an asset comes to rest in the hands of the end user, often for a short while until it is consumed or thrown away. Except for capital goods, very little is resold and there is little residual value in
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the area of chattels. We know that when we unpack a present it immediately becomes second hand and is not a store of value any longer (only land and durable goods like equipment or objects of art like paintings and jewels are—which are unlikely to be commoditised). It means that in a modern society property rights substantially lose their meaning once the assets come to rest and are therefore of particular interest only between professionals in their flows and transformation. It was submitted that at least in respect of commoditised assets, they have their true value only in these flows as flows and are hardly interesting outside them. Consumers may of course still have other assets notably claims but they are usually only a matter of collection. They may also have bank accounts and investments, the latter in custodial systems; both are now also treated quite differently from the traditional proprietary and transfer points of view, see Volume 3, chapter 1, part III and part IV. Thus in international trade and finance, it is these flows that count ever more fundamentally and they are enormous. By 2018, they were approaching a value of US$ equivalent of 20 trillion for goods, another five trillion for services, larger than the GDP of the largest countries or even conglomerates of countries like the EU. Another key point to remember in this connection is the force of these transnational flows, therefore their momentum, which in this book is seen to be at the heart of the creation of a new legal order: the commercial and financial legal order, competing with statist legal orders, in which the modern property concepts are founded and whose law is the modern lex mercatoria. It is a product of the globalisation of the marketplace itself resulting in a bottom-up process of law formation between professionals based on custom and practices, supplemented by fundamental and general principle and party autonomy that itself is also founded in this order, all corrected to the extent necessary by public order or public policy considerations. This process of law formation and correction was described in Volume 1, chapter 1. The Eurobond market, now more than 50 years old and the largest capital market in the world with an issuing volume of more than US$ equivalent of four trillion by 2014 and an outstanding total of more than US$ equivalent 27 trillion. The proprietary status of the Eurobond and its trading and transfer used to be the prime example of transnationalisation of the legal regime, imposed by the flows in the capital markets, but the commercial flows do so, it is submitted, in an ever more compelling way also in respect of other asset classes. It could be added that the international swap market is valued in the region of US$ equivalent 600 trillion of swaps after netting probably still in the US$12–18 trillion equivalent bracket. These flows are immense and increasingly difficult to capture in a territorial sense. It follows that governments can hardly decree the proprietary structures of and in these flows, even if they had a clear insight into the tipping points where, in terms of the theories discussed in the previous section, the extra information costs of novelty meet the frustration costs of more flexibility, or marginal benefit exceeds marginal verification costs. It is indeed in this void that the international marketplace itself creates the basic (proprietary) structures. It was submitted that this need not be greatly problematic in professional dealings, as the Eurobond market and swap markets have shown, but an important concern may still be the representation and formulation of the public interest, first to keep the international markets clean—it may be a reference to public order issues or to societal
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values which also in the transnational commercial and financial legal order exist and cannot be ignored. The public interest may in appropriate cases also resist the formation or functioning of new property rights (or limit, support, or expand set-off and netting facilities). Here again one may think foremost of the effect of these rights on third parties who buy assets in the ordinary course of business in these flows but no less of the effect of any new charges or the expansion of set-off rights on common creditors, who may lose out especially in bankruptcy. Another issue is the ranking of the insiders and the contributions they may have to make especially in reorganisation proceedings of a debtor under applicable bankruptcy law. The public policy aspect raises the question of who are the spokespersons for it in the transnational order or in these transnational flows. To the extent international transactions still come demonstrably onshore in terms of conduct and effect, sovereign states will have a dominant say, but only on their territories and there is an obvious problem with the international flows now often being intangible or virtual, therefore difficult to locate, while the risks concerning them may be moved elsewhere through derivatives. This pleads for transnational minimum standards. It was submitted that formulating and applying them is the true challenge in the legal transnationalisation process. In the international markets, the true force is an advanced form of party autonomy in the creation of proprietary rights and the acceptance of a reasonable description of how professional parties cut up these flows and the rights concerning them, which in principle they may be able to do at that level in any way they want and for whatever purpose they like, especially the outsiders being the buying public. Public policy does and should not prevent this and may even support it as long as it does not materially affect the flows themselves. In international finance, it becomes a matter of structuring in the case of asset-backed funding and not primarily of optimal standardisation or a matter of verification costs. The importance of this aspect of the discussion is that the property rights that emerge and start operating transnationally in this manner may be different in their operation from purely local property rights, even in terms of public order and public policy constraints. In international arbitrations, the issue of what the public interest requires in this connection and how it can be articulated and expressed is then potentially closely related to the powers of international arbitrators (see also the discussion in Volume 1, chapter 2, section 1.2). Party autonomy means in this connection in particular that in the international flows there is no limitation in the number of pre-set proprietary rights that work in rem, that means third parties (the numerus clausus). Rather, parties will be able to create proprietary rights but, again, they commonly work only against certain classes of third parties, notably the insiders who structure these deals themselves. They have the means and expertise to engage in that kind of structuring and due diligence and were earlier identified as notably banks and suppliers. How they do this is ultimately a matter of competition and efficiency or optimal use of resources between them and as such in principle a positive development subject only to public policy or public order requirements operating at the transnational level as we have seen. To repeat, the proprietary rights are here not cut off at the level of their creation but at the level of their operation. That is supported by public policy at that level. It was shown that this is the situation domestically in common law countries in equity
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and is perceived in this book as a more comprehensive and fundamental shift in the nature of proprietary rights at the transnational level. Again, it means that the public may ignore these rights in the commercial flows: the buyer in the ordinary course of business of commoditised products, wherever located, buys them free and clear; even bona fides has no longer much to do with it and there is no search duty whatever. At issue is the liquidity of these flows and it is of the greatest importance. The ordinary public therefore buys these assets unencumbered by definition and need not worry about any of this. Even now, local laws may express this when these assets come to rest domestically with consumers or other end-users, but the principle is more fundamental. So we have commercial flows that allow for property rights that are not asset specific and may depend on mere description, we have proprietary rights that are also formulated by the parties but enforced only against certain classes of third party participants in the international marketplace, and we may have different concepts of the public interest, which may affect, limit or promote risk management facilities of this nature including set-off and netting facilities. These three elements make for a new and dynamic movable property law among professionals123 which is, it is submitted, the direction of property law after globalisation.124 To summarise the modern literature on the subject, it has already been noted that there is not a great deal of new light, certainly not beyond what has already been discussed in the previous section.125 The discourse remains fairly traditional and moves from the moral justification of property126 to the economic question of control over scarce resources, especially in the exercise of proprietary rights, their optimum allocation, the externalisation (or not) of the costs of using them, the role of transaction costs in this connection, and of regulation especially of the environmental effects of the exploitation of property rights. That is Coase, who attempted to demonstrate in this connection the futility of traditional notions of nuisance, harm, causality and liability. This research is important with respect to how the traditional property rights are expressed in a newer environment where the pressure on resources increases. Demsetz built on this and shows how private property is here better than communal property or state ownership while internalising cost-benefit on the one hand and a social calculus on the other. Private discourse between competing interests gives the better result in
123 It is sometimes suggested that the corporate form of holding and controlling assets shows new departures in property law but it is simply a form of jointly held property that is separated from its ‘economic’ owners until liquidation, as such not much different from the marital community of property, some forms of partnership, and the bankrupt estate, all closely connected with the concept of legal personality and property put together and committed for a certain purpose and certain time, see also Vol 3, ch 1, s 1.1.9. cf however also O Hart and J Moore, ‘Property Rights and the Nature of the Firm’ (1990) 48 Journal of Politic al Economy 1119 and more pronounced AA Berle and GC Means, The Modern Corporation and Private Property (New York, 1967, revised from 1932). 124 Foreign investment and its protection under modern BITs are often seen as another form of property that may be transnationalised, but it may be a better to use the notion of governmental licence. Cross-border protection is then an issue of international administrative law that is increasingly developed through ICSID (under the Washington Convention) and otherwise, is better distinguished from the transnational property scene as here described, see Vol 1, ch 2, s 3.1.4 analogy being avoided. 125 See A Lehavi, Construction of Property (Cambridge, 2013) particularly in chs 1 and 2. 126 J Waldron, The Right to Private Property (Oxford, 1989); J Rawls, A Theory of Justice (Cambridge, MA, 1999).
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this view. All that has value is the object of private property rights, implying also that all that is losing that value becomes irrelevant from a private proprietary perspective,127 and important insight in the context of the above discussion. Others emphasise the room to be respected by the modern state for private ordering in civil society, sometimes connected to the stability-enforcing nature of capitalism128 versus the alternative idea that since civil society lives and operates (in that view) by virtue of the state, the latter can take all or at least can set out in a mandatory fashion the limits of proprietary rights and define or redefine them at will. The social function of property is then no more than a normal incident that could easily amount to forms of expropriation. Some sociologists have also been interested in the effect on social mobility.129 It was noted that where most people would probably spot a fundamental psycho logical concept of mine and thine in the legal concept of property, and some see here also a human right, there does not automatically appear to follow an inherent preconceived structure that finds recognition in morality, sociology and law alike.130 There would appear not to be much of a pre-set context.131 Common ground is that from a legal point of view all the world (or in equity at least important classes of competitors who can know about these rights before acquiring the assets) must recognise proprietary rights, which basically means respect them and not interfere with them. For security interests, it means that their rank must be respected by other creditors. It has already been noted several times that in these aspects, the fundamental structure of property in both civil and common law (including equity) has changed little over time although differently expressed in either system of laws. This has long been well understood and hardly anything dramatic emerged from newer writings,132 but globalisation may change everything in form and substance. This was the element of foreboding that was spotted before (in section 1.1.9 above) as hanging over the law of property, including its structure, and is what is happening as a result of transnationalisation. These issues will be revisited and summarised in section 1.10 below. To repeat and conclude, the key elements are always better risk management and greater liquidity, hence also the advance of party autonomy in the creation of proprietary rights in the professional sphere as here described, and transactional and payment finality. The professional modern contract then deals not only with the normal incidents in a commercial relationship allocating the risks in so far as foreseeable, but at the same time in a similar manner with the assets that are used or produced
127 Especially R Coase, ‘The Problem of Social Cost’ (1960) 3 Journal of Law and Economics and H Demsetz, ‘Towards a Theory of Property Rights’ (1967) 57 American Economic Review; see n 30 above. 128 See H De Soto, The Mystery of Capital (New York, 2000); M Cohen, ‘Property and Sovereignty’ (1927) 13 Cornell Law Quarterly 8 rather saw this as a state-endorsed system. 129 BG Carruthers and Laura Ariovich, ‘The Sociology of Property Rights’ (2005) 30 Annual Review of Sociology 23. 130 JL Rierce et al, ‘The State of Ownership: Integrating and Extending a Century of Research’ (2003) 7 Review of General Psychology 84–107. 131 Even for Grotius, see Vol 1 s 1.2.7. 132 But a political process of evolution and change in the design of property law has been spotted by G Libecap, Contracting for Property Rights (Cambridge, 1989) and Itai Sined, The Political Institution of Private Property (Cambridge, 1997).
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in that c onnection and with the risk in them or their use, especially in asset-backed funding where it concerns the recovery rights. Where in Hohfeld’s world,133 in a system of rights there was approximation between contract and property, here one sees another approximation: both are risk management tools and go together and financial structuring in particular becomes market driven in an open system of proprietary rights. This is hardly obvious in the work of Hansmann and Kraakman, or Merrill and Smith, who still plead for a numerus clausus as a matter of standardisation reducing transaction costs as we have seen. Somewhat curious for ‘law and economics’ adepts, they expect here much from government and mistrust market forces but how could government know about this in a transnationalising world? Which government? Treaty law? Who has the wherewithal for its content?
1.4 Transfer of Proprietary Rights in Chattels in Civil and Common Law 1.4.1 The Legal Requirements for the Transfer of Chattels Ever since the Roman jurist Gaius (Institutes 2.20), it has been said that for a valid voluntary transfer of chattels, there needs to be (a) a disposition right in the transferor (normally an ownership right in the underlying asset although it could be another), (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. Also in common law one may note these essentials even if less clearly expressed. In respect of both the contract and the act of transfer there is the further requirement of legal capacity. Another requirement is often stated to be sufficient identification of the asset to be transferred.134 It will have to be considered in this connection in p articular to what extent the asset must physically exist in order for it to be legally transferable. This has already been discussed in section 1.1.5 above. In civil law, the requirements of identification and existence became closely associated with or even integrated in the disposition right itself, but it may be clearer and better to keep them apart. The accent so far has been on the transfer of the ownership right in chattels, but another important issue is what transfers of this nature are meant to achieve, therefore what proprietary right is meant to be created or transferred. In chattels, a (formal form of) transfer may also be necessary to create a usufructs or security interests. In civil law, this goes back to the numerus clausus of proprietary rights and their creation
133
See n 30 above. Goode (n 80) 54. It is deemed implicit also in laws that do not require delivery for the transfer of title, like the laws of England and France: see also J Ghestin and B Desche, Traité des contrats, la vente (Paris, 1990) No 544; see also Art 1129 CC. Note that in Goode the civil law requirements in this respect are transposed into the common law. It leaves open the question what sufficient identification is, notably whether future assets or assets in bulk or as a class can be transferred, see ss 1.1.5 above and 1.4.3 below. 134
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and raises the further issue whether for different proprietary rights there are different requirements in terms of disposition rights, contractual requirements, and especially transfer requirements or formalities besides legal capacity and asset identification. If, as proposed in this book, we must look first at the creation and operation or transfer of all user, income and enjoyment rights in the underlying assets and subsequently decide when, why and how they become proprietary, therefore affecting any subsequent transferee of an asset if these rights are pre-existing, and accept that they all have a tendency to become proprietary if only to promote the liquidity of the underlying assets, see the discussion in section 1.1.3 above, this would suggest that proprietary rights may arise more spontaneously without further formalities, although there would still be a need for disposition rights in the transferor, signalling sufficient control which is then n ormally assumed, while the question of bona fide protection against such rights for any subsequent transferee (or any transferee in the ordinary course of business regardless of bona fides) would also arise. This was earlier identified as the issue of transactional finality and is a key issue transnationally. Civil law strives on the whole for a unitary approach, as we have seen, but there are obvious differences in the creation or transfer requirements and formalities of proprietary rights especially in the creation of security interests as compared to (notably) conditional and temporary ownership rights: see particularly section 1.7 below and it was noted before that a unitary approach may not be fully sustainable in modern financial products. Civil law prefers not to distinguish according to the underlying type of asset, but in respect of land there are in any event different publication requirements (and also more proprietary rights such as easements or servitudes and in some countries also certain types of leases). In respect of intangible assets, especially for the assignment of monetary claims, there may be further differences and refinements, also already mentioned and as we shall see in more detail in section 1.5 below. Hence the idea that the above transfer requirements apply primarily to chattels and to the proprietary rights created or transferred in them. Similar issues, however, also arise in the assignment of intangible assets, especially receivables, very clear even in the DCFR (see Articles VIII-2:101 and III-5:104) therefore even when claims (as in the DCFR) are not considered assets proper. As for chattels, it is efficient first to explain the formalities, especially the requirement of delivery in some countries. Thereafter we will turn to the requirement of identification and existence, then to capacity, then to the contract, and finally to the disposition right. As already mentioned, the last normally derives from ownership and it should then be clearly distinguished from capacity. Capacity goes to the heart of both the validity of the contract and of the delivery (if considered a juridical or legal act as is likely to be the case, at least in countries requiring it as a condition for the transfer of ownership). The disposition right is a different requirement, as we have seen, and derives in principle from an unbroken chain of transfers, bona fide acquisition or acquisitive prescription (in civil law), in which identification and existence of the asset may also play a role. Although capacity and the disposition right must thus be clearly distinguished, and may lead to different issues of finality when they fail as we shall also see, they may sometimes be closely related in the sense that lack of capacity earlier in the chain of transfers may affect the ownership and therefore the disposition rights of a later seller.
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The discussion of these issues will particularly take the perspective of failure of any of these requirements for a valid transfer and address its effect on the transferee (usually a buyer) especially if in physical possession of the asset, more particularly relevant if a chattel. May he keep it, or must he return it and, in the latter case, is the return of title automatic or does it require a separate act of retransfer? If so, it is unlikely to lead to the retrieval of the asset in the case of the intervening bankruptcy of the buyer. This is indeed the issue of finality where the importance of bona fide p urchasers 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, therefore against lack of disposition rights (see section 1.4 below) but not normally against invalidity of its own purchase agreement for whatever reason (lack of capacity, lack of intent in civil law or consideration in common law), or of the delivery thereunder (wherever required) or other formalities. Only acquisitive prescription (which in the case of chattels could, however, be immediate) may achieve this (see also the discussion above in section 1.2.5). 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 they may do in common law excepting criminal behaviour and now also in many civil law countries) and are certainly not immediate. As just mentioned, we shall be concerned here mainly with sales of goods of physical movable assets (chattels). The transfer of intangible assets through assignment will be dealt with in section 1.5. The transfer of immovables will be largely ignored. It was already said that the legal regime concerning them is not a primary concern in this book and not of great importance in international business (unless real estate is that business). Transfer of ownership is on the other hand the prime objective of all sales agreements, although it can also be achieved through exchange or barter. Succession is another way of acquiring property, as are acquisitive prescription in civil law and bona fide purchases, or increasingly even those in the ordinary course of business for commoditised products as we have seen. 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). It was argued that transnationalisation of the flows and rights established and enforced therein overcome these limitations. Hence the modern law merchant or lex mercatoria. In connection with the ownership transfer, the word ‘title’ is often used, but it should be realised from the outset that it may be used in different ways. In civil law, title is in this connection mostly considered the underlying sales contract while in common law it is the ownership that is being transferred. Here we shall use the English terminology so that ‘title’ refers to the proprietary right that is transferred.135 In the present context, transfer of title means therefore transfer of ownership. It should be recalled in this c onnection that in civil law terminology, strictly speaking the transfer
135 Title may sometimes also mean the document giving rise to enforcement action, not here immediately relevant.
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of ownership is the transfer of the ownership of the underlying proprietary right (in the asset and never strictly speaking the asset itself): see section 1.2.1 above. Delivery should then be perceived as the transfer of possession (therefore transfer of the will to hold for oneself) of the underlying proprietary right and the surrender of the disposition right. This possession is here in essence perceived as entirely abstract or constructive (as is the delivery itself) in the nature of the intent to exercise the proprietary right, signifying control, which is surrendered in this manner upon a sale, see further section 1.2.2 above. In the following, this terminology will be respected but not belaboured so as to avoid a pedantic vocabulary. To also retain some simplicity, the discussion will largely be limited to the transfer of full ownership of chattels. In terms of the matrix of proprietary rights and their manifestation in civil law set out in section 1.2.2 above, this means mainly the transfer of the ownership manifestation of the ownership right and not of usufructs and security interests concerning these assets. The transfer of the possession or holdership of these rights will also not be the main focus—it is mainly a change in the intent to possess or to hold (see also the observation at the end of section 1.4.4 below). Again, intent (contract), capacity, and disposition rights are here always p erceived as purely legal notions. Any remaining anthropomorphic approach to property is thus abandoned (or considered exceptional as in the case of the protection of the bona fide purchaser only if in actual possession of the chattel), all the more proper, it was posited, in professional dealings in the international commercial flows, in which commonly legal rather than natural persons are involved.
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 of chattels).136 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 (section 929, first sentence, BGB), Switzerland, Austria, the Nordic countries, the Netherlands (Article 3.84(1) CC) and Spain are in the first category and all require an act of delivery for the passing of title in chattels. The law in these countries uses in this connection the
136 See for the Statute of Frauds requirements and its remnants in common law, and for the requirements of Art 1341 CC in France, more particularly ch 1, s 1.2.8 above. See for the remnants in the creation of security interests in the US, s 9-203(b)(3)(C) (9-203(1)(a) old) UCC.
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notion of delivery of possession, which is more theoretical and allows this possession and its transfer to be constructive. Delivery is here indeed a legal and not a physical act. This largely follows Roman law, which, however, in sales also required payment, as we shall see shortly.137 England (sections 17 and 18 of the Sale of Goods Act 1979), France (Articles 711, 1138 and 1583 CC),138 Belgium, Luxembourg, Italy (Article 1376 CC) and Poland are in the second category and do not require a formal act of delivery to complete the transfer. The civil law countries in this category follow here the teachings of Grotius and P ufendorf 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 US there is still a preference for the old delivery rule. The UCC confirms this and states that the moment of transfer of title in chattels upon a sale is still delivery except if parties agree otherwise (section 2-401).139 Again, such a delivery is then thought of as a physical act, which conforms to the common law notion of possession as physical (and only exceptionally constructive, see section 1.3.5 above). It should be noted that the English and US approach unite in leaving the issue to the parties, therefore to party autonomy: under English law they can still agree to delivery as a transfer requirement, under US law they can agree to delete it. If they do not say anything in their contract, the statutory regime as default rule will differ. It follows that the situation in England and France, although very similar on its face, is still not exactly the same. As just mentioned, in common law, parties are entirely free in the manner and timing of the transfer. Only if they do not make a choice in their contract does statutory law as default rule decide for them with a different result in England and the US. Contractual freedom is here the basis. That is not so in France where there is, strictly speaking, no possibility for the parties to decide the modalities of the ownership transfer. The Code Civil (Articles 1138 and 1583) determines that title passes at the time the contract of sale is concluded (provided the assets sold are
137 Inst 2.1.41. See also R Feenstra, Reclame en Revindicatie [Reclaiming Rights and Revindication] (Dissertation, Amsterdam, 1949) 11ff, and more recently R Zimmermann, The Law of Obligations (Deventer, 1992) 273. The question whether credit was extended and whether this could be done indirectly by not insisting on payment became a much discussed point in medieval law, most authors requiring an express credit agreement. 138 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’. 139 The UCC states expressly in its Comment, however, that it does not want to focus on the title transfer and seems to consider it secondary in a sale of goods. It is true that in practice, the passing of risk is often a more important issue and this can also be determined by the parties in the contract. Nevertheless, the question of title and especially the finality of the transfer cannot be ignored. It acquires special importance in the case of the bankruptcy of the seller who has not yet delivered or of a buyer in possession who has not yet paid.
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s ufficiently 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 is common in a reservation of title. This is a statutory exception, however, and there is in principle a mandatory regime of title transfer in all civil law countries, whether they require delivery for title transfer or not. As a consequence of this statutory legal regime, one normally finds little said on title transfer in sales agreements under civil law. In common law, on the other hand, title transfer normally figures as an important part of a sales agreement and will be elaborated by the parties. Common law is here in essence directory. The consequence is therefore that in the approach that transfers title at the moment of the conclusion of the contract (in principle) there are still two different attitudes that should be clearly distinguished: the French and English.140 The latter is freer.141 It also affects the 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 has already been discussed in section 1.3.1 above. How equitable interests (in terms of user, income and enjoyment rights) are created is here in principle also entirely left to contract although trust deeds form a different category of instrument in this regard as we shall see in section 1.6 below and do not need consideration for example. They are usually unilateral declarations of the settlor. The result is that there are three approaches: the German, French and English ones. The fourth type is the old Roman law, which for title transfer in chattels through a sale required not only delivery but also payment for the validity of the transfer. It still survives in South Africa. It is not as curious as it may seem and is intuitive in most people, while legally this result is obtained through a reservation of title, which postpones title transfer until payment. In this sense, the Roman law system included a reservation of title in all sales agreements, which parties could, however, agree to disregard. In the US, until the advent of the UCC, cash sales were often also thought to be completed only upon payment. The UCC now gives a brief reclamation right instead, which is proprietary and also obtains in a buyer’s bankruptcy (section 2-702). Although a distinction
140 Drobnig (n 79) 345 does not make this distinction and sees as a consequence only two systems operating, one transferring title by virtue of the sales contract, the other upon delivery; so also M Waelbroeck, Le transfert de la propriété dans la vente d’objets mobiliers corporels en droit comparé (Dissertation, Brussels, 1961). It is posited that this does not sufficiently reflect the different attitudes towards the creation of in rem rights in countries like France and in the common law. 141 In the common law approach, parties may thus fundamentally opt for the moment, place and other modalities of title transfer and the nature of the proprietary right created, which choice may, however, sometimes be deemed implied, as in the FOB term in England, when full title is assumed to pass at the ship’s rail: see Carlos Federspiel & Co SA v Charles Twigg & Co Ltd [1957] 1 Lloyds Rep 240. Similarly, in the case of a reservation of title it is deemed to be postponed until payment. Only in the absence of such an explicit or implicit determination by the parties, is there, at least in England, the objective law rule which now fixes (full) title transfer in the case of a sale of chattels at the time of the conclusion of the contract. Thus the sole intention of the parties prevails (assuming it can be established) as regards the time, method, nature and extent of the title transfer.
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must thus be made between countries that require delivery for title transfer in chattels and those that do not, in both systems there are exceptions and further variations. As we shall see in France, for example, a sale of unspecified assets cannot proceed and the transfer must wait until the assets are properly set aside. That is also the English rule. In both countries, there is also a stronger right for the buyer who obtained possession when there is a double sale. On the other hand, where normally delivery is necessary, as in Germany and the Netherlands, there are traditionally three situations where it is not required and they all come from Roman law. Delivery here becomes truly constructive. Thus if ownership is meant to be transferred but the erstwhile owner reserves for himself some contractual user rights in the asset, for example a rental, and therefore converts himself in civil law terms from an owner/possessor into a holder, it is not necessary for him first to hand over the asset to the buyer in order for it subsequently to be given back. The result is that in such cases the ownership transfers upon the mere agreement of the parties. This is the transfer constituto possessorio (section 930 BGB). It is sometimes said in countries that follow the French system, which does not require delivery, that under this system all transfers are by statute constituto possessorio so that the French system is also based on the notion of delivery (see also section 1.4.4 below) although it is not immediately clear what is gained by this insight. Another situation where, in countries that require delivery, it can be done by mere agreement is when the asset is already with the buyer who thus converts himself from holder into possessor/owner. That is the traditio brevi manu (which in Germany does not require any delivery of constructive possession as a further legal act as, in the German concept of possession, the buyer already has it: see section 1.2.4 above and section 929 second sentence BGB). Finally, there is the traditio longa manu under which an asset that is under the control of a third party, for example in a warehouse, is transferred (section 931 BGB). It may be seen as a variation of the constitutum possessorium, as the third party is here only the holder for the seller, while title transfers by him becoming the holder for the buyer (which in the constitutum possessorium applies to the seller himself). This change is achieved by the mere agreement of which the warehouse will be told. It is conceivable that such information is itself a constructive element of the transfer which is delayed until such time. It is often said that in these three cases the transfer is by mere agreement even in countries that normally require delivery, but it may also be said—and this is probably the better view—that there is constructive delivery of possession. Of course these situations may also arise in systems that do not require delivery, but they do not then solicit special attention because title will have passed upon the conclusion of the agreement anyway unless delayed by agreement.142
142 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, see s 1.3.5 above. Yet in other cases where delivery is necessary, it is mostly meant to be a physical requirement,
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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.143 In such an approach, delivery may be a two-step structure. It implies the conclusion of a further legal agreement followed by the factual delivery of the asset or the actual handing over. Again, there may here be some re-emphasis of physicality (unless the asset is already with the buyer or remains with the seller or under a third party), which is more particularly German and may also be noted in its attitude to holdership, as we have seen. It means nevertheless that there is foremost a need for acceptance of delivery in a legal sense and for legal capacity of both parties. As we shall see in section 1.4.6 below, in Germany this additional agreement is deemed implicit in all delivery and is referred to as the dingliche Einigung, earlier called the dinglicher Vertrag by von Savigny, who first formulated the concept.144 It is important, however, not to apply the precise requirements of contract law to this type of agreement but rather the general rules concerning bilateral juridical acts, which may be found in the general part of the German BGB. As already noted, where delivery is not required to complete the transfer, it is merely a matter of contract implementation and mostly considered merely a physical act (that must be performed). It shows that physicality is not irrelevant and is likely to be objective. Indeed for the buyer it is ultimately likely to be of extreme importance, although the legal and physical aspects should not be confused, as they often still are. As already mentioned, delivery is sometimes also legally material in countries that do not normally require it for title transfer in chattels. The traditional situation concerns the situation of a double sale. Thus Article 1141 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 may suggest a need for physical delivery. It is in fact a lex specialis to the more general protection of the bona fide purchasers under Article 2279 CC and the delivery requirement, which is therefore physical, may be better explained in the context of this bona fide purchaser protection than as a condition for the title transfer itself. In England, section 8 of the Factors Act as for example in the case of the requirement for delivery that still obtains in the sale of goods in the US: see s 2-401(2) UCC (again, unless parties agree otherwise). 143 Although title transfer was in England originally also achieved through the physical act of delivery and the receiver had to have some intention to receive the asset, it was done without the Roman law distinction of possession and holdership and the protections behind it, even though the Roman law traditio requirement with animus possedendi was at one time seen as compatible with this system. See in the thirteenth century, H Bracton and G Woodbine (eds), De Legibus et Consuetudinibus Regni Angliae, f 38 b (Newhaven, CA, 1922) ii, and Twiss (ed) (with English translation 1878), i, 305. This line 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. 144 3 System des heutigen römischen Rechts (Berlin, 1840), para 140, p 313 and 2 Obligationenrecht (Berlin, 1853) 256ff. One may well ask whether in a system such as that of the UCC, where in the absence of a contractual provision to the contrary title also only passes upon delivery (s 2-401(2)), it is not then also a juridical act, although s 2-401(2) still insists on physical delivery. The importance is in the need for acceptance and capacity of the parties. The (independent) status of the juridical act of delivery itself may become a particular issue if the underlying contract fails, as we shall see (s 1.4.6 below) and goes to the question of the causal or abstract system of title transfer. It is not an issue commonly discussed in common law, however. The insistence on physical delivery shows that the act of delivery as a legal concept is not an immediate common law concern and its meaning is not normally further considered.
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(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 s econd buyer the stronger title upon physical delivery145 but again only if he was without notice of the first sale, which here means actual knowledge.146 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 (section 929(1) BGB) and Dutch (Article 3.90(2) CC) systems, which require delivery for title transfer, on the other. It was already Roman law, which did not know of the bona fide purchaser exception (C.3.32.15 pr). Ownership of the second buyer follows here simply from the fact that the seller retains the disposition 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 in such cases so that the first buyer can still collect the asset—especially important when scarce equipment is involved. Where, as in the three cases mentioned above (the delivery constitutum possessorium, longa and brevi manu), systems requiring delivery are satisfied with constructive delivery, any subsequent p urchaser 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 Relevance of Identification. Effect on the Transfer. Sales of Future Assets, Bulk Transfers and De Facto Transfers of Title Traditionally, title cannot transfer if the goods sold are not yet sufficiently identified or set aside to the contract—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 still 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
145 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. 146 Worcester Works Finance Ltd (n 145) (per Lord Denning).
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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. It was already noted in section 1.1.6 above that this problem arises more particularly when future assets are sold, those that do not yet exist: see section 18(1) of the Sale of Goods Act 1979 in the UK.147 They may also physically exist but not yet in the ownership of the seller although eventually they may enter his ownership, as under a call option upon the exercise of which title might shoot through to the buyer of the goods if sufficiently identified. In German terminology, these goods are relatively future.148 When goods do not yet exist, this shooting through 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, such as next year’s harvest, automatically accrue to a seller. In many legal systems the difference between absolute and relative future goods is immaterial. Thus in the UK, there is in both cases only an agreement to sell to which the Sale of Goods Act 1979 does not apply (section 5(3)). It means that title cannot pass under it until there is an appropriation to the contract. In truth, there is no problem with the sale itself, but the transfer of title cannot follow before the goods emerge in the ownership of the seller, even therefore in a country that do not require delivery for title transfer. Once the goods so emerge, transfer is then immediate to the buyer in systems that do not require delivery. In systems that do require it, it is constructive.149 The remaining question is whether such a transfer is retroactive or is ineffective against a seller who has gone bankrupt before the asset emerged.150 Even where no delivery is necessary, whether in a system that normally requires it for title transfer or not, a transfer in bulk may also be problematic and normally requires some special form of identification, 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 or as a class, again a sufficient setting aside or identification is mostly deemed necessary before ownership can transfer. 147 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. 148 See also n 31 above. 149 See also s 2-501 UCC in the US 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 always allowed the transfer of future tangible assets, also as security—see Art 1130 old CC—but it is much more restrictive of a transfer of future claims: see s 1.5.4 below. For chattels, these authors assume that title passes automatically as soon as the goods emerge and are identified to the contract, although there is older French case law to the contrary still requiring delivery in that case, see Cour de Cass, 28 November 1900 [1901] D.1.65. Completion of construction may also be an element in France when a structure is sold in advance: see Art 1130(1) old CC and Cour de Cass 20 Mar 1872 [1872] D.1.140 and 14 March 1900 [1900] D.1.497 with the problem of determining when it takes place. In any event, there is here still a physical element to perfecting the title, no different from countries requiring delivery, cf also Art 3.97 of the Dutch CC: although delivery itself is, strictly speaking, not necessary, it would be indicative of the emergence of the asset as a prelude to the title transfer. 150 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.
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Often weighing and measuring may achieve it, although the mere surrendering of control may also be sufficient as it was in Roman law (D.41.1.9.5/6). There may be further problems, however, when future or unspecific goods are included while a bulk transfer commonly does not provide a vehicle to circumvent the specificity requirement entirely (they may be recast and widened). It may still present an important hurdle even in countries that do not normally require delivery for title transfer.151 It means that circumstances are likely to decide when a transfer is complete in these situations, but notions of ‘generality of goods’ or definitions of what ‘bulks’ are may help and facilitate their transfers while they may also include a concept of substitution or automatic inclusion of replacement goods, which are likely to be (absolutely) future. However, new Dutch law notoriously failed to define these concepts after an earlier attempt was made. It is particularly relevant when floating charges are created as security interests in inventory or in whole portfolios of trade receivables, which, without a concept of replacement, would also require new transfers to the lenders (even if sufficiently identified in the contract from the start) each time such a replacement took place and would then also endanger the rank of the security in these replacements which, coming later, would (normally) be lower. It may also be an issue when businesses or parts thereof are transferred unless they are incorporated when shares are transferred. It was already said that 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 as modern Dutch law shows (Article 35 Dutch Bankruptcy Act, as amended in 1992).152 Again, where delivery is required, the problem of what can be transferred 151 In the US, Art 6 UCC provides a special regime concerning bulk transfers but does not go into these issues. Its main aim was to avoid fraud by a debtor who sells his estate for too little or for any price and thereafter absconds and it may as such be seen as part of the law against fraudulent or preferential transfers. It provides therefore mainly a creditors’ protection measure. It renders ineffective against creditors of the transferor any such transfer without a list of creditors and sufficient identification of the assets, see s 6-104 UCC. In many states it has been repealed. 152 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 3, ch 1, s 1.4.1. See for newer French law in this connection, Ordinance no 2006-346 of 23 March 2006 and Vol 3, 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) was allowed and was perfectly effective, even without publicity, although of course it put the risk of earlier securities operating in the same assets on the later secured creditor. This only changed in the era of codification in continental Europe. The specificity requirement was then used to outlaw any inclusion of future assets and also non-possessory security; it can be traced at least to the Prussian Code of 1794 (Art I.2, para 136), which only retained non possessory mortgages for (existing) real estate subject to a form of registration, see for the Roman law further also n 27 above. It could not last and, in the later industrial age, at first through forms of conditional sales, the situation was redressed for chattels, at least in so far as the element of possession was concerned, but the use of future assets remains problematic in civil law even now. In such an atmosphere, floating charges in particular have difficulty in developing: see also Vol 3, ch 1, s 1.1.4, Germany being here somewhat of an exception, but there would appear to be regression in the DCFR, see s 1.11.4 below. Notions of reputed ownership are closely related: see Vol 3, ch 1, s 1.1.10. The common law did not suffer similarly. It retained the non-possessory chattel mortgage, since Holroyd v Marshall [1862] 10 HL Cas 191, in equity also extendable into future assets, but more importantly was also able to use the concept of the equitable charge to introduce the floating charge covering whole classes of future assets
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surfaces more acutely. Where there is constructive delivery in civil law as, for example, in a delivery constituto possessorio of assets that are meant to remain with the seller or in a traditio longa manu of assets in the custody of third parties, as a minimum some physical setting aside may still be necessary for the transfer of title. That would seem to exclude the sale and delivery of future goods in those cases, but, as will be discussed shortly in section 1.4.5, it is technically conceivable to assume a delivery under an anticipated constitutum possessorium of (future) goods that therefore remain under the seller. Thus a more physical and anthropomorphic concept of delivery might be abandoned and the transfer of ownership in such future goods is then considered in a predominantly normative manner, always assuming that the goods are sufficiently described and are identifiable upon their emergence in the ownership of the seller. It thus becomes possible to operate with a reasonable description to effect the transfer, see also the discussion in section 1.1.7 above. That presents, however, an great leap forward in many legal systems and many have not yet taken that step. It is the direction nevertheless that needs to be taken in order to make, for example, modern floating charges fully effective.153 In relation to future goods and their possible transfer, it is possible to elaborate on the above in terms of the (future) disposition right of the seller and distinguish in that connection also between the sale and delivery of future assets on the one hand and the conditional and temporary sale of present (and future) assets on the other. In that case, it may still be necessary to make a further distinction between physical and intangible assets, especially between chattels and claims. This will be further discussed in connection with the disposition right in section 1.4.5 below. Finally, although the applicable national property law will normally pronounce on the issue of resulting ownership rights, tying it, in the case of a sale of chattels, either to the conclusion of the contract or to delivery, some ownership change is also bound to arise de facto or through the operation of the law—for example where commodities are converted into semi-finished products or goods are commingled so that title perforce transfers to others with physical possession or it may have to be shared so that a co-ownership structure or forms of beneficial ownership emerge as a result of physically handing over the goods, whatever the more formal title transfer regime may be. Another example may be client accounts of brokers who trade investment securities for their clients and may retain such accounts in their own name. The applicable law will recognise this state of affairs and may elaborate on it as a separate way of acquiring ownership. Accession is of course another way of acquiring ownership, based on factual considerations. It has already been said in section 1.1.3 above that user, income and enjoyment rights in assets tend towards becoming proprietary, if only to promote their liquidity. and including a shift of the charge into replacement goods: see further Vol 3, ch 1, s 1.5.2. A reasonable description of the charge and the assets covered becomes here the criterion. See, for the US s 9-204 UCC, and Vol 3, ch 1, s 1.6.2. Theories of reputed ownership in the transferor or assignor, which could still affect such transfers, have been abolished since 1986 by the UK Bankruptcy Act and were there already abandoned in earlier case law for corporate bankruptcy: see Re Crumlin Viaduct Works Co Ltd [1879] II Ch 755. They were always less popular in the US: see further Vol 3, ch 1, s 1.1.10. 153
See the liberal US statutory approach in s 9 UCC, n 152 above.
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This also has a spontaneous proprietary element and may derive from the mere contractual declaration or obvious intent, where party autonomy is accepted in these matters or even from public policy, subject always to the protection of the ordinary course of business against such charges.
1.4.4 The Development of the Rules Concerning Delivery as a Formal Requirement of Title Transfer in Civil and Common Law Above, it was said that in England originally title in goods passed upon a sale only through their physical transfer. It had to do with the concept of seisin, which, unlike on the Continent, was in England never superseded by the Roman law notion of possession and delivery as legal concepts which could under that law both be purely constructive. In England, there had, however, long been an exception if the transfer was by deed. Eventually a further exception was created if there was a sales contract, as now reflected in section 17 of the Sale of Goods Act 1979, superseding the earlier (but virtually identical) text of 1893 in this respect. Strictly speaking, in England, (physical) possession no longer plays a role in the c ontext of title transfer in goods: see also section 2(1) of the Sale of Goods Act 1979 (except in instances discussed in the previous section), which Act also applies in Scotland. If the seller remains in possession, in this system he becomes a retentor (see section 41 of the Sale of Goods Act 1979) or a kind of bailee of the buyer, who, in line with what has been said about bailment before, would, as bailor, only have a contractual right to delivery against his seller. Upon payment, this personal right can convert into a proprietary right (enforceable, however, only in tort under the general rules of proprietary protection) if the seller/bailee defaults (when an immediate right to repossession results), 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 on this alternative section 1.4.3 above. As we have seen in the US, the subject of the sale of goods is now covered by Article 2 of the UCC. It allows title to pass at the moment set by the parties in the sale contract but presumes that it only passes upon physical delivery if parties have not agreed otherwise: see section 2-401(2). Article 2 UCC de-emphasises the aspect of title transfer, however, and it does not concentrate on the proprietary aspects, which may therefore remain a source of disparity under State law. In fact, the older common law is in this aspect still controlling except where especially superseded: see section 1-103 UCC. Article 2 is particularly relevant in this connection for the protection of bona fide purchasers from buyers who do not have good title: see section 2-403.154 154 It abolished in this connection the consequences of the distinction between credit and cash sales for bona fide purchasers, as mentioned in s 1.4.2. In credit sales there is a voidable title upon the buyer’s default. In cash sales, title is often not considered transferred at all until payment, resulting in a kind of implied reservation of title if possession has been transferred (or a retention right, if it has not been). The common law in the US was and is confused about the moment of title transfer, which in cash sales seems to be only upon payment, as under the old Roman law, which attitude also received some early support in England: see Blackstone (n 143) 247 (who also
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In France, the concept of seisin or saisine had earlier also led to a system based on the protection of physical possession at the expense of the owner who had voluntarily parted with it, just as under English and early German law: see sections 1.1.5 and 1.16 above.155 In this system the transfer of physical possession was also necessary for a transfer of ownership. Eventually, the Roman law approach prevailed for movables,156 with the resulting distinction between the positions of the owner, possessor and holder. It confirmed the requirement of delivery of (legal) possession (in this sense) for title transfer. However, as far as the transfer of title in movables was concerned, it became the practice in France early on to include in the sales agreement a clause (clause de desaisine) under which possession in a legal sense was immediately transferred to the new owner while the seller remained the holder for the time being, subject to immediate demand by the buyer.157 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.158 The standardisation of the clause de desaisine established the practice of title transfer at the moment of the conclusion of the sales agreement, at least for movables. As we have seen, the natural law school, starting with Grotius in the early seventeenth century, independently concluded that the transfer of property at the time of the conclusion of the sales contract was more natural and closer to the will of the parties who should have the right to decide these issues.159 In France, this view was followed in the late seventeenth century by Domat,160 who believed that the clause de desaisine was always implied. From there the principle entered the French Civil Code of 1804 (see Articles 711, 1138 and 1583) although it was not without opposition,161 while 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 fi ction finally abandoned in the Italian Civil Code of 1942 (Articles 1376 and 1470). It could wanted delivery): see also Williston, 3 The Law Covering Sales of Goods (New York 1948), s 342. The UCC does not change the law but protects bona fide third parties against the consequences of this confusion. 155 This development dates from the thirteenth century when an owner, even without physical possession, was increasingly given standing to defend his rights in rem under the influence of Roman law concepts which became prevalent with regard to chattels under local customary laws. The rights of the physical holders were thereupon considered inferior to, and derived from, the owner. In this system, the holder no longer had an independent possessory action against third parties who interfered with his holdership and could at best defend in tort motivated by his own inability to fulfil his obligation to return the assets on the due date to the owner. This owner was, on the other hand, denied the action against the wrongdoer under Roman law as long as he could recover from the holder: see Justinian Inst 4.1.17(19). 156 See also J Brissaud, A History of French Private Law (Boston, MA, 1912) 300. 157 See Art 278 Coûtumes d’ Orléans, in C-A Bourdot de Richebourg (ed), Nouveau coutumier general (Paris, 1724) III.2. 158 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 149) no 695. 159 See De Iure ac Pacis Lib II, Cap VI, ss 2ff. 160 Les lois civils dans leur ordre naturel, Livre I, Titre 2, No 8 (Paris, 1777). 161 Among others from Pothier, Oeuvres completes (Paris, 1821) Vol 3, s 1, and Oeuvres de Pothier, Vol IX 299, Traité du droit de propriété (Paris, 1823) No 245.
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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, such as a pledge, where delivery remains necessary. It also does not extend to the assignment of receivables, which still requires notice (Article 1690 CC; see for the 1981 amendment for finance transactions, Volume 3, 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, such as an exchange or barter, also effects an immediate passing of title. For movables, in France, legal possession is thus by law transferred with the title at the time of the conclusion of the sales agreement (assuming no further conditions are added and the title transfer is not postponed). In this c onnection, 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. 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. It is in both countries the remnant of a more physical and anthropomorphic notion of property law. At least from a civil law perspective, a final observation may be in order. It should be remembered that the delivery requirement in countries that maintain it for chattels is normally only in respect of the transfer of the ownership right and then refers to the transfer of possession, not in a physical sense, but as the intent to hold for oneself, and then also the transfer of the intent to control the asset. It may be accompanied by physical delivery of the asset if the sales agreement so requires, as it is likely to do either immediately or later as a matter of contract compliance but not then as a legal act. For the transfer of the other proprietary rights in chattels, therefore the usufruct or security interests, delivery may not be a formal requirement, especially for non-possessory security interests, although it is for the pledge. It should be understood, however, that the creation of a security interest, even if non-possessory, still means in civil law the transfer of possession in the above sense (as the intent to hold the interest for one self), although not the physical delivery of the asset, which, under the terms of the security interest, will stay with the debtor, who in respect of this asset will then result as the holder of the security interest for the creditor.
1.4.5 Legal Capacity and Disposition Right. Causes of Contractual Invalidity. Effect on the Title Transfer. Future, Conditional and Temporary Sales In section 1.4.1, it was already observed that in sales, the issue of legal capacity arises in two ways. Everywhere it is required for the validity of a sales agreement (as for any other), but it may also arise at the level of delivery in countries where it is a prerequisite
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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 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 a legal act if already made, even if in the meantime the incapacity was lifted, an issue which will be discussed in more detail below in section 1.4.6. The Germans distinguish here between the abstract and causal systems of title transfer. In the first approach, which is the German one, delivery is considered a separate legal act, which is independent of or abstracted from the underlying sales agreement in so far as its effect on the transfer of title is concerned. As far as the delivery goes, it follows that once it is properly done, German law ignores any defects attached to the original sales agreement. In this approach, the invalidity of the underlying agreement may give rise to a damage action but it cannot itself affect the transfer once completed. There is no revindication possibility of the asset on that basis. To undo the transfer, an unjust enrichment action must be brought aiming at the (ex nunc) return of the asset. This is never automatic in an abstract system, except perhaps in the case of fraud. In the causal system, on the other hand, the invalidity of the underlying sales agreement entails the automatic invalidity of the title transfer (ex tunc, therefore retroactively), even if at the time of the delivery there was sufficient capacity. It gives the seller a revindication right or in rem remedy. If in the meantime the buyer went bankrupt, it would allow the seller to reclaim the asset as owner. This would not be so in the abstract system. 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 also be avoided for reasons of default. Especially in that case, the question of the abstract versus the causal system is important. In a pure causal system, the seller of a bankrupt buyer who does not pay would be able to reclaim from the estate the sold property, also if the bankruptcy itself were the event of default that avoided the underlying sales agreement. That is the consequence of retroactivity and used indeed to be the system in the Netherlands in case law under its old Code. It meant that in practice a condition of payment or a reservation of title was implied in each sales agreement. As we shall see in the next sections, that extreme position has now been abandoned unless the contract still provides otherwise, which is especially the case if there is a reservation of title. It has already been said that legal capacity issues should always be clearly distinguished from the disposition right. That is the right to be able to transfer ownership of an asset or any other proprietary right in it (or perhaps all user, enjoyment and income rights). It is therefore not a general requirement for legal acts but arises only in connection with the transfer of ownership (or other more limited proprietary rights in the asset or indeed all user, income and enjoyment rights therein which have the
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potential of becoming proprietary). In principle, only the owner of rights or anyone authorised by him can make such a transfer. 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, and nor does a bailee in common law. They can at best transfer their own more limited right, but never more than they have. Naturally, by contract they may sell or otherwise dispose of all they want, but without proper disposition rights they cannot properly transfer in a proprietary sense, even in countries that do not require delivery for the transfer of title proper. In c ountries that require delivery, they cannot deliver, in those that do not, they can simply not transfer title. 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 have seen, in most civil law countries and under statutory law also in some common law countries, the exception is the transfer to the bona fide purchaser in the case of chattels. Even if he acquires from someone without sufficient disposition rights, he may become full owner of the relevant right if he did not know and the transfer agreement was valid: see in more detail section 1.4.8 below. The notion of the bona fide purchaser thus normally goes to the lack of disposition rights in the predecessor. Except in France, as we shall see in the next section, it does not go to the lack of capacity of the predecessor or to the lack or invalidity of an agreement with him for other reasons. It should be repeated, however, that lack of capacity or of a valid agreement for other reasons earlier in the chain of transfers would result in the lack of a disposition right in the seller, which would then not, in the case of chattels, affect the bona fide buyer. As noted, the issue of sufficient disposition rights arises in a more specific manner in connection with the sale of future assets. Can they be sold and transferred, assuming that they can be sufficiently identified in the contract? Must they 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 from conditional or temporary sales and deliveries (in countries requiring delivery for the transfer of title even if only conditionally or temporarily). Assuming the asset can be sufficiently described in the contract, it is mostly accepted that a future asset of the seller can be transferred immediately at least if it exists although not yet in the ownership of the seller (either through physical or constructive delivery). It may also be seen as the transfer of an existing claim to delivery, and would then suggest the legal form of an assignment. To repeat, it is in German terms a question of relatively future assets. In the case of chattels, existence in this sense is then a physical requirement; an intangible claim of this nature sufficiently exists if at least the relationship out of which the future claim arises has been created when it is also considered identifiable. In legal systems like that of Germany, which require delivery for the transfer of chattels (but not of intangibles, as we shall see in section 1.5.6 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
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(in anticipation of the seller acquiring the asset). In Germany, for intangibles proper, the delivery is complete with the assignment and no anticipated delivery in this sense is necessary as in Germany no delivery is required for the transfer of intangible assets. As just mentioned, for being relatively future, the relationship out of which the claims are likely to arise or another sufficient Rechtsgrund (legal basis) must exist. In fact, it appears that mere description is here sufficient to transfer even absolutely future claims (see further section 1.5.5 below), at least if they are replacement assets. The DCFR requiring assets to exist for their transfer appears to undo this: see section 1.11 below. At least in Germany, as part of a floating charge or an extended reservation of title, absolutely future chattels may be covered if they are replacement assets: see further section 1.7.8 below. Some tracing facility would therefore be deemed to be implied. In both cases (relatively or absolutely future chattels or intangibles, 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, title shoots through to the buyer or assignee. Nothing further is required from the seller or assignor in terms of transfer (delivery) and the transfer is complete. Section 91 of the German Bankruptcy Act 1999 gives expression to this approach,162 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/transferees. As just mentioned, both in Germany and the Netherlands (but more so in the latter country) this is relevant in particular for floating charges (see also section 1.7.9 below), which may thus be cut down in bankruptcy for assets that emerge only after the bankruptcy of the transferor. It may also be relevant in the extended reservation of title, which is a reservation of title that shifts into replacement goods. Also this facility appears under pressure in the DCFR: see section 1.11 below. In these cases of future assets, even if replacement assets, the disposition right has sometimes been qualified as conditional, leading at most to a conditional sale and transfer as such still vulnerable in a bankruptcy of the seller although there seems nothing against a seller binding his disposition right in advance, the expression of which is in the case of chattels the already mentioned anticipated delivery constituto possessorio (thus constructively, title shooting through when the asset is obtained by the seller). In the case of receivables, in countries where notification to debtors is required for the validity of an assignment, such as legal assignments in England and non-financial assignments in France and the Netherlands (and unlike assignments in Germany and equitable assignments in common law), it would require an anticipated notification to the debtors, who must therefore be known, which is a serious limitation, 162 In the Netherlands, there is a similar provision in the Bankruptcy Act, Art 35(2), which, however, applies not only to absolutely future assets, but also when goods do already exist but have not yet entered into the ownership of the seller and are therefore only relatively future at the moment of his bankruptcy. For the situation in common law countries, see n 31 above.
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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 have seen. In the case of existing assets, the conditionality is subjective or foremost contractual and not related to the state of the asset. It still raises the question of the nature of the resulting interests, especially in civil law with its closed system of proprietary rights, but is a different issue. However, also future assets can be conditionally or temporarily transferred, which would again raise the question of the effectiveness of such a transfer upon an intervening bankruptcy of the seller. A potent example is the finance sale or sale of future assets for financing purposes—see more particularly section 1.7 below—when, for example to achieve financing through the factoring of receivables, future receivables are conditionally or temporarily included in the transfer (depending, eg, on their ultimately being collected, which is a matter of credit risk). It may be argued, however, that in such cases the situation may be different altogether as these assets were never meant to come fully into the ownership of the bankrupt seller (or assignor of receivables) in the first place and the ownership part that was always meant for the financier accrues to him directly. At most, the bankrupt or his trustee act here as (undisclosed) agent for the financier in the title transfer while it will depend on the agreed condition who ultimately acquires full ownership in the asset. Thus if the receivables are collectable, the financier will have them, if not they may be automatically returned to the bankrupt for any residual value (probably collectable only upon litigation), and the financier will recover from other receivables as there is likely to be an excess of receivables in the assignment. If the financier has fully recovered his money, any remaining excess receivables will then also automatically revert to the bankrupt estate. Similarly, if the sale of a future asset to a financier was conditional upon him releasing full ownership to the debtor upon the latter tendering the repurchase price in a timely manner, it would be the bankrupt estate that would become the full owner upon such a tender. Should such a payment not occur, it would be the financier who would ultimately have full ownership rights. The conclusion is that in such cases the present or future nature of the asset might not be relevant. Note that these problems do not arise in the US, at least not in the context of a floating charge, which, according to section 9-204 UCC (both in the old and revised 1999 text), allows the inclusion of absolutely and relatively future assets. It makes no distinction in this regard. In England, the situation is different, the idea being that only upon acquisition does the charge become effective, regardless of whether the goods were absolutely or relatively future at the time of the sale. Note that in England the floating charge has a low rank, which derives only from the date of its crystallisation, normally the date of default of the debtor. That is not now so in the US where the date of filing of the security interest or charge is normally conclusive. In any event, in the
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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 and its Failure: The Abstract and Causal System of Ownership Transfer. The Finality Issue In section 1.4.1 above, it was pointed out that, in civil law, the transfer of ownership needs an underlying reason or cause which is normally found in a contract, particularly in a sales contract, but it could also be an exchange or even a gift if resulting 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 p erformance. Thus it is often said that obligatory rights mean change and proprietary rights mean continuity or achieve a new status quo meant to endure. This makes sense although it was also demonstrated before that in the international flow of goods, services, technology, information and money, property becomes a dynamic concept and movement of assets and their transformation into others the dominant feature. The abstract theory of title transfer, which was already mentioned in the previous section and which obtains especially in Germany, supports this older truth but in terms of transactional and payment finality and asset liquidity also supports this newer world. It de-emphasises the legal consequences of an invalid contract and therefore of an insufficient cause for the title transfer once delivery has taken place. As such it may also be seen as protection of the new status quo.163 As we have seen, there is in this approach no automatic return and revindication right when the underlying contract is invalid for whatever reason assuming the delivery is complete. At most there is an action for unjust enrichment meant to retrieve the asset, which can hardly be initiated after a buyer’s bankruptcy. The opposite result may be reached in the causal approach, as we have already seen also. Everywhere, the underlying cause of the transfer, therefore normally a sales contract, should be valid for title (or the relevant proprietary right) to pass definitely, although the consequences of it not being or remaining valid may differ. This brings us back to the lack of capacity, but at least in civil law there must also be a valid consensus or in common law at least a valid exchange of offer and acceptance and some valid bargain in view of the consideration requirement. It is clear in this connection that mistake or misrepresentation, force or undue influence, or fraud may undermine the contract
163 Bona fide purchaser protection notions and the notion of reliance also contribute. So does de-emphasising in this context notions of intent, defences and excuses and making them more objective, especially in the professional sphere. See for the notion of finality also Vol 3, ch 1, ss 2.6.1 and 2.7.2.
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as much as a lack of capacity may do. Illegality may be yet another reason for failure of the underlying agreement. Lack of an object may be another, and in older civil law codifications also a lack of a sufficient or licit cause, a requirement often equated with consideration in common law, although technically speaking not requiring any quid pro quo and in modern times going foremost into the rationality of the arrangement: see 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 here is that a contract may fail and we shall 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 considered further, one special reason for the failure of the underlying sales agreement was identified as the default of payment and should here be considered separately. In such cases, the underlying contract may be rescinded and comes to an end in that manner. If so, under older civil law, the contract was then often considered avoided from its beginning (ex tunc) and was thought never to have existed. At least in causal systems, like that of the N etherlands, the consequence was that title would automatically and retroactively revert. That would be so even in the bankruptcy of the defaulting buyer. The rescission of the sales agreement, or rather default, becomes here a resolving condition of the title transfer and is often referred to as the lex commissoria (tacita), a concept already existing in Roman law, see D.41.4.2.3 (but not so named). This seems in principle still the French and Spanish approach (with modern limitations in France as we shall see), was also the approach in the Netherlands until its new Code, but has long been abandoned in Germany and does not figure in the BGB or in this manner in the new Dutch Civil Code. In this newer German and Dutch approach, the parties must still undo any acts of performance rendered so far and the defaulting party in particular must co-operate 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.164 Thus where under modern law the rescission in the case of default only works from the moment it is invoked (ex nunc), its effect on the title transfer itself is less strong. That is indeed the German and new Dutch system, which therefore only gives a personal retrieval right that has no proprietary effect and will therefore not be good in the bankruptcy of the buyer. Parties may, however, still achieve the proprietary effect
164 This state of affairs in the Netherlands is deduced from the rescission now being ex nunc and there no longer being any retroactive title effect upon default (unless the parties agreed otherwise). See Arts 6.265 and 269 CC. It confines the operation of the full causal systems to situations in which the underlying agreement is invalid for lack of capacity, lack of consensus or illegality: see Arts 3.53, 6.203, 3.84(1) and 5.2 CC, which in such cases of voidness of the sale agreement allow the title still to revert ab initio or retroactively.
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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 section 159 BGB). Thus lack of retroactivity does not necessarily exclude all proprietary effect even though that conclusion is often drawn, but it still makes a difference in the bankruptcy of the transferee and for the reclamation/repossession right in such cases. Another perspective on the abstract or causal system of title transfer is that of the delivery itself, particularly in countries that require it for title transfer. Indeed in civil law countries a distinction is often drawn here between countries where delivery itself (even if only constructive) is a requirement for the transfer, therefore a legal act in itself, and those in which it is not. It is often concluded in this context that, where no such delivery is required for title transfer, the automatic retransfer would follow more readily upon the rescission of the underlying sales agreement. This would be all the 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, such as England and France, but it explains why the issue of automatic return (or not) is not discussed there in the same way. Nevertheless, also in these countries, it is still necessary to determine the effect of the invalidity or rescission of the sale agreement on the transfer and a clear distinction should still be made in these countries between the contract and the transfer of title, which are merely coterminous. One could even maintain the delivery perspective if a delivery constituto possessorio (therefore a constructive delivery) were always implied in countries that do not openly require delivery for title transfer. It is an analysis sometimes still advocated in France and Belgium, as we have seen in section 1.4.4 above, and might here acquire some special meaning.165 It suggests an implied additional legal act of transfer, which indeed highlights the difference between the sale agreement and the transfer of title, even in countries like France. Normally, however, in these countries one uses the concept of voidable or void title, rather than the concept of transfer or real agreement, and determines when voidness may lead to an automatic return of title. Clearly, German law is considered the prime example of an abstract system, which in that country is largely tied to the delivery requirement or real agreement itself. 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)166 leads by itself to the conclusion that the failure of the underlying 165 166
See also s 1.4.2 above. See also n 144 above.
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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. This is then thought to undo the dingliche Einigung also (section 123 BGB). Under German law, in the case of a reservation of title, it must be included in the dingliche Einigung to be effective, although it will normally be considered part of the latter if it was in the sales agreement until proven otherwise.167 In fact, in Germany it is possible to introduce the reservation of title as late as at the dingliche Einigung stage, assuming it can be established that that was what the parties intended at that moment. If the dingliche Einigung is so affected, the transfer is conditional and the reservation of title will be effective also in the bankruptcy of the buyer in Germany who has failed to pay, regardless therefore of the wording of the underlying sales agreement that had omitted it. It should be noted that in countries such as the Netherlands, Switzerland and Austria, which all have the requirement of delivery as a separate legal act (even if not all going as far as assuming the need for an Einigung in the German manner), the causal approach can only exist while assuming that the legal act of delivery is invalidated at the same time as the underlying sale agreement. It confirms that the delivery requirement need not lead to an abstract system per se and the characterisation of delivery as a separate legal act can coexist with a causal system. In countries like England and the US, there is largely an abstract approach even though 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, also not in the US where delivery is mostly still required for title transfer in chattels (see section 2-401(2) UCC); at law it is probably rather the physical possession of the buyer and his bankruptcy trustee and in equity the discretionary implementation of the rescission remedy. As important, there is for personal property in any event no revindication remedy proper in common law. 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 have seen, in the case of a default and rescission of a sale agreement, the lex commissoria tacita is indeed normally implied in these countries,
167
See for reservation of title in Germany, BGH, 1 July 1970, 54 BGHZ, 214, 218 (1970).
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also in a bankruptcy of the buyer. It suggests a causal system, but also here it does not automatically follow and, at least in France, there are significant corrections to any implied causal approach. Thus for effect in bankruptcy, the return of the asset to the rightful owner must have been requested before the bankruptcy of the wrongful owner occurred.168 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 3, 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 its bankruptcy. If it can be established that they relied on the outward signs of creditworthiness of the debtor/buyer caused or inflated by the seller putting the buyer in possession of unpaid assets, they may be protected and prevail over the retrieval rights of the seller. The asset will in that case remain part of the bankrupt estate. This theory of the solvabilité apparente even prevented a reservation of title being fully effective in bankruptcy in France until 1980 and in Belgium until 1998. In the meantime, the bankruptcy Acts of both countries have been expressly amended to overcome this problem—see Volume 3, chapter 1, section 1.3.4—but it still demonstrates that France does not have a full causal system. In fact, on the basis of French case law, the buyer may hold on to 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.169 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 it was already said that normally it only cures a lack of disposition rights in the seller, not the absence of a valid sales agreement between seller and buyer: see further the discussion in section 1.4.8 below. Only in France and in countries following its lead might it also cover the case of a failed sales agreement for reasons concerning the seller and as regards which the buyer is bona fide. 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
168 If the goods are already with the buyer, they can only be returned upon his bankruptcy if the seller has already started the revindication proceedings: see Art 117 French Bankruptcy Act 1985; see also G Ripert and R Roblot (eds), Droit Commercial 2, 16th edn (Paris, 2000) no 3158. A distinction is now made (since the Bankruptcy Act 1985) between a situation in which the sale was already rescinded before the bankruptcy and in which rescission was petitioned or intended but not yet granted. In that case, revindication is still possible but only if the rescission was for reasons other than default of payment of the purchase price. This is because of Art 47 of the French Bankruptcy Act, which after bankruptcy generally suspends all actions for the rescission of contracts based on lack of payment of a sum of money. See in France for the lex commissoria tacita, Arts 1184 old, 1610 and 1654 CC and for the lex commissoria expressa Art 1656 CC. 169 Cour de Cass (civ), 6 July 1886 [1887] D.I.25.
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in interest of such a buyer is thus protected but not the buyer himself, which would require an abstract system of title transfer. 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. It is therefore an important feature of any transnational property law. The concept of finality is a key notion in this book, see Volume 1, chapter 1, section 1.1.8 and the abstract system of title transfer is one main pillar of it, as is the protection of the bona fide purchaser against a lack of disposition rights, now increasingly extended to all buyers in the ordinary course of business as we have seen. Reliance is another, as we have seen, and so is a more formal approach to capacity and intent. Again, this was earlier identified as an issue of the protection of the ordinary flow of goods on which society wholly depends and is a key public policy requirement. Roman law had not progressed this far and it is not even central to the DCFR. In fact the Justinian compilation was contradictory in the matter of the abstract system, but the ius commune adhered to it, as we shall see in the next section. It is logical in a legal environment in which bona fide purchasers of chattels were not yet protected as was the situation under Roman and medieval law. Conversely, one could say that the causal system can only properly operate when bona fide purchases from the buyer without a valid contract with the original seller are safe. It is therefore still less suitable for transactions in real estate and in intangible assets where there is no bona fide purchaser protection. In the case of chattels, only in Spain might 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),170 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. In practice, there was never a consistent choice in favour of either approach. As already mentioned, the more extreme application of the causal system was abandoned in the Netherlands through the curtailment of the lex commissoria tacita. In other countries, the causal system may not apply when the rescission of the agreement is invoked after the bankruptcy as the debtor is not supposed to be able to effect a re-transfer under those circumstances and in such countries the return of title is not then deemed automatic. There are signs of this in France. Moreover, French law still adheres in bankruptcy, when it truly matters, to the notion of the solvabilité apparente protecting unsuspecting creditors of the bankrupt, as we
170 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.
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have seen, while the buyer is protected if in good faith as to the causes of the invalid contract. It all undermines the causal approach. On the other hand, the abstract system often yields to a causal result in the case of fraud or of a reservation of title, as we have seen also, even in Germany, while the situation in England for reservation of title is still not fully clear.171 Nevertheless, in Germany we see the fullest abstract approach. For chattels, this is combined with the protection of the bona fide purchaser. Finality is here further buttressed but the connection between the two was never fully considered in Germany when the BGB was enacted. It did not go so far as to move finality to the centre but it was in line with the later ius commune, and therefore pre-codification law, under which the abstract approach prevailed, while as from the seventeenth century in France and earlier in the trading cities of Northern Italy and the Netherlands the notion of the protection of bona fide purchasers of chattels also started to develop for situations where there had been a valid contract but not a sufficient disposition right as we shall see in s ection 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 3, 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,172 narrows the situations in which a lack of disposition rights becomes relevant 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.
1.4.7 The Origin of the Abstract and Causal Systems of Title Transfer The problem of the continuing validity of the title transfer regardless of the invalidity of the underlying sales contract and the opportunity of protecting the ordinary flow of goods it offered was identified early, especially in the ius commune. As mentioned in the previous section, it is now often cast in terms of the abstract versus causal system of title transfer. In South Africa, where the ius commune system still obtains, the issue has been of special interest, also because of the common law influence on the law.173 Both the ius commune and the South African system that follows it are abstract, the later Justinian Roman law itself having been unclear on the subject. There is a famous contradiction between D.41.1.36 and D.2.1.18. 171
See s 1.3.6 above and for England also n 187 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 Weekblad voor Privaatrecht, Notariaat en Registratie 96. It probably applies to all assets that are market traded or commoditised: see for emission rights MH Koster, ‘Handel in emissie rechten: het causale stelsel uitgesloten’ (2005) 6617 Weekblad voor Privaatrecht, Notariaat en Registratie 301. The nature of the asset and the way it is traded seem to suggest it. 173 See JE Scholtens, ‘Justa Causa Traditionis and Contracts Induced by Fraud’ (1957) 74 South African Law Journal 280ff. 172
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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.174 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,175 but a simulated contract was not good enough as in that case there was no transfer at all. The same was more generally true when the parties were not ad idem. This was particularly the case when the contract was induced by fraud, although even that was sometimes contested, but no longer since the seventeenth-century Roman Dutch School.176 In practice, when the asset was handed over, it was normally assumed that there had been sufficient power to transfer it, as it was unlikely that there had been no reason at all for doing so.177 The result was that the abstract system of transfer title transfer was considered a substitute for the sales contract as iusta causa traditionis. In modern times, in civil law, Germany remains the most perfect example of the abstract system as we have seen.178 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),179 in a legal system that
174 But cf R Zimmermann, The Law of Obligations (Deventer, 1992) 271, who accepts without reservation the causal system for the Roman traditio in classical Roman times. 175 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. 176 See J Voet, Commentarius ad Pandectas, 4.3.3 and for further sources and comments, Scholtens, n 173 above, at 284ff. 177 See Vinnius, Commentarius ad Inst 2.1.40.10. 178 See also U Drobnig, ‘Transfer of Property’ in A Hartkamp et al (eds), Towards a European Civil Code (Nijmegen, 1994) 353. 179 See n 144 above and accompanying text.
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c ontinued to require delivery, even if it may only be constructive, as a prerequisite for title transfer, as is still the case under the present German Civil Code. This view was supported by his pupil Windscheid who had much influence on the drafting of the new German Codes.180 It thus entered into the BGB (section 929), which as a consequence does not view the prior (sales) agreement as the immediate cause of the transfer but rather the will of the parties (dingliche Einigung) that ownership should transfer at the time of the delivery (of tangible assets). Yet even in this approach, incapacity, illegality or fraud may invalidate the intent both in the underlying sales agreement and in the real agreement (or delivery as a legal act). Mistake, however, is much less likely to do so. In this system, only the dingliche Einigung or the real agreement is causing the in rem or proprietary effect of the transfer. As we have seen, it does not, strictly speaking, require the physical transfer and can be constructive (Übergabesurrogat). The physical delivery in this approach is no more than a factual event or condition of the sales agreement but not itself a further legal act. In legal terms, it is insignificant except in the context of enforcement of the sales agreement if it requires the physical transfer. In fact, the terms of the dingliche Einigung itself may be different from the original sales agreement and the delivery may therefore be made subject to extra (proprietary) conditions at the time the legal possession is transferred. As we have seen, of these conditions, the reservation of title is the most important. Only if it is part of the real agreement may it lead to an automatic return of the full title in the bankruptcy of the defaulting buyer.181 It may be difficult to prove but there is, as also noted, some presumption under German law that the real agreement (dingliche Einigung) is in the same terms as the underlying sale agreement and a reservation may be deemed implied if it is a term of the underlying sale agreement, although it may still be inserted at the time of the dingliche Einigung itself, even if contrary to the original sale agreement.182 It was already mentioned that the situation in France is less clear. Under older French law, the approach of the Glossa Ordinaria, limiting the retrieval possibility to a personal action only (in modern terminology resulting in the abstract approach), was normally followed.183 In modern French legal writing, the subject appears of lesser interest, apparently since delivery is no longer required for title transfer in chattels under the Code Civil. In the previous section it was said, however, that that cannot in itself be decisive and French case law does indeed not suggest the automatic return if the acquirer was bona fide as to the causes of the contract failure and had physical possession. This is largely an expression of the bona fide purchaser protection rule in France (Article 2279 CC), extended also to operate between two parties to a sale confronted with the invalidity of their contract.184
180 See B Windscheid and T Kipp, Lehrbuch des Pandektenrechts 1 (Frankfurt am Main, 1900) paras 171(5) and 172(16a). 181 See n 144 above and accompanying text. 182 See BGH, 9 July 1975, 64 BGHZ 395 (1975). 183 See R Pothier, Traité du droit de propriété (Paris, 1823) no 228. 184 The classical case is Cour de Cass (civ), 6 July 1886 [1887] D.I.25.
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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 pre-date the bankruptcy.185 Also if the asset is already in the possession of the bankrupt it may have to stay there in view of the theory of reputed ownership or solvabilité apparente: see section 1.4.6 above. As we have also seen, in English law the lack of the delivery requirement has not led to a causal system of title transfer. The situation is not discussed in these terms in English legal literature.186 However, case law seems to bear it out,187 also (very clearly) 185
See n 168 above. Except in the context of Roman law discussions, see for the UK, F Schulz, Classical Roman Law (Oxford, 1951) 350 and F de Zulueta, The Roman Law of Sale (Oxford, 1945) 56. 187 See for older English case law, Lord Cairns in Cundy v Lindsay (1878) 3 App Cas 459 at 464, opting for an abstract approach, although the House of Lords in this case of fraud accepted the return of title as there had never been any intention to contract with the person who had lied about his identity. The leading modern case (of the Privy Council) is Sajan Singh v Sardara Ali [1960] 1 All ER 269, in which Lord Denning, with reference to Scarfe v Morgan [1835–42] All ER 43, held that the lack of a government permit to acquire a transport vehicle did not prevent the transfer of title between parties, who clearly meant that title should pass, no matter the illegality and consequent invalidity of the underlying sale agreement. It had transferred the property, even though under Malayan sales law the title had not passed at the moment the contract was concluded, as would have been the case if the contract had been valid. The situation became less clear after Belvoir Finance Co Ltd v Stapleton [1970] 3 All ER 664, where in a similar case of invalidity of the sale contract, Lord Denning accepted the permanence of the transfer of title ‘even where the transferee has not taken possession of the property, so long as title to it has passed’. Implementation, performance or physical transfer of the asset seemed not to be required. See more recently also Dewar v Dewar [1975] 2 All ER 728, in which a gift, accepted as a loan, once given, was still considered a gift, no matter the clear disagreement on the underlying cause. It is true that most of these cases seem to be more concerned with the transfer of title itself than with its undoing whilst the last case involves a gift situation or loan substitution. In RV Ward v Bignall [1967] 1 QB 534 it was said that, upon both termination and rescission of a sales agreement, title automatically revests in the seller. The seller, even if not in possession, may as a consequence make a valid sale to a new buyer, but whether the latter can reclaim the asset from the first buyer, particularly in the latter’s bankruptcy, must be in doubt. This may also affect a reservation of title. R Goode, Commercial Law, 3rd edn (London, 2004) 391ff makes a distinction between rescission and termination and reserves the first term for situations of voidable title in cases of misrepresentation, fraud and duress, and the last for major breaches and notes that title re-vests in the seller in both cases, although in the case of termination not retrospectively so that in that case accrued rights and liabilities are not affected. This re-vesting is seen as exceptional and typical for the sale of goods only. However, it remains unclear what physical possession of the buyer means, especially in his bankruptcy. In that case there may be no real, ie proprietary, remedy, but only a personal retrieval action for the owner except where there is a charge, lien or other type of security or equitable interest in the asset. The problem is that English law does not systematically analyse the contractual remedies (see 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 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). 186
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for assignments of intangible claims.188 There may be reasons to think that under the Sales of Goods Act 1979 title reverts at least ex nunc in the case of irregularities in a sales agreement or its performance, but physical possession by a buyer would give him strong rights to the asset regardless of the fate of the underlying sale agreement, while in the case of rescission, there is no automatic right to a return of the property in equity (specific performance). This has clear consequences in bankruptcy and may weaken the seller’s proprietary position fatally. Only in the case of fraud would, under English law, the title appear to revert automatically and retroactively, at least if the fraud went to the heart of the title transfer.189 In most other cases of invalidity of the sales agreement, the question therefore remains whether the seller can prove a better right to the asset against the bankruptcy trustee of the buyer in possession and retrieve the asset, which seems doubtful under English law. Lack of specific performance and the strong position of the physical holder appear to make the English system in practice abstract. The exception, confirmed in section 2-401(4) UCC in the US, is the situation in which the buyer rejected or otherwise refused to receive or retain the goods upon a tender of delivery, whether or not justified or where there is a justified revocation of the acceptance. The UCC states that in such cases the re-vesting occurs by the operation of the law and is not a sale or resale. The exceptional nature of this remedy giving the seller retrieval rights confirms at the same time that normally they may not exist, certainly in a bankruptcy when the bankrupt is in possession. Clearly, US law does not suggest the return of title either in the case of the failure of the underlying sale agreement and specifically disallows the effect of rescission clauses with title return in bankruptcy.190 It can be seen as another confirmation of the basic approach, which, in German terms, is the abstract one.191 In common law countries
188
See n 239 below and also s 1.5.7 below. Car and Universal Finance Co Ltd v Caldwell [1965] 1 QB 525 and Cundy v Lindsay cited in n 192 above. Third parties who were bona fide purchasers of the asset while the original sale agreement was not yet voided are in any event protected by the special provision of s 23 of the Sale of Goods Act 1979, provided there was at least an intention between the original contracting parties to transfer title. It is an instance of bona fide purchaser protection under common law, which remains exceptional under common law, and which itself suggests a greater need for an abstract approach to title transfer. 190 Confirmed in s 365(e) of its Bankruptcy Code. 191 See also G Gilmore, Security Interests in Personal Property (Boston, MA, 1965) 63. It is indeed established case law in the US that default in a credit sale does not automatically retransfer title: see Frech v Lewis 218 Pa 141 (1907). There is only voidable title. A voidable title also results if a sale fails in the US for reasons of invalidity, illegality or fraud: see s 164 of the Restatement (Second) of Contracts (1997), but not if the sale contract is induced by the fraud of a third party who presents himself as an agent for a non-existing principal: see Moore Equipment Co v Halferty 980 SW 2d 578 (1998). In that case there is no contract at all and no voidable title either, but rather a void title. In a cash sale, title transfer was traditionally considered postponed until payment and no title had therefore passed either. As it implied some kind of reservation of title, it could still give the seller repossession rights. Under present law, that would be a security interest, however, which implies the immediate transfer of title to the buyer: see s 9-109(a)(5) (9-102(2) old) UCC. The UCC largely abolished the distinction between credit and cash sales and title passes when parties want it or otherwise upon delivery: see s 2-401(2) UCC. Good faith purchasers from a defaulting credit or cash buyer are now in both cases protected against what is considered voidable title provided there is (voluntary) physical delivery to them: s 2-403(1)(c) UCC. It is an instance in which the UCC does not necessarily correct or clarify the former law, but neutralises its effect on outsiders, here by assuming voidable title in both cases. In fact, between the 189 See
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there may also be a remnant of the reputed ownership notion and in any event a suspicion of hidden non-possessory proprietary interests. As in England, the situation is less clear in the US when there is invalidity, illegality or fraud voiding the contract rather than a rescission upon mere default or for other reasons. In the US, early case law suggested a return of title in these cases,192 but State law then developed in the sense that in a credit sale invalidity, illegality, fraud or default led to a voidable title only and no automatic return if the voidness was invoked. In cash sales, title was not even considered to pass before payment, but was thereafter probably considered absolute. As already pointed out in the previous section, it is clear that in practice most systems are hybrids with 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 (such as misrepresentation or fraud) as a defence, certainly in the professional sphere when the other party is innocent. In the case of illegality it may depend on the policy objective behind it, which may not always require the undoing of the transaction. French law is seemingly causal but does not always bear this out. Dutch law is said to be causal but now with considerable restrictions, at least in default situations.193 In terms of transactional and payment finality, the subject remains of vital importance between seller and buyer in the bankruptcy of the latter and more especially for the transfer of immovables and especially intangible property, where the bona fide protection is not normally available to bona fide purchasers of these assets, except for intangibles embodied in negotiable instruments or in the case of a special statutory
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 a bankruptcy of the buyer: see In the Matter of Mort, 208 F Supp 309 (1962), but still subject to the right of bona fide purchasers and the bankruptcy trustees’ lien under the Bankruptcy Code (if the request for payment is made after bankruptcy). Another instance of a reclaiming right results in the US under s 2-702 UCC for 10 days after delivery of goods in a credit sale whilst the buyer was insolvent, a right since 1978 also recognised in bankruptcy, see s 546(c) of the US Bankruptcy Code. Again it is incidental and exceptional and does not denote any causality of the transfer. It is also subject to the right of bona fide purchasers: see s 2-702(3) UCC, which refers to s 403 UCC. 192
Gifford v Ford 5 Vt 532 (1833). While legal doctrine in the Netherlands often accepts the concept of the ‘real’ agreement: see HCF Schoordijk, Vermogensrecht in het algemeen naar Boek 3 van het nieuwe BW [The General Part of the Law of Property and Obligations according to Book 3 of the New Dutch Civil Code] (Deventer, 1986) 254ff, it does not lead to an abstract system, as the law negates its effects by generally rendering it void together with the underlying sale contract. It has been argued in the Netherlands, however, that there are situations where the sale agreement itself is valid, but the later real agreement not, another way of proving its own separate character, cf ibid, especially in cases where governments intervene to prevent delivery without declaring the contract itself illegal or in situations in which an impending bankrupt is forced to deliver pursuant to a sale agreement without wanting to do so or in any other case in which excessive pressure is exerted to achieve performance of an existing agreement. 193
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provision like the new Article 3.88 of the Dutch CC for real estate transfers having failed earlier in a chain.194 The causal system seems more natural and is in modern comparative legal writing sometimes preferred.195 The DCFR also favours it with restrictions (see section 1.11 below) but it is not the system that prevails most. The hesitancy concerning the causal system, although seemingly more normal, is understandable as it creates uncertainty in the title. In truth the issue is always one of finality and its promotion, which the abstract system does do better. The causal system may even be more objectionable if the avoidance or rescission derives from later acts of the parties, notably from the default of the buyer in possession. The need for an abstract system is 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 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.196 The principle of abstraction in title transfers is in the meantime well established and is also apparent in many other areas of the law. It is inherent in agency and the concept of its independence under which the principal may become the owner of assets bought by the agent regardless of underlying restrictions on the agent’s activity in the agency agreement. Negotiating a bill of lading or other documents of title and acceptance of a bill of exchange are also believed abstract. The principle of abstraction operates in a not dissimilar way in the issue of bank guarantees and letters of credit. In bills of exchange the acceptance is independent of the drawer–drawee as well as drawer–payee relationships, while the commitments under a bank guarantee or letter of credit are 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.
194
See n 170 above. See Drobnig (n 178) 359: see also F Ferrari, ‘Vom Abstraktionsprinzip und Konsensualprinzip zum Traditionsprinzip’ (1993) Zeitschrift für Europäisches Privatrecht 52. 196 See in the Netherlands HR 12 January 1979 [1980] NJ 526. 195
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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 or means to dispose of in other ways, eg by transferring a security interest. It is a typical proprietary issue. As far as the contractual side of a sale is concerned, it is possible to sell anything, even assets which do not (yet) belong to the seller or may as yet not even exist, but it is a basic assumption in many legal systems that title cannot be legally transferred in them if the seller is not the owner or, if it concerns the transfer of another property right, at least the disposition to transfer (or create) that right. Lack of disposition rights exist obviously in a thief but they more legitimately 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. Unlike capacity, the ability to dispose of an asset may be considered a more factual than legal issue, but this is misleading and has led particularly in civil law to difficulties in the transfer of future assets and in bulk assignments as we have seen. It should also not be associated with the delivery requirement or possibility, which in civil law may in any event be entirely constructive or abstract, as we have seen also. It is true that in Germany it also plays a role at the level of the dingliche Einigung or real agreement, therefore at the level of the transfer itself, but again in an abstract or legal sense, not necessarily physically or factually. For the present discussion, the key is that failure of the disposition right 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). 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, which is not the case, for example, in an undisclosed agency. The law has not halted here but has over time developed the concept of the bona fide purchaser, at least in respect of chattels upon a defective sale. It may also have relented in redefining the concept of disposition right in respect of future assets and their transfer: see section 1.4.5 above. Bona fide purchaser protection is one way of protecting the ordinary flow of goods or business, which is not served by uncertainty as to ownership and even less by assets moving (physically) backwards and forwards between the parties. This is finality and as we have seen the bona fide purchaser protection is one way of achieving and supporting it besides an abstract system of title transfer, reliance notions, and more objective notions of intent and its failure, see Volume 1, chapter 1, section 1.1.8. The acquisitive prescription in civil law and statutes
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of limitation had a similar objective: see sections 1.2.5 and 1.3.5 above. The instant protection of the bona fide purchaser took that concept one step further, at least in situations where the only defect was a lack of disposition rights in the seller because of earlier events concerning the chattels sold. Rather than the protection of the ordinary course of business and therefore the commercial flows as a public policy imperative, the more traditional justification given for the 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. If anyone, the seller is here considered to be at fault, which is in the anthropomorphic civil law tradition a key issue also in default situations especially in contract as we have seen in the previous chapter when discussing force majeure. The question is then simply who is protected: either the old owner or the new one? In modern law, even in common law, which is in principle stricter and will allow only statutory exceptions to the nemo dat rule (except in equity), the balance shifts here increasingly towards the protection of the new owner. In the more traditional approach, a sale by an unauthorised person to whom the original owner voluntarily handed his goods is then considered the latter’s risk. This is also called the entrusting principle, which is also possible to view as a variation on the agency principle, but again the true and more modern perception is the protection of the ordinary course of business and therefore the finality of commercial and financial transactions or flows which are not or no longer to be undermined by sophisticated legal reasoning. When this is the objective, bona fides might not any longer be 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, at least the latter in respect of chattels, is now normally protected provided he obtained the physical possession of the goods for value. It was pointed out before that this physical aspect may well be a remnant of older anthropomorphic thinking and the requirement is in any event less clear under the statutory exceptions in common law, but also in German law in the case of a sale of goods under a holder (longa manu) or custodian when the real issue appears to be whether the seller lost control rather than whether the buyer obtained physical possession: section 934 BGB. In these cases, technically only the retrieval right on the basis of the relationship with the holder (the Besitzmittlungsverhältnis, see also section 1.2.4 above) is assigned under section 870 BGB (although if there are no disposition rights proper in the seller, this relationship is hardly likely to exist).197 Commonly the bona fide buyer must also have paid good value, although this value need not be commensurate while the requirement is altogether absent in the German
197 The question is especially relevant in Germany in a reservation of title, when the conditional buyer sells the asset constituto possessorio to someone else (eg, his bank for security purposes) who on-sells through a tradition longa manu to a bona fide purchaser. Upon default of the first buyer under a reservation of title and in physical possession is the first seller or the last buyer protected? In the absence of physical possession of the latter, it should be the former, but that does not seem to be the solution of s 934 BGB. Another aspect of the present German system is that while a traditio constituto possessorio of a non-owner to a bona fide purchaser fails under s 933 BGB, it would succeed if the non-owner were to put the asset with a custodian or agent and subsequently deliver it longa manu.
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system. The other 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 Article 3.11 CC, even implying an investigation duty) and the German BGB on the other (subjective: see section 932(2) BGB). Dutch law refers in this connection specifically to the disposition rights, German law only to the ownership question, although in section 366 HGB (Commercial Code) broadened to the disposition rights to protect commercial dealings. The concept of the bona fide purchaser where it prevails is usually not confined to the transfer of a full ownership interest. Here one sees in civil law the connection with the acquisitive prescription based on bona fide legal possession as the manifestation of any proprietary right. French law looks at the protection of the bona fide purchaser still very much from this perspective and assumes an immediate acquisitive prescription or a prescription period of zero years. It cures not only the lack of disposition rights in the seller but any defect in the sale of chattels on the part of the seller as long as the buyer/possessor was not aware of any defect in the transfer when he concluded the transaction: see also section 1.4.6 above. It could even have dispensed with the physical element of possession, which for acquisitive prescription was never necessary in Roman and civil law, but this is not the approach of Article 2279 CC. It puts emphasis on the possession réelle rather than on the transfer itself. It is the modern meaning of the maxim ‘en fait de meubles possession vaut titre’. Earlier French law had allowed the transaction to stand on the basis of the mere physical possession of the buyer. This was expressed in the maxim ‘meubles n’ont pas de suite’ (or ‘mobilia non habent sequelam’). It still finds a resonance in the English bailment as the English buyer in possession has a strong position, even if his under lying contract is invalid, as we have seen in section 1.3.2 above, and probably no less when there were no disposition rights in the seller. It may be a reason why the bona fide purchaser protection under common law still does not need to operate as a general principle for chattels. Importantly and as an indication of newer thinking, in common law, the applicable statute will even now sometimes allow all transfers in the ordinary course of business to stand, that is even without bona fides on the part of the buyer. This is so in particular where the law guards against security interests and does not want them to obstruct the ordinary flow of goods. An important example of this may be found in the US under section 9-320(a) UCC. Again, it is a question of protection of business flows, therefore indeed of finality. It was posited throughout that this is truly the way forward in respect of all commoditised products, including receivables, and even now the basic rule. Indeed, the key is that the protection of bona fide purchasers directly protects finality against a lack of disposition rights, now increasingly broadened to the protection of all transactions in commoditised chattels acquired in the ordinary course of business, even without bona fides in the transferee, who will realise that probably all he buys is in one way or another encumbered by the shop. 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
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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. The key is to understand that it fundamentally reduces the need for bona fide purchaser protection in respect of lack of disposition rights, which is thus less likely to occur. The abstract system even protects the buyer against an invalid contract between him and the seller, in Germany subject to an unjust enrichment action only as we have seen. In France, the extension of the bona fide protection to instances of a defective agreement leads to a result similar to that of the abstract system, but only if the buyer does not have knowledge of the invalidity of his contract nor 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 purchaser protection in respect of chattels, not therefore for real estate (which has to do with constructive knowledge where land registers exist, as we have seen) and intangible assets acquisition (if not embodied in negotiable instruments). Where the bona fide purchaser protection is still not commonly available, as in the case of intangible assets (except for bona fide collection in the law of equity in common law countries as we shall see), the abstract system, where obtaining, retains its full importance in limiting the instances in which a lack of disposition rights may occur.
1.4.9 On the Origin of the Nemo Dat Rule and the Principle of Bona Fide Purchaser Protection In section 1.2.3 above it was noted that under the old Germanic principles of property law, no clear distinction was made between ownership and possession. Under the prevailing notion of gewere, or elsewhere seisin or saisine, physical possession appeared the basic right, at least for chattels. It is still so in the common law when possession in a physical sense is voluntarily surrendered by the owner, leaving him only in the position of a bailor with not much more than a personal action against the bailee for retrieval of the asset at the end of the bailment while in the meantime the latter as bailee has all actions against third parties. 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
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expressed in the Germanic maxim ‘Hand mu Hand wahren’. It is clear that in such a system the protection of bona fide purchasers is less urgent, at least if they are in the physical p ossession of the asset. In France, this same approach led originally to the old French maxim: ‘meubles n’ont pas de suite’, in medieval Latin expressed as ‘mobilia non habent sequelam’ noted in the previous section. This is the saisine. It left any rightful owner with only a personal action against a holder of his assets if he voluntarily surrendered them. As regards the protection of title acquired from this holder and presumed owner, it was only later made dependent on notions of good faith of the acquirer. Except in France, probably as the consequence of its old tradition based on the saisine, the position of the acquirer was mostly 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.198 In this approach, acquisition from a thief (therefore upon involuntary surrender) would also lead to full ownership (or lack of a retrieval action) but only after a number of years, again provided the purchaser was bona fide and obtained physical possession, except (in many countries) when the acquisition took place on a public market or at auction, when it was immediate. As in England, this often did not even require bona fides (as long as there was no bad faith). There was no investigation duty. Here we see an early example of the protection of the ordinary course of business taking over. Roman law had not pursued the idea of the protection of the bona fide purchaser of movables and adhered strictly to the requirement of D.50.17.54, which formulated the so-called ‘nemo plus (iuris ad alium transferre potest, quam ipse haberet)’ maxim of which the nemo dat (quod non habet) maxim is a simplified version. It meant that nobody could transfer more than he had and the receiver could therefore not receive more and have better rights than his predecessor. Notions of the protection of the o rdinary course of business did not play a role either. There was only one exception in Justinian law (C.7.37.2/3): in the case of execution sales by the tax authorities, the buyer was exceptionally protected (regardless apparently of 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.199 One of the keys to understanding the Roman system is that the mere holder (as distinguished from the legal possessor) who sold the asset for whatever reason was considered a thief and acquisition from him could therefore never result in ownership
198 Another idea altogether was the option of the owner to retrieve the assets from the outsider upon payment of certain damages, usually the price the third party had paid or a part thereof, thus sharing the burden of any unauthorised sale. This idea also had a basis in old Germanic law and is often referred to as the Lösungsrecht: see R Feenstra, ‘Revendication de Meubles et “Lösungsrecht” des Tiers Acquéreurs’ in R Feenstra et al (eds), C ollatio Iuris Romani, Etudes dediées à Hans Ankum à l’occasion de son 65e anniversaire (Amsterdam, 1995) 87. It has no equivalent in modern law. 199 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.
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since it rendered the asset a res furtiva.200 In such a system, the protection of the bona fide purchaser cannot develop. This was not a problem in the old Germanic law, except in respect of the true thief, but it remained a serious complication in the further development of Roman law in Western Europe, which, as we have seen, gradually overtook the Germanic law of chattels from the thirteenth century onwards. In fact, Spanish and Portuguese law remain to this day closer to the Roman notions in this regard notwithstanding the general protection of the bona fide purchaser of movables with possession (and for value) developed under modern civil law in most leading civil law countries. Spain and Portugal balance this by having very short acquisitive prescription periods. The essence remains that during this period the original owner may retrieve its assets by offering the new owner the latter’s purchase price. Although the physical holder may 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 in the transferee and a valid contract with the seller/holder. Some city laws in Italy, Northern Germany and The Netherlands had in the meantime adopted similar approaches in the interest of continuing trade, often without great clarity on the aspect of bona fide acquisition.201 Again, one sees here a difference in the reasoning: it is the ordinary course of business that needs protection. This is public policy and the entrusting principle or bona fides in the acquirer become less relevant, or to put it another way, bona fide purchaser protection is a narrower c oncept of protection. As we have seen, in France the original, maxim ‘meubles n’ont pas de suite par hypothèque s’ils sont mis hors du pouvoir du débiteur sans fraude’, which suggested that all physical possession represented ownership in line with the concept of saisine, was eventually modified by the requirement of bona fide possession under the maxim ‘en fait de meubles possession vaut titre’; but also in France, the requirements of trade and of the ordinary course of business contributed to this development,202 where 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 or way ownership could be obtained (fonction acquisitive).203 200
See for this concept and its consequences, n 74 above. See also the later notes of Grotius on the laws of Amsterdam and Antwerp in his Inleidinge tot de Hollandsche Rechts-geleerdheid [Introduction to Roman-Dutch Law] in the Lund manuscript, F Dovring, HFWD Fischer and EM Meijers (eds), 2nd edn (Leiden, 1965) 50–55. In the original text, II.3.5, Grotius had still adhered, however, to the general rule that protected the owner against bona fide possessors even if they acquired the chattels for value. This later, largely commercial, development was subsequently also noted in commercial circles in Northern Germany by Mevius, Commentarii in Ius Lubecense Libri Quinque (Frankfurt, 1700). 202 In the eighteenth century, the ‘sureté du commerce’ was invoked as an argument for the extension of the protection in this manner by F Bourjon, Le droit commun de la France et la coûtume de Paris, réduits en principes 6, Title 8, ch 3, s 4(18). 203 Again this development was in particular reflected in the writings of Bourjon in the eighteenth century, Le droit commun de la France et la coûtume de Paris, réduits en principes 3 (Paris, 1770) Title 2, ch 5 and Title 22, ch 5, who fully deduced this acquisition principle from the prescription (reduced to zero years) and hence implied the bona fides requirement: see also WJ Zwalve, Hoofdstukken uit de Geschiedenis van het Europees Privaatrecht 201
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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.204 In the German sphere, the Prussian Codes of 1794 followed the Roman law system rather than old Germanic law in this area. The Austrian Civil Code (section 367) of 1811 clearly introduced the notion of the protection of the bona fide purchaser of chattels from a 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 (section 932 BGB), the protection is cast neither in these terms, nor as an acquisitive prescription as in France, but rather in terms of independent separate way of acquiring possession and ownership. It still requires as a consequence a valid cause, but not necessarily a valid sales agreement, and concentrates here on the dingliche Einigung as a sufficient causa traditionis in the German abstract approach to title transfer as noted previously. As already mentioned in the previous section, it may not insist on some value or even physical possession either and allows constructive possession for the operation of the bona fide purchaser protection but only in the case of the traditio longa manu.205 In England, the law of chattels, although still largely based on the Germanic principle of seisin, did not develop a protection for the acquirer with physical possession buying movables from a non-owner. It is somewhat surprising that the common law as the law of a trading nation like England in its basic approach is here closer to Roman law than most civil law countries now are. All the same, the old principle of protection of the possessor/bailee upon the voluntary surrender of the asset to the latter by the true owner makes him virtually the title holder (as possessor) against the whole world. Even the true owner has then only a weak personal claim against him, as we have seen, while the defendant holder always had the choice either to return the asset or pay damages, a discretion which in England may now be exercised by the defendant at the discretion of the courts. The result is that the owner’s position is enfeebled towards the holder, and even more so towards acquirers from the latter (except if the transfer to them creates a right to immediate repossession in the owner vis-à-vis the bailee), even regardless of their good faith or bona fides. (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). 204 The French approach insists on bona fides at the time of acquisition and requires physical possession (here even in the context of acquisitive prescription) so that a mere acquisition pursuant to the conclusion of a sales agreement (the normal French rule) is not sufficient. It excepts acquisition from a thief. 205 Dutch law largely follows this German example, although its emphasis in terms of the causa traditionis is on the validity of the sale agreement itself in the causal tradition, rather than on the validity of the delivery as a legal act. It is less elaborate in discussing the various types of delivery in the context of bona fide purchaser protection, but excludes the acquisition constituto possessorio from the protection while it requires the acquirer to disclose his predecessor in order to benefit: see Art 3.88 new Dutch CC.
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It was already said that the English developments must be seen against this background, which may explain why bona fide purchaser protection might not have been so necessary and even now remains exceptional, at least at law. The nemo dat rule is in England expressed in section 21 of the Sale of Goods Act 1979, which Act formulates, however, a number of important statutory exceptions, which take it (for the sale of goods only) close to the dominant civil law position. The oldest exception was the purchase in markets overt (section 22 old), which were certain marketplaces and shops in the City of London. Meant to protect the ordinary course of business, it required a weak form of bona fides of the buyer, no more than the absence of bad faith. It was an exception never introduced in the US and, because of its antiquated formulation, is now also abolished in the UK (since 1995). It should be taken into account in this connection that the system of title transfer may be considered abstract in common law (see section 1.4.6 above) and therefore already underpins the notion of finality from this perspective. The modern concept of the protection of the ordinary course of business is important and reinforces it, particularly expressed in secured transactions in the US, as we have seen. Then there is the more general protection under the English Sale of Goods Act 1979 of all persons in possession buying from sellers who were voluntarily entrusted with the goods by the original owner (section 25). This is therefore the entrusting principle, which approximates the broader protection for bona fide purchasers under civil law, under which the notion of voluntary loss of the physical possession of the asset often also plays a major role. Another important exception in England is the one caused by estoppel when the owner of the goods through conduct is precluded from denying the seller’s authority to sell. It leads in the same direction (section 21). Section 24 of the Sale of Goods Act 1979 further protects dispositions by a seller who has not yet delivered the assets to his buyer and concerns the question of the protection of the bona fide buyer in a second sale, for which English law, unlike legal systems in which title has not yet passed because of the lack of delivery, logically requires bona fides, as French law does in a similar situation. Then there is the protection of the bona fide buyer who bought and obtained possession before the seller’s contract with his predecessor was voided for fraud or similar reasons: section 23.206 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).207 Section 9 in conjunction with section 2(1) of the English Factors Act 1889 similarly allows the commercial agent who handles assets of his principal with the latter’s consent to make any kind of disposition in the ordinary course of his business, while any bona fide purchaser of the agent in possession is protected under these circumstances. Except where there is a second sale, there may not be the same insistence on actual possession of the acquirer
206 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. 207 It produces a so-called agreement to sell rather than a sales agreement, only the latter of which immediately transfers ownership. The reservation of title is the prime example.
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under these statutory exceptions, as civil law often requires, notwithstanding the common law’s normal insistence on seisin for proprietary protection. In the US, the principle of bona fide purchaser protection also remains exceptional. However, as in England, it is by statute accepted in the sale of goods. It may be enhanced when they are traded in the ordinary course of business when there may be no bona fides requirement. This applies particularly to security interests in those goods as we have seen. Thus security interests of third parties in goods that are normally sold in the ordinary course of business are ineffective against subsequent buyers even regardless of their good faith or more properly regardless of the filing of the security interest if the assets are sold in the ordinary course of business of the seller. In this connection section 2-403(2) UCC elaborates on the entrusting notion in sales but only to a merchant who deals in goods of that kind, probably without physical delivery. It leads to a bona fides requirement. Section 9-320(a) UCC elaborates on the protection against non-possessory security interests in chattels sold in the ordinary course of business, which protection is notably not conditional on any entrusting notion208 and therefore not on bona fides either.209 Special protections apply to bona fide purchasers in the case of failed sales agreements because of default.210 In the US, the concept of the protection of bona fide purchasers is normally tied to the concept of the purchase being for value. This is usually added in the statutory texts. 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, while for the protection against secured interests under section 9-320 the possession of the bona fide purchaser is not relevant at all.211 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).
208 See for the classic study on the subject, G Gilmore, ‘The Commercial Doctrine of Good Faith Purchase’ (1954) 63 Yale Law Journal 1057 showing that the requirement of good faith itself became less and less demanding. In the US, it may mean no more than an absence of mala fides while for a purchase in the ordinary course of business from a merchant dealing in the goods the bona fides may no longer be relevant altogether, 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 191 above. 209 Note, however, the definition of a buyer in the ordinary course of business under s 1-201(a)(9) UCC, which itself requires that the buyer is in good faith and without knowledge that the sale to him was in violation of the ownership rights or security interests of a third party in the asset. He must also buy in the ordinary course of business from someone in the business of selling goods of that kind. The good faith requirement is here not meant to undermine the concept of protection in the ordinary course of business under Art 9, however. In fact, it is confirmed in the Official Comment on s 9-323 that the third party buyer takes free even if he knows that there is a prior interest. He takes subject to it only if he knows that the sale was in violation of the underlying agreement between the seller and the original buyer or in violation of a security agreement, which term was not waived by words or conduct of the seller or secured party. See also JJ White and RS Summers, Uniform Commercial Code, 4th edn (St Paul, MN, 1995) 881. 210 See n 191 above. 211 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 c onceivably be sufficient for the continuation of the security interest under s 9-203 (new and old) UCC. Section 9-203 (new and old), which does not require ownership of the debtor in order for him to give (and maintain) a security interest of a third party in his asset, is here not helpful and could still give a foreclosing secured
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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 US, sections 9-201 and 9-315(a)(1) UCC. In this connection section 9-320(a) UCC adds that the exception in respect of buyers in the ordinary course of business is only in respect of security interests created in the sold asset by the seller (and not by any of his predecessors in the title). Finally, in common law, there is the overriding trust law principle under which the trustee is able to transfer full title free of the beneficiary’s interest to anyone who is unaware of the transfer in breach of trust, provided this is done for adequate consideration. It may not require physical possession. As we have seen before, this general principle of protection in equity against unknown equitable proprietary interests is of utmost importance in an open system of proprietary rights (as the common law is in equity) and then also applies outside the law of sales and to other than movable assets. It should not be confused with the much more limited concept, here discussed, of the protection of bona fide purchasers at law against other than equitable proprietary interests in the property, which protection in common law countries is usually only statutory. As noted before, this protection of bona fide purchasers in equity is not exceptional but a natural consequence of the rule that all who do not know of the equitable proprietary interest while acquiring the property for value are protected.
1.4.10 The Retention Right of the Seller in the Case of Default of the Buyer In legal systems that normally transfer title in goods at the time of the conclusion of the sale agreement, as is now the rule in England and also in France and in many legal systems derived from French law, the seller is naturally extra vulnerable as he loses title even before physical delivery, let alone payment. It is normal therefore to construe both under English and French law a legal lien or retention right in the sold assets for the protection of the seller who has not yet physically delivered the goods and therefore remains in possession, although he has lost title. This particularly relevant in respect of payment and was an issue already briefly discussed in the law of sales: see chapter 1, section 2.1.10 above.
creditor some protection if unaware of an earlier sale (without a delivery of possession) in the ordinary course of business. The civil law requirement of physical possession of the buyer in order for him to be protected presents a clearer picture but obviously also gives less protection. However, also in the US, only physical possession would give the buyer in the ordinary course of business full protection. In a situation where there was first an unauthorised sale plus delivery to a buyer who subsequently resold the goods in the ordinary course of his business to a bona fide purchaser after having given a security interest in the asset to a third party, the bona fide purchaser would defend against the original owner on the basis of the entrusting notion under s 2-403 UCC and against the security holder on the basis of a sale in the ordinary course of business (assuming the requirements for it were met) under s 9-320(a) (9-307(1) old) UCC: see also White and Summers (n 214) 33–16, and Gorden v Hamm 74 Cal Rptr 2d 631 (1998).
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It means that, in cash sales, the seller cannot be forced to deliver the goods before he is certain that he will receive payment. In legal systems that do not require delivery of possession for the transfer of title, it is another instance in which physical possession retains an important meaning. The lack of it weakens the new owner’s position considerably. In systems that require delivery for title transfer in chattels, such as the German and Dutch systems, the seller remains in any event the owner before delivery so that there is only a need for a retention right if there has been constructive delivery with the seller retaining the asset, as in a delivery constituto possessorio: see section 1.4.2 above. Section 41 of the Sale of Goods Act 1979 in the UK indeed states that the unpaid seller in possession is entitled to retain it (the seller’s lien) until payment, even in the case of insolvency of the buyer, unless there are credit terms that have not expired before delivery. In France this legal retention right (droit de rétention) results under Articles 1612 and 1613 CC and is reinforced by the legal reclaiming right of Article 2102(4) CC during a short period after the sale when possession has been transferred but the buyer is in default of payment. It re-establishes the retention right and is therefore itself not in the nature of re-transferring title. Beyond this, it follows that in civil law, a lien or retention right does not automatically result from the mere possession of the asset by any creditor but foremost depends on statute or the operation of the law, see sections 273, 986 and 1000 BGB and Article 3.290 of the Dutch CC. It provides as such a strictly limited remedy and generally guards against proprietary action or self-help. However, it may also be agreed in the contract and does not then automatically follow the rules of the statutory liens. Rather, the contractual retention right may under applicable law then equate to a p ossessory charge subject to the rules concerning the creation of such security interests. That is at least the position in the US. A retention right of this nature always assumes that the owner or holder (or bailee) ceded the asset voluntarily to the retentor or left it voluntarily with him, as in the case of a sale without transfer of physical possession. Appropriation of an asset will n ormally 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. Important for this discussion, it may then also allow a seller in possession to retain the asset until payment. In that case, it may imply yet another kind of retention situation (besides the statutory and contractual ones). Reference to that kind of retention right is in Germany made in sections 273 and 320 BGB. In modern legal thinking, at least in civil law, the exceptio non adimpleti contractus and the statutory retention right may both be considered examples of suspension
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or postponement rights—see for example Article 6.52 of the Dutch Civil Code212— although the consequences are often very different. The retention right, even if resulting under the exceptio non adimpleti contractus, may have some proprietary and preferential aspects and has often become much more than a simple defence. It is likely to provide a first step in the return of title, especially in systems in 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.213 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 r eciprocity 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.214 This principle of connexity is clearly expressed in Article 6.52 of the new Dutch CC, which covers all postponement actions, including the retention right, applicable unless connexity is explicitly not required: see Article 6.57 and Articles 3.290 ff Dutch CC. The connexity may be more widely or more narrowly interpreted depending on the facts and on reasonableness in a contractual sense. The general course of dealing between the parties may here also be relevant: see also Article 6.52(2) Dutch CC. In Germany, in the case of a retention right under a mutual claim, a greater degree of connexity seems necessary: section 320 BGB. Another fairly general requirement of a retention right is that the claim of the retentor must be mature (except in commercial matters in Germany: see section 369 HGB when the principle of connexity is also relaxed) and for an amount of money, although the final determination of the total sum may have to await judgment. It means that
212 In France, the retention right is now often also explained as a consequence of the exceptio non adimpleti contractus, which, although not as such expressed in the Code, is held to be a general principle under French law: see also J Ghestin and B Desche, Traité des obligations I: Vente (Paris, 1990) no 695. 213 Apart from these retention rights for the unpaid seller still in physical possession, in most legal systems there are also retention rights for other types of creditors with actual possession (or possibly with possession through an employee, broker or custodian, but not through other holders or bailees, mere legal or constructive possession not being sufficient) of certain goods (if movable and being of some economic value) in some other precisely defined circumstances. The most common example is the retention right of the repairer in respect of the repair costs of the asset he holds. The carrier may also have certain retention rights in the goods he carries in respect of the freight price or loss averages. In the Netherlands, the security broker (‘commissionaire’) has now also been given a retention right on the securities he holds for his clients. They are all incidental and specific and there is especially in civil law no general retention right for any physical possessor of goods in respect of any claim he may have against their owner. Special liens of this nature are sometimes also available in common law but equally only in certain situations, such as for a private carrier, a warehouse, a bailee, a trustee, a lawyer, an arbitrator and any general or special agent; see in the US, Sheinman and Salita Inc v Paraskevas 22 Misc 2d 436 (1959). 214 See OLG Düsseldorf, 27 October 1977 [1978] Neue Juristiche Wochenschrift 703.
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non-monetary claims, such as those for specific performance, may not be backed up by a retention right in the asset. It is increasingly accepted that the true owner need not be the contract party of the retentor who may therefore even prevail over an owner or over the beneficiary of an older proprietary right, cf Article 3.291 of the Dutch CC. A related question is whether the retention right may be transferred with the debt it secures and is therefore an a ccessory 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).215 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 US where this term primarily covers security interests, whether consensual, statutory or judicial). It considerably loosens the requirement of connexity. However, these general retention rights operate only for certain providers of services, particularly bankers and brokers.216 They may then cover all outstanding debt between them and operate as security interests. The essence of such a general lien is that w hatever asset is surrendered to the rightful owner or client, the remainder of his assets with bank or broker will serve for the rest of the owner’s debt to the retentor. Any additions to the assets will serve as further security at the same time, while unsatisfied earlier obligations and future obligations are also covered. Although the instances of a general lien are limited in common law, commercial usage appears to add to them and have a greater impact in this area than under civil law, which looks more towards statutory authorisation, even if broadened under the exceptio non adimpleti contractus. If by contract certain present and future goods are designated for the purposes of a retention right, there is no question of illicit retention. Thus, in countries where no general liens or general retention rights exist, banks may through their general conditions of business claim a retention right covering all they have received or may receive on behalf of their client in order to protect any credit or other types of client indebtedness from being extended in the present, past or future. Even in civil law countries this may amount to a general retention right and the question then arises whether this contractual enhancement of the retention right does not exceed its normal use while creating or attempting to create a more general security interest at the same time. As already mentioned above, retention rights, if contractually created in individual assets, might be considered possessory pledges and may thus become subject to their rules. If they are in future assets of the debtor, they may be considered floating charges, which may be subject to further formalities in terms of documentation and registration or publication at the risk of the retention right so extended becoming a voidable preference. There may also be problems with the identification requirement, especially
215 See F Derrida, Encyclopédie Dalloz (Paris, 1987) Rétention No 30. In a French bankruptcy of the debtor, the bankruptcy trustee may demand the handing over of the asset but he must then cede a preference in the proceeds of an execution sale of the asset to the erstwhile retentor: see Art 60 of the French Bankruptcy Act 1985. 216 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 a ltogether and become limited to a preference in the execution proceeds only, as appears to be the case in a French bankruptcy. The related question is always whether the retentor may appropriate or execute the property he holds under statutory or consensual liens or only has a right to retain the asset, of which the nuisance value is then the most important aspect. This used to be the situation in most countries under statutory retention rights, but is now abandoned in the Dutch Civil Code of 1992 in favour of an execution right with the highest p riority, assuming the conditions of a pledge or charge are inapplicable (Article 3.292 CC). Prior judicial authorisation following attachment of the goods (under the retentor himself) is required. Thus, even the statutory retention right acquires here some features of a security interest and a right in rem. This is in civil law indeed the more modern tendency; see also Article 37 of the Swiss Bankruptcy Act, for statutory retention rights or liens not so far followed in common law. However, there may be a contractual or implied power of sale for the creditor/retentor, which would not be an execution proper but would lead all the same to a preference for the selling retentor or lien. There remains in this connection the further question whether upon a default under a sales agreement, the statutory retentors in countries like England and France, where title passes upon the conclusion of the sales agreement, may appropriate the asset if not automatically returned to them upon a rescission of the sale agreement. It appears that where such a rescission is subject to judicial approval as in France (except if waived in the agreement itself), title cannot revert earlier on the basis of the statutory retention right of the seller alone. In contractual retention rights, whether of an individual or general nature, parties will often introduce special provisions covering default situations, which may authorise appropriation or sales and recovery out of the proceeds. As already mentioned, the main question is here whether the retention right must be characterised as a pledge or charge, as a consequence subject to the rules of either. Modern statutory retention rights are also moving in that direction. In conclusion, it may be said that the modern retention right is of a hybrid nature. It has clear proprietary aspects, where it may lead to appropriation of title in sales when ownership has already been transferred but not yet the physical possession and there is a default in payment, or where it begins to function as a security interest in the assets concerned. Where they are contractually created, they may even be seen as security substitutes or as ways to avoid the formalities normally attached to the former, and may as such be curtailed or converted. A particular instance of this is the retention of a bill of lading in the US: see section 2-401 UCC, an attitude sometimes also favoured by English law. Statutory retention rights may acquire similar features. On the other hand, retention is clearly a matter of the law of obligations in terms of the determination of the reciprocal nature of the obligations and of the connexity between asset and claim, in which reasonableness and commercial reality will also play a role. It may also give no more than a contractual defence or exception.
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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 sections 1.1.1 and 1.1.5 above, the proprietary aspects of claims were mentioned217 and it was argued that claims, even though intangible, are ordinary assets like any other and should as such be proprietarily protected against third parties, who must respect the owner’s (creditor) rights in them. It follows that they may also serve as a basis for recovery of the creditor’s own creditors, are in principle transferable, and can be given as security or be the subject of finance sales.218 Yet, because of the dual nature of these assets in terms of the internal (obligatory) and external (proprietary) aspects, it took some time for the law to create a legal framework for the transfer of these rights without the consent of the debtor and to devise a means of proprietary protection for claims, also in civil law.219 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 II). That is also the approach of the DCFR, which again in this respect follows German law uncritically, although the conditions and formalities of the transfer are now substantially the same for all movable assets, even the limitations inherent in the notion of specificity which so far in present German law allows for more flexibility in respect of claims, mostly because they are not considered assets proper. 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. This issuer was already raised in section 1.1.5 above. The internal relationship is covered by the law of contract, tort or unjust enrichment, depending on the nature of the underlying claim,
217 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 an 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 without differentiation. 218 See for this development in common law SA Riesenfeld, Creditors’ Remedies and Debtors’ Protection, 3rd edn (St Paul, MN, 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). 219 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 1.1.5 above, while in Roman law possession was not merely physical, see Gaius 4.153 and further n 65 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 228 below. It may be noted that notably German law has not progressed much from here.
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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 to similar proprietary interests. It has been argued in this connection that everything of value may be an asset in a legal sense, see section 1.1.6 above. In civil law, this was to some extent recognised as it strove from early on for one ownership concept in respect of all assets,220 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 countries do not show here one single picture, as we shall see. 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 have seen, the most common. For the creation and transfer of these rights and also of 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 of full ownership is either through the contract itself at least for chattels (in the French system it is different/for pledges) or upon subsequent delivery of possession (in the German system) as previously explained. For the creation and transfer of other proprietary rights there may be further formalities, see more particularly section 1.4.1 above. For intangible claims, the proprietary rights that may be created in them (besides full ownership) may also 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 and also does not refer to the most complete right in them. It refers only to disposition rights (Article 3.84(1) CC). This is new in modern Dutch law and derived from the German example: see sections 1.1.4 and 1.2.3 above.221 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 for acquisitive prescription (Article 3.99 CC). This remains less clear in German law. Presumably, there is also holdership, eg under a collection arrangement. Nevertheless, there is no proprietary or possessory defence and the intangible claim as an asset can be defended only in tort against third parties that infringe the
220 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 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; for the English law see also Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, holding that ‘a chose in action is property’, and AG Guest, Guest on the Law of Assignment (London, 2012) 4. See for developments under English law further, s 1.5.3 below. 221 New Dutch law appears to take a retrograde step here 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 5.1ff in conjunction with Arts 3.107ff CC and further n 17 above.
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creditor’s rights (Article 3.123 Dutch CC). This is the general way of protection of claims and rights therein 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.222 Intangible claims commonly transfer through assignment (an outright assignment). For the creation of more limited rights in them there may be special assignment forms and further formalities.
1.5.2 Assignments, Conditions and the Meaning of Notification of the Debtor. Bulk Assignments. The Situation in Double Assignments. Civil Law Developments As for the transfer of claims, this is indeed done everywhere in a special manner, commonly through assignment, although the specifics may still vary 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 asset) in the transferor, intent or a valid cause (mostly a transfer agreement), and formalities (mostly an act of transfer, normally a form of delivery). 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 (actual or constructive) delivery, meaning a form of transfer of (actual or constructive) possession—should not be problematic for intangible assets either. This only causes problems in an anthropomorphic approach to property rights, closely associated with the notion of physicality as we have seen, but notions of (constructive) possession are in modern legal systems perfectly compatible with intangible assets and therefore also their transfer. The transfer still may require some special act, notably notice to the debtor, or it may be implicit in the assignment agreement as it is in the German approach to assignments as we shall see, even though German law maintains a delivery requirement for the transfer of chattels. Mostly (as in Germany) there are no special formalities in this respect for an outright assignment or they are reduced to mere notice to (not approval by) the debtor, notice being traditionally a formal requirement in France. Notice is then a constitutive condition for the validity of the assignment, therefore in the nature of a specific legal act or formality. In some civil law countries, this notification is still equated with transfer of possession (in the case of chattels) as an act of publicity. It must be doubted whether that is 222 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 233 below and s 1.5.11 below. Also, the contractual prohibition of an assignment tends to be valid in the case of claims and then has third-party or proprietary effect, undoing any assignment to the contrary (see s 399 BGB and BGH 14 Oct 1963, BGHZ 40, 156 in Germany and Art 3.82(3) in the Netherlands) while it most certainly has 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. There is here some trend towards restricting the effect of contractual limitations on the assignment in the Netherlands, HR March 21 2014, NJ 167 (2015). Statutory law in the US is much more reluctant to give these contractual assignment prohibitions third-party effect: see ss 2-210 and 9-404ff UCC and s 1.5.3 below. It is also 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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a correct view but it is the old French approach and caused considerable confusion in the new Dutch Civil Code of 1992, as we shall see, and is increasingly being abandoned everywhere. It has already been said that notifying a debtor is hardly an act of publicity. The only similarity with the delivery of chattels is the additional formal requirement of a legal act. Sometimes there is also a need for a document for each individual assignment. More importantly, notice and a document still suggest specificity and identification, again an anthropomorphic attitude, but an important issue nevertheless, which handicaps bulk assignments and the assignment of future claims, as already noted. These requirements may, as in the case of chattels, even go to the disposition right of an assignor 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 unless the right is highly personal or different arrangements are agreed. It demonstrates by itself the proprietary nature of the right in the claim and then also its transferability or liquidity in that sense, especially if these claims are for money, when it becomes highly relevant, eg in receivable financing or securitisations. The same goes for the creation of limited proprietary rights in claims such as 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.223 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, but only in the context of financial dealings.224 223 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 assignments, see 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 R Pothier, Nouveau coutumier général (Paris, 1724) III, 1, and follows here a course different from the one for chattels where Pothier’s teachings requiring delivery of possession had been less successful and were abandoned in favour of the natural law school approach, 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, while 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 could be proven by any means: see Art 2074 CC as compared to L 110-3 and L 521-1 (Arts 91 and 109 old) Code de Commerce. As just mentioned, this system allowed, however, payment to the assignee even before notification in the context of the possibility of recognising the assignment (acknowledgement), which in the case of immediate payment did not need to be similarly formal: see Cour de Cass, 9 May 1864, D.1.190 (1864). But 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. 224 See Law 81-1 of 2 January 1981 modified by the Banking Law of 24 January 1984 (Arts 61ff) and supplemented by Decree 81-862 of 9 September 1981, now codified in Arts L 313-23–L 313-35 CMF. It provides
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In Germany, these requirements never existed in modern times: see section 398 BGB following in this respect late nineteenth-century German case law. It abandoned the traditional ius commune approach and adopted later Pandectist thinking,225 which had started to deviate from its earlier development226 requiring notice (or recognition or for an alternative way of assignment for professionals to facilitate modern financing structures involving portfolios of receivables: see also G Ripert and R Roblot (eds), Droit Commercial 2, 16th edn (Paris, 2000), nos 2428ff. It requires an official deed (bordereau) to incorporate the receivables, which may then be transferred to a credit institution providing advances on the basis of it. The necessity of notification to the debtors as a constitutive requirement of the transfer is abandoned for these types of assignment. Nevertheless the requirement of the bordereau remains restrictive and any further receivables need a new document, which would appear not to allow the inclusion of future receivables in the transfer so that it is still not possible to assign whole cash flows derived from certain types of activity in this manner. Belgium has more radically and generally abandoned the notification requirement for assignments in Art 1690 of its own civil code in 1994. A further French amendment of 1984 allowed the bordereau transfer technique also to be used by way of guarantee and without any determination and payment of a price. It may lead to a security in the guise of a fiduciary transfer, which had been favoured in France since the Cour de Cassation allowed it on 19 August 1849, D.1.273 (1849): see also Vol 3, ch 1, s 1.3.5. It also made collection possible to reduce any advances given, which were in this manner amortised. This collection possibility had remained uncertain where receivables were merely pledged under Art 2073 CC. The fiduciary transfer still required individual notification of each creditor for its validity, however, which may now be avoided by using the bordereau transfer technique if the transfer is to banks. 225 See s 398 BGB, although, until the decision of the RGH, 8 March 1881, RGHZ 4, 111 (1881), the older ius commune (see n 227 below) continued to be applied in this area in Germany during much of the nineteenth century: see B Windscheid and T Kipp, Lehrbuch des Pandektenrechts 2 (Frankfurt am Main, 1900) no 331. It allowed in a bankruptcy of the assignor the assignment to be operative as at its date and not as at the notification. This more 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 particularly s 1.4.2 above) to complete the assignment and it suggests indeed the transfer of a proprietary right in the claim. It is normally considered coterminous and implicit in the assignment agreement, although in an abstract system of title transfer, such as the German one, both the contractual and proprietary aspects should still be distinguished. This fits in with the approach of Voet, see n 227 below, which is at the root of the modern German system. In Germany the notification was not equated with giving notice as a matter of publicity, nor is it seen as a delivery substitute. The result is nevertheless that there are in Germany formalities for the transfer of physical assets but none for the transfer of claims. 226 In Roman law, because of the view that all contractual relationships were highly personal (see n 219 above) creditor substitution could be achieved only through a novation, which meant 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 M Kaser, Römisches Privatrecht [Roman Private Law], 14th edn (Munich, 1986) 246. The actio utilis subsequently became the vehicle to achieve a situation which became broadly similar to the modern assignment. This development was underpinned by the facility existing since the Emperor Antoninus Pius in the middle of the second century to assign 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 given, C.8.41.3, and ultimately also to the heirs of a deceased assignee (see C.8.53.33 pr), but it never meant that the original creditor was fully substituted and he could still collect while the debtor could always make a liberating payment to him. The assignee could stop this under later law, however, by giving notice (denuntiatio), see C.8.41.3, and could in any event exert recovery rights against the collecting original creditor. Recognition by the debtor, payment, or the start of a lawsuit by the assignee would also suffice and signify sufficient knowledge on the part of the debtor. It was accepted that the debtor could make a liberating payment to the assignee even earlier. His right became exclusive, however, only after any of these actions. Until such time the assignor could still demand payment as well.
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the start of a lawsuit by the assignee for recovery from the debtor),227 this being at the origin of the approach of the Code Civil in France as just noted. 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 itself unless clearly intended to be otherwise.228 It is not therefore common in Germany to distinguish between the 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 did not need to be notarial and the French notification requirement was abandoned under the old Code of 1838.229 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. For a security transfer this notification was not necessary; there is in that case a
227 The ius commune used the actio utilis of C.8.41.3 (see n 230 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 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 therefore suggested a return to the older Roman law in which the notice or recognition had not fulfilled a similar role (although the starting of the law suit had) while believing that the mere assignment should be sufficient to transfer the claim to the estate of the assignee. 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, 18.4.15ff, who invoked the customary law of his time. In this system, upon a double assignment the first assignee would ultimately prevail while 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 to the first assignee. Where notice is a constructive requirement of the assignment, the debtor may 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 requires the notification for the validity of the assignment, may well have left some doubt in this respect: 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 C Wolff, Institutiones Juris Naturae et Gentium (Halle, 1734), para 338, which school had also argued that in the case of chattels the mere agreement should transfer the asset, an approach for movables accepted in France: see s 1.4.4 above. There was, however, a difference from 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. 228 See n 227 above. 229 As in Germany under the BGB of 1900 and following Voet (see n 227 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.
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r equirement for registration. It still creates problems for bulk security transfers as the other formalities, especially documentation, continued to apply in respect of each transferred claim.230 Proposals to lift the notification requirement for outright assignments also (although limited to financial assignments) suggested the route of the registration instead, b orrowed from security assignments. It led to an amendment in 2004 allowing for this alternative. It remains 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 c ertifies the date of the assignment.231 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:232 see the famous case of Dearle v Hall of 1828,233 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 (while further requiring the debtor to be in good faith while paying, but not strictly speaking the assignee while 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 as delivery is in systems that do not require it for title transfers in chattels. Without it, the debtor may still pay the former creditor/assignor and 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 still discharged 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
230 See Art 3.236(2)9 CC, which raised the question whether the registration must be done for each receivable individually. The Dutch Supreme Court now allows the claims to be described in a general fashi0n (“all claims”), see HR Sept 20 2002, NJ 182 (2002), if necessary to be determined retroactively from the records of the debtor/ pledgor. 231 The main reason for the Dutch switch to notification was dogmatic. It was considered incongruous that there was a requirement for delivery for the transfer of chattels in Art 3.94 CC but that claims were transferred by mere (written) agreement (although it probably implied a traditio at the same time in the German manner). As in France, notification is in this view considered a form of publicity, as delivery is 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 have seen in s 1.2.2 above, while notification of an assignment to the debtor is not publicity in respect of anybody else. It has already been 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 1.1.3 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. 232 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. 233 Dearle v Hall (1828) 3 Russ 1.
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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 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. It has already been mentioned that protection of bona fide assignees is normally not part of civil law, which generally protects only bona fide purchasers of chattels (on the basis of the outward manifestation of ownership of the transferor), but it may be different in common law and there are States in the US, notably New York, that accept that bona fide collectors may retain their collections:234 see also section 342 of the Restatement (Second) of Contracts (1981). English case law at least protects the bona fide debtor who pays in good faith to a second assignee. That assignment is thereby perfected—see again Dearle v Hall—but it did not strictly mean that under English law the collecting assignee could also retain the earnings, even if he himself was also unaware of the earlier assignment, although in modern case law that is now accepted.235 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 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 amend their contract affecting assigned (future) claims thereunder. Then there is the status of the defences that the debtor may have had against the assignor and their continuing efficacy when payment is requested by an assignee. This especially 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, even if the latter proved by no
234 235
See also n 242 below. Rhodes v Allied Dunbar Pension Services Ltd [1987] 1 WLR 1703.
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means enlightened—as we shall see—and especially in France remained restrictive. But in common law, the situation remained more complicated, although not when compared to Roman law, which was very similar. As under Roman law, claims in common law were at first hardly transferable as they were considered too personal in nature and could therefore be transferred only with the debtor’s consent through a kind of novation. Later on, some power of collection could be given to a third party (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. Under common law, this type of a rrangement also required documentation.236 It was further already noted that there was never a unitary system in England so that the assignment of contractual claims was considered a contractual matter, of tort claims a tort matter, and of restitution claims a restitution matter. Here also arose the issue whether these intangible rights were merely obligatory or were assets and as such protected as property against third-party interference, which at least in equity became accepted,237 while 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).238 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 section 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. Again, equity in particular became willing to accept that claims were ordinary
236 The creditor would give a written power of attorney to a third party to collect and an instruction or a ssignatio (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 law suits merely for one’s own benefit without any other concern: see WS Holdsworth, History of English Law 7 (London, 1927) 534. Most importantly, the creditor/assignor was not released from the contract and would have to join any lawsuit by the assignee against the debtor who in any event could still pay him, although in the assignor’s bankruptcy the debt was eventually believed to belong to the assignee: see Winch v Keeley (1787) 99 ER 1284. It also became possible for the debtor to agree to pay a third party at the request of his creditor. This is called acknowledgement, dispenses with any novation or assignment requirements, and remains common: see Shamia v Yoory [1958] 1 QB 448. 237 In Fitzroy v Cave [1905] 2 KB 364, 372, it was said in this connection that at least the courts of equity admitted that the assignee of a debt had title and the debt was considered a piece of property, an asset capable of being dealt with like any other, see also n 224 above. 238 Republica de Guatemala v Nunez [1927] 1 KB 669, 697.
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assets. It was therefore better able to do away with these traditional constraints. 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).239 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 also became available for claims at law (like those in contract and tort, although notionally in these cases the name of the original creditor is still used in litigation).240 Since no notification or documentation is required, it also favours bulk assignments and facilitates assignments of future claims. There remains a difference, however, in that technically upon an equitable assignment, the assignor retains legal title and has at least in a security assignment the right to repurchase the receivables accompanied by the equity of redemption. How real this still is in practice is another matter. 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 the requirement for assignments may also differ depending on the nature of the
239 For equitable claims (as in tax, agency, partnership, company, trust, insolvency and specific performance matters), equity did accept the ownership notion from an early date and rejected the restrictions on transferability as confirmed in Fitzroy v Cave (see nn 220 and 237 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 220 and 225 and s 1.4.6 above for the case of a sale of chattels, and further Republica de Guatemala v Nunez, n 238 above, where it was held that the validity of the assignment did not depend on the existence of a prior valid contract to assign, as far as the debtor was concerned. For the equitable assignment of future claims and what is future in this connection, see n 33 above. 240 This was the consequence of the Judicature Act 1873, which merged law and equity, although even then not fully. Section 25(6) of the 1873 Act (now superseded by the similar s 136 of the Law of Property Act 1925) instituted a statutory assignment facility requiring a document and notification for the assignment to be valid. This statutory assignment does not require consideration and gives the assignee power to discharge the debtor without the consent of the assignor. It requires a full transfer, therefore, not an assignment by way of charge or a conditional assignment, although it does not exclude the assignment of a mortgage: see Tancred v Delagoa Bay Co (1889) 23 QBD 239, as mortgages are not considered charges or limited interests: the whole interest of the mortgagee (or conditional buyer) is considered transferred in that case subject to a redemption right. Nevertheless the statutory assignment remained cumbersome and the equitable assignment technique (still requiring consideration) therefore survived on the basis of the argument that the statute had not meant to destroy equitable assignments and that in the case of a conflict between law and equity, the latter prevailed: see Wm Brandt’s Sons & Co v Dunlop Rubber [1905] AC 454. The equitable assignment now covers claims at law as well, but still in a different way as the assignor must still be involved in lawsuits of the assignee against the debtor: see Durham Bros v Robertson [1898] 1 QB 765 and more recently The Aiolos [1983] 2 Lloyd’s Rep 25, 33. The reason is that technically legal title cannot be transferred in equity. Thus the assignor of a legal claim must be made party to the equitable assignee’s lawsuit against the debtor. Only the assignee of an equitable claim may therefore sue in his own name as equity allows the passing of the full equitable claim. This technicality is probably of little importance in the US today. The assignor must also become involved in equitable claims if he retains an interest in the contract, eg when the assignment is only partial or limited, as for security purposes only, or is conditional: see Durham Bros v Robertson, cited above, which is logical as the assignor is not meant to be released.
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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.241 But even the assignability of contractual claims may present special issues, especially in the case of contractual assignment restrictions as will be discussed further below. In the US, the legal assignment seems to be entirely abandoned, but in other aspects242 the law among the various States remains divided, especially in the meaning of notification.243 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, while 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 not a requirement for the validity of the assignment itself. The Restatement (Second) of 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 and therefore covered by Article 9 UCC), the UCC has a special regime altogether, which allows in principle assignment of present and future claims without filing or notification unless it concerns substantial portfolios of receivables. In this connection, bulk assignments no longer present problems, neither do a ssignments of
241 As far as tort claims are concerned, under common law, traditionally their transfer was impeded by the impossibility to assign a right of action. Under modern law, the proceeds of such an action may, however, be assigned, see Glegg v Bromley [1912] 3 KB 474, and probably now also the action itself. At least actions for other types of damage are now assignable: see Linden Gardens Trust Ltd v Lenesta Sludge Disposal Ltd and Ors; St Martin’s Property Corporation Ltd and Anor v Sir Robert McAlpine & Sons Ltd [1993] 2 All ER 417. 242 In the US the law of assignment developed on the basis of the equitable assignment and did not inherit the old common law impediments: see also W Cook, ‘The Alienability of Choses in Action’ (1916) 29 Harvard Law Review 818. However, even in the US the subject remained riddled with controversy, primarily centring on the question whether the assignor’s right had been fully extinguished or whether the assignee had only an irrevocable power of attorney to collect, albeit in his own name and not affected by his death or bankruptcy. The difference between law and equity played a role here too; equity in the US would accept that the assignee had a claim in his own right and did not need to rely on the power of attorney notion, but the courts at law never permitted the assignee to sue in his own name: see the NY case of Wardell v Eden, 2 Johns Cass 258 (1801), also stating, however, that an assignor had no more power over the judgment than a stranger. Only the name of the assignor had to be used, for which his consent was not required. Suing exclusively in the assignee’s name was only made possible by statute and most States now have these enacted, superseded or amended by the UCC for sales contract claims and security assignments: see ss 2-210 and 9-406(d), while in the US the courts sitting in equity have largely renounced the 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. 243 Some states follow the English approach of Dearle v Hall, see n 239 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 on Contracts, 4 (St Paul 1951) s 902. Notification is, however, nowhere an absolute requirement for the validity of the assignment itself.
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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 and requires filing (of a finance statement) for perfection unless it is done for collection purposes only.244 Section 9-406(a) UCC authorises the debtor to pay the assignor until notice. Thereafter, he must pay the assignee. The suggestion is that the debtor pays the first one; there is no search duty. As to the ranking between assignees, the filing of the finance statement determines the rank. See further also sections 1.5.7 and 1.5.8 below.
1.5.4 Assignment of Rights and Delegation of Duties. The Issue of Severability of Monetary Claims and the Transferability of Entire Contracts. The Debtor’s Defences As regards the transfer of intangibles, the 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 must 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 severability and the separation and transfer possibility involving creditor substitution does not normally 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 or she 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
244 Section 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 when the assignment materially changes the duties or materially increases the burden or risk of the other party (the debtor), the assignment is allowed. The method of assignment of monetary 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, 9-404ff, 9-501, 9-607, 9-615(e) UCC. These assignments under Art 9 do not cover sales receivables only and may also cover others, such as 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. 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 ss 9-604ff 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, while Art 9 UCC concerns the (security) assignment of all kinds of monetary claim. Section 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. Section 9-406(5) seems even less disposed to accept assignment restrictions on receivables when assigned for security purposes. In any event, in the US the splitting out of a receivable and its separation from the context out of which it arose seem less problematic under the UCC than under earlier common law, even if the assignment is only partial or limited for security or other purposes or merely conditional: see also G Gilmore, Security Interests in Personal Property (Boston, MA, 1965) 1077ff.
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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 in this regard is 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 by the original promisor. The debtor/ transferor is not released, however, without the consent of the original counterparty, and he remains a guarantor although like this counterparty the transferor may insist that the transferee (the new debtor) performs first (unless otherwise agreed). It is an 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 was already mentioned that for personal services, 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 service contract. In French (Latin) legal terminology, the contract is intuitu personae, which is an implied condition in many service contracts. This personal aspect applies then to debtor and creditor or to the active and passive side of the contract alike. 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, although it is obvious that even for monetary claims, those that are highly personal may remain unassignable, such as claims for alimony or child support. Life insurance policies, wages and pension payments may equally not be assignable because of their very nature. Social security benefits may also be in that category, as are more generally claims that are created with the person of the debtor in mind. Other claims may be considered inherently unassignable for other reasons; future claims may be the c lassic example. Their assignability will be discussed in the next section.245 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 and often controversial in the details 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
245 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 254 below.
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under a collection agreement (which raises important issues in civil law as to the title in these collections if the assignor continues to collect in his own name even if he segregates the proceeds). Naturally, this is relevant especially if the collecting assignor goes bankrupt. Another important aspect of the involvement of the debtor is that, if substantial extra burdens result for him, he may 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.246 The most important defence against payment is often, however, non-conform delivery in sales contracts247 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. 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.248 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 then whether it is in truth sufficient to be taken into account as a 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 especially in the case of monetary claims can now normally be achieved without debtor consent, as we have seen. If the assignment is burdensome for the debtor, the next question is thus how burdensome is it? Is there something like a de minimis rule? If so, it is probably an expanding concept.
246 The retention of the set-off facility upon an assignment against the assignee is commonly accepted: see for Germany, s 406 BGB, which allows the set-off in respect of all claims which the debtor acquires against the assignor even after the assignment but before the debtor becomes aware of it. That is also the system of s 9-404 UCC in the US for security assignments. In the Netherlands under its new system requiring notification for the validity of the transfer, all counterclaims until the notification can naturally be offset, as was earlier the case under the ius commune: see C.8.41.3. In England, the set-off right is at least good for claims arising out of the same contract whether they arise before or after the debtor has notice of the assignment: see Graham v Johnson (1869) LR 8 Eq 36. Other claims may be set off only if they arose before notice was given: see Stephens v Venables (1862) 30 Beav 625. A problem is that for a set-off normally both claims need to be mature: see eg Art 1291 French CC and Art 6.127(2) Dutch CC. If the claim of either assignor or debtor was not mature before the assignment but matured thereafter, there is a question whether the debtor may still invoke the set-off against the assignee. It 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 offsettable, 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 3, ch 1, s 3.2. 247 It includes the benefits of the exceptio non adimpleti contractus. This is established in France through case law (see Cour de Cass, 29 June 1881, D.1.33 (1882)) and in Germany through ss 404 and 407 BGB, again allowing all defences accruing to the debtor until he becomes aware of the assignment; see also s 9-404 UCC in the US for security assignments. See for England Ord v White, 3 Beav 357 (1884). See for the Netherlands, Art 6.145 CC, under which all defences accruing until the notification can be maintained. It will be argued below, however, that these defences need curtailment in a modern setting and that receivables should be considered much more like promissory notes in respect of which these defences do not obtain. 248 In the US, s 9-403 UCC especially upholds these contractual limitations for security transfers of claims.
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Finally, what is the effect on the assignment? (a) Does it undo the assignment, or may it be merely 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.
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 have seen, 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, as we have seen. In bilateral contracts, as in sales and exchanges, rights are often balanced, however, by contractual obligations 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 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, while the transfer of the entire contractual position is in any event likely to require such consent, because it normally includes 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 perils unless there is a specific arrangement in the underlying contract that separates the monetary claim from the rest of the agreement or implies it. As far as the latter is concerned, uncertainty about the kind of exposure may impede the assignment for him, but as already noted, 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 for performance of these related duties. But 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.
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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 (such as security interests)249 will transfer at the same time, as they may be considered integral parts of the assigned right. Closely connected duties are in this connection 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.250 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 as we have seen also. 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, while 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 but without a full release in this regard of the assignor, provided further that there are no substantial extra burdens, like delivery complications and cost. 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. But 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 regard, 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 again sections 2-210 and 9-404 ff UCC in the US.251 The idea is in the latter case that any credit extended
249
See for the accessory nature of the security interests more particularly, Vol 3, ch 1, n 23. The rights to mineral extraction subject to payments of royalties have, however, been found assignable without consent while imposing the payment duty in respect of royalties on the assignee: see the English line of cases on the subject starting with Aspden v Seddon (1876) 1 Ex D 496. See 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. 251 To release, in the US under s 2-210(2) UCC, all rights under a sales contract are assignable except where the assignment materially changes the duty of the other party or increases materially the burden or risk imposed on him. Section 2-210(4) UCC further presumes that a non-assignability clause only concerns the delegation of duties and not the assignment of rights except where the circumstances indicate otherwise. In any event, a right to damages for breach of the whole sales contract or a right arising out of the assignor’s due performance of his entire 250
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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, but 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 damages action for the debtor against the assignor while the assignment itself is increasingly likely to be enforceable by the assignee. The courts in the US have been particularly impatient with contractual assignment restrictions.252 However, German law in section 399 BGB and Dutch law, even in its new Article 3.83(2) CC, still defend the older attitude.253 Contractual limitations on the transfer in these countries still have 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 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.254 obligation under a sale of goods agreement is always assignable despite agreement otherwise (s 2-210(2) UCC old). Section 9-406 UCC is even more liberal when receivables are assigned for security purposes, cf also n 249 above. In England, an assignment prohibition in respect of the ‘contract’ as a whole is still upheld and considered to affect the obligations as well as the rights, not only in respect of future performance under it, but also in respect of payments and accrued rights of action thereunder, Linden Gardens Trust Ltd v Lenesta Sludge Disposal Ltd and Ors; St Martin’s Property Corporation Ltd and Anor v Sir Robert McAlpine & Sons Ltd [1993] 2 All ER 417 (1993). In fact, it was held that liquidity was not the issue and that there was no need for a market in choses in action. This may be considered a remarkable and wholly out-of-date finding. The Court of Appeal (per Kerr J) had allowed a split and ignored the prohibition in respect of payments and rights of action. That seems to be greatly more sensible and 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. 252 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 Michigan Law Review 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 Martin’s Property Corporation Ltd and Anor v Sir Robert McAlpine & Sons Ltd (n 241 above). 253 Confirmed in HR, 17 January 2003, NJ 281 (2004), although somewhat weakened in HR March 21 2014, NJ 167 (2015). Under Dutch law, the assignment restriction does not go to the issue of the disposition right of the assignor as it may be for chattels, but is simply considered a condition of the claim itself. 254 In 1998, German law relented and denies proprietary effect to assignment restriction clauses between merchants excepting consumer debtors and bank loans, see s 354a HGB. The restriction may also be inherent in
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Another question is whether the debtor and assignor may still change the underlying agreement after an assignment of a claim arising out of it so as potentially to deprive the assignee of a benefit. In the case of a security assignment in the US, section 9-405 UCC makes such modifications effective if made in good faith and in accordance with reasonable commercial standards. The assignee will receive any benefit; if harmed 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, while 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.255 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 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 September 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 October 1963, BGHZ 40, 156 (1963). It is even said that in such cases the assignment was ineffective per se so that the assignee has nothing at all. 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-à-vis the assignee or can only the debtor do so? Would the situation be different if the limitation or prohibition of the transfer were inherent in the claim and would the abstract or causal system of title transfer have any relevance in this respect in the relationship between assignor and assignee as suggested by the first case cited above? 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 45 above where there is a need for bona fides in the transferee to retrieve the situation. In this respect s 137 BGB in Germany and Art 3.83(3) of the new Dutch CC are clear. 255 This was nevertheless held sheer madness by Professor Gilmore, n 244 above, at 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 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.
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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. But it has already been said before that within reason, the debtor must increasingly 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.256 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 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 at least in the US. Thus, their in rem effect is increasingly denied. The alternative for the creditor is to have the debtor sign a promissory note; as has been noted before, the modern development is to make receivables ever more to operate like promissory notes to promote their liquidity. Although contractual monetary claims, especially receivables, are the most likely objects of assignments, it was already noted that 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 greater 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 a mere claim for monetary damages—as already mentioned. Especially in common law, there were other impediments, as we have seen, often of a procedural nature, while earlier, even in the case of contract claims, 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 then serve as an impediment to assignment.
256 Assignor and assignee could make special arrangements among themselves to ensure that no extra b urdens arise for the debtor, who under applicable law might otherwise be able to ignore the assignment even upon notification. As we saw in n 255 above, s 2-210(2) UCC in the US 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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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 separates them from the legal relationship out of which they arose and de-emphasises their personal origin and nature for the purpose of facilitating their ready transfer without the debtor’s consent.
1.5.6 The Assignability of Future Claims. When is a Claim Future? 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 raised in section 1.4.5 above in connection with future chattels and will be briefly revisited in section 1.7.9 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,257 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,258 freed itself from this constraint and the only modern German requirement in this connection is that the claim be identifiable259 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.260 In an (extended) reservation of title, it means that all receivables connected with a resale of goods in which title is reserved by the supplier are assigned to the latter at the time the reservation of title is made, regardless of who the ultimate debtors will be and of the exact amount of the claims against them. German law proves indifferent to these two uncertainties261 and the reference to the goods sold under a reservation of title and to all claims deriving therefrom upon a resale are considered sufficient identification of the goods and claims
257
See n 227 above. See n 225 above. 259 See also BGH, 9 June 1960, BGHZ 32, 367 (1960). 260 See Vol 3, ch 1, ss 1.5.4 and 2.2.4. 261 See BGH, 25 October 1952, BGHZ 7, 365 (1952). 258
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in Germany and sufficient legal reason or Rechtsgrund for the transfer or assignment which are immediately complete,262 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, does not, in that case, take precedence. Altogether, it may be seen that German law is liberal here, 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.263 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. 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.264 If there is no control, it is still possible to assign a right to future income from a specific source.265 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 moment the claim arises or control is established. This presents problems, especially in an intervening bankruptcy of the assignor. However, equity, which regards as done that which ought to be done, may 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.266 That would also appear to be the German result even under section 91 of its 1999 Insolvency Act.
262
See also K Larenz, Schuldrecht, Allgemeiner Teil, 14th edn (Munich, 1987), para 34 III. See also n 34 above and the interesting case of Tailby v Official Receiver (1888) 13 AC 523 where the House of Lords followed Holroyd v Marshall (1862) 10 HL Cas 191 in which it had dealt with similar questions on the transfer of future chattels. 264 Hughes v Pump House Hotel Co Ltd [1902] 2 KB 190. 265 See Shepherd v Commission of Taxation [1966] ALR 969. 266 Cf Chitty on Contracts 30th edn (London, 2008), paras 20-028/20-032. The assignee’s interest is therefore more than a mere matter of contract, even before the claim comes into existence. 263
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It is notably different in the Netherlands under Article 35(2) of its Bankruptcy Act: see also section 1.4.5 above.267 As mentioned before, the situation in the US is not the same everywhere, and in some States the policy of the courts appears more restrictive than in others, probably on the view that no one should commit too far out and mortgage the future or defeat the reasonable expectations for recovery of future creditors. However, the UCC under its Article 9 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 (section 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 not a 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 US all transfers of receivables and similar claims are now covered by Article 9 UCC, whether or not a secured transaction is intended, unless the assignment was for collection purposes only or clearly an incidental act. 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 make it assignable, although Dutch law under its new Code appears to leave some more room if the assignment is an outright transfer of title (Article 3.97 CC) but not in the case of an assignment for the purposes of security only (Article 3.239 CC).268 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.
267 Cf also Art 5(b) of the UNIDROIT Factoring Convention, which also assumes the existence of the receivables before the transfer can be effective (see Vol 3, 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. 268 Under pre-1992 law, this was a general requirement for all assignments, HR, 24 October 1980 [1981] NJ 265 and 25 March 1988 [1989] NJ 200. For outright transfers of claims (but not for security transfers), Arts 3.84(2) and 3.97 CC now suggest greater flexibility by merely requiring that they are identifiable. At least the debtor must be known, a requirement reinforced by the need for notification to make the assignment valid. In this system it is conceivable that all claims against a particular debtor, whether they are present or future, may be assignable, which assignment would under the general rules of assignments relate back to the date of the notification and not to the date of the emergence of the claim. This possibility could be limited, however, to all claims arising out of certain activities or derived from certain identified sources or any balance in a current account with a particular bank. The requirement that the legal relationship out of which the claims arise is already in existence need not then be fulfilled. It concerns a potential debtor only, which in cases where the contract out of which the claims arise is not yet in existence, seems not then to impede the notification possibility itself. The regime may be stricter for security transfers, which also impedes the notification requirement. In that case, exceptionally, registration of the contract is possible as an alternative to notification but may still present identification problems. As already mentioned, the Dutch new Code was amended in 2004 allowing alternatively a system of (ordinary) assignment without notification but still requiring registration: see also Vol 3, ch 1, s 1.2.1, from which the priority derives.
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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, which means for want of a contract out of which any benefit could arise.269 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 facilitate the transfer of future income, assuming contracts with the playwrights or publishers came into existence in this manner. 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 because they have not yet got a contract for performance of their (future) plays or for the publishing of their (future) books.270 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,271 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 difference in Germany is that the debtor need not be known at all, while 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. As we shall see in Volume 3, chapter 1, section 1.3, the introduction of the floating charge in France in 2005 and of the fiducie in 2007 followed by the fiducie-sûreté in 2009 lifted the restrictions on the transfer of future receivables in the context of these newer facilities. The implementation of the EU Collateral Directive did the same in the area in which it is operative. Earlier, the law of securitisation (titrisation) of 1988 (as amended)—see Volume 3, chapter 1, section 1.3.6—had taken a similar approach in France. But the widening of this possibility of an assignment of future claims or receivables in various modern legislative amendments in France in recent years may not properly have taken into account the far-reaching consequences when going beyond the transfer and shifting of recovery rights into replacement assets. 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,
269
See Court of Appeal Paris, 31 January 1854, D.2.179 (1855). See also Court of Appeal Paris, 27 November 1854, D.2.253 (1856). 271 See for the Loi Dailly and its aftermath n 224 above. 270
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which is likely to depend on the debtor being known at the time of the assignment. Countries with such notification requirements, such as France and the Netherlands, here have a further impediment for the assignment of absolutely future claims unless special statutory arrangements exist, which are now often created in finance.
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, while the former creditor or assignor normally remains responsible and involved only for any duties it 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 In respect of the performance of these obligations. 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. Again, 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 debtor substitution and in those cases where creditor substitution may be more difficult because: (a) the debtor retains an interest in the person of his creditor (especially likely in the case of him supplying personal services); (b) there result 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 p osition 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 counterparty and its actual co-operation and consent. The old contract and its supporting secured interests would lapse, as well as all defences thereunder (if not settled on that occasion) and any security interests
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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 1449ff old CC, which may retain 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 performing a personal service for another party, leads to no more than an amendment of the old contract allowing substitution of the old creditor. Its supporting arrangements may then remain in place, even though the old agreement may be changed at the same time to allow for the new situation, for example as regards the place where the service or payment will be performed (now at the place of the new creditor or assignee). Thus it seems that creditor or even debtor substitution 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.272 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,273 while this alternative for notification may 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.274 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 while costs will be saved. The continuation of the debtor’s defences against the assignee may be an acceptable price to pay, as it is often in the assignee’s interest that a novation is avoided while the risks will be discounted in the price paid for the receivable. For the assignor, however, there may remain a particular question whether, short of such a novation, he is fully discharged
272 273 274
See also the discussion in n 255 above. See for this common law approach in England, n 236 above. See n 233 above.
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from any connected duties, as this is often unlikely to be explicit. Such a release would not necessarily be an indication of an amendment of the agreement or of a novation either, but may in common law still lead to the requirement that adequate consideration is paid 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 often remains the only way out where a party wants to transfer all his duties at the same time and insists on 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.275 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 former creditor is thereby satisfied while the payor steps into his position so far as the debtor is concerned. The subrogated party retains the benefits of any securities but remains subject to the defences of the debtor. Subrogation is a limited concept, however, and not all payors may automatically demand subrogation. Statutorily, it often follows when a third party is forced to pay the debt, either because he conceded a security interest in his assets to support someone else’s debt or he conceded a guarantee or accepted an insurance contract. Contractually, it may arise when the debtor and a third party agree that the latter pay the debt to the creditor and he does so followed by creditor’s substitution. In new Dutch law, this type of subrogation is made subject to the requirement that the original creditor at the moment of payment is made aware of this agreement (see Article 6.150 of the new Dutch CC). In France, contractual subrogation traditionally has a broader application. Under Articles 1249 and 1250 CC, it does not require notice to the creditor if payment to him by a third party (who will be subrogated to the creditor’s rights) is arranged by the debtor. Neither does it require notice to the debtor if payment by a third party is arranged by his creditor (as an assignment and also a pledge in receivables would require in France: see Articles 1690 and 2075 CC). The third-party payor will be subrogated to the rights of the original creditor. This kind of subrogation was before the Loi Dailly of 1981, which did away with the notice requirement in professional financings,276 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
275 This may be distinguished from or a situation where one party transfers its contractual position to a third party with consent of the counterparty, when all ancillary rights may remain intact, cf Art 6.159 Dutch CC. 276 See n 224 above and accompanying text.
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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 the proprietary status of intangible assets will surface not only in determining whether and how intangible assets can be transferred, but also in how the interests in intangible asset may be split up and rights may be given in the claims to others (as in iura in re aliena for chattels), often with different transfer formalities, for example when creating security interests. More generally, the possibilities are similar to those in chattels and entail the possibilities277 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 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), 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 more particularly issues of formation, assignability and validity, relevant 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. On the other hand, 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 have seen, are practically unlimited but cut off by the rights of bona fide purchasers or
277 See for English law Durham Bros v Robertson [1898] 1 QB 765 and more recently The Balder London [1980] 2 Lloyd’s Rep 489.
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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, who, when collecting in good faith, would then be able to retain the proceeds. The protection of the o rdinary commercial and financial flows is here the paramount policy issue as we have seen. 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,278 and English law resorted therefore 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 as noted above. Most civil law systems may have particular difficulties here with conditional assignments or fiduciary transfers of receivables and with floating charges as we have seen. Where assignments concern monetary claims and create junior interests or charges, all in the end concerns the question of who may exercise the collection right, 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 (although also relevant in floating charges and securitisations); see also Volume 3, 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. 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 while the assignee may technically become the owner of the claims, he acts here in fact as a c ollection agent. The collection transfer could then more properly be seen as a temporary or conditional transfer. In common law countries there may be a trust for the benefit of the creditor. It is a question of characterisation and definition of the
278 See also n 240 above. See for the possible development of an unbridled creation of equitable proprietary rights n 11 above.
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assignor’s rights, especially in a bankruptcy of the collecting agent. The danger in civil law is that the collections will be considered part of the estate of the collection agent collecting in his own name unless another characterisation can be given, which may be in the uncertain construction of the conditional (or limited) transfer. It is relevant particularly in a bankruptcy of the agent. 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 while returning any overvalue. In English law this is also referred to as a collateral assignment. In common law countries, 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 to party autonomy, however, and the bank may take the full credit risk while retaining any overvalue. It is possible that there is 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 while greater advances may be made when this total value increases. Many variables are possible in the funding and in the asset support given in this manner. The essence is the use of receivables in one structure or another. Receivables 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, however, in which the cash flow that receivables produce is differently treated. In a secured transaction, any excess receivables or collections over the loan provided are for the debtor; in a conditional sale that remains to be seen and is likely to be weighed against the credit risk the funding party assumes in the receivable portfolio. Again, there is an uncertain proprietary environment for these alternatives. In the US, 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 antiquated 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 sections 9-607 and 9-608 UCC). On the other hand, the arrangement may also be such that those receivables which the debtors prove unwilling or unable to pay are automatically returned to the assignor. There may also be an arrangement where the assignee approves every receivable before assignment. 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 3, chapter 1, section 2.3.
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However, apart from the specific US 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—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 of a number of financial products: see Volume 3, chapter 1, part II.279 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 while 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.280 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 although for future claims it may now be sufficient to refer to all claims on a certain debtor (Article 3.84(2)), as we have seen, yet for an assignment by way of security it is necessary that the relationship out of which the claim arises is already in existence (see Articles 3.97 and 3.239 CC). A further difference may be (e) in the right to invoke any security interests supporting the receivable itself, therefore in the nature of the accessory right: in a sale this benefit is likely to be automatically transferred to the assignee, but in a security transfer of the portfolio it is possible that these accessory protections remain with the assignor, who alone may institute alternative recovery proceedings against other assets of the debtor if the latter defaults. Finally, (f) in the case of chattels, the difference between conditional sales and security interests may be more fundamentally characterised as a difference in risk 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 279
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. 280
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of chattels. Nevertheless the conditional sale allows for greater flexibility and parties’ input. Again, they may, for example, distribute the overvalue in the assigned portfolio very differently in exchange for other benefits such as the allocation of the credit risk to the assignee in whole or in part. The reward structure is as a consequence 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 also 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 interest must then be returned to the entity requiring the funding. This is the important issue of re-characterisation: see more particularly Volume 3, 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-à-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 (section 405 BGB) and was also introduced in new Dutch law (Article 3.36 CC). There are therefore situations in which the (bona fide) assignee is in a better position vis-à-vis the debtor than the assignor. As yet this may not go so far as to allow the assignee to ignore assignment restrictions in the original contract and especially set-off rights or other defences of which the assignee was not or could not have been aware at the time of the assignment (and the lifting of any investigation duty in this respect). In the case of a transfer restriction, modern law, especially in the US, reduces, as we have seen, the debtor’s right to a personal claim against the assignor for breach of contract only, rather than affecting the validity of the assignment itself. Also, in the US, 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
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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 US, set-off rights of debtors under the agreement between them and the assignor are likely still to be upheld against the assignee. Thus assignability may still suffer and debtor defences may also still be accepted because of material extra burdens, but it may increasingly depend on how heavy they are, again especially important in bulk assignments, and a reasonable cooperation duty of the debtor may be implied. In modern law, there may here also be a de minimis rule. 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 particularly a contractual monetary claim, normally the payment claim or receivable), any automatic delegation of duties that are closely connected to the assigned rights may create another risk for the debtor. Allowing a delegation of (connected) duties without the debtor’s consent is, however, also a feature of the modern US approach as now legislated for in respect of rights and duties arising under sales agreements in section 2-210 UCC: see section 1.5.5 above. As noted, 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 matter 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 rather reduce the assignee’s rights. As we have seen in section 1.5.5, in this aspect, modern law in the US 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 o rdinary 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 nevertheless 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 a sufficient excuse not to pay the assignee. They are in any event unlikely to void the assignment and the debtor will increasingly have to sort matters out with the assignor while respecting the assignment itself. In other words, the tendency is for the internal relationship to have less and less effect on the external relationship, which is in line with intangible monetary claims being considered ordinary assets and liquid. There is here an increasing element of abstraction or independence under which the assignee may not only ignore the underlying relationships out of which the claim arises but more generally also 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. Naturally, the debtor would retain damage actions against the assignor in the internal relationship but neither the assignment itself nor the duty of the debtor to pay the full amount of
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the assigned claims to the assignee would be affected. 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 it 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 financing 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.281 The end result is indeed that monetary claims become more like negotiable instruments (promissory notes). It implies also that bona fide assignees are 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 of goods delivered under a sales agreement: see the discussion in section 1.5.4 above.282
281 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 such as 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 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; see also the discussion in s 2.2.4 below. The abstraction or independence principle just mentioned separates the receivable from the underlying legal relationship out of which it arises. It is likely increasingly to limit the debtor also in his defences, as we have seen, and it 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-à-vis any senior assignee or to protect him against any defective assignments earlier in a chain of assignments. However this is becoming the more modern approach as we shall see in the next section. It was always a question how much of the connected obligations could also be incorporated in the receivable. The Eurobond expanded the facility considerably and incorporates a whole legal framework in the bond that is meant to transfers with it. The law made applicable by the parties, usually that of England or New York, would not condone it, but international market practice does, an example of a situation where the choice of the applicable law is irrelevant as proprietary status and its effect are not at the free disposition of the parties. 282 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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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 or independence, 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 giving notice and requesting the debtor to pay them and subsequently retaining any collections made. As we have seen, 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.283 It may introduce considerable uncertainty. Whom the debtor should pay then depends on his knowledge and on his investigation duties under the circumstances. In any event, it could still leave open the question of the ultimate entitlement to the collection proceeds.284 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
283
This is the famous rule in Dearle v Hall, see n 239 above. It can also be criticised on the grounds that it undermines the equity assignment approach, which in principle does not rely on notification. 284
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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 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.285 It is clear that any emphasis on the bona fides of the debtor while paying an assignee may put him in a difficult position if faced with several notices. It 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.286 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 sections 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 US, 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 285 The form of the notification itself may vary a great deal—see for the notification requirement more generally, s 1.5.2 above. In France, where it is a constitutive element of the validity of the assignment, it 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 while 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, but in practice it is naturally still necessary to make the debtor pay the assignee but may then be informal. It raises, however, the question who the debtor can validly pay. In the Netherlands, where notification became a 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, however, that the assignor provide him with an extract of the document which appears to put the ultimate burden of the notification being properly given upon the debtor (Art 3.94(3) CC). A 2004 amendment replaced the notification requirements with a registration requirement as an alternative in finance. It is similar to the one applying to assignments for security purposes: see also Vol 3, 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 US, in States where notice is required for a valid assignment (beyond those covered by the UCC), it may apparently be oral also: see Fugato v Carter County Bank 187 BR 221 (ED Tenn 1995). Knowledge by the debtor was considered sufficient: see further s 1.5.3 above in fine. 286 RGH, 19 September 1905, RGHZ 61, 245.
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assignee. There is no search duty and the various assignees will have to establish among themselves who will ultimately be entitled to the collection. In England, the situation under Dearle v Hall has already been discussed, with its emphasis on the bona fides of the debtor while paying. It leaves the sorting out of the better right in the first instance to the unsuspecting debtor who is a total outsider as far as the assignments are concerned. This may leave him with a heavy burden, which could allow him 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 either. As noted earlier, 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.287 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 while producing the authorisation document or the assignment document itself. That would most likely reduce multiple notifications. A system like the US one (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 have seen 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 287 See Rhodes v Allied Dunbar Pension Services Ltd [1987] 1 WLR 1703; see also text at n 239 above 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.
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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. The protection among 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.288 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 from invoking his own better rights against the bona fide purchasers for value with a valid contract from the holder. The unauthorised sale is here considered the risk of the original owner. Obviously in the case of intangibles, the appearance or indices of ownership of any unauthorised assignee are 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. Given the entrusting principle, the exception 288 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 243 above. In a causal system the collecting assignee is then unprotected, as in the Dutch system.
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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. 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 in sections 1.4.8 and 1.4.9 above 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) as a public policy requirement. 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. It is a matter of finality and if that is truly the concern, as suggested here, it would put the position of the bona fide collecting assignee also in a different light, even in civil law. Whether there is an exception in common law in the case of a double assignment of 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 could pay him if unaware of better rights, but it did not say who had 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.289 US law remains divided, as we have seen. 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.290 That is also the approach 289 See for Dearle v Hall, nn 239 and 243 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 (London, 1991) 155ff challenging (with regret) this interpretation. 290 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 243 above and accompanying text.
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of the Restatement (Second) of Contracts (section 342). For security assignments, section 9-406(a) UCC fails to provide a fundamental rule, although section 9-322(a) UCC maintains for all filed security interests the priority of the first finance statement. Filings 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. It would suggest that they are always considered insiders (other financiers). 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, h owever, for assignments of less than a substantial part of a debtor’s receivables portfolio (section 9-309(2) UCC). It is a somewhat curious departure in Article 9, more understandable in the case of chattel paper, which was specially created as a collateral category to promote financing: see also Volume 3, 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 (section 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
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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 regardless of notice in countries that require it for the validity of the assignment must, however, remain doubtful.291 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 requirements of the assignment and especially the formalities of documentation and notice in terms of validity and the possibility of bulk assignments; (b) the assignability of claims, the possibility to separate them from the underlying relationship out of which they arise, the question of abstraction or independence, 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, any extra burdens and the debtor’s ability to ignore the assignment in such cases; (d) the impact of multiple assignments, especially on the debtor in terms of his a bility to make a liberating payment; (e) 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); (f) the ranking between the various assignees and the entitlement to collect or to collections already made by any of them; (g) 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; (h) 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 (i) the possibility for the original parties still to amend the underlying agreement.
291 In the US, 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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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, 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-à-vis the debtor and among 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, however, has proprietary effect like in the case of any ordinary, conditional or security transfer of assets. This being said, 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. Indeed, 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
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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 US 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 regardless of the wishes of the parties. If objective or mandatory rules are applicable here, the question arises which law is applicable in situations which have contacts with more than one jurisdiction, an issue that will be discussed more fully in section 1.9 below. In proprietary matters, the lex situs is often deemed controlling, but as we shall see produces special problems for intangible assets like monetary claims. The question, as we shall see, then becomes what the alternative might be.
1.5.13 Special Assignment Issues: Warranties, Conditions and Default While 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 assignments, 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, n otably 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 fulfilment is in the control of the assignor. Whether claims arising out of a certain source, for example the sale of assets in which title is reserved by the assignor, or from a particular line of business, or against a certain debtor are present or future remains 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 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 such as 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
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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 not affect 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 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. The Status of 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 3, 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 (a) outright, (b) as a security or (c) 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 while 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.
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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 of the Dutch CC, cf also section 9-607 UCC in the US (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 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 nonrecourse financing, the assignee will pursue the collection in the bankruptcy of the relevant debtor. In recourse financing, non-payment 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 statutes relevant here? (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 while residing in different countries, may lead to conflict. Yet it may be possible to make some general observations on the effect of bankruptcy in the above-mentioned aspects.
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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 executed by either party. In this case, the assignor has received his money while 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 ongoing 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. If under applicable law the assignor need not
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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 more readily be 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 questions arise whether the assignor may vary or withdraw any notification already given to the debtor(s), whether in his own bankruptcy his trustee may do so and how this can be done. The question is always to which estate the assets belong in the circumstances and whose creditors benefit: those of the assignor or assignee. Stays or freezes under applicable bankruptcy law, like the one under section 362 of the US Bankruptcy Code, do not appear to impact on collections by the assignee’s estate, but they normally have an effect on the completion or perfection of secured transactions or conditional sales. Yet there will be no effect if these are already in place, except that under security arrangements executions or forced disposals can no longer take place or continue in reorganisation-oriented jurisdictions like the US and now also France until the restrictions are lifted by the courts or through lapse of time. Collections of a cash flow under a bulk assignment, even if only for security purposes, are not so likely to be considered executions or dispositions in this context, however, and do not appear to be affected by freezes of this sort. The debtors simply continue to pay the assignee upon notification and can always liberate themselves by doing so, at least in jurisdictions where bona fides, or in this case knowledge of 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.
1.5.15 Uniform Treaty Rules Concerning Assignments? 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
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by UNCITRAL in its 2001 Convention on the Assignment of Receivables in International Trade. Particular attention is given to these Conventions and their uniform rules in Volume 3, chapter 1, sections 2.3.5ff. There are also rules on assignment in the UNIDROIT Principles of Contract Law and in the European Principles of European Contract Law (PECL or ‘European Principles’). They will be discussed together with the DCFR in section 1.11.3 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, which everywhere remain domestic, 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 a 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 while this country is a Contracting State, the principles of the Convention are likely to have considerable weight and they may also be respected in a bankruptcy elsewhere if in these aspects the law of the assignor is deemed to prevail. The situation may be more difficult in the bankruptcy of a debtor. Another complication is that the proprietary interests, which are allowed to operate or to be created under a Convention of this type, particularly if less than full ownership is conferred on the assignee, still have to be fitted into the priority ladder of the applicable bankruptcy law or lex concursus, which may be difficult to predict in advance. The place of the opening of the bankruptcy will normally depend on the location of the bankrupt, who may be situated in various countries (through branches or more incidental activities), or on the location of the bankrupt’s major assets. In bulk assignments, bankruptcy of individual debtors 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. It should: (a) separate the monetary claims from the underlying relationship out of which they arise; (b) back the validity of a bulk assignment through one document or act of transfer based on a reasonable description of the assets; (c) do away with any notification requirement as a precondition for the validity of the assignment for each individual claim; (d) accept the inclusion of future claims as least to the extent they are replacement assets;
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(e) force all debtors to pay the assignee upon notice, specifying their duties and protections in this respect; (f) limit the defences of the debtors to those that are material, accepting that liquidity of monetary claims is ultimately in the interest of all and that a measure of co-operation of debtors may therefore be demanded; (g) do away with the third-party effect of contractual assignment restrictions; (h) define what type of interests can be created and promote receivable financings as conditional ownership structures and floating charges as security interests; (i) establish the order inter se among competing assignees, but protect the bona fide collecting assignee; (j) sustain collection agreements and the notion of segregation of the proceeds; (k) promote the transferability of commercial contracts subject to the transferor remaining a guarantor of the performance of his duties thereunder. It may be seen in this connection that the approximation of the receivable to the promissory note is one of the main conditions for the success of a Convention of this nature, and the more this is accepted, the more useful such a Convention is likely to be. It could be that that was never sufficiently realised by the drafters of the 2001 UNCITRAL Convention and contributed to its failure. For the contribution to this discussion of the DCFR, which suffers from a similar antiquated perspective, see section 1.11.3 below.
1.6 Trusts. Constructive and Resulting Trusts, Tracking and Tracing. Agency. The Civil Law Response 1.6.1 Basic Features of the Common Law of Trust The obvious example of equitable proprietary interests in common law is provided by the trust. A trust in its simplest form is a three-party arrangement under which a settlor transfers assets to a trustee for the benefit of certain beneficiaries. The beneficiaries have no direct access to these assets, which are held and managed by the trustee and distributed by the latter to the beneficiaries in the manner set out in the trust deed, although it is conceivable that they have some user and enjoyment rights and it is frequently the case that they have income rights in the trust assets. Both trustee and beneficiaries have proprietary interests in the trust assets, which operate side by side, the one in law, the other in equity, both conveyed or granted by the settlor. That therefore also applies to the beneficial interest. This is the principal difference from what in civil law is often called economic ownership or interests, which are not proprietarily protected and may therefore present considerable problems as to their protection, not least in a bankruptcy of the holder of the underlying assets in which these interests operate. In common law thinking, the proprietary rights of the trustee (at law) and of the beneficiaries (in equity) are not seen as directly connected or dependent for their continued existence on the settlor or on each other, and were originally enforceable in different courts (the courts of law and the courts of equity).
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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 (the civil law usufruct is otherwise perhaps most closely related). Rather it is considered imprinted on it, see also the discussion in section 1.3.3 above. In common law, the idea is that the beneficiaries have an altogether separate set of rights, proprietary and obligatory or fiduciary under the trust, although this may be largely semantics. The trust concept has always caused confusion in the minds of civil law lawyers, unnecessarily so it would seem. It is often said that the separation in the ownership structure, which is at the heart of the law of trust with its legal and equitable owners, is unfamiliar to civil law thinking. Civil law is, however, entirely familiar with limited proprietary rights: see also section 1.2.1 above. Indeed, one of them, the justmentioned usufruct, can be easily structured in a trust-like fashion when conveying a benefit for a number of years and is sometimes seen as a temporary ownership right (cf Article 3.85 new Dutch Civil Code). Through conditional ownership rights, even if remaining underdeveloped in civil law (but see also section 1.7.1 below), similar splits or separations in ownership may be achieved more informally, even though technically, in civil law, the result would be limited proprietary rights rather than a separate or parallel set of rights. Again, much of this is semantics and due to the particularities of equity that developed for historical reasons as a different legal facility, which was never felt to need integration in a larger more coherent framework. The key is the split of the ownership right. The advantage of the English system though is that in equity the common law structure could be ignored while in civil law its system cannot be considered irrelevant and newer proprietary rights must then be expressed in an existing context, which has proven to be a considerable handicap. This being said, also in civil law there are structures that are more properly trustlike or more particularly in the nature of split ownership rights outside the existing system, but they are more incidental and have always appeared incapable of extension or of being amenable to analogical interpretation. In civil law, the fideicommissum of Roman law and its fiducia are often thought to be the most closely related to trusts. The fideicommis allowed a person to leave its property (by will) to heirs or legatees and impose on them a duty subsequently to dispose of the property through transfer or by will in a certain indicated manner. Thus one could leave certain property to a spouse with the obligation on her to leave it subsequently to the children and any testamentary or other dispositions by her to the contrary would then be considered void. The result was a limited ownership in the spouse that amounted to the right to take the fruits and income for life only. In civil law countries these facilities often survived: see for example section 2100 BGB in Germany. It creates forms of suspended interests or ownership and it could even lead to perpetuities. Other elaborate testamentary structures may also lead to situations more closely related to common law trusts, as in Germany the appointment of a testamentary executor (Testamentsvollstrecker) to watch over this arrangement. This person is sometimes said to have a mandate without representation. That means that he is not an agent nor is the property he manages part of his estate, even if held in his own name, a position not dissimilar to that of a common law trustee in a testamentary trust. Also the new Dutch Civil Code
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accepts a s imilar structure (Article 4.1066). The emphasis is then on management and the ownership is with the beneficiaries even if it may be immobilised in respect of them and they cannot dispose. Guardianships over minors are closely related at least under G erman law,292 and also lead as a minimum to a split or separation between the ownership and disposal rights in the assets. Again, in civil law thinking, the results are limited proprietary rights or more specific but also more incidental iura in re aliena in a proprietary system that is still perceived as being one as such integrated and coherent. There is no such need or urge in common law countries. The Roman fiducia had provided a somewhat broader framework covering various forms of custody, also with split rights, although in this instance with a lesser proprietary protection for the beneficiaries than possible through the fideicommis.293 In Germany, there is as a survivor the fiduziarische Treuhand, as we shall see. It is a structure that more generally compares to the modern trust but it is now mostly considered a purely contractual arrangement and is therefore in its generality less developed, although modern statutory forms of it may still be more pronounced, but again they are incidental. This remains the basic civil law attitude and is certainly also the drift of modern Dutch law (Article 3.84(3) CC), which superseded the earlier more friendly case law disposition towards the fiducia: see also Volume 3, chapter 1, section 1.2.2. To repeat, even in Roman and old German law, which have both been claimed to be at the origin of the trust in a common law sense—a view rightly abandoned in modern times294—the fideicommis and this type of fiducia (cum amico) only presented special solutions. Where these structures continue to exist in civil law, it is the same and they are mostly connected with testamentary dispositions, custodial situations, indirect agencies, or otherwise with charitable foundations or the legal personality of public institutions. In the latter case, they may well go beyond what common law trusts mean to be. In view of the foregoing, there should be little place for civil lawyers’ bafflement in matters of trusts. They know various instances of informal splits in proprietary rights, but it is the ensuing potential of greater flexibility in creating proprietary rights that is likely to be the true reason for the commotion. It may be systematically unsatisfactory but it gives the common law an advantage, even intellectually. In the foregoing it has already been explained how split proprietary rights work and the trust is only one expression of them, even though a major one. Others that were identified in respect of movable property were the conditional and temporary ownership rights and the floating charge. Notably in the Netherlands, the new Civil Code having made room at least for conditional and even temporary ownership rights (although converting the latter into a usufruct) but not dealing with floating charges, was unable to formulate broader structures and concepts of this nature, even in respect of owners who created separate
292
See also W Fratcher, International Encyclopedia of Comparative Law 6 (Tübingen, 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 340 below. 294 See R Helmholz and R Zimmermann (eds), Itinera Fiduciae, Trust and Treuhand in Historical Perspective (Berlin, 1998). 293
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management structures in their assets, originally meant to be covered by Title 3.7 of the new Civil Code, later abandoned, exactly because they were deemed to be against the system. As we have seen, civil law traditionally puts extreme emphasis on the way in which assets are held. Once in someone’s name, it does not like to recognise beneficiary ownership types except if taking the form of a limited proprietary right such as the usufruct or possibly conditional ownership. That is the essence of their numerus clausus of proprietary rights. The consequence is that these beneficial ownership rights normally only have contractual status and can therefore only be defended as such. This suggests at the same time that there is no proper segregation of the assets and that creditors of the owner in name have full access to these assets. This may amount to a considerable windfall for them (and especially their creditors in their insolvencies) and is as such undesirable, for example if we think of custodial arrangements or client money that may wash up in a bankruptcy of the custodian as being considered its own, part of its estate, and thus available for its creditors. Indeed in business, this creates special problems in fund management, custodial arrangements and nominee accounts, when separate company structures or foundations may have to be created. Contractually created preferences or priorities (short of security interests), in French called privilèges, may sometimes help and may be more easily created or recognised in case law. In some countries, these difficulties led to special statutory intervention to achieve sufficient segregation for these types of activities. Nevertheless, the segregation issue remains problematic in the absence of clear proprietary structures in all civil law countries and also shows itself in undisclosed or indirect agency, assignments of trade receivables for collection purposes, in transfers of any other assets for management purposes including investment management, in client accounts held in an intermediary’s name, and in partnerships without legal personality. Again, special statutes may try to deal with the situation, especially the segregation issue upon a bankruptcy of the intermediary in special instances. Modern custodial arrangements for investment securities organised through book-entry systems may by statute also acquire sufficient segregation and introduce in that connection also a notion of joint ownership of the beneficiaries separate from the custodian. The traditional example is here Euroclear, which, however, may be said to operate rather on the basis of market practice (see for greater detail section 3.1.4 below). On the other hand, it has long been recognised, also in civil law, that where persons gather money from the public for charitable purposes or from a group of people with a special objective, which may even be commercial, this money does not belong to the persons having collected it. Everywhere it must be set aside (as Sondervermögen) and is separated from the estates of those who collected it. Its distribution is or should be governed by the professed purpose for which the money was collected. As such, these funds may have no owner in the typical civil law sense at all, which would seem the only way to satisfactorily deal with this situation. As soon as beneficiaries are determined by name, they acquire a proprietary interest in the collections but even that does not necessarily give them the property rights in all the moneys collected or so set aside. It is clear on the other hand that the gatherers only have management and investment duties corresponding with the professed purposes of the funds. Yet they may make
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disposals, always within the advertised purpose for which the funds were collected. As such they behave, at least externally, as owners but they are truly trustees. These relationships are in civil law typically not further developed.295 Civil law remains rudimentary here in what is in essence a trust situation, which in common law countries only fully evolved as an independent structure and overarching concept from at least the nineteenth century—with much older but also much more incidental earlier roots. The law concerning it is of major significance both in a business and family context. The segregation is the key, and uncontroversial even if threatened by an irretrievable commingling of assets. In terms of split ownership it has already been said that civil law may conceptually come close to the common law trust also, not only therefore in charitable collections and similar situations. The conditional sale, in enlightened modern civil law thought, leads to suspended ownership rights and a duality in ownership between both parties to the transaction. Reservations of title and hire-purchases are acknowledged examples also, but there are others: see section 1.7 below. In civil law terminology, one may say that one party has here an ownership right under a resolutive condition and the other under a suspensive condition.296 It is this duality in ownership which, even in civil law, may go well beyond the limited ownership rights that it commonly allows. What is notably absent, however, is the protection of the ordinary course of business or the commercial and financial flows against these interests, which are therefore not limited in their full proprietary effect to insiders, such as banks and suppliers. This may well be the true reason why these interests could not develop much further in civil law. In true trust or similar equitable structures, these split or separate ownership rights are less likely to be of a conditional nature, but they may be temporary, that is, for a number of years only. On the other hand, common law was always advanced in the acceptance of future or suspended interests, especially in land law. At least in E ngland these conditional and temporary ownership rights are now considered always to be equitable when created in personal property (and since the Act of 1925 also when created in land). Although they are mostly considered to o perate behind a trust, they should probably still be distinguished from trust structures, as, for example, in the case of the reservation of title, which presents another type of split ownership that becomes equitable only for chattels and need not take on trust-like appearances. Given the example of the reservation of title, it is clear that conceptually there continues to be room also in civil law for a similar split ownership to operate, but again it remains a more rudimentary concept. It results in segregation, but it notably misses a management structure mostly innate in formal trusts and especially the tools to remedy any abuses in terms of breaches of fiduciary duties. Nor is it predicated on the protection of the ordinary flows, even if in civil law countries in respect of chattels bona fide purchasers are p rotected. However, this is a narrower concept that notably does not extend to receivables (and land). 295 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. 296 See also JH Dalhuisen, ‘Conditional Sales and Modern Financial Products’ in A Hartkamp et al (eds), Towards a European Civil Code, 2nd edn (Dordrecht, 1998) 525; see further s 1.7 below and Vol 3, ch 1, s 2.1.5.
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As just mentioned, in civil law, trust-like needs emerged especially in charitable collections, testamentary dispositions concerning minors with suspended interests, investment management, custodial arrangements and client accounts, and in indirect agencies where an agent operates in his own name for the account and risks of his c lient. In all, it is best to view the client (or economic owner) as the constructive owner of the assets which the manager/custodian or indirect agent holds or acquires for him (even in his own name), as indeed is mostly the case in custodial arrangements and undisclosed agencies of common law. What this means then needs further expression and would in a proper modern system amount to (a form of) full ownership. Short of a formal trust structure, in common law countries there is here in equity the alternative of a constructive or resulting trust (see also section 1.6.4 below) although still giving the client less than full rights. They are not legal owners proper, an issue for indirect agency discussed more extensively in chapter 1, section 3.1.6 above. But there is at least segregation. If in civil law these assets should not properly belong to the estate of the custodian or agent either, it lacks the proper means of expressing this in a more general manner or through a more general legal structure. Hence incidental statutory law must often come to the rescue here but may not then be expansively applied. The foregoing suggests at least seven essential points in connection with trusts or trust-like structures, both in common and civil law, although by far the best developed in common law countries: (a) In formal trusts, a fund or certain assets are unilaterally set aside for certain purposes, which determine how they are to be treated for a time which may exceed the life of trustees. (b) There is some management structure,297 which, unlike in contract, may leave considerable discretion to the managers (trustees) and cannot be eliminated298 but is subject to the courts having the right to remove trustees and to a system of fiduciary duties.299 (c) The assets do not belong outright to the managers (trustees), are segregated, and not rightfully part of their estate.300 (d) The further consequence is that in law they do not belong to the beneficiaries’ estate either (except perhaps for allocated benefits—it depends on the trust deed); in formal trusts, beneficiaries also have no joint (legal) ownership of the assets;
297 This is the idea of the ‘patrimony plus office’: see GL Gretton, ‘Trusts Without Equity’ (2000) 49 ICLQ 599, 618. 298 See D Hayton, ‘The Irreducible Core Content of Trusteeship’ in AJ Oakley (ed), Trends in Contemporary Trust Law (Oxford, 1996) 47. 299 See on this development and its drawbacks also R Cooter and BJ Freedman, ‘The Fiduciary R elationship: Its Economic Character and Legal Consequences’ (1991) 66 New York University Law Review 1045 and FH Easterbrook and DR Fischel, ‘Contracts and Fiduciary Duty’ (1993) 36 Journal of Law and Economics 425. 300 Asset partitioning is indeed seen as the most important commercial function of trusts by H Hansmann and R Kraakman, ‘The Essential Role of Organisational Law’ (2000) 110 Yale Law Journal 387. They note that the partitioning may be less perfect in trusts than in companies, because there may not be much physical separation of property in trusts, which complicates the segregation as a practical matter, but it is nevertheless not less real, although differently handled. To avoid unjust enrichment, the constructive trust must often come to the rescue and reinforce the notion of segregation as we shall see in s 1.6.4 below.
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even in constructive trusts, the beneficiaries are not the legal owners although they may have joint equitable title and may be able to demand full title. (e) In all cases there results some duality of ownership, or at least a split or separation in the proprietary disposition rights between the managers (trustees) and beneficiaries; neither is the sole owner; only together do they have full ownership rights but may not even then be able to make disposals as they please as the provider of the moneys or of the assets (the settlor in a trust) may have intended these m oneys or assets to be used or treated in a specific way, at least for some time, while the managers or trustees will be duty bound to deal with the assets accordingly. (f) Trustees are subject to strict fiduciary duties in their management. (g) Bona fide purchasers are protected against these interests, a protection increasingly extended in modern times in equity or by statute to the protection more generally of the commercial and financial flows in commoditised assets, therefore to all transferees in the ordinary course of business. It means that only insiders, such as banks and suppliers, must be aware of these interests (even if not published) and have a search duty when acquiring security or other interests in the underlying assets. Technically in common law countries, the segregation of property in this manner does not lead to legal personality of the trust, although this is often also pure semantics. The trust should nevertheless be clearly distinguished from corporate entities or other legal entities in civil law, even if the charitable trust is much like a foundation in a civil law sense, but it remains different in that 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 (personal liability) is exceptional for directors.
1.6.2 Definitional Issues, Fiduciary Duties and Court Intervention The 1985 Hague Convention on the Law Applicable to Trusts and on their Recognition attempts some sort of definition of trusts or similar structures in both common and civil law and assumes therefore some universal framework. It covers ‘legal relationships created—inter vivos or on death—by a person, the settlor, when assets have been placed under the control of a trustee for the benefit of a beneficiary or for a certain purpose’. Note that there is here no limitation per se to the common law trust. Specific characteristics are that the assets constitute a separate fund and are not part of the trustee’s own estate. Although the title to the trust assets stands in the name of the trustee, the latter has the power but also the duty to manage, employ or dispose of the assets in accordance with the terms of the trust and the special duties imposed
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upon him by law. This suggests some duality of ownership. The trustee is accountable for the exercise of his powers and the performance of his duties. The Principles of European Trust Law (Article I) (see section 1.6.7 below) are more elaborate. They also concentrate on the settlor transferring assets to a trustee with the intention 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 is an important issue and has always been endemic, especially in family trusts. They might be tempted to favour their own interests and deplete the trust fund with their charges. As a consequence, in common law countries, a large array of fiduciary duties of trustees was built up by the courts to deal with these conflicts of interest and the courts’ equitable powers have always been used to the full to protect beneficiaries. There is no passivity of the judiciary in these aspects. The key duties are those of loyalty, care and confidentiality. The duty of loyalty in particular requires the trustees to postpone their own interest and not to compete with the trust fund for the better opportunities. The fact that these duties and powers do not exist to the same extent in civil law may be another reason why, besides structural and fittingin d ifficulties, 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 potentially as a separate source of law, although in the approach of this book in such cases relying on fundamental principle and custom or established practices. Even then, civil law courts are not used to the same kind of activist judicial intervention as the courts of equity are in a preliminary or final manner through injunctions and similar relief, especially relevant in this area of trusts. As we have seen in chapter 1, section 3.1.4 above, similar problems of abuse have bedevilled indirect agency in civil law countries, where these types of agent have often been prone to ignore their clients’ vital interests and compete with them for the best deals: see for the position in equity section 1.6.5 below. Fiduciary duties and activist judges are vital aspects of the law of trust and agency and are central to this part of the law in common law countries, but are not (yet) so in civil law. There is here a significant deficit in civil law. Indeed, it is clear that in common law, there is a detailed regime for trusts, which still has no obvious parallel in civil law, whether or not the concept itself is now recognised and practised. In particular, in common law countries, the transfer in trust has a distinct legal character. It is notably not the same as a sale giving the trustee and the beneficiary a contractual right to delivery (although in the case of real estate, a sales contract in land by itself transfers an equitable interest in the realty). It is not considered a contractual transaction at all and can exist without consideration. It is unilateral and cannot (in principle) be undone in the manner of a contract by agreement of all concerned either. This non-contractual nature also makes the operation of informal trusts possible. We should think here of constructive and resulting trusts, see section 1.6.4 below.
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As already mentioned, both trustees and beneficiaries have proprietary rights against the settlor and third parties upon the establishment of the trust. The recovery rights of the beneficiaries against the trustee are often considered in personam, however, therefore still contractual or rather more properly fiduciary in nature. The essence is that they are not then considered to be primarily proprietary, although as regards the creditors of the trustees there is a clear split in a proprietary sense (and recovery p ossibilities) and there is strictly speaking no direct obligatory bond between the trustees and the beneficiaries. It is possible to say in this connection that the personal rights of the beneficiaries against the trustees were allowed to attach to the trust fund itself and as such gained proprietary status. As regards third-party effect, in common law jurisdictions, the rights of the trustee in the trust fund are protected at law as ownership, but there can be little doubt that the beneficiaries have proprietary protection rights against third parties also, which are therefore of a non-obligatory nature. However, they are strictly speaking not rights against the whole world. Rather, as we have seen before while discussing equitable proprietary rights in section 1.3.3 above, they are rights that can only be exercised against a more limited number or class of third parties. They are: (a) the trustee (although the relationship with him could still be seen as personal or obligatory, but as just mentioned there is no direct bond between them and there is a segregation of assets); (b) his creditors; and (c) transferees from the trustee who acquired his title with knowledge of the beneficial interests or did not pay good value. The rights of the beneficiaries are thus rights maintainable against (some) third parties or classes thereof, especially against all who knew of the interest before acquiring the property, and are in that sense clearly proprietary. In other words these rights can be maintained against others than the settlor and trustees. In fact, only bona fide third parties that acquire trust assets from the trustee (for value) may ignore these beneficial interests. It is the traditional way in which the common law protects third parties against an unbridled proliferation of equitable proprietary rights but does not make them less ‘proprietary’. Also in civil law, nobody would deny ownership rights because they may be undermined by bona fide purchasers. It only means that third parties may be better protected against the effect of unknown proprietary interests in the assets they acquire. It was earlier i dentified as the key question of transactional finality. The separate existence of trust funds in this manner means that they are protected not only against the trustee and its creditors but also against the creditors of the beneficiaries, except for the benefits themselves as defined in the trust deed once accrued or vested. In the US, in so-called spendthrift trusts, the beneficiary cannot even freely dispose of his benefit, which is then completely shielded from his creditors. Whatever the additional terms, the key is that the trust assets themselves cannot be reached by either type of creditor while the trustee’s legal rights under the trust can only be transferred subject to those of the beneficiary (except for bona fide purchasers for value). The beneficiary’s own equitable rights under the trust can be freely transferred by them (without the trustee’s consent), but not more than they have under the trust deed and applicable law (which may restrict this facility). In the main, the beneficiary is entitled to some future income stream, but he may also have the actual enjoyment and use of certain assets of which he will then acquire
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(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 limitations of his rights in them. In common law, there is no bona fide purchaser protection here. In the case of chattels, there may be, strictly speaking, no bailment either, as it could be argued that the beneficiary holds the benefit in his own (equitable) right,301 But there could be a bailment for any person to whom he surrendered actual possession. Trusts, except if set up for charitable purposes, have a limited duration. This is not of importance for identified beneficiaries who are alive, but under the rule against perpetuities, future benefits under a trust must vest within a period of no more than a life in being plus 21 years. At least, that is the classical rule. The same goes for all sequences of equitable future (or non-vested) interests. The life in being need not be specified and can be among a class of persons, for example all the descendants of George V or Franklin D Roosevelt living at the time of the creation of the trust (although in England that is no longer possible and ‘lives in being’ must now be drawn from a narrow group of people directly connected with the trust, such as the settlor, certain beneficiaries or parents or grandparents of them or persons with an interest prior to the non-vested interest in question). The duration of the trust for vesting purposes is then the life of the longest survivor plus 21 years. In many States of the US and as an option in England, a fixed number of years has by statute replaced the rule against perpetuities. Although the trust is normally tripartite, between settlor, trustee and beneficiaries, the settlor may convert 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 among the legal community and the better off. They 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
301
See for the relationship between trust and bailment s 1.6.5 below.
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of the estate of minors if of some value. Segregation and management are here the key 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: see section 1.6.4 below. The latter are of great practical significance and play a decisive role in client accounts, fund management and custody, and undisclosed agency. The common law (equity) flexibility here presents a great advantage over the civil law concern with system thinking and closed systems of proprietary rights. This being said, in business in common law countries, the use of companies as alternatives or contractual arrangements are practical issues depending on the needs of the situation. In practice, it is often the constructive or resulting trust alternative that is of special interest, principally to obtain a more informal way of segregation and to avoid a windfall for the creditors of asset managers.302 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.303 Where special trust statutes exist, especially in jurisdictions that only have a limited common law tradition, such as South Africa, Scotland and Quebec, the concept may be more rigid and less all-encompassing. That is also the likely result under the DCFR, which, since 2009, proposes to introduce formal trusts for movable property in the EU. It means that the trust notion is not fully integrated in the rest of the legal system. But this is not always so under statutory law and it would, for example, not seem to have affected the operation of the trust concept in the Channel Islands, which are (to some extent) civil law jurisdictions. Apart from the uses already mentioned, trusts are often also created to circumvent debilitating legal restrictions and thus acquire a facilitating function. In this vein, trusts are not only useful to manage tax liabilities but may also allow mortgage replacements under which the legal interest is transferred to a trust company for the benefit of a bank. This may avoid cumbersome and costly registration duties. Debtors may even transform themselves into trustees of their assets to hold them on trust for their creditors. It is a more flexible security arrangement, although in the US in the case of movable property this structure is now converted into a security interest subject to the formalities of Article 9 UCC. They remain, however, important as mortgage substitutes. The risk for the lender is, however, that bona fide purchasers of the assets for value are protected, which would not be the case under the legal mortgage. When covering a whole business or a multiplicity of changing assets, trusts are also often used, then called indentures, and may equally serve as security interests supporting a debt or
302 For these commercial uses see also S Worthington, ‘The Commercial Utility of the Trust Vehicle’ in DJ Hayton (ed), Extending the Boundaries of Trusts and Similar Ring-Fenced Funds (London, 2002) 135–62; see also HLE Verhagen, ‘Ownership Based Fund Management in the Netherlands’ in ibid 163, and D Hayton, ‘The Development of the Trust Concept in Civil Law Jurisdictions’ (2000) 8 Journal of International Trust and Corporate Planning 159, 178; J Langbein, ‘The Secret Life of the Trust: The Trust as an Instrument of Commerce’ (1997) 107 Yale Law Journal 165. 303 This is often overlooked by those who believe that contract can achieve the same as trusts, see JH Langbein, ‘The Contractarian Basis of the Law of Trusts’ (1995) 105 Yale Law Journal 625.
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debenture, in the US for personal property now superseded by Article 9 UCC and its filing requirements. In deceaseds’ estate planning, trusts traditionally play an important role and they are often of crucial importance as they allow a testator in testamentary trusts to make all kinds of arrangements for heirs or legatees that may afford them additional protection as trusts may deprive the beneficiaries of an actual say and thereby keep the asset from the reach of their creditors (except for the immediate benefits they receive). The trust may also include the heirs of the settlor in the beneficiary class in order to avoid the payment of estate duties upon the death of the settlor. The transfer in trust itself may, however, attract gift tax. This being said, in civil law countries, trusts are often still viewed as mainly tax avoidance vehicles. In common law countries, they are rather considered a feature of ordinary tax planning, which it must be admitted is a greater sport in common law countries, perhaps indeed because the law allows more flexibility. It was always an important argument in France against allowing trusts to operate and its modern facility (fiducie) is therefore limited and can only be used in certain circumstances and never to avoid taxes, at least that is the policy as we shall see in section 1.6.6 below. There are many other conceivable uses of the trust. It may, for example, be very useful where it replaces partnership or joint venture arrangements, as it creates a different ownership and management structure, which may prove more neutral, although the intervention of trustees, who must be paid for their services, may be costly. A trust may even acquire the shape of a company in which the trust res functions as the capital, the trustees as the board, and the beneficiaries as shareholders. This was not uncommon in the US in the nineteenth century before the concept of the limited liability company fully developed. Combating these structures gave rise to the term antitrust laws. Again, it is the flexibility that counts and the unitary legal concept that now prevails in c ommon law, whatever use is made of trusts, has 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 less formal structure than a trust itself, although it is equally a product of equity and operates in similar ways. It results from the objective law (not from a settlor’s will therefore or even from a statute under which, however, there may be further trusts of this nature) and is often closely associated with the unjust enrichment notion. It means that it is usually imposed on the parties regardless of their intent and is as such of great importance. In England, it is often considered to follow automatically in certain circumstances; this suggests a more institutional approach and a closer connection with and structure like that of the formal trust.304 In the US there may be greater discretion for the judge
304
This is also clear from C Mitchell (Ed), Constructive and Resulting Trusts (Oxford, 2010).
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and there may be a closer connection with the judicial granting of equitable liens; this suggests a more remedial approach. But again in all cases it is the 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 accounts or other client assets, relevant therefore in particular in the fund management and custody functions. It implies the facility of the beneficiary to track these assets and physically to recover them. Even though in principle only the equitable owner, the deprived beneficiaries may be able to demand full title. As just mentioned, at least in common law countries other than England, the constructive trust tends to be remedial, rather than institutional, although even then a constructive trust may sometimes still arise as a substitute for the trust proper. In the remedial sense, the constructive trust is the formula through which the conscience of equity finds particular expression, clear especially in the US.305 It is there seen primarily as a means by which courts order defendants to relinquish property, the retention of which would lead to their unjust enrichment. It results in an order to surrender the property and creates therefore a proprietary retrieval right in the beneficiary, not normally obtainable under an unjust enrichment action. It shows the temporary nature of this type of facility where the analogy with the institutional trust ends. The remedial function thus arises particularly when title in an asset 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 which may lead to a constructive trust. The return of the asset is not automatic, which, as we have seen earlier, it normally is not, even at law. It should be realised that in such cases also in England the constructive trust notion can be purely remedial, for example when an asset has been sold but the title transfer is delayed. However, it may still be a narrower concept. Although the application of constructive trust principles is mostly incidental, the constructive trust arises all the time. Thus the thief and his successors may be seen as constructive trustees for the true owner pending the return of the property, which in the case of fraud, will normally be ordered. To repeat, it should be realised that in common law even the thief may be seen as legal owner (bailee) vis-à-vis all, subject only to the better right of the person from whom he stole the asset. In countries that use the notion of the constructive trust more liberally, like the US, there is still a difference between adverse possession (at law) and constructive trust (in equity); they seem not always to be clearly distinguished, however, and may supplement each other. The equitable principle includes fiduciary duties while handling the asset even during periods of adverse possession. This could amount to bailment (see, for the relationship between both, section 1.6.5 below) and an element of overlap may result while the adverse possessor (even the thief) acquires at the same time features
305
See Justice Cardozo in Beatty v Guggenheim Exploration Co 225 NY 380, 386 (1919).
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of a trustee. Another example of a constructive trustee may be an agent who holds the assets acquired for the principal as constructive trustee while the principal is already considered the true owner at law. Nevertheless, technically there is here often cause for confusion of concepts, as the beneficiary under the constructive trust is already the owner at law (as in the case of a theft), but pending confirmation of this status, the assets may still be considered to be held in trust by the wrongful legal owner for the rightful one, who therefore also has an equitable ownership, which is then also p rotected as such. A trustee who wrongly converts trust property will hold any replacement assets as constructive trustee for the trust. Here we have the concept of tracing and also the beginnings of the concept of the floating charge in equity, under which an equitable security interest automatically shifts into replacement goods and proceeds as converted assets. These floating charges may even result from security interests or conditional sales created at law, such as the reservation of title upon conversion of the asset. In the US under Article 9 UCC, this concept has been reaffirmed and extended by statute (see for replacement goods, when it must be agreed, section 9-204 and for proceeds, when it is automatic, section 9-315(a)(1) UCC). Elsewhere, tracing and constructive trust may remain more closely related and the one often presumes the other. Tracing then acquires a broader meaning and allows the beneficiary under a constructive trust to follow the original interest into the hands of any third party who is not entitled to it. As this does not concern converted assets, probably the term tracking already used above is better. All kinds of fiduciaries may thus be held responsible for assets they control but which effectively belong to others, either outright or as beneficiaries, and these goods may as such be tracked, also in equity, which is especially important if a remedy at law fails. That is also true in the shift of charges into replacement assets, but there are many other instances of tracking, especially in the US. Obviously, the effect of constructive trust, tracing and tracking is most direct and acute in bankruptcy. There is no general theory suggesting a clear approach, however, except perhaps for tracing under floating charges, and bankruptcy courts have often been reluctant to broaden the concepts. They could easily take away what little there is otherwise left for unsecured creditors. Nevertheless, in urgent cases, the concepts of constructive trust, tracing and tracking remain potent, also in bankruptcy, and especially in the US the courts allow new preferences or charges to arise, or correct, p erfect or substitute old charges when such is just and equitable, albeit only in extreme cases and reluctantly. As already mentioned, the term ‘equitable lien’ is also used in this connection and is closely related. Indeed, all constructive trust or tracing rights (but by no means all tracking rights, which may arise as a sequel to ordinary property rights) are equitable (even if deriving from legal rights) and are therefore all subject to bona fide purchaser protection. Thus any security interest in assets held by a constructive trustee and given by him for value to third parties who had no notice of the equitable interest prevails over the equitable owner.306 This situation is the same as in an
306
See eg Department of Natural Resources v Benjamin, 40 Colo App 520, 587 P 2d 1207 (1976).
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rdinary trust. Naturally, there is also the problem of commingling with the construco tive trustee’s own assets.307 A resulting trust is usually distinguished from a constructive trust (both sometimes being seen as forms of an implied trust), although where, as in England, the approach to constructive trusts is more institutional (rather than remedial) as we have seen, there may be a lesser difference. Resulting trusts are foremost created if a transfer without adequate consideration is made while there is no intention to make a clear gift. The transferor is then presumed to have had the intention 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 especially where a resulting trust is imposed by law as it sometimes is in England, there may be no appreciable difference from a constructive trust. There are also statutory trusts of which the bankrupt estate is the prime example. As for charitable trusts, it has already been said that they are very similar to foundations in civil law and may under applicable law be unlimited in time. A practical difference is that the creator of a foundation normally retains power to vary the terms of the foundation, which would require a special power (of appointment) in trusts. If charitable trusts lose their objective when the charitable cause disappears, the objective may usually be varied by the courts to the nearest alternative. This may be more difficult in foundations. Another major difference is that charitable trusts have no legal personality and are in that sense still not separate from the trustees, although obviously there is segregation of assets as a fundamental structural issue.
1.6.5 Trust and Agency. Trust and Bailment It is sometimes said that agency is to services what trusts are to goods. It means that in providing services, for example the purchase of goods for others, the agent has a responsibility in rendering this service while the beneficiaries are his principals or clients. Accordingly, the agent is under a fiduciary duty to them to do whatever is required under the agency agreement and under objective law to complete the transaction in a proper manner and postpone his own interests, much as a trustee has to do in respect of a trust fund. The added feature is that any goods so acquired by the agent are held by him in trust for the principal. In the previous sections this has already been mentioned, also that the equitable right may here coincide with the legal right as the principal is likely to have become owner already, at least in a disclosed agency. Different, specialised types of agent, such as security brokers, may have further duties in this respect, even if acting in their own name albeit for the risk and account of their clients, or commercial and collecting agents. In common law jurisdictions, brokers must obtain best prices for their clients and may not compete with them for business: see more particularly Volume 3, chapter 2, section 1.3.9. The assets acquired 307 See, for some incongruous results, DMW Waters, ‘The English Constructive Trust: A Look into the Future’ (1966)19 Vanderbilt Law Review 1215.
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are in the meantime held for the clients (as legal owners) in constructive trust to shield them and preserve them for their clients in brokers’ bankruptcies. So, where ownership rights become involved, agency and trusts naturally come together and agents become constructive trustees pending the assertion of full ownership rights by their clients if they do not acquire it directly under agency rules. Being a beneficiary or an owner makes an important difference for the principal, however, in terms of his protection. As legal owner he must (in principle) respect any transfer by the agent to third parties. As beneficiary, he may ignore these transfers unless the third parties were bona fide purchasers for value. Trusts and bailments also have overlaps.308 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 so that there may be a constructive trust at the same time. In any event, even in bailment, there may be fiduciary duties very akin to those of a trustee as we have seen. Again, there could be an important difference in the protection of bona fide purchasers in these cases. If the latter acquire the assets for value, they may ignore the trust or agency and any beneficiaries (the original or true owners) of whom they had no knowledge. Tracking against them would be impossible. On the other hand, a pure bailor has an interest at law, which results in a better title that cannot be ignored by the bona fide purchasers from the bailee (except if there is a statutory rule to the effect as there commonly is in sale of goods statutes in common law). If there is an agency at the same time there may be a constructive trust also. C onstructive trusts may also operate in replacement assets in a converted bailment, in that case also subject to the better rights of bona fide purchasers. In practice, courts may opt for a pragmatic approach and equalise the results of bailment and constructive trust in these circumstances.
1.6.6 Related Civil Law Structures It has already been mentioned in section 1.6.1 above that also in civil law the idea of certain funds being set aside for certain purposes, and therefore not belonging to the person holding them, is well known. The best example is the proceeds of charitable collections. In statutory form, trusts may exist as testamentary structures, as we have seen for Germany. Suspended or dual ownership rights are in those cases accepted, at least in principle. These dual rights are now also known in some other situations, especially in reservations of title or situations of a fiducia cum creditore or finance sale, which may all be considered to result in some form of conditional transfer and ownership. Indeed in common law they often operate behind a trust when in movable assets, as we have seen, but they also operate at law, especially in respect of land. In modern financial arrangements these conditional sales and split ownership concepts play an important role, and can no longer be avoided in civil law either, as will be discussed more extensively in section 1.7 below. Although they are not necessarily equitable in a 308
See C Uniken Venema, Law en Equity (Antwerp, 1990) 214.
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common law sense, there are many reasons why they are best so treated, especially in the aspects of segregation and of the protection of third parties and the ordinary commercial and financial flows. Duality of ownership is thus known, at least in principle, in all legal systems, even if in civil law again not treated as a unitary concept or structure, especially not in the proprietary effect for both parties. It has already been said that this is related to the numerus clausus of proprietary rights, which will notably in its generality not allow conditional or temporary ownership forms to operate as such. But even in civil law it cannot be denied that, especially in custody and agency, there are special needs for segregation of assets, even if held in the name of the custodian or agent, again implying a duality or conditional or temporary ownership in them, if not an outright ownership of the client. In modern client accounts the question also arises of joint but separate ownership of the assets by the clients or of a constructive trust pending distribution. So it is in fund management, custody and in partnership forms without legal personality. In legal commentaries on civil law, trust-like structures are becoming better known. Especially in Germany, the testamentary trust and the fiduziarische Treuhand have received particular attention in this connection, the latter mostly still being considered a contractual device, however, which makes a vital difference in the bankruptcy of the Treuhänder or trustee handling the assets.309 Special applications of the concept may be found in client and custody accounts, in investment management and in indirect agency, where statute may have reinforced the proprietary rights of the beneficiaries. The best example in Germany may be in the Kapitalanlagegesellschaftgesetz of 1970 aiming at better protection of investors against their investment managers or brokers.310 In Germany, the security transfer or Sicherungsübereignung is often also mentioned as an example of a fiducia cum creditore, as is the Sicherungszession for receivables. As just mentioned, they were, like a reservation of title, more likely to have features of a conditional sale and transfer but are now mostly considered a security interest only. The charitable trust or Stiftung, also often mentioned in this connection, is a legal person and therefore has fewer trust-like features. We may review these structures in the light of the most obvious aspects of the common law trusts identified before and first summarised in section 1.6.1 above: (a) the separation of the estate of the trustee and the trust; (b) the duality of ownership between trustee and beneficiaries; (c) the primary liability of the trustee for its actions in connection with the trust property (the absence of legal personality), and the operation of fiduciary duties; (d) the non-contractual nature of the transfer in trust, which also allows for constructive and resulting trusts; and (e) the management structure that the trust entails. This is supplemented (f) by the protection of the ordinary commercial and financial flows against these interests. As we have seen, it means that insiders are affected, especially banks and regular suppliers, and everybody otherwise 309 See for an overview, S Grundmann, ‘The Evolution of Trust and Treuhand in the 20th Century’ in elmholz and Zimmermann (n 299) 469. See also S Grundmann, Der Treuhandvertrag (Munich, 1997) and H H Koetz, ‘National Report for Germany’ in DJ Hayton, SCJJ Kortmann and HLE Verhagen (eds), Principles of European Trust Law (The Hague, 1999) 85. 310 See for other incidental statutory examples more particularly Grundmann (n 309) 28ff.
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in the know, but not the public at large, especially not in respect of commoditised assets that are meant to trade. In civil law, the greatest weakness remains in the potential lack of segregation and in the consequential lack of protection of the trust assets in the case of the bankruptcy of a Treuhand or trustee (equivalent) and in the lack of refinement in the fiduciary duties and powers of the courts. The difficulty of separating client account and of collections by collection agents are prime examples, although in the latter case one solution could be to consider the collection agent the mere holder or detentor of the collections. There is also the issue of tracing and more generally the protection of the ordinary commercial and financial flows against these interests, which may well prove the key concept in their broader acceptability. At least in Germany, the first shortcoming could perhaps be overcome by a more extensive application of the regime of the Testamentsvollstrecker.311 As for fiduciary duties, some writers have concluded that a much fuller regime already operates today in Germany.312 Yet it would not bring constructive trust notions, segregation and tracing, which in business are perhaps the more urgent concerns. The inadequate (activist) judicial back-up and the need for it in order for trusts to operate properly has not so far been given much attention in civil law. In Italy, the discussion often stops with the general observation that split or separate ownership structures do not exist but there is more perceptive and flexible modern thinking.313 In France, since 1990, there had been a renewed interest in the fiducia or fiducie.314 To create a securities transfer it was always possible and practices exist particularly for receivables: see also Volume 3, chapter 1, section 1.3.5. Legislation was finally implemented in 2007 after serious objections from the tax authorities were overcome: see for the details Volume 3, 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. The new facility appears largely meant to manage funds for special purposes by banks and similar entities. It is therefore a facility for the commercial and especially financial sphere and may then best be considered in the context of other recent statutory interventions in France facilitating assignments of receivables, floating charges, securitisations and repos. Its nearest analogy is said to be in corporations. The key idea of segregation is clearly introduced although the settlor retains a residual liability for the debts of the trust. It remains to be seen how this new French facility will develop further. 311 See Koetz (n 314) 109. Creditors of the trustee aware of the arrangement are generally thought not to be able to recover from the trust assets. Earlier the German Supreme Court had already held that they were not entitled to a windfall: RGZ 45, 80 (1900), but it later changed its mind and drew a distinction between assets coming from a settlor and those coming from third parties, the latter being no longer protected: RGZ 84, 214 (1914). Newer case law is, however, more generous when the creditors are or ought to have been aware of the arrangement: BGH [1954] NJW 190. Many authors have gone back to the earlier windfall-avoiding rule: see H Coing, Die Treuhand kraft privaten Rechtsgeschäfts (Munich, 1973) 178 and Grundmann (n 309) 315. 312 See Grundmann (n 309) 478ff. 313 See M Lupoi, ‘Trusts and Civilian Categories’ in Helmholz and Zimmermann (n 299). The segregation issue is the key feature and considered promoted after acts of 2006 and 2016, Proprieta nell’interesse altrui are increasingly deemed to exist and operable against the numurus clausus notion of proprietary rights, see M Lupoi, Istituzioni del Diritto dei trust e degli affidamenti fiduciari, CEDAM 258 (2011). 314 See especially C Grimaldi, La Fiducie: reflexions sur l’institution et l’avant-projet qui la consacre (Repertoire Defrenois, 1991) 897.
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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.315 This may also be the situation in the Netherlands, where, as we have seen in section 1.6.1 above, the fiducia was outlawed under its new Code, thus eliminating an important support for the trust concept. In Switzerland, the environment has long been more congenial but legally no more certain.316 In Scotland, the split or separate ownership concept inherent in trusts is not recognised. Neither is the separation between law and equity and the rights of the beneficiaries are habitually characterised as in personam or obligatory. The b eneficiary 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.317 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 3, chapter 1, section 1.4.1. New Dutch law is more reticent—Volume 3, 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 theoretical level, serious problems arise more generally in modern civil law in the area of dual, conditional or temporary ownership rights and their protection
315 Arts 6 and 18 are usually cited in support, see M Lupoi, ‘Il Contratto di Affidamento Fiduciario’ (2012) 3 Riv. Notariato 513, but it may create major implementation difficulties, especially in the registration of real state in the name of a foreign trust under Art 2643 CC, amplified to this end in 2006 by a new Art 2645-ter. See for France P Remy, ‘National Report for France’ in Hayton et al (eds) (n 314) 131 and for Italy, M Lupoi and T Arrigo, in ibid 123. In France, the French Revolution meant to base all social structures on equality and consequently the law of 14 November 1792 abolished all feudal rights including the restrictions (inter vivos and mortis causa) on the disposal of property rights. Family settlements became suspect whilst intestate heirs (depending on their degree) could not be deprived from a slice of the inheritance (the reserve heriditaire). Thus the fideicommis was curtailed. On the other hand, the fiducia was not abolished. 316 See AE von Overbeck, ‘National Report for Switzerland’ in Hayton et al (eds) (n 309) 105. 317 On the other hand if the trust goes bankrupt, beneficiaries are entitled only to the residual assets in a distribution. See for Scotland KGC Reid, ‘National Report for Scotland’ in Hayton et al (eds) (n 314) 67, and G Gretton, ‘Scotland: The Evolution of the Trusts in a Semi-Civilian System’ in Helmholz and Zimmermann (eds) (n 299) 507. Interestingly, Gretton cites the law of Quebec (Art 1261 CC) in this connection: ‘The trust property, consisting of the property transferred, constitutes a patrimony by appropriation, autonomous and distinct from that of the settlor, trustee or beneficiary, and in which none of them has any real right.’ It comes close to the concept of separation and legal personality of which Gretton approves (at 508 n 7). It makes the discussion of beneficiaries’ proprietary or personal rights in the assets irrelevant. It may be noted in this connection that in an ECJ Case C-294/92 Webb v Webb [1994] ECR I-1717, a situation in which a father claimed a constructive trust in real estate of a son in France was not considered a real estate matter to be decided by French courts under the exclusive jurisdiction provisions of Art 16 of the Brussels Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters of 1968, now Art 22 of the 2002 EU Regulation covering the same ground (Brussels I). It left open the question whether there was here an issue concerning a proprietary right or merely an obligatory right of the father.
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beyond the few limited proprietary rights officially recognised as we have seen. The duality that may result in the ownership concept, as particularly demonstrated in the modern reservation of title as a purchase price protection and in modern forms of financing such as finance leases, repurchase agreements and factoring of receivables, exists and may operate in principle but in civil law countries the status and consequences in law often remain unclear as will be discussed more fully below in section 1.7. They are also present in trust structures (behind which they often operate in common law c ountries), which structures are therefore also difficult to place in civil law. The key is the status of trust assets in a bankruptcy of the trustee and their segregation. In this aspect, more sophisticated civil law countries like Germany and S cotland seem to have developed at least some workable solutions in case law. The other practical aspect is in the fiduciary duties, which are a necessary sequel to all trust law. Here again, there is no easy civil law equivalent, although it might be found in modern notions of good faith, in this connection extended outside contract law proper. Tracing and constructive trusts are other legal facilities not easily incorporated into civil law either, although German law may be more forthcoming and leaves much of this to party autonomy when it concerns replacement assets as we have seen at the end of the last section. It was noted before that the lack of activist courts is another civil law deficit in this connection. The acceptance of the trust concept through treaty law (in terms of recognition of foreign trusts), is now possible under the 1985 Hague Convention on the Law Applicable to Trusts and on their Recognition, ratified also by some civil law countries such as Italy and the Netherlands, besides the UK (also for Jersey, Guernsey, the Isle of Man, Gibraltar, Bermuda, the British Virgin Islands, the Turks and Caicos Islands), Canada (but not for Toronto and Quebec), Australia, Hong Kong and Malta. France, Luxembourg and the US are so far only signatories. The Convention itself will be more fully discussed below in section 1.8.4. The treaty covers express trusts and similar structures and its definition is therefore wide enough also to cover similar civil law arrangements if voluntarily created and evidenced in writing (Articles 2 and 3), not therefore, it would appear, resulting or constructive trust and tracing facilities. For the application of the Convention, not only its definitional structure, briefly discussed in section 1.6.2 above, and the exceptions are of importance, but also the rules of international jurisdiction. They may serve as the connecting factor and are derived in the EU from the 1968 Brussels Convention on Jurisdiction and the E nforcement of Judgments in Civil and Commercial Matters, since 2002 replaced by the EU Regulation on the same subject (Brussels I) and in other European countries from the similar 1988 Lugano Convention. They cover together the recognition and execution of civil and commercial judgments in most countries of Western Europe (with the exception of legal capacity, arbitration and bankruptcy-related matters) and provide in that context common jurisdictional standards. The relevant Article in the EU Regulation is now Article 23(4) in conjunction with Articles 5(6) and 2. Article 23(4) allows in this connection an election of jurisdiction by the parties in the trust instrument in any proceedings against a settlor, trustee or beneficiary, if relations between these persons or their rights or obligations under the trust are involved. In the absence of such an
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election, a settlor, trustee or beneficiary must be sued in the state in which the trust is domiciled (Art 5(6)). This is, at least in the UK, the state with which the trust has its closest and most real connections, but under Article 2 they may also be sued in their capacity of settlor, trustee or beneficiary in a Contracting State in which they are habitually resident.318 In this manner the competent court also acquires jurisdiction over the trust, which is not a separate entity. This is not without problems. If a foreign trust recognised in an EU Member State has a trustee there, while others may reside elsewhere, that resident trustee may be sued in the relevant EU country, for example to account and provide other relevant information. If trustees are delinquent in their duties, a replacement could also be demanded before the competent court in the EU country concerned. In practice, this may well be problematic as these courts will not have the tradition of acting as equity judges, may not have the power to issue injunctions, and may be generally reluctant to get involved as a common law court (of equity) would. They might even suggest that parties go to the court of the country under the law of which the trust operates. Even though the concept of forum non conveniens is not well known in civil law countries, it could amount to a similar approach in these circumstances, even if in the country of the applicable law there may not be any settlor, trustee or beneficiary at all. That is indeed likely to be the case when the law of small Channel or Caribbean Islands is chosen. In that case, the jurisdiction of these countries would be exorbitant, based only upon a provision in local laws that jurisdiction attaches to the applicable law (which is for trust law not uncommon). In any event, in the absence of execution treaties with such countries, any decision would be unlikely to be recognised elsewhere. It is likely to create great delays and extra costs. It shows the danger in recognising foreign trusts and allowing them to operate without adequate powers and experience in the courts of the recognising country to deal with them. One of the most important aspects of the 1985 Hague Trust Convention (see also the reference in section 1.6.2 above and the discussion in section 1.8.4 below), is that it may serve as a catalyst in the development of the trust in civil law to the extent that civil law countries ratify it, which Italy and the Netherlands have done, even if it only means to recognise foreign trusts. At least in Italy, it seems to allow Italians to bring their Italian assets into foreign trusts that would be recognised in Italy. Articles 6 and 18 of the Convention are here commonly cited but it creates serious implementation issues of a foreign trust in land under Article 2643CC. A similar facility may now also exist in the Netherlands.319 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.320 However, the process is slow. 318
See for these jurisdictional aspects also n 360 below and accompanying text. 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 3, 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 N etherlands, 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 e nforcement of the fiduciary duties of the (Dutch or foreign) trustees in such trusts. 320 See ch 1, s 3.1.6 above. 319
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Principles of European Trust Law were in the meantime developed at Nijmegen University.321 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 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 (Article IV(4) and (5)). In order to create the trust, the settlor must transfer the trust assets to the trustee with the intention of creating a segregated trust fund, although he may himself become the trustee by making this clear (Article II). He must be specific in his designation of the beneficiaries or must designate purposes. Excess trust assets are for the settlor or his successors (Article IV). The trust fund consists not only of the original assets and those subsequently added, but also of the replacement assets. Except to the extent that the trust was created to contravene the laws protecting the settlor’s creditors (spouse or heirs), only creditors (including beneficiaries) dealing with the trustee in his capacity as such may recover from the trust assets (Article III). Beneficiaries have a right to information to protect their interest and the trustee must account to them (Article IV(3)). The trustee must exercise his rights as owner in a ccordance with the terms of the trust, must take reasonable care of the trust assets, keep them separate and protect them, maintain accurate accounts, act in the best interests of the beneficiaries and honestly, and avoid all conflicts of interest. He must p ersonally make good any loss occasioned by his breach of trust and personally augment the trust fund by the amount of any profits made by him in such breach (Article V). Courts may restrain trustees or remove them for breach of trust and order compensation. They may also declare particular assets of the trustee trust assets or regard them as security for satisfying his liability (Article VI). Third parties who obtain trust assets and are not protected as bona fide purchasers (including their successors who are not bona fide either) must make good the loss to the trust or may be ordered to hold the assets (or those into which they are converted) as part of the trust fund, therefore separate from their private patrimony (Article VII). Beneficiaries may terminate the trust and distribute the trust fund between them, the terms of the trust notwithstanding, provided they are unanimous, have capacity and all interests are vested. The trust also terminates if all funds are distributed, if there are no beneficiaries or potential beneficiaries left, by virtue of the exercise of a power of termination, or upon the end of the permitted period of the trust when the trust fund must be distributed as soon
321
See D Hayton, ‘The Developing European Dimension of Trust Law’ (1999) King’s College Law Journal 48.
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as practicable in accordance with the terms of the trust. If there are excess funds they must be held for the benefit of the settlor or his successors (Article VIII).
1.7 Secured Transactions and Conditional or Finance Sales. Floating Charges 1.7.1 The Importance of Conditional Sales in Finance and the Difference from Secured Transactions A person who has assets and needs money can do one of two things. He or she can sell the assets to obtain cash or can try to take out a loan secured on these assets. Everyone would agree that 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 for the debtor because it is less reliable for the bank as the security is left with the debtor and therefore less safe. As far as the debtor is concerned, interest must be paid and much less than the real value of the asset may be obtained in financing. Naturally, the asset would still be lost in the case of default, although any overvalue on the security will be returned. Thus an outright sale might be better after all, but an alternative may be a sale with a right to repurchase the asset at a certain date against a pre-agreed price. This is the sale/repurchase structure under which the seller pending the repurchase may even be able to retain the use of the asset. At least surrendering the property would not be obligatory as is often still mandatory in the case of a security interest or pledge in chattels. The economic value of this user right is likely to be added to the repurchase price, which may also contain a fee element. The total cost may be higher or lower than interest that would be charged in the case of a secured loan agreement. Market conditions will decide. The key is to appreciate that these are different facilities and different markets, each with a different price or reward structure, an important practical difference being further that in a repurchase transaction the seller is likely to obtain the full value of the asset, which may fail him in a secured transaction that may carry a large cut against the value of the property. The drawback is that, if the seller does not repurchase the asset on the appointed date, all rights in it may be lost, therefore also any right to any overvalue that may have been created in the meantime (eg in times of inflation or in the case of market-related assets such as investment securities that may have increased in value). The buyer will have the benefit. On the other hand (unless agreed otherwise), any decrease in value will also be for the buyer whose right in the asset is now complete at the originally agreed sales price. Nothing will have to be returned. That was the risk the buyer took. For the present discussion, the key is to understand that it concerns a different way of financing with a different risk and reward structure. There are here immediately three issues to consider: first, how the repurchase right should be legally characterised; secondly how the sale and repurchase can still be
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istinguished from a secured loan; and (if so) thirdly how either operates. These issues d are discussed in greater detail in Volume 3, 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 and Repurchase Agreements or Finance Sales? The Characterisation Issue. Property-based and Security-based Funding The sale and repurchase agreement (or repos in investment securities) presents itself basically in terms of (a) a (call) option for the original seller to repurchase the asset on a given date. In that characterisation, he has probably no more than a personal or contractual 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 remere (Article 1659 CC). However, the sale and repurchase could also be cast in terms of (b) a right and duty of the original seller to retrieve the asset on the appointed date. In this characterisation the issue is whether a seller retains a proprietary right in the asset, such that in a bankruptcy of the buyer the seller may still reclaim the asset upon tendering the repurchase price. Finally, the sale and repurchase may be cast in terms of (c) a (put) option for the buyer. In Germany this is called an uncharacteristic (unechte) repo and will be of lesser interest in this context. It is likely to give no more than a contractual retrieval right. The chosen alternative should be clearly spelled out in the repurchase contract, but the contract may be less than clear in this respect and it is then a matter of interpretation. The importance is that in the absence of a proprietary right, the reclaiming right will be contractual or personal and gives no more than a competing claim for damages in a bankruptcy, although in that case one other alternative is, as we shall see, the netting out of mutual contractual rights, which may at least result in an important preference. The arrangement under (b), therefore the one under which the seller has a right and duty to repurchase the asset on the agreed date, is the most common. It could still be seen as a purely contractual arrangement, but 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. As just mentioned, the importance of this characterisation is first that in the bankruptcy of the buyer, therefore upon default, the seller may still be able to repossess the asset and ignore the bankruptcy, at least in countries where (a) in bankruptcy such a repossession is not stayed pending liquidation or, more likely, reorganisation proceedings; or where (b) other considerations may prevail, such as the notion of the solvabilité apparente in France, which traditionally protects the outward signs of creditworthiness; or where more generally (c) there is an impossibility under applicable law for conditions to mature against a debtor after his bankruptcy has been opened.322
322
See s 1.4.6 above.
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An important issue is thus the reclaiming or appropriation right upon default, in other words the proprietary nature of the repurchase right and its effects. As we shall see, the importance of the proprietary characterisation made itself felt at an early stage in a somewhat different context, especially in reservations of title, which, at least in Germany and the Netherlands, are another type of conditional sale, but it is no less relevant in the modern financing structures of the hire-purchase, finance lease, investment securities repo, and (recourse) factoring of receivables as we shall see. Again, the alternative is a set-off of mutual contractual claims, assuming there are enough of them to make this meaningful. How the conditional ownership and set-off alternatives work will be briefly explained below and in more detail in Volume 3, chapter 1, sections 2.1 and 3.2. For the proprietary approach, which is the essence of the discussion so far, it may suffice at this stage to look first at the reservation of title. Under it, a seller sells and hands over the asset to a buyer who has not yet paid, while the seller retains title for himself. The conditional 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, as German case law confirms (dingliche Anwartschaft). It may, as we shall see, be better to accept that in civil law terminology and conceptualisation, both seller and buyer have a kind of title, the seller under the resolving condition of the buyer’s timely payment and the buyer under the suspending condition of his own performance. In a hire-purchase there may be a very similar situation except that the buyer is likely to pay in instalments, while at the end of all instalment payments title automatically passes to him. 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 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, such as the US, this latter solution is the more common, for reasons that will be explained later. In civil law countries, mostly there is an option for the lessee to become the full owner at the end, but in some countries it may be more normal for him 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 specialises in this kind of repo financing. In these repos, the seller will have accepted the right and duty to repurchase the investment securities at a certain date. This goes to the proprietary characterisation of the repurchase option as we have seen. Again the result may be characterised as a conditional sale under which there is a proprietary reclaiming right such that the assets will automatically revert to the seller upon a tender of the repurchase price. This would activate a resolutive condition in the transfer. It could also be seen as an outright or
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unconditional sale and conditional repurchase with an automatic retransfer under the suspensive condition of repayment. It may not make much difference, the solution is proprietary in each case. However, the proprietary characterisation may still be affected by any f ungibility of the investment securities, as we shall also see. In the factoring of receivables, also called receivable financing, their transfer may be made conditional on the approval or collectability by the assignee/factor/ funding provider, and the receivables may be automatically returned when they are not approved or cannot be collected. They may also be so returned when the total of the collections by the factor reaches the amount he has provided in funding plus an element of reward. Here again we see a conditional sale and transfer (assignment) of these receivables, posing the question of what happens to them if the (conditional) assignee goes bankrupt in the meantime. Reservations of title and hire-purchase agreements are sales protection devices. They do not provide funding as such but protect sales credit. Repos and factoring, on the other hand, result in a form of funding and may therefore be more properly referred to as finance 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 and have become very important funding alternatives. Repos are now commonly used to finance large short-term investment positions and run into billions of US dollars (equivalent) per day in the main financial centres. Factoring of receivables has become a normal way to finance trade credit. Finance leases are believed to cover at least one-eighth of all financings of capital goods and are particularly popular in the aircraft industry. Real estate may equally be acquired on that basis. The finance or conditional sale used in financings is often considered a novel funding structure but is in fact quite old. Under common law, the traditional real estate mortgage was a conditional sale under which the parties in need of financing sold their land upon the condition that they could repurchase it on the appointed date while returning the principal plus the agreed interest. The difference was that there was here a true loan rather than a finance sale, as demonstrated by an interest rate structure. However, upon default there was no true execution sale and the mortgagee became full owner. There was no return of overvalue either (although it could still be agreed that the mortgagee kept the overvalue as constructive trustee for the mortgagor) nor indeed did the mortgagor need to make good any undervalue unless again otherwise agreed. Yet the courts in equity, which abhorred forfeiture, devised a special protection (the equity of redemption), 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 US, under earlier State law, they were often made subject to registration, lost their conditional sale features, and became more like ordinary security interests with disposition needs upon default. They have been superseded by Article 9 UCC, which indeed inclines to making all conditional sales, used in finance, secured transactions, which, as we shall see, created great problems for finance
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leases and repos. The old common law mortgage is now supplemented by an alternative more modern statutory one in England but not necessarily in all States of the US. Historically, conditional sales are often revived and used when secured interests are not available or become too restrictive. Thus in Germany and later also in the Netherlands, where in the nineteenth century the non-possessory chattel mortgages were outlawed (they had existed under Roman law and in the ius commune) and all security interests in chattels had to be possessory, the sale and repurchase were used to achieve a similar (non-possessory) result. It was an obvious way out when non-possessory security became a necessity in a more advanced industrial society, where equipment and inventory had to be used to support financing but could, as part of the business of the borrower, not be turned over to the financier. The same happened in the US. This was the origin of the German Sicherungsübereignung and of the Dutch fiduciary transfer, both creations of case law. In Germany it gradually transformed into a kind of security interest,323 as also happened in the Netherlands (although in a different way) where under the new Civil Code of 1992 it is now superseded by a statutory non-possessory pledge, therefore as a pure security interest. Under a conditional sale, it thus became possible to transfer equipment and inventory while 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 floating 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, at first only in case law, now superseded in the US by Article 9 UCC. Receivables became similarly transferable in what came to be called in Germany a Sicherungszession. In France, on the other hand, the funding arrangement through finance sales never became popular because conditional sales were handicapped in a bankruptcy of the buyer by the difficulty in reclaiming them. This was because of the general impossibility for conditions to mature in bankruptcy (except in pure sales) and in any event in view of the notion of the solvabilité apparente in respect of chattels, already discussed above in connection with the reservation of title: see section 1.4.6 above. Again, this will all be discussed in greater detail in Volume 3, chapter 1. In England, there was no such problem with non-possessory security as the English here developed equitable floating charges as true security interests instead of building further at law on the conditional sale structure inherent in (chattel) mortgages. As these chattel mortgages were legal interests, they had to be in specific assets while the automatic shift of the interest into replacement goods was more problematic than in equity, the reason floating charges (in equity) became more popular. Their drawback is, however, that at least in England they provide a low priority as they crystallise only at the time of default, a complication eliminated under Article 9 UCC in the US where the priority is established as of the filing date. Both in England and the US, in the nature of a true security interest, they require a form of disposition upon default with the return 323 In Germany, in modern lending practice, banks normally do not allow automatic return of the asset to the borrower upon repayment but prefer to keep control of the asset subject to a contractual obligation to retransfer only.
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of overvalue and they need publication. The debtor remains responsible for any undervalue which results in an unsecured claim for the creditor. As an alternative, debtors may convert themselves into trustees for their assets and hold them for their creditors as beneficial owners. In the US, this remains a traditional way of financing real estate. True conditional sales for financing purposes are also still possible in common law countries (although for chattels and intangibles no longer in the US, as we shall see) and do not lead to the equity of redemption, at least if not clearly supporting a loan structure. Finance leases, repos and factoring fall into that category, although it should be added that they are seldom so analysed in England, where they are not, however, considered secured loans either. Even the reservation of title is in England seen as a delayed rather than as a conditional sale and transfer, but often never as a security interest. The practice in common law countries is not inclined to go behind the wishes of the parties, except now in the US by statute under Article 9 UCC, where there results an important re-characterisation risk, transforming these finance sales into secured transactions, only partly redressed by a new Article 2A on equipment leases and for the repo by amendments to the Federal Bankruptcy Code as we shall see, which, for complicated financial structures does not encourage this re-characterisation.324
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 3, chapter 1, section 2.1). It results in conditional or temporary ownership rights especially in the case of the reservation of title, hire-purchases, finance leases, repos, and recourse receivable financing. These are important structures, long underrated or even ignored in civil law but now coming back to the fore in finance. Early signs were in the use of the Roman pactum de retroemendo of C.4.52.2 in the development of non-possessory security rights in movables in civil law countries as from the end of the nineteenth century, leading, for example, to the important Sicherungsübereignung in Germany and to the so-called fiduciary transfer in the Netherlands, as we have seen. It was pointed out before that common law is essentially comfortable with such conditional rights, which in equity also operate for chattels and intangible assets. But also in civil law, there is a long pedigree which stretches through the ius commune into Roman law.325 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
324
See also S Vasser, ‘Derivatives in Bankruptcy’ (2004) 60 The Business Lawyer 1507, 1537. 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). 325
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was not believed to have third-party effect, however, on the basis of D.2.14.61, unless it was imposed by statute. Later, the resolving condition could manifest itself more independently, and the Digests give some examples, of which the lex commissoria (rescinding title upon default in a sales contract, D.18.3) and the lack of a valid sales agreement (iusta causa traditionis, see further also section 1.4.7 above) are the most important ones, but at first again mostly without proprietary effect (although less certain for the lex commissoria, D.18.3.8), a view that only changed later in the ius commune326 and ultimately in the German Pandectist School. These conditions thus became proprietary and that remains the trend in civil law to this day, even though the concept remains underdeveloped as we have seen, while modern Dutch law no longer sees the proprietary effect as deriving from the contractual condition, it being no longer considered retroactive (Article 3.38(2) CC since 1992) but rather as resulting independently from special statutory provision (Article 3.84(4) CC). That approach has been criticised, but it appears to be the position for the moment even though parties may still agree otherwise in respect of the payment condition. It leaves conditional ownership well intact, although more surprisingly, temporary ownership is now viewed as a usufruct: Article 3.85 CC. The conclusion is that in conditional forms of ownership, a split ownership right results under which the resolving condition in the one party is necessarily coupled with a suspending condition in the other party: see also Volume 3, chapter 1, section 2.1.4. This was an early perception, particularly strong in France—see Volume 3, chapter 1, section 1.3.3—and in the Netherlands—see Volume 3, chapter 1, s ection 1.2.3—although less so in Germany where an Anwartschaft or proprietary expectancy was ultimately assumed instead: see Volume 3, chapter 1, section 1.4.1. This latter approach now also finds support in the Netherlands, at least for the reservation of title, see further also the discussion of the split ownership right in section 1.7.5 below. Although their exact proprietary effect may thus remain somewhat unclear, in principle, in civil law, conditions and terms of time are as such well known. In this connection, conditions or contingencies are uncertain events like payment in a sale under a reservation of title. There is a conditional sale and transfer under which the date at which the condition matures (or not) may be certain, but the event is not. If the event is certain, there is a term of time or temporary sale and transfer, for example when ownership is only transferred after a certain date, even though the date itself may be uncertain, for example death. The fact that a transfer is delayed until a certain date as in a reservation of title does not itself mean that it is not conditional. That is clear under German and Dutch law, although in France and England this seems often not to be fully understood. The difference between conditions and terms of time is, however, on the whole not great and it is therefore not normally necessary to distinguish sharply. Yet conditions may redirect title retroactively (although not now in Germany and the Netherlands with regard to the condition of payment in sales agreements, except where expressly so provided). Terms never have such retroactive effect. In the Netherlands under its
326
See J Voet, Ad pandectas D.18.3 para 2. See later R Pothier, Traité de contrat de vente, Partie V, ch II, 2–5.
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new law (Article 3.85 CC), temporary transfers are converted into usufructs as we have seen, not, however, the conditional transfers. That suggests a more fundamental difference but in truth it is the re-characterisation of temporary transfers as usufruct that is artificial. It came late into the recodification project and is hard to explain or understand. In common law, the situation with respect to conditional or delayed title transfers leading to future interests is generally quite different from the situation in civil law. Common law has always accepted these conditional or future interests, first at law as defeasible titles in land and subsequently, in equity, also in chattels. Besides the fee simple, the life interests, and the estates for years or leaseholds, they arose early in common law (as defeasible title). In fact, at law there were always split ownership forms, which could largely be defined by the parties as a matter of party autonomy. Thus future interests like reversionary interests arose if the land was supposed to revert to the grantor or there could be remainders if it was to go to someone else, again either for life or in fee simple. The future interests were either vested in the beneficiary, that is to say, subject to the passing of a term of time only, or contingent when a condition was attached. Traditionally, in a life estate, the condition was that at the end of the life interest the beneficiary of the remainder was still alive. If not, the interest would revert to the grantor. Later, other conditions became possible, such as the grant of an estate for as long as the asset served a particular purpose or for as long as the grantee behaved in a certain manner. In common law, these future interests exist at law beside the present interests, are fully transferable, and are not affected by statutes of limitation or, in civil law terms, extinctive prescription, although if not vested they (together) are curtailed in time under the statutes against perpetuities. They are not retroactive. It is not necessary in this context to elaborate further on what is not an easy subject in common law either, where the precise characterisation of these future interests (into reversions, remainders or executory interests, either vested or not) is often complicated and they are by no means all treated the same. As just mentioned, these conditional and future interests, originating in land law but which subsequently became possible also in chattels, even though then only in equity (which is in England since 1925 by statute now also the situation in respect of land). It meant that the protection was largely based on an economic interest in the asset giving a limited proprietary right that could in particular not be maintained against bona fide purchasers for value of the legal interest or bailees. In England, these future interests in chattels are now mainly hidden behind trust structures as we have seen. As such they receive less attention separately. That may be different in the US, although if used for financial purposes they risk being hidden behind and re-characterised as security interests under Article 9 UCC, as also noted. Although conditional ownership exists in principle, there is no proper equivalent for these future proprietary interests in civil law, and whatever there is remains underdeveloped and has an uncertain status in a proprietary system that is in principle considered closed, as we have seen, and therefore inimical to the flexibility that conditional and temporary sales and transfers may bring.
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1.7.4 When are Finance Sales Converted into Secured Transactions? The Recharacterisation Issue Secured transactions concern loans supported by security interests in the debtor’s assets. In this sense, security interests are more particularly connected with loans, not directly with sales credit protection as reservation of title or hire-purchases are. It is true that under the UCC in the US security interests are all facilities that support any payment or performance of another obligation, monetary or otherwise: see section 1-201(a)35 UCC. In that country, reservations of title, conditional sales, finance leases and receivable financings are therefore converted into secured transactions if supporting such payments or the performance of other obligations: see sections 1-201(a)35 and 9-109(a)5–6 UCC. The consequence is that the UCC subjects them all to the same formalities in terms of publication (except charges in consumer goods: section 9-302 UCC) and disposal upon default with the duty to return all overvalue to the debtor. It is said in this connection that the UCC looks at economic realities in a unitary functional approach. This approach ignores the different risk and reward structures and the parties’ choice in this connection and attempts to eliminate, in particular, true conditional sales with their appropriation possibility and release of the buyer in favour of a system under which a disposition must always take place and overvalue is returned while the debtor remains liable for any shortfall. It was submitted before that this is not a good approach and deprives participants of an important alternative and risk management tool. To repeat, it caused considerable practical problems, especially in the area of finance leases and repos (see also the discussion in the previous section). In the new Dutch Civil Code, there is a not dissimilar resistance to funding alternatives. Here security substitutes are given only contractual effect and therefore no rights against third parties at all (Article 3.84(3) CC). Unlike in the US, there is no conversion into a security interest (subject to its formalities and safeguards). On the other hand, since security of this nature is not defined, it is difficult to determine what true security substitutes are. The conditional sale seems not to be excluded, as under Article 3.84(4) CC the proprietary effect of conditions is explicitly accepted, although, as in the case of reservation of title, the new Code does not elaborate on the parties’ rights thereunder and seems not to consider duality in ownership. It does not clearly exclude it either. This has left the status of the modern finance sales in considerable doubt and required it to be determined by case law. It does not give the lessee in a financial lease a proprietary interest except where clearly so negotiated: see more particularly Volume 3, chapter 1, section 1.2.3. The result is the opposite of the situation in the US where the conversion into a security interest means that the lessee becomes the legal owner subject to a security interest for the lessor in the leased assets. Elsewhere, the distinction first between sales and loan credit is usually maintained so that sales credit protection, as in reservations of title, is not considered a security interest, while conditional or finance sales may present other funding techniques altogether, even if their characterisation (as conditional sales and what that means) may remain subject to (considerable) doubt.
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In this approach, security as distinguished from other funding techniques is narrower and connected with loan credit. Security interests thus support loans, which are advances of money subject to repayment together with agreed interest. It is an agreed interest rate structure that is the essence of this type of funding. Without it, there is no loan agreement, and without a loan agreement there can be no security interest, but if there is a loan in this sense, it is likely that any supporting structures will be re-characterised as secured transactions. Since sales credit is normally not a loan because there is no interest rate structure, reservations of title and hire-purchases are not or should not normally be converted into a security interest. If there were such an agreed interest rate structure, however, it would be normal to assume such a conversion. It would render the transaction subject to the formalities of secured transactions in terms of creation and enforcement or foreclosure. Again, a case in point is the German Sicherungsübereignung and the former Dutch fiduciary sale, both developed in case law on the basis of conditional sales to allow funding assets with non-possessory protection. Since there is here a normal loan (with an agreed interest rate), it was logical to expect the conversion of these conditional sales into security interests and that is indeed what happened, especially in the Netherlands, while in Germany the position of the bank was further eroded as in a bankruptcy of the borrower it was given merely preference status in the proceeds of a sale of the relevant assets rather than a separate repossession and execution right or self-help remedy. However, it follows from the above that if there is no such interest rate structure and therefore no loan, as there is unlikely to be in finance leases, repos and other finance sales, one should assume that there is a true conditional sale and transfer without any need for conversion. English law bears this out: see Volume 3, 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 and are often considered purely contractual in nature: see Volume 3, chapter 1, section 1.4.3. In the details the distinguishing features are as follows: (a) Secured transactions create proprietary interests that go with the asset and that are (at least in civil law) accessory to the loan they support. It means that a sale of the asset will not extinguish the security interest in it (except if sold to a bona fide purchaser or purchaser in the ordinary course of business) and that an assignment of the secured claim will automatically entail the transfer of the security interest to the assignee. (b) These security interests require upon default a disposition, therefore normally some form of public sale, or a sale which may attain some objective value of the asset, and a return of the overvalue to the defaulting debtor, while the latter remains liable to the extent of any undervalue. (c) There is also the question of the extension or shift of the interest into replacement assets and proceeds to be considered. (d) There may be extra formalities, especially in terms of publication or turning over of possession. (e) There is also the question of ranking. (f) Finally there is the separate repossession or execution right of the security interest holder in the nature of a self-help remedy in the bankruptcy of the counterparty.
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As far as the accessory nature of the interest is concerned, it traditionally receives more attention in civil than in common law: see also Volume 3, 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 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 r etention 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 even be considered to have been paid so that the reservation of title or retention right lapses altogether and the buyer becomes the full owner. Only in France, and probably also in Belgium under modern case law, is this different in the case of a reservation of title, which is now considered accessory to the receivable it supports: see also Volume 3, chapter 1, section 1.3.4. It shows French ambiguity as to the nature of the reservation of title (and implicitly other finance sales), and the security analogy is increasingly pursued. So far an execution sale is not required but under case law any overvalue must be reimbursed to the debtor. It comes close to the situation in the US where a disposition and repayment of any overvalue to the debtor is now required under Article 9 UCC, also for a reservation of title. It is indeed typical for security interests that the debt will be set off against the proceeds upon some objective disposition and that the overvalue will be returned to the debtor. In finance sales, on the other hand, in the case of default, one key is that there will be appropriation of the asset by the financier without any return of such overvalue. Against this, there are obvious benefits for the party requiring the funding: the funding may be larger, up to the full value of the asset, and it may be cheaper. It may be quicker as formalities may be avoided in terms of documentation, publication or special t reatment, which applies especially to the repo of investment securities that may fit in the normal system of transfer and settlement of investment securities rather than needing special pledge registers. There may also be tax and accounting treatment differences. The result is a different risk and reward structure, which shows security-based and ownership-based funding as true alternatives. It also shows that conversion from the one into the other or the risk thereof can be greatly inconvenient to the parties who wanted another risk and reward. Especially giving back the overvalue to the defaulter under the circumstances might be a great disadvantage and an unexpected variation of the contractual balance achieved between the parties or desired by their economic objectives. Where the interests shift into replacement goods, the overvalue possibility is greatly enhanced but other suppliers of commodities or spare parts may become involved as well and may have to be accommodated at the level of priorities. In that case, for example where reservations of title are extended into replacement assets, one may therefore see a change into a security interest also in common law countries (apart from the UCC in the US) leading to a disposition upon default and a return of overvalue while the debtor remains liable to these secured creditors for any undervalue. Lack of formalities, especially publication of these charges (like other floating charges), may upon automatic conversion reduce the financier’s interest to the lowest secured rank. On the other hand, where a conditional sale, including a reservation of title, does not shift into replacement goods and is limited to specific goods, a disposition seems improper and unnecessary.
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It follows that 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 US under Article 9 UCC, in chattels, the conditional sale is no longer an acceptable funding alternative, as we have seen, even if it is in specific assets and parties opt for this structure. Again, in civil law, this shifting of the security into replacement assets is in many countries problematic, even for security interests, and that may be another reason why there remains a need for conditional sales in such countries. There are great differences, h owever, as we shall see in Volume 3, chapter 1, with German law being more liberal, allowing creditor and debtor to agree to this shifting into replacement assets (only); see also section 1.4.3 above for the complication of the future nature of the asset, which is also overcome in this manner in Germany. Dutch and French law is traditionally much less generous. This also applies to conditional sales such as the reservation of title, which in these countries are not extended into replacement goods either. Then there are the formalities. In the case of the conventional pledge as secured transaction there is the old requirement of the transfer of physical possession in civil law and the creation of a bailment in common law. Constructive delivery is outlawed in this connection in most civil law countries. For non-possessory security, publication became an alternative for corporate floating charges in England and for most nonpossessory security interests in chattels and intangibles in the US (through the finance statement), but there is an important difference, already mentioned before. In England, the security interest of the floating charge only crystallises upon default, and notably not upon filing, so that the floating charge gives only a low priority right (just above that of the unsecured creditors). This is not now the case any longer in the US, where under Article 9 UCC the security is perfected as from the moment of filing. Only if filing is omitted (except for security interests in consumer goods that do not require it), is the ranking just above that of the unsecured creditors. In technical language, the interest is ‘attached’, but not ‘perfected’. Civil law mostly 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 clear in bankruptcy for the Sicherungsübereignung and Sicherungszession. It was also true for the fiduciary transfer under former Dutch law, which is now replaced by a statutory facility that requires registration with a notary but only to identify the transaction and its timing. It is not a publication facility. In France, there was no general facility allowing non-possessory security in chattels but they could exist in certain types or in a business (fonds de commerce) for which instances special publication facilities were imposed that are very different in nature. In 2006, a broader floating charge facility was introduced by statute.327 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
327 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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so that it acquires features of a floating charge, this may be in doubt in England if companies are the debtors. Conditional sales do not traditionally require other formalities either, such as special documentation or registration requirements. Then there is the ranking to consider. In pure finance sales there is unlikely to be any, although it is conceivable that the seller sells the asset twice under a finance sale. It is certainly not unknown under the German Sicherungsübereignung, but this is now largely treated as a non-possessory security interest, as we have seen, which allows a ranking according to time. In true conditional sales, the seller can certainly sell his remaining interest or reversion in the asset, but that does not, strictly speaking, amount to a ranking among his succeeding buyers. Thus in a reservation of title, the second buyer from the original seller risks automatically losing his interest if the first one pays the original seller because the reversionary interest is lost (and he will not be protected as a bona fide purchaser if he was not given possession, which is unlikely). As far as the ranking of secured transactions proper is concerned, the first in time will be first in right although first publication or perfection may change the order. This ranking principle according to time follows in general from the nature of the proprietary right, which may be maintained against the whole world, therefore also against younger interest holders. Hence the principle of relativity or priority, also called the droit de préférence, already discussed above in section 1.1.1 and expressed in the maxim prior tempore, potior iure: first in time, first in right. Yet specific interests may rank above general ones. Thus a younger reservation of title is likely to prevail over an older floating charge owned by someone else in the same asset (in England obtaining its rank in any event only from the moment of crystallisation). Possessory interests may also prevail over non-possessory ones. By security statute, further changes in the order may be imposed, which may also result from applicable bankruptcy laws. Finally, there is the separate repossession or self-help remedy and execution right of the security interest holder to consider. It follows in general terms from the fact that the security interest is a proprietary right that can be maintained and executed against all the world, from which also follows that it can be maintained against whomever owns and is in possession of the asset (except if they have a better, older right thereto). This is the droit de suite, or the right-to-pursue aspect of all proprietary rights, already highlighted before. The repossession and execution right is expressed in Germany as the Aussonderungsrecht; it is typical for owners and for those who benefit from reservations of title. In Germany it is denied to security interest holders in bankruptcy if they do not have a possessory interest. Thus a pledgee in possession conducts a normal execution sale outside the bankruptcy (but with a return of overvalue to the trustee), but not therefore the beneficiary of the Sicherungsübereigung or the mortgagees of real property because they are not in possession.328 For the non-possessory security interest holders under the Sicherungsübereignung, there is in Germany in bankruptcy otherwise only an Absonderungsrecht, which gives 328 This changed to some extent with the implementation in Germany of the 2002 EU Financial Collateral Directive (in 2004). In the new section 1259 BGB, the security holder in possession under a commercial pledge of assets (with a market value) may upon bankruptcy not only execute his securities interest but also appropriate the asset if so agreed. This would amount to a true Aussonderungsrecht.
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a preference in the execution proceeds after a sale is conducted by the trustee. It is a typical German limitation, not often followed elsewhere. Outside bankruptcy, the position is different and the status of the Sicherungsübereignung then depends to a large extent on the contractual terms. There is no appropriation facility, however, except if expressly so agreed. In France there is a special class of statutory lien holders (privilèges) who also do not have a separate execution or repossession right. Elsewhere, the repossession or self-help right of security interest holders is naturally also a key issue, especially in a bankruptcy of the debtor, whether or not they have possession. The repossession facility is mostly upheld (and German law would seem here exceptional), also for non-possessory security where it is allowed to operate. It gives the security interest holder in principle the right to ignore the bankruptcy, claim the secured asset from the trustee, dispose of it, and set off the claim against the proceeds, while only the overvalue is returned. The initiative and timing are therefore with the secured creditor who also does not need to contribute to the costs of the estate. Yet those who do not have the repossession right will have to contribute, and as the costs of the estate normally rank highest, the collection of those who cannot repossess is thereby limited even if they rank higher than ordinary creditors. Modern bankruptcy statutes, especially when reorganisation and not liquidation minded, may intrude on the repossession right to prevent a situation in which the secured creditors take most of the assets immediately so that a reorganisation under modern reorganisation statutes becomes a practical impossibility. Thus section 362 of the US Bankruptcy Code imposes a stay by law subject to the courts being able to vary the measure. It does not mean that the security is lost; its benefit is suspended, but the self-help remedy may be reinstated if no adequate protection can be offered by the bankruptcy trustee. Another measure is that security interest holders may have to accept the immediate release of overvalue and accept an alternative security interest if to the benefit of the estate, provided that they always remain adequately protected. They may now even be forced to co-operate in the reorganisation and their rights may be ‘crammed down’ under certain circumstances although they cannot be completely taken away from them against their will. Similarly, the French Bankruptcy Act of 1985 included the secured creditors in the proceedings, which was mainly meant, however, to provide a delay to facilitate a reorganisation: see also Articles 621-39ff of the Code de Commerce of 2001, which incorporates this Bankruptcy Act. The new German Insolvency Act of 1999 goes in many respects also in the direction of the US approach with its reorganisation ethos, but did not need these elaborate special stay provisions as there was never an Aussonderungsrecht for non-possessory security holders (including the beneficiaries of a Sicherungsübereignung and mortgagees) in Germany, as we have seen. The repossession or self-help facility and separate position of the secured interest holders nevertheless remains an important feature of most secured transactions and continues to give them a special place, also in modern bankruptcy statutes. It means that they may mostly still avoid sharing in the cost of the bankruptcy administration, can time their own recovery, and need not wait for the trustee and his distribution schedule, even if the repossession right may be stayed for some time pending the
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ecision of reorganisation or liquidation.329 Conditional ownership rights as proprid etary interests in principle also give repossession rights, as was already noted, when the condition (or term of time) matures. In bankruptcy, they may as such be maintained against the bankruptcy trustee assuming that, if the condition has not already matured in their favour, it may still do so and be effective after the bankruptcy. Thus even in Germany, reservation of title gives an Aussonderungsrecht. Whether conditions of this nature may still mature after bankruptcy remains, as we have seen, in many countries still an important issue while in France the theory of the solvabilité apparente or of ‘apparent ownership’ may also be a further bar to the recovery rights.330
1.7.5 The Operation of Finance Sales. Effect of the Conditionality of the Transfer. Proprietary Effect of Conditions. Duality of Ownership and of Possession in Civil Law. Openness of Proprietary Systems? Security interests have a long history and in the course of time their proprietary status and effect became accepted, systematically more particularly so in civil law where the security interest as a proprietary right of the creditor became well established. In civil law, the mortgage in real estate and the possessory and non-possessory pledges in chattels date from Roman law. The protection of the debtor through an arm’s-length sale of the asset to obtain objective values with the return of the overvalue to him was here an early concern and led even before Justinian times (lex commissoria) to an outlawing of an appropriation clause in the pledge (C.8.34.3). It did not, however, outlaw the conditional sale as an alternative that allowed appropriation as we have seen, at least not the pactum de retroemendo of C.4.54.2, cf also D.41.4.2.3. But neither Roman law nor the ius commune elaborated much on the conditional ownership theme in this connection: see section 1.7.3 above. Common law, on the other hand, in its development of security interests, stayed much closer to the conditional 329 In addition, statute or case law may create statutory or similar liens with preferential rights. They could give certain creditors repossession rights or only preferential rights in the proceeds of a bankruptcy liquidation. The difference is again in initiative, timing and sharing in the cost of the estate. Tax authorities and wage earners are the best-known beneficiaries of statutory liens of either type. They normally have a high statutory preference, in civil law mostly without their own repossession and execution right, however. Modern German bankruptcy law has done away with the tax preferences altogether. On the other hand, some individual creditors may also have preferential rights to the proceeds, such as (often) the unpaid repairers of assets without a retention right: see for such rights s 1.4.10 above. Since they have no repossession rights, they share in the cost of the administration and must wait for the trustee to start distribution. As we saw, they have in Germany only an Absonderungsrecht or in France a privilège. 330 In reorganisation-oriented bankruptcy statutes there is also likely to be a stay. Where conditional transfers have been converted into security interests because they support loans, they may be weakened further, like the German Sicherungsübereignung, by being treated as a mere preference so that the beneficiary of the right must share in the cost of the estate and can recover only after the trustee has liquidated the assets. Where the reservation of title is allowed to shift into replacement goods and proceeds, the end result may also be a degeneration of the proprietary interest of the seller into a preference or Absonderungsrecht only, as is indeed the case in Germany. On the other hand, modern bankruptcy statutes may make exceptions for modern financial products in terms of a stay so that self-help and immediate set-off or netting can proceed in market-sensitive structures. This will be discussed further in Vol 3, ch 1, ss 2.2.6 and ss 3.2.3–3.2.4 and 4.2.4.
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sale and was always more relaxed about the possibility of appropriation upon default. This may be seen in the traditional real estate mortgage, which was considered a conditional sale (even if in modern English law it can also be structured as a true security interest) resulting therefore in a full appropriation of title upon default, balanced only by the equity of redemption. In this approach, there was no return of overvalue per se; on the other hand if the lender sought to repossess the property, there was no need for the borrower to pay any undervalue either. This followed from the nature of the conditional sale itself, which became absolute upon default. Execution and supervised sale with a return of overvalue is a more specific aspect of recent US statutory law in this area, especially for chattels, as may be seen in Article 9 UCC (sections 9-601ff).331 As noted before, in civil law, conditions and terms may be suspensive or resolutive. It is difficult to determine when they are (for whom). The reservation of title may be seen as a resolutive condition for the seller but could also be characterised as a suspending condition for the buyer at the same time (a step as yet not taken in most civil law countries). It may indeed be best to see them as complementary: see also section 1.7.3 above. Consequently, the seller in a reservation of title has ownership or title under a resolutive condition, the buyer under a suspensive condition. The sequel is in civil law that the seller has resolutive possession and the buyer suspensive possession. As the buyer under a reservation of title is normally the holder of the asset in a civil law sense, one could further say that until payment he holds the resolutive title for the time being for another (the seller) but is the possessor of his own suspensive title. The reverse applies to the seller. Once payment is made, the scene changes completely of course 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. They may become too contrived and tort actions may be the more appropriate response, as they now usually are for the defence of intangible assets, even in civil law. It may not matter much whether the one party has the suspensive or resolutive rights. In practice, physical possession may matter more (in a reservation of title with the buyer), as it may give the possessor in that sense the income and user rights (or even an implied right to on-sell the property) unless otherwise agreed, which also suggests that this party will be liable for the maintenance and harm caused to others (again, unless the contract says otherwise). The more important point is that there results here even in civil law a duality in ownership and an independent right for each party to defend and to transfer conditional ownership and accompanying possession. For the party not physically holding the asset, this transfer in countries where transfer of ownership or title requires delivery of possession could be achieved only through constructive delivery. It means for the seller under a reservation of title delivery through a transfer longa manu (which might under applicable law require notice to the buyer/holder as a constitutive requirement, see eg Article 3.115(3) Dutch CC). 331
See SA Riesenfeld, Creditors’ Remedies and Debtors’ Protection, 3rd edn (St Paul, MN, 1979) 149.
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It is also conceivable that the transfer of these conditional proprietary rights of a seller not in possession could take the form of an assignment, more likely the German approach (under which no notification of the debtor, here the original buyer under the reservation of title is required, section 870 BGB). For the party holding the asset (here the buyer), physical delivery would be possible. If to a bona fide purchaser, the latter would in most civil law countries obtain full title (including the seller’s conditional title), even if the title of the original buyer who is now selling were only conditional. If the interest of the original seller under the reservation of title were disclosed, however, the purchaser from the buyer would obtain no more than the latter’s interest. The purchaser from the original seller, on the other hand, would never obtain more than the latter’s interest (his conditional ownership right in the asset, probably transferred together with the assignment of the receivable) as in traditional civil law the constructive nature of the delivery would not make this buyer a protected party, even if bona fide: see further section 1.4.8 above. The duality of ownership here discussed is largely accepted in Germany and probably also in the Netherlands, at least for reservations of title, but seems not so far more generally developed for other forms of conditional ownership. That is also the position in the DCFR, as we shall see in section 1.11. 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 1956.332 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 3, 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 it is that conditional sales may be able to operate.333 Where through conditional ownership concepts the duality of ownership in this manner forces itself also on civil law, it is necessary better to determine the relationship between both split owners and their respective rights in the asset, especially in cases of default but subsequently also in a bankruptcy of either (or both). It must be admitted that these aspects are not always clearly elaborated in common law either, although for the conditional sale and the reservation of title in the US before the UCC became effective there developed extensive case law,334 much less so in England. The most pressing issues are the entitlement to income and capital gains and the liability for the
332
See BGH, 22 February 1956, BGHZ 20, 88 (1956); see also Vol 3, 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 better against hidden equitable proprietary interests as we have seen. As suggested before, it may well be seen as the trade-off in allowing their free creation: see also s 1.3.8 above. 334 See Vol 3, ch 1, s 2.1.3. 333
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loss of the asset and for the harm it may cause others, already briefly mentioned above. So is the transfer of each party’s interests and the position of bona fide purchasers. Other issues are the possibility for each party to encumber its (conditional) interest. Could the conditional ownership rights also concern future assets, and may they shift into replacement goods? What is the non-bankrupt party’s position in a bankruptcy of a conditional owner in possession? The question of what the effect is of an attachment of the asset on the other (non-possessory) party’s rights in it seems related. It raises the issue of the relationship of this conditional owner vis-à-vis the secured and other creditors of the other conditional owner with possession of the asset.335
1.7.6 Examples of Finance Sales: Finance Leases, Repos and Factoring. Finance Sales as Executory Contracts, Cherry Picking and Netting In the foregoing a number of finance sales or ownership-based funding techniques were identified, which will be discussed more extensively in Volume 3, chapter 1, such as the finance lease, the repo of investment securities, and the factoring of receivables, with particular emphasis on their characterisation in terms of proprietary options or conditional sales, of which the more traditional examples are the reservation of title and the hire-purchase. These are both, however, sales credit or sales price protection devices rather than schemes to raise financing, as is the case with repos, factoring of receivables and, although less obviously so, in finance leasing. It should of course be borne in mind that in all these cases there is credit provided, whether there is sales credit, loan financing through secured transactions or funding provided through conditional sales, but not all are funding schemes. Of the modern funding schemes, the finance lease is probably best developed in law, although in practice the finance repo and the factoring of receivables are probably more important. The finance lease was the subject of early statutory law in France (credit bail) and other southern European countries. The finance repo was the subject of legislation in France (the pension livrée since 1993) and to some extent also in Germany (section 340b HGB). Special factoring or receivable financing statutes are less common so far, except for the partial lifting of the notification requirement in respect of assignments in France and the Netherlands as we have seen, but both the finance lease and the factoring of receivables have drawn attention at the international level, the finance lease and factoring in UNIDROIT, and receivable financing in UNCITRAL: see again for the details Volume 3, 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
335 A reservation of title may, eg, give in principle the strongest status to the seller upon a default of the buyer but if the seller retakes the asset it is likely to be subject to any security interests the buyer has created in it in favour of others. This is certainly so if they are bona fide in those countries that protect bona fide purchasers of chattels. In those that do not, the question is whether the buyer under the reservation of title has sufficient title to make a disposal. If he could not transfer more than his own interest, that interest is at an end upon default. That could also mean the end of the rights of any transferee in the asset, including security interests.
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on factoring of portfolios of receivables with debtors in various countries. The result was mostly a set of private international law rules. The 2001 UNCITRAL Convention on the Assignment of Receivables in International Trade is more ambitious and attempts to provide a uniform law in the major aspects of receivables financing itself. The UNIDROIT Leasing Convention has obtained a small number of ratifications and has thus entered into force, as did the Factoring Convention more recently. The UNCITRAL Convention has not received any ratifications so far but has been signed by the US, Luxembourg and Madagascar. Finance leases should be distinguished from operational leases, on the one hand, which are mere contractual arrangements, or on the other from rental or borrowing agreements, both normally for the use of the assets for a shorter period. The finance lease is essentially for the life of the asset and has proprietary aspects. It resembles more closely the reservation of title and probably even more the hire-purchase, especially if it is an instalment arrangement under which the lessee eventually becomes the owner although there may be a mere option (possibly against further payment). Where the lessee automatically becomes the owner or has a free option (which is more common), it appears that there is a conditional sale. This characterisation is sometimes avoided (especially in England) in order to eliminate the hire-purchase analogy and the consumer protections of modern hire-purchase statutes. They are inappropriate in the finance lease, which is normally a professional financing tool. In the US, as we have seen, the concern is rather to avoid the application of Article 9 UCC and therefore the conversion of the lease into a security interest making the lessee the immediate owner subject to a security interest of the lessor that needs to be properly filed. There will therefore not be an option to acquire the asset (except for extra value) and there is likely to be a return at the end of the lease period. In Germany it seems that the finance lease remains characterised as a purely contractual arrangement for the lessee, although the latter may benefit from the general protection of a hire contract, which can survive, for example, a sale of the asset by the lessor and in this manner probably also his b ankruptcy, but technically only when the lease concerns land— see section 566 BGB. Dutch case law appears to go in similar directions. In the repo of investment securities and more so in the old sale and repurchase agreement (of which the German Sicherungsübereignung was an example and which in its conditional transfer form still seems a possibility if parties expressly so provide), there may be a purer instance of a conditional sale, although again it is not widely so analysed. For investment securities there is in any event a problem with the fungible nature of these securities so that the same securities are not likely to be returned but rather only the same quantity of the same sort. This may further undermine any proprietary claims of the seller, at least in the absence of tracing notions, unless one accepts more generally the shift into replacement assets. See for the different G erman, Dutch, French, English and US attitudes more extensively Volume 3, chapter 1, sections 1.2.3, 1.3.3, 1.4.3, 1.5.2, 1.5.3 and 1.6.2. As we shall see in Volume 3, 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 3, 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
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much less protection for the party acquiring the funding (the seller) than there is under a security interest. The simple tendering of the repurchase price may not then result in full ownership. It has already been said that the alternative in finance has become the set-off or netting facility of mutual claims participants have against each other rather than reliance on the proprietary remedies. In factoring of receivables, on the contractual side, there are three possibilities: it may be a mere administration and collection agreement under which the creditor leaves this part of his activity to an expert who can handle the receivables more efficiently, quickly and cheaply; there may also be a credit risk transfer to the factor, which means that the factor gives some form of a guarantee of collection to the creditor; and finally there may be a funding operation under which the factor funds the receivable portfolio on a current basis. For true factoring there is always administration and collection, and there must be either a guarantee arrangement or funding or both. Mere administration and collection are therefore best seen as a contract for services (under which nevertheless there may result some conditional ownership right in the collector) and not factoring proper. Factoring proper always implies some transfer of the receivables to the factor, including a transfer of credit risk and sometimes payment as a matter of funding). This poses the problem of a bulk transfer and the inclusion of future receivables, discussed earlier. As regards the transfer itself, therefore on the proprietary side, there are also three possibilities. The (bulk) transfer may be in full, it may be as security transfer only, or it may be a conditional transfer. Often it is conditional, at least as regards the individual claims: this may be so in collections as we just saw, but receivables also may have to be approved by the factor, may have to be uncontested by the debtor, or may not be affected by an insolvency of the debtor so that there is no credit risk for the factor at all. These are forms of recourse factoring in which all claims that do not comply with the conditions are then automatically returned. It only has the first and last contractual aspect just mentioned (or also a limited version of the second aspect). The most common form of factoring—the old line or non-recourse factoring—has all three contractual aspects and is on the proprietary side best characterised as a full sale and transfer of the receivables. See more particularly the discussion in Volume 3, 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 repos. It means for the finance lease that the lessor remains the full owner of the lease assets while the lessee has only contractual (and perhaps some possessory) rights, possibly subject to the protection of the lessee as if there were a rental agreement of real estate under section 566 BGB. In a repo, it suggests that the purchaser is the full owner and that the seller has no more than a personal retrieval right. In factoring, it would put the financier equally in the strongest position and the seller of the receivables could retrieve those rejected by him/her in a personal action only. This is all pertinent, especially in a bankruptcy of the financier when the counterparty may thus be in a weak position. In a long-term agreement like the finance lease, for example, the lessee risks that the
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trustee of the bankrupt lessor (as finance company) may attempt to repudiate the contract as executory and retrieve the lease asset if beneficial to the bankrupt estate. In the repo, it could mean that the bankrupt buyer/financier would insist on full p erformance 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 have gone up. This is called the cherry-picking option, which invariably results from the characterisation of finance sales as being merely contractual. Both in Germany and the Netherlands, there is at least a difference in that agreements covering market-quoted assets are automatically and immediately rescinded upon a bankruptcy of either party. As already mentioned, where the finance sale is characterised as a mere contract, some relief may be obtained through set-off and netting. This is an important elaboration of the set-off principle and relevant particularly if there is a netting agreement that expands the concept, in the international repo markets particularly relevant under the Repo Master Agreement as we shall see in Volume 3, chapter 1, section 4.2.5, provided always that there are sufficient positions either way between the same parties. It may notably occur in repos where professional parties may be each other’s financiers in different repo transactions between them. The contractual expansion of the setoff concept now commonly allows netting of claims that are not all mature or even monetary or in the same currency: see further Volume 3, chapter 1, section 3.1. The netting contract will have to introduce here acceleration of maturities and related discount clauses, valuation clauses for non-monetary claims such as the one for a return of the investment securities, and an exchange rate valuation if not all values are in the same currency. As it is not clear whether such expanded set-off clauses could be upheld in bankruptcy, some bankruptcy laws, like the ones in the US (upon amendment, see sections 559 and 562 of the US Bankruptcy Code) and the new German Insolvency Act (section 104), especially so provide. It has already been said that netting thus becomes here the more normal protection tool rather than reliance on proprietary concepts and options. In fact, it may well be that the commercial practice has accepted that finance repos are not proprietary, probably because of the fungible character of the underlying securities but also because of the right of the repo buyer commonly to on-sell the property, repo it, or give it as security. It also avoids problems of re-characterisation into secured transactions, which only arise if the repurchase right is deemed proprietary.
1.7.7 The Outward Signs of Security Interests and Ownership-based Funding. Possession or Filing To give effect to security interests or even conditional ownership rights in terms of finance sales, some outward manifestation of the interest is now often deemed desirable, also in respect of movable assets. The normal proprietary effects of security interests and conditional ownership rights are the right for the financier to pursue these
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interests or rights in the assets regardless of who owns them (allowing the debtor to transfer them regardless of any security interests or conditional ownership rights in them or sometimes even regardless of any contrary stipulation in the security agreement itself, cf sections 9-315(a)(1) and 9-401 UCC), the right to repossess the assets upon default (section 9-503 UCC) and, in the case of a security interest, the priority in the distribution of the proceeds upon a disposition (sections 9-609, 9-339 and 9-615ff UCC), which must, in the case of a security interest but not a finance sale, usually follow. In fact, for proprietary rights of any sort to emerge and be recognised in their third-party effect, some outward sign of them is often considered desirable to warn and protect the public as it must accept and respect these rights and could only acquire the assets subject to them. At least that is the idea, but it was posited before that publicity is not truly the source of proprietary rights—see section 1.1.3 above—although the requirement of delivery for title transfer in chattels in most civil law countries and also under the older common law (see section 1.4.2 above), and of notification of assignments in some countries (see section 1.5.1 above), are sometimes seen as an example of such a manifestation, here of title transfer. It was, however, pointed out that delivery, at least in civil law, may be wholly constructive and many countries are dispensing with notification requirements in assignments also, notably to make financial bulk transfers or assignments possible. However, if there is no such outward sign, in modern legal systems any change in the proprietary rights in the asset might be ignored, especially in land. That is the essence of all land registration systems. Bona fide purchasers are not then protected as all are assumed to have constructive notice of any ownership rights reflected in the register. In fact, normally, no ownership can pass without amending it, although there might still be some doubts if property is acquired through inheritance or acquisitive prescription. For chattels, on the other hand, there is not normally a filing system concerning their ownership. It would be entirely impractical, not only because of the multitude of such assets but also because of their short life span. In this situation, holders may be presumed the owners, as a consequence of which bona fide purchasers of such holders tend to be protected, at least if they acquire the physical possession of the property: see section 1.4.8 above. It defeats all prior proprietary interests in these assets of which the purchaser could not know. Indeed, even for chattels and more so for intangible assets, the outward manifestation of lesser proprietary rights and certainly also of security interests (or conditional ownership rights supporting funding) in them is and has always been particularly problematic. More generally, if a person holds these assets, in the case of chattels for example on the basis of contractual user rights or a proprietary usufruct, or in the case of intangibles as a collection agent, who can say what the real proprietary structure in these assets is? Proprietary rights in personal property thus often remain hidden unless they coincide with physical possession. To minimise confusion, it has not been uncommon for the applicable law to require, at least in the case of security interests in personal property, especially chattels, (physical) possession for the validity of the interest. This was neither the Roman law nor ius commune system, as we have seen, which allowed the non-possessory security interest (or hypothec) also in chattels and even a pledge with no more than constructive
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possession,336 nor was it that of the common law, which accepted chattel mortgages (usually a conditional sale, however),337 but it progressively became a requirement in 336 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 3, ch 1, s 1.2.2, n 70. It was also used for non-funding purposes and then more a custody arrangement (the fiducia cum amico, see Gaius Inst 2.60). In neither context did clear fiduciary duties and reclaiming rights develop, a problem still apparent in the development of conditional or finance sales and custodial arrangements in civil law today: see s 1.7.5 above and 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 (while bona fides and/or possession of later interest holders was irrelevant), but an officially established security right (by a kind of deed or through witnesses) had a higher rank: see C.8.17.11.1. By this time, also claims could be pledged. C.8.16.4 gave the lender the actio utilis (see n 226 above) to collect. If the claim was monetary, the proceeds would be set off against the debt, but if the claim was for the delivery of goods, the security interest would shift into the assets upon their receipt by the borrower: see D.13.7.18. A closely related aspect was that future assets could be liberally included under the suspensive condition of their acquisition by the borrower: see D.20.1.16.7. C.8.16.4 suggests the possibility of general liens that could also include receivables and D.20.1.1 specifically mentions in this connection the inclusion of future assets, whether tangible or intangible. It amounted to the possibility of non-possessory floating charges, which seem to have been very popular in later Roman times. They could be established through a hypothec but also through a constructive pignus, as D.20.1.1 clearly states, and their priority would arise as at the time of the creation of the interest, not therefore of the later emergence of the assets, so that later specific security interests in any of them in favour of other lenders would be subordinated. At least D.20.4.2 seems to suggest so and the idea also finds support in D.20.1.34. In the ius commune, there was a tendency, especially in the natural law school, to limit the effect of the nonpossessory interests to situations in which the asset was still with the debtor. In any event, upon a sale of the asset by him to a third party, the security interest came to an end, apparently even absent bona fides on the latter’s part: see Grotius, Inleidinge 2.48.28, at least in the case of a hypothec. It seems not to have affected the constructive pignus, which was popular, based on necessity and in Holland supported by the Supreme Court: see its decision of 13 November 1737 cited in Van Bynkershoek, Observationes Tumultuariae ed Meijers (Haarlem, 1962) IV, no 3051, but it disappeared in the nineteenth-century codifications under the influence of earlier French customary law: see n 337 below. Earlier, the general (contractual) lien as floating charge became subject to the better right of later specific security interest holders: see Grotius, Inleidinge 2.48.34 and was also in other aspects progressively reduced in effectiveness and equally disappeared in the nineteenth-century codifications. That may have had to do with the increasing emphasis on specificity and identification in the nineteenth-century development of civil law, which became here more anthropomorphic. On the other hand, some general (and special) statutory liens emerged (pignora tacita), some derived from Roman law, like the one for the tax authorities in C.8.14 (15). They sometimes prevailed over consensual liens. There also emerged preferences in proceeds without special repossession rights, which would prevail over nonsecured creditors but not over secured ones, unless so dictated by statute. In this system, confusion could easily arise. An interesting countervailing feature was that already in later Roman law lack of disclosure on the part of the borrower of any liens against its assets became a criminal offence. This is the stellionatus of D.47.20.3.1. 337 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
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the nineteenth century, especially on the European Continent and also in the US.338 Thus the possessory pledge became preferred and survived as the only type of security possession: see Art 170 of the Coûtume de Paris (of 1510) which stated the famous maxim: ‘meubles n’ont pas de suite par hypothèque, quand ils sont hors de la possession du débiteur’, from which later the general principle of protection of bona fide purchasers of chattels was deduced in France: see s 1.4.9 above. The non-possessory hypothec thus lost its significance for chattels early in France but retained it for real estate and entered as such the Code Civil (Art 2114 CC). The principle of ‘meubles n’ont pas de suite par hypothèque’ was retained in Art 2119 CC, and the transfer of physical possession became a validity requirement for all pledges of chattels: see Art 2076 CC. In real estate there remains also a possibility of a possessory security interest with the use of the asset, called the antichrèse (Art 2072 CC). It is uncommon. The floating charge had already been eliminated in the Ordonnance de Commerce of 1673, which in Art 8 required a document in which the collateral was clearly described. Art 2074 CC retains that requirement, although in the commercial sphere a document itself is not necessary (gage commercial, L 521-1 and L 110-3 Code de Commerce). Only in the more recent nantissement du fonds de commerce established by the Law of 17 March 1909 (which also covered the sale of the fonds de commerce), now codified in Arts L142–1 to L142–5 Code de Commerce, was there a more limited floating charge facility, especially in respect of a business (which need not be incorporated) and its equipment. It was a peculiar French concept not defined in law, cf also Art L144 Code de Commerce for the lease of the fonds de commerce (replacing an earlier law of 20 March 1956). It could also cover the receivables of the business but not its debt (therefore assets only). See further also F Lemeunier, Fonds de Commerce (Paris, 2001). By ordinance 2006–346 of 23 March 2006, a broader floating charge facility was introduced in France. For receivables, the pledge became uncommon in France as it was doubtful whether it allowed collection by the lender. A conditional assignment therefore became the more common method of using receivables for funding purposes: see Vol 3, ch 1, 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 3, 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 accepted the principle of a conditional or finance sale in chattels (with mere constructive delivery of possession through a transfer constituto possessorio) in the so-called Sicherungsübereignung, which subsequently developed in the direction of a non-possessory security interest. See for this development and for that of the related Sicherungsabtretung for receivables, more particularly Vol 3, ch 1, s 1.4.2 and for the development of the modern German reservation of title, Vol 3, ch 1, s 1.4.1. 338 In England, the mortgage was a conditional sale (see Vol 3, 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. Statutory law also established priority in accordance with the time of registration, which was more generally meant to warn unsuspecting creditors, while at the same time protecting the debtor against hasty decisions in transferring assets to obtain funding. The conditional sale nature of the chattel mortgage had been confirmed in Ryall v Rolle (1749) 26 ER 107, with emphasis on the ownership status of the buyer and his risk of a reputed ownership of the seller if the goods were left with the latter. These conditional ownership rights could perhaps have been structured as floating charges but that became progressively more difficult under statutory law, which required identification of the assets, the reason why these floating charges subsequently developed in equity, helped by the equitable tracing rights and shifts of charges into proceeds: see Vol 3, ch 1, s 1.5.2. In English law, on the other hand, the pledge was a proper security interest at law and was always possessory but limited to chattels. As such, it was a form of bailment. As English law was never entirely strict in the physical possession requirement, constructive delivery could (exceptionally) be sufficient: see s 1.3.2 above. It may be difficult in such a situation to distinguish a pledge from a chattel mortgage with its formal registration requirements (in the private sphere). Like the pledge, it remained in the corporate sphere in England a fixed charge supplementing floating charges and having a higher rank. Differences between the pledge and the chattel mortgage may be found mainly in the disposition requirements, overvalue repayment or redemption facility and position of bona fide purchasers. In the case of a chattel mortgage, there is only an equity of redemption for the debtor upon default whilst bona fide purchasers of the creditor (even if not in possession) are likely to be protected against any equitable (redemption) interests of the debtor (even though in possession). In the case of a pledge, the debtor remains the owner and can reclaim his title from all purchasers of the creditor even if the latter is in
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interest for chattels, therefore as a possessory interest only. The unavoidable separation between ownership and possession, also in this instance, protects the security interest holder in its proprietary or third-party rights, which cannot be surreptitiously taken away from him. It leaves on the other hand the (better) interest of the owner and of other interest holders in the asset exposed. That is a trade-off for the owner who will normally be the beneficiary of this situation as a secured borrower. Yet this method of providing security in respect of personal property is costly as it deprives the borrower/owner of the use of the asset in its business. It is the reason why nonpossessory security interests in personal property became a necessity after the Industrial Revolution, especially in respect of equipment, inventory and accounts receivable of a debtor, exactly to finance these assets themselves. This raised again the issue of the manifestation of these possessory interests. In some countries, mainly of the civil law and notably in Germany, the non-possessory hidden liens of the Sicherungsübereignung became accepted, although subject to bona fide purchaser protection of anyone acquiring title and physical possession in them, at least in the case of chattels as we saw. This bona fide protection against hidden liens did not exist in the case of receivables. Thus liens in them, although hidden, were (and are) perfectly valid against subsequent assignees of these assets, even if they are unaware of the earlier interests. In the US, bona fide protection of these assignees developed: see section 1.5.9 above. Earlier in England, in equity the bona fide later assignee who collected had become protected provided the debtor paid in good faith. This was somewhat unexpected as this type of protection did not exist under common law in respect of chattels at law (and needed in that case statutory backing as was given in the US in Article 2 UCC and in the UK in the Sale of Goods Act 1979: see section 1.4.9 above). There is a related problem in the bona fide protection of the security interest holder. May the lender rely on the outward signs of the debtor’s personal property while creating the security interest and deem all included (if the security agreement is so formulated), even if the assets themselves belong to others? In respect of chattels this is indeed likely in civil law on similar grounds. In common law this may be so by statutory disposition. Section 9-203(b)(2) UCC presents (indirectly) an example of this approach. Only if there is mere possession is the debtor not supposed to have a sufficient interest in the property in its possession to transfer it to a lender as security.339 possession. The sale or re-pledging of pledged assets by a debtor in possession is not likely to be subject to bona fide purchaser protection. The creditor/mortgagee will retain his rights, in which connection the publication of the interest provides an additional argument. In the US, the chattel mortgage as conditional sale was superseded in the nineteenth century in many States by State laws converting them into true security interests subject to registration. In that approach the pledge of chattels always required physical possession and there was a disposition upon default. The subsequent difficulties of creating floating charges were remedied in a number of different departures, depending on State law, partly based on conditional sales especially for reservations of title, partly on factoring acts, which aimed at general contractual liens shifting into replacement equipment and particularly inventory and receivables, and partly on assignment statutes especially aimed at funding transfers of shifting portfolios of monetary claims. All are now superseded by Art 9 UCC: see for these US developments more particularly Vol 3, ch 1, ss 1.6.1, 1.6.2 and 2.3. 339 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 b ankrupt
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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.340 Unless clear exceptions are made as in the US for the equipment lease, appearance of ownership, apparent ownership or ostensible ownership of a borrower/transferor seem here to be sufficient, resulting in a prospective windfall for the bona fide secured lender and a risk for anyone who leaves assets with a third party. This is curious in the sense that this notion of apparent ownership, which here works in favour of secured creditors, may under modern law not or no longer be sufficient to protect ordinary, nonsecured, bona fide creditors341 or even judicial or statutory lien creditors, at least no longer in the US under applicable State law. Thus their reliance on the debtor’s outward signs of wealth, even if created by hidden non-possessory security holders leaving the debtor with their assets, no longer works in their favour. Only secured interest holders still appear to benefit from such protection. In England and France, the notion of reputed ownership to protect bona fide ordinary creditors is also clearly on the wane. The acceptance of a reservation of title creating a hidden interest of the seller is here the most important example.342 Security interest holders, even if hidden, are therefore better protected all the time unless their interests clearly arise from fraudulent conveyances.343 builder with materials which it may not therefore be able to retrieve: see Litwiller Machine and Manufacturing, Inc v NBD Alpena Bank 457 NW 2d 163 (1990). The UCC is here not interested in ownership rights even if mere possession is not good enough, cf also s 9-112 (old) UCC (now omitted). The question is therefore whether there are ‘sufficient’ rights, which need not be strictly proprietary. The right of the bankrupt may be an entirely personal or contractual user right, which would still lead to the inclusion of the assets in his estate (assuming he also has physical possession). Generally, title (in the sense of ownership) itself is of relatively little significance under the entire UCC and deprecated, even in the sale of goods: see also s 2-401 UCC (and this not only in respect of bona fide purchasers). Ostensible ownership by the bankrupt may here be an additional argument and also the easy facility for the customer who provides materials to the construction company to protect himself by instead granting a loan with a purchase money security interest in the assets and filing a finance statement in respect of it: see Kinetics Technology International Corp v Fourth National Bank of Tulsa 705 F 2d 396 (1983). 340 Art 2A UCC made one exception in s 2A-309. See further also CW Mooney Jr, ‘The Mystery and Myth of “Ostensible Ownership” and Article 9 Filing: A Critique of Proposals to Extend Filing Requirements to Leases’ (1988) 39 Alabama Law Review 683. 341 See for this notion also Vol 3, ch 1, s 1.1.10 and Vol 3, ch 1, s 1.3.2 for France, and for its demise in England in the Bankruptcy Act of 1986 Vol 3, ch 1, s 1.5.2. 342 See Vol 3, ch 5, s 1.3.4 for the situation in France and Vol 3, ch 1, s 1.5.4 for the situation in England. 343 This is the English approach since the famous Twyne’s Case (1601) 76 ER 809, when a debtor transferred his assets to a friend while maintaining possession and all user and income rights. In modern bankruptcy laws, there have been added presumptions of fraud in transfers made between a certain period before bankruptcy (suspect period) but these presumptions are normally rebuttable. In civil law, this is the reach of the actio revocatoria or Pauliana.
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However, these security interests, if non-possessory, are now mostly subject to a filing requirement in the US, at least for their priority status. It is of interest in this connection to explore this US filing requirement and its meaning somewhat further, as it is often held out as a model. What does it do and what does it achieve or fail to achieve? Here we need to go into the meaning of attachment and perfection of the security interest in personal property under UCC law.
1.7.8 Attachment and Perfection of Security Interests in Movable Property under the UCC in the US. Meaning and Weaknesses of the Filing System Under section 9-201 UCC, a security agreement is valid immediately upon its conclusion and has third-party effect. It works therefore immediately against purchasers and other creditors. For this third-party effect itself, no filing or publication is necessary; no formalities are imposed except that of a writing under section 9-203(b)(2) UCC. This is unlike a full transfer of ownership under the law of the sale of goods where section 2-401(2) still requires (physical) delivery for the property right to pass unless parties agree otherwise. It is to be noted in this connection that any public filing of a security interest does not commonly replace the delivery of possession requirement, wherever obtaining. However, in the US, the security interest attaches immediately, therefore even before filing or the taking of (physical) possession and is under sections 9-201 and 9-203 UCC immediately enforceable provided it is in writing, value is given, and the debtor has a sufficient interest in the assets, which is any interest beyond mere possession. The priority right is in consequence also immediate. Sections 9-317, 9-102 and 9-323 UCC reflect this. It suggests that there is an immediate priority in respect of all later attaching creditors and non-secured creditors. Only filed or perfected voluntary security interests and statutory or judicial lien creditors prevail over it. As regards the latter, in bankruptcy, there is in particular the lien of the bankruptcy trustee to reckon with, which automatically pushes the attached but non-perfected security interests down. That is most important, but here a detail. The key is that the priority right of the secured creditor against non-secured creditors is attached upon the mere conclusion of the security agreement and that in principle it is also valid against purchasers of the asset unless they purchase in the ordinary course of business or are bona fide, in which connection, importantly, they do not have an investigation duty (section 9-323) and even perfection through filing does not affect these purchasers. Thus attachment and even perfection is only of importance between secured creditors and determines their ranking. This was earlier expressed as a facility operating among insiders, here especially other lenders or banks and suppliers. This is in the nature of the operation of all equitable proprietary rights, which do not affect outsiders who have no search duty either. The ordinary commercial and financial flows are thus always protected: see also the summary in section 1.10 below. The publication/filing or perfection itself only establishes priority over later perfected (and earlier attached) secured creditors under voluntary or
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(often) statutory and judicial liens. That is all. In the US this filing is limited to a finance statement, which only indicates in summary terms the type of collateral covered. Its importance is the warning it gives to later secured lenders. Filing establishes the time of the priority over other (perfected) secured creditors in which connection the UCC even allows an advance filing system under which the loan and security may be agreed later and also the collateral may emerge later under an after-acquired property clause (section 9-204 UCC), while the priority always relates back to the time of the filing of the finance statement. These last two aspects (the priority and relation back) of the filing requirement are especially important and substantive law issues. The warning function, on the other hand, is a means of giving the enquirers a rough idea, but any professional lender will have to make its own enquiries anyway, ask for detailed information from the borrower, and search its accounts as a matter of due diligence. In fact, the filing under Article 9 UCC does not guarantee anything, especially not the existence or extent of the collateral or the capacity of the debtor to dispose of the assets in this manner or indeed the existence of any valid security agreement at all. Thus the debtor may have void title although the security interest holder may be protected against a voidable title if he is unaware of it. This does not result from the fi ling however. The collateral may not exist as in the case of future property even though the lien may relate back to the date of filing as soon as the asset emerges while the contract to acquire a future asset may itself be pledged (as a general intangible) under section 9-102. Other assets of the debtor may be excluded because the debtor has an insufficient interest as in the case of leased property under Article 2A UCC. On the other hand, for other property in the possession of the debtor there may be inclusion, but the point is that the filing has no relevance in this connection either. It also does not protect against statutory or judicial liens in the same assets, which are not normally published, or against any purchases in the normal course of business or bona fide purchases by consumers of consumables, which will be free and clear regardless of the filing and there is no investigation or inspection duty for these purchasers. Possessory interests of all kinds, at least in consumables, may also prevail over the filed interest. Although the filing thus guarantees nothing, it is relatively costly while in the US the filing systems in many States are still cumbersome, and the place of filing and investigation is sometimes uncertain, and could be in any one of several States where the debtor is engaged in business. The name of the debtor may have changed in the meantime or the debtor may have been subject to a merger or reorganisation. Also here the registers guarantee nothing. Most importantly, they do not allow for the filing of adverse interests of third parties (if not themselves secured creditors) in the property to protect these interests against later security interests. The consequence is that the benefits of this filing system, which is meant to establish an easy, simple and certain method of creating priorities, are in practice much less obvious than they appear at first. Consequently, there is much less of a model in the US example than would appear from its face. Even in the US, scepticism has been expressed although no abolition s uggested.344 It may therefore come as less than a surprise that filing was 344 IM Hillinger, RT Nimmer and MG Hillinger, Commercial Transactions: Secured Financing Cases, M aterials, Problems, 2nd edn (New York, 1999) 144 are critical and suggest that Art 9 notice requirements have long outgrown
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not foreseen in earlier drafts of Article 9 UCC.345 In Europe not much need has been felt for a similar system, particularly in Germany, understandably so, it would seem. Importantly, the 2002 EU Directive on Financial Collateral explicitly ignores all domestic filing requirements for the validity of security in, or conditional sales of stocks and shares (in dematerialised form). The DCFR prefers a filing system, however: see also section 1.11 below. Nevertheless, especially in an international academic context, more than lip service is sometimes paid to this filing facility although its significance is generally overrated. It is not a key issue at all once it is understood that such a filing system operates very differently from land registers. Thus some form of filing also appeared as an alternative in the 2001 UNCITRAL Convention on the Assignment of Receivables in International Trade, and it is also an important aspect of the 2001 UNIDROIT Mobile Equipment Convention. Indeed, filing as some substitute for (delivery of) possession in the creation of security interests remains an article of faith in many quarters, but is not here the true issue. Again, as bona fide purchasers in the ordinary course of business are normally protected and have no investigation duties (except in the Mobile Equipment Convention, which is concerned with specific high-value items), the essence is to warn other creditors who should and will make their own inquiries. It is not immediately apparent what filing systems add here to justify their cost and expense even if access were easy and there was no confusion possible on where to look. It is true that they establish clearly the time of the perfection, but this could also be done by deed.
1.7.9 Floating Charges in Common and Civil Law. Extended Reservations of Title. The Concepts of Bulk Transfers, Asset Substitution and Tracing and the Inclusion of Future Assets. The Facility to Sell Goods Free and Clear Article 9 UCC in the US is rightly famous for the system of security interests it introduces, and in particular for the broad facility of creating floating charges (a term not itself used in the text of the UCC although it is in the Official Comment) especially in respect of equipment, inventory and receivables (or accounts). It allows in this connection the inclusion of future replacement assets, which may also be used to protect future debt: see section 9-204. In such cases, the charge may relate back to the date of the original filing. It is further noteworthy that the concept of absolutely or relatively future goods (see also sections 1.4.3 and 1.4.5 above) developed under German law
their historical roots. In Europe, the US system has been extensively studied in this aspect also with sceptical conclusions: see UH Schneider and J Miss, US-Amerikanische Erfahrungen mit dem Abtretungsregister, Institut für deutsches und internationales Recht des Spar-, Giround Kreditwesens, Arbeitspapiere (University of Mainz, Working Paper in English) 1998. The fallacy of filing systems has also been noted by PR Wood, ‘Publicity for Transfer of Property: Is the World Out of Step (except New Zealand)?’ KP Berger, G Borges, H Herrmann, A Schlüter and U Wackerbarth (eds), Private and Commercial Law in a European and Global Context, Festschrift für Norbert Horn zum 70. Geburtstag (Berlin, 2006) 191. 345
See G Gilmore, Security Interests in Personal Property (Boston, 1965) s 15.1.
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does not play a restricting role. As long as the assets to be given as security can be reasonably described in the security agreement as well as the charge itself, there is no further requirement for their inclusion and security transfer. For receivables there is thus also no need for the relationship from which they derive to already exist. The future credits that are secured in this manner do not need a basis in an already existing legal relationship either. Thus a bank may obtain security in all that the debtor has or will ever acquire (assuming these are the asset classes covered by Article 9, which include notably equipment, inventory and receivables) in respect of all that it owes or may owe the bank for whatever reason: see for the US system further also the previous section and more particularly Volume 3, chapter 1, section 1.6.1. In England, there is a similarly broad approach, in that country still substantially based on case law, under which the rank, however, is determined not from the date of registration in company registers but from the date of crystallisation of the floating charge, which is normally the date of default of the debtor.346 As a consequence, it has a low rank, just above the non-secured creditors, much like the attached but not perfected security interest holders under the UCC in the US, and is therefore a less potent security. Often it may include a number of fixed charges, which acquire in respect of specific assets (notably real estate) the rank as from the date they are established. What is decisive here is the matter of control over the asset—not always an easy criterion: see also Volume 3, chapter 1, section 1.5.2. The existence of floating charges is a test of the modernity of any security regime as demonstrated in Article 9 UCC in the US. In countries like Germany and the Netherlands, the situation is greatly more complicated as a floating charge as such is not supported by statutory law and must be cobbled together on the basis of contractual clauses. In Germany, there are in this connection the socalled 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 3, 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 its 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 3, chapter 1, section 1.2.2. 346 In England, the Law Commission Paper no 164 of July 2002 suggested an advance filing system along US lines under which floating charges would acquire their rank as per the date of filing and would therefore move from lowest to (conceivably) highest rank.
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One way to limit the damage is to deem any further releases invalid after default or bankruptcy so that the trustee in bankruptcy cannot continue to deliver goods free and clear to prospective buyers, while the present charge over them ‘crystallises’ and gives rise to execution remedies (or Absonderung in a German bankruptcy). Yet another is to limit the vulnerability of the transfer of future assets to those that are absolutely future, therefore to those that do not yet exist at all at the date of the bankruptcy, although in truth it may well be asked whether from a theoretical perspective there is any difference between assets that do not yet exist or that do exist but are not yet in the patrimony of the transferor. Another possibility is indeed to deem all replacement assets sufficiently identified and transferable per se even if still absolutely future at the time the security agreement was agreed. That would appear to be the German approach under section 91 of its Insolvency Act of 1999 under which the transfer of absolutely future assets would otherwise be vulnerable if they have not emerged before bankruptcy of the transferor. In the Netherlands, both the transfer (if only by way of security) in absolutely and relatively future assets is now ineffective under Article 35(2) of the Bankruptcy Act. In this important aspect, it may be different for conditional sales in future assets, which may not be so affected: see section 1.4.5 above in fine. See for the transfer of future goods more generally sections 1.4.3 and 1.4.5 above and for the assignment of future claims section 1.5.4 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 the goods free and clear of any charge. This is expressed in section 9-320 UCC for goods sold in the ordinary course of business. It depends therefore on the nature of the assets. Not even the bona fides of the buyer is required in such cases. As has been noted several times above, this is an extremely important and necessary modern departure, fully recognised in modern US law. Elsewhere one may be able to say that there is an implied licence to sell regardless of the charge. Thus if a manufacturer sells his inventory to a distributor under a reservation of title, the distributor will be able to sell free and clear. If the buyer of the distributor in order to purchase the goods needs financing and gives his financier a charge in the assets (even if they are still with the distributor but sufficiently identified), in a modern system that latter charge will prevail over the possessory rights or liens of the distributor and over any reservation of title of the original manufacturer. It is simply a function of the nature of the assets that must move and be sold. That need prevails over the rights of interest holders earlier in the chain.347 347 It is also in the nature of bills of lading or warehouse receipts on which such interests are not marked (thereby becoming incorporated in the asset), even though the endorsee might know about the charges.
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1.7.10 Uniform Security Law and Principles of Security Laws Some uniform treaty law was developed in respect of secured transactions especially in the UNIDROIT Mobile Equipment Convention: see also Volume 3, chapter 1, section 2.1.8, and for finance leasing also the Ottawa Leasing Convention of UNIDROIT of 1988, Volume 3, 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 3, chapter 1, section 2.4.5. The attempt to formulate some principles of security laws, especially by the EBRD (European Bank for Reconstruction and Development) and its Model Law are briefly discussed in Volume 3, chapter 1, sections 1.1.7 and 2.1.7, and see further also section 1.8.5 below. Some early efforts were also made in the EU: see Volume 3, chapter 1, section 1.1.7, now further pursued in the DCFR: see section 1.11.4 below. The 1999 EU Settlement Finality and 2002 Financial C ollateral Directives are more tangible examples: see also sections 3.1.3 and 3.2.4 below. They ignore local limitations and create harmonised systems of law EU wide in the area of settlement, netting and collateral or margin in or concerning financial transactions involving investment securities, albeit only in these narrower fields, in which local law could otherwise operate as a serious impediment to crossborder financial operations within the EU.
1.8 Private International Law Aspects of Chattels 1.8.1 When Conflicts Arise In proprietary matters, we are faced in essence with a mandatory system of law, or at least a system that, because of the effect on third parties, is in principle not at the free disposition of the parties and therefore not subject to party autonomy. Except in a limited way in equity in common law countries, in the traditional view, parties cannot freely create proprietary rights, as we have seen, and it follows that they cannot freely choose the applicable law in these matters either (except as to the manner in which the particular proprietary right functions between them, which is in such a case a purely contractual and not a proprietary issue, as there is no effect on others). This is in civil law the numerus clausus principle concerning proprietary rights, which operates in common law countries also at law and which does not allow private parties to create or modify proprietary rights with third-party effect. In proprietary matters, the search is therefore on primarily for the applicable objective law, also in international transactions. In the traditional conflict of laws approach that is since the nineteenth century always a domestic law. It is the consequence of private law having been nationalised since that time as extensively discussed in Volume 1. The result is that under the traditional private international law or conflicts approach, domestic restrictions prevail also in respect of the operation of proprietary rights internationally, therefore in respect of
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assets that move trans-border. The true issue is then to find the appropriate objective domestic law to determine how the particular proprietary right functions domestically and whether and how such functioning can be accepted or extended elsewhere, especially when the asset moves. It is true that, in the approach of this book, party autonomy has an important place in modern proprietary law and could transcend some of these restrictions, even domestically, all the more so, it was submitted, at the transnational level (see further section 1.10 below). This has proven to be perfectly workable at the operational level provided the inroads into the numerus clausus principle of proprietary rights are balanced by proper bona fide purchaser protection, or better still at the level of the ordinary course of business in commoditised products, so far demonstrated and accepted only in the equitable proprietary interests in common law countries. There is nothing in principle against this working also in international transactions, therefore in the international flow of goods transnationally under the modern lex mercatoria. But it follows that party autonomy operates at that level only among a group of professional insiders who are able to investigate and gauge the extent of these rights, whilst also claiming them for themselves. They may in this manner become affected third parties as under any other proprietary right. Outsiders, especially those that buy the underlying assets in the ordinary course of business ion these flows, are thus protected against the interests so created. In this book, this is more broadly considered a question of the protection of the commercial and financial flows as a public order requirement and issue of finality and now a necessity, even domestically, but more so in international commerce and in international finance when asset backed. It means that, as in equity, under newer transnational law, contract principles and party autonomy may operate in the creation of proprietary rights 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. That is the same as saying that the ordinary commercial and financial flows are always safeguarded against these interests. It was submitted that this is or should become the transnational model or standard in professional dealings. This does do away with the need to cut international transactions up into domestic parts in the hope that the different legal regimes that so become applicable (often different even for contractual and proprietary aspects of an international transaction) together add up to a manageable and efficient legal system for the transaction as a whole. It might be seriously doubted. Even now, party autonomy may in some legal systems lead to the selection of a more suitable domestic law in proprietary matters. Overcoming unsuitable and arbitrary property law regimes is the reason why common law legal systems such as the English are in this respect often more comfortable with the parties’ choice of law in international cases, for example in international sales agreements. But here again, this is made possible only because the resulting foreign interests are accepted only as equitable proprietary interests in the relevant common law jurisdictions—probably even in respect of assets that do not move to, but were always located and remained in these countries—subject therefore to bona fide purchasers’ protection and the protection of
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the ordinary commercial and financial flows. It means that these foreign interests are domesticated in order to operate in the UK. Ordinary contract conflict of laws principles may thus apply in principle in respect of these interests but even then not wholly in the proprietary consequences. Missing this (equitable) facility, civil law was always likely to be hesitant in allowing parties to opt for a domestic law that is not the lex situs of the asset at the same time. For foreign trusts proper, as we shall see, there is the 1985 Hague Convention, which in countries that have ratified it, among which there are a number of civil law countries, maintains a more specialised regime in respect of the recognition and operation of foreign trusts in other countries, which allows, however, for a measure of party autonomy, at least in the choice of the applicable legal system: see section 1.8.4 below. Indeed, barring treaty law, an approach accepting the proprietary effect especially of foreign secured interests, conditional ownership and finance sales or comparable equitable or split ownership structures, whether deriving from a foreign lex situs or under a contractual choice of another domestic law, may be more difficult in civil law countries. More particularly party autonomy leading to a contractual choice of a foreign law to determine these issues is not likely to be effective in these countries, although, as we shall see in section 1.9 below, it is now sometimes defended regardless, also in civil law countries, for the trans-border transfer or assignment of intangible assets, notably monetary claims, covering therefore also the proprietary aspects of the assignment or transfer. One reason or justification is that these are not assets in a proprietary sense, but probably more compelling is that there is no proper situs in respect of claims in the first place and therefore also no proper lex situs, although, as we shall see in section 1.9 below, the situs of claims may be determinable by reference to the place of the debtor or the assignor, but this has remained contentious. Beyond this, in the traditional view which always looks for a national law, we remain relegated to conflict of laws theory and lex situs notions as far as the creation of proprietary interests is concerned, but subsequently there is still the issue of their recognition and operation elsewhere, where they may raise public policy order concerns. As we shall see, this is relevant especially when assets move between countries or, even if they do not, end up in a foreign bankruptcy estate under the applicable (foreign) lex concursus or are deemed to do so under this law. Taking a step back, in general, a conflict of laws problem truly arises when several (domestic) legal systems present themselves. Conflicts in respect of the creation and transfer of proprietary rights commonly arise at the level of the contract that creates them or sets the transfer in motion only if both parties are in different countries. 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 principally arise when assets move between countries and therefore not primarily on the occasion of their creation or transfer unless delivery in another country is foreseen at the same time. Again, the basic objective rule concerning the properly applicable law in proprietary matters remains here traditionally the lex situs,348 at least 348 It was said earlier that the lex situs principle is another manifestation of a physical anthropomorphic attitude to property law and is therefore parochial and atavistic, even if it may be one expression of the closest
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for tangible assets. It is usually no problem for land, as their location is normally easily identifiable, it does not move, and the applicable domestic law results from it. This is mostly also not problematic for chattels as long as they do not move between countries as part of the transaction or by their very nature (like ships and aircraft) or when they are caught up in foreign bankruptcy proceedings. 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 a movable asset crosses borders. In that case, it raises the question whether the old or new lex situs applies, therefore the one of the place of origin or destination. So in proprietary matters, the mere reference to the lex situs does not in itself produce a choice of law solution when it matters most, viz when the asset moves, and it leaves open the question whether the applicable law is the law of the situs of origin or of destination of the asset and how they may relate. As we shall see, the idea is here often that the rules of the place of origin of the asset determine the extent of the proprietary rights created in them but that upon movement elsewhere, the matter of their recognition and operation in other countries is determined by the law of that country. That is then mostly seen as a public order issue. In matters of full ownership or title that may not create insurmountable problems as this notion of full ownership exists everywhere, but especially in secured transactions and finance sales or reservations of title and retention rights, where there may be great differences, this may not be so and a measure of transformation in nearest local equivalents may be necessary for these foreign rights to operate effectively abroad, as we shall see. Barring such a nearest equivalent, these rights may lose their proprietary status in the new location of the asset altogether especially important with respect to their ranking in a bankruptcy. It has already been said that in common law countries they may only operate as equitable rights, which gives more flexibility. They will then be cut off at the level of the bona fide purchaser or the buyers in the ordinary course of business. Even when no asset moves, a transfer in bulk, either outright or conditionally or as security concerning chattels located in different countries, presents further applicable property law problems as especially at the transnational level the notion of bulk itself remains underdeveloped. The problem with the traditional lex situs approach is then that there is no single lex situs. It is a great impediment to an international bulk transfer, which can only be solved if we assume that movable assets are always located at the place of the owner. That is a fiction, easier, however, to maintain for intangible claims (see section 1.9.4 below) and is more generally perhaps the direction of the modern conflict of laws in this area. It still raises the issue of any shift into replacement assets under various legal systems, including receivables, and the law applicable to it.
connection. Law is about rights and obligations, not about anything physical, including in property law, and there was therefore never anything compelling in the application of the lex situs in international transactions in respect of property issues. This is borne out especially in respect of intangible assets, such as monetary claims that have no natural situs, but it is also an issue in assets that move between countries as we shall see. Even if the situs stands here for closest connection, it need not then be physical and could be purely constructive as it is in the case of claims.
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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.349 As already mentioned in the case of bankruptcy, proprietary conflicts arise not only when assets move between countries or when a transnational transfer in bulk is considered. In terms of creditor action against the asset, conflicts arise further when enforcement action is attempted from abroad, thus away from the situs of the assets, for example in a foreign bankruptcy. Enforcement or execution is always closely connected with the situs and the applicability of the lex situs in proprietary matters may well derive from this situation and normally coincides with the lex executionis. This law may itself change the proprietary rights, eg in amending the priorities of security interests or even voiding them under certain circumstances as bankruptcy laws may do. But especially in bankruptcy, it must be remembered that the jurisdiction internationally is not necessarily based on the location of assets but often on the location or place of major activities of the debtor and that therefore at least some of its assets may be elsewhere in a different situs. In fact, conflicts of laws in matters of enforcement against the asset do not normally derive from the movement of the asset but rather from any attempt to conduct enforcement proceedings from a place other than the situs while effect is wanted in that place. This may be a mere accounting for benefits in the foreign bankruptcy and its distribution or reorganisation, but it may also come down to a foreign bankruptcy trustee claiming the asset and/or denying limited proprietary rights therein at the situs. Again for effectiveness, this is a question of recognition and therefore ultimately of public policy of the recognising country, here in respect of foreign bankruptcy proceedings and their effect on the proprietary status of assets outside the country of the bankruptcy. In general such recognition may not be favoured as enforcement against an asset normally requires judicial intervention while the courts of the place of the situs of the asset are usually considered to have exclusive jurisdiction here, their measures not being extraterritorial either. Article 23(5) of the EU Regulation on Jurisdiction and Enforcement of Judgments in Civil and Commercial Matters of 2002 (Brussels I, amended in other aspects in 2014) bears this out. Foreign enforcement decisions and even preliminary attachment orders are therefore unlikely to be recognised under the Convention in respect of assets elsewhere and courts will apply their own law in matters of enforcement against assets within their jurisdiction. This principle of exclusive jurisdiction
349 As far as security interests are concerned, the issue of their proper place and law of filing may also arise even when no asset moves as long as the owner is elsewhere, certainly if the normal filing place is at the place of the owner. The lex situs seems primarily involved but could point to the place of the owner, who may be elsewhere, for publication of non-possessory security interests. The formalities of creation would then be decided by the law of that place, although that might not ultimately be sufficient if the asset moves to a third country which has different formality requirements and becomes the place of execution. This matter has given rise to much thought in the US in the UCC, revisited in the 1998 revisions of Art 9. The emphasis is here in respect of the formalities concerning the creation of non-possessory security interests on the law of the 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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avoids conflicts of laws in this area and underscores the applicability of the lex situs. At least that is the principle in respect of individual enforcement action but recognition of foreign bankruptcy jurisdiction may imply greater power of enforcement against domestic assets under a foreign regime. Thus in bankruptcy, upon its recognition in principle elsewhere, the situation may be different assuming the bankruptcy decree under its own law covers all assets of the bankrupt worldwide regardless of their situs. However, effectiveness at the situs of each asset, if located elsewhere and for its collection, if necessary, still depends on recognition of this bankruptcy jurisdiction under the public policy of the country where enforcement against the assets is being sought. This is now increasingly promoted internationally, notably to avoid debtors hiding their assets elsewhere: see in particular the EU Bankruptcy Regulation of 2002, Chapter 15 US Bankruptcy Code 2005, and the UNCITRAL Model Law of 1997. It requires the foreign bankruptcy enforcement measures to be translated in terms of the effect on proprietary rights in assets located in the recognising country. Local charges or finance sale constructions therein could thus be affected to the detriment of local interests. To mitigate the effect, local sub-pools protected by local laws may still be created within the foreign bankruptcy and this is very much the idea behind the EU Regulation, Chapter XV in the US, and the UNCITRAL Model Law on which it was based. In fact, in order to facilitate international recognition of its jurisdiction, the opening bankruptcy court may itself adapt its rules and take foreign interests better into account, especially in respect of assets which are not physically within its jurisdiction. In this connection, it should also be considered that the effect of the bankruptcy on assets elsewhere and on the interests therein comes in any event within the contemplation of the opening court if the interest holder is also a creditor of the estate and wishes to share in the bankruptcy proceeds. Its foreign interests will then be given their proper place and any preferential separate execution at the foreign situs may be discounted accordingly and affect the interest holder’s share in the distribution of the bankruptcy proceeds. The conclusion of the foregoing is that modern conflicts laws in many countries consider the question of the discretion for their judiciary both (a) in the recognition of foreign proprietary charges or security interests/finance sales in respect of assets that move to such countries, and (b) in the recognition of foreign enforcement and collection power, at least in a foreign bankruptcy, in respect of assets within the jurisdiction of these countries. The result may be that on the one hand the foreign proprietary interests (like security interests or conditional ownership interests) in assets that move to another country may increasingly be given their own status and ranking with adaptations of their original status if necessary in terms of finding the nearest equivalent and that, on the other hand, upon a foreign bankruptcy foreign enforcement powers may reach local assets in which connection their proprietary status, especially in terms of secured transactions or finance sales, must also be considered and may be adjusted within the context of that foreign bankruptcy and its rules in order to promote internationally the unity of these proceedings, although, as a kind of intermediary solution, there is also a possibility of the creation of domestic sub-pools under domestic law ancillary to these foreign bankruptcy proceedings.
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1.8.2 The Application of the Lex Situs and the Concept of Transnationalisation In section 1.8.1, the main areas in which proprietary conflicts of laws may arise were identified. They are (a) when assets travel to determine who owns what under what law and more specifically also (b) when local assets and the proprietary interests in them must be determined in international enforcement proceedings, especially in or under a foreign bankruptcy law. The discussion below will principally concentrate on these two situations in order to make it less abstract. There is also (c) the issue of bulk transfers of assets, including claims located or arising in different countries, particularly important in respect of receivables with debtors in different countries and their use in backing up international funding operations as we shall see in section 1.9 below. At this stage of the discussion it may be said that in the traditional conflict of laws approach the situation under (a) and (b) concerns mainly the recognition of rights properly created at the original situs and implies public policy issues in the recognising country leading to substantial judicial discretion. The situation under (c) is more complicated and fundamental as one unitary (domestic) law would be considered applicable to each asset transferred in bulk, which assumes at the same time in respect of all assets located elsewhere an abandonment of the lex situs in the transfer of the proprietary rights itself. As we shall see in section 1.9, this may be less difficult in respect of bulk assignments of intangible assets, notably monetary claims, probably exactly because the situs is here much more contentious, but the notion of the application of the lex situs in respect of physical assets may still remain too strong to allow a bulk transfer under some unitary (domestic) law for these assets. This awaits transnationalisation. Unlike bulk assignments, the bulk transfer of tangible assets located in different countries will therefore not be here broadly discussed much further from a conflict of laws point of view and we will concentrate on situations (a) and (b). It has already been said that when assets move, normally, in the traditional conflict of laws approach, proprietary rights are assumed to be created pursuant to the lex situs of the country of origin of the asset, that is the place or situs where it was at the time of the creation of the interest in the asset. At issue, in terms of creation of the proprietary right, are the matters of power, intent and formalities. It is a question of disposition rights of the transferor and of the contractual arrangements and proprietary implementation or formality requirements, in the case of security interests usually in the sense of some documentation and forms of delivery or registration (see also section 1.4.1 above). So it must be assumed that in the classical conflict of laws approach, always pointing to some domestic law, the lex situs of the country of origin in principle determines these issues of power, intent and formalities, including the disposition rights. This may be sufficient if the asset remains in situ. But once an asset moves to a new situs, either as part of the transaction or later, the conditions under which acceptance or recognition may follow elsewhere are more likely to be those of the lex situs of the country of destination and are then likely to be closely related to its public order. It may at least have some relevance. Indeed, there are some tests. Under it, recognition under the law of the country of destination tends to centre foremost on the proprietary right having been properly created at the original situs. It means first that it must be created under the
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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 or public order requirement in the recognising country. One must assume that no such adverse policy exists if there are the same or equivalent proprietary rights operating in the recognising country as a matter of acquired rights.350 The key is thus to accept that in the case of conflicts in a proprietary sense, principally occasioned when assets move (therefore a typical 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, which may possibly involve a kind of adaptation. This means that if the interest is properly created under the law of the country where the asset was at the time of creation and the country of destination has a similar proprietary right under its own lex situs, the proprietary right created in the country of origin of the asset may be more readily accepted at the new situs. In the case of a full ownership right, this will normally be the case and recognition will be implied.351 Indeed, it seems to be a matter of the acceptance of acquired rights. More problematic may be the recognition of more limited ownership interests such as temporary ownership rights, especially reservations of title or other conditional ownership rights, security rights or common law equitable proprietary interests such as 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 proprietary rights, even if more atypical, could be altogether ignored elsewhere, although particularly their rank and status might still be affected in an execution against the asset. This is then primarily a question of the lex executionis or of the lex concursus in the case of bankruptcy at the (new) situs.352 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 among creditors with similar interests in the recognising country. In other words, if charges in assets require registration in the country of execution and local creditors are subject to this rule under penalty of losing their security, foreign creditors without such registration duty in the country of origin but with an equivalent charge could seek to prevail at the (new) place of enforcement. It will be a (public) policy question of the 350 The problems in this connection are as yet little discussed, but see CGJ Morse, ‘Retention of Title in nglish Private International Law’ [1993] Business Law Journal 168, 174, and further also HLE Verhagen, Conflit E mobile bij roerende zaken (Studiekring Offeraus, Kluwer 2007). 351 This is so even if it concerns goods stolen at the original situs, subsequently transported and sold in another situs to bona fide purchasers and offered by them for resale in the original country, an example frequent in the art world: see in England, Cammell v Sewell (1860) 5 H&N, 278, and Winkworth v Christie, Manson and Woods Ltd [1980] Ch 496; see also Morse (n 355) 184. 352 See also JH Dalhuisen, ‘International Aspects of Secured Transactions and Finance Sales Involving Moveable and Intangible Property’ in D Kokkini and FW Grosheide (eds), Molengrafica (Lelystad, 1994) 405, 430.
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recognising court to what extent this discrepancy can and will be accepted. It cannot be denied or avoided that the recognising court exercises considerable discretion here. Even if full ownership rights rather than security interests or charges are involved, the creation aspect itself may still need some further consideration if movement is considered at the same time. This may be best illustrated by an example. German law requires delivery for title transfer in goods; English law does not: see section 1.4.2 above. If as part of the sales agreement the asset must be delivered in the other country, the question arises whether the transfer of title will be under the law of the country of origin or of destination. Thus if a German resident and an English resident conclude a sales contract in Germany concerning an asset in Germany that under the agreement must be delivered by the German seller to the English buyer in England, the question is when title passes and therefore what law applies to the title transfer. Is it the law of the country of origin or of destination? In line with what has just been said, one would expect the applicability of the law of the country where the asset is at the time of the conclusion of the sales agreement as to the time and manner of the creation of the ownership right, here German property law, requiring delivery even if it will not take place in Germany while the sales agreement itself may be under English law. It may be recalled that proprietary issues are in principle not at the free disposition of the p arties because of the third-party effect and parties cannot therefore select or formulate by contract the applicable legal regime at will. It means that the asset, upon arrival in England, is still owned by the German seller, even though under English law the title would already have passed, while title transfers in England only upon the delivery and the asset remains part of the seller’s estate until that moment, relevant especially if the seller should go bankrupt in the meantime. In the reverse situation, in which the contract had been concluded in respect of a chattel in England that was to be transported for delivery by the English seller to Germany, the goods upon arrival in Germany would already be owned by the German buyer, English law not requiring delivery for title transfer, and they would no longer be part of the English seller’s estate in his intervening bankruptcy even if German law applied to the sales agreement. Where in this last case title has already transferred in the country of origin, this title transfer would be a matter of recognition in the country of destination, here Germany. In the circumstances, it is likely that German law would accept that the title transfer had already happened, as in the case of a transfer of the full title there is an obvious equivalent proprietary interest in Germany. The situation might be different, however, if only an equitable or limited ownership or security right had been created in this manner in England, for example under a trust which, at the English situs of the asset, could have been perfectly legally created by a German settlor, even pursuant to a German contract in favour of a German resident beneficiary in respect of an asset located in England. But the question of equivalence and public policy would arise in terms of recognition of this interest upon arrival of the goods for use by the German beneficiary in Germany, particularly if there arose a subsequent German bankruptcy of the settlor in which the proprietary interest of the beneficiary in the asset upon its arrival in Germany would have to be considered. Would it be respected in Germany where there is no clear equivalent? This may be much more doubtful. The consequence would be that the beneficiary might have no
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more than a contractual claim to his benefit rather than a proprietary right and could therefore only claim damages for loss of it as a common, unsecured creditor. However this may turn out, the validity of the interest created at the original situs of the asset depends on the law of the situs of the asset (in terms of power, intent and formalities) at the time of the conclusion of the agreement and not on where or under which law the agreement itself was concluded or operates. So, contractually, parties can agree any type of proprietary interest they want (perhaps even against the public policy requirement of a foreign law of contract under which they operate as long as the asset is elsewhere), but whether and when such a proprietary right attaches depends in the now traditional conflict of laws view on the objective law of the situs of the asset at the moment of the conclusion of the agreement. In this vein, it is possible to create in one country under its contract law security interests in an asset that is located in another country, provided the formalities (if any) of that other country are complied with. If subsequently the asset were to move to the first country or to a third country, the security interest would still be subject to the recognition process in that country and if the interest so created is not allowed in the recognising country or has no equivalent there, recognition is likely to be withheld or the interest may be varied to the nearest equivalent while its ranking may be further determined by any formalities (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 proprietary law and its effect is likely to remain the same under modern private international or conflicts law. To highlight yet another variation, the following example may also be of interest. Assume that two German residents conclude a sales agreement in Germany, under which an asset in England is sold by the one to the other for transfer to Germany. As we have seen, title in the asset would under the lex situs transfer immediately. Yet if the Germans had expressly agreed that title was to pass only upon delivery or if that followed from their relationship, for example in a cost insurance freight (CIF) contract when title transfers on the tendering of the bill of lading by the seller to the buyer, the title transfer in England could under English law still be delayed pursuant to the intention of the parties. It may vary the normal rule of instant transfer under English law. In such cases, the delay is still a matter of the English law of the original situs, however, which allows it, and not of German (contract or proprietary) law. One could of course argue that it was always the intention of the German parties that title should pass upon delivery, as they would not know any better, but English law, as the law of the situs at the time of the conclusion of the agreement, would probably require a clearer expression of the intention to delay title transfer under sections 17 and 18 of the Sale of Goods Act 1979, although in a CIF sale the delay may indeed be implied: see section 2.1.5 below. The question is whether the delay in title transfer until delivery in Germany subsequently makes German law applicable in the title transfer and delivery formalities it requires. That seems to be the result, as it can only take place when the asset arrives in Germany, therefore at the new situs. If the German contract itself proved invalid, the effect on the title transfer would again be a question of the lex situs, and if the asset were still in England, English law would apply. As we have
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seen, it maintains on the whole an abstract system of title transfer except in the case of fraud and the title would therefore not automatically return to the seller in Germany, even less so in the case of a rescission of the sale agreement upon default: see also section 1.4.7 above. It was earlier identified as the important issue of finality. Rights of bona fide purchasers of an asset are also determined in the first instance by the law of the location of the asset at the time of the title transfer, therefore by the lex situs of origin. Thus if the German seller of the English asset were not the owner, his German buyer could not rely on his bona fides under German law but only on the n arrower concept of it under English statutory law: see section 1.4.8 above. Had the asset been in the US, where for chattels delivery is still required for title transfer (except where the parties agree otherwise), title transfer would only have taken place in G ermany upon delivery in that country, and the German bona fide purchaser protection would in that case have prevailed, therefore the law of the new situs under which delivery took place. A special complication may present itself 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 destination). 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 also substantially nationalised following the codifications in Europe at the beginning of the nineteenth century, although never entirely satisfactorily so: see more particularly section 2.1.1 below for the bill of lading. The modern Eurobond as a bearer paper may be an example of a more compelling recent variant and expression of a transnationalised ownership concept in terms of a negotiable instrument: see Volume 1, section 3.2.2. It is a fundamental thesis of this book that if the concept of transnational ownership is so (re)established, there is no reason in principle why it should not start operating more broadly, therefore also in other types of assets that may be considered internationalised. There is in any event no reason why this concept should not be further explored: see also section 1.1.9 and the introduction to section 1.8.1 above. It would probably mean that party autonomy as expressed in the parties’ contractual arrangement and the law applicable thereto would acquire a greater significance in the proprietary aspects of professional dealings; already greater party autonomy may here be especially relevant for intangible assets (see section 1.9.2 below) always subject, it is submitted, to the unhindered protection of the commercial flows. This law could itself
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be the lex mercatoria (see further section 1.8.5 below), as it always was for negotiable instruments and documents of title. To begin with, this may then apply to all assets that habitually move across borders, such as ships and aircraft, or to assets that may be permanently on the high seas such as oil rigs, but there is no reason not to extend it to all assets that move under the contract as in trans-border sales. Although in a transnationalised environment the creation of proprietary rights may be left more fully to professional parties operating at an international level, the third-party effect of the type of property rights so created cannot be left entirely to the will of the parties either and is therefore also not truly a matter of party autonomy, as it never was in purely domestic systems either, including in common law where there is nevertheless greater freedom in the creation of equitable proprietary rights, as we have seen in section 1.3.1 above and as was highlighted many times thereafter. Because of the third-party effect, there is here always some objective or mandatory limiting element or public policy aspect, in civil law countries often connected with the requirement of (some) publicity of the interest so created or of possession of the asset, either physically or sometimes constructively. Again, more practical would be a reinforced (uniform) protection of bona fide purchasers or rather of all purchasers in the ordinary course of business of commoditised products to cut out all adverse proprietary interests in chattels and intangible assets (except, therefore, in respect of insiders such as banks and suppliers who are able to make their own enquiries), whether domestic, foreign or transnational, in order to protect the commercial and financial flows. As will be further discussed in section 1.10 below, it is not to be excluded that these mandatory concepts and protection needs in respect of the ordinary commercial flows are themselves becoming transnationalised. This could at the same time allow for greater party autonomy in this area and make it manageable. Fundamental legal principle, of which ownership is an important aspect, and supporting transnational custom may provide here the objective elements necessary to establish ownership at that level vis-à-vis third parties (and creditors of the interest holders so created): see more particularly also Volume 1, chapter 1, section 3.2.2. Again, the trend has long been clear in negotiable instruments, including Eurobonds, and most likely also for documents of title such as bills of lading. Where monetary claims are increasingly commoditised and their free negotiability established regardless of contrary contractual clauses and defences (see section 1.5.7 above), the same could apply to them in the nature of promissory notes and there is no reason why chattels should then be exempt. This would also affect the manner of title transfer (or creation of other proprietary interests in the asset) and indeed the protection of bona fide purchasers or purchasers in the ordinary course of business of these assets. It is in fact somewhat unexpected that in international sales that require movement of the goods, the transfer of ownership, which is its real objective, still remains largely unsettled even in traditional private international law. The total value of the trans-border trade in goods is estimated by the World Trade Organization to have reached a US$ equivalent amount well beyond 15,000 billion per year, title in which thus remains largely unclear, at least until the moment of physical delivery. The somewhat humbling conclusion for conflicts lawyers
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must be that this does not on the whole seem to matter a great deal or to present a substantial impediment to international trade. Neither do the considerable vagaries of the international sales laws in their contractual aspects, which also often remain unsettled, even under the Vienna Convention (see Chapter 1, section 2.3 above). But it is very different for security interests and finance sales. In any event, it could be argued that the surge of international trade is now such that it no longer accepts domestic laws and concepts as an impediment to it and seeks to transform the proprietary and other legal concepts if necessary at a transnational level. It is entirely appropriate and indeed necessary to study the law in the commercial or professional sphere increasingly from this perspective. This was the subject of Volume 1. Again, in proprietary matters, this is especially obvious in respect of assets that move to another country as part of the sales process but it 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). The same is true for receivables, where the need to transfer them in bulk regardless of location is another issue as we shall see in section 1.9 below. But also the operation of security interests in transnationalised assets such as ships and aircraft needs to be considered further. The same goes for repos and other types of finance sales cross-border, such as finance leases of ships and aircraft, see also the 2001 UNIDROIT Cape Town Convention and Aircraft Protocol. Another issue is the need to transfer future assets, especially as security if replacement assets are to be included. On the other hand, in international sales without purchase money securities or other security interests attached, there is a particular reason why the international proprietary problems should not be exaggerated. In these sales, the accent is normally on the transfer of risk, the allocation of costs and income in connection with the asset and the place of the physical (not legal) delivery and the cost of transportation and insurance. These matters can all be decided in the contract and are not proprietary. It is the reason why in the US the UCC in its Article 2 on the sale of goods no longer attaches great importance to the title transfer and seems to consider the concern about ownership largely a metaphysical urge. The 1980 Vienna Convention on the International Sale of Goods does not deal with proprietary issues at all, although for different reasons: there was hardly a unifying concept. Nevertheless, wherever assets may be and whatever rights may be created in them, proprietary aspects still figure in respect of purchasers of the interest and creditors of the interest holders, especially in execution sales and in bankruptcy, and may then figure very large indeed. Who owns what or who has security interests of whatever nature and rank in these assets or were they transferred in a finance sale? These events require clarity in the proprietary aspects, especially when these assets are used for funding purposes or sales price protection. Buyers need to be clear in a legal sense about what they buy even though under the lex situs they may be protected if bona fide and in physical possession of the asset, which reduces their exposure but again there may be differences. Finality especially remains an important issue here, as we shall see, and may itself become a matter of transnationalisation to provide the n ecessary clarity and avoid unnecessary conflicts.
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1.8.3 The Notions of Equivalence and Adaptation; Temporary and Conditional Ownership, Security Interests, and Retention Rights Requiring equivalency for recognition of foreign proprietary rights in assets that move may sound rational but is a legal criterion of dubious value. A reservation of title might, for example, exist in both the country of origin and that of destination, but may still be very different. In France, for example, the right is of an accessory nature,353 and therefore transfers 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 Netherlands,354 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 no longer has 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 US, under Article 9 UCC, reservation of title, even if the term is used, is, as we have seen, fully equated with a security interest to the point that it requires upon default an execution sale with reimbursement of any overvalue to the debtor, while in Europe a US reservation of title 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 or adaptation upon a cross-border move of the asset. 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.355 Whether the reverse could be true for a German car moving to France without publication of the security interest there (Germany does not require such publication, but France does) is another matter. The result would be published and unpublished interests serving the same purpose operating side by side, a problem emerging in all cases upon recognition of foreign security rights if the local equivalents require domestic publication or registration for their validity and ranking as we have already seen. Whatever the result, it is clear that the equivalence test cannot be taken at its face value. As far as the formalities are concerned, it follows that a US reservation of title in a piece of professional equipment may easily be accepted in the Netherlands and may 353 354 355
Cour de Cass, 15 March 1988, Bull civ IV, no 106, see also Vol 3, ch 1, s 1.3.4). HR 18 Jan 1994 [1994] RvdW 61. BGH, 20 March 1963, BGHZ 39, 173 (1963).
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well allow the US seller to repossess the asset in the Netherlands upon shipment of the asset to that country, even though the seller could not have done so in the country of origin. A Dutch seller would certainly not have a similar repossession right in the US when the relevant asset in which he had reserved title in the country of origin was s ubsequently shipped to a US port. Without having filed a finance statement in the US, the Dutch seller of professional equipment may have lost his protection altogether upon shipment of his asset to that country (as only reservations of title in consumer goods do not need this type of publicity in the US). The interest is not perfected although it may still be considered attached, ranking it just above the ordinary creditors. For perfection, filing is likely to be an extra recognition requirement in the US, which other countries might not similarly impose. For example, although nonpossessory 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 conflict approach, which always looks for a domestic law to apply, the key for recognition of foreign limited proprietary rights is thus in the adjustment and conversion of the foreign proprietary right as part of the determination of its status and rank in the law of the recognising country upon movement of the asset to that country, at least if it concerns a foreign security or similar right, particularly relevant in an execution at the new situs. 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. In that sense, reference to the lex situs of the country of origin or even of the recognising country may not mean a great deal. The question is whether the interest was properly created in the country of origin (while the asset was there) and to what extent it must or can be adjusted in the country where it is invoked (upon the asset moving to that country), which adjustment may even apply to the execution or bankruptcy laws of the recognising forum themselves.356 It could even introduce a measure of transnationalisation of the interest, but in most countries the discussion is unlikely to take that direction for the moment. In the case of retention rights, as a matter of private international law, the lex situs of the asset will in principle 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 356 Another example may throw some further light on the problem. A French reservation of title in a car after it has been moved to Belgium, where the law did not accept reservation of title to be effective in a Belgian bankruptcy until 1998, did as a consequence not have much effect in a subsequent bankruptcy of the buyer in Belgium even though properly created at its original situs and not rejected as such in the country of destination. It would have required the Belgian courts to make special room for it on the basis of the foreign properly acquired right (for value), which would seem unlikely: Commercial Court Brussels, 22 March 1988 [1989] RDCB 633, cf also F Rigaux, Droit international privé II (Brussels, 1979), no 1111. It would have such effect, nevertheless, if the car were subsequently moved to the Netherlands and a Dutch bankruptcy of the buyer would follow, as Dutch law accepts the consequences of the reservation of title fully under its own bankruptcy law: see further JH Dalhuisen, International Insolvency and Bankruptcy (New York, 1986) 3–398ff.
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common law countries these retention rights are often statutory liens not giving rise to an e xecution facility. In civil law that is the same except under some more modern statutory law, such as that of the Netherlands: see also section 1.4.10 above. When the retentor moves the asset to another country, the nature of the retention right may be affected in these aspects at the same time and there may then also arise questions of adaptation and adjustment in the same way as just mentioned for security interests in goods that are moved to other countries.357 It has already been said in the previous section that the notion of the nearest equivalent may acquire a special interest in common law countries when foreign interests are made subject to greater party autonomy in terms of the applicable law. It is likely that the foreign interests so created will be considered equitable proprietary interests as nearest equivalents further subject to bona fide purchaser protection in the recognising common law country. This may even concern assets that never moved from or to a common law country if there status becomes an issue there. This protection makes party autonomy and any inroads into the numerus clausus of proprietary rights it is likely to entail more palatable, also at the international level, for example in an international sale between parties from different countries in which the assets do not move. As we have seen, it is an important feature of conflicts law in common law countries in respect of foreign interests.
1.8.4 Trusts: The 1985 Hague Convention on the Law Applicable to Trusts and their Recognition In section 1.6 above, a basic outline of the common law of trusts was given. In crossborder 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 offshore trusts, however, such as those in the Channel Islands or in the Caribbean) and the trustee took control of the assets. Normally, the trustee may defend these assets and his title therein, also in a foreign country or in foreign bankruptcy, as he is considered the full owner for these purposes even in (civil law) countries that do not accept the trust notion. In that case, they will probably consider these assets part of the trustee’s estate, however, which might even include assets 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 357 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 the law of which is more congenial to these rights.
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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 may 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 section 1.6.6 above). It would be relevant especially if the assets were moved to the country of the bankruptcy. The rank of the security interest would in any event have to be determined and 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) assuming the trust in respect of them was created there, even if the foreign bankruptcy itself could be recognised in principle in that country. More complicated is the question whether assets at the time of the creation of the trust located outside the country where the trust is created may also be included if the lex situs itself does not have the concept, quite apart from the question whether any trust so created could be recognised in the country of the assets concerned. This is the situation with offshore trusts, which are often assumed to be able to cover such foreign assets. Yet there could be legitimate doubts in this aspect as the creation of proprietary rights normally follows the 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, while France is also contemplating ratification. It is mainly a vehicle for recognising the typical common law trusts, although according to the Preamble,358 similar civil law structures are also covered, and among civil law countries Liechtenstein and Luxembourg in particular developed them:359 see for approximations also section 1.6.5 above. France has now 358 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. 359 See for similar structures in other non-common law countries also ibid, nos 33ff.
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also introduced a form of trust as we saw, which could also benefit from the recognition facilities of the Convention if showing the characteristics of Article 2. The approach of the Convention is to recognise trusts that are created according to the law applicable under the conflict rules of the Convention (Articles 6–10), assuming that such applicable law provides for trusts (Article 5). Key is here that this law may be selected by the parties. This is an important concession that introduces a measure of party autonomy, therefore, also in proprietary matters. Such trusts will then be recognised in their most salient aspects (Article 11) in Contracting States, no matter whether the country of their creation (including the law chosen to be applicable) is itself a Contracting State. Yet they will not necessarily be recognised in all their third-party effects or against relevant mandatory rules. It depends on the law objectively applicable pursuant to the conflict rules of the forum (see Article 15). Recognition may in particular be withheld if the trust assets are substantially connected with a country that does not recognise the trust in its own law (Article 13) or if there are serious tax avoidance problems (Article 19) or other public policy considerations against recognition (Article 18). It has already been 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 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.
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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 ection 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 (Article 11d), which would in case of property most likely be the law of the situs of the asset. Statutory trusts, like those concerning a bankrupt estate, are always outside the scope of the Convention. The Convention according to Article 4 does not cover either preliminary issues relating, for example, to the validity of the transfer into trust itself or to the underlying testamentary, matrimonial or paternal dispositions, gifts, financial or other structures or security transfers in this regard. The trust is normally the result of such underlying relationships or objectives, the legality or validity of which may thus be an issue. This would be relevant, for example, in the case of lack of capacity, intent or formality, in the absence of consideration or because of fraudulent conveyance considerations or other restrictions on gifts or similar legal acts. As these aspects are not covered by the Convention, it means that the applicable law according to the conflict rules of the forum will determine these issues, which may be all the more important when the trust covers assets outside its country of origin but is invoked in that country or in any other. This raises also the question of jurisdiction in trust matters.360 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 (Article 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
360 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.
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before the Convention the conflict approach had been uncertain while literature on the subject was sparse.361 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 (Article 6). Article 7 gives a uniform conflict rule in the absence of a choice by the settlor, and opts in that case for the law with the closest connection when regard is to be had especially to: (a) the place of administration; (b) the situs of the trust assets; (c) the place of residence or business of the trustee; and (d) the objects of the trust and the places where they are to be fulfilled. It is of interest that the language of Article 6, requiring that the applicable law so established provides for trusts, is not repeated in Article 7. Again the applicable law so established does not cover the proprietary aspects (see Article 8). In fact, the applicable law resulting under Articles 6 and 7 (including the parties’ choice) appears to govern only: (a) the appointment, resignation and removal of the trustee and the latter’s capacity to act; (b) the rights and duties of trustees among themselves if there are more than one; (c) the right of the trustee to delegate his functions or the exercise of his powers, particularly relevant when he must manage the trust property; (d) the powers of the trustee to administer and dispose of the trust assets; (e) his powers of investment; (f) the restrictions on the duration of the trust (law against perpetuities) and on the accumulation of income; (g) the relationship between the trustee and the beneficiary including the trustee’s personal liability to the beneficiary; (h) the variation and termination of the trust; (i) the distribution of the trust assets; and (j) the duty of the trustee to account for his administration. While it is thus clear that the law applicable pursuant to Articles 6 and 7 does not cover the proprietary aspects of the status of the trustee proper and the proprietary protections of the beneficiary’s rights and his tracing facilities, at least the tracing powers are matters of recognition under Article 11, as we have seen. While the Convention does not therefore specifically mention the beneficiary’s in rem protections, it is also made clear that the trustee’s own creditors cannot reach the trust assets (it is not made clear if and when the same applies to the beneficiary’s creditors). Article 11 in fine and Article 15 state on the rights of bona fide third parties who become holders of the assets and leave the determination of their rights to the law 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 Articles 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 (Article 6). This is a 361 See for the Recognition of Trusts Act 1987 giving effect to the Hague Convention and more extensive comment, Dicey and Morris on the Conflict of Laws, 15th edn (London, 2012) 1485ff.
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very liberal approach, balanced, however, not only by public policy considerations in the recognising country (Article 18) but also by the more elaborate provisions of Articles 13 and 15, already mentioned above. Where the applicable law results from the more objective choice of law rule of Article 7, the same rebalancing is possible but probably less necessary. The recognition according to Article 11 implies as a minimum that: (a) the trust property constitutes a separate fund; and (b) the trustee’s capacity is recognised. The recognition also implies elaboration of these two principles, but only to the extent that the applicable law so provides and is then in particular likely to imply: (a) the lack of recourse by the trustee’s personal creditors against the trust assets; (b) the exclusion of the trust assets from the trustee’s estate upon his insolvency; (c) the exclusion of the trust assets from the trustee’s matrimonial property regime; and (d) the tracing rights of the beneficiary, which is subject to the protection of bona fide holders if they are protected under the law applicable pursuant to the conflict rules of the forum in this aspect (normally the lex situs, as we have seen). Except for the tracing point, it is curious that the other three consequences of recognition are still made subject to the applicable law since, without them, a trust would hardly exist. Article 13 limits recognition if the trust (except for the choice of the applicable law, the place of administration and the habitual residence of the trustee) is more closely connected with states that do not have the trust in their own law. Article 15, moreover, accepts that the recognition of foreign trusts cannot go against applicable mandatory rules of the recognising country (expressed as not being able to go against the mandatory rules of the law applicable under the conflict rules of the forum). These rules may in particular (but not only) concern: (a) the protection of minors and parties lacking capacity; (b) the personal and proprietary effects of marriage; (c) succession rights, especially with regard to the legal minimum distribution rights of relatives; (d) the transfer of title to property and security interests in property; (e) the protection of creditors in insolvency; and (f) the protection in other respects of third parties acting in good faith. The Convention has a number of unavoidable weaknesses, which may still be softened or remedied by the implementing legislation into domestic law. Thus, Dutch implementing legislation allows its own mandatory rules concerning the transfer of title and of security interests and the protection of creditors in the case of insolvency (Article 15(d) and (e)) to be superseded by the recognition of foreign trusts even in respect of trust assets located in the Netherlands at the time of the creation of the trust. Article 15(d) and (e) could in fact have led to the substantial frustration of recognition in the Netherlands. Clearly the Dutch legislator meant to provide for a broader recognition possibility and any limitations are to be restrictively interpreted. In respect of trust assets located in the Netherlands, it means a deviation from the lex situs principle (except that in respect of real estate in the Netherlands the interest of the trust will require registration, compare also Article 12 of the Convention and Articles 3.17(1)(a) and 3.26 CC). A similar deviation from the lex situs is also increasingly common in the conflicts rules concerning matrimonial property rights and in inheritance matters. It may also result from a more liberal recognition of foreign bankruptcies.
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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 3, chapter 1, section 1.2.2), is also not seen as an impediment while it is expressly left to the Dutch courts to fit the foreign structure into the Dutch system of proprietary rights. The impression is given that the Dutch legislator, aware of the untenable aims of Article 3.84(3) in its new Civil Code of 1992, accepts the recognition of foreign trusts with Dutch trust assets as a way to rectify the situation to some extent. Under the Convention, a close connection of the trust with a country other than the recognising one remains necessary for recognition. In this sense, the trust must be a truly foreign trust. A mere choice of law in favour of the law of a foreign country or the choice of a foreign trustee or a fictitious foreign place of administration is not sufficient to achieve foreignness in this sense, especially if there are substantial trust assets in the country where recognition is sought. It seems therefore likely that only trusts that substantially function outside the recognising country are capable of recognition so that the trust assets in the recognising country may not be substantial or at least not a substantial part of the total trust assets. Unavoidably there remains here an element of doubt about where the line must be drawn and there is a measure of discretion for the recognising judge. The Dutch implementation statute in its favourable bias towards recognition may well have given the Dutch courts greater freedom here.362 Similar approaches may be taken in other countries to make the recognition regime of the Hague Convention more meaningful.
1.8.6 Uniform Laws Concerning the Proprietary Aspects of Chattels Attempts at a uniform law regime, especially in respect of secured transactions in chattels, were made by UNIDROIT in its 2001 Convention on International Interests in Mobile Equipment (see Volume 3, chapter 1 section 2.1.10) and for finance leasing see also the Ottawa Leasing Convention of UNIDROIT of 1988 (Volume 3, chapter 1, section 2.4.5). In respect of receivables, the UNIDROIT Factoring Convention of 1988 and the 2001 UNCITRAL Convention on the Assignment of Receivables in International Trade are also relevant (see section 1.9.5 below and Volume 3, chapter 1, section 2.3.5). There is further an earlier Geneva Convention of 1948 on the International Recognition of Rights in Aircraft. It was widely adopted and was followed by an International
362 For Italy, the liberal inclusion of domestic assets in foreign trusts has been advocated by Professor Lupoi, ‘Trusts and Civilian Categories (Problems Spurred by Italian Domestic Trusts)’ in Helmholz and Zimmermann (n 299) 507.
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Convention on Maritime Liens and Mortgages also concluded in Geneva (in 1993), which met with less success. Together they concern aircraft and ships and accept the law of the country of registration of these assets as decisive for the security interests created in them. No substantive law is created here. There is also a 1926 Brussels Convention on the Unification of Certain Rules Relating to Maritime Liens and Mortgages, followed by another one in 1967. These Conventions concern substantive law and have been widely incorporated into domestic laws, although often in quite different ways. In 1994, the EBRD presented its Model Law on Secured Financing. This will be discussed in Volume 3, chapter 1, sections 1.1.8 and 2.1.9. Some efforts at harmonisation were also made earlier within the EU (see Volume 3, chapter 1, section 1.1.8) and also now pursued in the DCFR (see section 1.11 below). The sum total of efforts in this area remains limited and they are geared to special areas of the law.
1.8.7 The Modern Lex Mercatoria Concerning Chattels. Earlier Approaches in the Law of Admiralty: The Maritime Lien In Volume 1, chapter 1, section 3.2.2 and in section 1.8.2 above, the important development of the lex mercatoria in proprietary matters was discussed and especially the notion of transnational ownership in connection with negotiable instruments, documents of title, and the modern Eurobond. For security interests in them, the key here is possession or control. This was also demonstrated in their relationship to assets on the high seas: see also section 1.1.7 above. So far, there appears to be little latitude for more sophisticated non-possessory security interests under the lex mercatoria. It was also said, however, that there may be room especially for conditional sales and title transfers and that may be the more appropriate manner to organise chattel-based funding under the lex mercatoria, dispensing with numerus clausus restrictions but subject to better bona fide purchaser protection at least to the extent they are given adequate control. This is considered in this book the essence of a dynamic movable property law operating at the transnational level, first mentioned in Volume 1, chapter 1, section 1.1.6 The contours of a modern property approach transnationally, particularly important in international finance, were already described in section 1.8.1 above and will be further explored below in section 1.10. The Hague Trust Convention may also be of use here if newer asset-backed funding structures are operated behind formal trusts, but it should be noted that the Convention does not present uniform law and is cast in the traditional mould of a choice of domestic laws only and their recognition elsewhere. In the previous parts of this book, the continuing impact of the lex mercatoria has been demonstrated (see in particular Volume 1, chapter 1, section 1.4.4 with respect to negotiable instruments, in modern times more particularly relevant for Eurobonds). However, the law of admiralty should not be overlooked in this context either, here especially for the effect of the maritime lien on ships following from its operation and the contribution of third parties thereto in terms of wages, but also unpaid freight, salvage and torts. The subject has received little attention in academic writing, certainly
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in more recent times363 and has remained more of a practitioners’ concern where their practices remain important. Assuming local courts accept jurisdiction, which in common law countries they do restrictively subject to a hefty forum non conveniens approach, they are likely to reinterpret their own laws to make way for these liens. This means that they are accepted for what they are in admiralty, whether or not supported by treaty law, such as the Brussels Convention of 1910, although they are transformed so far as necessary in domestic laws. This is much like recognition at the situs of destiny as the general rule in all international proprietary issues under the more classical conflict of laws approach, with the difference that in admiralty there is this transnationalisation of the concept on the basis of the practices in the international maritime markets.364 Similar attitudes result when, as in a bankruptcy, local public policies may be at stake, for example in matters of ranking or set-off. In other words, the more the foreign interest impinges on local ones, the more likely it is that local courts will protect own (governmental) interests. It was also said that this may be different in international arbitrations, international arbitrators having no natural lex fori to apply or to defend, while their awards in these matters also have international currency under the New York Convention, even though still subject to the public policy bar of that Convention in recognition countries. This is itself, however, increasingly interpreted in a restrictive manner—see the discussion in Volume 1, chapter 2, section 1.6.
1.9 Private International Law Aspects of Assignments 1.9.1 Conflict of Laws Issues in Respect of Monetary Claims. The Special Problems with Bulk Assignments The international aspects of the rights in claims remained long ignored in private international law and this part of the law may even now be considered underdeveloped as the law of assignment itself mostly still is. This is relevant especially in respect of the proprietary rights in receivables, therefore in respect of their asset status internationally. The situation is generally complicated because of (a) the problems with the asset status of claims more generally, domestically, especially in Germany but even in England,365 363 One has to go back the writings of Ernst Rabel and Albert Eherenzweig, see E Rabel, The Conflict of Laws 4 (Ann Arbor 1958) and AA Ehrenzweig, Private International Law 1 (St Paul 1974) 196. 364 cf in the US, Brandon v Denton 302 F 2d 404, 410 (5th Cir 1962) and Barnouw v SS Ozark 304 F 2d 717 (5th Cir 1962). 365 It may be recalled in this connection that a claim according to its internal aspect is always obligatory, even if only acquired upon an assignment, but according to its external aspect, therefore in respect of third parties, it is an asset like any other, capable of transfer and the creation therein of ordinary proprietary rights, like ownership, usufruct and security interests; see also s 1.1.4 above. We further have seen 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 s 1.5.1 above. This complicates the private international law approach, where, as a consequence, the analogy with other assets, notably chattels, may be lost, especially relevant in the proprietary and enforcement aspects. As we shall see, the law applicable to
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(b) the lack of understanding of the nature of a modern receivable, especially the issue of its approximation to the promissory note, and (c) the problems with determining its location, which is commonly considered a key element in finding the applicable (domestic) property law under traditional conflict of laws rules. In fact, even domestically as we have seen, there is often a poor understanding of the legal nature of claims and of the modern needs in this regard, which is also reflected in their uncertain treatment at the international level in private international law. There are here major unresolved policy issues which result in considerable differences in approach between the various legal systems and with which private international law has found it difficult to cope, in the proprietary and enforcement aspects even more so than for chattels. One consequence is that the approach to chattels in private international law is not followed in respect of claims, probably one aspect of the difficulty in determining their proper location. It follows that there is altogether no recognised traditional legal framework for assignments in the conflict of laws. Another aspect is that the emphasis is here often on transfers or assignments of claims in bulk, which, as mentioned in section 1.8.1, is not (yet) the major issue for chattels located in different countries. These problems are acquiring a particular importance in international financings and often arise there in the context of the bulk transfer or assignment of claims with debtors in various countries to support one single funding transaction, for example by way of a security transfer of a portfolio of receivables with debtors in different countries. This problem of the applicable law could even arise between a (security) assignor and (security) assignee in the same country. Similar issues arise in loan securitisation as we shall see. For reasons of efficiency and clarity, the question is then whether under the rules of private international law it is possible to find and accept one (national) single regime or unitary approach under one domestic law or perhaps the modern transnational lex mercatoria that would cover the transfer of each claim in the same manner, the effect of which being then also the same at the place of and in the enforcement against each debtor. Clearly, the situation may here be further complicated if the assignor and assignee are in different countries. But even if there was only one claim assigned, there may still arise problems of how the assignment is to be conducted and under what law. As in the transfer of any proprietary right (and unlike the manner of its original creation in the law of obligations), this concerns in particular the aspects of power, intent and formalities (see also
the internal aspect is then soon transposed to the external or proprietary and enforcement aspects as well. This transposition, if at all correct, further raises the issue of party autonomy in the choice of law in proprietary aspects: see on this point the text below. The essence is that even though all debts arise from an obligatory relationship, eg tort, unjust enrichment or a contract, its asset status arises at the same time but becomes visible especially in the case of a transfer or assignment (which is another way of becoming a creditor, subrogation being yet another) and is therefore mostly considered only in that context, when, however, different requirements exist for becoming a creditor. 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] Weekblad voor Privaatrecht, Notariaat en Registratie 6824, 1038, 1039, a misunderstanding also common in Germany, note Drobnig (n 84). There are no proprietary rights as such between contract parties: all is here obligatory but the claim is an asset in respect of third parties. Proprietary effect is by definition third-party effect, no more, no less.
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section 1.5.1 above) and of the law applicable thereto, more particularly therefore in respect of the determination of the disposition right in the relevant claims, the contractual requirements for their transfer, or the creation of more limited proprietary rights therein, and any documentation, notification or registration needs in this connection. Again, the approach to chattels is here not commonly followed, which might serve only to increase the confusion. There is subsequently also the question of what type of proprietary rights may be created in this manner—full transfers of title, security interests, or conditional or temporary interests in the claims concerned—and whether such rights, if properly created, could find acceptance elsewhere, eg in a foreign bankruptcy or other type of enforcement, and under what circumstances or conditions. Again, that is, in practice, more particularly the issue in bulk assignments of entire portfolios of receivables with debtors in different countries, often as security (or as finance sales) in an international funding operation while assignor (usually a commercial company) and assignee (usually a bank) may also be in different countries. It may also be an important issue in asset securitisation. An important point to repeat in this connection is that the types of proprietary rights that may operate in claims and how they are created, transferred or assigned are, as for other assets, subject to the prescriptions of the objectively applicable property laws and as such commonly not considered matters of party autonomy. This is so both in terms of (a) the creation of the proprietary rights and their transfer or assignment for whatever purposes and (b) the choice of another legal system in respect of them than that of their situs, even if, as we shall see, there are other views possible here for intangibles while their situs may not be easy to determine. Although in common law countries more generally a foreign law might be more freely selected in respect of the proprietary regime as already mentioned for chattels, which for claims could be relevant especially upon the occasion of an assignment (for security or other purposes), such a choice of a foreign law would only result in equitable proprietary rights in the asset or claim, subject therefore to the protection of the ordinary flows. This means here the protection of the bona fide creditor or the creditor in the ordinary course of business who manages to collect under such (foreign) rights. This was explained in section 1.8.1 for chattels and needs no repetition. But even if no transfer or assignment takes place, one could still ask what the status of a claim is internationally, in particular when creditor and debtor are in different countries, and under which law this is to be determined. This may go back to original creation of the claim under the law of obligations. As in the case of chattels, it may be useful to distinguish here as well between the contractual, proprietary and enforcement aspects of claims, while adding, in the case of an assignment, as a special concern, the protection of the debtor. This reflects the internal aspect of the asset and is a special assignment complication.366 If we ignore for the moment the origin of the claim in
366 Although it is 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 proprietary and he may usually waive his defences in this connection in the underlying contract (unless public policy or public order requirements dictate otherwise).
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the law of obligations,367 it is clear that for claims the contractual aspects of conflicts of laws normally arise only when debtor and creditor are in different countries. As for the proprietary and enforcement aspects, which can largely be dealt with together (ignoring bulk assignments for the moment), conflicts of laws are foremost likely to arise (as for chattels) when the asset moves between countries. It would result from a change in the situs—for chattels fairly easy to determine, see section 1.8.1 above—but for claims it is harder: see further section 1.9.3 below. If the place of the debtor may be considered controlling in this regard, as will be suggested as the general rule, one could say that true conflicts of laws in the proprietary and enforcement aspect of claims only arise when the debtor moves to another country.368 This is rare for private persons but could be increasingly relevant for companies or trusts. More important may be the situation of an assignment of the claim. Here a conflict of laws arises in a contractual sense only when assignor and assignee are in different countries. In a proprietary sense, even when the claim is sold to foreigners, the issue arise not truly if the claim remains in the same country which is the case as long as the debtor does not move at the same time (which would be most coincidental and therefore unusual). It follows that no proprietary conflicts arise from the mere assignment of a claim, even if the assignee is in a different country. This is probably the true reason why in international assignments369—thus even in assignments between an assignor and assignee in different countries—the proprietary aspects traditionally received so little attention. in particular, the law concerning the enforcement action against the debtor would remain unchanged. Only in the case of an enforcement action against the debtor under a foreign bankruptcy (to the extent it can be recognised in principle at the place of the location of the debtor) would there be the issue of the impact at its putative situs, therefore on the debtor.370 As already suggested, situations in which international proprietary conflicts may be identified in the context of assignments are more likely to arise in the modern environment of bulk assignments of receivables with debtors in various countries (who do not move). It has become a matter of special concern in the context of modern international financings, where the application of one single or unitary legal system to all would be useful and efficient even if still raising issues of recognition at the place of
367 The origin of the claim itself is an obligatory issue, in contract at the international level in the EU foremost a matter to be determined under the 2008 Regulation on the Law Applicable to Contractual Obligations (Rome I). 368 Following the analogy of movable tangible assets in the case of the asset moving between countries (see s 1.8.3 above), this poses first issues of the proper creation of the debt or any other proprietary interest therein (such as a conditional or temporary ownership right or a security interest or, in common law countries, equitable proprietary interests such as floating charges) in the country of origin of the debtor and subsequently issues of recognition of ownership of the debt and the characterisation of any other proprietary interests therein in terms of nearest equivalents in the country of destination of the debtor. Issues of power or disposition right, intent or contract, and formalities such as documentation and publication or registration in the country of origin may thus arise (see s 1.5.1 above) as well as issues of recognition or finding the closest equivalent in the country of destination. 369 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 1.1.6 above. This is changing and particularly bulk assignments of trade receivables have already been marked out as being of ever greater importance. 370 See for the foreign bankruptcy complication, its recognition and effect in the place of the situs of chattels outside the bankruptcy jurisdiction, the discussion in s 1.8.1 above.
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the location of each individual debt, that is, in the place of each debtor, especially in terms of collection, therefore enforcement, and also in terms of the debtor’s proper protection, already identified above as a separate issue, not itself proprietary.371 In view of their significance, unlike in the case of chattels where their moving between countries is the more likely complication as we have seen, the discussion below is t herefore largely centred on bulk transfers, here especially (security or conditional) assignments (for funding purposes) of monetary claims for payment of goods or services that may be recoverable in different countries. As already mentioned, this discussion is important, especially in connection with the use of receivables in international financial transactions, as in floating charges and receivable financing. It is also important in securitisations, Where in the case of these bulk assignments 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 may be binding upon them all. In other words, when must they consider the claims to have transferred to another creditor or assignee thereunder? To repeat: as in all proprietary transfers, questions are first raised as to the proper law concerning power, intent and formalities. That was shown to be so for chattels but it is no less so for intangible assets. Was there sufficient power in the assignor to dispose in this bulk manner and under what law? Was there a valid (bulk) assignment agreement and transfer pursuant thereto, both with sufficient intent, and what if it was deemed to have failed after the claims were already transferred, and which laws must here be considered as applicable, not merely in the contractual aspects therefore, but also in the matter of transfer (and its potential undoing)? 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 of title transfer, probably more commonly prevailing in the case of claims: see section 1.5.9 above and is the issue of finality. The more specific question is thus whether there is conceivably one unitary (even though national) law covering all these aspects. As for the formalities, more especially notification but also documentation and, if the assignment is meant to achieve a secured interest, possibly registration or publication may also become relevant. Again the question is whether short of transnationalisation, there may conceivably be one law that could cover all claims and which law that should be. More particularly, can it take care of the proprietary (and enforcement) aspects in a unitary fashion regardless of the location of the debtors, ideally also dispensing with recognition problems and finding the nearest equivalent in respect of them if the transfer is invoked in other countries? In the traditional private international law approach, this would hardly fit. Any attempt by the parties (assignor and assignee) to select the applicable law to cover this kind of bulk assignment would appear unlikely to succeed, at least in civil law countries. It particularly raises questions of the applicable law concerning v alidity, which poses foremost the issue whether under the applicable law notification is a constitutive
371 Another example of conflict of proprietary laws is perhaps the situation in which a foreign debtor creates a charge (through a more limited assignment) in one of his intangible assets abroad while filing is supposed to happen at the place of the owner/debtor under the law of the charge.
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requirement for the assignment. Bulk assignments would then hardly seem to be efficient. As a form of financing is usually the objective of bulk assignments of monetary claims, the further question is which (domestic) unitary law determines whether the arrangement may be a simple security interest, a floating charge in a whole cash flow, or a conditional/finance sale and what kind of disposition is necessary upon default in these various instances, and who is entitled to the collections and overvalue in the portfolio. Does it still make sense to search here for some national law? A related 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 u nitary approach possible in this regard under tradition conflict of laws theory and which domestic law must then be preferred? In fact, it would more likely need the form of transnational law to be effective even though formally it may not be treaty or uniform statutory law. It could be transnational custom among professional participants. Besides validity, there is also the question of the assignability to be considered, particularly of highly personal claims, claims for services, and claims in contractually blocked accounts and the matter of the assignment of future claims, potentially 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 issue of the defences 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 in this connection is 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. In the traditional approach, the applicable (domestic) law will also have to determine whether the 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 may 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 of the obligations, 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. As we have seen, in bulk assignments the underlying issue is rather whether a measure of unity of the entire portfolio of receivables to be assigned may be legally assumed or construed at the transnational level, even if debtors come from different countries, if necessary under transnational law. Again, short of such kind of unity, practical
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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 would at the same time destroy the possibility of one assignment in bulk, while requirements of specificity or identification in any one country may further 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. In fact, the issues of (a) formalities, (b) validity, (c) time of effectiveness, (d) assignability and (e) defences, just mentioned, may all create special problems if no (transnational) 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, assuming it covers these specific issues), it is hard to find any unitary law among the various domestic possibilities in terms of the traditional conflict of laws approach. As most of these issues are barely 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. Again, by choosing a particular legal system to apply to the assignment, parties may indeed endeavour to influence the outcome and try to achieve the desired unity in the applicable law for bulk assignments of claims with debtors in different countries, even if such a law would be merely domestic whilst these issues are not truly at the free disposition of the parties either. It has already been said that it may be easier in common law resulting in equitable proprietary rights in enforcement countries but it still raises a lot of issues, all centring on the question whether (unitary) proprietary effect can truly be achieved through party autonomy, and no less whether the debtors’ protections under their own laws can be affected, even curtailed, in this manner without their consent.372 Although party autonomy may appear here inappropriate, or at least ineffective in so far as third-party effect, including the proprietary aspects, are concerned, it is 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 the case of claims
372 Parties may, 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. Again, it raises the issue of the applicable law. 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 not truly a matter of party autonomy either unless the debtor co-operates at the moment of the assignment, which raises at the same time the danger of novation and loss of all connected or supporting rights, notably security interests.
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by the p rotection of bona fide collecting assignees (or even all assignees collecting in the ordinary course of business). Such a newer approach, so far only available in equity in common law countries as we have seen, facilitates the recognition of foreign proprietary interests, also in claims, which may then all be considered ‘equitable’ in this sense. As has already been observed in respect of chattels, this approach 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, this may in particular lend support to the question whether receivables may be the subject of finance sales and floating charges if parties so desire under whatever law they choose as the effect in countries like England would always be to protect the collecting bona fide assignee. In civil law that may be more difficult. Again, one other important issue in international finance is here whether the modern receivable may increasingly be considered from the perspective of the analogy with the promissory note: see section 1.5.9 above. Also here in common law countries a choice of a more friendly law may help, but again it is doubtful whether a contractual choice of law can do much about it in civil law legal systems. To repeat, especially for bulk assignments, there may be a need instead for more transnationalisation of the applicable legal regime and reliance therefore in particular on transnational custom or the modern lex mercatoria and its hierarchy of norms more generally o perating in the professional sphere to promote in this way the use of r eceivables in international finance and avoid unnecessary conflict.373 Whatever the regime in respect of bulk assignments, enforcement issues against the debtor may still have to be considered for each assigned claim individually, including the questions of 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 such as a security or usufruct; or who may recover from other assets of the debtor in the case of his default. Here the issues of set-off and netting also arise. 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. Short of transnationalisation, so far it may 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 (fully) at the free disposition of the parties and subject to their contractual choice of law. 373 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, while 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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1.9.2 Terminology and Characterisation Issues Rather than the framework of contractual, proprietary and enforcement aspects, or references to power, intent and formalities, as in the case of other assets, the terms commonly used or the distinctions made in this connection in conflict of laws doctrine concerning assignments are validity, assignability or protection of the debtor, not therefore proprietary aspects, or even enforceability. They were already identified in the previous section but this terminology is necessarily tentative and these terms are all poly-interpretable, although this is not always fully appreciated. It may be said straight away that in these various aspects, the 2008 EU Regulation hardly achieves any greater clarity: see section 1.9.5 below. 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 lack of proper distinction between proprietary and obligatory issues and the matter of party 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 constructively here. But perhaps the most important feature is that for bulk assignments the complications are different than for ordinary assignments, and this may also not be properly appreciated. Neither may be the fact that these issues arise and are more especially relevant in the case of bulk assignments in support of international financing. As for the poly-interpretable terms often used in this connection, ‘assignability’ was used in Article 12(2) of the 1980 EU Rome Convention on the Law Applicable to Contractual Obligations, now replaced by Article 14(2) of the EU Regulation of 2008 (Rome I), but may mean many things: 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, such as a security interest, a conditional or temporary right, or usufruct, thus whether the claims are so assignable; to (c) the modality of the transfer, thus whether the claims are assignable in bulk also in their proprietary aspects; to (d) the protection of the debtor whose debt might not be transferable (as to him) if the assignment creates extra burdens for him; and to (e) the position of various transferees or assignees inter se, who might find that an earlier assigned claim was no longer validly assignable by the same assignor as regards them. The reference to validity, often also used in this connection (although strictly speaking not in the original Article 12(1) or its replacement Article 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
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of proprietary interests created thereunder; or, in the case of a bulk assignment; or (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 here also often used (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 Articles 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 conditions leading to an (automatic) return of some or all receivables, but the reference to enforcement may cover similar ground. Any reference to enforcement (also not directly made in Articles 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 thus be clear 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 such use is unsatisfactory, again because it is not always clear what the terms cover and the same issues may be covered in different characterisations with different consequences for the applicable law. 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
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further investigation of contractual or rather proprietary and enforcement aspects of the assignment,374 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 conflicts issue in the case at all.
1.9.3 Mandatory Proprietary Laws Relating to Assignments. The Situs Issue However desirable a degree of party autonomy may be, especially 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. They are not at the free disposition of the parties, and are traditionally subject to the lex situs as the more objective law. It has already been said that this notion is contentious for claims and it is necessary to revert to this subject. 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 have seen in section 1.5.1 above, but it is constructive and cannot of course be physical. So is their situs. 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 law of obligations, which is the internal aspects of claims, where party autonomy may be important. Yet it mostly came to be 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.375 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); see further section 1.9.5 below. This might still have worked in a fashion, at least to the extent that it was 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. It follows that the freedom to choose the applicable law under Article 3 of the Regulation cannot apply here either.
374
HR, 11 June 1993 [1993] NJ 776. 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. It has already been said that the nature of proprietary rights becomes apparent solely in respect of third parties (see n 369 above) so that one could conclude that the new Preamble (in its innocence) only serves to underline that the ‘real’ proprietary effects of the assignment are now excluded. 375
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But the real problem is that, even though the idea is that Article 14 should (exceptionally) 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 already noted from the perspective of characterisation and as we shall see more particularly below in section 1.9.5 because they were never truly considered or distinguished. Probably as important is that the law applicable to bulk assignments was not specially considered either, although it was in the 2001 UNCITRAL Convention on the Assignment of Receivables in International Trade (see section 1.9.6 below). 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 more commonly determined by objective or mandatory standards, not mere contractual rules,376 which points to continuing emphasis on the traditional lex situs approach instead, whatever the EU Regulation and earlier the Convention may or did say. Again, there are here objective 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 (although they may still be effective in some of the aspects of the assignment, but 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 additionally to the debtor’s protection, the more useful distinction has already been 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, which raises more particularly the complications of bulk assignments when there are debtors in different countries. These issues were already discussed in the previous section. To repeat, the Rome Convention in its Article 12, now Article 14 of the 2008 EU 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 (Article 14(1)) and the law of the underlying claim to the assignability (Article 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, it is now accepted that the Convention and subsequent Regulation cover assignments in all their aspects: see also Article 14(3) of the EU Regulation. A lex situs reasoning is still avoided, however. It has already been said that the law applicable to the proprietary issues, in any event, remains unclear or in doubt.
376
See also P Lalive, The Transfer of Chattels in the Conflict of Laws (Oxford, 1955) 114.
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1.9.4 Current Approaches to Choice of Laws Issues in Assignments: Different Views of the Legal Situs of Debts In Germany, established opinion remains that the law of the contract out of which the receivable arises determines its proprietary regime, transfer possibility, and transfer method.377 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 doctrine sometimes switches to applicability of the (proprietary) law of the assignor in that case, again without giving much consideration to the consequences elsewhere of proprietary interests so created and the defences of debtors in other countries.378 Also in France, leading authors often still opt for the law of the underlying contract out of which the claims arise,379 bulk transfers not having been of great interest because of the notification requirement before the Loi Dailly of 1991. In Switzerland, Article 145 of the Act on Private International Law of 1989 accepts the law chosen by assignor and assignee, but this law may not detrimentally affect the debtor except where he agrees to it. The default rule is the applicability of the law of the place of the creditor or assignor, although it is not clear whether this also covers all protection and proprietary aspects. It is unlikely to cover enforcement elsewhere. In the Netherlands there is no unity of view, but probably a greater acquiescence at the moment in party autonomy.380 377 See G Kegel, Internationales Privatrecht, 6th edn (Munich, 1987) 478; C Von Bar, ‘Abtretung und egalzession im neuen deutschen Internationalen Privatrecht’ [1989] RabelsZeitung 462 and C Reithmann and L D Martiny, Internationales Vertragsrecht, 5th edn (Cologne, 1988), nos 214ff, but cf also EM Kieninger, ‘Das Statut der Forderungsabtretung in Verhältnis zu Dritten’ [1998] 62 RabelsZeitung 678, who argues for the law of the residence of the assignor, which will normally follow if under the law of the assignment approach the assignor performs the most characteristic obligation, which, in a bulk assignment, is the delivery of the receivables. The applicability of the law of the assignment in proprietary matters is supported in two German dissertations on the Rome Convention: see H Keller, Zessionsstatut im Lichte des Übereinkommens über das auf vertragliche Schüldverhältnisse anzuwendende Recht (Munich, 1985) 145, and E Kaiser, Verlängerter Eigentumsvorbehalt und Globalzession (1986) 219; see also Kieninger, cited above. 378 See Kegel (n 377) and Kieninger (n 382). 379 See Y Loussouarn and P Bourel, Droit international privé, 3rd edn (Paris, 1988) nos 424 and 425 and H Batiffol and P Lagarde, Droit international privé, 7th edn (Paris, 1983) no 611, but cf also B Audit, Droit international privé, 3rd edn (Paris, 2001) no 762, who opts for the law of the residence of the debtor. 380 In more recent Dutch case law, even in the proprietary aspects of assignments, sometimes the law of the underlying claim and in other cases the law of the assignment have been upheld as applicable following Art 12(1) and (2) of the 1980 Rome Convention rather than the law of the debtor or that of the assignor. This 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 April 1964 [1965] NJ 23, HR, 11 June 1993 [1993] NJ 776, and HR, 16 May 1997 [1997] RvdW 126. See for a discussion of the first two cases, JH Dalhuisen, ‘The Assignment of Claims in Dutch Private International Law’ in Comparability and Evaluation: Essays in Honour of Kokkini-Iatridou (Dordrecht, 1994) 183 and for the last one THD Struycken, ‘The Proprietary Aspects of International Assignment of Debts and the Rome Convention, Article 12’ (1998) LMCLQ 345 and Kieninger (n 382) 678. In 1964, with reference to the never ratified Benelux Uniform Private International Law Statute (Arts 17 and 21), the law governing the underlying claims was deemed applicable to their assignability and to the requirement and formalities of assignment when Indonesian subsidiaries assigned their claims on an Indonesian bank to their Dutch parent for recovery out of the assets of the bank located in the Netherlands, except that the law of the debtor was considered applicable to his protection (liberating payment) and to the protection of other third parties. In the proprietary aspects proper, as in the position of subsequent assignees, there was some suggestion at the time (in the opinion of the AG) that the law of the assignment applied. In this case, the assignments were
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In common law countries, the law of the assignor is accepted for global statutory assignments, as for 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; it would amount to full foreign bankruptcy recognition. For non-statutory or ordinary assignments, in England, there is a preference, at least in matters of validity, for the applicability of the law of the assignment,381 which may be chosen by the parties, while a clear distinction
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 the Rome Convention (although not yet in force at the time), and was ultimately identified as a problem of assignability under Art 12(2), and therefore governed by the law of the underlying claim, rather than as an issue of the validity of the assignment (as the lower courts had found) covered by the law of the assignment under Art 12(1), although strictly speaking Art 12(1) does not refer to the validity requirements and formalities of the transfer, where in 1964 the HR had accepted the law of the underlying claim. In the end, the characterisation of the issue in terms of assignability rather than validity determined the issue and aligned the 1993 decision with the one of 1964. In 1997, the issue was a verlängerter Eigentumsvorbehalt (a reservation of title extending into the receivable) under which according to German law the sale of goods to a Dutch manufacturer who sold them on to an enduser resulted in a claim in which the original German supplier had a preferred position. Dutch law does not accept the verlängerten Eigentumsvorbehalt and the assignment of absolutely future claims it entails. It now also requires notification for such an assignment to be valid except where a security interest is created according to Dutch law while all alternative securities are invalid (Art 3(84(3)). The Dutch manufacturer went bankrupt and the question was whom the end-user had to pay. This was resolved in favour of the German supplier with reference to the applicability of the law governing the assignment pursuant to Art 12(1) of the Rome Convention, therefore the law covering the validity of the assignment rather than the assignability under Art 12(2), which would have resulted in the applicability of the law of the underlying claim. Who had the collection right, therefore whom the debtor should pay, was the issue in both cases and is in truth a proprietary issue, according to most authors not covered by the Rome Convention. 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 1.1.5 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 370 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] (Deventer, 1997). Earlier in the Netherlands, RIVF Bertrams and HLE Verhagen preferred the law of the assignment: ‘Goederenrechtelijke Aspecten van de Internationale Cessie en Verpanding van Vorderingen op Naam’ (1993) 6088 Weekblad voor Privaatrecht, Notariaat en Registratie 261. THD Struycken, above, prefers the law of the residence of assignor. Dalhuisen, above, defends the applicability of the law of the residence of the debtor. See for a defence of party autonomy in these matters and therefore the acceptance of the use of private international law as a route to open up the numerus clausus system of proprietary rights in civil law (without much emphasis on the equivalency test), A Flessner and H Verhagen, Assignment in European Private International Law, Claims as Property and the European Commission’s Rome 1 proposal (Munich, 2006) and also n 395 below. 381 See
Dicey and Morris on the Conflict of Laws, 14th edn (London, 2012) 1354; see also Morse (n 355) 168.
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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, in this English approach, assignability and priorities are often thought to be governed by the law of the assigned claim.382 But an important, more commercially oriented train of thought considers the law of the debtor applicable in these aspects.383 In this vein, bank accounts, whether in credit or debit, are normally deemed located in the place of the bank branch in which they are opened, therefore of the debtor, but rights of claimants under non-negotiable share or bond certificates are usually deemed to be located at their register. It could be the same for securities in book-entry systems: see for the notion of PRIMA (Place of the Relevant Intermediary Approach), section 3.2.2 below. Negotiable instruments and documents of title are deemed located in the place of their physical whereabouts, which is at the debtor’s place upon their presentation. Again, under present insights it all points away from the place of the claimants to the place of the debtors or obligors under these arrangements and therefore not to the place of the assignors/creditors/obligees. In any event, in England party autonomy, including the choice of a foreign law in these matters, leads only to equitable rights and is balanced by an adequate protection for bona fide purchasers or collectors of the underlying asset, which is mostly not available as a matter of domestic law in civil law, 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, probably in terms of nearest equivalents cut short by the protection of bona fide collectors. This is an entirely different approach, but it has already been said above that it by no means solves all third-party issues, such as those concerning the protection of the debtor and its defences to the extent they may be considered of public order. In line with common law thinking which, as already 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 (foreign) 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 departure point. In practice, it appears to be the place of the contract of assignment rather than the situs of the claim.384 Yet there is at least in case law also support for the law of the debtor in terms of the lex situs of the debt.385 The UCC firmly opts, 382 Earlier the English Court of Appeal had suggested that there were at least five possible theories on the law governing the validity of the assignment alone: see Republica de Guatemala v Nunez [1927] 1KB 669; see more recently also Raffeisen Zentralbank Osterreich AG v Five Star General Trading LLC [2001] 1 All ER (Comm) 961 in support of the law of the assigned underlying claim also for the validity of the assignment (in situations when the Rome Convention does not apply). 383 See R Goode, Commercial Law, 4th edn (London, 2010) 1241 and M Moshinsky, ‘The Assignment of Debts in the Conflict of Laws’ (1992) 109 LQR 613, except for bulk assignments which are thought to be covered by the law of the assignor) and Dalhuisen (n 380). 384 See eg Barbin v Moore 85 NH 362 (1932). 385 The most important case in this connection is Harris v Balk 198 US 215 (1905), which has been overruled in other aspects, see Shaffer v Heitner 433 US 186 (1977), but its debt situs holding remains unimpaired in matters
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however, for the applicability of the law of the borrower/debtor who offers the receivables as security, therefore of the assignor (section 9-301(1) UCC), at least in matters of perfection of security interests or transfers of receivables under Article 9 UCC and for its effects. This applies more generally also to goods that are mobile and are normally used for security in more than one jurisdiction (like aircraft). It is in line with the situation for chattels more generally, where under the UCC the law of the debtor/transferor of the security interest is preferred above the lex situs: see again section 9-301(1) and also section 1.8.1 above.386 For the assignment of accounts receivable, the most important issues in this regard in the US appear to be the conflicts arising in double assignments or in attachments of garnishment of the debt. In the US, as probably elsewhere, there is, however, not one rule and the context needs to be considered also. Thus in the UCC, there is another rule in respect of secured transactions involving chattels and accounts (receivables) applying the rule of the secured debtor, therefore of the assignor in the case of receivables, see s 9-301(1) at n 349 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, while in addition some freezing orders were put on some deposits (of certain individuals while the foreign head offices were asked to remit to Cuba sums equal to these liabilities, which they usually did). The question was whether in such cases the American head office still remained liable for repayment to the original depositor, see Garcia v Chase Manhattan Bank NA 735 F2d 645 (1984) in which it was so held in the case of (non-negotiable) certificates of deposit in dollars seemingly guaranteed by the head office in the US and therefore deemed located at that office in the US, therefore outside the reach of the act of state doctrine. In Perez v Chase Manhattan Bank 61 NY 2d 460 (1984), it was found in a similar situation, however, that the debt was not exclusively payable in the US (there was no guarantee either) and the act of state doctrine was applied (so that no review of the expropriation took place). In the case of promissory notes in US$ and payable in the US but issued through a Costa Rica branch of an American bank put under a domestic (Costa Rica) order not to pay foreign currency notes to protect the local economy, it was believed on the other hand that since the notes were not wholly extinguished by the order, they could still be collected in the US where they were deemed located for this purpose, see Allied Bank International v Banco Credito Agricola de Cartago 757 F2d 516 (1985) and the interest of Costa Rica to change the payment terms was not deemed sufficient to reach them. In Alfred Dunhill of London v Republic of Cuba 425 US 682 (1976), receivables payable in New York were held to be located there, as a consequence still owned by the former owners of a nationalised Cuban cigar company and payable to them. In such cases it was assumed that the power to enforce payment depends on jurisdiction over the debtor, see also Menendez v Saks 485 F2d 1355 (1973). In a similar vein, a bank that closed its foreign branch voluntarily (in Saigon before the collapse of the old regime) was considered to retain the deposits on its books in the US, see Vishipco Line v Chase Manhattan Bank NA 660 F2d 854 (1981). Vietnamese depositors (in local currency) who had placed deposits in branches of French banks in Saigon were not allowed to claim at the head offices in France, however, French courts finding that under private international law these deposits were covered by Vietnamese law as the law of the place where the deposit was made and this law did not allow payment in French francs equivalent abroad, see Trib Gr Inst Paris, 8 March 1985, DS Inf Rap 346 (1985). This is another (private international law) way around a nationalisation or payment freeze order in which the public law element is deemed subsumed in the private law governing the case but the situs issue also arises. In the US, this approach is not unknown either: see Wells Fargo Asia Ltd v Citibank NA 852 F2d 657 (1990) in respect of a dollar deposit made in Manila that could not be repaid there. Ultimately New York law was held applicable under which the head office of Citibank was held responsible for repayment as under this law a creditor may collect or enforce a judgment wherever he can obtain jurisdiction over his debtor. In all these cases there is otherwise not much of the old banking rule that deposits are deemed to be made at the branch where the money is taken in and the account is held, meaning that without further arrangements it can only be withdrawn at that branch. This may be different for certificates of deposits when the deposit is not reflected in a deposit account balance in the bank but in the certificate itself. If it is negotiable it would represent the deposit itself, which therefore would be located at the place of the holder. Note that in Garcia and Perez the certificates of deposit were non-negotiable so that it could be maintained that their situs was not that of the holder. 386
At n 349 above.
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of the assigned accounts, when the law of the assignor’s business is sometimes held to be the most appropriate to apply.387 As just mentioned, modern opinion, especially among commercial lawyers, makes a much sharper distinction between the contractual and non-contractual aspects of assignments and often opts for the law of the debtor in the latter aspects.388 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 also being normally governed by the law of the debtor (except where enforcement is sought against his assets in other countries). Indeed, attachments and garnishments necessarily take place at the place of the asset, which in the case of claims would appear to translate into the place of the debtor. Modern case law confirms this tendency and it has often been held that a debt is situated where it is properly enforceable, thus normally at the place of the debtor.389 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.390 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 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 re-characterisation and adjustment problems, especially if the assignment is conditional or for security purposes only).
387 See the authoritative ‘Comment’ (1958) 67 Yale Law Journal 401, 418, but see also AA Ehrenzweig, A Treatise on the Conflict of Laws (St Paul, MN, 1962) 640 warning against a dogmatic approach in this area. In any event adequate protection of the debtor may dictate otherwise. Where the assignor continues to collect, the relevant receivables could still be considered included in his estate upon a bankruptcy of the assignor: Benedict v Ratner 268 US 353 (1925), although not all State courts followed this. Garnisheeing creditors have been held protected by the law of the state of garnishment, likely to be that of the debtor’s residence: Lewis v Lawrence 30 Minn 244 (1883). The assignability issues, including the effect of contractual limitations on the assignability, are mostly held to be governed by the law of the underlying relationship out of which the claim arose, but policy considerations may supersede this approach, especially to support justified expectations of the debtor: In re Poma’s Will 192 NY Supp 2d 156 (1959). The matter of set-offs and defences has in the main been settled by statute preserving for the debtor all those arising until the date of notification, while his own courts would naturally protect him in collection suits when the lex fori includes such a statute, cf also ss 2-210 and 9-404ff (9-318 old) UCC. 388 See Goode (n 383); Dalhuisen (n 380); A Sinay-Cytermann ‘Comment’ (1992) 81 Revue critique de droit international privé 35; Moshinsky (n 383), although preferring the law of the assignor in the case of bulk assignments. See for support for the law of the debtor also Re Helbert Wagg & Co Ltd’s Claim [1956] Ch 323 and C Schmitthoff, The English Conflict of Laws, 3rd edn (London, 1954) 211. See for the early acceptance of the lex situs notion in this connection and of its close relationship to the place of enforcement, F von Savigny, W Guthrie (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 (London, 1896) 533. In more recent times AA Ehrenzweig accepted the law of the debtor in matters of his protection: see n 391 above, 641; cf also E Rabel, The Conflicts of Law, A Comparative Study 3 (Ann Arbor, MI, 1950) 424, 434: see in the US from an early date Moore v Robertson 17 NYS, 554 (1891). In the meantime, Art 2(g) of the EU Bankruptcy Regulation of 2002 defines the situs of a claim as the Contracting State in which the debtor has its main interest. This is 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. 389 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 nn 367 and 388 above. 390 Re Herbert Wagg & Co Ltd [1956] Ch 323.
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It has also been argued that assets are located where they are controlled, which is therefore at the place of the owner or assignor.391 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,392 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 1.1.9 above.393 It has already been 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.
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 Member States in 1980 provided as follows: 1.
2.
391
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. 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.394
See Struycken (n 380) 345, and Kieninger (n 377). See also the approach of Moshinsky (n 383) and Kegel (n 377) for bulk assignments. 393 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. 394 It may in this connection be of interest to cite an earlier draft (then contained in Art 16): see (1973) 21 American Journal of Comparative Law 589: ‘Obligations between assignor and assignee of a debt shall be governed by the law applicable under Articles 2 to 8. The law governing the original debt determines whether the debt may be assigned; it also regulates the relationship between the assignee and the debtor and the conditions under which the assignment may be invoked against the debtor and third parties.’ 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’. 392
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The 2008 EU Regulation replacing the Rome Convention in Article 14 now reads as follows: 1.
The relationship between assignor and assignee under a voluntary assignment or contractual subrogation of a claim against another person (the debtor) shall be governed by the law that applies to the contract between the assignor and assignee under the Regulation. 2. The Law governing the assigned or subrogated claim shall determine its assignability, the relationship between the assignee and the debtor, the conditions under which the assignment or subrogation can be invoked against the debtor and whether the debtor’s obligations have been discharged. 3. The concept of assignment in this Article includes outright transfers of claims, transfers of claims by way of security and pledges and other security rights over claims.
It has already been said that sections 1 and 2 (except for the addition of contractual subrogation) are essentially unchanged. As already mentioned also, section 3 suggests that the proprietary aspects may also be covered even in this Regulation on contractual obligations, 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. 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, awareness of proprietary and enforcement issues, which goes back to the problems with the asset status of claims;395 (c) how the 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 (Articles 3 and 4). They focus on the choice of law of the parties and, failing such a choice, on the law with the closest connection, which is the law of the party performing the most characteristic obligation (since the 2008 Regulation supported
395 It may thus be noted that the Regulation covers assignments of contractual claims but does not deal with the law applicable to their asset status. Again, the reason is that there is no clear understanding of the asset status of proprietary claims. See further also A Flessner and H Verhagen, Assignment in European Private Law: Claims as Property and the European Commission’s Rome 1 Proposal (Munich, 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 debtors 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.
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by a list approach in Article 4(1), which does not have a bearing on assignments). 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 14(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 has already been noted in section 1.9.2 above that many of these terms are 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 again section 1.9.2 above.396 Also the debtor’s special duties pursuant to an assignment and his protections are 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 again often overlap. 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 again 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
396 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 384 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 vis-à-vis the debtor (or the lack of assignability vis-à-vis him because of extra burdens), and (d) the position of the various assignees inter se (or the lack of assignability vis-à-vis older ones).
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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 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: see Volume 3, chapter 1, section 2.3.6. This is different for the 2001 UNCITRAL Convention on Assignments of Receivables in International Trade, which (Articles 28ff) deals in particular with bulk assignments and is therefore of major interest (see Volume 3, chapter 1, section 2.3.8). Regardless of its uniform law, it still has a number of conflict rules supporting its Article 8, which requires supplementation of the Convention on the basis of private international law rules unless the issue can be settled in conformity with the general principles on which the Convention is based. This is language derived from the 1980 Vienna Convention on the International Sale of Goods (CISG) (Article 7), which was written for an entirely different situation in which all proprietary issues were excluded. 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 cannot truly be separated from supplementation) may end in a search for local rules: see more particularly the discussion in Volume 3, 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 28ff 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 like that of UNCITRAL should be considered sufficiently self-contained and specific, therefore allowing interpretation and supplementation by analogy, 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 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
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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. It would seem an unavoidable progression to support especially bulk assignments of claims with debtors in different countries. The main concepts could be derived from international Conventions such as the UNIDROIT Factoring Convention and the 2001 UNCITRAL Convention on Assignments of Receivables in International Trade, even in non-Contracting States, whose true problem was, however, that they could not make the leap to treating receivables as promissory notes. But newer rules could also derive from fundamental legal principle, international c ustom and general principles or party autonomy (subject to the protection of bona fide purchasers/assignees/collectors against adverse interests so created): that is the modern lex mercatoria, see more particularly Volume 1, chapter 1, section 3.2.2. It would allow other than purely domestic proprietary rights to be created pursuant to whatever assignment agreement, international or not, and regardless of the otherwise applicable domestic law. This results in another, more informal but probably also more responsive, type of uniform law and facilitates 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 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 here set 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 from negotiable instruments and in more modern times from their Eurobond variety. The more the notion of abstraction or independence is accepted in respect of the transfer of 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. This allows newer security and conditional or temporary transfers to operate subject to their own transnational regime of bona fide purchaser/collector protection. It is suggested that this is the true way forward, at least for international bulk assignments. Private international law depending entirely on some domestic legal regime even in major international financial transactions is, quite apart from the considerable confusion that reigns here in the subject, no longer likely to provide sensible answers, and has also in this area come to its natural end.
1.10 The Modern Law of Chattels and Intangibles 1.10.1 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
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it describes. It does not strictly speaking aspire to a broader intellectual platform in private law as a whole. In common law terms, this is no more than the continuation of the present situation. In it, the sale of goods was traditionally at the heart of commercial law and it followed that the transfer of title, at least in chattels, became a commercial law matter also. A special feature was in sales the protection of bona fide purchasers, outside equity not a common law feature but introduced by statute (Sale of Goods Act 1979 following the earlier Act of 1893): see sections 1.4.8 and 1.4.9 above. That is the issue of transactional finality, in common law countries by statute limited to the lack of disposition rights in the transferor as we have seen. More uncertain is the position when the underlying contract fails after title has been transferred, but it was shown that in England case law protects the transferee also in such cases except probably when there was fraud, see section 1.4.7 above. Then there is the notion of reliance in common law to help and the lesser emphasis on intent in matters of validity of the commercial contract. In the common law other proprietary aspects of the law of chattels were subsequently considered commercial matters too, which went to all issues of title and possession (or bailment) of chattels, including possessory security, later extended to non-possessory security interests, including floating charges and other equitable proprietary interests. Bills of lading and bills of exchange as well as other negotiable instruments, especially promissory notes, were also part of this commercial law, and then largely treated as chattels, although even within the commercial law there was not necessarily one unitary proprietary regime for all commercial assets either. At least that was not the aspiration and this is clear, for example, in the important matter of the protection of bona fide purchasers or holders in due course of these negotiable instruments. Such protections developed especially for them and were recognised in case law, while, perhaps surprisingly in view of the commercial setting of the law concerning the sale of goods in common law countries, it was not for chattels, where it required statutory intervention in the Sale of Goods Act as mentioned. It meant that the issue of transaction and payment finality was still not the key issue, including in commercial law. It suggested from the beginning a fractured often product-oriented approach to proprietary issues or at least a pragmatic attitude. Analogy was here not always the answer either. Again, in this approach to commercial assets and the law concerning them, in common law countries their transfer as security for debt became also a commercial law matter and therefore no less the types of security interests, at least to the extent they were possessory (as part of the law of bailment). Subsequently, there developed some close connection with equity when in commerce the need arose for non-possessory security interests 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 further expanded, in more modern law, to all buyers in the ordinary course of business (and to collecting assignees in the case of monetary claims).397 This provided important flexibility, especially for all kinds 397 Discussions of these issues are few, however, especially in the US, where equity has long disappeared from the law schools’ curricula. See also n 94 above for a certain standardisation in the development of equitable proprietary rights which did not, however, constrain the further development of floating charges and finance sales,
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of non-possessory security interests and finance sales to develop. It also allowed interests in future assets or a shift of the interests into replacement assets, including receivables, as in floating charges. Thus modern floating charges in particular were especially dependent on equitable notions of inclusion of future assets, tracing rights, shifting interests and constructive trusts. This is at the heart of the use of future commercial flows and income streams as back-up for present and future funding dependent on simple description (cf section 9-204 UCC). Equity influence may also be detected in the important and connected facility of bulk transfers of tangible assets and of bulk assignments of receivables, and altogether in the modern law of assignments. It is indeed this close connection with the law of equity in common law terms that was earlier identified as a most important feature of modern commercial (and financial) law: see Volume 1, chapter 1, sections 1.1.3 and 1.1.5. In the English-speaking world, this has given modern financial law, which now drives commercial law, its flexibility and sophistication.398 Risk management and asset liquidity become major guiding policies here. We then also see a strong emphasis on finality through the protection of the ordinary commercial flows: purchasers in the ordinary course of business of commoditised products being protected against these equitable proprietary interests or charges. Another area where equity was active was in the conditional and temporary ownership rights, their creation, operation and transfer, for our purposes again especially important in personal property, including monetary claims, and finance sales concerning them. Again a product approach here becomes apparent in the sense that common law in its equity variant would allow proprietary structures to develop separately, for example for repos and finance leases. In recent times, the law of payments and payment systems, of book-entry systems for investment securities and the modes of the holding and transfer of these entitlements became other commercial law matters (in a common law sense), again with a strong equitable bent in the proprietary aspects. The law of guarantees and letters of credit, although not proprietary as such, introduced or built in this connection on notions of independence and bona fide payee protection, therefore on strong notions of finality borrowed from negotiable instruments. Here, credit risk protection (guarantees) and payments stand alone and are separated and considered independent from the underlying contractual framework out of which they arise. This was earlier identified as a key support of the notion of finality, which in the abstract system of title transfer also protects the transfer after it was completed although eventually in the US directed by the UCC, therefore by statutory law; see more particularly Vol 3, ch 1, s 1.6.1. 398 It was mentioned before that in equity—a facility civil law never had—we may find the greatest practical private law differences between the common and civil law. It is highly significant and covers key areas, giving the common law its flexibility and sophistication, in modern times especially in finance, but equity is not an alternative or supplementary system of law and only offers incidental protection. As explained in Vol 1, ch 1, s 1.3.1, equity is not therefore a system that allows for a general influx of good faith and reasonableness notions into common law. It developed a limited set of rules only in certain areas, such as equitable proprietary interests in assets including trusts and future (or conditional or temporary) interests in chattels, assignments of proprietary rights in intangibles, client protection in agency and in other situations of dependency through fiduciary duties, and equitable liens or floating charges. Only in the law of trusts, bankruptcy and companies is there a fuller equity system, now mostly supported by statute.
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even if the underlying contract fails. It further supports finality besides the protection of the bona fide purchaser or purchaser in the ordinary course of business of commoditised products who buys from a transferor without sufficient disposition rights (see section 1.4 above and also Volume 1, chapter 1, section 1.1.7). The effectiveness of these instruments or transfers is thus immunised against any legal defects in the steps leading up to the protections given or payments made. Again, the notion of finality, the certainty it is supposed to bring at least in the transactional aspects and its legal underpinnings are now increasingly considered crucial for all kinds of commodity and financial transactions including payments. These issues are proprietary and are in this book at the centre of the discussion (besides the risk management and liquidity issues). Given the trend 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 their use in funding schemes. 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 more obvious (see also section 1.5.9 above). Again, in common law countries equity came to the rescue, sometimes supported by statute, especially in the US, first in reducing the effect of assignment restrictions— see s ections 2-210 and 9-406(d) UCC. Thus, in common law countries, their liquidity may be enhanced. Subsequently, bulk transfers or assignments in floating charges creating liens covering not only inventory, but also receivables and cash proceeds as a (shifting) class including future replacement assets became important funding devices too, again all considered part of commercial law (and in the US ultimately covered by statutory law in Article 9 UCC). In fact, these developments explain much of the structure of the UCC in the US. It deals in Article 2 with the sale of goods, in Article 3 with negotiable instruments, in Articles 4 and 4A with payments, in Article 5 with letters of credit, in Article 7 with documents of title such as bills of lading, in Article 8 with investment securities entitlements and their transfer, and in Article 9 with secured transactions in chattels and intangible assets. In Article 2A it deals with equipment leases and separates them from secured transactions under Article 9. The most significant feature is that different proprietary structures are developed per product and there is no unitary proprietary system, even for chattels, nor is there any desire to create one.399 Modern bankruptcy protection is thus also likely to be different per product, especially important in modern finance.400 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, it is submitted, are now becoming an important focus of transnational commercial and financial law, are being reinforced because 399 In the UCC in particular, it is clear that in proprietary matters, an approach per product is now favoured leading to a different attitude to proprietary rights and their transfer in Art 2 (sale of goods) where the emphasis remains eg on the goods being in existence to be part of a sale (s 2-105), which approach is entirely abandoned in Art 9 in respect of security interests in future assets (s 9-204), whilst Art 2A on finance leases, Art 4A on electronic payments, Art 8 on interests in security entitlements and their transfer again maintain different approaches, none of which are interconnected. 400 See Vasser (n 329) 1507.
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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 a common law sense. This introduces tensions, particularly in the civil law tradition, in the way that the more traditional proprietary notions are being expanded. It is a development probably more fundamental than it may seem at first and still goes largely unnoticed. Reference may be made in this connection to Volume 3, 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 countries either. Even in the US, not everything is taken care of in the UCC. Especially repos, securitisations, different forms of factoring, modern derivative transactions, systems of clearing and settlement, and modern netting methods have not found coverage in it. It may be that no need has been felt, but there are also a number of structural and circumstantial reasons why the UCC, although ahead of 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.401 An important structural problem is the UCC’s approach in funding schemes to conditional and temporary ownership transfers, to finance sales therefore, which it tried to suppress in Article 9, as we have seen, while converting them into secured transactions. It had a near fatal effect on finance leases, some of which had to be given a separate home in a new Article 2A UCC (although not for all of them), on repos of investment securities, which were in due course indirectly exempted from Article 9 through an amendment of the Federal Bankruptcy Code (section 559), and on forms of factoring where the collection and risk had not been entirely transferred to the factor or receivable financier (sections 9-607 and 9-608 UCC). This is the issue of the unitary functional approach to asset-backed funding in Article 9 and the re-characterisation issue under which all asset-backed financing was considered a secured transaction. It has also raised its head in securitisations: see Volume 3, chapter 1, section 2.5.4. It undermines for no good reason many perfectly normal modern funding transactions which have a sale
401 Thus qualifying repos are now specifically defined (but still limited to repos in certain instruments, although steadily increased in number) in s 101(47) of the Federal Bankruptcy Code as last amended by the Bankruptcy Abuse Prevention and Consumer Protection Act 2005. Forward contracts are defined in s 101(25), investment securities contracts in s 741(7), swaps in s 101(53B)(A) and commodity contracts in s 761(4). Particularly, ipso facto termination clauses upon bankruptcy remain effective in respect of these financial products: see ss 559, 556, 555, 560, and 556 respectively. See for master netting agreements s 561 and for set-off and netting agreements also s 362 exempting them in particular from automatic stay, preference and fraudulent transfer provisions. See further also Vol 3, ch 1, pt II.
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of assets rather than a pledge structure at their core.402 Even the sales price protection device of the reservation of title was affected. Circumstantial problems derive here from the international character of the modern financial practices and products, leading unavoidably to further characterisation 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 great tension and may seriously undermine these practices and products in international transactions, again for no good reason, quite apart from the fact that conflicts rules proved hard to formulate in this area, as we have seen in sections 1.8 and 1.9 above.403 Legal transnationalisation is the unavoidable answer, that is to say that fundamental and general principle, international custom and practices, and party autonomy must precede the application of domestic laws and must ultimately be accepted by domestic bankruptcy courts, at least in all countries that want to participate in globalisation, seek its benefits and must then also abandon parochial legal thinking. This concerns the issue of the new lex mercatoria and its operation as a hierarchy of autonomous sources of law or norms in the manner as explained throughout this book: see more particularly Volume 1, chapter 1, section 3.1.2. In the proprietary area, this poses in particular the issue of party autonomy where it is traditionally not believed to operate because the nature of a proprietary right is its effect on third parties. Thus the proprietary or third party effect is (in principle properly) believed 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 b ankruptcy in the sense that assets backing up funding could be reclaimed by the financier regardless of the bankruptcy of the person or entity requiring and having received the funding and the claims of their (other) creditors. However, it has already been shown that through financial structuring, party autonomy is becoming more important in the proprietary aspects of modern financing, perhaps at first more particularly by the facility to choose a more appropriate foreign (domestic) law in the modern law of receivable financing and in the assignment techniques that underlie it. This was noted in section 1.9 above. For trusts it was noted in section 1.8.4 above. Contractual choice of law in proprietary matters through which more favourable domestic proprietary regimes may be selected by the parties
402 The Bankruptcy Code s 559 did not fully take care of the re-characterisation problem in respect of repos in particular, but courts now seem less than keen to re-characterise in respect of sophisticated financial products; see also Vasser (n 329) 1537. 403 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) Nederland Internationaal Privaatrecht 416. The idea is that the law of each market system covers all its transactions regardless of the rule that ties the applicable law to the most characteristic obligation. This includes also the regulatory laws. However, it is not quite clear which market systems are included and it may also be asked whether parties can elect another regulatory law, which the Regulation leaves open but it would seem ineffective as these are matters not at their free disposition. Consumer sales are excluded, but in this connection the more obvious question is the protection of smaller investors.
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may now also apply to the legal regime covering securities entitlements.404 The situation in equity, even in purely domestic transactions in common law countries, was extensively and repeatedly discussed above for common law countries and allows more directly a measure of party autonomy in the creation of proprietary rights, which are not then cut off at the level of creation but rather at the level of their operation through the protection of the bona fide purchaser or more generally of all purchasers in the ordinary course of business of commoditised products. It was observed before that the consequence is the opening up of the limited number of proprietary rights, now at the transnational level. Again, common law countries are used to this in equity, subject to a strong protection of the ordinary commercial and financial flows as we have seen. It is the issue of finality and the ability therefore for purchasers to ignore all adverse charges (although in common law countries only the equitable, not the legal ones, even in chattels and intangible assets). It is suggested in this book that the common law in equity is in essence followed at the transnational level, allowing therefore for a measure of party autonomy in the creation of proprietary rights subject to this strong cut-off facility in respect of adverse interests at the level of bona fide purchasers or even purchasers in the ordinary course of business, regardless of their knowledge, at least in respect of commoditised products. This is all unusual from a civil law perspective, which continues to think in what is in essence a closed system or numerus clausus of proprietary rights in which these rights 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 which proprietary rights are used became increasingly de-emphasised in favour of one system for all. Although in the process, physical notions of holdership, so strong at law in common law countries, were abandoned in civil law in favour of a more rights-based system, this development may not yet be complete: see section 1.2.2 above. In particular, equitable flexibility (curtailed by rights of bona fide purchasers or purchasers in the ordinary course of business of commoditised products), which is also rights based even
404 In respect of the transfer of security entitlements, the US first accepted party autonomy and the possibility therefore of a contractual choice of law in the proprietary aspects of the transfer (s 8-110(e)(2) UCC). It is probably explainable because of its practicability. Security interests and their ranking in favour of third parties/ financiers would then be determined by the law agreed between investor and custodian, which third parties/financiers could verify by asking for a copy of the account agreement. This appears to work satisfactorily. It suggests, however, different regimes for a seller and a buyer of securities if they use different custodians, less strange where in fact only book entries are eliminated, respectively created, between the seller and buyer and their custodians. In that sense there is no (trans-border) transfer. It was followed in Art 4(1) by the 2002 Hague Convention on the Law Applicable to Securities Held with an Intermediary, although there is a limitation here: the relevant intermediary must have an office in the country of which the law is chosen, which office must handle the security account: see more particularly s 3.2.2 below. In Dutch case law, even in proprietary aspects of assignments, sometimes the law of the underlying claim and in other cases the law of the assignment have been upheld as applicable following Art 12(1) and (2) of the 1980 Rome Convention on the Law Applicable to Contractual Obligations, now replaced by the 2008 EU Regulation, Art 14(1) and (2), rather than on the (objective) law of the debtor or that of the assignor: see more particularly n 372 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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if often still product specific, has so far found no place in civil law. Yet 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 especially for international transactions. It was already said that although the notion of property seems innate in the perception of the human race, legal systems have had considerable difficulty expressing the concept. The comparative analysis in this chapter was meant to show this for both civil and common law. The civil law, although seemingly more sophisticated, appears in practice to have the greater handicap because of its systematic rigidity. It is the conclusion of this book that its basic attitude, at least in commerce and finance, must now be abandoned. There are no clear public order reasons why it should be otherwise. Rather than a limited number of proprietary rights in identifiable and individualised existing assets, modern risk management and liquidity requirements demand a more dynamic concept of movable property law in commerce and finance that can deal with asset flows and expand the proprietary interests that can be created therein especially through financial structuring by the parties (see also Volume 1, chapter 1, s ection 1.1.6). On the other hand, as we have seen, the ordinary commercial and financial flows require protection against a host of adverse newer proprietary interests that may be so created, therefore against full party autonomy in this area. They only work against professional insiders. This is the balance that is here struck and ultimately resolves into the key issue of transaction and payment finality.
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 underdeveloped in both civil law and common law largely as a result of the fact that until quite recently no great value resided in them (unless they were documents of title or negotiable instruments). In all of this the key of modern property law development, it was submitted, is in the operation of the law of chattels and intangibles in an international commercial and especially financial setting. The concern is here the legal expression of the operations in the international flows of goods, services, money, information and technology, now often combined in the product streams in international supply and distribution chains. Its natural focus is then the bankruptcy resistance of modern financial products in which movable assets of a counterparty or ultimately entire commercial flows and related income streams are used in new ways to raise financing (such as in floating charges or finance sales). This poses in particular the issue of segregation and ultimately the issue of the protection of the proprietary interests in these flows, which are by their very nature bankruptcy resistant, meaning that any assets owned by others although in possession of the debtor or assets of the debtor in which others have (limited) proprietary rights, such as security interests are not part of the debtor’s estate and may be repossessed (in principle) by these third parties.
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Thus we are particularly concerned with the survival of these facilities and their inbuilt protections in a bankruptcy of a counterparty requiring asset-backed funding. As such, newer proprietary insights often remain conceptually undervalued and do not yet get the attention they need and deserve. But certain trends are clear and they direct the modern transnational law and new lex mercatoria in these matters. They may perhaps be summarised as follows: (a) Modern property law is rights based. That means that it always concerns a question of (intangible) rights and obligations in respect of underlying assets (which may themselves be tangible or intangibles) that may be maintained against other legal or natural persons not themselves directly involved in their creation or acquisition. It concerns here in particular the use, income and enjoyment of these assets and the protection and the effect vis-à-vis others of the transfer of these benefits. All must respect them as the new status quo even if not themselves party to the transaction. In a legal sense, proprietary rights are not then ever physical as the underlying assets themselves may or may not be. (b) In other words, in a proper legal analysis, property rights are never physical and should not be identified with the underlying assets: see further sections 1.1.5–1.1.7. In a rights-based system, it follows that it is wrong to say that we own our car (in a physical sense). Legally, we only have an ownership right in our car, which will normally give us the rights vis-à-vis all others to claim and operate it or to sell and transfer it. That is clearer when there is a usufruct or a security interest in someone else’s car. In such cases, we will say that we have a usufruct or security interest in the car. In fact, all three may operate in the same car at the same time, and we may as a consequence not even be able to claim and operate the car that we say we own. (c) 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 these proprietary rights can be exercised, protected or transferred, especially in the case of intangible monetary claims or industrial and intellectual property rights, also in civil law that otherwise prefers a unitary system (see sections 1.1.7 and 1.2.1 above), assets should not be confused with the legal rights and obligations concerning them. In terms of proprietary rights and their operation, the nature of the underlying asset is in a modern legal system substantially immaterial as long as there is economic value. (d) Indeed, in such a more modern proprietary system, all assets that can have a commercial value will be capable of being the object of user, income and enjoyment rights in this sense. That also includes the intangible rights themselves. Thus not only chattels but also receivables, patents, copyrights, trademarks, domain names, etc are all capable of being owned in a legal sense and may as such be protected and made transferable either outright, conditionally, as security, or in usufruct/life interest, etc. So may be other user, income and enjoyment rights created therein. 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’, although when it comes to the
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more limited proprietary rights in assets belonging to others, there may still be limits in what can be proprietary. (e) In this context, we say that user, income and enjoyment rights in assets are proprietary if they can be defended vis-à-vis legal or natural persons that have not been involved in their acquisition. It is then commonly accepted that they can be maintained against all the word or at least some classes of third parties not involved in the creation or transfer of these rights. In civil law thinking, the expression and operation of these (user, income and enjoyment) rights as proprietary are limited (that is the numerus clausus of proprietary rights), the main ones being ownership, usufructs, some long leases and servitudes (in land), and security interests, although there may also be temporary and conditional ownership rights, which, as we have seen, could allow for some greater flexibility but their operation remains more contentious and is in its incipiency in civil law, exactly because of the numerus clausus notion. Nevertheless, all user, income and enjoyment rights, even though contractually created, have the potential, it was argued, to become proprietary, even in civil law and incline towards them. The key issue then becomes the prior knowledge of these rights of others in the transferee of the underlying assets. This was explained as a liquidity and risk management issue. They need not then be restricted at the level of their creation but rather at the level of their operation. That was the analogy with equity in common law countries in which party autonomy has an important function in the creation of proprietary rights between professionals as we have seen. (f) In civil law, proprietary rights may be proven and claimed or manifested and protected also in limited ways. The basis of rights so claimed lies in the acquisitive prescription, itself depending on bona fide possession of these rights, in the sense of control over the underlying assets and the relative rights therein for a number of years. In civil law, that leads in essence to the revindication of the relevant proprietary right (and not strictly speaking of the underlying asset), which means that there is a special proprietary action in this connection, which is strong. While there continues to be confusion in countries like Germany in respect of obligatory claims as these countries do not recognise the asset status of these assets, this may be considered a detail for the moment and should not distract from the general (civil law) picture. (g) In a civil law sense, possession as compared to ownership of a proprietary right is simply a different way in which these (proprietary) rights are expressed, delivered and protected. It follows that possession is also non-physical (the way a proprietary right is held) and may be entirely constructive in respect of the underlying asset. It always was in respect of intangible assets. The emphasis is here on control of rights to or in assets, not on holding anything physically. In truth no one can physically hold on to their assets all the time—it means that the requirement of physically holding is in any event a practical impossibility. Control of the relevant right is the key and may give rise to possessory actions in respect of each proprietary right and its reclaiming as an alternative to the revindication. It is often an easier way to protect as only control of the relevant proprietary right is sought
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to be re-established, but it is not as strong a remedy as the revindication, as it is based on a better, not on an absolute right. (h) Holdership of the relevant proprietary right forms here yet another category of its expression and protection. It concerns the rights and protections of persons that hold proprietary rights for others. This is likely to result from agreements under which user, income and enjoyment rights are transferred purely contractually, for example when assets are lent or otherwise made available to other persons for a short period of time. The manner of proprietary protection differs here between different civil law countries, notably in the rights of the holder as compared to those of the legal possessor: see section 1.2.2 above. When user, income and enjoyment rights are merely held, they cannot be freely transferred to others without consent of the owner/possessor. The way they are held is commonly contractual, not proprietary, although the rights themselves are proprietary, holdership of them not being a proprietary right but merely a way a proprietary right is expressed and protected. (i) For the present summary, it is sufficient to note that in traditional civil law, there are a limited number of proprietary rights and only three ways in which they can be expressed and protected. This approach in essence dates from Roman law although it was analysed in this conceptual manner only much later. It was ingenious especially in developing at an early stage an abstract system in which possession, although related to a particular asset (corpus) is foremost a state of mind or animus: it was the willingness to keep a proprietary right in an asset for oneself and control it, indeed not necessarily to hold the asset as a physical condition.405 This allowed for a highly original concept of possession and its defence. (j) This is very different from the situation in common law, which first has different ways of formulating and protecting different assets classes such as land, chattels and obligatory claims. Second, their legal protection still depends, especially for chattels, on physical possession. Possession is here considered a proprietary right, which can be transferred as such, not merely a way in which a proprietary right is expressed and protected. As a consequence the ownership right is weaker: see section 1.3.2 above. In this approach, for obligatory claims the concept of possession plays no role at all (in land it is the remnant of the feudal
405 It may still be true that for bona fide purchaser protection in the case of chattels, physical possession remains a requirement in civil law as it is under sale of goods statutes in common law, but it is exceptional and never was a requirement eg for bona fide purchaser protection in equity in respect of unknown equitable proprietary rights and is also not required for this protection under Art 9 UCC. As noted, in civil law it is not a requirement of eg acquisitive prescription either. As we have seen, in common law countries under more modern law, all tangible or intangible movable assets transferable in the ordinary course of business might increasingly be acquired free and clear of adverse proprietary rights regardless of physical possession or even bona fides of the transferee (see s 9-320 UCC). Bona fide assignee protection will also increasingly be demanded in assignments where the requirement of possession could in any event not be physical, although, alternatively, in the case of intangible claims, it could still be required that the right of a bona fide assignee/payee is only protected to the extent the assignee collects. That is a common law variation and could still be seen to equate to the position of the bona fide purchaser of chattels who obtains physical possession.
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system—seisin—which makes for a different way of protection altogether), and the concept of ownership is here also problematic as we have seen. The actual protection of one’s chattels or intangible assets is in any event always in tort. In common law, there are no ownership or possessory actions proper. This approach in chattels may be seen as more primitive than in civil law. All remains primarily physical, which originally also affected the transfer of these assets, which required physical delivery. It notably does not allow for a more universal concept of control that may also cover other asset types. Such a system is not rights based. (k) It must be noted in this connection, however, that in common law countries, equity had always been less strict in matters of physical identification, and as a consequence more easily allowed transfers by class or in bulk and of future assets (even chattels), including a shift of the interest into replacement assets. Physicality is here abandoned, much is left to party autonomy, but this has not led to a more fundamental reappraisal; common law remains, as usual, pragmatic and moves step by step through case law on the basis of practicalities. As we have seen, equity not only leaves much to the description of the parties here but also opens up the system of proprietary rights itself while allowing trusts, conditional and temporary ownership rights and floating charges to operate in chattels and intangible assets besides the proprietary interests at law, always subject, however, to the protection of the bona fide purchaser against such interests, even of the purchaser in the ordinary course of business of commoditised products. The issue thus becomes the protection of the ordinary commercial and financial flows and of finality here especially relevant for consumers. Here the developments in equity in common law countries proved highly original. (l) It follows that any physical and anthropomorphic attitude to property is increasingly abandoned in both the civil and common law system, but in very different ways. In civil law, the situation was from early on no longer determined by what individuals could see, feel, imagine and handle. This also affected the manner of delivery of possession (where still required for a form of transfer), which could be entirely constructive. Conceivably this could even affect the close connection introduced in the early nineteenth century between identification and specificity requirements (Bestimmtheitsprinzip) on the one hand and the disposition facility on the other as a key requirement for a valid transfer, although civil law is here at best only in its incipiency. But this is in civil law not the direction of present development, which is further constrained by the stringent numerus clausus principle, which seeks to cut off the proprietary rights at their creation, not their operation. (m) Nevertheless, a more 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 future assets, especially those in transformation in a production process, while creating at the same time disposition and transfer possibilities in them, including the possibility of their transfers in bulk. This is the issue of proprietary rights attaching to classes of assets. Reasonable description of the asset (not physical existence) becomes the key issue here in terms of identification.
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(n)
(o)
(p)
(q)
As in civil law the concept of possession may be entirely constructive, also where a form of delivery (of possession) is still required, bulk transfers and the tracing of a proprietary interest into (future) replacement assets are then possible. In a rights-based approach, there is nothing fundamental either against proprietary rights shifting into (replacement) assets that can be identified but may not yet exist. It could also allow for a final disposition in respect of future assets that is effective also in a future bankruptcy of the transferor in respect of any replacement goods once they emerge (even after the bankruptcy). It means that classes of assets could be structured so as also to cover assets in transformation and replacement assets. That becomes essential, it was submitted, when we talk about the proprietary right in respect of the international commercial and financial flows. Transfers of related income streams or giving them as security thus also become possible. Yet, in civil law these facilities are in need of rediscovery, remain embryonic or are not much noted or encouraged. This is evident in the DCFR as we shall see in section 1.11. In fact, one may note a nineteenth-century regression because of the emphasis in modern codifications on identification and disposition rights, which soon acquired a physical character, much more so than in the earlier ius commune. Common law, even though still more obsessed with physical possession, here took a much greater step forward but only in equity. In a proprietary system of pure rights and duties, notions of the legal independence of a transaction in relation to the steps leading up to it may also easily be assumed. It means that once a right in or to an asset is transferred, the invalidity of the underlying transfer agreement will not automatically void the transfer: see section 1.4.6 above. The opposite system depending on causality is then likely to be considered anthropomorphic and atavistic. This ultimately also concerns the issue of transactional finality, which was identified as an important proprietary matter in that the status of a transfer, assignment or payment, once completed, is not then to be affected by extraneous defences of the transferor, assignor or payor, or by legal sophistry. 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. This was discussed in section 1.5 above. Nineteenth-century will theories may here also be increasingly abandoned, and the rescission of a contract on the basis of a lack of will is not then encouraged as a way to undermine a transfer that took place. Bona fide purchaser protection is another important underpinning of the notion of finality in this sense
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(see section 1.4.8 above). Rather than to the invalidity of the underlying agreement, it goes in civil law more in particular to the issue of lack of disposition rights, which are then also de-emphasised. It is in truth a question of further protection of the commercials flows against unexpected adverse interests. In terms of transactional and payment finality, the notion of reliance fulfils here a similar support function as we have also seen in section 1.4.6, although in civil law the notion of finality is commonly still linked to the transfer of chattels only, based on the idea that the physical entrusting of an asset to a third party who may sell it entails a risk on the part of the entruster, but the real issue is the protection of the ordinary course of business as a public order requirement. This ultimately has nothing to do with the entruster nor with the physical handing over of the asset and concerns also intangible assets, especially receivables and their assignment. (r) 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).406 Thus in the US, in the UCC, the transfer of a chattel under Article 2 is perceived quite separately from the creation of a security interest in Article 9, or an equipment lease under Article 2A, or a payment under Articles 4 and 4A. (s) It has already been said that party autonomy may be acquiring here an important role through financial structuring, especially where temporary or conditional ownership rights, floating charges and shifting liens are created as modern alternatives to or elaborations of secured transactions. Again, it means the end of the traditional civil law notion of the numerus clausus of proprietary rights subject always to a broad protection of bona fide purchasers or transferees in the ordinary course of business, especially of commoditised products. The restriction is therefore no longer in the number but in the operation of these rights. Party autonomy in this area then operates only among insiders, especially lenders and suppliers, and o may be supported by filing systems but they will not impose search duties on any others. Again, one sees here the influence of equity in a common law sense. Knowledge by others becomes the basis for the third-party effect of these rights as they can be maintained against all who knew of them when acquiring an interest407 but conversely not against bona fide purchasers or
406
See more particularly n 399 above. Prior knowledge in third parties may itself be a purely subjective or alternatively a more objective requirement. In the latter case, as for filing systems, it could become entirely constructive (therefore always presumed to exist) as it is in land. Not checking the land register normally means therefore that there is no excuse and bona fide purchasers are not protected. Here proprietary rights have the broadest scope. That is as we have seen not normally the approach in respect of filing systems of security interests in movable property, which are only meant to be relevant for other lenders, not for purchasers. Here knowledge has retained its subjective element in cutting off proprietary rights and it may even become entirely irrelevant in respect of acquisition of commodities, at least 407
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purchasers in the ordinary course of business.408 The ordinary commercial and financial flows are here protected. In this book this is perceived as the way forward in commerce and finance, especially at the transnational level. (t) It has already been said that in this manner, all economic interests in terms of user, income and enjoyment rights may in modern law increasingly find legal protection against third parties to the extent they were aware of these interests when acquiring the underlying asset, at least in commerce and finance. It follows that if third parties acquire the underlying assets, these third parties would have to respect adverse user, income and enjoyment rights of which they knew. They may be pursued against them and may become protected in tort, even in their bankruptcy. There may not be a right to specific performance on the part of the beneficiaries, but there would at least be a right to damages as a preferred claim. (u) This was earlier identified (in sections 1.3.7 and 1.3.8 above) as presenting a major legal advance and potentially substantial approximation between civil and common law of property at the practical level and a major approximation between proprietary and contractual rights in respect of assets at the same time. Newer law will then also develop more specific concepts of bulk or generalities of assets, of future assets, of replacement assets and of tracing, facilities in their generality all commonly absent from civil law codes, even the most modern ones.409 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 more ready example in common law jurisdictions. It was suggested that this is likely to happen first at the transnational level in the professional sphere. It was always the true challenge in the DCFR to identify the issues here and move things forward. That did not happen as we shall see. (v) At the same time, not only the notion of the numerus clausus of proprietary rights but also the civil law triptych of ownership, possession and holdership in respect under Art 9 UCC (s 9-320(a)), which protects any buyer in the ordinary course of business (regardless even of bona fides). Here proprietary rights acquire a limited scope while the notion of finality is always sustained. A more basic expression of publicity was sometimes thought innate in the transfer of (physical) possession of chattels and in notification of assignments of claims to the debtor. But as has already been mentioned several times before, physical possession does not denote ownership at all while the delivery of possession can be entirely constructive in civil law and the notification of an assignment to the debtor has no publicity value in respect of anybody else. In s 1.1.2 above it was pointed out that publicity is not the key issue in proprietary rights. It is eg clear that putting a notice in a newspaper concerning a user right in an asset does not make that right proprietary (therefore operative vis-à-vis all), again an indication that publicity itself is not the cause of a proprietary right. It is much more likely to be actual knowledge of prior interests except for those (old) proprietary rights that were always protected, when publicity or even knowledge are not truly relevant. 408 In this book, prior knowledge in the third party is considered the underlying idea of all equitable proprietary rights in a common law sense, although not necessarily so analysed by all. But the physical nature of proprietary rights is here abandoned. In terms of the proprietary regime of the modern lex mercatoria in the manner here explained, this is nevertheless an important pointer where one may thus observe the overtones of the law of equity although it never produced one coherent underlying proprietary concept. Instead, it concentrated on special, more incidental areas such as trusts and trust-like structures, conditional and temporary ownership rights, and floating charges: see, for some form of standardisation and the resulting more incidental approach in common law countries even today, n 98 above. 409 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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(w)
(x)
(y)
(z)
of all proprietary rights and the specific proprietary expression and protections they give may lose its significance. Protection may be rather in tort as even in civil law in respect of intangible assets it already commonly is. This may also mean the end of the very special position possession holds in civil law in terms of control, at least in terms of possessory actions. Yet in an international setting, for example in respect of offshore oil rigs, one may also still see some return at first to a more extreme (and it could be said more primitive) physical notion of possession and control that hardly allows a notion of ownership to develop separately; see also section 1.1.9 above. It is the old notion of seisin, which did the same at law in England. However, once such an approach starts to be balanced, as in England, by other concepts, through equitable notions and their rights-driven more abstract approach to property rights, other interests will emerge. Non-possessory security interests may thus be created, to be reinforced through direct notice of the interest, for example to other creditors or banks. We see here a double root of modern property law—the one physical and more primitive, the other more sophisticated, rights based and flexible—potentially operating side by side at the transnational level under the modern lex mercatoria: see also Volume 1, chapter 1, section 3.2.2. Eurobonds may provide here a vivid example of this development, which was originally based on the physicality of this type of bond as bearer instrument at the transnational level (local laws not having been sufficiently flexible to allow for an expanded notion of promissory notes that allowed many conditions to attach), now superseded by concepts of security entitlements with their own ways of transfer, trading and settlement. It also concerns the proprietary rights that can be established in them, especially repos. Although there is a tendency to re-domesticate these products, of which the Hague Convention gives an example, transnationalisation is here the better perspective: see also section 3.2.2 below, reason probably why interest in the Hague Convention has wained. It may also allow for the protection of various beneficial interests regardless of the ownership right in the underlying asset and for protection of these interests in a bankruptcy of an owner who knew of the interests before acquiring the property. One may subsequently ask whether such interests could be freely transferred without the consent of anybody else, including the physical holder of the asset (who may, however, have to be notified in order to make the transfer effective). It also raises the question whether contractual positions may increasingly be transferred as property: compare again section 2-210 UCC, which favours it. Finally, it should be understood that this development concerns primarily the law between professionals or professional dealings. Having traditionally been captured in commercial law in common law countries, it reflects these newer tendencies, at least to some extent, and explains the more flexible and specialised nature of this type of law, which is geared to better risk and liquidity management. It may well be that for consumers very different needs present themselves, dictated by different protection requirements, especially in the absence of sophisticated knowledge or access thereto. It is another world and there is no obvious need for similar
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proprietary structures in both while in professional dealings a unitary approach may no longer be sustainable as we have seen. This is unlikely to be a disaster.410
1.10.3 Paucity of Modern Property Theory In section 1.1.8 above it was said that there hangs a veil of intellectual impotence over movable property law, perhaps especially in civil law countries, because it needs a more dynamic approach, which its notion of specificity and identification of assets, its limited number of proprietary rights, and its systematic attitude to their expression and protection can hardly provide. The demands of liquidity, finality and risk management and their connection with property law and its operation in modern commerce and finance are poorly understood. It was noted in this connection that in contract, civil law was ultimately able to develop a more dynamic and less anthropomorphic attitude, mainly by introducing the good faith notion as a liberal interpretation tool: see chapter 1, sections 1.1.4 and 1.3.3 above. The common law of contract needed this much less because it had always been less will and intent oriented, looked more at the nature of the relationship, notions of dependency and reliance, and implied conditions (see chapter 1, section 1.3.7 above), although especially in the US it is now additionally accepting good faith notions too. As was shown, in property law, common law jurisdictions have long had greater flexibility through equitable notions and equitable proprietary interests especially leading to trust structures, conditional and temporary ownership forms even in personal property, and to floating charges, always subject to bona fide purchaser protection or the protection of the ordinary course of business. The civil law has here no ready equivalent although it is making limited progress in the direction of sometimes tentatively recognising proprietary effect on the basis of the knowledge of the party acquiring the underlying assets, especially in respect of covenants that may thus start running with the land, such as contractual passage rights.411 By introducing nonpossessory security interests, at first often through case law, and by increasingly accepting conditional ownership rights in reservations of title, the civil law system is also prised open, but much still has to be done, especially in the area of floating charges
410 See more particularly Vol 1, ch 1, s 1.1.10. Professionalisation is obvious in connection with modern nancial dealings, even domestically. If one takes the UCC as an example, it is clear that Art 2 on the sale of goods fi 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 403 above. That is also true in Art 9 on secured transactions, which in its new 1999 text tends to address itself principally to professionals as well (therefore excluding consumer transactions, cf eg s 9-109(d)(13)). In Art 4A (s 4A-108) on electronic payment, consumers are explicitly excluded. They are also excluded in Art 5 from the practice of issuing letters of credit (s 5-102(9)(b)). This confirms the assumption that because of the specialised nature of these arrangements they cannot be handled or are less suitable or even dangerous for non-professionals. 411 See nn 45 and 46 above plus accompanying text.
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and finance sales. This also concerns its notions of specificity, identification and disposition rights. There are sometimes also timid steps in the direction of recognition of conditional and temporary ownership rights, often on the back of the reservation of title. What is clear is that there is no sense of direction412 as the DCFR also shows; see further the discussion below in section 1.11. In particular, it is not fully appreciated that this needs more room for party autonomy, in finance as a matter of risk and liquidity management, balanced by a more elaborate and broader approach to bona fide purchaser protection, or to the protection of the ordinary course of business more generally. A similar approach is needed in respect of intangible monetary claims, their acquisition and protection as a major asset class. In this way, proprietary user, income and enjoyment rights can indeed be more freely created and operate more flexibly in respect of all types of assets and in respect of all kind of third parties. Another problem demonstrating a lack of perception is that the concept of finality itself is seriously weakened in the DCFR through the abandonment of the abstract system of title transfer in favour of the causal system. In commerce and finance, this is unrealistic. In the DCFR, generally, certainty is promoted but without any clear view of what it is or can be. While the key concept of transactional and payment finality could easily have been strengthened, it was weakened and is basically ignored. Although property rights may be cast in terms of an effective allocation of personal and social benefits, some of which was discussed in section 1.3.9 above in the context of the modern functional US approaches, it was said before that property rights are intuitive in respect of all that has economic value. It was always fundamental in terms of ‘mine and thine’, but how the law expresses this has perpetually been problematic. 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) as we have seen throughout. It remains in this respect primitive and anthropomorphic but also practical. However, a proper system of proprietary rights can hardly develop if physical possession continues to play such a strong role. Nevertheless, that remains in common law countries in essence the situation at law in respect of chattels. In such a system even the owner is for its protection dependent on the physical possessor except when he has a right of immediate repossession: see section 1.3.2 above. Again, in such a system, proper ownership notions hardly develop and the asset status of intangible assets can also barely be considered. But as we have seen, 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
412
See s 1.2.1 above.
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of rights and charges (in equity), whose protection is based in essence on knowledge of the (equitable) interest in any successor when acquiring the underlying asset, which knowledge is only constructive in respect of professional insiders. In the civil law, starting in Roman times, the problem was analysed above as being 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 abstract concept, which was not physical per se but signified the willingness to hold the relevant proprietary right in the asset for oneself (animus). As such, possession became a matter of control over assets exercised through the various proprietary rights rather than their physical holding as we have seen, in turn closely connected with the disposition right and ability, not then considered physical either. The other continental European achievement in this area, only completed in the ius commune, was to integrate the iura in re aliena, therefore the proprietary rights in the assets of other persons such as the usufruct or servitudes and even the secured interests together with the ownership right, into one coherent system of proprietary rights, which ultimately became identified as a closed system, the famous numerus clausus. In this system, which was thought of as unitary, therefore in principle applying to all assets,413 the proprietary rights that are recognised, starting with ownership as the most complete right, which can be unbundled, allowing for a few, more limited, proprietary rights that others may acquire in the same asset, are thus interconnected and manifested either through ownership (here in the sense of the property right or title itself or other proprietary rights), possession or holdership of these different proprietary rights, all as legal concepts in the manner explained in section 1.2.2 above. The important by-product was a better understanding of the difference between proprietary and obligatory rights, the first in principle operating against all, therefore even those not aware of them before the acquired the property, and the latter only against identified counterparties (in contract, tort or unjust enrichment). It led to the identification of the key proprietary concepts in civil law in terms of the right to pursue (droit de suite) and the right to a preference or separation (droit de préférence): see more particularly section 1.1.1 above. It should be appreciated that both in common and even in civil law, the law of property was shaped in response to practical needs, not to grand ideas. It took a long time before its contours became intellectually clearer and could be described and generally 413 Earlier, the problem with intangible assets, still leading to a different approach notably in Germany was identified as a remnant of an anthropomorphic and physical attitude to ownership rights: see s 1.1.4 above. The lack of intellectual depth in the new Dutch Civil Code, especially in respect of the notion of assets, liquidity, types of proprietary rights and the abstract or causal nature of the transfer, is now more fully recognised by one of its main authors: see W Snijders, ‘Ongeregeldheden in het Vermogensrecht’ [Irregularities in the Law of Property and Obligations] (2005) WPNR 6607/8. It is not necessarily seen as a disadvantage and it is suggested that this gives judges greater flexibility, but it also confers extraordinary powers of law making on the judiciary. A case law approach is here preferred over statutory amendment, but present Dutch case law, not unnaturally, shows a great propensity to follow rather than to redirect the new Code. It should be noted in this connection that in the US functional analyses, the preference is sometimes given to statutory intervention instead: see TW Merrill and HE Smith, ‘Optimal Standardisation in the Law of Property: The Numerus Clausus Principle’ (2000) 110 Yale Law Journal 1, 59; see further s 1.3.9 above. It may indeed be doubted whether with present insights, case law can be the answer at the national level and create greater dynamism in proprietary law. On the other hand, it is not clear why vital tools of risk management should be regulated by statute only.
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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 result of all that went before. It may be possible in retrospect to reinterpret the development as a response to ethical, social and efficiency considerations, but they do not explain the system as such and even less its specifics, the limitation of the proprietary rights to the ones particularly recognised (and not others) and the considerable differences in the detail between common and civil law. It was explained before that it took until later in the seventeenth century, when on the European Continent in the ius commune the differences could be identified empirically on the basis of existing legal practices.414 Hence the manner of expression and protection, either against some identified parties (in contract) or against all the world (in property), the different types of rights (proprietary or contractual income, user and enjoyment rights) that could be held in them, the manner they could be created, transferred and protected, the finality of such transfers, and the ranking between various claimants. Eventually, also in civil law, there arose the question of the status of future assets, their transfer and protection, and the shift of rights into replacement assets, either in the production process, or upon a sale in replacement inventory or proceeds, especially important with respect to security interests (resulting in forms of floating charges). Future interests in terms of conditional and temporary ownership rights could no longer be ignored either, regardless of the numerus clausus idea. Again the common law in equity had the edge here.415 This process of evolution guided by practical needs continues unabated, for example in finance sales, but has hardly started in civil law doctrine. Trust and trust-like structures as well as floating charges cannot then be far behind. In the past, this development always progressed fragmentarily, regardless or even ignorant of any deeper thought, as we have seen, and is undoubtedly spurred on at the moment by the practical needs of international finance where civil law is losing out. It is connected in particular with nineteenth-century notions of disposition rights 414 See nn 24 and 44 above. It led to a sharp distinction between proprietary and obligatory rights or rights in rem and in personam and the definition of proprietary and obligatory rights. Indeed, only in eighteenth-century Germany did it become fully understood that the essence of proprietary rights is that they can be maintained against the whole world, obligatory rights only against identified counterparties. Hence it became possible to identify the existing proprietary rights on that basis, to note empirically the fact that they survived transfers of the asset (droit de suite) and were as such limited in number, and to define also their status in a bankruptcy of a debtor with residual interests in the underlying assets (droit de préférence). Various proprietary rights could subsequently be ranked among themselves according to time, obligatory rights, on the other hand, being all of equal status. This was the result of careful observation of what already existed. It was not a new design. 415 In equity, common law thus made room eg for conditional and temporary ownership rights in chattels (besides trust structures and floating charges). They originated in land law: see s 1.3.1 above. Again, they are lost to the extent a purchaser of the underlying assets is not aware of them. In civil law, we also see an increasing recognition of conditional ownership rights. Reservations of title are a basic example but there may be others, like hire-purchases. Modern finance leases and repurchase agreements may have a similar structure Reservation of title produced in Germany the notion of the dingliche Anwartschaft: see s 1.3.8 above. As in a conditional sale, the condition may be anything, it suggests a more fundamental opening up of the entire system of proprietary rights in civil law. Yet it may still produce serious re-characterisation issues, even in common law: see Vol 3, ch 1, s 2.1.4. Earlier, the development of non-possessory security interests in Germany (Sicherungsübereignung) and even of floating charges happened in the context of conditional sales too: see s 1.2.1 above. They were based on practical need, were non-statutory and went against the closed system of proprietary rights.
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and of specificity, which acquired physical aspects and were superimposed on the more rights-oriented ius commune. Later emphasis on the physical nature of possession in German law did not help here either. To repeat, an anthropomorphic attitude to property and property rights is particularly unhelpful and increasingly needs to be abandoned in a more modern system. But as important to note is that in a more modern commercial and financial setting, there is no longer much of a unitary system either, at least at the practical level in the operation of modern proprietary rights in financial transactions between professionals. That was already identified earlier for documents of title and negotiable instruments. This is only to repeat that modern proprietary rights are increasingly diverse and product specific.416 As a consequence, even in civil law, the system opens up but it is a slow process, the reservation of title being an important example. So was the Sicherungsübereignung in Germany and the attempts there to create floating charges through contract. We are thus seeing a class of user, income and enjoyment rights that, although contractually created, may increasingly be maintained against all subsequent interest holders in the underlying assets as split ownership rights that are not enumerated in the Codes but can be maintained against all who knew of them, even in civil law. In civil law terms, this is potentially a most important intellectual expansion of the notion of proprietary rights and their operation, increasingly allowing room for trust structures, finance or conditional sales, and floating charges,417 but this development remains searching and hesitant. Again, there is no clear sense of direction, which the DCFR demonstrates only too clearly as we shall see. It suggests nevertheless that there are some broader underlying currents concerning the operation of assets and their protection in terms of private rights and obligations and how they function. A modern transnational system of proprietary rights is likely to be more flexible and dynamic here than civil law. There are of course also some clear external exigencies. Important for our purposes is that there is a need for greater flexibility, especially in terms of better risk and liquidity management, but then also for a strong protection overall of the ordinary course of business (therefore of the economic environment), therefore of the commercial flows, and hence, in respect of movable assets, in particular for an ever stronger protection of bona fide purchasers and even assignees who manage to collect in good faith or in the ordinary course of their business. This is no less a public order requirement closely related to the need for transactional and payment finality in respect of consumers.
416 See also the discussion in ss 1.1.5 and 1.1.10 above and n 399 above and n 419 below. 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 3, ch 2, s 1.2.1. In particular, the fact that in bank transfers we have a sui generis manner of transfer (see Vol 3, ch 1, s 3.1.5) suggests that we may have here also some different product that, although intangible, may not be moved by assignment. For book-entry entitlements for investment securities, there is also a special regime discussed in pt III below. Again it raises issues of transferability, liquidity and protection in respect of this facility. Financial derivatives are usually considered contractual rights and are as such transferable though they are normally hedged or could otherwise be unwound with the counterparty: see more particularly Vol 3, ch 1, s 2.6.2. Risk protection as a c ommodity in credit swaps may become another newer asset class in the context of that product only. 417 See for the dubious role of publicity in the context of proprietary rights and their third-party effect s 1.1.2 above.
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It naturally limits the reach of newer structures and may even lead to the protection of all buyers in the ordinary course of business regardless of any knowledge of adverse claims in the underlying assets as we saw. Again, this becomes an issue of finality and suggests that at least for movable property all rights of others in assets and their use, whether contractual or proprietary, are vulnerable. Any residual physical element in terms of a need for possession by bona fide transferees or for collection by bona fide assignees may then also be increasingly de-emphasised.418 To repeat, the consequence is greater party autonomy in the formulation of proprietary rights subject to the limitations of their operation against outsiders, like the public. The type of proprietary rights is thus likely to depend ever more on the type of commercial or (especially) financial products in which it functions and the nature of the relationship in which it functions, different in professional and consumer dealings, rather than on a system or on the nature of the asset.419 Again, in this book, from a legal point of view, an asset simply is all that has economic value and can be reasonably identified as such and then be used in commercial and financial structures, which could vary from a simple sale of goods to a transfer of a security entitlement or a temporary or conditional ownership right and finance sales or trust structures. It also suggests some control (or disposition power) over these assets but again in a modern system that kind of control need not be immediately physical either as is clear in the case of receivables or other intangible assets and the constructive notions of possession and delivery, at least in civil law. It has already been said that nobody can carry all their belongings with them all the time, and even in common law it must be admitted that that has no effect on the protection of bailment. It is always control that matters and that is not physical. Barring public policy (such as governmental intervention in state embargos or trading licensing) and public order considerations (in terms of fraudulent or other abusive behaviour), all valuable assets (unless highly personal like a right to a good name) must further be assumed to be transferable and their liquidity is in most legal systems indeed promoted. 418
See nn 405 and 408 above and more particularly ss 1.1.7 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, even in respect of the same asset. It may thus make a difference whether the same assets were used in a sale, a finance lease, in repo financing, or as security for debt. There are ample indications in the UCC in the US that this is the modern trend: see also text at nn 404 and 399 above. Bona fide purchasers may then also have a different status per product or facility. In civil law terms, notions of ownership, possession and holdership might then also operate differently per product or become irrelevant in respect of some of them: see s 1.10.2 above under (v). It goes also to the issue of acquisitive prescription and its relevance. These remain important structural issues in civil law. Product orientation is also clear in more conscious international harmonisation efforts. It is clear from the 2001 Mobile Equipment Convention, which introduces a new international interest resulting from a security agreement, reservation of title or finance sale of mobile equipment (see Vol 3, ch 1, s 2.1.8) and from the EU Collateral Directive, which introduces new types of collateral in cash deposits and security entitlement holdings including conditional transfers in financial instruments and organises indirectly also a floating charge under which the interests may shift from investment securities into proceeds and back and may therefore also include future replacement assets: see further s 3.2.4 below. Especially in respect of the Collateral Directive, which in truth introduces equitable proprietary interests EU wide in finance, the incorporation into local law is of major interest. It has led to great complications in many civil law countries and may still lead to great differences in the applicable regime. It is an important event and a major departure in many civil law countries although limited to the narrow field of financial dealings. 419
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In modern terms, it may be better to say that it is not merely their transferability and liquidity but rather their being usable in commercial and financial structures which further defines them legally as assets, although this does suggest transferability and liquidity. Hence also the great importance of the liquidity of receivables, which may equally be seen as a public order requirement in a modern society. It may be statutorily supported, for example in respect of intellectual and industrial property rights, but even without such statutes these rights are commercial assets all the same and as such in principle transferable and protected.420 Legally, in a modern system, such assets may be present or future, provided always that they are capable of sufficient description and some control. This inclusion of future assets re-emphasises the fact that the physical element is abandoned, that we are talking here only in terms of (future disposition) rights and duties, and that the control element might be entirely prospective. The key is to determine whether in a bankruptcy of the seller such a future interest may indeed be deemed to have passed to the buyer should the assets only emerge in the
420 See more generally also n 30 above for more modern theory. Especially in intangible assets, such as trademarks, copyrights, patents, security entitlements and carbon dioxide emission rights, statutes may provide a more specific system of proprietary rights, their transfer (either outright, conditionally or as security for debt), and their protection. Here the proprietary regime becomes product specific also. That appears to be a more universal direction at this moment. In security entitlements the proprietary right may thus manifest itself simply in the entitlement holder having a claim against any bankruptcy trustee of the intermediary/custodian for removal of his entitlement to a new custodian with the simultaneous release of the back-up entitlements. In more recent times domain names have also acquired asset status. They may also find further support and backing in legislation. They have also acquired some international status. Under the classic rules of private international law great differences could arise here and forum shopping be encouraged. To avoid this, the World Intellectual Property Organization (WIPO) developed a simplified procedure concerning domain names conflicts. The WIPO procedure allows everyone to ask online to be entitled to use a domain name registered in the name of someone else. WIPO will then appoint an arbitrator who decides within six weeks. If the arbitrator finds in favour of the claimant, the respondent may appeal to the normal state courts to get his domain name back. At first these cases were decided on general principles and on those derived from national laws, but are now increasingly determined on the basis of the (transnationalised) case law of these arbitrators themselves, which can be accessed online. There are other modern examples of new legal assets in the law of artists’ rights, where modern law is starting to allow painters and sculptors to retain some residual rights in their creations after sale. Important here are the right to integrity, which requires the artist’s permission for alteration or destruction, and resale royalty rights. Statutory backing will be necessary for these rights to operate fully, also against bona fide purchasers. They are to that extent more special in that they are not commonly alienable and may be considered to fall in the class of highly personal rights. They may also be limited in time. The Berne Convention on the Protection of Literary and Artistic Works recognised the integrity right. The US ratified in 1988 after having adopted the Visual Artists Rights Act allowing artists to retain an integrity right in their work. It applies to writers of recognised stature (undefined). The statute supports the presumption that the artist has retained this right unless waived in a standard form that is transferable with the art object. In the US, these rights only endure for the life of the artist. Elsewhere they may be perpetual and inalienable (in France, for example). Resale royalty rights allowing artists to claim a percentage of the price upon each resale were rejected. They can only be contractual and therefore have no third-party effect (in the US at the federal level). They are recognised, however, in California (under State law since 1979). Other asset classes may be found in the modern emission rights in respect of the emission of CO2 gases in the atmosphere. They have become fundamentally tradable, supported by legislation in many countries. This acts as a kind of commercial licensing system. In the EU, they are now traded under an EU emission trading scheme (ETS). Another question is whether public licences or concessions may become more generally tradable also or will normally remain confined by the law under which they are granted, maintaining a distinct regime. It raises the question whether they may be transferred by the beneficiary if nothing to the contrary is said in the relevant statute and, if they may be traded, whether the transfer regime (and its incidents) is one of predominantly public or private law (should nothing more be said in this respect in the relevant enactment either).
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(physical) control of the seller after its bankruptcy. That is the issue of segregation and the true test for a sufficient (prospective) proprietary right having been duly acquired by the buyer in these assets. The example given earlier was of the air we breathe. It is free and not legally owned but if we capture it (even temporarily in our lungs) we 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 the latter’s risk.421 It is then no longer a legal issue. Eliminating this possibility, as older law did, meant in fact no less than limiting business choices for no obvious reason. Although conceivably it may harm prospective future common creditors in any prospective bankruptcy of the transferee, there seems to be no fundamental issue of protection involved, at least not between professionals who should be able to assess these risks. In terms of other (more limited or divided or partial) proprietary interests such as security interests, usufructs, etc, we may then also create them in these assets (in the sense of prospective objects of economic value), even (in floating charges) if they are future. In modern law, this may particularly include classes of assets such as inventory of future manufactured assets and of receivables c onnected with their sale. But we may be able to sell them free or clear or collect regardless of the security interest so as not to impede liquidity and the ordinary flows. If so, in a modern system, the security is likely to shift automatically into the replacement assets (replacement inventory, receivables or proceeds), while the security interest in these replacement goods (which are as such sufficiently identified even being future at the time of creation of the interest) will survive in them at its original rank. One other aspect is here that these security interests may also prove good in protecting future debt (again always at the original rank). That is indeed the system and achievement of Article 9 UCC in the US and generally acclaimed. In Germany, it was possible to achieve through contract (party autonomy) a facility that comes fairly close—see Volume 3, chapter 1, section 1.4.1—but that flexibility does not obtain in most other civil law countries and was not even incorporated into new codes such as that of the Netherlands in 1992, which retains the notion of physical identification of individual assets and of physical disposition rights: see more particularly Volume 3, chapter 1, section 1.2.2. The connection of physical identification with the disposition right is here particularly fatal as it is also in the DCFR as we shall see. In such a system, future transfers and floating charges cannot thrive.422 421 Thus under modern law, the interest one has may be very little and entirely prospective: see Vol 3, 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 3, ch 1, s 1.1.9) without any requirement of physical possession in the transferee. 422 New Dutch law is here regressive and states at least in the case of bankruptcy of the transferor that the transfer is not complete until the assets have not (physically) accrued to the transferor before his insolvency, see Art 35(2) Dutch Bankruptcy Act (as amended in 1992 at the time of the entering into force of the new Dutch Civil Code). It means that at least in the case of a bankruptcy of the transferor the disposition right can no longer be deemed transferred in advance (not, in countries requiring delivery, through a so-called anticipated delivery
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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 when acquiring the property, the sharpness of the distinction between proprietary and contractual rights is reduced in respect of all user, enjoyment and income rights in assets, the latter ones, even if in origin merely contractual, being strengthened. On the other hand, the original ones were for chattels weakened by bona fide purchaser protection, which is also the limit of the reach of contractual user and enjoyment rights in terms of economic or equitable proprietary interests. It was pointed out 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, however, the important extra of the preferential status of such damage claims in a bankruptcy. There is also the question of a more product-specific approach. Whether in this environment the civil law triptych of ownership, possession and holdership retains validity and efficiency in terms of the modalities of expression and protection is another matter already raised before, as was the connected concept of acquisitive prescription. The common law, which protects proprietary rights only in tort, normally therefore in terms of damage actions across the board, may well here also show the way of the future in the modern lex mercatoria. Although specific performance is not likely to result, it means all the same full or adequate protection in bankruptcy, either by the estate paying the full damage amount or handing over the asset. Even now in civil law a similar approach is often taken in respect of intangible assets, especially monetary claims when used as security. A similar approach is conceivable in respect of conditional and temporary ownership rights and the expectancy that they raise in the reversion, although a dual ownership structure is here also possible (see section 1.7.3 above) and perhaps more understandable in civil law. It suggests that the civil law notions of ownership, possession and holdership and its concept of acquisitive prescription may lapse in respect of contractual user, enjoyment and income rights when protected against third parties on the basis of their prior knowledge. It follows that these proprietary and equitable rights are then more likely to be protected on the
c onstituto posessorio either). Such a delivery can then only become effective once the asset emerges in the patrimony of the transferor. This is an exception to the more general rule formulated in this respect under Art 3.97 of the new Dutch Civil Code. It has already been noted that in France through an Ordinance of 23 March 2006, floating charges are now being made possible by statute subject to further implementation decrees. It is an important departure that strays far from the system of the Code Civil and will put it under further stress. As we shall see in Vol 3, 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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basis of their being the better rather than the absolute right. Again, that is the common law approach. Finally, one could ask whether there is here still some greater or more modern underlying concept of property altogether, a question which may not yet be capable of a meaningful answer. It may not even be relevant. In fact, a search for one new unitary system, regardless therefore of the type of product, would appear premature, although there are unifying aspects in: (a) the proprietary protection of modern contractual interests of which there is knowledge in the acquirer of the asset; (b) the protection the ordinary course of business against such charges through the notion of finality; (c) the protection of the modern proprietary interests basically in the tort; and (d) the distinction of proprietary rights being enforceable against the whole world and obligatory rights only against identified counterparties remaining valid,423 but in economic or equitable interests there follows an important middle ground. In section 1.3.9 above, a reference was made to a more functional analysis in m odern US legal scholarship, especially in connection with the limitation of the types of proprietary rights under the objective law, leading to modern support for the numerus clausus notion.424 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 US functional theories would therefore seem remote from reality and out of date. They are not even a proper reflection of the present common law (especially equity) approach. In particular, there is here no discussion of the risk management and liquidity aspects of modern property law and the need to allow variations per product. In fact, any defence of a numerus clausus in the modern circumstances seems bizarre. Rather, we need a more dynamic concept of property rights. Predictability remains an important issue, but as we speak here of transactions between professionals it is foremost for them to understand their products and the proprietary consequences. In fact in the simple system here proposed, with its strong emphasis on the protection of bona fide purchasers and of ordinary commercial life, finality is enhanced and certainty or the lack thereof becomes a dubious concept beyond it. Indeed, a more pragmatic approach is now needed which, in this book, is not guided by theory but finds its empirical foundation in modern commercial and financial needs and practices, particularly in terms of risk distribution and liquidity management. There is not and never was an obvious public policy argument against such an approach. 423 This traditional distinction, although much less clear in common law, especially, as we have seen, because of the operation of equitable proprietary rights, is nevertheless maintained by more modern thinkers in the US: see H Hansman and R Kraakman, ‘Property, Contract, and Verification: The Numerus Clausus Problem and the Divisibility of Rights’ (2002) 31 Journal of Legal Studies 373. 424 In Europe, no fundamental effort has been made either, although problems have been spotted, especially in connection with the proprietary status of modern security entitlements, but there remains a difficulty in recognising intangible assets as being capable of giving rise to proprietary claims while on the other hand there continues an inclination to search for an underlying unitary system: see eg A Pretto-Sakmann, Boundaries of Personal Property (Oxford, 2005).
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1.11 The European Draft Common Frame of Reference 1.11.1 Introduction It is finally necessary to consider the DCFR, which now serves as a model for an EU private law codification, and how it approaches the subject of proprietary rights in movable assets. The DCFR was discussed in 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 its objectives may be. This development was also signalled in Volume 1, chapter 1, section 1.4.21 in the context of the harmonisation of private law at EU level and of the limited EU jurisdiction in these matters. A general codification project of private law is not within the EU’s present legislative authority and the founding treaties do not envisage it. Without proper authorisation in the founding treaties, which would have had to be given by each Member State, a project of this nature is illegitimate and an EU overreach. So far the principle holds that no Member State is to be deprived of its own private law. A similar attitude has always existed within the US. The promotion of the internal market under Article 114 TFEU is often considered a ready substitute, but it limits projects of this nature to cross-border dealings only and superimposes the continuing need to promote the internal market as leading interpretation principle in any EU law so introduced. Consumer protection and similar considerations would thus become subservient to it lest the whole basis of this jurisdiction collapses. In any event, any such backdoor legislative jurisdiction needs to be narrowly construed and a demonstrably positive effect on the operation of the internal market needs to be established. The hubris with which the Commission announced the presumptive benefits for the internal market of its initiative in the sale of goods (CESL), now withdrawn, which was a DCFR carve-out as we have seen in chapter 1, section 1.6, bordered on the delusional and undermined even further the credibility of this project, whose fundamental problem is, however, a lack of quality: see the comments in chapter 1, section 1.6.13. Nevertheless, the DCFR tries to synthesise and presents the first attempt to cover substantially the whole field of the private law of obligations and movable property at the EU level. While in contract there were earlier studies such as the European Principles of Contract Law and also the UNIDROIT Principles as we have seen, in property it involved substantially a new effort largely inspired by German law. Real estate is excluded and is rightly perceived as remaining a domestic matter, even though it must still be asked how, in a system approach, it will then fit the model and how two different property regimes per country may cohabit. It has already been pointed out before that methodology was never considered in this project and the DCFR is uncritically cast in the traditional civil law codification mould, built on formal legislative texts, and is as such top down, statist, prescriptive, static and positivist. This law has technique and logic at its heart, supposed to issue from a coherent text that is deemed to be a comprehensive reflection of reality and capable, if properly interpreted, of producing all answers. Other sources of law are not considered or accepted as valid and there is no decentralisation in that sense. In this approach, even
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fundamental principle or deeper values only operate by statist fiat. It follows that the DCFR functions as a proposal for a national code, now at EU level, and presents without questioning old-fashioned codification thinking in the civil law tradition, which has always sought to monopolise the field and push out all competition in law formation and interpretation or supplementation. This also applies in principle to crossborder dealings within the EU, which is here considered one internal market and the private law concerning it henceforth a domestic matter. For dealings cross-border within the EU, the modern lex mercatoria is then ignored even though, as has already been said, the EU has at most only limited authority for cross-border transactions under Article 114 TFEU and never, it would appear, has authority to abolish at the same time the force of other sources of law unless it can prove that they also hinder the internal market, something that would be very difficult to maintain. This now abandoned project for a common sales law or CESL, having been the first one officially proposed by the EU in this connection, only applied to crossborder sales in the EU. This was done principally because of the constraints in respect of legislative jurisdiction under the founding treaties as mentioned above. Indeed, this limitation is understandable, but where there is still an apparent attempt to eliminate all other sources of law in this area, the reasons and the authority for doing so remain unexplained. As a project, the DCFR in its aspirations does not limit itself to cross-border transactions: it is as yet not an official proposal (unlike the CESL) and merely an academic exercise. First drafts were presented in 2008, mainly concerning the law of obligations, the contract part of which was discussed in chapter 1, section 1.6 above. In 2009, further chapters were added in the area of movable property while the Introduction was rewritten. It especially struggled with the notion of fundamental principle without being able to assign it a proper place, although the horizontal effect of human rights had already found a place in the text and is allowed to operate in the interpretation of the DCFR but may be of little consequence in private professional dealings. So may be the other accepted fundamental notion of anti-discrimination in Article II-2.101. The essence is that the DCFR purports here to have made all the necessary choices. The rest is irrelevant. Again, it is the competition with all other sources of law, especially fundamental principle, industry practices or custom and general principle, that remains beyond the contemplation of the drafters. In this vein, also the important issue of the impact of party autonomy in proprietary matters eludes them. The approach in equity in common law countries is here also ignored. Perhaps there was not even awareness of it. It can only be repeated that in particular for modern professional dealings, this is becoming seriously problematic. More generally, the attempt is unfriendly to all more spontaneous law formation including the autonomous transnationalisation of private law. The DCFR does not understand the modern developments and needs in this direction, and still assumes that through codification of this nature, which, moreover, does not go beyond a nineteenth-century model, a complete system of property law can be devised that continues adequately to cover all eventualities for all types of participants in a unitary manner, now EU wide, in their present and future transactions. It has been pointed out before that there is not much awareness nor much special consideration in
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this connection for the nature of the relationship of the participants and of the needs and modern demands of professionals and their commercial and financial transactions in particular. The idea is to have one text for all of the EU that simultaneously covers professional and consumer dealings in a parochial model. Business remains an unknown world to the drafters of these texts. It is no wonder that in this approach modern forms of asset-backed financing find no place or are distorted. Conditional and temporary sales, including reservation of title, repos and finance leases suffer. Floating charges remain underdeveloped. The entire law of intangibles and assignment is adrift. It has already been pointed out in chapter 1, s ection 1.6 above in connection with contract law that the DCFR, at least in its perspective and mentality, is in truth a consumer law text extended to the professional sphere. This is not surprising given the experiences of its drafters, but the result is a continuation of what is in essence an anthropomorphic concept of private law, including property law, with physical concepts of possession, disposition rights and specificity requirements. Prescriptive consumer law notions further float into professional dealings. Again, the result is an antiquated movable property framework that does not properly cater for modern financial needs, products, risk and liquidity management. It may be recalled in this connection that the UCC in the US follows here largely a product and not a unitary approach and advanced greatly the law concerning modern finance, be it in Article 9 (secured transactions), Article 8 (investment s ecurities), Article 4A (electronic payments) or Article 1A (equipment leases). Generally its endeavours in these areas have been greatly welcomed and its innovative thinking admired. There is nothing of this mentality to aid, facilitate and find new and better ways in Europe. That is the true reason why projects like the DCFR do not catch on. The professional practice does not recognise itself sufficiently in these efforts. In particular, the consumer mentality hamstrings all efforts in the professional sphere, which is not properly distinguished and set apart. It has been said many times before that this lack of relationship thinking is one of the basic flaws of projects of this nature besides an unwillingness to respect other sources of law and allow through them alternative bottom-up or immanent law formation, subject of course always to legitimate public policy and public order concerns, system creation and thinking not being among them. This attitude was demonstrated in the previous chapter in particular in contract law but it is no less evident in the new chapters on movable property. It leads at the same time to a prescriptive and censorious attitude fed by a suspicion of market forces that far exceeds normal public order concerns. Hence still the physical notion of possession, which operates in the German manner (in the nature of the old German gewere notion, see section 1.2.3 above), and the rejection of a more advanced and more modern fully rights-based approach. Hence also the problems with intangibles and with their asset status. In the German way, they are still covered under the law of obligations (Book III, chapter 5) and are not considered objects of property rights as we have already seen. This no longer makes much sense but is an unavoidable consequence of the fact that property is still seen as something physical and not as a system of rights and obligations, as all law is. In this vein, problems also emerge with the transfers of future assets
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and those in bulk, more so even than under present German law. There is no concept of future commercial flows and related income flows or their status and there is even regression. The notion of finality is not given its proper (central) place either; the concept of certainty in interpretation (Article I-1:102(2)(c)) does not adequately cover it—see further section 1.11.6 below—but far worse is that the abstract system of title transfer is abandoned in favour of a causal system (Article VIII.-6:102), indeed another anthropomorphic notion that in this instance undermines the key concept of transactional and payment finality. It seems that for the DCFR in these areas, there was hardly any proper comparative law analysis. The result is that the common law experience was generally ignored except for the important introduction of the trust in Book X but only as a formal separate proprietary right in the numerus clausus. Notably it is not associated with the important notions of constructive trust and segregation. Again, the true issue is the operation of equitable proprietary interests more generally and their significance in commerce and finance. Especially the concept of knowledge of adverse interests in the transferee when acquiring an asset and their protection should have been considered in their fundamental aspects but are not developed as general concepts. The modern role of party autonomy in property law (subject to the protection of the commercial flows and transactional and payment finality) and risk and liquidity management through a freer creation and operation of more specialised proprietary rights are thus also ignored. A dynamic concept of modern property law as primarily a risk management tool cannot develop in this environment, even for professional dealings. The end result 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. Germany is an industrial nation and misses an insight into the flexibility required in services and the handling of risk. We thus see a closed system of proprietary rights maintained and no awareness of its opening, even in terms of conditional and temporary ownership rights. Nevertheless, the concept of conditional ownership is provided for in Article VIII-2:203, which also distinguishes between resolutive and suspensive conditions, but its use in finance in particular is not further considered and it is not clear how this type of property works. Unlike under present German law, the reservation of title is separated out (see Article VIII-2-307) while hire-purchases and some finance leases follow this regime (Article IX-1:103(2)). The sale and lease-back as well as the repo are re-characterised as secured transactions (see Article IX-1.104(4)) probably without it being realised what this truly means in terms of funding alternatives. The finance lease is perceived to be purely contractual in the traditional German manner unless ownership is transferred at the end when it becomes a reservation of title; see also section 1.11.4 below. The floating charge is not favoured either and is mainly seen as some contractual extension of existing property rights (Article IX-2:307). The result is a number of new, narrowly described property rights. There is no use for deeper, more fundamental building blocks in terms of conditional and temporary ownership rights, segregation and constructive trusts and the concept of future flows of commerce and income.
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Again, this is very German and may well continue to work for the Germans in their domestic dealings, but the DCFR would appear to be regressive in these areas even compared to present German law425 and suggests less flexibility and in any event no conceptual clarity, which may be entirely inappropriate in transnational professional dealings in the international flow of goods, services, money, information and technology. Neither is there any awareness of the more conceptual matrix of proprietary rights and the way they are commonly held and protected in civil law, which is otherwise followed: see section 1.2.2 above. To repeat, the approach is not rights based but one of identification of the ownership right with the asset coupled with a physical notion of possession, all operating at the level of common speech in the consumer or anthropomorphic manner, but even then without much practical insight. The DCFR thus misses the opportunity for reform that a more abstract, rights-based, approach offers. The basic division is here along the lines of the nature of the asset, either tangible or intangible, not in terms of transaction or product.
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 it is, as a consequence, foremost concerned with the way they are physically held, transferred and defended.426 Real estate remains domestic and is not covered, which is quite understandable, although, as already mentioned before, one may wonder how a duality in the applicable property law may operate in countries which, like those of the civil law, engage here in system thinking. The key is ownership, defined in the traditional manner as the most comprehensive right a person can have over the property (Article VIII-1:202) but in the DCFR, following the BGB and earlier von Jhering in the style of the old Saxon gewere (which still very much corresponds with the English bailment or seisin notion), the true perspective is still physical possession, quite different therefore from the Roman law that was adopted and is still taught to be the basis, but is not truly the ultimate model in Germany as we have seen. Articles VIII-1:202 (ownership) and 1:204 (iura in re aliena) enumerate the proprietary rights that may exist in chattels. For physical movable assets, this is the continuation of the traditional numerus clausus notion, only widened for reservation of title and formal trusts in Books VIII and X. The manner in which chattels are held and defended is dispersed, however. We find the ownership right in Article VIII-6:101 (the r evindicatio) supported by acquisitive prescription, and Article V-4:101 (based on 425 It would seem that contrary to present German practice, the bulk transfer of chattels, including future assets and their anticipated transfer, is endangered under the text of Art VIII-2:101(1)(a). The Globalzession or bulk assignment including future debt appears no less in trouble under Art III-5:104(1)(a), also of major consequence in securitisations and receivables financing, see Vol 3, ch 1, s 2.2.4. This narrowing of present-day German facilities in these areas may also affect the possibility of an erweiterten or verlängerten reservation of title, see Vol 3, ch 1, s 1.4.1. See for floating charges also s 1.11.4 below. 426 They are here called ‘goods’, which acquires a narrower meaning following the common law tradition, see Art VIII-1:201.
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ossession, which must be continuous for periods that seem unusually long for chatp tels). 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.427 As just mentioned, in the DCFR physical possession or at least control stands beside ownership (not as a proprietary right but as a strong base for protection), the preference, however, in a more theoretical sense still being for the revindicatio as a proper defence of the ownership right itself (not necessarily for the other proprietary rights). That is also the German tradition (never mind its interest in physical possession), not necessarily followed in this aspect elsewhere in civil law and in any event different in the common law, although (at law) equally physical where bailment gives then altogether the stronger protection: see section 1.3.2 above. In terms of possession, the emphasis in the DCFR in the area of protection is in fact on restoring physical control only, however obtained (under proprietary or other rights). Indeed, possession is defined in Article VIII-1:205 in terms of physical control (not, therefore, as the shadow of each proprietary right) and appears protected only in that limited sense (Article VIII-6:201). In the German manner, we have here further direct and indirect physical possession (corpus), the latter through another person (holder). Again, possession in this sense is meant to be factual, in derogation of Roman law (animus), therefore in the manner of the old idea of gewere, but where there is reliance on control, it can hardly be mere fact. It may here also be seen that holdership is no longer distinguished from legal possession. Thus the mere holder or indirect possessor defends also on the basis of possession: Article VIII-6:201. The holder who holds the asset for someone else thus ‘borrows’ the possessory action from the latter. For title transfer, there is a need for delivery as a separate legal act, also still captured in a largely physical manner followed by protection of bona fide purchasers (also based on control in this sense), not of the commercial flows as such. This protection may not be relevant in respect of the operation and transfer of other proprietary rights. In this system, transfer of title is also physical (Article VIII-2:104) (although it may sometimes be constructive, see Article VIII-2:105).428 See for the physicality of this transfer also the sections in the chapter on sales: Article IVA-2:101(b) in conjunction with 2:201, and Article IVA-3:101(b) in conjunction with 3:104. It may well be questioned whether this is still the most sophisticated approach; again it goes back to physicalities. Further requirements for the transfer of ownership (only) are (Article VIII-2:101) that the
427 In respect of each of the iura in re aliena or limited proprietary rights, there is in Art VIII-1:204 still a reference to national laws in respect of user rights; it would be interesting to hear why and how this is to work if various proprietary rights are established in the same assets. The General Provisions of Book I apply but, while making it clear that proprietary rights in movables are covered, they do not enter into the relationship to domestic laws in respect of them. It may in this connection further be noted that the good faith and reliance notion of the General Provisions (Art I-1:103(2)) also covers proprietary dealings, which raises finality issues (as mentioned above, ignored in the DCFR: probably a further indication of its consumer law orientation). 428 It concerns here the transfers brevi and longa manu and the constitutum possessorium. Curious is the addition that where there is a document containing a promise to deliver the goods to the holder, the transfer of that document is equivalent to delivery of the underlying assets. This is not implicit in many legal systems (see also s 2.1 below on international sales) and commonly does not affect bona fide purchasers of the goods who acquire physical possession.
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goods exist, are transferable by nature, that the transferor has sufficient disposition rights, and that there is a contract or similar juridical act. Again all this is basically perceived as physical. It follows that there are the usual problems with transfers in bulk (see Article VIII-2:305, which still relies on goods being in a defined space or area for purposes of their transfer) and of future assets, and the difference in this regard between absolute and relative future assets, all again connected with physical notions of delivery and a (connected) limited concept of disposition rights in chattels. This is also typically German, but, against the German tradition, there follows here the adaptation of a causal system of title transfer (in defiance of all modern trends) as has already been mentioned. Again, this is a perception also mired in anthropomorphic thinking unaware of key finality needs, especially in commodity trading. Finally, it may be of interest to consider how in this system assets sold and delivered but not yet paid for are treated from a proprietary point of view, an issue not generally dealt with in the DCFR nor in its chapter on sales (Book IV, Part A). It may be recalled that there are here often aspects of equitable interests in civil law.429 They also figure in so-called economic interests, aspects that do not receive attention in the DCFR either. It may further be remembered that a third area where a type of equitable interest may arise in civil law is in the contractual right of passage if disclosed to the buyer before a sale of the serving property. Since this is a real estate matter, it is not part of the DCFR.
1.11.3 Intangible Assets and their Assignment. The Problem of Asset Status As for intangible assets, the DCFR also follows the traditional German approach, not even the somewhat diluted more recent Dutch version of 1992.430 As the general German approach towards assets is that they must be physical, as we have seen, there is no concept of ownership, possession or acquisitive prescription in intangible assets, the asset status of which is not considered; the rights in or to them are defended in tort. As a consequence in Germany, assignments are contracts, not transfers of title, even though it is not denied that the transfer takes place at the same time as the conclusion of the assignment: see also section 1.5.1 above. In fact, in Book IX, claims are all of a sudden given asset status and treated as such when serving as security. It is only further testimony to the confusion in German law in these matters. An advantage of sorts was always that even absolutely future claims could then be included in an assignment, and that it could also be in bulk, although now s pecifically hemmed in by the DCFR in Article III-5:106, which would appear to be here seriously regressive. In fact, Article III-5:104 requires the rights to be assigned to exist and to be assignable, the assignor having proper disposition rights in them, while there must also be a contract or similar juridical act. Interestingly, it may be observed in this connection that this language entirely tracks that for the transfer of c hattels in
429
See s 1.3.7 above. The DCFR was here preceded by later chapters of the UNIDROIT Principles of Contract Law and of the Principles of European Contract Law (PECL). 430
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Article VIII-2:101, which makes it even less understandable why the transfer of intangible assets is still treated as if they have no asset status. It is positive in this connection, however, that in the DCFR contractual assignment prohibitions have largely lost their third-party effect—see Article III-5:108, which also tracks the situation for tangible movable assets (see Article VIII-1:301), all the more so for receivables (see Article III-5:108(3)(c)). It was said earlier that the real policy issue here is whether receivables are increasingly to approach the status of negotiable instruments and are treated as such: see section 1.5.9 above. In traditional German thinking, the extended facilities for the transfer of claims largely follow from the absence of a need for notification of the debtor. The abstract system of title transfer appears still to be implied here also: see section 1.5.1 above. Again, this approach generally allows a greater degree of party autonomy as it operates outside the ordinary civil law proprietary regime and its numerus clausus of proprietary rights. That could even allow for equitable interests in them in a common law sense, including conditional and temporary transfers or security transfers of all kinds, also floating charges. This is an advantage of sorts, but only derives in G ermany from an analysis of asset status (or the absence thereof) that is defective. In the meantime, it would appear that the DCFR is more restrictive here. The reason is that the law of assignment is increasingly copying the law of transfer of tangible movable assets. In fact, doing the opposite and pursuing the current more flexible German approach in respect of intangible assets and their transfer also into tangible movable property (doing away with physicality throughout) would have been more significant progress. Where the liberal German approach to receivables and their assignments still fell short was in the lack of approximation of receivables to negotiable instruments, the consequent limitation of the defences 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. Here the DCFR may do better, even though it still retains many of the old impediments: see in particular Article III-5:116. Interestingly, it protects the bona fide assignee, but forgets to require collection: see Article III-5:121(1).431 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 transferor remains in such cases the guarantor of his undertakings or duties under the contract (now transferred). Only if there is a demonstrable special interest of the creditor may he object: see section 1.5.4 above. There is no such idea in the DCFR, which always requires consent of the contractual counterparty: Article III-5:302. Even if merely a new debtor is added (incomplete substitution) and the original debtor remains the guarantor, it appears that the creditor can still reject: Articles III-5:203(3) and III-5:206.
431 Of interest is also the position of the assignor as collection agent and the preferred right of the assignee to the collections if reasonably set apart from the rest of the assignor’s assets, Art III-5:122.
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1.11.4 Security Interests. Treatment of Reservation of Title, Finance Sales and Floating Charges Much has already been said about secured transactions and much more will be said in Volume 3, chapter 1, but the real test in a modern law is the approach to finance sales as security substitutes and to the floating charge. The rest is detail in terms of modernisation. It was intimated earlier that the DCFR fails on both accounts. It now reserves a special place for reservation of title as purchase money security. Its nature as conditional sale is abandoned, which is further evidence that the DCFR omits substantially to bring the conditional and temporary transfer within the overall structure of proprietary rights. It may be mentioned in this connection that Article VIII-2:203, introducing the resolutive condition, withholds retroactive effect; the suspensive condition works, more naturally, only for the future, although it was said before that it might not always be clear who has the one or the other. Temporary ownership rights are not considered. In this way, one must assume that the drafters meant to keep the system of proprietary rights firmly closed. To repeat, Article VIII-2:307 avoids the terminology of conditional ownership in connection with the reservation or retention of title and only reserves for the transferee a proprietary right of sorts in the nature of an expectancy, in G ermany more properly called a dingliche Anwartschaft—see for the discussions in this connection in Germany itself, Volume 3, chapter 1, section 1.4.1. The DCFR does not explain how this expectancy operates. When picking up the concept of reservation of title in Book IX in the context of secured transactions (see Article IX-1:101(1)(b) and 104), only the connection with Article IX-2:104(4) still suggests the operation of a conditional ownership right. Importantly in this connection, the finance lease as sale or lease-back is considered a security interest and does not stand alone. So surprisingly is the repo (Article IX-1:102(4)(c) and (d)). This is a m atter, therefore, of re-characterisation under a unitary concept of securities, which has given so much trouble in the US. Hire-purchases are on the other hand sorted under retention of title, as is the finance lease, assuming the lessee may acquire the full ownership at the end of the lease. Otherwise it is a mere contract: see Article IX-1:103(2)(b) and (c).432 The practical difference between a security interest and a retention or reservation of title is notably in the appropriation facility under the latter: see Article IX-7:103(3) and 7:105(5). It was submitted before that there is here a substantive element: this facility results from the lack of an interest rate structure, which sets the finance sale apart from the security, which always supports 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 c ontractual arrangements. Again, it may be recalled that in the US the re-characterisation of the 432 In this connection it may also be noted that trusts for security purposes also follow the rules of Book IX: see Art IX-1-101(2)(a) and Art X-1:102.
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repo as a security interest was always considered a disaster and is avoided in case law (regardless of Article 9 UCC)—see Volume 3, chapter 1, sections 1.6.2 and 1.6.3— while repo netting is subject to a special regime under the Federal Bankruptcy Code, which favours it and does not accept the re-characterisation as a security interest in bankruptcy. For the creation of a security interest proper, Article IX-2:102 starts with the requirement that the underlying assets must exist and are transferable. This signals serious danger for a modern system. Disposition rights and a security contract are required in Article IX-2:105, but bona fide creditors are protected if in possession or registered in good faith (assuming the asset was not stolen), which also applies to earlier security interests created in the property: Articles IX-2:108 and IX-2:109. This approach begs the question whether receivables and other intangible assets may be the subject of similar secured interests and bona fide creditor protections. Article IX-2:104(2) allows them to be used as collateral, even if the underlying claim is itself not transferable as long as it can be reduced to money, cf also Article IX-2:301(2) in conjunction with Article III-5:108(1). Future or generic assets may also be transferred (perhaps also future claims, it is not fully clear) but the security interest arises in such cases only when the asset comes into existence or can be specified: Article IX-2:104(3). For receivables, there are further provisions in Article IX-2:301, which notably exclude the protection of bona fide security assignees under Book III, chapter 5. They have to accept earlier interests, why is not clear. Again, there are no provisions for a conditional or temporary assignment as we may see in some forms of recourse financing: see Volume 3, chapter 1, section 2.3.4. They are, however, not excluded either. It should be repeated that the bulk transfer of chattels, including future assets and their anticipated transfer, is endangered under the text of Article VIII-2:101(1)(a), which requires them to be existing. The Globalzession or bulk assignment including future debt is equally in trouble under Article III-5:104(1)(a), both of major consequence for floating charges, securitisations, and receivables financing: see Volume 3, chapter 1, section 2.2.4. Again, Article VIII-2:101(1)(a) requires any transferor to have the disposition right, which may further inhibit the transfer of future assets. Article III-5.104(1)(a) does the same for claims, which affects in particular the bulk assignment and is not retrieved in Article IX for security transfers. This apparent narrowing of present-day German facilities in these areas also affects the possibility of an erweiterten or verlängerten reservation of title (see Volume 3, chapter 1, section 1.4.1) and spells considerable trouble for floating charges. There is no concept of future commercial or cash flows. The situation may be retrieved to some extent by Article IX-2:307, where security interests can be extended by agreement to replacement goods (chattels). This may also cover proceeds (see Article IX-2:306) and follows present German case law, but it would have been better if the whole structure of security interests in movable property, including intangibles, had been more fundamentally reconsidered and the floating charge had been more solidly founded in the structure of the security rights itself. Essentially, it is no longer tenable to maintain as a general principle that security transfers can only be created in specific existing assets and then only attach when they do emerge.
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The protection of the commercial flows is 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 the commercial flows, however, and allows the sale of inventory free and clear, cf also Article IX-6:102. There is no search duty. Equipment may only be 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 have seen, but bona fide collecting security interest holders appear to be subject to earlier charges under this Article IX, notwithstanding Article III-5:121(1). Upon enforcement, whether through a sale, appropriation (where allowed), or upon collection in the case of receivables, the transferees are protected against the security provider and junior interest holders (those lower than the one of the enforcing creditor and his own): see Articles IX-7:213ff. A rule under which all interest holders would be paid out of the proceeds according to rank, leaving the buyer free and clear, might have been more sensible and especially facilitates execution sales.
1.11.5 Trusts. The Question of Systemic Integration Book X deals with trusts in the formal sense only. Except for awkward terminology (‘truster’ instead of ‘settlor’ and ‘storer’ instead of ‘custodian’), the main observation to make is that the trust structure is here isolated and not an all-pervading equitable notion. Constructive and resulting trusts are thus excluded or cannot generally arise. The important issue of segregation that is entailed in them is thus lost. It follows that in the perception of the drafters, there is one other proprietary right while the system of proprietary rights itself remains firmly closed. The result is that creditors may be able to lay claim to large parts of a debtor’s assets that are only his in name. It was said before that this may amount to an enormous benefit and major unjust enrichment of creditors in respect of assets the debtor held for third parties. One may refer here in particular to custodial and client accounts or collecting agencies. It is more generally a basic flaw in civil law proprietary systems that the DCFR does not seek to address.
1.11.6 Certainty, Finality and Predictability It has already been said that the key issue of transactional finality is not squarely met in the DCFR and this is an issue that should be revisited once more. It was explained before that in a modern transactional environment, finality is an essential element in the creation and operation of proprietary rights and in payments. In the professional sphere, no amount of legal sophistry should unsettle completed transactions of this nature except if there is fraud. It was shown that the notion of finality is in modern times particularly underpinned by the protection of: (a) bona fide p urchasers
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(or all those purchasers in the ordinary business concerning commoditised assets to protect the commercial and financial flows); (b) the abstract system of title transfer; and (c) the notion of reliance. It is further reinforced by (d) de-emphasising the psychological nature of the will, notably in matters of contractual validity and the notion of mistake that could otherwise easily undermine any transaction, even the delivery itself as a legal act where still required. The concept of independence, well known from n egotiable instruments and letters of credit, is here an important support. One may see the abstract system of title transfer as a particular example of it, but there are other instances such as the independence of the receivable vis-à-vis the contract out of which it arises (and once transferred it cannot be easily invalidated under it) and in assignments, the abstract nature of the rights of the assignee: see more particularly section 1.5.9 above. Finality should not be confused with legal certainty. The latter is an objective of the DCFR (see Article I-1:102(3)(c)), there only relevant in interpretation and, even then irrationally so, it was argued, as it condemns participants to antiquated notions that could be so out of date that certainty of this nature may mean low-quality law. One may recall the quote of Jerome Frank referring to a child-like need for stability and the earlier remarks to the effect that future needs can often not be adequately covered by extrapolations of past experiences. Indeed the true issue is rather transactional fi nality in title transfers and payments, a narrower proprietary but also more forceful concept, and otherwise predictability, which is a dynamic concept that should also be well distinguished from the notion of ‘certainty’: see for this discussion more particularly Volume 1, chapter 1, section 1.1.7. It has already been noted that the DCFR so far shows little appreciation of this key concept of finality. It is not central to it and it even seems to prevaricate, especially in rejecting the abstract nature of the title transfer, ultimately to embrace the causal s ystem as we have seen at least in the transfer of chattels (Article VIII-2:202) but perhaps even in the assignment of claims (Article III-5:118(2)). It has already been said that this makes little sense in a modern commodity-driven and trading environment. By moving away from the present German system, which in this aspect showed the greater insight, the drafters of the DCFR confirm that they have little idea of real needs. Nevertheless, the DCFR still 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 still appear to suggest a need for a retransfer, therefore an abstract system as borne out also by Article VII-5:101, which specifies that, where the enrichment consists of a transferable asset, the enriched person reverses the enrichment by transferring the asset to the disadvantaged person. Whatever the correct interpretation of these sections, in so far as finality goes, the DCFR’s various facilities add up to a concept of finality that is too weak for the commercial and financial practice, especially in the adoption of the causal
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system of title transfer as the general rule. The problems are aggravated in particular in connection with the transfer of rights in intangible assets where bona fide assignees still only receive a limited protection. Again, the main problem is that transactional finality is not a central theme in the DCFR as it must be in modern property law among professionals and must cover also intangible assets, especially receivables and their use in financial funding schemes.
1.12 Uniform or Harmonised Statutory or Treaty Law. The Alternative of Transnationalisation and the Need for and Emergence of a Dynamic Movable Property Law 1.12.1 Consumers and Professionals It was observed in 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.433 In fact, it has no clear idea of professional dealings or the operation of the modern marketplace or modern finance and the risk and liquidity management tools in that connection, neither of their needs in terms of transactional and payment finality, nor even of justified contrary public order concerns in this area. 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 marketplace and modern finance or the needs of professional dealings in the international commercial and financial flows, it assumes that all problems can be settled in the ambit of its text and that the result is satisfactory per se for all participants. There is no need for empirical research nor indeed for much comparative analysis either. In this approach, the system, being assumed to be sufficiently coherent and in accordance with past interpretations, will itself continue to provide the right answers for the present and future, at least that is the idea. But it is a misconception. It is nevertheless the background from which the DCFR hails and it remains its philosophy, which bears in it the seeds of intellectual failure and practical insufficiency. Again, this must be contrasted with the obvious success of the UCC in the US, due to its forward-looking perspective, confident guidance, understanding of the marketplace and acceptance of other sources of law to operate beside it.
433
See also Vol 1, ch 1, s 1.1.10 for this distinction and definitions.
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1.12.2 Different Sources of Law in the Professional Sphere In the approach of the DCFR, on the other hand, there is no need for an understanding of the variety of sources of law that in particular operate at the transnational level. In this book, the operation of these various sources of law and their hierarchy are considered the essence of the modern lex mercatoria and its operation in the international commercial and financial legal order: see in particular Volume 1, chapter 1, section 1.4.13. Again, the DCFR considers here the EU one domestic market in which it arrogates to itself the monopoly of all private law formation, top down in the statist manner. Thus, as far as the DCFR is concerned, fundamental principle, although mentioned and much struggled with in the new Introduction of 2009, is not given any independent status in the text, except for human rights and the combating of discrimination but then only as a matter of licence or concession (Article I-1:102(2)), in principle not going beyond what states have admitted in this connection. The same goes for good faith (Article I-1:102(3)(b)), behind which, it was submitted upon a better analysis, these other sources of law now often hide. Custom and party autonomy similarly are not independent sources of law either (and are in any event only allowed to operate in contract law, see Articles II-1:104 and II-1:102), nor is general principle. In fact, it is somewhat curious that the laws of Member States do not figure in terms of general principle either. The reason is that they are meant to be superseded (except notably for real property and in family law, wills and succession, and employment matters). The basic problem in all of this is that the momentum of the international markets is not recognised, appreciated or accepted, again driven by the idea that the EU is henceforth some domestic marketplace that is basically ordered or regulated by government. It is true that civil law has never been particularly perceptive in this area as its main protagonists, France and Germany, are not traditionally trading nations, although France more recently has made strident efforts to at least keep abreast of modern financial developments.434 But even the Netherlands in its 1992 Code surrendered to the continental attitude and the Dutch were also not able to make the necessary amendments for the professional sphere. They should have been a great deal wiser. The result is not geared to a modern, mainly finance-driven society, admittedly with all the dangers and pitfalls of such an environment on which modern society is nevertheless totally dependent.
1.12.3 Dynamic Movable Property Law In Volume 1, chapter 1, section 1.1.6, much was made of the need for a dynamic contract and movable property law in the context of its transnationalisation in the commercial
434
See notably Vol 3, ch 1, s 1.3 and for a summary Vol 1, text at n 66.
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and financial sphere for it to remain functional and living. Both become here essential risk management tools in the professional sphere. That change of paradigm was seen as an essential contribution of the transnational law merchant or modern lex mercatoria, which then allows for a substantial measure of party autonomy in devising new proprietary structures operating among professionals subject to adequate protection of the ordinary commercial flows against such interests. It speaks to a different and, for the uninitiated, often more dangerous world. Property rights are here a matter of risk and liquidity management, which operate worldwide. It may require special public order limitations but that is then foremost a matter of regulation. There should be no confusion here. How this modern lex mercatoria is structured and operates on the basis of different autonomous sources of law, also in this area, was the subject of Volume 1 and need not be rehearsed. It is clear that in so far as international business is concerned, the DCFR lives in a past world. As for the future, the DCFR mainly extrapolates past anthropomorphic experiences, now transfigured into consumer notions, and seeks to apply the end result to all. It tries to clarify the legal meaning as well as academic committee insight can. That would appear to be ‘safe’ in the sense of taking the least risk and in terms of certainty as the DCFR perceives it, but, in the view of this book, academia is nothing and cannot make a real contribution if it is not imaginative and innovative at the same time while being aware of and responding to ever newer practical needs and ever evolving public policy requirements. The DCFR presents here no view of the future and in particular no view of the different place and dynamic of modern (international) commerce and finance. This is not surprising—the present author is more than aware of how difficult it is (and how long it takes, given that three volumes in this present series are now required) to present some coherent view and understanding—but it would have been better if the drafters of the DCFR had been more conscious of their lack of international experience, and of commerce and finance in particular, had therefore been less ambitious, and had limited themselves to consumer dealings, not only in the law of contract, but perhaps even more so in the law of movable property. For an effort of this nature to succeed, there must be a different structure of investigation and drafting where practitioners and other participant or stakeholders meet with academics in a stable institutional environment, which can avoid the lowest common denominator impulse that bedevils all committee work. The American Law Institute may be an important model and serve as a proper example. It will be of interest whether the fledgling European Law Institute set up in Vienna in 2011 as an independent institution will acquire credibility. So far it concentrates on the common constitutional traditions in the EU and is leaving the DCFR well alone. Here the essence is, that in commerce and finance, these efforts should be requested by its participants, as in the EU only the Collateral Directive was, or be suggested by overriding public policy concerns as may exist in consumer dealings. Where the EU is addressed, in all cases, it should have sufficient authority and legislative jurisdiction to progress, which under the founding treaties it does not have at the moment to codify private law nor indeed to eliminate all other competing legal sources including the modern lex mercatoria and its hierarchy of norms in cross-border transactions including those within the EU.
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As things now stand, for all these reasons, the present DCFR project, including the sales carve-out in the EU CESL proposal (already withdrawn, see chapter 1, section 1.6.13 above), which did not even manage to deal with title transfer, although it is the principal objective of all sales, and with transactional finality, are better left for what they are and forgotten until we get some better idea. Consumers are already helped through a myriad of EU Directives and should otherwise be protected by their own governments. If we now need a special private law for them, which may also be doubted (and there is still the problem with EU jurisdiction), it should in any event be clearly distinguished from the private law for professional dealings where so far nobody has seriously asked for help in the creation of a new private law system at EU level and no such help would therefore appear to be needed.
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Part II Negotiable Documents of Title and Negotiable Instruments 2.1 The Role of Documents 2.1.1 Bills of Lading and Warehouse Receipts The international sale of goods is mostly still considered the key contract in international commerce. At least in common law, the emphasis is mainly on the contractual side as we have seen and the transfer of title, which is its objective, is often ignored or also seen as a contractual issue and the proper proprietary distinctions are not commonly made, helped by the fact that in England title transfers upon the mere conclusion of the sales agreement. It is a typical common law approach that is not c oncerned with concepts but these issiues become different and clearer when the goods must be transported and the help of intermediaries is needed. Indeed, if the goods must be moved under these sales agreements, there are often intermediaries in the shipping and warehousing arrangements. As a result, some documents are likely to emerge, if only as receipts, as the bill of lading and the warehouse receipt originally were. Traditionally, a bill of lading was given when the seller physically delivered the goods to a carrier at the ship’s rail or a warehouse receipt was given when a good was delivered in a warehouse, although a bill of lading could also be issued if the goods were delivered in a warehouse of the carrier. It was then called a received for shipment bill of lading. Once the goods were received on board, these bills would be stamped with the ‘on board’ stamp and become an on-board bill of lading. It is this onboard bill of lading that are 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 an FOB (free on board) contract as we shall see.435 This document allows full use to be made of the intermediaries’ safe harbour function, referred to in the context of international sales in chapter 1, section 2.2.1 above, the goods thus being in neutral hands, the full extent of its importance becoming clear if the document can be considered to incorporate the underlying assets when it is called a document of title, all the more so if it also becomes negotiable. That is usually deemed to be the case if it is expressed to order or bearer.436 Here we see the proprietary aspect of the arrangement more clearly, meaning the determination of `who got what and
435
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. 436
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when´ during and at the end of the transportation process. It means first that the goods, now being in the hands of neutral third parties, can be traded by the absent owner who has the bill which may be negotiated without the danger that the seller may not deliver the goods (for all kind of reasons). They can be claimed in ownership from the neutral intermediary by anyone who has the bill. Second, in this facility, the goods are traded and title is transferred at the level of the bill of lading, which legally incorporates them. The result is that once the bill of lading is negotiated, meaning sold and transferred to the buyer, the intermediary must release the goods to him as new owner upon the mere presentation of the bill (subject only to payment of any remaining transportation or storage charges). This facility has proved crucial in international sales, and provides great flexibility in any resale or trading arrangements, very common especially in the oil industry. It was indeed the direction in which the on-board bill of lading and warehouse receipt developed. It meant that, regardless of the whereabouts of the goods and their ultimate arrival in the place of destination, the issuing of this type of document achieved a simple method of handing over the (rights in the) goods to third parties. They may thus claim these assets as full owners against presentation of the documents without further formalities. The safe harbour function, which is achieved by means of using intermediaries, here the carrier, also allows seller and buyer to make special delivery and payment arrangements while the goods are under the control of a third party, therefore out of the seller’s reach and beyond its retention rights but also as yet beyond the physical control of the buyer. In this system, the buyer may be given the documents (normally the on-board bill of lading plus the insurance documents) mostly through the banking system, and thereby the reclaiming rights in the goods, but only against payment in the agreed manner by the relevant bank. In this way, the intermediary bank will objectively verify the documents and release the bill of lading (assuming the bank’s charges have been paid) to the buyer upon payment to the sellers, so that the buyer gains effective control of the goods only thereafter (while the goods themselves may still be in transit). It is inherent in this system that the payment cannot be threatened by a buyer 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 assets. In fact, not only the reclaiming documents but also the title is then commonly deemed transferred to him and there are no further legal formalities in respect of the transfer of the underlying assets. It follows that a direct connection between delivery and payment is restored in this manner and creates considerable comfort to the seller. Thus retaining the bill of lading while the goods are in transit and reaching their destination re-establishes a simultaneity in the performance of both parties, allowing payment to be made against delivery of the document rather than the goods themselves. In fact, it provides protection for either party in a sale: upon tendering the documents through the banking system, the seller receives (immediate) payment and the buyer is put in possession of the bill of lading and is able to collect the goods upon arrival without the co-operation of the seller. Parties may still argue over the details later, especially the safe arrival and quality of the goods and any counterclaims and their effect on the price, but at least the seller
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has the money and the buyer the goods. This is very much the idea behind collection arrangements and letters of credit.437 As we shall see, negotiability of this nature may in some legal systems (but less so in the UK) also imply a measure of independence and abstraction resulting in justified reliance of a transferee on the wording of the bill and therefore a reduction in the possible defences (or the so-called equities) of the carrier deriving from underlying relationships of which the transferee did not know. A bill of lading can be seen in this connection as combining the following characteristics: (a) acknowledgement of receipt of the goods; (b) prima facie proof of the transportation or carriage arrangements (although as between the original shipper (usually the seller) and the carrier their underlying transportation agreement may remain determining)438 and of the right to request performance and present claims and, if necessary, renegotiation of the shipping arrangements;439 (c) expression of the shipper’s (usually the seller if also arranging the transportation) presumed ownership or at least constructive possession of the goods and especially of the reclaiming right; (d) confirmation of the apparent condition of the goods, that is of their proper aspect and packaging;440 and (e) being a negotiable document of title creating a simple and speedy transfer facility of the goods through delivery of the document to bearer (or through endorsement plus delivery if made out to order), which may also imply a measure of independence in respect of the underlying relationships and the defences deriving therefrom.
437 See for the ‘pay first, argue later’ nature of this payment ch 1, s 2.2.3 above and Vol 3, ch 1, s 3.3.12. See for collection arrangements and letters of credit more particularly Vol 3, ch 1, ss 3.3.7–3.3.8. 438 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. 439 A bill of lading should be clearly distinguished from a charterparty, which is a document that covers the terms under which a shipper or group of shippers lease a ship from the owner of the vessel for a period or for one or more voyages. Thus there are time and voyage charters. Normally the owner will continue to be responsible for the management and control of the vessel (except in bareboat charters). The lessees of the vessel may subsequently carry goods for other shippers and issue bills of lading to them. These may be made subject to the terms of the charterparty, which are not then repeated in the bill of lading. This may cause problems for later holders who may not be aware of all the terms. More generally, this may be a problem whenever the bill of lading is not complete in this aspect. As just mentioned in the text, the bill of lading is only prima facie evidence of the transportation term, although as between the carrier and any bona fide transferee, the bill of lading is assumed to be controlling and transferees might thus be able (if bona fide) to ignore transportation terms unknown to them. 440 A clean bill of lading in this connection is a bill that contains no clause or notation identifying a defective condition of the goods and/or the packaging. The opposite is a claused bill of lading. A seller who tenders such a bill does not then automatically have a right to be paid, at least not if there was a breach of the sales contract. The statement of the carrier is in this connection prima facie evidence. This being said, the carrier is not held to more than a superficial inspection of the goods and a clean bill is not a quality certificate. One may also find clauses like ‘weight and quantity unknown’. Where the goods are labelled FCL (Full Container Load), the carrier has no inspection duty at all and will refer to ‘packed by shippers’, normal in container traffic. Generally, the carrier must deliver goods in the same condition as he received them, subject to fair wear and tear. So it is in his interest to note on the bill of lading all defects he can find.
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In civil law, these features of the bill of lading are now normally confirmed in codifications. Also in common law countries, such as England and the US, statutory law now normally covers them: see the Bills of Lading Act 1855 in England, supplemented by the Carriage of Goods by Sea Act (COGSA) of 1992, and Article 7 UCC for State law in the US, although in England and also in France, for reasons that will be explained below, the bill of lading is often not a fully fledged document of title in the above sense but only a quasi-negotiable instrument. One difference is, as we shall see, that the transfer of the bill of lading if a true negotiable document of title also implies the transfer of the underlying transportation contract. This would be so both in respect of the rights (of carriage) and the related duties, such as payment of the freight and insurance (although this payment may already have taken place under a CIF term).441 Much against the normal rules of delegation of duties (see section 1.5.3 above), usually therefore by statute, the transfer of the document then implies a full discharge of the previous holder of the bill by the carrier (unless it is the original party to the contract of carriage) in respect of all his duties without the need for the carrier’s consent, provided always that these duties are clearly marked by the carrier on the bill of lading, as in the case of ‘freight collect’. One could assume here an implied consent of the carrier, but in truth it is an issue of liquidity. It was already said in section 1.1.1 above, that a transfer of related duties is innate in all transfers of proprietary rights to promote their transferability as a matter of liquidity, identified as a key issue in the international flow of goods, and we see it here extended to the transportation arrangements concerning these goods which are integrated in them and the liquidity concern manifests itself here in the proprietary character of the bill of lading itself, although the original holder is not fully discharged, but the interim holders are. The immediate result is that it makes the present holder and the original contract party the sole persons liable to pay the transportation cost. On the other hand, becoming a party to the contract of carriage in this manner reinforces the position of the new holder of the bill of lading against the carrier. It also implies the assignment of the relevant insurance policies (without the insurer’s consent), at least if the insurance policy itself is not a similarly transferable document when it needs to be transferred separately. Even then consent of the insurer is an unlikely requirement.
2.1.2 The Concepts of Document of Title and Negotiability As already mentioned, documents of title, such as bills of lading and warehouse receipts, whether or not negotiable at the same time (therefore properly expressed to bearer or order), are proprietary instruments, the essence of which is that the holder of the bill may be considered the prima facie owner of the underlying assets. That is
441 As for an arbitration duty, this may still require the arbitration clause to be included in the bill of lading and reference to general trade conditions may not be sufficient.
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indeed the German and Dutch approach, where the normal way to transfer title in chattels is o therwise through delivery of the goods themselves. It provides for an easy way of transferring the underlying assets and is in respect of them a substitute delivery.442 The term ‘holder’ has in this instance a different meaning from the one common in civil law where it means possession with the will to hold for someone else: see section 1.2.2 above. That is not normally the issue here.443 As already mentioned, the situation is more complex in countries like England and France, where title to the goods normally transfers not upon delivery but immediately at the conclusion of the sales agreement: see section 1.4.2 above. For a bill of lading to operate as a document of title in these countries in the above manner, some intent to delay title transfer in the underlying goods until the presentation of the document must then be implied or demonstrated. In these countries this is indeed normally deemed the case under the CIF term and possibly also under the FOB term, certainly if payment against documents is agreed. It must be realised, however, that in all systems, there is an obvious complication with documents of title as the goods still maintain their own life and are by definition in the hands of someone other than the holder of the bill, like the carrier or the warehouse owner. The latter could still physically (even though improperly and without proper disposition right)444 dispose of these goods to, for example, a bona fide purchaser, who might subsequently be protected, potentially leaving the holder of the bill of lading without any effective proprietary rights in the assets at all. So the question always arises what the status of the document of title truly is. In practice, it may not be able fully to incorporate the rights to the underlying assets. Negotiability, on the other hand, is normally thought to result from the mere wording of the document itself: if it is issued to bearer or order, it is presumed to be negotiable,445 and then transfers either through physical delivery (if to bearer) or through endorsement (signature) plus physical delivery (if to order). It was already said that strictly speaking a bill of lading not expressed to bearer or order is a document of title without negotiability. Any transfer would then be under the normal rules of transfer of a document of that sort, which might have to be a form of assignment under which the carrier may have to be given notice. In any event, any holder, although prima facie entitled to the goods, would still have to prove rightful holdership of the bill itself if questioned. Although such a holder may be able to do so merely on the basis of its bona fide acquisition of the bill for value, this may not be possible if the bill is not expressed as a negotiable instrument and it may not even then be so in common law
442 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). 443 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. 444 See Lord Denning in the leading English case Sze Hai Tong Bank Ltd v Rambler Cycle Co Ltd [1959] AC 576 (PC). 445 See eg Art 8.413 of the new Dutch CC.
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countries as they do not normally accept exceptions to the nemo dat rule by statute). But as we may be concerned here with an expression of the law merchant and not of a traditional common law principle, this protection is normally considered implicit—it shows the continuing importance of the transnational law merchant even in England. It also confirms that there is no need for consideration to render the transfer of the bill valid. Nevertheless, even if the bill of lading is considered a true negotiable document, at common law, any prior rights of others in the underlying assets remain valid, no matter whether the bill of lading itself was acquired bona fide. In other countries, as we shall see, any holder of the document, if bona fide and having acquired the bill of lading for good value, may be entitled to the underlying assets on the basis of the mere holding of the document and receives them free and clear of any proprietary charges. Indeed, as regards later holders of the bill, in civil law they are likely to be considered full owners of the goods independently of the original underlying arrangements with the carrier or the precise relationship with or between the previous owners of the assets or holder(s) of the documents or any charges therein. Here one may note a fuller incorporation of the underlying assets in the bill itself and a better expression of the notion of abstraction and independence. Any defects in the transfer of the assets or documents between them is then also irrelevant, at least until proof of any better title in the goods is established, for example by bona fide purchasers for value of the underlying assets who acquire physical possession of them in countries that protect them as such. Similar principles apply to the warehouse receipt, although its status in law is often less clearly developed. Except in countries like England where the bill of lading is often considered to be only a quasi-negotiable document of title, as a consequence, documents of title might give a better right to succeeding third-party holders of the documents (and indirectly of the underlying assets) than to succeeding buyers of the underlying goods under ordinary sales agreements (at least in countries that do not protect bona fide purchasers of goods), but it is a matter for the applicable law to determine the status of the bill of lading in this respect. Bona fide holders of such bills may further ignore all personal defences of their predecessors, such as default in payment by any of them. Depending on the applicable law, they may probably also ignore all real defences in terms of the consequences of theft (thus going into the issue of a lack of disposition rights, cf section 7-507(2) UCC in the US but differently Article 3.86(3)(b) of the new Dutch CC), nullity, illegality and the like of any transfer in the chain of succeeding endorsements or deliveries of the documents including defects in the document itself. Again, this is inspired by the old law merchant in which documents of title and negotiable instruments of this kind have their origin. What this illustrates is that the special transfer and protection regime for documents of title is based on their own status under the law merchant, in essence independent from domestic law it is submitted. In fact, this is so for all bearer and order paper. This concerns ultimately the finality of the transfer, which for documents of title and negotiable instruments is traditionally highly prized, and is indicative of the continuing importance of lex mercatoria in this area and provides an important unifying theme, here clearly also operating
PART II Negotiable Documents of Title and Negotiable Instruments 667
in the proprietary aspects. As such in international trade upon a proper analysis, the bill of lading may still claim a transnational status: see more particularly Volume 1, chapter 2, s ection 3.2.2. It follows that the more bills of lading abandon their international form and come to be covered by typical domestic principles, the more they are likely to lose their status of documents of title and become mere receipts. The simple replacement facility of the previous holder under the contracts of carriage and insurance, and particularly the transfer of the duties thereunder to the new holder without express c onsent of the carrier or insurer, may then also be lost. Nevertheless, the protections of the holder of the bill of lading are not absolute, even under the law merchant and in countries that accept in this manner a high degree of independence and protect bona fide holders of the bill. They are often less extensive than those of the holder of a bill of exchange—see more particularly section 2.2.9 below—even though the protection against previous holders might be similar. Again, this is so because the bill of lading cannot incorporate the tangible goods it represents as fully as the bill of exchange is considered to incorporate the underlying intangible claim to payment so that these goods are still likely to lead their own life separate from the bill of lading and may surface in the hands of a bona fide possessor for value, as we have just seen. This may also occur under a bill of exchange but this is less likely, and holders of claims, even if bona fide, are in any event less well protected: see also section 1.5.9 above. The potential separation between bill and goods also means that the new holder of a bill of lading must still pay for the goods even if they have physically disappeared or if their whereabouts are unknown. The only thing he may be left with is a claim under the insurance policies. It also means that in an international context, under traditional conflict of laws notions, often still deemed applicable in the international flows, and which then always point to the application of some national law, the situs of the underlying goods will unavoidably remain relevant when bills of lading are presented. This may be important when the underlying assets are moved to countries other than those in which the bill of lading was originally issued, all the more so if the transnational nature of the bill is not itself recognised. From the point of view of the applicable law, the physical whereabouts of the goods therefore may remain quite relevant. Nonetheless, the easy transfer possibility of the underlying goods, even in common law countries and in countries in the French tradition normally implied in a bill of lading under a CIF contract, greatly facilitates international trade. Although differences in its status in the different legal systems cannot be denied and holdership of a bill of lading never provides absolute protection of the rights in the underlying goods, in most circumstances the bill of lading provides adequate safeguards. To avoid the considerable problems and inefficiencies attached to the handling of paper in a more modern environment, electronic bills of lading are increasingly being considered. They, as well as the consequences for their status, will be discussed below in section 2.3.2 in connection with the dematerialisation of negotiable instruments and documents of title and the issue of electronic transfers more generally. Discussion of the possible effect of the blockchain will follow. As we shall see, this may also affect the documentary letters of credit practice.
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2.1.3 The Origin and Nature of the Bill of Lading and its Operation in the Proprietary Aspects of the Transfer of Goods As already mentioned in the previous section, there is no unanimity internationally on the precise meaning and status of the bill of lading in its proprietary aspects. It once was undeniably a transnationalised instrument that substantially operated under its own rules in the context of the law merchant of those days but, like the bill of exchange, the law affecting it became nationalised in the nineteenth-century era of the codifications or, in countries like England, through domestic legislation, although in international transactions never fully so. Nevertheless there is no longer complete unity. As to its origin and operative significance, the pre-eminence of the bill of lading is closely connected with the development of the CIF trade term, which became standard when regular shipping lines started to operate from the end of the eighteenth century, so that the carriage of the goods was no longer done by the parties (buyers or sellers) themselves, who were now able to leave the goods for transportation with independent third parties such as shipping companies. At first, the bill of lading was undoubtedly considered to be based on the custom of merchants.446 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,447 it was indeed confirmed that property could be transferred with the bill of lading, thus recognising its potential status as a document of title. Above, it has already been said that the principal divide in the views on the status of the bill of lading appears to be between countries that require delivery for title transfer, like Germany and the Netherlands,448 and those that normally do not, like England and France. The consequence is that in the first type of country the bill of lading is normally considered primarily a negotiable document of title (if expressed to bearer or order). In these countries, it embodies the possession of and ownership in the underlying assets,449 which are in principle transferred with the delivery of the 446
See the 1787 case of Lickbarrow and Another v Mason and Others [1794] 2 TR 63. Newson and another v Thornton and another (1805) 6 East 17, with reference to the much earlier 1697 case of Evans v Marlett (1697) 1 Ld Raym 271. See for this history also DE Murray, ‘History and Development of the Bill of Lading’ (1983) 37 University of Miami Law Review 689. 448 In these countries the handing over of the bill of lading is perceived as a substitute delivery of the underlying assets, cf ss 363II and 650 of the German HGB and Art 8.417 of the New Dutch CC. This assumes that the bill is negotiable and transferable to bearer or order and there is a presumption of full negotiability: see Art 8.413 Dutch CC (unless marked differently on the document). In this system, regardless of the CIF and FOB term, holdership of a bill of lading always denotes prima facie possession of the goods and therefore ownership in civil law terms, at least for third-party (bona fide) holders of the bill, until proven otherwise. Under German law, there is the complication, however, of the real agreement (or dingliche Einigung: see s 1.4.6 above) as German law (and often also Dutch scholarship) sees the delivery not merely as a physical act but rather as a separate juridical act requiring the parties’ intention to transfer the title in the underlying goods. This may complicate the holdership of the bill by a paying bank if it has not agreed the real status of the bill of lading with the beneficiary in respect of any ownership or security rights therein. It may thus be unclear whether the bank, while holding a bill of lading (to bearer or endorsed in blank, which are the most common forms), has also received a proprietary right to the underlying assets. 449 Even in systems like the German and Dutch, the presumption of ownership of the underlying assets is (a) not necessarily valid in relation to the immediately preceding holder of the bill, who may still have a better (proprietary) right to the assets. It depends primarily on how the bill was acquired. Among the original interested parties (such as seller/shipper, carrier and buyer), the existence of the bill of lading may also have (b) little proprietary meaning, in the case of the buyer who has the bill, as long as the bill has not been handed over to a third party. This is commonly referred to as negotiation. So a buyer who has not paid for the goods cannot claim them 447
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ocument itself. Other ownership rights or more limited proprietary rights created d in the underlying assets at the same time or later but not marked on the bill, such as a reservation of title, might then be ignored by any bona fide holder of the bill upon negotiation. In this system, the holder of the bill may also be able to ignore any earlier proprietary rights of others in the underlying assets upon the bona fide acquisition for value of the bill, unless they were stolen.450 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.451 In France452 and England,453 on the other hand, where title in chattels in principle transfers upon the conclusion of the sales agreement, as we have seen, the bill of lading on the basis of the bill of lading in his possession. Mere notice by the seller to the carrier may then be sufficient to stop the delivery, cf also Art 71(2) of the 1980 Vienna Convention on the International Sale of Goods. The buyer must in these circumstances return the bill to the seller. Until negotiation, the bill of lading is therefore not much more than a receipt. To repeat, without negotiation, the bill of lading does not truly come into its own. Only upon negotiation would it appear that the questions of abstraction and independence properly arise. The true proprietary effect of a bill of lading is therefore likely to become apparent only upon such negotiation, which suggests that as far as the new holder is concerned, the goods have been paid for by the previous holder. To put it differently, the original seller takes a considerable risk in handing over a bill of lading to a buyer who has not yet paid him. Abstraction or independence here also mean that the carrier may no longer contest the terms of the bill of lading in respect of a third party. This is in these countries the so-called conclusive evidence rule. To repeat, in all cases it needs also to be considered that (c) the goods still retain their own life and, if disposed of regardless of the bill of lading, bona fide third parties acquiring physical possession may still be protected and be able to ignore the bill of lading under the applicable law of the situs of the assets. 450 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). 451 If more than one bill of lading is issued, the first endorsee has the best right among any subsequent holders, assuming he can prove the time of his acquisition, can show he was bona fide, and that he acquired the bill of lading for value: see also Art 8.460 of the new Dutch CC. Normally the shipper, the carrier and the buyer or his agent receive an original, but sometimes there are more. The existence of several bills of lading in respect of one cargo is undesirable and when one of the bills of lading travels with the cargo in order for the buyer to be able to claim the goods immediately upon arrival to avoid the costs of delays, it may destroy any built-in payment protection for the seller. It is more common in respect of sea waybills, which are not documents of title. In the US, s 7-402 UCC makes the issuer liable for any damage caused to holders of duplicates not so marked, while the duplicate holder has no rights in the goods. Generally, performance under one bill of lading renders the others void (cf Art 8.413 Dutch CC). 452 The relevant statute was Law 66-420 of 18 June 1966 on contracts of afreightment and maritime transport, as amended, now found in the revised Arts 131ff Code de Commerce. It emphasises the nature of the document as presumption of proof of receipt of the goods while upon negotiation no evidence to the contrary may be presented (Art 18). It is logical that in a system like the French, which transfers title in goods ‘par l’effet de l’obligation’ under Art 711 CC, the accent is not on the document-of-title nature of the bill of lading. That is clear in ordinary FOB sales as we shall see, even though they are deemed to delay title transfer until loading, but if in an FOB sale payment against documents is agreed, it is assumed that title transfer is always delayed by common agreement of the parties under Art 1583 together with Art 1138 CC until that moment and it is then thought that the transfer of title in the goods is effected only through the delivery of the bill of lading to the buyer, which may in that case more properly be considered a document of title, see Lamy Transports Maritimes (under the direction of Pierre Brunat 2000). Under the CIF term, title transfer is in France more commonly considered to take place only at the moment of loading, at least between the original seller and buyer, if the sale is made at that moment. It is further postponed, however, if individualisation of the goods can only take place later or when payment against documents is agreed, when the accent is again on the delivery of the bill of lading as ‘titre représentatif des marchandise’ to the buyer upon his payment, see Lamy/Brunat, cited above, No 276. 453 See R Colinvaux, Carver’s Carriage by Sea, 13th edn (London, 1982) 113.
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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 of the bill of lading as a document of title then may still depend on some intention of seller and buyer,454 and any subsequent bona fide holder of the bill takes in principle subject to that intention and is accordingly at risk, although this may not be fully clear under French law.455 Importantly, what is intent in this connection may be determined largely by custom and practice. It is relevant especially if the goods were sold subject to a reservation of title that is not itself marked on the bill. In England, the holder of a bill of lading is not considered free of equities either, as already shown. It means that the holder cannot acquire better title than its predecessors except where so provided under statute, as was done in a limited way in section 47(2) of the Sale of Goods Act 1979. Also, negotiability if intended must be practically possible, as demonstrated by the requirement that the assets it represents have been sufficiently set aside, cf section 16 of the Sale of Goods Act 1979, and are not commingled (although in some other countries co-ownership may result). As we have seen, it is one of the most important reasons that the bill of lading is often qualified in the UK as no more than a quasi-negotiable instrument and its status as a document of title should not be presumed, especially in an FOB sale. Even in a CIF sale, it remains rebuttable and may not be complete. As we have already seen also, in common law (therefore not in countries like France and Belgium), the holder takes subject to all earlier proprietary rights of others in the underlying assets created before the issue of the bill of lading. That is true even if the bill was intended as a negotiable document of title and the holder is bona fide and unaware of these rights, as in common law the protection of bona fide purchasers does not generally apply to the purchasers of goods because of the nemo dat rule (see section 1.4.8 above) unless provided by statute. This protection commonly applies to holdership of the bill of lading itself, but again only as an expression of the rules of the law merchant in this field and this does not affect the rights granted earlier in the underlying assets before a bill was issued, regardless of whether or not they are marked on it.456 This is
454 In England, even if the bill of lading is clearly expressed in negotiable terms through the use of ‘bearer’ or ‘order’, the intent as to it being a document of title still appears to be determining, see Henderson v Comptoir d’Escompte de Paris (1873) LR 5PC 253. It follows that in England, the bill (if existing) has no function per se in the transfer of title and is therefore foremost an instrument in terms of securing performance under the sales contract by giving the buyer access to the goods. 455 See in France, Tribunal de Commerce de Nanterre, 31 October 1990, Bull des Transports et de la Logistique, 136 (1991). It means that in the case of a reservation of title by the seller not marked on the bill of lading, the bill may not acquire any proprietary effect at all. Upon default, the title is deemed to have remained with the seller and the bill of lading in the hands of the buyer may be null and void, at least in its proprietary aspects. Bona fide holders take subject to this impediment, which means that the goods are returned, unless the bona fide holders of the bill acquired physical possession of them in the meantime. 456 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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also confirmed in the US where State law now accepts the presumption of the bill of lading being a document of title (in a system that normally requires delivery for title transfer in goods unless parties agree otherwise), but the bona fide holder of the bill still takes subject to any proprietary rights in the assets themselves established before the first negotiation.457 As already mentioned, under applicable domestic laws, use of the FOB or CIF term may itself imply the parties’ intent to postpone the title transfer in France and in England, at least to the moment of loading at the ship’s rail, and this may be explored a little further.458 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, including in England (when any other moment of title transfer indicated in the sales contract may become irrelevant). However, this remains rebuttable while the first transfer (to the original buyer), if made at the time of loading, may still be considered to take place at that time and not therefore through the handing over of the bill of lading to the buyer.459
457 In line with common law practice, the UCC in the US explicitly recognises all legal and security interests in the goods obtained before the issuing of the bill of lading, including any granted by the mere operation of the contract (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 US is more complicated, however, as there is also a set of federal laws concerning bills of lading. It equally abandoned the English approach by means of the Pomerene Act of 1916 (as amended), which supplements the earlier Harter Act of 1893, which was more hesitant in defining the status of the bill. The 1916 Act (see 49 USCS s 80102) applies when the bill is issued for transportation between the various States of the US, to foreign countries or in the US territories and the District of Columbia. Federal law is in fact of greater importance than the UCC which is pure State law applying to movement within a State only. Under Federal law, the bill is considered negotiable if made out to order and represents the title to the goods, see 49 USCS s 80105(a)(1)(A), and (b). It operates as such for any holder who negotiated the bill in good faith and for value, but the proprietary rights to the goods the bill represents are always subject to the earlier rights of third parties obtained before the first negotiation. Here the general common law approach is followed under which bona fide purchasers are not generally protected (except where there is statutory law to this effect). 458 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. 459 See in France Cour de Cass, 11 June 1991, Bull des Transports et de la Logistique no 2443, 591 (1991), but in England it is more properly at the moment the bill of lading is tendered to the buyer: see TD Bailey Son and Co v Ross T Smyth (n 463) and The Glenroy [1945] AC 124. It could be still later in France, particularly when the first sale occurred later or when the original parties agreed to a payment against documents (or when the goods are appropriated to the contract later, or possibly when there is a reservation of title, which in that case should be marked on the bill), cf in England also Enichem Anic Spa and Others v Ampelos Shipping Co Ltd (the Delfini) [1990] 1 Lloyd’s Rep 252, and in France Lamy/Brunat (n 457) II No 219 (2000).
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In an 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 US) and in France, the presumption under an FOB term is normally that the bill of lading (even if ‘on board’) is not a document of title, except where there is clear evidence to the contrary. There is such evidence if the seller is entitled to retain and present the document for payment when title transfer is deemed postponed until presentation of the bill of lading in that context.460 It has been reported that in the North Sea oil trade, title transfer is always deemed to be postponed until the handing over of the bill of lading to the buyer or its endorsement if to order, also in an FOB sale regardless of whether the sales contract specifies another moment of title transfer, and even if the bill is not used to retain title pending payment. In fact, it is usually the oil terminal rather than the carrier that prepares the bill of lading (on its own terms), which is subsequently signed by the ship’s master or an agent and handed to the first FOB seller regardless of who arranged the transportation.461 This may even lead to bills of lading circulating before the oil is loaded or produced. It is normal that in a chain of North Sea oil sales, the sales are FOB until the oil has been loaded, thereafter CIF, but it does not appear to make any difference to the (other) terms of the contract, and moment of title transfer, which is always upon endorsement of the bill of lading.
2.1.4 Consequences of the Different Attitudes to Documents of Title when Goods are Transfered to Transferees Other than Through a Transfer of the Bill of Lading In the German and Dutch approaches, a buyer without the bill of lading if one has been issued—especially likely to be the case pending payment—is in a vulnerable position. 460 See for France n 463. It is sometimes said that a ‘received for shipment’ bill of lading is no more than a waybill, but that may be incorrect as the waybill testifies at least to the receipt of the goods on board. 461 See RM Wiseman, ‘Transaction Chains in North Sea Oil Cargoes’ (1984) Journal of Natural Resources Law 134.
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First, any holder of the bill including the original seller or an intermediary bank, may transfer or negotiate the bill to others, who, if bona fide, acquire proprietary rights in the underlying assets. On the other hand, if the buyer somehow manages to appropriate the goods and takes physical possession upon their arrival (which is not uncommon), its position may be enhanced. The seller and its bank holding the bill for payment may then find their protection endangered. This problem also exists in England and was identified before. As noted, except in a CIF sale, under English law the bill of lading has no prima facie title function, but only plays a role in terms of (constructive) possession providing access to the goods as part of the seller’s performance under the contract of sale (unless otherwise agreed). Indeed in Bristol and West of England Bank v Midland Railway Company,462 goods were delivered by the carrier to the buyer before the bill of lading had been negotiated by the seller to his bank, which, upon receipt of the bill, found itself left with only a claim for damages against the carrier, which could not then deliver. If a bill of lading has been negotiated to a third party, including a bank or a pledgee, the original buyers of the goods upon receipt of them are unlikely to be so protected if they are aware of the existence of the bill, which they normally would be. At least in the Dutch and German systems, they would not receive title under the circumstances. Protection could still result, however, for the buyer in a situation in which the seller is obliged to deliver the goods to him or her at their place of business and uses a carrier that issues a bill of lading to the seller without the buyer’s knowledge. If this carrier, aware of the contractual obligations of the seller, hands the goods over to the bona fide buyer without the bill of lading, the latter would be protected. In the English and French systems, under which title is normally transferred upon conclusion of the sales agreement or in a CIF sale at the latest upon the tendering of the documents to the buyer (unless payment is against documents only, when it will be at that moment), the acquisition of possession of the goods under these circumstance is more generally likely to fully protect the buyer even regardless of its bona fides. Another way of approaching this situation, more particularly in England, is to say that in cases where a buyer is unaware of the shipping arrangement and receives the goods without knowledge of the existence of the bill of lading, the intention of the seller/ shipper and carrier must have been that the bill of lading was no more than a receipt and not a document of title in the first place, even if expressed in such a way as to make it negotiable. Better still may be a reference to custom and practice. If the seller in possession of the bill negotiated this bill of lading, the subsequent rightful holder of the bill would then have no rights in the assets if transferred to the original buyer, although he would of course still have a personal action for damages against the original seller in respect of a double sale or wrongful conversion of possession and possibly against the carrier for having released the goods without the holder’s authorisation as long as the carrier knew of any legitimate interest of the original seller/shipper that he should not do so. A similar system appears to prevail in France. The presumption of the bill being
462 Bristol and West of England Bank v Midland Railway Company [1891] 2 QB 653. It was followed by a long line of cases, cf lastly The Future Express [1992] 2 Lloyd’s Rep 79.
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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.463
2.1.5 The Transfer of Risk The transfer of risk in the underlying assets is not now commonly related to the title transfer and therefore also not to the handing over of the bill of lading to the buyer. They are different issues. Under modern law, the risk is normally associated with the physical possession of the assets: see chapter 2, section 2.1.9. More old-fashioned approaches such as that of French law, which still associate the risk with ownership, continue to pass the risk with the title transfer, in which connection the status of the bill of lading as negotiable document of title may still be of importance.464 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.
2.1.6 The Named or Straight Bill of Lading and Sea Waybills There is no doubt that the named bill of lading (or straight bill of lading under the 1916 Pomerene Act in the US) in which the person entitled to the goods is specifically mentioned (without the document being at the same time to order), can present problems as regards entitlement to the asset under it as it is not truly a negotiable document. In such cases, it is not necessarily so that the person named in the bill has the exclusive rights to the assets, for example a bank may be named in such a bill of lading (as consignee) under a letter of credit but it is still no more than an agent, and upon reimbursement by the buyer, it is the latter who is entitled to the goods and the bank would be required to make the necessary arrangements. This could not be endorsement as these named bills are not truly endorsable (they are not to order). An assignment 463 Thus in Germany and the Netherlands also the carrier or any other handling agent, naturally aware of the existence of the bill of lading cannot claim a pledge or other contractually created security rights or liens in the assets they hold, even under the contract of afreightment or storage, although commonly included in their standard conditions, eg in order to recover their costs by priority (although they may still benefit from statutory liens or privileges, cf explicitly ss 7-307–7-308 UCC in the US for the carrier), because they cannot legitimately claim to have become the holder of the goods in their own right (they hold for the holder of the bill), without also obtaining or having retained at the same time the bill of lading (unless the bill of lading itself states on the pledge facility), except again, it seems, if the bill has not yet been negotiated by the original holder (a distinction implicit in the Netherlands, cf HR, 26 November 1993 [1993] RvdW 15.108). In countries like England, it follows from the fact that the bill of lading was never meant to be more than a receipt, except in CIF sales, when, however, prior claims to the assets still survive. 464 See Cour d’Appel Aix en Provence, 24 October 1980, Bull de Transports, no 186 (1980).
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would therefore appear to be the proper way of transferring the bank’s rights under the bill, but even without it, the buyer may not be without proprietary rights. First, the transportation contract may indicate who is entitled to receive the goods while the entitlement to them may also be proven in other ways. Again, it would appear that any collection of the assets by the bank is in these circumstances only done as agent for the buyer and that the buyer is the rightful owner of the assets even if the agency remains undisclosed. The named bill of lading is now often considered a sea waybill. This is a document in principle in the nature of a receipt only and not a negotiable document of title. This is by implication even statutory law in the US and the UK. It confirms that there is no negotiability and that third parties obtaining such a named bill from the bank are not protected. It need not be presented to collect the assets. However, in countries where the named bill is not so ‘degraded’, its status remains ambivalent and it may still be necessary in order to claim the goods. This may be very inconvenient if it does not arrive on time or is still with the bank for payment under a letter of credit. That may also happen with ordinary bills of lading and can be a real problem, but they at least have the balancing advantage of being documents of title. It also follows that if a named bill is made out to the buyer, a bank that has paid the seller under a letter of credit but retained the bill under a retention right pending reimbursement by the buyer is in a weak position. It cannot dispose of the bill in an execution sale, even in countries that normally allow execution under a retention right, as the buyer is marked as the rightful owner of the goods and is certainly no agent for the bank. This may also be a problem for the bank if the bill of lading is issued to the buyer or his order. There may, however, be specific statutory provisions to the contrary: see in this respect, for example, section 9-601(a) UCC in the US, which in the case of an execution sale of documents of title allows either the document or the underlying goods to be reached. Even the precise status of the sea waybill is in many countries still unclear except that (unless otherwise intended) it is not considered a document of title. The Comité Maritime International (CMI) issued in 1990 Uniform Rules for Sea Waybills. Under these, only the sender of the goods may give instructions concerning them and the goods must be delivered to the addressee assuming reasonable identification, but both have a claim to them. As for the liability for the transportation, the rules are the same as if the sea waybill were a bill of lading. The sea waybill is assumed to describe the goods adequately and no proof to the contrary may be presented against the addressee who relies on the description in good faith. Here again there is a parallel with the rules for bills of lading. The sea waybill is normally used in transportation to subsidiary companies within the same group or wherever the goods are not likely to be sold to others while being transported or when documents are not required in the payment circuit.
2.1.7 Private International Law Aspects of Bills of Lading Since the carriage of goods by sea is normally an international business, it is important also to consider the private international law complication resulting from different
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attitudes concerning the status of the bill of lading as document of title and possessory instrument or mere receipt, which itself will also be a characterisation issue. Short of full transnationalisation or full acceptance of the international law merchant or modern lex mercatoria in these matters, we are here foremost concerned with the proprietary aspects under applicable local laws. Is it in present conflict of laws theory, always pointing to some domestic law, (a) the law of the place where the goods may be claimed applicable (as their lex situs), or (b) perhaps the law of the underlying contractual transportation agreement, or (c) the law applicable to the bill itself even if this law is chosen by the parties? (d) Could it be the law of the place where the bill of lading was issued or is held? The last option would amount to a lex situs approach, now in respect of the bill itself. If it is the first option, then it is likely that the nature of the bill changes and is adjusted depending on the location of the underlying goods even if acquired rights are given some protection in principle, as in the case of the recognition and execution of foreign security rights in movables: see section 1.8.2 above. This is perhaps the more likely approach, which assumes that the lex situs of the underlying goods determines the status of a foreign bill of lading in respect of them, but it may still be necessary to determine whether under the law of the place of issuance of the bill, it was meant to be a (negotiable) document of title in the first place. If so, there may also be some adjustment to the nearest equivalent in the recognising country, which may well concern the negotiability, the question of abstraction or independence, and bona fide holder protection. If it is the second or third option, then it is conceivable that proprietary issues in respect of the underlying assets are decided by the parties’ mere choice, not on the whole believed desirable or even possible in proprietary matters, which by their very nature affect third parties. If it is the last option, then foreign proprietary rules, especially in respect of bona fide holders of the bill or of the assets, could prevail at the final delivery point of the goods against the notion of their lex situs. This last option makes the lex situs of the bill, or more likely the law of the issuance of the bill, the dominant one and allows it to prevail over the lex situs of the goods. If the bill of lading is considered a fully negotiable document of title subject to the law of its own location from time to time (situs of the bill), at least in the aspects of its negotiability, and the validity of the title in the bill itself,465 there remains a particular problem in the relationship to the underlying assets and their transfer or entitlement which have their own lex situs, although the location of the bill will in the case of presentation normally coincide with the place of the location of the goods upon unloading (country of destination), so that there is only one lex situs in respect of both, but only at that moment. 465 See for the attitude in connection with bills of exchange, Dicey and Morris on the Conflict of Laws, 15th edn (London, 2012) 2074. Authority is scarce on the subject of the law applicable to documents of title cf the lack of a reference to bills of lading even in the 15th edition of 2012, 1940ff except for short references to the Carriage of Goods by Sea Act (COGSA) 1971 incorporating the Hague Rules 1924 as amended by the Hague Visby Rules 1968, and the COGSA 1992, which established that the lawful holder of the bill had all the rights and duties under the carriage contract as evidenced by the bill of lading, thereby repealing the Bill of Lading Act 1855 in this respect. See more extensively AA Ehrenzweig, Private International Law (Leyden 1964) 226 and E Rabel, The Conflict of Laws: A Comparative Study 4, 2nd edn (Ann Arbor, MI, 1958) 280ff.
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It would present a clean solution as far as the ultimate claiming of the goods is concerned, although in other aspects the law of the situs of the bill could profoundly affect the rights that can be exercised under it. It could in particular affect the negotiability and use of the bill in the payment circuit. Thus, if a bill conceived as a negotiable document of title in the place of issue is presented in England, the parties’ intent could become relevant in determining its status and affect any negotiation of the bill. Alternatively, if a bill intended to be merely a receipt in England were subsequently negotiated and presented in another country it could then be considered a prima facie document of title if that is the status of such bills in that country. This may be the reason why applicability of the lex situs of the bill is now normally avoided but it still appears in adjusted form: in order to be given the status of a fully negotiable document of title in another country, it would appear necessary as a minimum for a bill of lading to be at least created with such status under the lex situs of the place of its issuance. The place where the bill of lading is issued will normally be the place of loading of the goods (country of origin, although the issuing function may now be centralised at the headquarters of shipping companies). So normally, the law of the place of loading may be considered relevant, also in respect of the continued capacity of the original seller/shipper to engage in further sales of the goods after any negotiation of the bill. If not created with this status at its original situs, the applicable law could be a question of discretion of the recognising courts in the country of negotiation or more particularly a question of the lex situs of the place of unloading (therefore of the country of destination) as to what extent its negotiability could be accepted. Indeed, it would ultimately appear to be the lex situs of the goods that would give guidance on the status of the bill and also determine the question of how the bill could subsequently be fitted in the proprietary system of the recognising country as a document of title, thereby determining the title in the underlying assets in competition with the proprietary rights of any other claimants in these goods. As just mentioned, it may be a matter of adjustment and finding the nearest equivalent in the law of the country of destination. This process of recognition and adjustment of the bill of lading then becomes similar to the one more commonly encountered in the recognition of foreign proprietary rights: see section 1.8.2 above. The result is that a proper distinction should be made between the status of the bill of lading itself and the rights in and transfer of the underlying assets. The law of the country of origin would affect the bill in terms of its status as a negotiable document of title, but the law of the country of destination of the goods would decide the proprietary effect of the bill on the assets and ultimately determine the effect of the bill of lading in that context. The lex situs of the underlying assets is thus dominant. Only party autonomy in respect of the bill of lading and the law applicable to it in its proprietary aspects would allow this law to coincide with that of the country of destination of the goods (assuming the destination is not changed in the meantime), but in proprietary matters such party autonomy is not favoured, as noted many times before, and would at least require a broad bona fide purchaser protection in respect of any intervening transactions in the underlying assets, which might not be sufficiently available under the law of the country of destination. It is in this connection perhaps
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clearest to consider the bill of lading as a document that may autonomously create proprietary interests in chattels, therefore as a facility that aims at a special transfer regime.
2.1.8 Lex Mercatoria and Uniform Treaty Law Concerning Bills of Lading. The Hague, Hague-Visby, Hamburg and Rotterdam Rules Finally, it is possible to treat the bill of lading as what it originally was: a typical transnational document of title, negotiable if properly so expressed, that was derived from the law merchant and substantially operated under its own principles and rules supplemented by treaty law where available. This is likely to be the more productive direction of modern research. While uniform treaty law has been produced in this area, this is mainly the case only in the transportation aspects of the bill of lading, and not in its status as a document of title. Absent treaty law, in a transnational legal environment, in a more responsive approach, this status is foremost to be determined on the basis of the intrinsic purpose and logic of these documents themselves, thus on the basis of established practices subject to any fundamental legal principle and further to be interpreted and supplemented on the basis of the principles common to domestic legislation in this area in mercantile nations and only ultimately on the basis of the application of a national law if deemed applicable on the basis of the prevailing principles of private international law. This approach conforms to the hierarchy of norms which may be considered the essence of the modern lex mercatoria: see more particularly Volume 1, chapter 1, section 3.2.2. It is likely to emphasise the status of the bill of lading (if expressed to order or bearer) as a negotiable document of title at the expense of parties’ intent. As far as treaty law in the transportation aspects is concerned, in this connection the Hague, Hague-Visby, and Hamburg Rules are relevant. Again, they mainly deal with the transportation aspects of the bill of lading and not with its status as a negotiable document of title. The need for uniform law in this area appeared first after World War I when the freedom of the parties to agree the transportation conditions in practice left the carriers great bargaining power to impose their conditions while there was often a lack of clarity even on the transportation terms as printed on the bill of lading. In the US, the federal Harter Act of 1893 had first achieved here some order and provided a mandatory infrastructure for the carriage of goods by sea (between different States of the US) and achieved a compromise between the conflicting interests of shippers and carriers. The US subsequently pursued this policy internationally and the International Law Association (ILA), which is a voluntary body of legal practitioners existing since 1873, took this over. It led to the Hague Rules, accepted by the ILA in 1921 in the Hague, amended and translated into French in 1922. Subsequently, these Hague Rules became the subject of a diplomatic conference in Brussels in 1923 leading to the Brussels Convention incorporating them in 1924. Under it, mandatory rules, especially in the area of carrier liability, were agreed for the period of the carriage of the goods (not for their handling by the carrier in the port of loading or discharge). It thus remained a very partial codification and only unified rules for bills of lading with regard to damage occurring between the time of loading
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and discharge (to hull cargo other than live animals) (see Rule I(b)(c) and (e)), while Rule III(8) stressed the mandatory character of the rules if embodying a prohibition or restriction rule. Choice of law or forum selection clauses likely to result in a limitation of the liability as determined by the Rules are now mostly ignored, at least by fora in the Contracting States, which, as in the case of the Netherlands, may sometimes assume jurisdiction themselves on the single ground that the cargo is destined for ports within their jurisdiction. The Brussels Convention left Contracting States the choice of ratifying the Convention or incorporating its rules in national law, which incorporation took place in some countries in various succeeding steps (as in the Netherlands where this process was completed only in the 1950s). In the UK, the COGSA, incorporating the Hague Rules, was adopted as early as 1924. The US COGSA dates from 1936. The result was the emergence of unavoidable differences in implementation between the various countries adopting the Rules. In particular, problems continued to arise in the determination of the carriers’ liability and the validity of negligence clauses in bills of lading. An attempt at greater uniformity was made through amendments resulting in the HagueVisby Rules agreed in Visby in 1967 upon the initiative of the CMI. These were adopted by a diplomatic conference in Brussels in 1968, the relevant Protocol becoming effective in 1977. The Hague-Visby Rules notably increased the limits of the liability of the carrier. Since 1979 these limits have been expressed in special drawing rights (SDRs) of the International Monetary Fund (IMF). In the meantime, the character of the Hague and especially Hague-Visby Rules as customary law applicable regardless of their ratification and/or incorporation into local law even as mandatory rules was noted.466 They may also apply to transportation arrangements other than under bills of lading, such as those under sea waybills or charterparties (if not already clarified under incorporation statutes). The Hague-Visby Rules have been widely adopted: see for the UK the COGSA 1971 replaced in 1992, for France a law of 1977 and for the Netherlands a law of 1982. The US and Germany remain party to the old Hague Rules and have so far signed but not ratified the Hague-Visby Rules. Several countries, such as France, extended the coverage to sea waybills. Pressure from less developed countries for greater carrier liability, especially in respect of servants and agents, also during handling in the port of loading and discharge and therefore not only during the carriage of the goods, led to the Hamburg Rules. They are an UNCITRAL compilation adopted at the diplomatic conference in Hamburg in 1978 and became effective in 1992. They replaced the risk allocation of the Hague-Visby Rules in favour of a rebuttable presumption of liability of the carrier. It proved controversial. As a consequence, the Hamburg Rules have been ratified only by a number of smaller countries, among which is Austria. The US and France signed but have not so far ratified. Some East European and African countries have ratified without apparently repealing the Hague or Hague-Visby Rules to which they had become
466 See WE Haak, ‘Internationalism above Freedom of Contract’ in Essays on International and Comparative Law in Honour of Judge Erades (The Hague, 1983) 69. See for a similar public order characterisation of the HagueVisby Rules, W Tetley, Marine Cargo Claims, 3rd edn (Montreal, 1988) 944.
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a party. As a consequence of all these developments, various countries may now apply the Hague Rules, Hague-Visby Rules, Hamburg Rules or their own rules (if not incorporating any of the others). This may give rise to conflicts. The Hague Rules are applicable to contracts of carriage covered by a bill of lading or any similar document of title in so far as such document relates to the carriage of goods by sea (Rule I(b)), assuming that the law of a Contracting State applies to the bill of lading. They do not apply to carriage covered by sea waybills or a charter party under which no such document is issued (although some countries did extend their application to sea waybills, as we have seen). As mentioned before, the Hague Rules put emphasis on the transportation aspect and not on the documentary aspect of the bill. The bill of lading is in truth considered prima facie evidence of receipt of the goods only (see Rule III (4)) and there is notably no definition of the bill of lading itself. According to Rule X, the Hague-Visby Rules apply to all carriage of goods by sea under a bill of lading: (a) issued in a Contracting State; (b) concerning carriage from a port of loading in a Contracting State regardless of any other choice of law clause; and (c) in which a choice of law is made in favour of the law of a Contracting State. They continue to view the bill of lading as prima facie evidence of the receipt of the goods but no longer allow proof to the contrary upon negotiation (Rule III(4)). The Hamburg Rules define the bill of lading as a document of title if expressed as a negotiable instrument (Article 1(7)) and also apply to incoming carriage of goods by sea under a bill of lading. It may thus be confirmed that the various Rules are not primarily concerned with the bill of lading as a negotiable document of title in terms of proprietary effect. The Hague-Visby Rules are the least controversial and therefore probably the most important standard. They do not clearly state that the bill must be in writing or manually signed. The carrier must, however, issue a bill of lading upon the demand of the shipper, in which connection reference is made to documents and to information that must be supplied therein: Rules III (3), V, VI and X. Most incorporation laws require a document and in most countries there must be a hand-written signature.467 The bill of lading must also contain leading marks to identify the goods (see Rule III (3) of the Hague Rules). In 2009 via UNCITRAL, a new set of Rules appeared (the Rotterdam Rules), which covered the situation where the transportation was partly by sea and partly by land.
2.2 Negotiable Instruments 2.2.1 Bills of Exchange It has been established that the concept of the bill of exchange or draft was used in the large European fairs as early as the fourteenth century AD to avoid the need for traders 467 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.
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at these fairs to carry large amounts of cash (gold and silver). Through the banking system of those days, the Lombard bankers present at these fairs would offer these traders the facility of receiving the cash they had collected at these fairs in their home residence. To this end, the Lombard banker would take the trader’s cash and instruct his correspondent to make the necessary payment in the residence of the trader. These instructions would be in writing and would be given to the trader, who would present them to the correspondent banks in his own town upon his return. It subsequently also became possible for buyers at these fairs to draw cash from the correspondents of their home banks present at these fairs, to which end they would carry a written instruction of their own banks. The bankers operated a form of clearing among themselves to reduce their own subsequent need to send cash to other places. The banking instructions used in this connection were subsequently made negotiable and developed into the modern bill of exchange. However, bills of exchange as negotiable instruments as we know them today date more properly from the end of the eighteenth century, when, in the earlier stages of the Industrial Revolution, trading and shipping of goods became more frequent and new payment methods had to be designed. In this context, the old drafts were refashioned to suit the new needs. Like the bills of lading, they then acquired their present legal form.468 The modern bill of exchange in its simplest form is no more than an irrevocable instruction (in writing) a creditor to his debtors to pay their debts on the appointed date to the bearer of the bill or to the person indicated by the creditor (who may be the creditor himself) on the bill or to that person’s order. Normally the instruction is given by a seller (the drawer) to his buyer (the drawee), ordering the latter to pay whatever he or she owes the drawer to a third person/beneficiary (the payee). The reason for this payment to a third party will often be that the drawer469 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 468 In England, the modern development of the bill of exchange is associated with the name of Lord Mansfield; see also G Gilmore, ‘Formalism and the Law of Negotiable Instruments’ (1979) 13 Creighton Law Review 441, 446–50. It was a product of the law merchant but became incorporated into the common law, which in turn affected its further development: see also Vol 1, chapter 1, s 1.1.3, and JS Rogers, The Early History of the Law of Bills and Notes (Cambridge, 1995). 469 See for assignments competing with bills of exchange, s 2.2.8 below.
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interest rate unless it is a floating rate.470 The payment cannot be conditional or the sum payable otherwise vague. The bill of exchange must instruct the drawee to make immediate payment or payment at a later date. In the case of an instruction to make an immediate payment, we speak of a sight draft or sight bill, which the drawee either refuses or pays upon presentation. In the latter case, the drawee will subsequently hold the sight bill as proof of liberating payment. It becomes a receipt. In the case of a payment at a later date, we speak of a time or term draft or bill, which the drawee either accepts or ignores upon presentation. The due date may be specified on the draft or may be expressed in a number of days after sight (that is after presentation) or after the date the bill of exchange was drawn. The basic principle of a bill of exchange is that nobody is bound under it except those who have signed the bill itself—thus the drawer is always liable (relevant upon negotiation, eg to a bank), as are a drawee if he has accepted the bill by putting his signature on it, the payee, but only upon endorsement, which means the sale of the bill by him to someone else, and all other endorsers. Anyone else who signed the bill will be considered to have done so as guarantor (aval in civil law terms). Acceptance by the drawee is crucial but only for time bills (it is neither relevant nor possible for sight bills). Without it, a time bill has little value. Acceptance does not mean payment, but rather the commitment of the drawee to pay on the due date, of which his signature on the draft is the acknowledgement. An accepted time draft thus signifies not merely a special liability of the debtor upon negotiation of the instrument, but also a benefit in terms of credit for the drawee. It means that during the period of the bill the seller cannot invoke default remedies such as a reservation of title or other security given to protect the underlying indebtedness of the drawee. Acceptance is not novation, merely confirmation of a postponement of payment probably already agreed in the sales contract and is otherwise an amendment thereto. The main practical significance of a time draft is, however, that it may be discounted with a bank for immediate payment. This implies a discount related to the prevailing interest rate to maturity taking into account also the creditworthiness of the drawee as ultimate debtor under a bill of exchange. As we have seen, a sight draft cannot be accepted. It is either paid or refused upon presentation. It can therefore not be discounted either. Technically, it may still be negotiated—that is, sold to whomever wants to buy it—so that there may also be holders (in due course) of sight drafts, but in view of the lack of acceptance this is rare. As just mentioned, the main relevance of sight drafts is in the order to pay a third party immediately, implying the drawee’s discharge if the latter obeys the order and collects the sight draft as a result. If made out to the order of the drawer (as payee), possession of a sight draft gives the paying drawee written proof of his payment and a release vis-à-vis his creditor/drawer as he becomes the rightful holder of the draft upon payment. We see here a doubling of functions, which is common in bills of exchange. Similarly in a time draft: the drawer may be the payee at the same time (when the bill of exchange is to the drawer’s own order or in German a frassiert-eigener Wechsel). This makes sense if the agreed payment takes place only later and the drawer wants
470
Except in Germany, see s 5 Wechselgesetz [Bill of Exchange Act] 1933.
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a facility to receive immediate payment from a bank through discounting. This is a method of raising cash on bills of exchange that mature later. Banks will provide this facility at a discount. If the time draft is to bearer, it usually means that the drawer retains the bill of exchange. He is then in the same position as if the draft had been to the drawer’s own order; he is payee at the same time. It is also possible that the payee is not the drawer/seller himself but rather its bank, which in this case is not a true third party but will collect as agent on the drawer’s behalf in this manner. The drawee and the payee of a time draft may also be the same. This means that the drawee is instructed by the drawer to pay to himself (or order) on the payment date. This makes sense if the drawer owes the drawee money at some date earlier than the bill’s maturity and wants to give the drawee a facility to raise cash by discounting the bill upon its own acceptance. The drawer may also be the same as the drawee. This means that a drawer has drawn the bill of exchange on himself in favour of a payee. The draft is then treated as a promissory note (assuming the drawer has accepted the bill of exchange drawn on himself at the same time, therefore as a promise to pay the payee a sum certain upon demand or at a certain date).471 The terms ‘to order’ or ‘to bearer’ were used before. This is standard language in bills of exchange (as it is in documents of title) and denotes negotiability of the paper. It means that if proper language is used and the instrument is to a named payee or his order or to bearer, it will be negotiable and can be transferred by endorsement and delivery if to order, or by delivery only if the bill was to bearer. The result is that bills of exchange become negotiable instruments. It is true that in civil law the bill of exchange to bearer is often discouraged, unlike in common law. Under the Geneva Conventions of 1930 (see section 2.2.10 below) the bill of exchange to bearer is even considered void, but a similar result is achieved when the drawer draws a bill of exchange to his own order (making himself the payee), while endorsing the bill in blank. The pure bearer bill is considered negotiated when in third-party hands. This is relevant for its status as an abstract obligation: see section 2.2.4 below. Only the holder of the bill of exchange may request payment. When the holder is in good faith, he is called a holder in due course and may have a better right to ask for payment than his predecessor as the holder takes free and clear of earlier defects in the chain of transfers of the document (but not of any in the transfer to himself). As such the holder may demand payment from anyone who has signed the bill, except from a drawer or any endorser who has put ‘without recourse’ next to his signature, or from any signatories indicating that they are signing only as agent or representative of others. Pure guarantors or avalists might also have a special status in this respect and might only be liable after other signatories are in default of their payment obligations (in which case the guarantee is only a secondary obligation). As just mentioned, the holder in due course may ignore defences arising from irregularities earlier in the chain
471 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 will result. For purposes of the bill of exchange, the establishment may here be assumed to have sufficient independence, even though not itself a legal person separate from the company. The result is that the drawer and drawee are not considered to be the same.
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of transfers but also in the creation of the instrument unless apparent from its face. In demanding payment from the original payee, the drawer or the drawee, the holder in due course may thus also ignore all defences derived from the underlying relationships between drawer and drawee or drawer and payee. If any earlier endorser is asked to pay, the latter has recourse against any signatory before him (except a drawer or any endorser without recourse) but not after, so that ultimately the drawer and any drawee who accepted the bill of exchange are liable under it vis-à-vis the payee and all his successors in interest.
2.2.2 Acceptance and Discounting of Time Bills The practical importance of bills of exchange is mainly in the possibility of discounting accepted time bills or drafts. There is on the whole no obligation for the drawee to accept a bill of exchange and thereby incur greater liability if the bill is discounted or otherwise negotiated to third-party holders as upon acceptance the drawee loses the defences he or she may have had against their creditor/drawer: see section 2.2.5 below. In some countries, however, there is a duty to accept, notably in France and the Netherlands. It has been a traditional feature of the Dutch law of bills of exchange that they must be accepted by the drawee if the seller/drawer has fully performed its obligations under the contract, therefore in the case of a sale upon delivery of the goods. A seller who remains unpaid at that moment may therefore draw a time draft on the buyer for payment to the payee (or himself) on the payment date, which bill of exchange the buyer must accept. It is nevertheless an onerous legal act on the b uyer’s part and the acceptance duty must be considered outdated and is certainly not required by the Geneva Conventions of 1930: see section 2.2.10 below. Belgium deleted the acceptance obligation from its own law (Article 8 of the Bill of Exchange Law 1872, which had been thought to reflect commercial custom) in 1930 on the occasion of the incorporation of the Geneva Conventions into Belgian law. Of course, it is always possible that the sales agreement itself imposes a duty on the buyer to accept the bill of exchange drawn on him in respect of the sale price, but under Dutch law acceptance concerned a statutory right of the drawer under the stated circumstances. It does not, however, itself effect acceptance (as it did at one time in Belgium), and even a judgment ordering acceptance cannot take its place if the debtor remains unwilling. Specific performance action would be required. In France, the acceptance duty dates only from 1938 (Decree of 2 May): see Article 124 of the French Commercial Code (old) now L 511-15 (penultimate paragraph). The Cour de Cassation had earlier rejected the obligation.472 As a sanction, a buyer refusing to accept loses his sales credit and the price becomes due immediately. The usefulness of the acceptance obligation is debated in France as the acceptance is required only upon full compliance by the seller and there may always be some doubt on that point. At least it is easy for the buyer to find
472
10 April 1878, D.78.1.289.
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excuses in the quality and delivery of the goods.473 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.474 The drawer, while handing a time draft to the payee (after giving notice to the drawee), guarantees acceptance (except where he indicates otherwise on the bill). He also guarantees payment by the drawee. This liability cannot be excluded under the Geneva Conventions but it can be under common law: see section 2.2.3 below. Acceptance is a condition for the discounting of bills of exchange. Banks that make a business out of the discounting of time drafts themselves become the holders of the drafts they discount and they will present them to the drawees on the appointed dates. They therefore incur the credit risk of the drawee but they have recourse against anyone who has signed the bill as all signatories (except those who sign as disclosed agents or without recourse) are assumed to have guaranteed that the drawee will have sufficient funds on the payment date. This concerns principally the drawer and payee.
2.2.3 The Persons Liable under a Bill of Exchange: Recourse The basic rule is that under a bill of exchange all those whose signatures appear on the bill are in principle liable. They all function as guarantors of payment vis-à-vis the holder. They are principally the drawer and any endorsers, except for the latter if they signed ‘without recourse’. As we have seen, under Article 9(2) of the Geneva Convention, the drawer may not do so, but he may under common law: see section 16 of the English Bills of Exchange Act 1882 and sections 3-414 and 3-415 UCC in the US. This is likely to complicate and change the chain of recourse. Any special guarantors or avalists (in civil law terminology) may have a lesser guarantee obligation. In some legal systems, they may not be considered primary guarantors. It means that others liable under the bill of exchange must first default before the avalist may be required to pay. The aval may be limited to non-payment by certain parties. The aval is often thought to be relevant for time drafts only. It is in any event unlikely to be given without acceptance of the draft by the drawee. In English law, these special types of guarantors are usually not distinguished from endorsers, although in terms of recourse they may still come later and are as such more properly considered quasi-endorsers. It requires their place in the line of endorsers to be established.475 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.
473
See also G Ripert and R Roblot, Droit Commercial 2, 16th edn (Paris, 2000), nos 1986ff. This was earlier also suggested in the leading Dutch treatise of FG Scheltema and J Wiarda, Wissel en Cheque Recht, 285. 475 See on this problem, which will not be discussed here any further: R Goode, Commercial Law, 4th edn (London, 2010) 542. 474
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The drawee himself becomes liable on the bill only through his own signature as token of acceptance. Without it, the draft has value to holders only as a guarantee of acceptance and payment by the drawer (without defences derived from the underlying contract giving rise to the claim) or any endorsers (provided they have not signed without recourse). It is clear that a bearer draft is, from the point of view of protection, less interesting to the holder, as it will have only the signature of the drawer and of the drawee in the case of accepted term drafts. An advantage for the holder of a bearer draft is, however, that the latter cannot and need not show a continuous line of endorsements so that it is easier to establish that he is the proper holder. Endorsers against whom recourse is taken do not strictly speaking become holders in due course as a consequence of their payment. They have recourse only against their predecessors (in principle according to their order) and therefore not against all signatories of the bill of exchange.476 The idea is that, in terms of recourse, ultimately the original payee, and thereafter the drawer in that order, are reached. A drawee who has accepted is the principal obligee (as are any avalists if primary guarantors) and can in that position always be asked to pay. The drawee is not therefore a recourse debtor who can only be reached in the order of endorsement. If the bill of exchange is not accepted, as in the case of the sight bill, the ultimate debtor is the drawer, who may, however, still be able to solicit payment from any guarantors of the bill and from the drawee but only as debtor under the original sales contract. The bill need not be presented on the due date, but the periods thereafter during which this may still be done are likely to be limited under applicable domestic laws.
2.2.4 The Principle of Independence or Abstraction The key to the understanding of the bill of exchange is that as an ‘instrument’ embodying a claim (a) it is at least upon negotiation independent of the underlying creditor/debtor relationship between the drawer and drawee; (b) it has its own manner of transfer, which is not through assignment (and its formalities under local laws) but is achieved through the handing over of the paper (with endorsement if to order); and (c) it also has its own way of protecting bona fide holders for value (or ‘holders in due course’). These principles all derive in origin from the law merchant rather than from national law (which only introduced more refinement). Any national law not accepting these principles destroys the essence of the bill of exchange.
476 It is of interest to note that under a bill of exchange endorsers become liable by adding their signature. They thus guarantee to their successors that the drawee will have sufficient funds upon presentation of the bill to the latter. No similar guarantee structure is implied in the endorsement of bills of lading and the endorser of such bills does not therefore guarantee in any way that the goods are with the carrier and are collectable upon presentation of the bill of lading.
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The principle of independence under (a) is particularly important in this connection and serves as major support for the negotiability of bills of exchange, which in turn implies its own mode of transfer and protection of third parties. It makes the bill of exchange (like bills of lading) a proprietary instrument that cannot be directly fitted under the general rules of property of the applicable legal system. They continue to have their own separate status everywhere. This notion of independence, which is also called the principle of abstraction, is not relevant as between the seller (drawer) and the buyer (drawee), although in England a cheque being a sight draft is often given independent status in respect of the payee: see also section 2.2.6 below. The better view is, however, that if the drawer retains the bill made out to his own order or to bearer (where possible) and presents it to the drawee on the due date, the ordinary defences as between them still prevail even if the drawee accepts the bill. There is an effect in so far that the burden of proof may shift to the drawee upon acceptance, as any drawer will in the first instance sue on the bill of exchange and not on the basis of the underlying relationship. The abstraction is thus more particularly relevant for any third-party holder acquiring the bill in good faith, thus for the holder in due course.477 It protects against all defences from those with whom the holder did not deal. Indeed, the 1990 Comment on the UCC (at section 3-302) explains that the ‘holder in due course’ doctrine applies only in cases where more than two parties are involved. The essence is that such a holder does not have to suffer the consequences of a defence of the obligor (on the instrument) that arose from an occurrence or relationship with a third party of which the holder did not know. It means that in connection with payment of the purchase price in a sale, the drawer or a drawee, while being asked to pay on a sight or accepted time draft by a holder in due course, cannot invoke any defences derived from the underlying agreement between seller/drawer and buyer/drawee in order to refuse payment. They cannot reclaim any (full) payment made under those circumstances either. In this connection, it should be noted that the original payee is not strictly speaking a holder in due course either and may therefore have a weaker position, at least under English law.478 In the presentation of the bill to the drawer, the payee may thus still be faced with the defences derived from its own underlying relationship with the drawer giving rise to becoming the payee in the first place. This may not apply when presenting the bill of exchange to the drawee. At least in England, payees may also be able to claim the status of holders in due course vis-à-vis the drawer if they later negotiated the draft and became an endorsee.479 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. 477
See s 17 German Wechselgesetz, L 511-12 French Commercial Code and s 3-305 UCC in the US. RE Jones Ltd v Waring & Gillow Ltd [1926] AC 670. Jade International Steel Stahl und Eisen GmbH & Co KG v Robert Nicholas (Steels) Ltd [1978] QB 917.
478 See 479 See
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2.2.5 The Holder in Due Course. Personal and Real Defences. Other Types of Holders As we have seen in the previous section, the holder in due course of the bill is strongly protected but must make sure that the bill of exchange is not overdue, incomplete or irregular on its face. It also means that a bill to order must have a continuous line of endorsements. At least in common law, the holder in due course must also have acquired the bill of exchange for value and, under all legal systems, in good faith as regards any prior defects in the chain of transfers. There should not be any notice of a previous dishonour. The transfer of the bill to the holder will also be subject to the normal rules, defences and exceptions in terms of capacity of the parties and validity of the contract. With this proviso it is, however, possible to say that holders in due course do not derive their rights from their predecessors but rather out of the documents themselves, which is a common feature of all negotiable instruments and even documents of title. As a consequence, subsequent holders in due course need not be concerned about defects in the issue, acceptance or negotiation, lack of capacity or any nullity or illegality of transfers earlier in the chain in which they were not involved and of which they did not know. However, there may still be some differences in the various national laws in the area of these so-called defences. As in bills of lading, it is not uncommon to distinguish here between personal and real defences. Personal defences are those derived from the relationship between a plaintiff and a defendant in an action concerning a bill of exchange. They only operate between parties that entered direct relationships with each other and therefore not against endorsees. Real defences are based on the nature of the bill of exchange itself and concern defects in the instrument or its transfer or chain of endorsements. Personal defences in an action between a drawer and drawee are therefore most likely to be based on their underlying sales agreement. Between succeeding holders they are any defects in the negotiation or discounting of the bill. Personal defences do not affect the status of a bill of exchange itself but affect only the current holder of the bill. They concern its status as holder in due course, therefore the requirements of that status, such as proper acquisition or otherwise the bona fides itself, or, in respect of the immediate predecessor, the circumstances under which the holder acquired the bill of exchange. As already mentioned before, between drawer and drawee their underlying relationship may still be invoked as a defence even if the bill has been accepted. As we have seen also, vis-à-vis the payee, the drawer may have certain defences derived from their underlying relationship which gave rise to the drawing of the bill of exchange in the payee’s favour in the first place. In any event, if the bill is not accepted or is dishonoured, the original relationship is re-established and may always be sued upon between a drawer and drawee. Real defences concern the bill of exchange itself and its validity and may relate to forgery of signatures, alterations to the bill, nullity or illegality of the issue of the bill or its transfers, but also to lack of capacity or other defects in drawing or transferring it earlier in the chain of transfers. They thus signify an irregularity in the creation or continuing
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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,480 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), later forged signatures or irregular transfers are not relevant at all and they may ignore them. But later signatories are considered new drawers or endorsers of the bill and cannot deny liability vis-à-vis subsequent holders of the bill of exchange on the grounds of earlier invalidity, irregularities or other real defences. Common law often makes a further distinction between the types of holders and, besides the holder in due course, there may also operate the notion of the normal holder as distinguished from the mere holder. Under English law the (mere) holder, the (normal) holder for value, and the holder in due course,481 each have different defences. It is all a question of powers and defences and they become stronger for each type, the holder in due course having the strongest position. Continental law distinguishes only between the (mere) holder and the holder in due course.
2.2.6 Cheques Cheques are still common in common law countries, also among professionals, although now fast being overtaken by electronic bank payments. They are simply sight drafts to order, drawn on one’s bank and ordering it to pay to a third party (payee or his order). They may also be issued and handed to a payee in blank, creating a bearer instrument until the holder fills in his own or somebody else’s name. As a sight draft, in most countries, a cheque cannot be accepted by the bank and the bank either pays the third-party payee (usually debiting the current account of the drawer) upon presentation of the cheque by the payee or dishonours the cheque by simply refusing to pay. The bank will normally dishonour the cheque and is allowed to do so if there is an insufficient balance in the drawer’s account unless other arrangements were made in terms of overdrafts on the account. Negotiation has a meaning here only in the sense that the cheque, if not crossed (a typical English practice that requires the cheque to be paid into the payee’s own bank and not to him directly or to anyone else as endorsee), may be transferred by the payee or his order or otherwise by any bearer to a third party who will subsequently present the cheque for payment to the bank with recourse on its predecessors and the drawer if no payment is received in this manner. It is particularly important in this connection that at least in England, as between the drawer and payee, the cheque creates an independent payment obligation, even if, as in the case of bills of exchange, the payee is not truly a holder in due course and the drawer therefore still retains the personal defences against the payee derived from their 480 See s 24 of the Bill of Exchange Act 1882. On the Continent, the forgery may not distract from the right of bona fide purchasers of the bill: see s 7 of the German Bills of Exchange Act 1933. This is also the situation in the US: see s 3-404 UCC. Theft of a bearer instrument may equally be irrelevant to the holder in due course: see Art 3.86(3) (b) of the new Dutch CC. 481 See Goode (n 475) 533.
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relationship that gave rise to the issuing of the cheque in the first place. Negotiation is not therefore necessary to activate this protection. It follows that if the bank does not pay, the payee may (at his option) still sue the drawer for payment on the cheque rather than on the underlying contract or relationship. This is likely to be simpler, and writing a cheque therefore implies a risk for the person doing so.
2.2.7 Limited Modern Use of Bills of Exchange and Cheques The bill of exchange has lost much of its attraction in modern times, particularly in countries that have an easy way of assigning receivables as security, that is particularly in countries that do not require notification as a constitutive requirement for assignments. In countries that still do, as those in the French tradition used to (see section 1.5.1 above), this requirement could be avoided by drawing a bill of exchange in favour of the third party, which could then be handed over as possessory security to lenders, who would subsequently collect. As the bill of exchange is usually presented for such payment at the place of the debtor (drawee), the attendant country and political risks attached to the transfer of the proceeds meant that, in international transactions, it was eclipsed by the letter of credit: see for these letters of credit Volume 3, chapter 1, section 3.3.8, which are normally payable in the country of the seller. A bill of exchange may, however, still be used in that context and is then often drawn as a domestic bill on a confirming bank under the letter of credit in the home country of the seller. In all cases, the chief advantage of a bill of exchange, if a time draft, remains that it allows for the facility of acceptance and subsequent discounting for the drawer to obtain immediate cash, which latter facility is not inherent in the letter of credit facility. It is in a sense in factoring of receivables, but the difficulty of a bulk assignment and the possibility of defences of the debtors under these receivables often made straight discounting complicated. Hence the alternative of bills of exchange on the one hand and the need to make receivables themselves more abstract undertakings on the other (see section 1.5.8 above), coupled with a bulk assignment facility. Here the bill of exchange is at a disadvantage as it cannot be arranged in bulk (therefore in respect of different drawees at the same time). In some countries, dishonouring an accepted bill of exchange by the drawee or failing to provide recourse by the other signatories may give rise to criminal penalties and is in any event considered a grave undermining of one’s own credit standing. As a consequence, drafts still have some advantages, although in international trade their overriding importance has disappeared as other payment methods have become more popular, and modern communication facilities have allowed greater informality, especially between parties who are now in closer contact and better known to each other. One may also say that the risk inherent in international trade has been substantially reduced as a consequence of the modern communication facilities and the increased possibilities of following goods and payments from afar. On the other hand, cheques continue to be used extensively in countries such as England and the US in the consumer sphere, but electronic payments through banks are
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now superseding them rapidly. In England there was even a recent proposal (rejected) to eliminate cheques altogether. Earlier they were the subject of much attention and modern legislation to protect consumers better. Also the processing of thousands of cheques on a daily basis has required legislative action to make handling easier for the banks, although it remains an expensive and cumbersome process. Much of the modern legislation concerning negotiable instruments has been in this area without affecting the fundamental principles for professionals. These consumer aspects are outside the scope of this book.
2.2.8 Bills of Exchange and Competing Assignments of the Underlying Claim The problem of competition between a bill of exchange and an assignment of the underlying claim may present itself especially in the factoring of a portfolio of receivables. It raises the question of the status of any bill of exchange drawn on a debtor by its creditor in favour of a third-party payee, either before or after a bulk assignment of receivables to a factor or other financier. Especially where notice of the assignment to the debtor (drawee) is not necessary under applicable law for the assignment to be valid, any later notice to the drawee with a request for payment to the assignee may conflict with the debtor/drawee’s earlier duty under an accepted bill of exchange to pay the payee or any holder in due course on the payment date. May or must the drawee refuse any notice and payment request of the assignee under the circumstances? In principle, a debtor may ignore any assignment materially detrimental or burdensome to him (see section 1.5.3 above) and may, if a payor has already honoured the bill, be able to refuse any payment to the assignee on that ground or as a defence under the original contract with the drawer out of which the claim arose in the first place. If the drawee has not yet accepted the time draft or if a sight draft is presented after payment to the assignee, he will naturally not accept or honour when requested to do so. Where there is an acceptance duty there may be a greater problem for the drawee. The drawee if forced to pay twice will probably have recourse against the drawer, not under the bill of exchange, but rather under the original contract or perhaps as a matter of unjust enrichment of the drawer. On the analogy of the bill of lading, in common law countries, it may be possible to say that the holder of a bill of exchange is always subject to the rights of third parties in the underlying claim, in this case the assignee, at least if the assignment was made before the bill of exchange was drawn or accepted. Even in civil law countries, there is here no exception to the nemo dat rule as it concerns the transfer of receivables. Their incorporation into a negotiable instrument is not therefore likely to protect the payee and his successors against earlier rights of others. It would mean that the right of the earlier assignee is always stronger than that of the later holder in due course of the bill of exchange and that the drawee may plead that right as a defence against the holders in due course while paying the assignee. It does not oblige the drawee to pay the assignee unconditionally, certainly if an endorsee has already been paid and paying the assignee will entail double payment. If he must subsequently also pay the assignee, he may be able to recover from the earlier endorsee. He would certainly be able to recover any double payment from the drawer/assignor.
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As the bill of exchange is only another method of payment, it could also be said that any later assignments affect the drawee equally, even if holders in due course may then be better protected. It means that they may be able to keep their collections also if the drawee is subsequently forced to pay the assignee. In that case, the drawee is more likely to recover any double payment from the drawer/assignor than from the holders in due course.
2.2.9 Position of the Holder in Due Course of a Bill of Exchange Compared 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 (such as handling agents) claiming rights in respect of them without being at the same time the holder of the bill of lading, even though in respect of the holder in due course of a bill of exchange there may still be a competing assignment, as we have seen in the previous section. This problem in respect of bills of lading was discussed in section 2.1.5 above. At least in common law countries like England, but also in civil law countries like France, the absence of the need for delivery to transfer title in the underlying assets makes the holder of the bill of lading extra vulnerable to alternative alienations or even the vesting of security interests of others in the underlying assets. In any event, in these countries, the status of the bill of lading as negotiable document of title depends on the intention of the parties creating the instrument, and any holder of the document takes subject to that intent. This is less of a risk in countries like Germany and the Netherlands requiring delivery for title transfer, as we have also seen, and the handing over of the documents will always be a good substitute regardless of intent, even if one cannot avoid the underlying assets still leading an independent life especially if in the hands of those that do not know of the bill of lading or when acquired by bona fide purchasers. This is here also less of a danger in the case of bills of exchange which, as just mentioned, more truly incorporate the underlying asset and have their own more exclusive method of transfer and protection, also in common law,482 although, as noted in section 2.2.5 above, the defences of earlier endorsers cannot always be ignored by the holder in due course of a bill of exchange either, especially if derived from the face of the bill. As we have seen in the previous section, bills of exchange also remain subject to the prior rights of others in the underlying claim. That is also true for bills of lading in common law countries. In countries like Germany and the Netherlands, on the other hand, the creation and negotiation of a document of title are likely to erase all earlier proprietary rights in the underlying assets in respect of bona fide holders of the document. 482
See also CM Schmitthoff, The Law and Practice of International Trade, 9th edn (London, 1990) 573.
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2.2.10 Foreign Bills of Exchange: Private International Law Aspects Under domestic legislation, so-called foreign bills of exchange sometimes have a somewhat different status, as for example under the English Bills of Exchange Act 1882 (section 4). They are in English law defined as bills of exchange drawn by non-residents or drawn on a person resident abroad and payable abroad, which normally (but not necessarily) follows. The main difference is that foreign bills of exchange as distinguished from inland bills of exchange must be formally protested upon dishonour by non-acceptance or non-payment (section 5). It means that dishonour must not only be notified to the drawer and each endorser but must also be established formally by a notarial deed. This formal protest, which will be marked by the notary on the bill of exchange, is not necessary in England (unlike in other countries) for inland bills. Also the interpretation of the endorsement abroad of a bill governed by English law is different (section 72(2)). The Act further contains in section 72 some detailed conflict of laws rules dealing with validity, interpretation, the preconditions for the right to recourse, the effect of the bill of exchange, and discharge.483 It is quite clear that bills of exchange may be drawn by a seller in one country on a buyer in another, who is likely to accept the bill in its own country. This bill may be in favour of and handed to a payee in a third country and may be payable in a fourth. The bill of exchange itself may subsequently circulate in yet more countries and be delivered and endorsed in any of them. There are here four basic areas of conflict: (a) the creation of the bill of exchange in terms of formalities, capacity and validity; (b) any subsequent transfer in the same aspects; (c) the acceptance and the effect of the bill of exchange elsewhere when ultimately presented for payment to the drawee, but no less when presented for recourse by the holder to any signatory of the bill which goes into the strength of any defences levelled in those situations against the presentation; and (d) any payment and discharge under the bill of exchange. The basic rule, at least in England, is that the creation and transfer are complete when the instrument is delivered to the party concerned. That means, as far as the creation of the document is concerned, its handing over to the payee. For acceptance it means its return by the drawee (to the payee) and for transfer it means its delivery (upon endorsement if to order) to the subsequent holder. In each case it is considered that the law of the place of delivery (or receipt even though the delivery itself may be constructive, for example through an agent) applies to the relative legal act (creation, acceptance and transfer) in its formalities, capacity and validity. It is therefore not the law of the place of the signatures but rather the law of the place where the bill of exchange is sent after it. The law applicable to these acts therefore has nothing to do with the law applicable to the underlying contract between the drawer and drawee, for example of sale giving rise to the drawing of the bill, or to the underlying contract between the drawer and payee giving rise to this type of benefit for the payee, or to any underlying contracts 483
See also Dicey and Morris (n 4) 2081ff.
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between succeeding holders giving rise to the transfer of the bill. The impact of conditions is another problem. Where, in a documentary bill of exchange,484 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 bill upon acceptance and not by the law of the place where the condition was entered. Yet emphasis on the law of the place of delivery may not require full compliance with all its rules and especially not with typical domestic complications like stamp duty requirements in the UK. It only concerns rules which are of a typical bill of exchange nature and conform to its basic purposes. There is here still a whiff of the international law merchant. Emphasis on the law of the place of delivery in these aspects of creation, acceptance and transfer, which are not strictly or, in any event, not only contractual, is logical from the point of view that the bill of exchange is likely to circulate in that place and must therefore exert there the desired effect (of delivery). Even then, the law held applicable is likely to relate only to the personal defences and, upon negotiation of the bill of exchange, it may no longer be relevant and other rules may apply. It nevertheless suggests a close relationship to the lex situs which more properly applies in the proprietary aspects of the bill of exchange as if it were a tangible movable asset. What concerns us here principally is the question whether the holder may be truly considered the owner of the bill of exchange even upon forgery or theft, particularly relevant to the holder in due course but also to pledgees. It also concerns the kind of (personal and real) defences that may be used against them if they present the bill for payment or for recourse. In all instances upon circulation in other countries, it is likely that the new lex situs will adjust rights acquired earlier under a bill of exchange to its own system as a matter of adaptation to the nearest equivalent but in a positive sense so as to respond best to the purposes for which bills of exchange are used. The law of the place of payment or recourse may well make further adjustments in this sense and may also have its own formal requirements, notably also as to the timeframe for payment. See for the adaptation technique particularly in proprietary aspects, section 1.8.2 above. To demonstrate this approach, the examples of the effect elsewhere of an acceptance of a bearer draft, of a blank endorsement, or of any endorsement may be illuminating. That would be so especially in countries which allow a forced acceptance like the Netherlands, do not allow bearer bills like most continental European countries, do not allow a blank endorsement as once was the case in France, or do not allow an endorsement if the bill is not expressed ‘to order’ as in the US. It appears that whether an acceptance can be imposed would in this approach not depend on the law of the residence of the drawee but rather of the payee, often the drawer. Whether effectively the courts in the country of the debtor would accept this is another matter as public
484 A documentary bill of exchange is a bill of exchange to which a bill of lading is attached. It is sent to the buyer of the goods together with the bill of exchange. The buyer may keep the bill of lading only if he accepts the bill of exchange if a time draft or honours the bill of exchange immediately if a sight draft. The drawee must return the bill of lading forthwith if he does not pay on the due 465 date.
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policy may be involved. A German creditor could, however, draw a bearer bill on a drawee in Switzerland, payable in England if returned to the payee in that country. A blank endorsement, although invalid in the country of the endorsement, may still be valid in the country of the endorsee upon delivery there and enforceable against the payee in a country which accepts blank endorsements. An endorsement of a bill to a named person only may be perfectly valid if delivered to the endorsee in a country such as England, which accepts such endorsements under its own law. The attitude in all these cases may be contrasted with the more traditional approach in conflict laws which would as a minimum requirement insist on the act of which recognition elsewhere is sought being valid in its country of origin, but (except in the case of forced acceptances) it conforms to international standards concerning bills of exchange, a result here achieved by giving preponderant weight to the law of the country of delivery even in the creation of the instrument as a matter of adaptation. As suggested above, there may be further adaptation at the place of endorsement or of payment or when the bill of exchange is being presented for recourse. Thus German bills of exchange, which under their own law cannot allow interest to be added to the amount payable, may be perfectly valid against a drawee outside Germany, notably upon presentation for payment in England. Set-off rights of the signatories if under applicable law qualified as a matter of discharge rather than as a personal remedy may be invoked against the holder in due course when payment is requested. Yet what the applicable law in this respect should be is less clear. There must be a bias against these set-offs. Lack of consideration in the country of origin or transfer for the various undertakings of the different parties becoming signatories and thereupon a kind of guarantor, is a typical common law complication, but also, it is submitted, alien to the concept of bills of exchange (except perhaps as regards the position of holders in due course, who are not signatories as long as they do not endorse the bill), and therefore unlikely to affect the bill of exchange if delivered elsewhere or presented for payment or recourse outside common law countries. More complicated may be the question whether a choice of law by the parties may have a bearing on the applicable law, and in what aspects. The first requirement would be that it is indicated on the draft, which is not usual (it is much more common on bonds as promissory notes). Even so, it could prevail in the aspects of form, possibly presentation and acceptance or in the contractual aspects of a transfer, but much less likely so in the aspects of validity of the creation and transfer of the instrument and especially in the proprietary aspects. There is legitimate doubt about the impact in these areas of a contractual choice of law clause, even if reflected on the bill of exchange.485 The second of the 1930 Geneva Conventions deals with certain aspects of conflict of laws concerning bills of exchange. The obligations of the drawee who has accepted are covered by the law of the place of payment (Article 4(1)). The form and other obligatory aspects are determined by the law of the place where the relevant signature was placed on the bill of exchange (Article 3).
485
See also Dicey and Morris (n 465) 2087.
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Conflict of laws problems are difficult to resolve in all tripartite situations, as we have already seen in the case of agency and trusts: see 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 conflicts rule conceivable which may cover all situations. This begs the question whether references to domestic laws in this fractured manner as a result of the a pplication of private international law rules may be at all satisfactory or realistic or solve anything.
2.2.11 Uniform Treaty Law Considerable differences developed in the details of the law of negotiable instruments as a consequence of the various codifications in the nineteenth century (France in the Code de Commerce of 1808, Belgium in the Bill of Exchange Act of 1872, the Netherlands in the Commercial Code of 1838, the Germany in the Allgemeine Deutsche Wechselordnung of 1848, England in the Bills of Exchange Act of 1882, and the US in the federal Negotiable Instruments Law of 1896, later followed by uniform State law in Article 3 UCC). The result was the emergence of basically three types of approaches: the French (including Belgium and the Netherlands), the German (including S witzerland and Italy), and the Anglo-American. In the French group, the bill of exchange was basically viewed as the sale of the underlying claim, therefore as an alternative to an assignment, which required the payee to give (or to have given) counter-value, while another basic requirement was that the draft needed to be payable in a place different from the one in which it was drawn, although in the course of time both requirements were eroded in case law. The German group accentuated the abstract nature of the draft and tended to ignore the underlying relationships, even between the original parties, so that an underlying default did not affect the status of the bill of exchange as between them, while the Anglo-American group protected the holder in due course but withheld this protection to the parties to the bill of exchange. This proved the more sensible and viable approach. For civil law countries, the differences were narrowed for bills of exchange in the Geneva Conventions of 1930 and for cheques in the Geneva Conventions of 1932, which were concluded upon the initiative of the League of Nations (in both fields as a set of three Conventions dealing respectively with certain material, conflict of laws, and stamp duty aspects). Although common law countries participated in the deliberations, they ignored the results while a number of South American countries signed but did not ratify (except notably Brazil). As a consequence, the Conventions became mainly E uropean affairs, with the Scandinavian and Benelux countries, France, Germany, Italy, Portugal, Switzerland, Austria, Poland, Hungary and the Soviet Union as parties, although outside Europe, besides Brazil, Japan also ratified. The Conventions led, however, to different forms of incorporation into domestic law and also allowed certain deviations and reservations. Moreover, the incorporation legislation was differently interpreted. Nevertheless, the Conventions introduced a substantial measure of unification of the law in civil law countries and were particularly important in redefining the status of the holder in due course, much along common law lines.
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As a consequence, there is now much greater uniformity in the material aspects of bills of exchange worldwide and the remaining differences between the civil and common law group are mainly in a number of technical issues: the civil law mostly does not accept a bearer draft and in some countries like France and the Netherlands the drawee may be forced to accept time drafts under certain circumstances.486 In the details, UNCITRAL, in its Convention on International Bills of Exchange and International Promissory Notes of 1988, attempted to narrow the differences between civil and common law concepts further for the so-called international bill of exchange. It is defined as a bill of exchange which specifies in it two of the following five places as being in different countries: the place where the bill of exchange is drawn, the place indicated next to the signature of the drawer, of the drawee, and of the payee, or the place of payment, provided that for the Convention to apply either the place where the bill is drawn or the place of payment is in a Contracting State. It illustrates the complex nature of this Convention, also obvious in many of its other aspects. Following the UCC, it distinguishes between the holder and the protected holder and their various powers and defences in a convoluted manner. The position of the various types of guarantors (avalists) and their defences also remains complex and can only be understood by tracing a large number of sections of the Convention. This lack of conceptual clarity prevented early ratifications.
2.2.12 The Lex Mercatoria Concerning Bills of Exchange In section 2.2.1 above, reference was made to the fact that the bill of exchange (like the bill of lading) is the product of the law merchant and that local legislation concerning it only developed later and cannot deny or contradict the basic nature of these negotiable instruments in terms of (a) the principle of independence, (b) the method of transfer, and (c) the protection of bona fide holders of the bill. There is here an independent legal regime and nowhere do the rules concerning bills of exchange follow completely from the general rules of the applicable domestic laws. They are unlikely to fit international transactions, although since the nineteenth century many efforts have been made to ‘nationalise’ the bills of exchange and fit them into domestic legal regimes. Modern treaty law, in order to be successful, must reinforce the innate general principles and practices governing bills of exchange, and it is desirable and efficient to continue to view these negotiable instruments as operating under their own transnational rules supplemented by treaty law to the extent existing and applicable (and always subject to its own rank among all sources of law of the modern lex mercatoria). Certainly, if operating in international commerce, they should be brought under the
486 See for a further discussion, also M Rowe, ‘Bills of Exchange and Promissory Notes—Uses and Procedures in International Trade’ in N Horn (ed), Studies in Transnational Economic Law, Vol 6, The Law of International Trade and Finance (Deventer, 1989) 243, with an Appendix B comparing the Geneva Convention with Art 3 UCC and the English Bills of Exchange Act 1882.
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various layers of law making up the hierarchy of norms of the lex mercatoria: see more particularly Volume 1, chapter 2, section 3.1.1. It accepts that these instruments are best covered by their own customary law, as elaborated by treaty law to the extent existing and applicable under its own terms (and always subject to fundamental legal principles and customary practices). Interpretation and supplementation should primarily take place on the basis of the intrinsic purpose and logic of these instruments themselves, the basic principles and rules concerning them, common principles developed for them in the national laws of mercantile states and only ultimately through application of a domestic law selected on the basis of the applicable private international law rules.
2.3 The Dematerialisation of Documents of Title and Negotiable Instruments; Electronic Transfers 2.3.1 The Traditional Use of Documents of Title and Negotiable Instruments. Their Inconveniences and Risks. Sea Waybills and Indemnities Negotiable documents of title, such as bills of lading, and negotiable instruments, which are documents of title concerning money, such as bills of exchange (and promissory notes), greatly facilitated the international transfer of goods and payment in the manner described above. The use of them in payment or collection schemes is more extensively discussed in Volume 3, chapter 1, section 3.3.7. Yet the need physically to handle these documents is cumbersome, compounded by the need physically for them to travel to the person who is entitled to them. In the case of bills of lading in particular, there may even result costly delays in the handling of the goods when, for example, these documents need to be checked physically before they can be handed over to the buyer to collect the goods, as in the case of documentary letters of credit, which are discussed in greater detail in Volume 3, chapter 1, sections 3.3.8ff. The consequence is that a buyer of goods may well receive the bill of lading and the facility to collect the goods after their arrival and time will be lost in the process of presentation to the carrier (or warehouse). A more legitimate reason for the delay may be longer credit given under the sales agreement allowing a bank under a letter of credit or collection to hold on to the bill of lading. This may cause serious further delays for the carrier, who is not authorised to release the goods to the buyer without the presentation of the document. The carrier may thus incur extra (demurrage) costs while the ship is held up. This may even encourage neglect of the goods or the handing over to the buyer without presentation of the bill of lading, although often in exchange for an indemnity. This may be understandable but it fatally undermines the effective use of the bill of lading as security in the payment circuit, which depends on the bill of lading being retained by the seller or his agent until payment and the goods not being delivered in the meantime. Allowing the bill of lading to travel with the goods instead of the seller retaining it for presentation to the bank is a common solution to avoid these delays but its role as a security instrument under letters of credit is then equally diminished.
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The need for the carrier to deliver the goods immediately upon arrival has given rise to the use of sea waybills instead of bills of lading. See for waybills further section 2.1.6 above. They are mere receipts and only sometimes reclaiming instruments, but are not negotiable. They do not therefore have the status of documents of title and may not be necessary for taking delivery of the goods at all as, without a bill of lading being issued, the carrier may make delivery to anyone who can prove that he is entitled to the goods. Their lack of proprietary status allows them more easily to travel with the ship should their presentation still be required. The carrier who normally issues the bill of lading will know that there is none so that he is safe to hand over the goods to the party entitled to them. Only in the US has the status of these sea waybills been the subject of comprehensive legislation, see 49 USCS sections 80101ff (1994) as an amendment to the federal Pomerene Act of 1916. The consequence of the status of these sea waybills is that there is no proper function for them in the payment circuit, as they cannot as such fulfil the function of a proprietary instrument for payment under documentary letters of credit: see also the discussion in section 2.1 above. Nevertheless, banks do sometimes accept them for documentary credit purposes provided the waybill is given some reclaiming status. That was the aim of the Cargo Key Receipt System, developed in Sweden, but all the dangers connected with the bill of lading travelling with the ship then re-emerge, plus the extra danger that the carrier may still issue bills of lading to others later. Under the Hague Rules (Article 3.3) and the Hamburg Rules (Article 14), he must do so whenever the shipper (often but not always the seller or its agent) requests it. It would render the sea waybill ineffective as a reclaiming document at the same time. Naturally, a shipper of the goods should only request a bill of lading when the latter is still in control of the sea waybill. However, in the case of less scrupulous or careless shippers, a bill of lading issued under these circumstances may end up outside the payment circuit set up by the seller (even if the buyer makes the necessary arrangements with the issuing bank) and fatally undermines any payment protection in terms of documentary letters of credit if based on the presentation of a waybill. In these circumstances, the seller may not be able to present a bill of lading for payment to the issuing bank and the buyer only has a void waybill upon payment. In any event, if there is no bill of lading but only a sea waybill, the carrier may have to hand over the goods to someone claiming better rights. Still, presentation of the sea waybill may require the issuing bank to pay under the terms of the letter of credit but the bank will not then have any proprietary leverage against a buyer who has not yet put the bank into funds. If the buyer already has, the latter will obtain the sea waybill from the bank but may not be able to retrieve the goods on the basis of it. The danger that a bank may lose its recourse against the buyer in this manner has increasingly led to demands for indemnities by banks from sellers while making payment to them under a letter of credit if there is only a sea waybill. It defeats the whole purpose of documentary letters of credit, which are normally organised by buyers and meant to give sellers untrammelled payment expectancy. Even carriers may now ask for indemnities, in this instance from buyers presenting sea waybills, certainly if they have issued bills of lading to the shipper or, if not, because others with better proprietary rights may, in the absence of any bill of lading, still claim better rights in the goods later.
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The problem of indemnities has become endemic and has particularly been felt in the oil industry.487 In the absence of the presentation of a bill of lading upon arrival of the oil for whatever reason (which could be that longer credit has been given by the seller), in this industry indemnities are commonly asked for by the carriers from a seller (oil company) if arranging the transportation on the mere ground that the buyer is less well known to the carrier. The result is that also the sea waybill route has become ever less attractive to speed up delivery. No wonder that in this situation there has been a search for better and especially quicker ways of dealing with bills of lading proper, including their endorsement through the use of the modern electronic filing, registration and communication facilities. They could at the same time shorten the time required to handle these documents by banks when presented to them by sellers under letters of credit. The physical handling of bills of exchange, including their endorsement and the verification of the authenticity and order of signatures, may be equally slow. It may delay payments under letters of credit further and also payments through collection schemes if under them use is made of bills of exchange, which still remains common: see also Volume 3, c hapter 1, section 3.3.7. Also here ways of electronic filing, registration and communication might help and it is logical that moves in this direction have been afoot in order also to achieve greater certainty, speed and efficiency for these instruments. In the area of the identification and transfer of ownership in shares and bonds, there has been a particular need to reduce paperwork and facilitate the handling of a large number of sale transactions of millions of shares or bonds per day where physical handling of the instruments becomes an impossibility. Also here the solution may be found in the use of electronic identification of ownership and the electronic recording of transfers. Progress has probably been the most urgent and greatest in this area through the introduction of book-entry systems, which will be discussed in greater detail in part III below. In modern times another concern has joined the extensive use of documents of title and negotiable instruments. It is the relatively simple possibility of fraudulent use of duplicate documents in the case of bills of lading or of falsification of the bill of lading itself to obtain goods or payment, respectively from a carrier or from a buyer/ drawee or its bank, either by the fraudster or by a bona fide holder of fraudulently used duplicate documents or falsified documentation. These holders may be protected under duplicate documentation at the expense of the true beneficiary but may themselves be the victims if under falsified documentation there are no goods at all or the drawee indicated in a bill of exchange is non-existent. Falsifying documents is often a question of false signatures or of effacing or changing certain markings on the bill, for example altering ‘received for shipment’ to ‘shipped’ so as to convert a mere receipt into a d ocument of title. Modern recording methods may allow greater verification
487 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 here and therefore added protection for participants. The same may apply to shares and bonds where still physical pieces of paper.488 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. 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 S eadocs Registry project of Chase Manhattan Bank in 1984 and may still be the simplest because it does not profoundly change the legal foundations of the system but only introduces a custody facility. It was superseded by more recent CMI proposals for a more truly electronic bill of lading, to be discussed in section 2.3.2 below. The best way forward may indeed be to look at the different industries and types of documents and to determine in respect of each of them the most appropriate or convenient approach. Within each area the emphasis will then be on international systems developed by the relevant industries themselves with their own set of rules of a transnational nature, just as the Eurobond developed into a transnationalised instrument with its own transfer system and legal infrastructure, particularly aided by Euroclear and Clearstream: see also section 3.1.2 below and earlier Volume 1, chapter 1, section 3.2.3 The main legal issues in electronic data transfer systems of this nature are: (a) the authenticity and evidentiary effect of signatures or their alternatives (upon loading and unloading) and documentation; (b) access by the most directly concerned parties and their successors (shippers, carriers, banks and insurers to the extent they have a legitimate interest) to the electronically stored information without the facility to change it; (c) negotiability as far as the electronic documents of title and instruments are concerned and the way this should be organised; (d) the maintenance of the abstraction principle and of the exclusive evidence rule in respect of bona fide third parties (being the holders by due negotiation) who acquire the rights to the electronic document;489
488 Another situation presents itself when the bill of lading indicates a lesser quantity (or different quality) than is actually shipped. In a CIF sale this is a problem for the buyer who will have to prevail on the carrier to release the missing part; in an FOB sale the seller will still be liable to provide the missing part to the buyer and will have to retrieve the goods from the carrier: see in England Hindley & Co v East Indian Produce Co Ltd [1973] 2 Lloyd’s Rep 515. 489 It may be recalled that such a person acquires title to the documents and to the underlying assets, including all rights to goods delivered to a bailee after the document was issued, all rights under the law of agency and estoppel, and to receive the goods from the issuer of the bill according to the terms of the bill free and clear of most defences or claims by the issuer. At least in the US, this right to the goods is also superior to the rights of stoppage of the goods, the rights of a prior holder of the document against which the negotiation was a breach, a person
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(e) the identification of the competing rights of all claimants and in that connection especially the time of electronically created proprietary rights and of charges in them, of particular importance in enforcement; (f) the flawless operation of this new type of bill in the payment system and the access of banks to the system in terms of verification especially for collections and letters of credit; (g) liability for faulty messages, communication failures and systems breakdown; (h) applicability of the mandatory Hague-Visby Rules (which automatically follows if there is a bill of lading or similar document but might have to be stipulated if there is not); (i) the confidentiality of the system; and (j) determination of the applicable proprietary law as the lex situs principle based on the location of the bill of lading loses its meaning, hence the increasing importance of customary law as part of the modern kex mercatoria. Overriding practical issues are the expertise, stability and independence of the operators, the costs of the systems, and who must bear them.
2.3.2 Electronic Systems and their Importance in Replacing Transportation Documents. The CMI Rules and Bolero. Clearing and the Use of Central Counter Parties? Internally, carriers now use electronic means to maintain and amend their records of loaded and unloaded goods, to achieve the best stowage, and to advise their agents of dates of arrival. However, in relation to their clients or third parties (such as banks under documentary letters of credit or insurers), there is a practical limit, which has to do with the legal status of documents of title and of their possible alternatives under electronically driven communication systems. It is the reason that so far electronic bills of lading have not developed, but electronic data and communication systems have started to be used in some countries for reporting sea waybill information, especially to allow the buyer to obtain the goods even without presenting the sea waybill in the port of destination.490 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 and maintain a register of ownership and any changes therein, which transfers could be achieved electronically. The project failed because of lack of transparency in the cost structure but probably also because there was a fear about confidentiality and the exclusive control of the system by one bank. It would who was defrauded of the document, or any third party to whom the goods were sold (UCC 7-502). The result is that upon negotiation the transferee of the bill will have a better title than the transferor. 490 See also AN Yiannopulos, ‘Ocean Bills of Lading: Traditional Forms, Substitutes, and EDI Systems’ General Report XIVth International Congress of Comparative Law (The Hague, 1995) 3. See further MN Boon, ‘Het Digitale Tijdperk’ [The Digital Age] Presentation Paper Kortryk 2006, discussing among other things the nine points raised in the previous section in the context of electronic bills of exchange and electronic documents.
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have been better if it had been an industry initiative and project, just as Euroclear was in the Eurobond market. An important key to success of any alternative electronic system is in the ability to maintain the functions of the bill of lading as an object that could also be used as security and retain its function in documentary letters of credit rather than being a mere source of information like a receipt or confirmation of the transport agreement. The problem is to find the right way around the need to produce the bill, its signing and endorsement and handing over, thus its physical aspects, which are becoming undesirable as they are inefficient. At least many domestic COGSAs now allow contracts of carriage covered by a sea carriage document to be in the form of a data message. The international community is generally also receptive to the notion of electronic bills of lading, as shown in Article 14(3) of the Hamburg Rules, which refers to them, but they do not provide any suggestions or criteria. To progress, in 1990, the CMI developed Rules for Electronic Bills of Lading. It allowed the carrier to maintain a registry. Rule 11 provides that any national law, custom or practice requiring the bill of lading to be evidenced in writing and signed is satisfied by the transmitted and confirmed electronic data residing on computer data storage media displayable in human language on a video screen or as printed out by a computer. The nature of these new rules is contractual, supposedly until they may be qualified as industry practice or custom as the Hague Rules and the Uniform Customs and Practice for Documentary Credits (UCP) are now often considered to be. The system is based on delivery of the goods to the carrier who subsequently transmits a receipt message to the shipper’s electronic address. It must contain the name of the shipper, the description of the goods, the date and place of receipt, the carrier’s terms and c onditions or a reference thereto and the ‘private key’ to be used by the shipper in subsequent transmissions. This receipt message must be confirmed by the shipper immediately upon receipt and is then the equivalent of the traditional bill of lading while the private key makes endorsement possible. Any transfer instruction requires the carrier to send a new message with the same information to the transferee who must accept the transfer. The new owner will thereupon receive a new private key and the valid private key holder is the only one who can claim the goods. This system may conceivably work but places a great burden on the carrier and his reliability and professionalism in these matters. That is the true weakness in this system. This may also create additional liability. The resulting electronic bill of lading would appear to be a creation solely of the law merchant, which as yet may be considered by some as an insufficient basis for its effectiveness. Transfer would in effect be through (a transnational) assignment of the instruction right, which could require additional formalities (still deemed applicable under domestic laws). The acknowledgement by the carrier introduces a uniform rule here, but it is less clear whether the assignor is entirely discharged as his duties may not sufficiently transfer at the same time. Electronic communication is through a number of ‘private key’ messages as just mentioned. Although the CMI in these Rules showed an approach that could work, there was no sufficient confidence in the operational aspects, especially not in the ability of carriers to maintain proper systems and in their ready co-operation in the a cknowledgement
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of transfers. Also the legal aspects were probably covered in too rudimentary a fashion and the transnational or customary (or uniform) status of the contractual arrangements on which the approach was based may (in the eyes of some in the industry and their lawyers) still have been too uncertain or weak. Other organisations have also attempted to deal with the matter, if only collaterally. In 1993 the UNCITRAL EDI Working Group published Uniform Rules on the Legal Aspects of Electronic Data Interchange and Related Means of Trade Data Communication. They concern the exchange and storage of electronic data generally and do not take a product approach. It was not necessary, as they do not cover the substance of the transaction either. The Rules mainly contain provisions to solve the problems connected with the requirement of a written document and signing under national laws and allow in this connection that the terms ‘signing’, ‘writing’ and ‘original’ also cover electronic documents and give them evidential effect. There was no provision on transferability of the underlying rights, which was to be dealt with later. Until such time it seems that these UNCITRAL Rules have no special meaning for bills of lading and bills of exchange. In 1996 there followed an UNCITRAL Model Law on Electronic Commerce. Articles 16 and 17 are particularly relevant. Article 16 contains a long list of actions to be taken by the parties concerned in the case of carriage of goods by sea. They may be of a practical, contractual or even proprietary nature (Article 16(f)) and are as such split up and separately considered in terms of electronic communication and storage. Article 17 deals with transportation documents. It follows under this approach that these documents are in essence the result of a number of data messages, the legal status of which is not explored further. No proper, or at least legally reliable, substitutes for bills of lading therefore result. The American Bar Association produced a Model Trading Partner Agreement in 1990 for EDI use in commercial sale transactions and communications but, as it is limited to the sale of goods, it has no significance for bills of lading or bills of exchange. The International Chamber of Commerce (ICC) adopted in 1987 Uniform Rules of Conduct for Interchange of Trade Data by Teletransmission (UNCID). They concern the transfer and receipt of messages in terms of identification of the parties, completeness, confidentiality and storage of data, but not in any way documents of title or their negotiability. Similar international or local standards have also been set for EDI by the UN (UN/Edifact), which particularly relate to the trade in goods and services and also cover a syntax and format for the recognition of shipping documents, regardless of the hardware and software used. EDI associations in countries like the UK, Australia and Canada have produced standard EDI agreements for use by commercial partners. The EU Commission also produced a model agreement in 1990 (TEDIS). None of them has any specific relevance for bills of lading or bills of exchange. In the area of transferable documents of title, an English research institute, Marinade Ltd, prepared a more specific study for TEDIS (Mandate, 1995). It led to a system called Bolero (Bills of Lading Electronic Registry Organisation), which became operative in 1999 as a commercial venture in which SWIFT and the TT Club (Through-transport Mutual Insurance Association Limited) participate. It does not attempt to change the present processes used in international trade but intends to find the electronic equivalents, including those for the bill of lading where used. As between its participants, the
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Bolero bill of lading is intended to have exactly the same effect and create the same obligations as a paper bill of lading. To this end, it replicates the functionality of the traditional paper bill and makes it also negotiable. It does not mean to change the existing commercial and shipping laws.491 At the centre there is a multilateral contract between participants governed by the Bolero Rule Book.492 The succession in rights and obligations is here by way of a form of novation, which does not, however, entirely discharge predecessors, while new holders carry on the obligations of the shipper in terms of disclosure (eg of dangerous substances) and timely unloading.493 The system494 is g overned by English law and gives the English courts jurisdiction in the case of disputes. It suggests that the Bolero bill of lading has similar problems with its status as a document of title to those that the paper bill of lading has in England. However, the underlying transactions may also be governed by the law of the parties’ choice. In all this, it should be appreciated that at least in the proprietary aspects some domestic laws may still consider themselves absolutely mandatory in the carriage of goods from and to the country of this domestic law, thus still ignoring the legal transnationalisation of the concepts. Bolero has been criticised for its cost, complexity, lack of flexibility (particularly in switching from electronic to paper bills and back, and handling the mix), and its severe limitation of liability for goods being wrongly released. The more ready solutions would appear to be a central registration or book-entry system, as originally contemplated by Seadocs, for which the operations in the international bond market through Euroclear and Clearstream may well provide the best model. If this is now not the direction, one could consider the aspect of security for payment in isolation. If the whole field of the sale of goods and their transportation is to be considered, UNCITRAL may have to provide a better transnational legal infrastructure even if its success in achieving treaty law is modest.495 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 closeout facilities: see for the operation of CCPs more particularly Volume 3, chapter 1, sections 2.6.5 and 4.1.4. It provides an easy transfer possibility and also introduces the
491 See the information memorandum prepared by Bolero International Ltd: Bolero Bills of Lading under US Trade and Commercial Law, 8 November 1999. 492 This system is described by R Caplehorn in C Reed, I Walden and L Edgar (eds), Crossborder Electronic Banking (London, 2000) ch IV. 493 This follows the much criticised s 3 of the UK COGSA of 1992. 494 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. 495 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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possibility of clearing but still raises the important issue of the alternative to the bill of lading in the payment circuit, especially in the documentary letter of credit practice. However, if connected with a proper clearing and settlement facility, even the letter of credit practice could become obsolete.
2.3.3 The Bill of Lading and the Potential of the Blockchain The electronic bill of lading in Bolero has proved to be a limited success. Its main problem is that it has not achieved general acceptance in the industry and therefore only operates between a small circle of (sophisticated) shippers and carriers and that is not enough for success. Notably outsiders may still ask for a traditional paper bill of lading upon negotiation and the papermill continues unabated in the shipping industry. Its role in the payment circuit remained ambiguous. Even though domestic laws have tried to incorporate the concept of the electronic bill in their legislation as in the US the UCC has done by using the notion of control in the definition section 1-201(5), it depends on the system reliably establishing the person to whom the document is transferred or issued. Internationally, the UNCITRAL Rotterdam Rules (not yet entered into force), in Articles 8, 50 and 51(4), also admits electronic bills as does the UNCITRAL (draft) Model Law on Electronic Transferable Records, which will only be a model and therefore never be directly effective. This has altogether not proved to be a sufficient incentive; these rules or proposal are in essence technology neutral and merely facilitating. Article 9 of the Rotterdam Rules require in this connection functional equivalence and concentrates here also on control (as does the Model Law in Article 17(1)) and in that context on a) the method of issuance and transfer of record, b) the integrity of the record, c) the manner in which the holder can demonstrate his title, and d) confirmation that a delivery has been effective. Only industry custom could help out. It has already been mentioned that this indeed happened in the Eurobond market. The Eurobond itself became a negotiable instrument under transnational customary law when it became clear that the domestic laws made applicable by the issuer (usually of England or New York), could not deal with negotiability in the international marketplace of a document that was far more complex than these local laws would allow for it to be negotiable whilst party autonomy in whatever manifestation could not by itself elevate its proprietary status, see the discussion in Volume 1, chapter 1, section 3.2.3 because of the effect on third parties. Only transnational principle and custom could and this became acknowledged although it remains debatable whether and how this affects all practices in this market including repo-ing and bond lending or rehypothecation and more especially the holding of these investments through custodial entitlement arrangements. As we have seen, the practices in the international carriage of goods have not developed that far. Even the Seadock approach which much copied the securities entitlement system in custodial holding systems was met with suspicion as we already have seen also. Transnationalisation is not identified in this market as a major issue although much of the customs and practices of the international carriage of goods are of that
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nature, it was already said that the Hague Rules were from early on identified as being a part of it. The absence of a clear situs in virtual registration systems is here further inducive to legal transnationalisation and shows its urgent need. It means that if sets of international rules, like the Rotterdam Rules, emanating from treaty law, find sufficient acceptance through ratifications, it is in the view of this book still conditioned by the practices and customs of the international marketplace and even by fundamental and general principle of which, as to the latter, the UNCITRAL Model Law just mentioned could be an important example. To repeat this tracks the methodology of public international law, embodied in Article 38(1) of the Statute of the International Court of Justice and for peremptory law in Article 53 of the Vienna Convention on Treaty Law, whose sources of law and their hierarchy were in this book proposed to be adopted by analogy also in international commerce and finance, thus returning to the pre-nineteenth century law merchant formation and application method and resuming its progress as transnational law in the operations between professionals in the international flows of goods, services, money, information and technology where transportation is a main issue. Bills of lading or their equivalents are here the cornerstones of present day practices captured and covered as such by the transnationalisation of the law in this market and its shipping practices in order to be fully effective. A robust legal regime is necessary but it can hardly be merely domestic any longer or even solely dependent on treaty law. In any event it was argued that even treaty law in its interpretation will be up against the other sources of law and their hierarchy. In other words, treaty law must find its own place in the competition with other sources of law. In section 2.3.1 a list was presented of legal items that should concern us in this connection. It centres on the identification of the instrument (and the guarantee of uniqueness or singularity), its separation from the relationship out of which it arises and from previous holders (the abstraction principle), and its negotiability, the position of the holder by due negotiation, the rights and rankings of competing claimants, and the operation in the payment system. Dependence of the state of mind of a (bona fide) transferee introduces here a subjective element. In an electronic system, it probably comes down to permit users to add additional information as to facts that they might have or discover regarding specific claims or defences which would trigger warnings or flags in the smart or self-executing contracts which constitute the computer protocols and allow the performance of contracts with new parties in a trackable and irreversable manner. It limits due negotiation and inhibits the liquidity of the bill, in fact the bona fide holder would find his protections reduced and his search duty increased. That may not suit everybody but is on the other hand a consequence of enhanced transparency. The question is now what the blockchain might conceivably contribute and how we must envisage the legal regime applying to it and how it may operate.496 Main legal issues arising for all bill of lading substitutes were already identified in section 2.3.1
496 See K Takahashi, ‘Blockchain technology and electronic bills of lading’ (2016) 22 JIML 202 and JA Estrella Faria, ‘Uniform law and functional equivalence; diverting paths or stops along the same road? Thoughts on a new international regime for transport documents’ (2011) 2 Elon LR 1.
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above and are identification for uniqueness, negotiability, maintenance of the abstraction p rinciple, and the absence of defences against a holder by due negotiation (unless marked on the bill or otherwise known). As a practical matter, the system would not be anonymous in the manner of bearer paper. Each user would be identifiable by its applicable digital signature which the computer would match to the relevant name. Transactions are validated by all users collectively, after which it is written into the blockchain. This is the distributed ledger which is nearly impossible to manipulate and is fundamental to the blockchain. Uniqueness is guaranteed. The first thing to realise is that the blockchain bill of lading in order to be fully effective cannot emanate from a (closed) permissioned system which is limited to a defined group of participants. That proved also a problem in Bolero. For negotiability to be effective it must be an open permissionless system, which so far is expensive, slower to operate and has serious problems of scale. This may well prove to be the real limitation for the time being, but no less will be the robustness of the legal system. It is submitted that this could no longer be a domestic legal system or a succession of them when the bill of lading may still be deemed to start moving. That is the situs issue which hardly can be established any longer. Where is the blockchain, even if standardisation within the system through smart contracts may make legal issues less frequent. An extension of the possibility to add additional information may make the relationships also more objective but is likely to extend the defences and could impact on the liquidity of the blockchain bill. The marketplace shall have to figure out with what it can live and whether it wants to trade paper inefficiency for potentially more defences.
2.3.4 The Situation with Regard to Bills of Exchange: Electronic Bank Transfers. The Facility of ‘@Global Trade’ As may appear from the previous section, so far there are also no specific EDI rules concerning or producing electronic bills of exchange, although that would appear a normal sequel once electronic bills of lading are developed. Electronic bank transfers may, however, substitute the payment functions of negotiable instruments and have already substantially reduced the use of: (a) cheques drawn on banks to pay a foreign creditor, which proved a lengthy process potentially causing much payment delay or conditionality and expense; (b) bankers’ drafts purchased from the bank drawn on a bank in the country of the creditor, which was quicker but costly as the bank was guaranteeing the payment; and (c) telex transfers to achieve a foreign payment, which depends on the foreign correspondent network of the bank and could still be costly. It is this last method of electronic transfers which is refined by EDI. It should be distinguished from SWIFT, which, although itself an EDI, is an interbank money transfer system. It is likely to be used in this connection as an alternative by the banks for interbank operations. These electronic bank transfers are no substitute for endorsement and negotiation or discounting of negotiable instruments. It must be admitted, though, that these
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facilities had already lost much of their earlier attraction as the important ability to raise cash on them has now often been overtaken by receivable financing and related forms of factoring. Electronic transfers are in any event normally preferred by parties that habitually deal with each other and are cheaper: for the modern use of negotiable instruments, see section 2.2.7 above. Yet, particularly in the context of letters of credit and collection schemes, bills of exchange appear to remain more commonly used: see Volume 3, chapter 1, sections 3.3.7ff. As in the case of bills of lading, the issue of negotiability requires extra attention and a special facility in the electronic transfer process, which in the case of negotiable instruments has not yet received much attention. One of the problems is that bills of exchange now mainly operate in international trade (connected to certain types of letters of credit) for which there is no uniform regime, while their status under the international law merchant may be further undermined by making them electronic. Largely the same legal problems arise here as in the case of electronic bills of lading: see section 2.3.1 above in fine. ‘@Global Trade’ may provide a new departure. It is an internet-based trade servicer, which aims at enabling buyers and sellers to conduct commercial transactions in a secure, cost-effective and efficient environment while bringing all parties in a trade chain together on the same electronic page. It is an end-to-end system for completing cross-border trade transactions and settlement over the internet, and aims to adhere to ICC rules and standard banking practices. It considers itself flexible enough to handle a mixture of paper and electronic messages and even introduces in this connection an electronic bill of lading. The end-to-end approach is undoubtedly a rational and desirable approach. The question is how it can be translated into a system that can generate and find the necessary legal support to create a sufficient degree of finality in delivery and payment. This is a major task, which requires a sophistication, imagination and international co-operative spirit that may not be presumed naturally to exist, even between professionals in their dealings internationally among themselves.
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Part III Investment Securities 3.1 The Different Types of Shares and Bonds 3.1.1 Traditional Distinctions. Negotiable Instruments and Transferable Securities. Dematerialisation Investment securities are instruments issued and used to raise capital in the capital markets. In Volume 3, chapter 2, section 1.3.1, the nature of investment of this type will be more fully discussed. The most common types are bonds and shares. Bonds are promissory notes of an issuer, which may be a private person but is now more likely a company or a government or governmental agency. They signify a form of lending/borrowing and are the prime instruments of the debt market. Shares, on the other hand, are rather participation instruments denoting some form of ownership of the company issuing them. They are more typically connected with the financing of corporations. Although the joint shareholders are often still considered to own the company, in the case of limited liability it should be clearly understood that they do not own any of its assets directly, nor are they directly liable for its debt. Rather their shares only give them some typical rights, normally those to (a) dividends, (b) voting in shareholders’ meetings, (c) any liquidation surplus, and (d) corporate information. Note that shareholders do not have a direct say in the management. If they nevertheless involve themselves, they may have the limited liability lifted. This is an example of the piercing of the corporate veil, a risk inherent particularly in parent–subsidiary situations, or one-shareholder companies. Banks, while interfering in daily management, may also take some risks here although they are not shareholders at all. Shares and bonds come in several varieties. Shares (sometimes also referred to as equities or stocks) may be distinguished according to the dividend rights they give. Thus ordinary shareholders share the dividend pro rata, but preferred shareholders have a preferred right to dividends and they therefore take before the ordinary or common shareholders in the way as set out in the charter or by-laws of the company. Other classes of shareholders may have extra dividend rights, which are often also preferred at the same time (for example the cumulative preferred shareholders). Shareholders may also be distinguished according to their voting rights and some classes may be given more voting rights than others. There might even be altogether non-voting shareholders. Bonds also come in different types. There are fixed and floating interest rate bonds or notes. Notes are bonds with a shorter maturity; the terminology is here not stable. As far as the maturity is concerned, there is short-, medium- and long-term paper. Shortterm instruments are also called money market instruments and often come in the form of commercial paper (CPs) issued by commercial companies, and of certificates of deposit (CDs) issued by banks. Medium-term paper may take the form of mediumterm notes (MTNs). Long-term paper may even take the form of a perpetual bond.
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Bonds may also be subordinated and then approach shareholdings, although in a liquidation these bond holders will still be just ahead of shareholders in any distribution of a liquidation surplus but lower than the ordinary creditors (including the other bond holders). In each instance, their precise terms, manner of issuing, and way of trading need to be carefully considered and could be very different. There are also hybrids such as bonds convertible into shares at a certain striking price. There may also be warrants, which are a special type of option issued by a company at a certain price and allowing the owners to acquire new shares in that company at a specific issuing or striking price on a specific date in the future. Intermediaries holding a portfolio of these shares or options to acquire them sometimes also issue these warrants, therefore warrants (or options) in another company. Investment securities often imply a trading facility by being transferable. This is a different but highly important issue and concerns their liquidity, which is the facility to reduce them to money (through a sale) at any time. On the European Continent, investment securities that are intended to be traded were historically issued as n egotiable capital market instruments. These are to bearer or order and as such documents incorporating title in the securities, which title is transferred with the document. Their trading traditionally took place on regular stock exchanges, on which they were quoted for this purpose, but this trading could also be informal in the so-called over-thecounter or OTC markets and is for the more important issues now frequently conducted in the international (telephone) exchanges largely created by the large investment banks: for greater details of the operations in these markets, of which the euromarkets are the most vivid example, see Volume 3, 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 1, chapter 1, section 3.2.3. As just mentioned, investment securities are often issued as negotiable instruments. As such they are to bearer or order, transferable respectively through handing over the document or through endorsement plus handing over. This is particularly clear for bonds which are promissory notes, but the same applies to shares if issued to bearer or order. As we have seen, in common law countries, there is no need for consideration to support such transfers. In fact, these structures are a product of the markets and were legally supported by the law merchant (section 2.2.1 above). At least for bonds, this also goes to the issue of independence of the instrument and abstraction of the transfer and the notion of holder in due course meaning the protection of the bona fide holder and the issue of finality of the transaction: see more particularly section 2.2.4 above. The bearer type of shares and bonds was the common type of tradable investment securities on the European Continent and was also preferred in the international capital m arkets, as witnessed in particular by the traditional Eurobond. Shares and bonds to order were uncommon in Europe but not in several States of the US (if endorsed in blank, they become bearer securities). Under the company laws of the various States of the US (which are not uniform), Memoranda and Articles of Association of corporations may vary the nature of the shares considerably and thereby also the manner of their transfer. These shares could also be of the purely register type, as they are mostly also in England when negotiability is not implied, even though these shares are commonly
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still t ransferable. However, such a transfer depends on notification to and a change in a share register held at the company. Notice must thus be given. A certificate could still be issued to the investor but it would not be negotiable, only a record. In the EU legal terminology, in order to cover all types, the broader notion of transferable securities is now often used in this connection (rather than that of negotiable instruments, which is a term of art that represents a narrower class of transferable instruments, excluding notably registered securities); see also Volume 3, 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, such as futures and options, as long as they are transferable and publicly traded (often through formal derivative exchanges like LIFFE in London, which in truth provides a system for closing out contractual positions: see more particularly Volume 3, chapter 1, section 2.6.5). In the US, Article 8 UCC, which presents perhaps the most important modern statutory instrument in this connection, deals with investment securities, but only in terms of investment security holdings/custodial arrangements and security entitlements, as we shall see. It was last fundamentally changed and updated in the Revision of 1994. In the US, issuing activity itself remains covered by State company statutes and for public issues also by federal regulation (the 1933 and 1934 Securities and Securities Exchanges Acts). Article 8 UCC still reflects the traditional situation as regards the types of bearer and order securities or registered shares and continues to follow in this respect the practices under State company laws. Article 8 UCC does not therefore itself create new types of shares or bonds, but captures them in terms of book-entry entitlements in custodial systems of securities holdings while creating a special t ransfer facility for these entitlements (only)—see sections 8-501ff UCC497—the nature and importance of which will be discussed shortly. This model is broadly followed in Europe. Its popularity has much to do with the problems of handling paper in the volumes that would otherwise be required in modern exchanges and became destructive. Article 8 UCC confirms that in essence in bearer form, securities proper transfer through mere delivery (section 8-301(a)(1)). In the registered security certificate form, the owner is indicated on the certificate but it is no more than proof of ownership and at least in England not itself a negotiable instrument. In the case of trading, the certificate is returned to the registrar who will issue a new certificate to the new owner. Transferability (not negotiability) is then achieved by the company having to accept the transfer instructions from the registered owner. These registers are thus indicative of the ownership of the securities (even if rebuttable) and any document issued is no more than proof of registration. It makes for a cumbersome transfer system that has all the disadvantages of shuffling paper and none of the advantages of a pure r egistration
497 Indeed, according to s 8-102(a)(15), investment securities themselves (therefore the securities underlying any book-entry entitlement) continue to be obligations of an issuer or a share or other participation or interest in the issuer. For purposes of Art 8, they may be represented by a security certificate in bearer or in registered security certificate form, or (only since the earlier 1977 Revision) by uncertificated or dematerialised securities, which are investment securities only marked in the books of the issuing company under applicable State law.
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system. In the US, many State company laws did not until quite recently provide for any type of shares other than those to bearer or order but most now also allow registered shares, although usually fully dematerialised. That is an important progression and means that these dematerialised securities transfer only through registration of the new holder in the company’s register, notice of which is normally sent to the investor electronically and there are no longer certificates.498 There is no document or certificate at all.499
3.1.2 The Notions of Immobilisation, Book-entry Systems, Security Entitlements and Compartmentalisation. Securities Accounts and Bank Accounts Distinguished It was indeed the paper-shuffling aspect of securities transfers, either using bearer or order securities, or registered securities still requiring some certificate, that brought the system of securities transfers to its knees, first in New York in the 1970s. The original remedial step was the introduction of fully dematerialised registered securities which allowed electronic settlement through securities accounts that investors held with issuers. It was, however, not the route the practitioners ultimately chose to go. They opted instead for a book-entry system in respect of end-investors. The registration facility leading to dematerialised shares (therefore to shares without a certificate proper as mere intangible property rights) should therefore not be confused with the modern book-entry system, which is the subject of the 1994 Revision of Article 8 UCC proper. In such a book-entry system, first a depository function is created, under which the issuer places all securities with a depository (or a small number of them) who thereby becomes legally the owner of all the issued securities.500 If there is only one, it is also
498 Dematerialised securities should not be confused with fungible securities, although it often results, but fungibility is foremost connected with custodial arrangements, not with issuers. There is a parallel in so far as in neither case is the investor entitled to specific (physical) securities, only to a number of the same sort, although dematerialised securities being intangible are still capable of identification by number. These rights may thus be determined not only in the quantity of shares but also in register numbers. It is probably a detail as it allows them nevertheless to be part of a custody portfolio (on which entitlements might be based as we shall see) and bookentry systems. Indeed as we shall see, the result of a book-entry system is usually that all security entitlements based thereon are fungible. Fungibility of securities should also not be confused with fungibility of bank deposits. In the latter case there can only be a contractual claim against a bank and pari passu status of the depositor. In fungible securities, the investor may still have some proprietary right but only to his pro rata part of a pool which will convert into a purely contractual claim only if the pool is no longer sufficiently segregated from the other property of the custodian. 499 In the US, this type of security may, however, still transfer through delivery of a certificate with endorsement to the new owner (s 8-301(a)(3)). This certificate is then negotiable in the nature of an instrument to order, but the new owner will in addition have to be registered in books maintained to that effect by the issuer (s 8-102(a)(13)) and may not be entitled to dividends or bond interest payments before that is done. Full negotiability of the certificate is thus lost (or at least affected) but there is no dematerialization. 500 Even now, not all securities are necessarily so held and especially units or shares in collective investment schemes often continue to be held directly, although there may in some countries now also be regulatory requirements in this respect.
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referred to as the central securities depository (CSD). A depository holding securities in this manner (as owner) leads to so-called immobilisation of the underlying investment securities at the level of the depository (which themselves need not be dematerialised) but the depository acquires the shares in the ordinary manner either as bearer or order paper or certified shares. At this level there is no dematerialisation per se.501 Second, investors will hold security entitlements502 against these depositories, expressed in securities accounts that they keep with them. This allows the entitlements to transfer through a debiting or crediting of these securities accounts and implies dematerialisation at this level. In practice, the system may be more complicated. Endinvestors will hold entitlements against their brokers in this manner, meaning that they have securities accounts with them only. These brokers will in turn have entitlements again the depositories. In fact, there could be more intermediaries (or sub-custodians) in the chain, holding accounts with each other. The result is a so-called tiered system in which there are layers or tiers of ownership rights. It poses the important question of the legal nature of the book-entry entitlement, especially in terms of the rights of end-investors in the underlying securities deposited by the issuers with the (central) depositories. As will be discussed later, this becomes relevant especially in a bankruptcy of a sub-custodian or broker who is part of this system on behalf of its clients/ end-investors. The idea is thus that clients or end-investors hold entitlements against their immediate intermediary only, who in turn holds corresponding entitlements against the depository (or any other intermediate sub-custodians in the system). This is called compartmentalisation. In this system the intermediary or sub-custodian is obliged to balance the entitlements of his clients against his own entitlements higher up in the chain: see section 8-504 UCC. This is the asset-maintenance obligation. In this tiered system, the end-investor has no rights (in principle) against any higher tier in respect of any back-up entitlements. There is thus no pass-through right.503 In such a tiered 501 Indeed, immobilisation may go together with dematerialisation but that depends entirely on how the ownership of the underlying securities is handled: either through negotiable (bearer) instruments when there is no dematerialisation at that level or through registration in a shareholder (or bond) register when there is. There would seem to be dematerialisation always at the level of the sub-custodians (and also fungibility) as we shall see. The holdings through a depository in this manner usually come about at the request of the issuer who has therefore only one (or a limited number of selected) owner(s) of the securities to deal with, which has considerable advantages for him in terms of costs. The depositories keep these securities per type and class in the form of pools in which the investors (or their brokers) as clients are therefore entitlement holders through a booking system that operates much like bank accounts in a bank. These entitlement holders when not themselves end investors hold these entitlements for their clients and are then called sub-custodians. 502 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. 503 The pass-through right is in fact a reminder and remnant of the earlier system and now often excluded by statute. However, if share or bond certificates exist or are still issued by the issuer to the depository, at least in the US the entitlement holders may still have a so-called pass through right and the intermediary must obtain the underlying certificates if the entitlement holders so request (s 8-508 UCC) unless this right is waived by investors, which is now normally the case. In the meantime, the depository has a duty to collect payments, vote in accordance with the directions of the entitlement holders, and supply them with the information the issuer must by law pass to investors (ss 8-505 and 8-506 UCC). As already mentioned, depositories will be paid for that service as part of the custody fee they charge their clients, which are usually sub-custodians for end-investors, which also means that the duties dribble down through the tiers of sub-custodians, so that the payments, proxy forms and information ultimately reach the end-investors.
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system, it is quite normal for a French end-investor who buys Dutch government bonds to have an entitlement against his French broker (say BNP), which has an entitlement against a Dutch broker (say ABN/Amro), which has an entitlement against a Dutch (central) depository (normally Negicef). It may also be that both BNP and ABN have a securities and bank account at Euroclear in Brussels where the positions are settled while Euroclear in turn has an entitlement against the Dutch depository of government bonds. If the French investor wanted German government bonds, a German broker (say Deutsche Bank) would become involved. Settlement could still be at Euroclear in Brussels, which would maintain a corresponding entitlement in respect of these German government bonds against Clearstream in Frankfurt, which is the normal or central depository in Germany. Investors will thus have security accounts with their brokers (rather than bearer shares or bonds or registered shares), who have them with the depository (either directly or via other 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 in many aspects. It follows that security transfers are booked and credited or debited in a similar manner as bank accounts are credited or debited as we shall see. But there is still an important difference in that the securities intermediaries in respect of their clients do not become owners of the underlying securities as a bank becomes the owner of the deposits (making the depositor a mere creditor with a contractual claim only). Rather, investors have a proprietary right against their brokers under their securities accounts with them. It follows that each operator of a book-entry system in its tier may not dispose of its back-up entitlement with the depository or other intermediaries as if it were their own (at least to the extent that the entitlement corresponds to their clients’ investments and not their own). They may not pledge these entitlements either. Yet the nature of the proprietary right of the end-investor, although in principle existing, may under applicable law (absent full transnationalisation) still not be as clear or undisputed as would be desirable. The right of each entitlement holder is often understood (in civil law)504 in terms of a pro rata co-ownership of these underlying pools or (in common law) in terms of 504 Among civil law countries, only German law has attempted to devise a full regime for security entitlements within their civil law system of proprietary rights. It has been hard work and the result may not be entirely convincing, the reason probably being its much longer pedigree. The key text is the Depotgesetz (DepG), which has a history going back to 1937 and which allows for the holding of fungible securities (Sammelverwahrung), but the general law concerning custody is still derived from the BGB, especially relevant for the proprietary and transfer aspects of securities, also in the form of entitlements. This still poses the question of sufficient segregation. Dematerialisation through global notes (Sammelurkunde) has in the meantime also become common in Germany and allows for fast and effective clearing (Effectengiroverkehr), normally done through Clearstream Banking Frankfurt, which is the only German entity conforming to the requirements of the DepG in this respect (as Wertpapiersammelbank). It is therefore the only German entity that may operate as depository. Section 1 DepG makes clear that this statute applies not only to traditional custody of paper securities, but also to dematerialised securities entitlements or securities accounts (Gutschriften in Wertpapierrechnung). Regardless of the still overriding structure and impact of the BGB, leges speciales have thus developed as some form of capital market law (Kapitalmarktrecht) besides the more traditional banking law and may deviate from the BGB norm. As much of this is professional dealing, further rules may be contained in the German Commercial Code (Handelsgesetzbuch or HGB) which may override the BGB. The Banking Act or Kreditwesengesetz may also retain some relevance in this area, but the most important statute is the DepG. The Negotiable Instruments Act or Wertpapierhandelsgesetz has under its own terms no relevance for custody services in connection with securities trading.
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beneficiaries under a (constructive) trust arrangement in which only the depository is the legal owner of the shares, in the nature of a trustee. This latter approach is the better as we shall see as compartmentalisation really means that there are no direct rights of investors in underlying pools. Civil law introduces here in truth a beneficial ownership interest in defiance of its closed system of proprietary rights (see Volume 3, 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 exercised against the most immediate tier. The question for the end-investor remains, however, how strong these rights to the back-up assets are in the case of the bankruptcy of an intermediary. Hopefully, the above structure leads to a pro rata beneficial ownership right or some similar sui generis pooled proprietary or co-ownership right against the intermediary in its bankruptcy The Special Conditions for Securities Dealings (Sonderbedingungen für Wertpapiergeschäfte) normally used by all intermediaries are also relevant as an expression of party autonomy. Clearstream Frankfurt also uses a special set of business conditions of its own: the Allgemeine Geschäftsbedingungen Clearstream Banking Aktiengesellschaft. The sum total of these various legal instruments may be summarised as follows. The first result is an atypical contract with the securities intermediary under which there is a form of custody (Verwahrung, s 688 BGB, which is not in itself compatible with fungibility) and service providing (Dienstleistung, s 611 BGB) in which connection there may also be some rules about instructions (Entgeltliche Geschäftsbesorgung, s 675 BGB). Intermediaries may engage sub-custodians under the DepG (Drittverwalter). All act and hold the securities with sub-custodians in their own name. The problem in this system is (as elsewhere) with the ownership structure. The end-investor in a domestic context is the legal owner and must ultimately be marked as such through the chain of intermediaries. The German challenge is to express this in terms of its traditional notions of possession or holdership. In this system the depository is considered no more than holder for the end-investor (unmittelbarer Allein und Fremdbesitzer, s 854 BGB), but this holdership is based on no more than an obligatory right under the custody agreement with sub-custodians. The end-investor only has a contractual relationship with his broker or intermediary but can in this system of contractual rights still reach the holder or issuer directly. Yet a problem still arises where the ultimate investment is not physically represented by paper. This problem occurred in the past in respect of registered securities. Rights or mere claims of this nature are not then protected in a possessory manner, but, since 1940–42, by statutory instrument (Verordnung über die Verwaltung und Anschaffung von Rechtsschuldbuchforderungen and Verordnung über die Behandlung von Anleihen des Deutschen Reichs) all are treated by way of a legal fiction in the manner of paper securities and subject to similar proprietary protection. That is now also deemed the case in respect of depositories of dematerialised securities. Thus it is not Clearstream but the end-investor who under German law is considered the owner of the securities in this manner. Clearstream as depository has only a personal holder’s right in the securities, which belong to the investor, who can protect himself through proprietary actions. It is even accepted that in this system the end-investor has a passthrough right and may at least in principle physically demand their delivery. In this regard it is interesting that the fiction of paper is maintained to give the end-investor the semblance of ownership in the traditional sense. The rules of subletting are analogously applied (s 546(2) BGB). This is done to achieve a form of segregation from the estate of intermediaries. The problem of re-characterisation of the investor’s interest in a modern system of securities accounts does not therefore strictly arise in German law as the thinking remains paper and delivery based, even if this is now so by way of fiction only. However, it is impossible to ignore the fact that in modern systems, this pass-through right is eliminated and may therefore also be contractually abandoned in German law. It is in any event not possible to exercise if there are no shares or only global notes and the continuing importance of the fiction must then be found in the segregation it effects between the property of the intermediary and its clients.
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but it suggests at best an indirect right in the underlying pools. The key is that investors are classified as pro rata beneficial owners mainly so as to be able to seek at least a separation of the assets backing up their own entries with the intermediary in an insolvency of the latter.505 In the US, Article 8 UCC decides so at all levels of entitlement holdings, therefore also at the level of the depository (section 8-508 UCC). The interest of investors is not truly defined in this connection and therefore neither is the exact nature of their proprietary right; rather a number of consequences are identified.506 A joint beneficial ownership under a constructive trust is probably the English approach, equally at all levels.507 In the absence of statutory support, in England there may still be a more explicit reliance on the trust concept and the fiduciary relationship between legal owner (broker or custodian) and equitable owner or beneficiary (the entitlement holder),508 but it is easy to note that the statutory approach of Article 8 UCC in the US is in reality no different. It means that in respect of the underlying beneficial ownership rights in each tier (therefore in each entitlement) the intermediary acts as trustee for the entitlement holder in the next tier (who therefore has a beneficial right in respect of his intermediary) in what was itself never more 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.509 In truth, the nature of the proprietary rights of the end-investors
505 Section 8-102(a)(17) UCC, comment 2, reflects in this connection: ‘A security entitlement is both a ackage of personal rights against a securities intermediary and an interest in the property held by the securities p 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.’ 506 The approach to proprietary rights and protection is here product specific, an approach also used in Art 2A UCC in respect of the rights of equipment lessees. It is a consequence of the US attitude, which is not interested in abstract or systematically interconnected ownership notions in chattels and intangible assets, to which in sales Art 2 UCC also testifies. 507 See R Goode, Legal Problems of Credit and Security, 3rd edn (London, 2003) 6-08. 508 It may be illustrative in this connection to compare the right of a security entitlement holder with that of an investor in an open-ended fund or, in UK terms, a collective investment scheme which (again in the UK) may be an (authorised) unit trust, an open ended investment company or a recognised overseas scheme (see Financial Services and Markets Act 2000 s 238). Under unit trusts, the investor receives a unit in exchange for his investment. In an investment company he receives shares. In either instance he must wait for the winding up of the trust or company before he can receive physical shares (if existing). Otherwise 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 the manager of the fund. In that respect, the situation is similar to that of a securities entitlement holder vis-à-vis his intermediary. 509 See for an important discussion and summary of the diverse views in this respect, L van Setten, The Law of Institutional Investment Management (Oxford, 2009) 223ff.
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may remain somewhat obscure even in common law countries,510 somewhat strange if one considers the economic interests at stake here and the legal risks involved for end-investors.511 But at least most everywhere there now follows some special regime for investors in the bankruptcy of their immediate intermediary. It shows that there are more than purely contractual rights. Again, this is notably different from bank accounts. The true meaning is that the investor may in insolvency of its immediate intermediary instantly shift its entitlement to another broker with the duty of the bankruptcy trustee to shift the back-up entitlement also. There is no pass-through right in the true sense and the end-investor does not move into the higher tier, but at least it means that the back-up entitlement does not belong to the estate of the intermediary. That is the true expression and embodiment of the beneficiary’s proprietary right against the intermediary and goes to the heart of the legal characterisation of the ‘entitlement’ right, which is therefore more than contractual and properly segregated. Naturally, the complications deriving for the investor from a bankruptcy of the intermediary (broker or even depository) in book-entry systems are the main concerns in systems of this nature, although they also arise outside a book-entry system where a broker holds client assets either directly or in a (pooled) client account. There are here also important issues of segregation and tracing, which may indeed be more easily handled or are even implicit in a book-entry system: see more particularly section 3.1.3 below. As already mentioned, in the US, these entitlements come about and are treated and transferred in the manner described in sections 8-501ff UCC. In this connection, it should always be understood that this tiered system is only an administrative arrangement. Although of the greatest importance in facilitating the modern holding and transfer of securities in an efficient and safe manner while avoiding any confusion through the strict compartmentalisation of the holding and transfer structure in this manner (which does not therefore go beyond the tier), it is nevertheless true that, even if in principle the entitlement can only be claimed against the immediate intermediary and certainly not directly against the depository or the issuer, the end-investors still have direct rights against the depository should all intermediaries somehow disappear. On the other hand, if all end-investors somehow disappeared, the intermediaries would still have no proper right against the issuer or depository, who would owe them nothing. It could also be said that as a consequence, the entitlements of the intermediaries are not truly of the same order as those of the end-investors who are the true beneficiaries. It follows that end-investors can pledge their entitlements but the intermediaries not (unless themselves end-investors).
510 In the US, Art 8 is based on the law of trusts but clarifies some aspects when the structure is used in this connection. It in particular clarifies that all back-up assets of the intermediary are the common fund of the investors in the next tier. It further clarifies that the book-entry is valid without back up, which means that the back-up pool is diluted: see Art 8, ss 8-503(b) and 8-501(b) and (c) respectively. It should be noted that in England no special statutory law was deemed necessary to clarify the position (which thus remains somewhat unclear). 511 Most end investors consider themselves quite wrongly still the owners of the original underlying securities, as indeed most depositors think themselves the owner of ‘their’ money in banks. Although, as previously mentioned, the position of both in proprietary terms is quite different, it does not solve the riddle of what investors truly have. It is surprising how little attention this issue got when the paper crisis demanded some kind of solution.
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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),512 but, whatever the layers of holdings and regardless of the lack of access to the issuer and depository, retains the exclusive right to the coupon and principal repayment in the case of bonds and to income or dividends in the case of shares and then also to the voting rights, any winding-up proceeds, and to corporate information.513 It is important to repeat that to achieve this objective, book-entry systems of securities entitlements have in principle nothing much to do with the issuer and the way or form in which the securities are issued, but everything to do with the way investment securities are now normally held (first by the depository and thereafter through brokers or other sub-custodians as intermediaries) and transferred in other tiers. They will be discussed more fully in section 3.1.6 below. The result is that in a book-entry system, the entitlement holder is a person identified only in the records of his immediate securities intermediary (rather than the issuing company). There is here nevertheless important clarification. In a traditional purchase of securities, the delivery of securities to a broker for the account of his purchasing client led to a form of ownership of the broker (who was acting in his own name but as indirect or undisclosed agent), from which subsequently his clients’ entitlements resulted. Under applicable rules of agency, title to the securities would shoot through to the clients immediately, assuming always that the securities could as such be identified per client, which in practice could be highly problematic for fungible securities. In book-entry systems, on the other hand, as a consequence of a purchase, theoretically an entitlement is shifted from the broker of the seller (who would debit his selling client’s security account at the same time) to the broker of the buyer, as a consequence of which the broker for the buyer will create a client’s entitlement vis-à-vis himself and credit the buyer’s security account accordingly. The end-investor thus has a direct right against the intermediary, never mind any identification of underlying securities. This is important progress. Similarly, in a sale, this entitlement would be transferred from the seller’s entitlement with his broker to the buyer’s entitlement with his broker through adjustments of both brokers’ entitlements in the previous layer. In modern securities dealing of this sort, there is not n ecessarily direct contact between brokers nor indeed a direct connection between seller and buyer. Indeed, in practice, in the case of a purchase, the buyer is credited immediately (and unconditionally) by its broker. Brokers of a seller do the reverse and immediately debit the seller’s account. The mechanism and details will be discussed more fully below, but
512 Although all end-investors together are jointly entitled to all beneficial interests their joint intermediary holds for them through his own entitlement with the depository or other intermediary, s 8-503(b), the characterisation of their interest as common or joint property (as is usual in civil law) is less satisfactory. 513 It is relevant in this connection that the 1994 Revision of Art 8 UCC in the US was foremost meant to facilitate the safe and efficient operation of the systems for clearance and settlement of investment securities in the US and started to promote book-entry facilities in this sense in that context. It was not meant to change the basic structure of security holdings to any other effect or diminish the rights of investors more than absolutely necessary to achieve this limited objective.
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in reality, there is no transfer of shares through the system from a buyer to a seller (or between their brokers), as there is in the case of payment through the banking system between payor and payee. In securities dealings, the buyer (or its broker) will never know who the seller (or his broker) was. There is no direct connection unlike when payments are made. In that case, the payor and payee are directly connected by way of credit transfers through the system: see Volume 3, chapter 1, section 3.1.5. Here the adjustments are made as part of the asset-maintenance obligations of intermediaries, who will either increase or decrease their back-up holdings as a result of the transactions of their clients. Naturally, it is not uncommon for brokers to access stock exchanges for larger trades or when they want to adjust their own entitlements. In the former case, they may still be acting as agent while only other brokers are their counterparties, either acting for themselves or customers. In such cases, an end-investor may well have a claim for entitlements against his broker if the latter has been credited for the necessary back-up as a matter of (indirect) agency while the end-investor is not yet credited. That would then also hold true in the broker’s bankruptcy. But technically speaking the title does not shoot through and the end-investor will not become a participant in the higher tier as would probably have been the case in the old system of bearer securities.
3.1.3 Transfer Instructions and Finality. Tiered and Chained Systems of Transfer In a book-entry system, normally end-investors only deal with the market as such through their immediate intermediaries (or brokers), who, while using security accounts for their clients, debit and credit them instantly on the basis of market prices copied from or established through the market mechanism (normally a stock exchange). Ultimately, these intermediaries adjust their own positions through their balancing and asset-maintenance obligations (in which clearing may play a further important role so that there may only be net adjustments between intermediaries as we shall see). Statutory law may further require the intermediary to follow the entitlement holder’s instructions and the intermediary may not be accountable in this regard for invalid or improper transfers (section 8-115 UCC). It is an important elaboration of the notions of abstraction or independence better known from letters of credit and negotiable instruments, in the latter case personified by the strong position of the holder in due course, or bona fide transferee protection. It is extremely important and no book-entry system could operate effectively without such a rule. Systems would become paralysed if they had to assume the reversibility of instructions and transfers on grounds that they were invalidly given or a mistake (except perhaps between two intermediaries if the transfer has not yet involved others in the ‘pipeline’ or if there was clear fraud in the instructions when the ultimate transfer to the buyer may have to be prevented or any credit to him reversed). This raises at the same time the important issue of finality, which comes up in all professional dealings. Also here, security entitlement transfer
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instructions and transfers show a close likeness to payment instructions: see Volume 3, chapter 1, part IV and for finality, section 4.1.2. In this connection, a sales order is an instruction to transfer an investment security given by the client to its intermediary (section 8-507 UCC). Although the result is a mere debit in the security account and a credit in the cash account, it retains the idea of transfer of negotiable instruments in so far as the transfer can only be challenged on very narrow grounds, as is also the case in payment systems. It lays stress on the system as one of communications and administrative entries only from which proprietary consequences flow nonetheless, although only to the extent specifically defined. To promote finality, it is, as we have seen, normally enhanced by: (a) deprecating or objectivising notions of capacity and intent in the instructions; (b) notions of abstraction and independence of the transfer; (c) notions of bona fide transferee protection; and (d) notions of reliance of a transferee who was owed the entitlements and received them. Here again, as in payments, the sui generis nature of this kind of transfer leaves special room for these fundamental notions that enhance the finality principle, which is key for the transfer of commoditised instruments of all sorts and their liquidity. In this aspect of finality, there is a particularly clear similarity with bank accounts and payment systems, demonstrated also by the absence of bailment in either case, even if for securities entitlements this does not lead to the intermediaries’ ownership of the rights in the underlying assets.514 A distinction must be made here also in the sense that modern securities holdings represent tiered systems and modern bank account holdings chained systems. In the case of transfers, it means that in a tiered system there are no credit transfers through the system proper, therefore no push system either. In chained systems like modern payment systems this is different. The end-parties, here payor and payee, are directly connected and there is a chain of connected transfers in a push or credit transfer system in which all intermediary banks are credited in order to push the credit from the bank of the debtor to that of the creditor: see more particularly Volume 3, chapter 1, section 3.1.5.515 This does not normally happen in book-entry systems (except perhaps in security lending): see Volume 3, chapter 1, section 4.1.2. In such systems, there remains as a consequence an important risk for the endinvestor. Even though intermediaries must retain sufficient back-up entitlement, they 514 This has the important consequence that, unlike in the case of bank accounts (and earlier in many legal systems when client securities were irretrievably commingled with those of his broker), the client does not here assume the insolvency risk of the intermediary but retains (in principle) his pro rata entitlement in the latter’s bankruptcy. Of course, it should be realised that the security and cash account usually go together and are mostly held with the same broker who may or may not be a bank. A credit of the security account (which is a purchase) will then go together with a debit of the cash account for the purchase price. If the broker is not a bank, the segregation issue arises in respect of client money. If the cash account is held with a different institution, there will be bank transfers between the broker and that institution for the account of the client. 515 See for a clear exposition also JH Sommer, ‘A Law of Financial Accounts: Modern Payment and Securities Transfer Law’ (1998) 53 The Business Lawyer 1181, 1203. The reason for the difference appears a practical one. Banks do not like to tier deposits, which would lead them to hold balances with their corresponding banks larger than needed to run a payment system. That is not efficient for them. It appears on the other hand cost-effective for them to use higher-tier intermediaries to satisfy their asset-maintenance requirement. It reconfirms the usual practice for large brokers to directly credit or debit their clients’ security accounts. Smaller (introducing) brokers may act differently and still go through some chain until they find someone maintaining an entitlement system for clients (clearing brokers). There may even be a full chain when both end parties are identifiable as in the case of securities lending. But those are not transfers proper.
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may not have done so, in which case the pool and the pro rata shares of investors are diluted. This may happen through the emergence of (bona fide) purchasers from a fraudulent intermediary who sells more entitlements than it has a back-up for and ignores its asset-maintenance obligation. That is the risk of clients when choosing their broker. The immediate result is that too little dividend money will be cascading through the system and in a bankruptcy of the broker, there will not be sufficient back-up assets to be transferred (together with the end-investors’ securities accounts) to other brokers.516
3.1.4 Negotiability and Transferability of Investment Securities under Domestic and Transnational Law. Use of Securities Entitlements to Enhance Transferability and Liquidity As mentioned in section 3.1.1 above, shares and bonds were traditionally issued in certificated form and were, at least on the European Continent, meant to be negotiable instruments (normally expressed to bearer) in order to allow an investor to change its investments instantly. When we use the term ‘certificated’ that is what it means. It was facilitated by regular securities exchanges, which would centralise liquidity in respect of the issues they listed. Negotiable instruments themselves denote a special, simplified form of transfer in this connection in that all rights of the investor and obligations of the issuer are assumed to be incorporated in the document and transfer with it. As negotiable bearer or order instruments, they had as such a status that could not easily be altered in the Memorandum and Articles of Association of a company without depriving the shares and bonds of this negotiability at the same time. To put it differently, if there were limitations on the transfer in the Memorandum or Articles, they were unlikely to affect the (bearer) instruments unless marked thereon. If so marked, these instruments would most likely no longer be negotiable instruments in the traditional sense and could not be traded on the official exchanges or only in a particular section thereof. This status as negotiable instruments derived from their legal roots in the old law merchant. Again, it could be changed by domestic laws or the rules of the exchanges on which these instruments traded, but like for bills of exchange and bills of lading, in making such changes the negotiability of the instruments could be easily undermined and would then start to depend on these domestic laws or exchange rules themselves. International off-exchange trading practices, as in the euromarket, could, on the other hand, also serve to enhance the status of investment securities as negotiable instruments. This proved especially relevant for Eurobonds as bearer securities. Because many conditions could be printed on them in connection with payment of interest and principal, while the interest rate could even be floating (therefore not being certain at all), these bonds often did not qualify under local laws as bearer instruments proper, 516 See for other complications in terms of shortenig of the securities, their pledging, finance sale or repoing and re-hypothecation, Vol 3, ch 1, ss 4.1.3 and 4.2.
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since they were not simple and no sum certain was due under them. These impediments could exist and be amplified even under those laws that were made explicitly applicable to these bonds by the issuer (often English or New York law). In such cases, to save these bonds and their negotiable status, international market practices were likely to be invoked instead and imposed their own proprietary regime and notion of negotiability. So the bearer status would be maintained regardless: see also Volume 1, chapter 1, section 3.2.2. That transnational status now probably also extends to the book-entry entitlements created in them through Euroclear and Clearstream, which are the habitual depositories and clearing and settlement agencies in the euromarket. At least that is posited in this book—see further the discussion in section 3.2 below. It suggests a transnational notion of transferability and transferee protection, even if, in the case of security entitlements, no longer cast in terms of negotiable instruments. It should immediately be noted in this connection, however (as will be further explained below), that in the opinion of many the introduction of a book-entry system in this manner and the consequential acceptance of a new form of transferability is serving to destroy the transnational character of Eurobonds and their transfer and (as in the case of register securities) means the return to purely domestic laws. It is submitted that this is a short-sighted and undesirable attitude and definitely not the better view, although now also the underlying philosophy of the 2002 Hague Convention as we shall see below in section 3.2.2. This is seriously regressive and serves no one. It is true, as noted in the previous sections, that under purely domestic laws, register(ed) shares do not have the status of negotiable instruments either (unless certified securities in the US) and are therefore primarily domestic instruments also. This allows easy limitations on their transferability in the Memorandum or Articles of Association, by domestic company law, or local (stock exchange) regulation and at the same time limits their international operation. Modern security entitlement systems could be a great help here. It has already been said that in continental Europe, the bearer securities variety was normal and still implied some uniform way of transfer under the law merchant but it commonly existed only for publicly quoted companies, therefore not in private companies, which are companies typically not quoted on stock exchanges, such as GmbHs in Germany, Sarls in France and BVs in the Netherlands. These companies tend to have register shares only and normally restrict the transfer of these shares while commonly submitting them to first-refusal rights of other shareholders or to company approval. They never were negotiable instruments but dematerialised investment securities have long existed in these situations also, the difference from the modern dematerialised registered shares for public companies being that they were never meant freely to trade while their issuance was not directed to the public either. If still tradable it would be done in a specialised forum, often off exchange. As we have seen, transfer of registered (non-certificated) shares, even if not restricted, was always unlikely to be through a simple handing over of a document and endorsement. Legally, a type of assignment could be required, which may, besides registration as a constitutive requirement of such an assignment under local law, further depend on other formalities such as specific documentation. It is on the whole not therefore useful to develop the assignment analogy much further and apply its rules.
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As with payments, it is better to assume here an own or sui generis way of transfer as expressed in company law. Like registered shares, they are less easy to handle in an international context on foreign exchanges or in internationalised informal telephone exchanges, which may, as a minimum, raise formal, stylistic and linguistic problems in a transfer.517 Even when transferability in such dematerialised securities is encouraged, local formalities in this respect may still prove to be particularly destructive of transfers if the securities are internationally traded. Foreign listing may be impossible, although a company may seek here to maintain a special register in the relevant foreign country. This may (partially) lift the transfer out of the lex societatis of the issuing company at the same time and may create a different regime of transfer, which may imply fewer (or different) limitations on and formalities of the transfer. It could also allow for foreign pledges or similar security interests to arise in such securities. Alternatively, it may also be that the domestic share register is adapted to accept foreign types of transfer notices. It may thus change the traditional way of notification or even its impact in the case of registered shares. It may, for example, be done in a foreign language with different stipulations. The more important development here is that by using security entitlements in respect of these securities, the tradability of such underlying securities may be enhanced, also internationally. It follows that using securities entitlement in a more modern system may here be the more ready answer. As in the case of Eurobonds, it may facilitate the transnationalisation of the regime of ownership and transfer of all types of (underlying) investment securities.518 Again, one may say that, as in the case of the traditional negotiable bearer certificates, book-entry entitlements may, in the case of international trading, by themselves start conforming to an international or law merchant type of transferability, which goes beyond its local statutory form. To repeat, this happened earlier with the Eurobond as a (materialised) bearer security of a transnationalised type. It is not a new phenomenon therefore and should be considered reinforced now book-entry systems are becoming common in international markets and may also affect the tradability of (underlying) domestic shares that have limited transferability under local law. This would be a most important and valuable development, which may impose itself further with the increase in international trading. The creation of book-entry entitlements as transnationalised proprietary structures separated from the underlying securities and the nature in which they are held and transferred (through the intermediation of depositories) may not only promote their transfer and liquidity internationally, but may also promote the versatility in the type of other interests that may subsequently be created in them, such as security interests,
517 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. 518 As in the case of register securities, transfer restrictions or formalities may also result under rules of stock exchanges on which these investment securities are listed or, if unlisted, from local securities or company law (which on the European continent for private limited companies may even necessitate notarial deeds for transfer and company approval while there may also be a right of first refusal for existing shareholders, as we have seen).
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repos or conditional or temporary interests for financing purposes. The key is that through book entries a different interest tier is created, which may be legally transnationalised independently and which is in any event separated from the underlying securities and not per se covered by their applicable laws. Such transnationalisation suggests a great advance in the potential liquidity of these assets. Thus through a book-entry system, domestic securities may become indirectly transnationalised. In any event, even now they may become subject to the domestic laws of another country, for example that of the place where a depository or intermediary/custodian is located if this is preferred (assuming that their law is sufficiently sophisticated to handle the new interests). If that is now a possibility, there is in principle nothing against a transnational law prevailing in the international markets. In the ultimate phase of transnationalisation, it would mean that domestic laws become irrelevant at the level of depositories and conflict of laws rules redundant in this area. They may in respect of book-entry systems (or even international share registers) also become fortuitous for lack of sufficient domestic contacts. This will be discussed more fully in section 3.2.2 below. It is likely to create a more efficient system and also enhance finality. Indeed, at least in respect of the status of securities entitlements and the type of proprietary interests that may be created through them or in them (such as repos, conditional transfers, pledges and the like), domestic laws found so applicable may not contain much guidance, even domestically. This applies no less to the protection of bona fide purchasers and in the issue of segregation of the client’s interest from that of its broker or other intermediaries, which in turn relates to the entitlement representing some proprietary interest. Transnationalisation is here a good development that creates uniformity on the basis of market requirements and reasonable expectations. It avoids conflict and is the ultimate opportunity to provide greater certainty and finality internationally. It promotes the liquidity and risk management facility. Issuers, if not actively promoting this transnationalisation, are likely to accept these results, which are ultimately dictated by the interests of international investors and not by those of the issuers or their legal systems. Again, through the tiering inherent in book-entry systems, in reality (if not also legally), the nature and status of domestic securities may be transformed indirectly and the trading therein at the same time in the interest of all. In any event, it can be seen as the risk an issuer takes while encouraging international trading in its investment securities, whether through special share registers abroad or through depository arrangements coupled with book-entry systems. So far, this may be clearest for Eurobonds but the same pressure applies to all investment securities or entitlements to them that are internationally traded with (or even without) the encouragement of the issuer.
3.1.5 The Risk Factors in the Holding and Transfer of Investment Securities and Securities Entitlements. Bankruptcy Issues and Risk Reduction Techniques. The EU Settlement Finality Directive Investment securities always carry the risk of the insolvency of the issuers but also the expectancy of their prosperity. These are risks and expectations that are probably the
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essence of these instruments and largely determine their value. The investors seek these investments out for this reason. As risk selection, not risk elimination, is likely to be the issue here, these commercial risks and expectations will not be further discussed. A connected risk is that of liquidity. That is the risk that the security, although transferable, cannot be sold readily or even then only at a large discount or can only be bought at a large premium, as there is no ready (official or unofficial) market in them. It is a reflection of the efficiency of markets, or rather of the lack of it, therefore of their inefficiency. Liquidity is thus another important aspect of investing proper but a risk that will not be further discussed here either. More important for the present discussion are the operational or collateral risks, especially of a legal nature, for the investor if not physically holding the investment securities himself (assuming that they are negotiable instruments). There may also be the issue of confidentiality. We are here concerned with the transactional and depository or custodial arrangements with brokers who hold securities for their clients, now often resulting in book-entry systems and security entitlements as explained above. There are risks in the holding of securities through third parties as we shall see. There are others in the clearing and settlement of investment securities. In practice, when an investor wants to deal, he will approach his broker. This broker must act promptly so that the price does not start to vary and seek the best one for his client (either buying or selling). To this effect, the broker will do one of the following: (a) Deal from his own account (self dealing), which means in the case of a purchase that he will credit the client’s security account immediately (and debit his cash account at the same time). The price will be the best one prevailing in the market at that moment. The broker may have the back-up in its own portfolio or it will come later as part of the broker’s asset-maintenance obligation, which must be fulfilled promptly. Pending the back-up, the broker is here exposed as the price may move against him in the meantime. (b) Match buy and sell orders among his clients in the same securities (internalisation). This is efficient and saves costs but these orders may not be or not be sufficiently concurrent and the broker cannot wait for a match when fulfilling the order. Rather he may wait for them to minimise his own back-up requirement but again that entails a risk as prices may start varying. (c) Go into the market to purchase the investments for the client. In that case, the back-up comes before the execution of the order. This is less normal in liquid securities. Delays are still likely to be the broker’s responsibility if the price moves against the client. The broker is more likely to go into the market later for his own back-up requirements, therefore after a client’s order has been fulfilled. In terms of back-up through the ordinary markets, the securities are likely to come to the broker after a process of clearing and settlement as a market facility under which mutual claims to securities (and cash payments) between brokers are being set off. This should not affect the moment of the bookings for the client. For the uninitiated, the key is to understand that when we buy investment securities we will not know who the ultimate seller is. This is lost in the system. In a modern book-entry system, it is our broker who simply credits our securities account and debits our cash account at the prevailing market price. It could be said that the latter simply creates the entitlements
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anew (or destroys them in the case of a sale) every time and they are not pre-existing and traded as such. For us, that is the end. But even if the broker goes into the market for us, he will normally obtain the investment securities anonymously through the clearing system of the relevant market. Only if he buys from other brokers or market makers would the situation be different as to him, but his client would not know of it. Even then, the broker would not know the final counterparty either, only the other broker, who may have pooled his orders. Even then the securities the broker ultimately acquires may be a resultant in the clearing process. One of the operational risks which the investor will obviously seek to minimise in these situations is the risk of a bankruptcy of the broker during the transaction (dealing, clearing and settlement) and subsequently as custodian or agent with whom or in whose name the investment securities are kept or acquired and against whom the investor therefore has in modern terms an ‘entitlement’. This has already been mentioned before but may need some further elucidation. The issue arises broadly in several different ways which may be summarised as follows: (a) Even before entitlement systems became common, there was always the question who owns certificated (fungible) investment securities held by a broker for his c lients upon the broker’s bankruptcy. If the client kept the certified securities in his own safe there would obviously not be a problem, but if not, a distinction could usefully be made between situations in which the insolvent broker (i) held the securities identified (preferably by number) for his clients and still had them at the time of his insolvency, (ii) held the negotiable bearer instruments directly for his client but in his own possession as fungible assets, or (iii) had them pooled in client accounts with a third-party custodian. In the second case, the client would be at risk and also in the third case if the client account was held in the name of the broker and not sufficiently marked and separated from the broker’s own accounts. There was obviously also a risk if the third party custodian went bankrupt and had not kept these assets sufficiently segregated from his own. (b) The further question then was whether this situation could be affected by operating a book-entry system. Does it automatically entail a form of segregation? This proved to be one of the benefits of the entitlement system explained above and made the client less vulnerable to the broker’s bankruptcy but the price was loss of anonymity. (c) The situation could be additionally complicated in respect of a broker who went bankrupt while transfers remained unexecuted or only partly executed. In the case of a purchase, the cash account could already have been debited but the securities transfer not yet credited. If obtained in the market the securities could have been credited to the broker already but not yet to the client. We have here agency questions: if the back-up is already there, the security, even though only in the form of an entitlement, may still ‘shoot through’ to the client, who is at risk, however, if the cash account is already credited but nothing further was done.519 519 The Dutch Supreme Court in a decision of 23 September 1994 [1996] NJ 461 characterised that kind of claim to delivery as no more than a personal right. The clients do not, therefore, under current Dutch law
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(d) Other issues arise when there are booking mistakes and corrections must be made which an intervening bankruptcy of the broker may further complicate, although it should be clear that in general, bookings once made cannot easily be corrected if already notified and acted upon in good faith. This is a question of finality. In this system, the lack of back-up never gives a right to annul a purchase. This is simply the result of compartmentalisation in a tiered system. (e) The greater danger is, however, that there is no sufficient asset back-up as the broker has not fulfilled his asset-maintenance obligation promptly and properly. The consequence is a shortage in back-up per type of security and the question is pro rata distribution of the shortage among all holders of the same securities— or do the last clients take that risk? A variation is the illegitimate pledging of the back-up by the broker. If bona fide, it must be assumed that all clients will be equal and suffer pro rata. Again, it is the consequence of compartmentalisation under which both tiers are not connected and the problem is simply the risk of all clients having chosen the wrong broker. (f) Other problems could derive in this connection from the applicable bankruptcy law itself and its effect on orders and on the clearing and settlement in terms of the finality of instructions already given, assets or collateral received or given, and any retroactivity of the bankruptcy in this respect. More precisely, in this connection, there arise: (a) proprietary questions, which have to do with the nature of the holding of the investors in terms of proprietary, co-ownership or beneficial (or similar) rights against intermediaries and the acquisition of investments and moneys by using (undisclosed) agencies; (b) finality issues, which have to do with the power of the insolvent intermediary still to give transfer and settlement instructions, the latter’s (continued) functioning in the relevant clearing and settlement facilities, the effect on this participation in the netting, and any retroactivity of the bankruptcy in this regard until the beginning of the day of the bankruptcy (which is a common bankruptcy rule and undermines all transactions in which the bankrupt was involved on the day of his bankruptcy); and (c) the question whether any transfer to clients under these circumstances was prejudicial or preferential in respect of the general creditors of the intermediary. In the EU, the EU Settlement Finality Directive of 1999 sought to deal especially with the problems under (b) and (c), and provides for a harmonised regime, which was in the first instance meant to protect the position of the European Central Bank in its function of providing liquidity to the banking system. It is based on repo financing, which means that banks will transfer securities to the Central Bank as collateral for the liquidity which it provides: see for this repo technique more particularly Volume 3, a utomatically stand in the place of their bankrupt broker vis-à-vis third parties. It is another vivid illustration of why internationalised custody systems should not be seen to become involved in the vicissitudes and peculiarities of local laws with which they have only a fortuitous relationship through their location. Domestically the answer is in a special arrangement in terms of some form of statutory assignment of such claims.
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chapter 1, section 4.2.520 As to the problems under (a) as already mentioned, in a bankruptcy of the broker holding securities for its clients, a distinction should first be made between whether the broker holds these assets physically (in the case of negotiable instruments) for its client or is registered as owner of them (in the case of registered or dematerialised securities), operates client accounts with third-party custodians or maintains a book-entry system. As a consequence of agency notions, it may now often be accepted that securities held physically or in a register for a client are owned by the client, assuming that they can be clearly identified, by the printed numbers in the case of bearer instruments or by sufficient identification in the register entry, or by their being held through a segregated client account, title shooting through as a consequence of disclosure (in common law) of the agency or on the basis of a special rule in respect of indirect agency in civil law. Especially if they are in a client account, it is likely that these securities are pooled with others, assuming they are sufficiently segregated from the broker. This may then lead to forms of co-ownership. Again, the assumption is here always that the investments can be segregated from those of the intermediary when there are still the serious problems of commingling and fungibility. It is also a serious issue when client moneys (even in client accounts) are reinvested by the broker in his own name. For the reasons indicated, in many legal systems the rights of investors in pooled accounts may remain under serious threat, especially in the case of fungible assets, which in the worst scenarios may lead to no more than a personal right for delivery of investment securities of the same sort or client money against a broker rather than a proprietary claim in the bankruptcy of the relevant intermediary or custodian. The result is that investors will get no more than the pro rata share in the liquidation proceeds of their bankrupt broker, which they must share with all other creditors. The latter ones thus receive the benefit of the commingling confusion, which could mean a substantial windfall for them. This would seem inappropriate as long as investors can still identify how many securities they contributed, assuming the totals add up. Trust notions and beneficial ownership may here be the more appropriate characterisations for the investors’ rights. O therwise, there must still be some reliance on co-ownership notions, an uncertain approach more likely to be tried in civil law countries. It has already been said that these two proprietary approaches (co-ownership and trust) should be clearly distinguished.521 Civil law is often condemned to the former in the absence of a trust concept. Common law has the advantage here and traditionally provides the better tools of protection.522 520 Most EU countries have implemented the Directive to apply more generally. The Directive side-stepped intentionally the issues under (a), which therefore remain unharmonised in the EU. A limited effort has been made in the Collateral Directive to deal with (some) rights (in terms of securities or repos) that can be established over securities entitlements (see s 3.2.4 below) without, however, defining these entitlements and their nature either. The Directive also did not enter the subject of finality more generally or the underlying theories that may back it up: see for these theories, Vol 1, ch 1, s 1.1.7. 521 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). 522 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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Again, security entitlement systems are here a further important step in the d irection of investors’ protection as in this context the notion of fungibility, segregation and pooling of assets is further developed, often statutorily in civil law countries, and the rights of the investors in the underlying investment securities more fundamentally addressed. The question of beneficial ownership and co-ownership rights of entitlement holders arises here more directly, leading to the possibility of simply moving or shifting these rights (as book-entry credits) to other brokers after a bankruptcy of the first one in the ordinary manner of shifting accounts. The back-up (in so far as it exists) moves with and completes the segregation as already mentioned. This is also called ‘porting’.523 Indeed in modern book-entry or security entitlement systems, that right is now institutionalised and segregation is to that extent presumed. The ideal is always that the business of the depository, broker or other intermediary should not impact on the business they do for their clients. Their personal creditors should therefore not obtain a windfall in having recovery or set-off rights in client assets. It is in truth a question of unjust enrichment. Apart from these important ownership, settlement and clearing risks when intermediaries are or become insolvent, another risk for investors in this connection is that intermediaries have not collected and transferred to them in a timely manner any distribution on the investment securities, have not (in a timely manner) followed their instructions, for example to obtain and deliver the underlying security certificates (if a pass-through right still exists in a book-entry system), or have not in a timely manner made the necessary sales (or purchases) or created the required security interests in respect of their creditors. In the US, Article 8 UCC has special provisions in this connection. Many of these risks are not typical for book-entry systems but arise wherever investors’ assets are handled by others (brokers or custodians), but may be more specifically dealt with in these newer immobilised systems of securities holdings. There are other risks more typically connected with the transfer of securities or entitlements. They are essentially twofold. The first one is that the transaction will not close or settle. That is the settlement risk, thus the risk that the intermediary does not amend the securities accounts for his clients. The risk that the deal will not close because the broker fails to perform (for reasons other than bankruptcy) is real. It has already been said that at least if the back-up is there, the client may have protection. In this connection, there is a closely related risk, which derives from order mistakes (to be distinguished from mistakes in the instructions). It is therefore important that buy and sell orders can immediately be matched so that any mistakes or misunderstandings as regards number and class of investment securities are resolved promptly, the necessary corrections made, and so that the deal does not close before that is done. But again this is all only relevant to the extent the intermediary goes into the market to fulfil the order. That will often not happen, as already explained. The second risk is that, unknown to the buyer, the back-up securities or entitlements did not legally belong (in full) to the intermediary because of defects in their acquisition 523 This is an important concept, which, in the EU under the so-called EMIR regulation (see Vol 3, ch 2, s 3.7.6), is proposed to be extended to clients of insolvent clearing members in a central counterparty (CCP) system in respect of their derivative dealings and supporting margin.
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(even though substantiated only in a mere book entry) or, perhaps more relevant, because they are encumbered or may have been given as security by the broker for his own debts. This therefore affects the legal status of the back-up entitlements and the further question then is whether a bona fide purchaser of a security or security entitlement who is effectively credited with the securities is (proprietarily) protected against such failings. Under modern law, it is normally established that intermediaries may not encumber their own entitlements that back up those of their clients, yet they may have been acquired subject to existing interests of this nature. Market practices may have something to say in this regard and protect the bona fide purchaser but perhaps also the bona fide intermediary buying the back-up. These are issues still subject to some doubt, but protection of the buyer is the natural consequence of a tiered system and compartmentalisation under which the two layers are not connected. It has already been noted that the result is that any shortfall is borne by all investors in the same type of securities.
3.1.6 Modern Clearing and Settlement Systems. Their Internationalisation Technically, clearing and settlement organisations usually operate on a membership or participants basis subject to a membership agreement or general conditions.524 In the
524
The following techniques are commonly used in this connection:
(a) A settlement agent or central depository system requires the participants to enter into bilateral relationships with the settlement agent under which that agent holds cash and securities accounts in which intraday debits and credits are netted out on a bilateral basis between the settlement agent and the participant. The modern book-entry systems on which security entitlements are based are an important example of this system and function also between a broker and his clients (assuming that the broker operates a book-entry system). (b) A clearing house system, which has two phases in the settlement process and which in principle involves all participants. In the first one, the payment and/or delivery instructions are calculated and netted out between the participants for a period (say one day). Subsequently (either the same trading day or within an agreed period thereafter, say T+1 or T+2) any resulting balances are settled by payment or delivery to and from each participant. In practice in the euromarkets that is the system of settlement through Euroclear and Clearstream and most modern payment systems: see for investment securities Vol 3, ch 1, s 4.1.4 and for payments Vol 3, ch 1, s 3.1.6. (c) A CCP system allows all transactions to be conducted with the same counterparty through back-to-back transactions, while this counterparty nets and closes out (either the same day or within an agreed period thereafter) all deals outstanding between it and any participant in its system. It is often exchange connected (especially in derivative exchanges) under which in the case of a transfer between two end-users who have matching trades, the CCP becomes technically the buyer from any potential seller and the seller to any potential buyer, see Vol 3, 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 practised— see also the ‘Delivery versus Payment in Securities Settlement Systems (1992)’ Report of the Committee on Payment and Settlement Systems (CPSS) of the BIS or Central Banks of the Group of Ten Countries, which distinguished between: (a) real-time gross settlement, which meant simultaneous trade-by-trade execution of the securities and of the payment transfers; (b) gross settlement over a time period, in which the trade-by-trade approach is maintained but the securities and the payment streams (often guaranteed by banks) are netted out at the very end of the cycle; and (c) net settlement, in which all is simply netted out between participants at the end of the settlement period (but still on the basis of simultaneity). The practical difference is in the liquidity requirements of the participants. Regardless of DVP, bankruptcy laws may still undermine the system in the case of an intervening bankruptcy of one of the participants. This is the concern of finality legislation as in the EU’s Settlement Finality Directive of 1998: see s 3.1.3 above.
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case of a transfer, the modern clearing systems themselves may guard against default by the broker, of which the CCP technique is the more advanced.525 It implies a guarantee of the operation of the system by one central counterparty, who takes over all rights and obligations from the participants (through a kind of novation or more likely through a chain of agencies) and nets out on a continuing basis all mature obligations in terms of security transfers and payments. Again, this is of foremost importance when the intermediary goes into the market either for his client directly or merely for his own back-up obligation. If he nets off the transaction between his own clients, this is less relevant. In the case of Euroclear and Clearstream, the system has not yet developed so far, but similar net calculations are being made on a daily basis between members in respect of their securities and cash transactions. They are the established underwriters, brokers and traders in the euromarket.526 In addition to their general conditions for m embership,527 these organisations commonly develop their own international p ractices. 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).528 Indeed, by introducing the book-entry system, early on these organisations substantially did away with the physical aspects of bond trading in the manner that will be discussed in greater detail in section 3.1.7 below. Although technically still subject to domestic legal regimes, respectively those of Belgium and Luxembourg,529 the manner of their operation in the euromarket, the functioning of their book-entry system,530 the rights in the pools,531 the manner of clearing, settlement and netting, the repo business in, and methods of pledging of, the assets, even the nature of the Eurobond itself, at first as a transnationalised negotiable bearer instrument and later as a book-entry entitlement, the transferability of these book-entry entitlements and the protection of bona fide purchasers, all became substantially subject, it was submitted, to the practices of the euromarket and should as such be considered transnationalised. This was posited 525
See for clearing also HF Minnerop, ‘Clearing Arrangements’ (2003) 58 The Business Lawyer 197. See for a description of them, RM Goode, ‘The Nature and Transfer of Rights in Dematerialised and Immobilised Securities’ in F Oditah (ed), The Future for the Global Securities Market (Oxford, 1996) 107. 527 The Terms and Conditions Governing Use of Euroclear and the Operating Procedures of the Euroclear System. 528 Global notes are substitutes for certificates, not for registrations. They may be permanent, semipermanent 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. 529 See Belgian Royal Decree No 62 of 1967 (as amended) and the Grand-Ducal Decree of 1971 (as amended). 530 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. 531 Technically, the Belgian Decree backing up the Euroclear system, see n 529 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. 526
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in the previous sections, see further also Volume 1, chapter 1, s ections 3.2.2 and 3.2.3, and section 3.2.1 below. It should neutralise not only the legal problems derived from any lex situs as applicable law in respect of the underlying bonds or other investment securities, but also the problems connected with the location of the book-entry system itself, which is no less fortuitous and in any event bears little relationship to the place of the transaction. Thus inappropriate leges situs concerning the proprietary aspects of Eurobonds and their transfer (or even inappropriately chosen domestic laws to cover the instrument) and inappropriate or inadequate domestic (Belgium or Luxembourg) laws concerning the system could be neutralised or overcome by established transnational market practices. At least in the euromarket, it allowed a system of transfer, bona fide purchaser protection, repos and pledges to develop in respect of euro-securities even regardless of the laws of these two countries and sudden changes therein, for example through adverse case law (such as the 1996 Tilman case in Belgium: see the next section).532 The result is less legal risk and also a more predictable and cost-effective system, although, as already noted, among legal scholars much lip service is still paid to private international law notions in this connection, unnecessarily as it would seem and as will be discussed further in section 3.2.3 below.
3.1.7 The Evolution Towards Security Entitlements: Depository Receipts and the Earlier Developments Towards Dematerialisation and Immobilisation In the foregoing, the modern book-entry system of holding and transferring securities was outlined but its development may be discussed more fully. Already by the late 1960s, the transfer of shares and bonds as negotiable instruments in the informal international Eurobond market was proving increasingly cumbersome because of the great volume of transactions, which each time involved a great number of physical (bearer) certificates. It was one of the reasons for the creation of Euroclear and 532 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 E uroclear and raised the spectre of the need for the execution of a pledge agreement in all cases and the crediting of the investment securities to the special Pledge Account in Euroclear under Art 5 of the Royal Decree of 1967 pertaining to Euroclear, assuming Belgian law was applicable. The situation was remedied through new legislation of 15 July 1998 concerning ‘amendments to certain legal provisions regarding financial instruments and securities clearing systems’ (Art 30) [1998] Moniteur Belge 28.934. The better view is that the 1996 case was not relevant in the first place as market practice applies to euro securities and the way they are held and transferred through Euroclear. Belgian law at most applies residually. That also appeared to be the view in the market before the remedial legislation became effective. The Belgian legislation of 1998 covered more than the operations in Euroclear but is limited to situations where the transferor is a bank or other financial institution or performs investment activities for its own account or for the account of third parties (or is a foreign company or institution with a similar status). In other words, it only applies to fundraising in the professional sphere (but can be done on behalf of customers). The re-characterisation risk was eliminated in Luxembourg much earlier through the Grand Ducal Decree of 19 July 1983 on fiduciary agreements entered into by credit institutions, but the protection is limited to securities located in the Grand Duchy, which raises the issue of the location of securities entered in a book-entry system: see for the modern solutions (also in Euroclear and 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 and facilitated. As noted before, purely domestically, the creation of register shares and bonds, which did not need physically to exist, could have simplified the transfer system, based as it was on register entries and dematerialised securities. That was the route Article 8 UCC in the US first chose as we have seen. Changes to Article 8 UCC in 1977 (section 8-313) introduced the possibility of electronic transfers precisely by allowing a system of registration to develop in which certificates would be entirely abolished. It meant therefore complete dematerialisation. The idea was that in this manner electronic transmission systems could become efficient and settlement a matter between the various settlement departments of the intervening brokers and the companies’ registers. In this system, individual shareholders would continue to appear as the shareholders on the companies’ registers. It meant converting all shares into registered shares and doing away with their status as negotiable instruments altogether. Transferability was to be maintained only on the basis of these register entries, shareholders’ instructions and statutory backing. It could easily have allowed for electronic trading and settlement. However, as it was still normal (especially in England) also to issue some type of certificate, even if not itself negotiable, this made the procedure for transfer no less cumbersome than in the case of the transfer of bearer certificates. Internationally, it raised the complication of registration in company registers itself, which registers could be far away. They could also imply domestic restrictions on the transfer of such register shares (or bonds), often hampering that type of trading also. In the event, this statutory initiative did not succeed but an alternative practitioners’ approach developed in the US through the use of the Depositary Trust Company (DTC), which came into being as a result of the back office problems caused by an excess of paper securities. It did not rely on dematerialisation, but rather on immobilisation of the securities as explained. Unlike dematerialisation, immobilisation technically breaks the link between issuer and investor by introducing an extra layer of holding the securities. These are the depositories. It became the key to the new system and was based on custody of the investment securities by a custodial company that would be the legal owner (normally called ‘depository’) of the underlying shares and maintain a book-entry system as proof of its clients’ entitlements to the securities, much in the same way as Euroclear and Clearstream (Cedel) had already started to do. Thus in the US, the DTC was likely to hold substantially all the shares of an issuer for ever and issue entitlements against it. Only the latter would change when investors traded. For US government bonds, a similar system was developed by the Federal Reserve (which is the Central Bank of the US) as depository/custodian. It is this system that is now supported by the 1994 Revision of Article 8 UCC. It has also become the domestic system in many European countries (like Germany and the Netherlands)533 and for Eurobonds had already been introduced earlier by Euroclear and Clearstream
533 In Germany under the Depotgesetz, see further n 504 above, and in the Netherlands under the Wet Giraal Effectenverkeer (Wge).
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(formerly Cedel).534 The English electronic transfer system (Crest), on the other hand, is not based on this custody or immobilisation approach but retains an approach under which shareholders (instead of their intermediaries) remain directly connected to the share register of each company but in an increasingly electronic way. 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 c ertificates 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 passthrough right may be excluded by contract or by the nature of the way the securities are issued (through a global note) or held (as in a book-entry system only). This exclusion has become normal, also in the US. As we have seen before, in the case of immobilisation, there are in the client tier only entitlements (and not securities) that change hands upon trading, which is likely to be followed by settlement through modern clearing systems, especially between intermediaries in connection with their back-up or asset-maintenance obligations. In the depository tier, there is an unchanged owner of the corporate shares and bonds in so far as the company is concerned. All income flows and information supplies are directed by the issuer to the depository, who deals with his clients and will be paid by them for that service. Consequently, there is here an important cost-saving element for issuers. Naturally, these clients could and are likely to be intermediaries themselves, like brokers, who have in turn a system of client accounts under which their clients will have entitlements against them. As mentioned in the previous sections, in modern systems there is likely to be pooling at each level in respect of fungible securities of the same type. In the US, the new Article 8 UCC framework is based here on a distinction between investment securities held directly by share or bond holders and those held indirectly by intermediaries on behalf of their clients. Part 5 of Article 8 applies to this second type of holding, therefore to securities entitlements. Under it, intermediaries may hold among their assets securities indirectly owned by their clients through a book-entry system. Again dematerialisation is here less important than immobilisation and the book-entry system also works in respect of shares and bonds represented by certificates in the various layers. In book-entry systems, the true or economic owners of the investment securities (the 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 i ntermediaries
534 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-à-vis the depository institutions, which cater for them as members, while their clients’ entitlement will only be marked in the brokers’ own books. Pooling therefore results at different levels. It should be clearly understood and cannot be sufficiently repeated that (in the absence of a pass-through right) in such an immobilised system there is no legal right of the investor (and his creditors) in the underlying securities. There is no claim against any other tier than the immediate one. That is compartmentalisation. Only in a bankruptcy of the intermediary is there a variation and form of separation, as explained earlier. As already mentioned in section 3.1.4 above, the book-entry facility acquires a special meaning if the underlying shares are not themselves freely transferable. In such cases, it provides for an indirect way of making them so. Book-entry systems may also provide a special transfer facility at the international level if transfers of the underlying registered shares require cumbersome registration in domestic corporate registers or are subject to other restrictions. That need not be an issue in international trading as the depository as registered owner remains the same, and only book entries change in a simplified manner, as agreed between the depository and his clients or members. This facilitating of international transfers was earlier often the objective of depository receipts (DRs), which function in a similar two-tier manner (and which may themselves be negotiable instruments). They re-created, however, the logistical problems of their own transfer and may now themselves become subject to immobilised depository and book-entry systems at the DR level. In these DR systems, there may still be a facility to receive the underlying shares (the ‘pass-through’ right), however. If not, there may be a particular problem with pledgees or similar security interest holders whose repossession right would then be limited to the DRs.535
3.2 The Transnationalisation of Custodial and Settlement Systems and its Opportunities 3.2.1 The Role of the Euromarket for Bonds and the Effect on International Share Trading. The Dominant Role of International Practices and the Bankruptcy Law Implications In the foregoing, the effect of the internationalisation of the investment streams on the nature, status and trading of the underlying investment securities has already been noted and might, from a legal point of view, be summarised as follows: (a) The Eurobond developed as a transnational negotiable instrument, detached from domestic laws, even those chosen by the parties or made applicable to it 535 The limitations on the pass-through right in Europe often resulted from schemes organised by a company to prevent an unfriendly take-over of the underlying shares.
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by the issuer at least in its proprietary aspects, and, while still a bearer instrument, was undeniably subject to the practices of the international euromarket: see Volume 1, chapter 1, section 3.2.2. (b) Market underwriting and trading practices also developed in that market at the transnational level; they are subject to the rules and recommendations of the International Primary Markets Association (IPMA) and International Securities Market Association (ISMA formerly the AIBD or International Bond Dealers Association), since 2005 merged into the International Capital Market Association (ICMA), which are in the first instance explained and enforced by market practitioners on the basis of their transnational practices: see Volume 1, chapter 1, section 3.2.3. (c) In this international market, there further developed special clearing and settlement facilities, which meant: (i) verification of all trades in Euroclear or Clearstream (formerly Cedel) without which the transfer could not settle; (ii) a delivery versus payment (DVP) method and moment of transfer, which is upon payment and not delivery; (iii) a clearing system for intermediaries, which does not itself result in the transfer (or undermine the DVP system, but now only for net balances), but makes the transfer process safer, quicker and less costly; (iv) the possibility of creating transnationalised limited proprietary rights in these instruments in terms of pledges, repos, securities-lending, and conditional or temporary transfers; and (v) the development of individual transnationalised rules for finality of the transaction and payment, including a rule for the protection of bona fide purchasers. (d) Subsequently, there also emerged in that market custodial arrangements with immobilisation of the securities and a book-entry system as another practitioners’ development with the entitlements based on their fungibility, transferability, manner of transfer or substitution, co-ownership or beneficial ownership and limitation of pass-through rights, the effects in a bankruptcy of an intermediary, the types of limited proprietary and security interests that could be created in them, the manner in which this was done and their protection and enforcement,536 all being determined and further developed by (euro-)market practices.537
536 See, for the complications of a purely local view of pass-through rights, M Dassesse, ‘Taking Collateral over Euroclear Securities: a Belgian Pledge Too Far’ [1999] Journal of International Business Law 141. Whether there is a pass-through right of clients of Euroclear members in the latter’s Euroclear entitlements would appear to be a question of Euroclear rules or euromarket practices. It could not operate in favour of non-members of the system. If there is such a right in principle, any pledgees of the clients would receive the pass-through right when they foreclose their pledges against the client. If this is possible, the next question is whether there is then also a pass-through right in the underlying securities and whether that could be pledged. That would again be a matter of Euroclear rules and euromarket practices, but would also affect the issuer in the case of registered securities (as distinct from bearer securities deposited with Euroclear) and could therefore in the case of shares become a matter of the internal rules of the issuer as expressed in its Articles of Association or its lex societatis. It is clear that one must distinguish here between the various layers at which entitlements and pass-through rights work. 537 This should avoid re-characterisation risk if re-characterisation is not common in that market and it is not. It is the risk that ownership-based funding is re-characterised as a security interest, relevant especially for repos. See for the distinction between ownership and security-based funding in this connection Vol 3, ch 1, s 2.1. See for the EU Financial Collateral Directive, s 3.2.4 below.
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(e) It is demonstrable that these practices prevail over the lex situs of the underlying securities, largely because of the fortuitous nature of the situs in respect of negotiable instruments, although in the case of a global note there may have been some doubt on this point. There may now be even more doubt in respect of security entitlements, although as intangible assets, they hardly have a location either. In truth, these practices prevail (in the view of this book also in the case of security entitlements) because of their recognition by the international law merchant, which leads to uniform transnational treatment regardless of location of the underlying investment securities. (f) Upon a proper analysis, these market practices being transnational thus also prevail over the domestic laws of the place of the book-entry systems or over conflict rules pointing to other domestic laws in respect of them, prima facie also because of their fortuitous location but in truth more particularly because domestic laws are often inadequate and inappropriate to apply to transactions conducted away from the place of these systems. (g) These domestic laws have in any event often an unclear view of the nature of the book-entry entitlement in terms of co-ownership or beneficial ownership rights or proprietary rights sui generis, and the effects of transnactional finality, which (if domestic laws were applicable) even for international entitlements could then change depending on the place of the custodian or intermediary operating the book-entry system. That would also affect the type of other interests that could be created in them, such as repos and security interests or conditional ownership rights, when these entitlements are used for financing or are the subject of securities-lending. (h) Transnational practices demonstrate the decisive influence of the investors and traders (rather than issuers) and the impact of their market arrangements with their custodians or other intermediaries that operate book-entry systems. (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, supported, if necessary, by general p rinciple, all as part of the modern lex mercatoria, in order to be recognised and enforceable in the market as a whole and against all its participants (but not necessarily others). (j) In this process, general conditions and operating practices formulated by the market itself become of great significance. There is therefore an important impact of party autonomy but only in the context of the operation of the market and its products and participants as a whole; it also means that market practices may be fluid as they must instantly react to market realities and changes in those realities. Here, custom is not static, as in truth it never can be if reflective of market practices. The practice-based legal system for Eurobonds developed very effectively and rapidly in this manner and allowed a market to emerge that was largely offshore, operated
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under its own rules, and became the largest capital market in the world. The lack of rigidity has proved a great advantage, much better than any illusory certainty that the application of domestic rules could have brought, even if they had been tailored to this market. For international markets and their participants flexible law is always preferable to wrong or underdeveloped mandatory laws—contrary to what is often said by practitioners. It has already been said several times that certainty on the basis of applicable domestic laws can be of such a low quality that it is much better to do without in favour of the force of transnational practices and their dynamics. They have always been the essence of the euromarkets, in which, upon a proper analysis, domestic laws are only used to the extent compatible with them unless relevant domestic public order or public policy requirements mitigate against it and demand otherwise but that could normally only be so in respect of conduct and effect under the international transaction in the relevant country and not elsewhere. The internationalisation of the security markets has also moved in the direction of covering (domestic) shares that are substantially internationally traded: see section 3.1.7 above. Once expressed in securities entitlements, this is greatly facilitated as they have their own simplified transfer method as we have seen.538 It may even lead to foreign proprietary interests, such as pledges and similar security interests or repos created in them, subject to the laws and practices of the countries of the next layer.539 It would be better still to accept the transnationalisation of such interests at least to the extent these interests are supposed to operate transnationally. Indeed transnationalisation of the international flows in securities and of the trading facility in them suggests the further dilution of the impact of the lex societatis in favour of a transnationalised concept of transferability even of register shares and the interests that can be created therein. It has already been shown in section 3.17 above, that issuers encouraging these securities to be traded through internationalised book-entry systems enhance that development. Naturally, the question arises of what all this means in the bankruptcy of one of the participants, especially the broker or similar intermediary maintaining a book-entry system, under the applicable bankruptcy laws. How do these transnationalised rights fit, especially under bankruptcy laws that have so far remained domestic? At this stage, it is not possible to generalise, but a number of observations may be made: (a) The entitlement tier concerned is important. If a domestic broker with many domestic clients is declared bankrupt in his own country while in the bankrupt
538 Immobilisation may be less complete for shares if still largely traded and settled through domestic stock exchanges and settlement agencies. These may practise similar book-entry systems, but in the case of a domestic variety are subject to domestic laws. In international trading the result may be a flow between these book-entry systems and Euroclear and Clearstream. 539 The details of attachments and perfection of these interests are not further discussed here, but all aim at possession whether actual or constructive (through registration in the relevant share register) in which case the term ‘control’ is often used. There is here no need for sophisticated filing systems, now customary in the US and some other countries, especially in respect of non-possessory security interests or floating charges. If the subject of such a floating charge, a separate marking on the securities or entitlement register would probably still be necessary in respect of internationally traded securities in order for these security interests and any pass-through rights thereunder to be effective. All still comes down to constructive possession, or indeed control.
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(b)
(c)
(d)
(e)
estate there are entitlements supporting a higher domestic layer or tier (either in the same or another country) or even an international book-entry system, the lex concursus may in the first instance determine whether the end-investors/ clients can step into the shoes of the broker in respect of the back-up entitlement or (more likely) may immediately transfer (as a matter of ‘porting’) their accounts to another broker with the corresponding adjustments of the back-up entitlements of the bankrupt broker. If the client or end-investor has no direct right to the back-up entitlement of the broker in the next tier under applicable local bankruptcy or other laws in the above manner, that need not be the end of it in respect of a foreign book-entry system maintained by the bankrupt broker outside the bankruptcy jurisdiction, in which respect there may be a further difference when the end-investors are also foreign. It may also make a difference when the broker declared bankrupt is himself outside the bankruptcy jurisdiction. The status of the end-investors/clients: (i) outside the country of the bankruptcy, (ii) in respect of a book-entry entitlement of their broker with a custodian also outside the bankruptcy jurisdiction, while (iii) the broker itself may have been declared bankrupt being outside the bankruptcy jurisdiction, becomes then first a matter of the bankruptcy’s extraterritorial effect or reach on that foreign book-entry system under the applicable bankruptcy law but subsequently also of the acceptance or recognition by the law of that foreign book-entry system of the consequences of the application of the relevant bankruptcy laws. This extraterritorial effect of bankruptcy is normally not accepted elsewhere except under treaty or uniform law; such law is mostly non-existent, but was in the EU introduced through the Insolvency Regulation and similar D irectives for the winding up of banks and insurance companies.540 In the US there is a favourable (unilateral) regime in the form of the new Chapter XV of the US Bankruptcy Code 2005 (following the UNCITRAL Model Law on the subject, now also incorporated in the UK); even then, the foreign bankruptcy measure may not affect the legal (proprietary) rights and practices in the recognising Member State without an adjustment process. It could in this respect be argued that the proprietary regime in respect of entitlements to assets of an internationalised clearing institution operating under its own practices would demand acceptance by the applicable bankruptcy law as a precondition for any extraterritorially and its recognition elsewhere.541
540 It should be noted in this respect that Belgium has a liberal recognition regime and is also the country with most bankruptcy Conventions: see JH Dalhuisen, Dalhuisen on International Insolvency and Bankruptcy 1 (Deventer, 1986) 3-162, which might still be relevant to Euroclear if its book-entry system were considered Belgian. 541 In the case of Euroclear, it would mean that the bankruptcy of a non-Belgian participant would not prevent the clients of the foreign broker taking its place vis-à-vis Euroclear in Belgium whatever the foreign bankruptcy regime would say even upon recognition (in principle) of the foreign bankruptcy in Belgium. As Euroclear would not want these customers as participants, in practice it means that each customer’s theoretical pro rata share would be transferred to the new or replacement intermediaries (‘porting’).
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(f) In view of its international status, this may even be so if this institution was within the bankruptcy jurisdiction itself. Thus, in a Belgian bankruptcy of a Belgian b roker, the broker’s Euroclear entitlements might be distributed to its domestic and foreign clients or, more likely, pro rata to their new brokers under the practices of distribution of entitlements within Euroclear and the euromarkets pending an insolvency of the intermediary, not therefore pursuant to Belgian bankruptcy legislation if different. This would be very much clearer where there still is a pass-through right. (g) An important further complication may be in the type of right that is held by third parties in the entitlement. One may think primarily of security interests, repos, or conditional or temporary transfers, where entitlements are used for financing purposes. It creates a further layer (of a different type, however) while such third parties/interest holders may indeed become the entitlement holders upon default of the original one. (h) They should not be affected by a bankruptcy of an intermediary either, but to what extent these rights of outside financiers or investors may be safeguarded in a bankruptcy of the broker or custodian maintaining the book-entry system in another country will pose further legal questions connected with the recognition of such security interests or repos elsewhere in the bankruptcy (in which connection the transnationalisation of these rights themselves may again be a facilitating factor) or their possible adjustment by the bankruptcy court to establish their status and rank under the lex concursus. (i) This highlights a particular problem in international cases of this sort, which has to do with a trebling of the level of uncertainty: (i) the characterisation of underlying book-entry entitlement may be legally uncertain in terms of the (proprietary) rights it confers; (ii) the types of security and similar interests that may be created in them and how this is done may as a consequence also be uncertain; while (iii) a third uncertainty results from the lack of transnational status of such interests themselves. (j) An important factor remains here the lex concursus and its competency in the case, which will have to do with the entity that is bankrupt, the location of the bankrupt and whether the bankruptcy is opened at that location or elsewhere, whether in the latter case the bankruptcy can be recognised at the location of the bankrupt, and what such a bankruptcy or recognition means in terms of security or other rights held by third parties/financiers in the entitlement of end-investors. It is submitted that the transnationalisation of investment security transactions is in full swing and is a natural sequel to the globalisation of the capital markets in which domestic transfer restrictions and impediments are increasingly felt to be excessive and outmoded. In this evolution, the dependence on local legal peculiarities becomes atavistic and practitioners will do everything to circumvent them. The market itself is likely to lead here, enforcing harmonisation on participants, and imposing freer, easier and cheaper transferability. Bankruptcy courts, even though still domestic, must here become increasingly accommodating of transnational practices and risk management facilities if their countries want to participate in the benefits of globalisation. It may
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be of interest in this connection to reconsider how international security transactions are now structured in which connection an example given above may usefully be repeated. It has become quite normal, for example, for a French end-investor who buys Dutch government bonds to have an entitlement against his French broker (say BNP), which has a back-up entitlement against a Dutch broker (say ABN/Amro), which in turn has an entitlement against a Dutch depository. It may also be that both BNP and ABN have a securities and bank account at Euroclear in Brussels, where the positions may be settled, while Euroclear in turn has an entitlement against the Dutch depository of government bonds (normally Negicef). If the French investor wanted German government bonds, a German broker (say, Deutsche Bank) would become involved. Settlement could still be at Euroclear in Brussels, which would maintain a corresponding entitlement in respect of these German government bonds against Clearstream in Frankfurt, which is the normal depository in Germany. The simplification and new possibilities that internationalised book-entry systems offer in this respect are likely to increase in importance as they provide not only a means of overcoming logistical problems, but also domestic transfer restrictions and other local peculiarities internationally. On the other hand, one may note that international instruments like Eurobonds are now often considered to be held through a series of what may be considered local entitlements governed by local laws. That seems indeed to be the tendency in much legal writing, even in respect of underlying securities that may themselves be considered internationalised. But as has already been said this is seriously regressive and it would be better if these entitlements were treated uniformly. It is the thesis of this book that globalisation offers a great opportunity to avoid conflicts of this nature and to do things better, free from inappropriate or even irrational domestic constraints, techniques and disabling or out-of-date legal structures. On the whole, that would be a healthy development, is likely to remove layers of unnecessary legal ballast, and would allow legitimate market practices favouring the (international) investment flows to flourish. Ultimately, the law follows here the commercial and financial needs and the justified requirements of the commercial and financial community, which is substantially internationalised.542 However, at the p resent stage in this development, domestic contacts can by no means be entirely eliminated or wished away, as in the following situations: (a) Book-entry systems may remain entirely domestic especially those that are connected with domestic exchanges and their settlement systems; yet, they may easily be connected with domestic book-entry systems in other countries, eg, for shares traded on the exchanges of those countries.
542 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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(b) This may also be relevant for international book-entry systems such as Euroclear and Clearstream. If the latter hold (directly or indirectly) a back-up entitlement through a domestic book-entry system in another country, this entitlement is likely also to have to conform to the domestic practices and laws in respect of them. If the domestic systems hold accounts with internationalised systems, they should on the other hand conform to international practices.543 (c) Where brokers lower in the chain operate with end-investors, it is likely that they also operate at the purely domestic level within a domestic legal framework. In such cases, even foreign clients seeking out a domestic broker could be deemed to have submitted to that local regime in terms of their entitlement against the broker, but this could all be different if the underlying instrument itself is internationalised (like Eurobonds). (d) It may not always matter a great deal, but the unity transnationalisation brings is in particular important in the proprietary aspect, that is to say in the assetmaintenance obligation affecting tiers in other countries, the protection against insolvent intermediaries who have back-up entitlements elsewhere, any remaining pass-through rights through tiers in other countries, the prohibition on the pledging of back-up entitlements and the issue of re-hypothecation, the way end-investors may themselves encumber their entitlements or transfer them conditionally, the matter of finality, the protection of bona fide purchasers, the danger of a shortfall in entitlements if there is insufficient back-up, and the effect of intervening bankruptcies on clearing and settlement.544
3.2.2 The 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.545 Often this is still believed to lead to greater stability and certainty. This approach is then preferred not only in respect of clearly domestic custodial and book-entry arrangements, but also in those that are internationalised and deal with international products. This is not the approach of this
543 On the other hand, in the case of domestic register securities it has already been noted that if the issuer actively promotes the international trading of its registered securities it may allow or institute a foreign register to operate and may have to accept the consequences in negotiability, transfer formalities and limited proprietary rights that can be created in them and eventually also pass-through rights, while losing the domestic restrictions and limitations in this connection. The shares may alternatively be held by an international depositary/custodian in an international book-entry system. 544 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. 545 See eg H Kronke, ‘Capital Markets and Conflict of Laws’ 286 Receuil des Cours (Hague Academy of International Law, 2000) and earlier Goode (n 512) 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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book, which seeks a higher-quality form of certainty and is more comfortable with transnationalisation serving the international flows as a consequence of globalisation. Nevertheless the more conventional approaches cannot yet be ignored. In this connection, at least five possible conflict rules present themselves: the lex situs of the underlying investment securities, the lex societatis of the issuer, a combination of both, the lex loci actus of the 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 under private international law. However, it is accepted that local law may remain relevant for domestic end-investors and, in the approach of this book, constitutes in any event still the residual rule within the modern lex mercatoria, which will be summarised in the next section. Here these five possible conflict approaches and their variants will be briefly discussed: (a) The lex situs makes the law of the location of underlying investment securities applicable to the proprietary rights established in them and to their transfer. It assumes that the investment securities exist separately from the issuer, for example as bearer instruments, attracting their own lex situs. Traditionally, this approach has indeed recommended itself in respect of negotiable instruments like bearer securities that are treated as chattels, but it still presents problems if they move cross-border so that the legal regime concerning them changes.546 The result is also less than clear where depositories hold the assets physically through sub-depositories in other countries as in the case of Euroclear and Clearstream where there is usually still a split as the underlying securities (if physically existing) are mostly held by sub-custodians in the country of the issuer (in the case of shares) or currency (in the case of bonds). (b) For investment securities, the lex situs is often also considered the natural rule for immobilised securities and would then operate foremost in the place of their immobilisation, so normally at the place of the depositories, although in respect of underlying register shares that may still be contested. More importantly, this lex situs could conceivably be extended to the book entries in respect of them but the disparity this may create in the law applicable to each underlying pool of securities may make such a system based on the lex situs of the underlying securities unworkable.547
546 Indeed, the lex situs has long been the preferred conflicts rule for chattels. It was copied from the law of immovable property where it is on the whole clearly appropriate (see s 1.8 above) although it was said before that since there is nothing physical about legal rights and obligations, a physical approach to the applicable law may in its generality be based on a misunderstanding. In any event, for chattels the complication of their movement presents a problem as it would suggest at the same time a change in applicable law (the problems connected with application of the law of the place of origin and place of destination (or both) were discussed in s 1.8 above). They also arise when negotiable instruments are traded internationally; see for the law applicable to negotiable instruments s 2.2.10 above. For assets that constantly move cross-border, the lex situs rule is clearly unsuitable. That may also apply, eg, to bills of lading and Eurobonds. An alternative is then application of the law of the place of the owner, who, however, changes in the case of a transfer, leaving again the question what law applies to such a transfer if buyer and seller are in different countries. 547 See for this objection also Goode (n 526) 134, and J Benjamin, ‘Immobilised Securities: Where are They?’ [1996] Journal of International Banking and Financial Law 85.
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(c) For book entries proper as intangible entitlements, the lex situs to be separated from the underlying securities would appear to hold hardly any message at all. It would only be of use if the situs for this purpose could be defined down the various tiers, as otherwise there would likely result disparity per tier if they are in different countries. So the lex situs idea would only work well if all tiers were in the same location as the depositories while the underlying securities were also in that location. In fact, this is no more than saying that there is hardly an international aspect at all, even if the end-investor was elsewhere. (d) The lex societatis or the law of the issuer is another possibility but in fact not much more than a variation on the lex situs, feasible more particularly for securities registered in the books of an issuer (who could also be a government or governmental agency in the case of government bonds when this law corresponds with the law of the country or issuing agency). The result is unity in the applicable law at the level of an international or foreign book-entry system as the rules concerning the entitlements would depend on the location of the issuer of the underlying securities or perhaps on the place of the register itself (although there could be several in different countries). But in respect of each intermediary, there would result a different applicable law per entitlement depending on the underlying securities. (e) The lex situs and lex societatis approaches could combine and result in a clear preference for the law of the place of the depository in immobilised securities systems, a reinforcement therefore of the situation described under (b) above. This approach is sometimes also referred to as the paper-based approach even though there may no longer be any paper around. It may still not provide a single solution as there may be several depositories in different countries. More importantly, the location or place of the depositories may be in doubt and could be considered that of their incorporation, registered office, or place of operation or main activities, or place where they hold the physical securities (through sub-custodians) or register. (f) To protect book-entry systems more properly, the applicability of the law of each intermediary, sometimes also referred to as the lex loci actus or the 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 also considered a variation of the paper-based method (which is itself a lex situs variant), moving from depository to intermediary, therefore to a level lower among the various tiers. However, no unity results in the applicable law, which may thus still vary per tier. It is the system now often preferred and also called PRIMA (Place of the Relevant Intermediary Approach). (g) The law chosen by the participants is a last possibility. On its face, it has little to recommend itself. In proprietary matters, full party autonomy is mostly not believed to be acceptable. There are, however, modern instances of it as we have seen. In international assignments, some indeed accept the application of the law of the claim in its proprietary aspects. That law could be determined by
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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: see section 3.1.6 above. Without it, party autonomy in proprietary matters should not be introduced through the back door of conflicts law. All the same, section 8-110(e) UCC suggests party autonomy for the proprietary law applicable to investment security entitlements548 even though it has been questioned.549 As we shall see, it is also the approach favoured (with limitations) in Article 4 of the 2002 Hague Convention on the Law Applicable to Certain Rights in Respect of Securities Held with an Intermediary. This approach is less surprising in legal systems such as those of the States of the US that are not used to a sharp distinction between the proprietary and contractual aspects, at least not in intangibles, in an environment, moreover, where between the various States the conflicts are also not likely to be severe. More importantly, the resulting proprietary rights are equitable, that means that their operation is in any event subject to the requirement of the promotion of ordinary flows of business, which will protect the purchasers in the ordinary course of business against excess. Party autonomy is also more understandable if set against industry practices, which are largely determined by its members and often reflected through the general conditions of their systems. Although contractual in origin, these general conditions may thus soon acquire the status of industry practice, while the line between contract and custom cannot always be sharply drawn. It is submitted that the emphasis should always be on industry practice as objective law, for international transactions duly transnationalised, even if started by contractual arrangements among members. These practices can of course be entirely domestic, but for international agencies like Euroclear and Clearstream they are 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 shows that there may be no great fundamental inconvenience in practice against party autonomy in this area and may avoid extra effort and cost. It would also allow non-members of Euroclear and Clearstream to opt for the law concerning these systems including their international practices. In this manner an underdeveloped local law could be avoided while doing business with a broker operating from a country with poor legal support. In short, on practical grounds much may be said for party autonomy in these matters. The serious drawback for the intermediary is, however, that each client may opt for a different legal regime.
548 The normal rule is, however, the law of the securities intermediary (and his book-entry system): see s 8-110(b) and (e)(2) UCC. 549 See R Goode, ‘Securities Entitlements as Collateral and the Conflict of Laws’ Oxford Law Colloquium 1998, 16.
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PRIMA was adopted instead for security interests in investment securities legally recorded on a register, account or centralised system located in a Member State of the EU in Article 9(2) of its Settlement Finality Directive, which became effective in December 1999 and was meant to underpin the collateralised liquidity operations of the new European Central Bank (even if the precise language left something to be desired).550 The approach was earlier accepted for Euroclear and Clearstream by the laws of Belgium and Luxembourg.551 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 section 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 (Article 9): see in particular section 3.2.4 below.552 Even at the practical level, PRIMA leaves some important open questions, however, especially about the creation or enforcement of collateralised rights such as security and similar interests and also whether the rule could apply to internationalised bookentry systems operating within the EU, which appears to be accepted. It may still be a 550 European Parliament and Council Directive 98/26 of 19 May 1998. The concern for proper settlement s ystems was inspired by Art 18 of the Statute of the European System of Central Banks (ESCB) and of the European Central Bank (ECB), according to which the ESCB lending operations (as instrument of monetary policy) must be based on adequate collateral. Within that framework, adequate settlement procedures became a concern and as a consequence also the applicable law: see also s 3.1.3 above. The title (‘Finality’) derives from the need to achieve a prompt system of settlement that cannot be unwound or reversed. In that connection, the effects of a bankruptcy on a settlement system and its participants are also curtailed and any retroactivity of the adjudication abandoned: see Arts 6, 7, 8 and 9(1). See for the English case law on this subject, Macmillan Inc v Bishopsgate Investment Trust Plc (No 3) [1995] 3 All ER 747. The lower court rightly pointed out that the place of the transfer and the lex situs would almost always be the same but there may be a discrepancy if security interests are created in register shares while trading and held in other countries. Is there a pass-through right under the foreign law or the lex societatis? What is the proper lex situs? In this case the confusion was increased because certificates were involved even though in the UK not negotiable instruments themselves. The lower court chose the law of the place where the transfer entry was to be made. The Court of Appeal referred in this context to the lex situs: [1996] 1 All ER 585. The result was the same. A better approach would have been to rely on a transnationalised concept of the good faith acquisition for value of transferable property but see also see W Blair, ‘Book Review’ (2002) 118 LQR 482 noting that ‘the financial players themselves continue to hanker after the certainty of reference to a particular legal system’. It is probably more the nationalistic upbringing of the advising lawyers than the parties themselves, but it indeed underlies the entire PRIMA approach, which is as such defensive and temporary in its (complete) reliance on domestic laws no matter how atavistic or parochial. 551 See for Euroclear Royal Decree No 62, Art 10, as amended in 1995; see for Clearstream (Cedel) the Grand-Ducal Decree of 7 June 1996. 552 There are problems in the formulation of the rule, however. Article 9(2) of the 1999 EU Settlement F inality Directive (which is limited to situations in which one of the parties is a financial institution) applies the law of the place of the register (considered the place of the administration of the account, which may leave some doubts on the location) to the type of security (collateral) interests that can be created in the entitlements (leaving some further doubts on whether this concerns the creation or only the execution of such a right) without providing a conflicts rule for characterising the legal nature of the entitlement itself. Indirectly it must be assumed that the characterisation of the underlying interests is a matter for the same law (although further confusion arises from Recital 21, appearing to suggest the operation of the lex situs of the underlying investment securities, which is a difficult, even undesirable, concept in this connection). Article 9 of the 2002 EU Collateral Directive refers here to the country in which the relevant account is maintained and is more elaborate in identifying a number of specific issues as being covered by the law so made applicable, notably whether the entitlement holder’s right is overridden or subordinated to security interests or conditional sales, the legal nature of any such rights, their creation and effect, the position of bona fide purchasers in this connection, and the execution of such interests. A problem remains also the complication of the clearing in which there is only a net amount delivered to the receiving intermediary subject to unscrambling. One must assume it to be done under the law of the receiving intermediary.
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workable solution, but is difficult to operate at the level of security interests in foreign investment securities and in any pass-through rights flowing from them. Pass-through rights would naturally have to concern themselves with the laws applicable to the securities or entitlements so reached while travelling through several tiers in different countries. It should also be noted that the applicable law found in this manner is based on a formalised notion of location that has nothing to do with the place of the transaction and the practices concerning them, much against the essence of all modern conflict rules. The result is therefore artificial and makes the financial transactions also dependent on whatever atavistic or underdeveloped law so found unless (again) in international transactions international custom and practices may be considered to prevail or precede the application of domestic laws. It should further be repeated that for intermediaries, including international custodians like Euroclear and 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 would appear incongruous. It has already been argued that for the euromarket and its instruments, transnational law has prevailed for a long time. In truth it applies its practices also to the Euroclear and Clearstream book-entry systems if only at that level. In a proper lex mercatoria approach, these practices precede an application of domestic laws (and the application of conflict rules). In fact, when adverse case law appeared in Belgium in 1996,553 it was quite rightly ignored. With that important correction, which suggests priority for international dynamics and harmonisation, and notwithstanding the difficulties mentioned above, PRIMA could work or at least present the residual rule. If not so corrected, PRIMA may only provide a low-quality certainty that could easily go against the dynamic development of the international financial markets. It is exactly this dynamism and this willingness to shape their own rules that has always been the essence of these markets and of their prosperity. This should be remembered also when considering that after the initial euphoria, the enthusiasm for the 2002 Hague Convention based on purely domestic law in the PRIMA approach soon petered out and so far it has received only two ratifications (Switzerland and Mauritius). The conclusion must be that a formal conflict rule that cannot accept transnationalisation (therefore the international practice to prevail) could not successfully operate without a substantial unification of the laws at national levels. In the EU, a limited attempt at harmonised law has been made in the Financial Collateral Directive discussed in section 3.2.4 below. It reduces the need for any conflict rule, at least within the EU, although the PRIMA rule remains residually applicable (Article 9). Full coverage is the objective of the UNIDROIT 2009 Geneva Convention as we shall see below in section 3.2.4, but it is too contrived to convince and equally short of ratifications so far. The consequence of the PRIMA conflicts approach is now that, since the location of brokers becomes determining for most (client) entitlements, the applicable law
553
See n 532 above.
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can be changed simply by moving to another broker in another country—as already mentioned. Even for members of Euroclear and Clearstream, Belgian or Luxembourg law can be avoided by using another broker, for example in a tax haven country or in a country of which the applicable law is deemed more favourable. That is also significant in respect of security interests that may subsequently be created in the entitlements or any repo transactions or conditional or temporary sales. One might recall, however, that PRIMA is now only the residual rule (Article 5) in the 2002 Hague Convention, where party autonomy is preferred in the choice of the applicable law (Article 4(1)). This is an important variation and addition to the approaches of Article 9(2) of the EU Settlement Finality Directive and Article 9 of the EU Collateral Directive. As already noted, it is also the UCC approach (section 8-110(e)). Unlike in the UCC there are, however, a number of limitations on party autonomy in the Hague Convention. Foremost, the relevant intermediary must (at the time of the custody agreement) have an office handling the securities accounts in the country of which the law is chosen. In view of the US experience, it is unclear why there is this limitation. It reflects reality in so far as an intermediary may have offices in different countries and may change its activity to any of them electronically. But once the law has been determined in the custody agreement, the change of the custody function to an office in another country should not affect the applicable law. Some other curiosity has been spotted in the approach of the Hague Convention in so far as the resulting applicable law is concerned. It is likely to be different for a seller and a buyer who may have different custodians. The crediting and debiting may therefore be under different laws. It follows that different intermediary accounts involved in a transfer of entitlements may operate to different legal regimes in respect of the same transaction. Thus the seller may have an intermediary with whom the account is held in one country and the buyer in another while their intermediaries both have an account with a custodian/depository in a third country, for example Euroclear.554 It should be noted, however, that in an investment security entitlement system, seller and buyer are not directly connected while there is original entitlement creation and destruction by each broker as explained above so that the differences in the applicable law may be more readily acceptable. In this connection, the Hague Convention is specific, referring in Article 2(1) first to the crediting of a securities account. That is ultimately the most important booking, as it establishes the new entitlement holder and his proprietary position vis-àvis 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
554 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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r equirements for p erfection of other rights in the entitlements, to the question of priority of such c ollateral 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 the law so deemed applicable to the entitlement, it would appear that the exercise of voting rights and the collection of dividends is always according to the law of the book-entry system. It is notably not affected by a contractual choice of law whomsoever the ultimate investor may be and whatever its agreement with its intermediary may say in terms of choice of law.555
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 now effectuated. In fact, in securities dealings increasingly both must be considered immediately connected as most end-investors will have securities and cash accounts at the same intermediary, such that a debit in the one will result in a credit in the other and vice versa. In any event, securities accounts are now handled in much the same way as bank accounts and both may be made subject to similar collateral arrangements, although the important structural differences between the two were emphasised above: see sections 3.1.3 and 3.1.6. One key is that in both, the type of right and its transfer are no longer primarily seen from the perspective of ownership rights in the traditional 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
555 Under the applicable rules for each tier, different claimants may arise, but it would appear unavoidable in so far as the voting or dividend collection is concerned in each tier. Only an internationalised system could prevent this from happening and it must be doubted whether a contractual choice of law could be decisive here. Also a (uniform) internationalised approach would be necessary to determine absolutely the status of book-entry entitlements in a bankruptcy wherever opened so that entitlement holders may always move their accounts to another intermediary resulting in an automatic corresponding reduction of the entitlement of the bankrupt intermediary against higher intermediaries wherever operating. An internationalised system is also necessary to determine the position of collateral holders where again a contractual choice of law per layer in favour of a foreign collateral law and its rules of perfection or control may not prove effective, at least not when it comes to collection of dividends and the exercising of voting rights in such situations.
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approach in this area and made it moot and therefore uncertain or even inappropriate (quite apart from other problems that afflict modern conflict of laws approaches, either in terms of hard-and-fast rules pointing to underdeveloped domestic laws or in terms of interest analyses). Instead, there are entries or accounts that are intangible and administratively adjusted. In banking, bank accounts never denoted more than a personal right against the bank. For securities, this remains different and modern securities accounts denote a pro rata beneficial share in a pool of fungible assets which has a sui generis proprietary character (as was discussed above, needs therefore to be further defined, centres on the notion of segregation, and does not necessarily flow from the general notions of traditional p roperty law), while both bank and security accounts transfers are mainly operated through sets of (electronic) instructions, but only in the case of banks through a system of credit transfers down the chain. In this connection, both payments of this nature (at least in the securities business) and security transfers of this type were viewed largely as professional activities, which is likely to have consequences in terms of a stricter regime of finality of transfer instructions,556 but also in the type of collateral, therefore in the type of security interest that can be created in them,557 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 r elevant 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 p roprietary or contractual characterisations.558 Nevertheless, legal characterisations are important but often remain uncertain, in which connection it was submitted above that in international transactions traditional conflict of laws theories and approaches may be a further disturbing element.
556 A severe attitude to finality may well conflict with consumer interests. It is one of the reasons why consumer payments were excluded from Art 4 AUCC in the US. They may not issue letters of credit under Art 5 (s 5-102(a)(9)) either and the revised Art 9 also focused increasingly on professional dealings whilst prohibiting consumers from granting security interests in their bank accounts (s 9-109(d)(13) (new)). 557 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. 558 A new form of formalism may arise here as was signalled for commercial law and the law of contract, see ch 1, s 1.1.5 above. Good faith notions, individual protections, anthropomorphic thinking in terms of transfers as legal acts of persons subject to capacity and disposition rights must now all be seen in a commercial professional context and may as such be curtailed or ignored. Notions of abstraction or independence of each tier or layer replace here the equally formalistic proprietary notion of the holder in due course or the protection of bona fide possessor of earlier law. In the new system, 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 their chains or tiers and ways of operation. The (unavoidable) inherent weakness is in fact the dependency of the clients on the intermediaries operating the system: on their honesty, management skills, and adequate structure. In this world professionalism is all. Regulatory supervision will help, but cannot prevent individual lapses.
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odern commercial law must accept the new world and adjust and the lex mercatoria M and its modern revival 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 relationships with their clients have filled the gap. In respect of investments, this is not agency either, although until such time that the new developments are completed and fully understood and refined, there may be a residual need for agency notions when brokers still act for clients in the market rather than credit and debit securities accounts at prevailing market prices (subject to their asset-maintenance obligation) or when clearing agents still operate systems for others rather than acting as central counterparties or CCPs. As far as the applicable rules in international securities transactions are concerned, the discussion in the previous sections brings us back to the internationalisation of the modern investment securities business and to the transnationalisation of the applicable law. The key is the globalisation of the marketplace. Again the application of the lex mercatoria, in this book perceived as a hierarchy of norms, quite naturally presents itself. Fundamental principle dictates the binding force of agreements concerning investment securities holdings and transfers at that level and also operates an ownership concept, very clearly where the investment securities are negotiable instruments, like Eurobonds, but in more modern times also where securities entitlements are created as pro rata beneficial shares in fungible pools of back-up entitlements, held in and transferred by way of a credit or debit through international book-entry systems such as those of Euroclear and Clearstream. The way these entitlements are held, traded, s ettled and paid for, the type of proprietary interests that can be created and maintained in them, including pledges and repo interests, the pass-through rights in the underlying securities, if any, and the manner in which they can be exercised, will then all be determined in the first instance by the proprietary regime and transfer practices operating in the international marketplace itself. International mandatory usages or practices, especially relevant in proprietary aspects and their newer forms and in the aspect of finality of transfers and transfer instructions, follow in the hierarchy of norms. Mandatory uniform treaty law is here largely absent although as we shall see in the next section there is now the UNIDROIT Geneva Convention of 2009, not yet in force. The EU Settlement Finality and Financial Collateral Directives are here so far more relevant—see for the latter also the next section—although they do not deal specifically with book-entry systems and their operation. 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 where the relevant intermediary
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maintains the book-entry system (PRIMA) or be determined by party autonomy (as under the 2002 Hague Convention and Article 8 UCC, where PRIMA is only the residual rule). Even then it will not automatically apply if the domestic rule is clearly contradictory, dysfunctional, inadequate or antiquated. If, on the other hand, domestic contacts clearly arise, as they may in the exercise of any remaining pass-through rights in respect of issuers or purely domestic custody and settlement organisations or in respect of domestic end-investors, it still seems appropriate to consider the applicable domestic laws in greater detail and more directly. What this comes down to in respect of the Hague Convention is that the domestic law or party autonomy principle under it will be preceded by mandatory customary rules and mandatory harmonised treaty or (in the EU) EU Directives law where they operate, or even general principle if suggesting an international normativity in the area of property law. In other words the Hague Convention, even if it should become widely ratified, is not absolutely dominant in the area but must find its place within the ranking of norms in the modern lex mercatoria. Ultimately, much depends in these matters on the behaviour and insight of (bankruptcy) judges or arbitrators, while in the day-to-day running of clearing, settlement, custody and book-entry systems much depends on the integrity and professionalism of the operators. Few legal problems have arisen so far. It is unlikely that many will. Considerable protection derives from the fact that all participants are professionals and few go bankrupt as shown even during the financial crisis of 2008–09.559 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 costefficient manner. Ultimately, it is submitted, this will also affect the applicable law in purely local securities dealings and make it conform. It may at the same time explain why, after an initial flurry of enthusiasm, interest in the 2002 Hague Convention has substantially waned. Even the 2009 UNIDROIT Geneva Convention, which introduces uniform law, has so far been substantially ignored.
3.2.4 Uniform Law: The EU Financial Collateral Directive. The UNIDROIT Project and 2009 Geneva Convention In the meantime, under pressure from the financial services industry, especially the International Swap Dealers Association (ISDA),560 and with the Settlements Finality Directive as an example (which was particularly concerned with the collateralisation of liquidity supply to the banking system by the ECB and harmonised the (bankruptcy) laws in EU countries in a number of so-called finality aspects—see also section 3.1.5 above), the EU agreed a Financial Collateral Directive in 2001, implemented by 2004
559 See, however, also the discussion in Vol 1, ch 2, s 2.4.3, also for the different role of judges and international arbitrators in this regard. 560 See ISDA EU Collateral Report (2000).
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(although in the event, only three Member States met the deadline). This Directive is concerned with the provision of investment securities and cash as collateral or in finance sales (including repurchase agreement and stock lending) as well as in derivatives, see recitals (3), (5), (7) and (8), and is a significant development, which, even though limited to financial transactions, aims to introduce at EU level a modern law in this area, a project which, in terms of collateral or security and similar protections has so far eluded EU countries for personal property more generally, the DCFR here being hardly an adequate response either, see section 1.12 above. Investment securities are broadly defined, including all tradable investment instruments, therefore also book entries in security accounts and derivatives. Cash must be understood as money credited to an account, therefore normally bank balances, provided they are connected to financial transactions (collateral or finance sales) and close-out netting (trade receivables thus being excluded unless tradable investment assets, which they may be when incorporated in negotiable instruments). Here, margin money springs particularly to mind. Although it is a private law measure meant to support the wholesale financial markets (being for professionals or rather ‘non-natural persons’), the Collateral D irective is surprising in its comprehensiveness in the limited area it covers, given also the EU’s limited powers in these matters. It was based on Article 95 of the EC Treaty, now Article 114 TFEU, seeking to further the internal market through an approximation of laws and the result of an industry initiative that asked the EU for help. It was earlier submitted that this is the way to go about uniform private law, which in the professional sphere should always be led by participants unless public policy and public order require otherwise. The professed aims of the Directive were the removal of major obstacles to the cross-border use of collateral in financial transactions, the limitation of administrative burdens, formal acts and cumbersome procedures, and the creation of a simple and clear legal framework. In fact, it applies to transactions between financial intermediaries (public sector bodies, central banks, international financial institutions, supervised financial institutions, central counterparties, settlement agents and clearing houses). Corporates may also be included provided their counterparties are one of those just mentioned. It may be seen that it is not particularly geared to book-entry systems and their support but has a broader scope. The most important features of the Directive are as follows: (a) There are simplified uniform rules for the creation, perfection and enforcement of collateral, more particularly security interests and rights under finance sales, which (as just mentioned) are here limited to cash and investment securities (as described above) given to support financial obligations. They must be expressed through bank accounts for moneys and in book-entry entitlements for securities. (b) There is a sharp distinction between pledge and title transfer (or finance sales) leading to the enforcement through a sale in the former 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 (Article 2(2)) and constructive dispossession is necessary in all cases, but it would appear that a floating charge
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(d)
(e)
(f)
(g)
may be created in which securities and cash are both captured within the same collateral agreement.561 All formalities are dispensed with in terms of registration or publication of collateral or in terms of an execution sale/appropriation. Only a document is required to record the collateral transaction. For the interest to attach, the simple marking of the (possessory) pledge or title transfer in the books of the intermediary indicating the pledgor’s or seller’s interest is sufficient. 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. In the case of a title transfer, there is a recognition of close-out netting arrangements (Article 7), particularly relevant for repos under the repo master agreements. Domestic bankruptcy rules are here suspended; this also applies to the top-up requirements in respect of collateral, which are not considered preferential as long as they were not agreed in the face of an impending insolvency (Article 8(2)).
As mentioned, the Directive is mainly concerned with the narrower issues of collateral, and notably omits any consideration of protection of bona fide purchasers and does not go into the nature of the underlying assets either (provided they are money or investment securities held in book-entry systems). Therefore the legal nature of the underlying securities and especially of securities entitlements is not considered and as a consequence nor are the important segregation and pooling issues and any underlying (constructive and resulting trust concepts). Here conflict of laws notions may remain paramount in which connection the Directive follows in its Article 9 the Settlements Finality Directive and opts for PRIMA, therefore for the law of the most immediately concerned intermediary with whom the account is held. The problems with this approach were highlighted in section 3.2.2 above, and the absence of any sensitivity 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. 561 Some confusion in the use of the term ‘floating charge’ may easily be created. In English law, the charge becomes fixed depending on the measure of possession or control of the chargee, see Vol 3, 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 need not necessarily always be non-possessory. Thus under the Directive a (possessory) charge may shift from securities once sold at the instruction of the chargor into (future) replacement securities or proceeds with retention of the original rank. The fact that important notions are here put only in the Preamble complicates the determination of the applicable regime. An express provision covering floating charges was suggested at the time in England. It would have avoided delineation questions, taken the matter out of the established English terminology and doctrine altogether (especially the crystallisation and connected ranking problem), and would also have clarified any remaining registration needs under s 396 Companies Act 1985 in the UK, if there had been some form of floating charge in the more traditional sense.
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Ranking is also specifically left to the law found to be so applicable. It would of course still be subject to the applicable execution or bankruptcy rules. On the other hand, close-out netting agreements are fully recognised in line with the approach of the Settlement Finality Directive. Three narrower problems nevertheless arose. First, the Directive is limited to professional dealings of considerable size. The financial services industry had asked for all financial dealings in the EU to be included but it was considered that private investors do not have the same facilities as to membership of clearing and settlement institutions and therefore have fewer options to choose a more convenient law by going to another broker. For them, there are also problems of disclosure in connection with suitability rules. Second, the industry asked for the right to top up security through collecting margin in respect not only of market risk but also of credit risk, regardless of any bankruptcy avoidance provisions on the basis of preferential transfers. This was accepted. The third issue was the possibility of re-hypothecation of any collateral collected under a pledge arrangement—see also Volume 3, chapter 1, section 4.1.3—which possibility was in the end also accepted if the original collateral agreement allowed it, but the two agreements in respect of which collateral is given in this manner must be coterminous so that both charges come to an end at the same time.562 If earlier different assets were returned under the sub-charge, the original charge would retain its original rank in any replacement assets, even if absolutely future at the time of the original agreement. Here we see some other features of a floating charge. The Directive called for a review by the end of 2006, and there were minor amendments. In 2005, France and Luxembourg were faulted by the Commission for not having incorporated the Directive in a timely manner. In other countries, it created upheaval, and in Germany and the Netherlands it proved difficult to incorporate the ideas and notions of the Directive into the existing system of proprietary rights, eventually leading to special sections in their Codes. Civil law is particularly unused to the notion of finance sales and shifting interests, as noted in section 1.7 above. In that sense, the Collateral Directive is a truly new departure in civil law countries in terms of the reform of the system of proprietary rights, the importance of which should not be underestimated. In the meantime UNIDROIT started work on a Convention on securities held with an intermediary, aiming therefore at some uniform law in this area, a first draft being published in 2005. It ultimately resulted in the Geneva Convention of 2009 on Intermediated Securities, not so far having received sufficient ratifications for its effectiveness. The aim is domestic reform that supplements the Hague Convention and the objective is a more comprehensive regime than the Collateral Directive provided
562 There were some specific legal problems. In civil law, re-hypothecation is not favoured, and the original pledgor can reclaim his pledge as a matter of ownership right once he has paid off his debt. There is no protection of a sub-pledgee on the basis of his bona fides if it concerns an interest in an entitlement (it would be different for bearer securities). In common law, the pledgee is a bailee who has sufficient power to give a further pledge over the property he has acquired as pledgee. The original owner cannot reclaim his interest until the re-hypothecation is unwound. The problem does not arise where there is a finance (or conditional) sale when there is a sufficient ownership right to pledge the asset. This being the case, it was not illogical to allow it also in the case of a pledge of entitlements.
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for the EU. One major issue is indeed the attitude towards security entitlements being held as security or being used in finance sales, especially repos. The Convention only applies when the law of a Member State is applicable to the transaction (Article 2). This is in the classical conflict of laws tradition not now always followed in uniform treaty law (see eg the CISG). In the implementation, interpretation and application, regard is to be had to the purposes of the Convention, the general principles on which it is based, its international character and the need to promote uniformity and predictability in the application. This is a faint recast of Article 7 CISG, with elimination, however, of all domestic law (Article 4). In respect of security entitlements, it talks about income, distribution and voting rights, not the right to information (Article 9(1)(a)). These rights work against third parties (Art 9(2)(a)) and are thus considered proprietary, the meaning thereof being explained in Articles 11–12. The duties of the intermediary are contained in Article 11, in particular the assetmaintenance obligation of Article 24 (any shortfall being pro rata distributed under Article 26) and the obligation not to dispose of the securities without authorisation. The mere crediting or debiting of the securities account denotes acquisition or relinquishment of the securities (Article 11). Article 12 deals with other types of transfers: secured transactions or other limited interest, such as, presumably, usufructs or those resulting in repos or from conditional and temporary sales. The conditions or formalities are set out in Article 12(3). The effect in insolvency is covered in Article 14, which provides that all the proprietary rights in intermediated securities are effective against a bankruptcy trustee. Finally, Article 18 protects the bona fide acquirer even though in truth there is no real predecessor and the entitlement is always created anew.
3.2.5 EU Activities in the Field of Clearing and Settlement. The Blockchain Potential The perception at EU level has for some time been that in matters of clearing and settlement (see also section 3.1.4 above) the situation in the EU is not what it should be. Part of the problem may be that this area of financial activity has remained largely unregulated. On the other hand, it is true that no major problems relating to investors’ protection have surfaced in this area. There may be inefficiencies, a lack of competition, and high cost. Indeed, it 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 trans-border settlement. How to better interconnect a structure which remains largely fragmented along national (or stock exchange) lines then becomes the true issue. Euroclear and Clearstream on the other hand have long experience in cross-border dealings. Even so, that may not eliminate an extra layer of cost and exploitation of international inefficiencies and lack of transparency. What may be wrong with cross-border clearing and settlement in the more technical sense has been the subject of some important studies in Europe and elsewhere. Thus as early as November 2001 the International Organization of Securities
PART III Investment Securities 759
ommissions (IOSCO) presented its Recommendations for Security Settlement Systems. C In January 2003, the Group of Thirty (G30) published its Plan of Action for Global Clearing and Settlement, which was closely aligned to the IOSCO findings. In the meantime the European Commission was relying on the knowledge and experience of the Giovannini Group, which had functioned as an advisory committee to the Commission since 1996. In this capacity it produced three reports: the first focused on the impact of the introduction of the euro on capital markets and especially on the redenomination of public debt (1997); the second on the EU repo markets, their differences in infrastructure, practices and tax treatment (1999); and the third on the euro-denominated government bond markets and their efficiency (2000). It was subsequently asked to prepare a report on an efficient clearing and settlement system in the EU and released a First Report in November 2001 on Cross-Border Clearing and Settlement Arrangements in the EU. In the event, the Group did not propose an altogether new system or approach but concerned itself foremost with greater efficiency and certainty in the existing fragmented system. In this connection highly technical issues arose first and policy issues only later. The Group identified 15 barriers and recognised the practical but also legal problems deriving from insufficient transnationalisation (page 54) in which connection a difference between shares and bonds was (rightly) identified, the latter being much more capable of transnationalisation: see 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 such as regulators, central banks or legislators or private bodies such as the European Central Securities Depositories Association (ECSDA), SWIFT and the IPMA (now ICMA) and proposed co-ordinators where several were involved. Subsequently the EU issued a First Commission Communication on Clearing and Settlement in the EU (May 2002), followed by a Second Giovannini Report in 2003 and a Second Commission Communication in April 2004. Ultimately the ECB and the Committee of European Securities Regulators published their Standards for Securities Clearing and Settlement in the European Union in September 2004. It produced 19 standards to increase the safety, soundness and efficiency of securities clearing and settlement systems in the EU. In connection with clearing and settlement, the most important issues were identified as follows: (a) the effective operation of national book-entry entitlement systems in respect of immobilised and dematerialised securities; (b) the problems connected with the access to and interconnection of these systems and the technicalities of international clearing and settlement; (c) pricing of the various services and anti-competitive practices; (d) legal risk, in particular the protection of investors against claims of creditors of the intermediaries/custodians in their bankruptcy, and the international dimensions of such protections; (e) the issue of finality of instructions and settlement; (f) the recognition of bilateral netting; (g) simplification of the collateral regime; (h) the impact of legal fragmentation and its effect on cross-border dealings;
760 VOLUME 2: CONTRACT AND MOVABLE PROPERTY LAW
(i) the impact of different regulatory regimes; and (j) the impact of different tax treatment. The original inclination of the European Commission was to leave the technical aspects to the market and evolving market practices subject to competition review. It follows that the accent shifted to the legal issues and to the impact of legal fragmentation, but the EU also saw a need for a framework Directive in this field to guarantee access and choice and provide a proper regulatory framework. To leave action solely to national legislators and regulators was from early on thought to lead to inadequate progress. A functional rather than institutional approach would concentrate on risk and its proper management. To remove the barriers identified earlier in the Giovannini reports, a Clearing and Settlement Advisory and Monitoring Expert Group (CESAME) was established by the EU in July 2004. It was chaired by the Commission with the G iovannini Group acting as policy adviser. 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 was also chaired by the Commission. In its proposals, the Group was faced with the potential impact of its recommendations on the system of property, company and insolvency law in each Member State. Its success thus depended largely on a proper understanding and recognition of the transnationalising forces that operate in this area to the benefit of all. In the meantime in 2006, the EU Commission threatened action through Directives if the industry itself could not come up with a more efficient system. This entire area of clearing and settlement subsequently became caught up in the financial crisis of 2008–09 and the need to restructure financial regulation more generally. This will be dealt with more extensively in Volume 3, chapter 2, section 3.7.6 in connection with the European Market Infrastructure Regulation (EMIR). The blockchain potential will be dealt with in Volume 3, chapter 1, section 4.1.8.
Index Introductory Note References such as ‘178–79’ indicate (not necessarily continuous) discussion of a topic across a range of pages. Wherever possible in the case of topics with many references, these have either been divided into sub-topics or only the most significant discussions of the topic are listed. Because the entire work is about ‘transnational law’ and ‘commercial law’, the use of these terms (and certain others which occur constantly throughout the book) as entry points has been minimised. Information will be found under the corresponding detailed topics. abandonment 20, 91, 580, 635, 642 absolute impossibility 132–34 absolute rights 392–94, 404, 407, 411 Absonderungsrecht 555, 557 abstract and causal system 447–59 abstract system 443, 448–50, 452–54, 458–60, 462–63, 466–67, 510, 655 abstraction 299, 459, 504–7, 509, 513, 515, 686–87, 707–8 and independence 20, 27, 630, 666, 669, 722 abuse of rights 2, 77, 85–87, 113, 250, 254 acceptance 46–49, 51–54, 56–57, 109–14, 186–89, 247–48, 681–88, 693–95 language 21, 34, 47, 52, 57–58, 183, 196–97 accounts, security 343, 624, 716, 721–22, 755 Accursius 454 acquired rights 581, 676 acquirers 153, 234, 323, 330, 455, 464–67, 643 Acquis Group 163–64, 183 acquisition 305–6, 388–89, 446–47, 464, 466, 626–27, 729, 731 bona fide 311, 386, 388–89, 393, 429, 464–66, 665, 669 acquisitive prescription 382–83, 385–89, 393, 407–8, 429–30, 462, 464–66, 642 actio Publiciana 383, 385, 389 actio quanti minoris 230–32, 260 actio utilis 478–79, 565 Action Plan EU Financial Services 163 actiones redhibitoria 230–32 activities, professional 634, 752
actual knowledge 333, 365, 436, 508, 632 actual possession 235, 407–8, 431, 467–68, 471 adaptation 131, 133–34, 136, 138, 141–42, 261, 587, 694–95 adhesion contracts 23, 43 adimpleti contractus 238, 260, 441, 470–72, 487 adjudicatory jurisdiction 212 administrative law 1 adverse interests 71, 335, 421, 570, 618, 624, 647 aequitas 75 agency 6–7, 15, 243, 273–74, 291–317, 459–61, 535–37, 729–30 agreements 2, 292, 297, 316, 459, 535 Commercial Agents Directive 315–17 consensual 300, 313 consequences 300–2 contracts 7, 306, 316 contractual 15, 293, 295, 297, 299, 301, 303, 305 direct 296–97, 307 disclosed 293, 301, 307–8, 310–11, 316, 535, 685 economic importance 309–10 general notion 291–310 indirect 292–93, 295–96, 301–2, 304–9, 313–15, 523–24, 526, 720–21 international aspects 310–17 open 305, 309–10 and private international law 310–12 and treaty law 312–15 undisclosed 292–93, 295–97, 299–300, 302–5, 307–9, 314–15, 526, 531
762 INDEX
agents 157, 159–60, 242–43, 245–47, 280–82, 291–317, 534–37, 674–75 bankrupt 307, 309, 405 collection 384, 501–2, 535, 538, 564, 651 commercial 64, 99, 315–16, 467 indirect 294, 307–8, 526 position 242, 291, 295 role 295–98 agreements agency 2, 292, 297, 316, 459, 535 assignment 476, 478–79, 491, 493–94, 514, 518–19, 603–5, 610 collateral 109, 160–61, 756–57 custody 400, 717, 750 distribution 23, 182 rental 3–4, 45, 144, 149, 152–54, 338, 380, 386 repurchase 354, 518, 540, 544–45, 561, 637, 755 sales, see sales, agreements transfer 161, 377, 444, 447–53, 476, 479, 500, 630 transportation 242, 291, 297, 705 aircraft 248, 250, 355, 371, 577, 585–86, 595–96, 612 amendments 79–80, 197, 235, 342, 491, 497–500, 505, 513–14 analogical interpretation 522 animus possedendi 379, 383, 385, 435 anthropomorphic approach 19–20, 183, 187, 357–59, 362, 476–77, 634, 638 anthropomorphic notions 2, 20–21, 58–59, 80–81, 146, 357–59, 629–30, 635–36 anti-competitive behaviour 77, 80, 119, 174, 361 anticipated delivery 445, 641 anticipatory breach 249, 260 Anwartschaft 412, 549, 559, 637, 652 appearance of authority 67–68, 108, 268, 292, 295–96, 298–300, 303, 315 appearance of ownership 268, 373–74, 383, 510, 568, 641 applicability 131, 177–78, 255–56, 264–65, 273–74, 276–77, 578–79, 608–10 applicable domestic law 219, 222, 233, 262, 265, 313, 618, 686 applicable law 209–10, 214–15, 275–76, 591–94, 603–4, 606–7, 745–46, 748–50 applicable private international law rules 206, 233, 264, 592, 698 appropriation 115, 117, 235–36, 238–39, 539, 553, 557–58, 755–56 of title 473, 558, 588
arbitration 10–11, 89–90, 209, 212–13, 219–20, 274, 278, 489 clauses 11, 32, 162, 214, 488, 664 international 11, 18, 32, 209, 212–13, 274, 278–80, 288 arbitrators 72, 76, 108, 138, 279, 285, 287–88, 640 commercial 285 international 279, 285, 754 asset-backed funding 347, 352, 361, 363, 425, 428, 622, 626 asset classes 327, 331, 360–61, 600, 621, 635, 638, 640 asset-maintenance obligations 715, 721–23, 727, 729, 736, 744, 753, 758 asset status 338, 340–42, 345–46, 597–98, 615, 638, 640, 650–51 asset substitution 319, 571–73 assets 324–61, 365–408, 434–39, 441–48, 463–76, 552–73, 575–93, 625–43 back-up 717, 719, 723 as classes identified through mere description 349–53 client 308, 405, 415, 533, 541, 719, 731 commoditised 251, 331, 333, 377, 381, 424, 458, 511 composite nature 342–43, 352 foreign 590–91 fungible 336, 728, 752 future 348–50, 358–59, 436–39, 444–47, 571–73, 620–21, 629–30, 650 immovable 4, 346, 354 liquidity 337–38, 341, 361, 363, 365–66, 411, 416, 418–20 movable 236, 339–40, 344, 353–54, 360, 387–88, 413–14, 651 ordinary 326, 474, 482, 493, 497, 505 physical 307, 342–43, 350, 385, 387, 402, 430, 648 replacement 349–52, 445, 534, 539–40, 552–54, 619–21, 629–30, 632 trust 364, 521, 527, 529, 538–40, 542, 589–91, 593–95 types of 339–49 underlying 321–23, 337–39, 410–14, 626–27, 636–39, 664–70, 676–77, 692 assignability 484, 486, 492–93, 513–15, 602–3, 605–6, 608–11, 613–16 future claims 493–97 assigned claimss 482–83, 487–88, 504–6, 604, 610–11
INDEX 763
assignees 151, 475–92, 494, 496–99, 501–21, 598–607, 614–18, 691–92 bankrupt 517–18, 614 bona fide 481, 484, 490, 506, 511–12, 521, 651, 656 collecting 479, 481, 506, 509–11, 516, 519, 521, 604 first 479–81, 484, 508, 511 first notifying 481, 483, 507–9, 511, 519 assignment agreements 476, 478–79, 491, 493–94, 514, 518–19, 603–5, 610 assignment contracts 507, 608, 611 assignment restrictions 152, 420, 485, 490, 504, 621, 654 assignments 351, 444–46, 474–520, 597–618, 620–21, 630–32, 650–51, 690–92 and bankrputcy 516–19 bulk 476–77, 479–81, 483–85, 504–5, 519–20, 599–609, 613–18, 620–21 of claims 358, 486, 512, 598, 655 competing 508, 691–92 conditional 483, 497, 500–1, 566, 606 of contractual claims 475, 482, 615 double 476, 479–80, 507, 510–11, 607, 612 equitable 481, 483–84, 494, 501, 511, 518, 611, 620 EU law 614–17 international 518–19, 600, 609, 611, 746 legal 445, 484, 501, 511 mandatory prprietary laws relating to 607–8 notification requirements for 478, 499, 564 and private international law 597–618 proprietary aspects 364, 513, 607, 609, 611, 624 of receivables 377, 442, 477, 485, 524, 538, 617–18 security 480, 483–84, 486–87, 491, 495, 599, 604, 607 special issues 515–16 statutory 307, 483, 518, 610, 729 terminology and characterisation issues 605–7 and treaty rules 519–21 types and objectives 500–4 valid 486, 508, 518 assignors 445–46, 477–79, 483–92, 494–510, 513–20, 601–2, 604–7, 609–17 asymmetric information 137 attachment liens 390–91 attachments 278, 307, 390, 473, 512, 560, 569, 612–13 auctions 248, 250, 313, 463–64
Australia 98, 349, 540, 590, 704 Austria 28, 33, 80, 378, 431, 450, 452, 466 authenticity 700–1 authorisation 305, 472–73, 509, 644, 673, 758 statutory 8, 305, 472 authority 67–68, 141–42, 172–74, 176–78, 185, 292, 294–300, 311–13 apparent 67–68, 108, 268, 292, 295–96, 298–300, 303, 315 automatic perfection 512 automatic return 121, 207, 234, 236–38, 447–49, 455, 458, 516 automaticity 237, 519 autonomous legal sources, see autonomous sources of law autonomous sources of law 7, 10–11, 24, 28, 61–62, 66, 91–93, 171–73 custom and practices 172, 623 fundamental principle 92 general principle 623 party autonomy 172, 623 transnational 173 autonomy 29–30, 76–78, 363–64, 603, 607–11, 615–18, 623–25, 746–48 party, see party autonomy avalists 683, 685–86, 697 avoidance 120–21, 123, 126–30, 187, 190–91, 233, 249–50, 260–61 back-up assets 717, 719, 723 back-up entitlements 640, 715–16, 719, 722, 732, 741, 743–44, 753 bad faith 74, 79, 83–84, 87–88, 173, 175–76, 186, 188 bailees 392, 400–1, 405–11, 461, 463, 466, 470–71, 536 bankrupt 408–9 bailment 355–58, 380–81, 397–402, 405–11, 418–19, 434–35, 530, 535–36 bailors 157, 400, 405–6, 440, 463, 536 balance 66, 134–36, 139–43, 213–15, 344, 347, 461, 465 contractual 134–36, 142–43, 175, 215, 553 bank accounts 344, 424, 715–16, 719, 722, 743, 750–52, 755 bank guarantees 155, 216, 240, 314, 459 Bank of International Settlement, see BIS bank transfers 638, 722 electronic 708 banking 313–14, 662, 681, 709, 716–17, 721, 752, 754 system 247, 662, 681, 721, 729, 754
764 INDEX
bankrupt agents 307, 309, 405 bankrupt assignees 517–18, 614 bankrupt bailees 408–9 bankrupt brokers 729–30, 741 bankrupt estates 235–36, 327, 329, 391–92, 408–9, 411, 446, 590 bankruptcy 234–40, 390–92, 408–13, 445–52, 455–58, 516–21, 554–57, 740–42 Belgium 588, 742 civil law proprietary defences 390–92 foreign 576, 578–79, 589–90, 594, 599–600, 741 France 223, 234–37, 451–52, 456, 472–73, 544, 547, 556–57 Germany 223, 236–37, 445, 449–50, 537–38, 554–55, 557, 582 intervening 236, 350, 430, 438, 445–46, 494–95, 729, 732 jurisdiction 579, 600, 741–42 law 234–35, 389–92, 403–5, 408–10, 455–58, 517–21, 556–57, 641–42 Netherlands 443, 445, 448, 450, 452, 563, 573, 588 trustees 161, 238, 390–92, 404–5, 409, 450, 457–58, 556–57 banks 216–17, 240–47, 673–75, 681–83, 689–91, 698–702, 708, 722 intermediary 241, 244, 662, 673, 722 paying 216–17, 245, 247, 291, 668 bargain 19, 21, 23, 47–54, 56–57, 59, 62, 303–4 bargaining power 87, 215, 678 bearer bills/drafts 246, 282, 683, 686, 694–95, 697 bearer instruments 633, 689, 723, 728, 730, 733, 738, 745 bearer securities 712, 721, 723, 725, 738, 745, 757 Belgium 306, 449–51, 588, 684–85, 696, 733–34, 741, 748–50 bankruptcy 588, 742 beneficiaries 152–59, 161–62, 402–4, 521–24, 526–30, 532–37, 539–42, 590–91 third-party 149–51, 154–55, 157–60, 162, 170, 193, 491, 498 best and reasonable endeavour clauses 111 bilateral contracts 117, 128–29, 189, 257, 260, 488, 518 bills of exchange 159–60, 246–47, 506, 667–68, 680–98, 700, 704, 708–9 and competing assignments of underlying claim 691–92
foreign 693–96 independence/abstraction 686–87 lex mercatoria 697–98 limited modern use 690–91 persons liable under and recourse 685–86 and private international law 693–96 bills of lading 241–47, 281–84, 583–85, 661–81, 686–88, 691–92, 694, 696–709 and blockchain 706–8 electronic 667, 701–3, 706–9 lex mercatoria and unifrom treaty law 678–80 named 674 on-board 282, 662, 671 origin, nature and operation 668–72 paper 705 and private international law 675–78 straight 674 binding force 10–11, 21–22, 51–53, 55–56, 62, 111, 173–74, 189–90 Blackstone 344, 435, 440 blame 19–20, 43, 48–49, 125–26, 131–32, 187, 192, 227 blockchain 42–43, 369, 667, 707–8, 760 potential 706–8 Bolero 702, 704–6, 708 bona fide acquisition 311, 386, 388–89, 393, 429, 464–66, 665, 669 bona fide assignees 481, 484, 490, 506, 511–12, 521, 651, 656 bona fide buyers 389, 444, 461, 467, 584, 673 bona fide creditors 234, 568, 599, 653 bona fide holders 666–67, 669–71, 674, 676, 692, 697, 700, 707 bona fide possession 382, 387–88, 462, 465, 627 bona fide possessors 389, 465, 667, 752 bona fide purchasers 402–3, 412–15, 452–53, 457–58, 460–62, 464–65, 467–69, 564–66 of chattels 335, 385, 430, 451–53, 466, 481, 560, 566 protection 365, 389–90, 402–3, 450–53, 460, 462–69, 509–11, 584–85 bona fide third parties 121, 238, 246, 381, 441, 529, 593, 669 bonds 344, 700–1, 711–13, 715–17, 723–24, 733–37, 743, 745–46 book-entry entitlements 713, 715, 724–25, 733, 739, 741, 751, 755 book-entry systems 700–2, 714, 716, 719–22, 724–28, 730–49, 751, 753–56 international 740–41, 743–44, 753
INDEX 765
borrowers 43, 155, 547, 552, 558, 565, 568, 570 breach 125–30, 192, 228–29, 232–33, 259–61, 489–91, 515–16, 542 anticipatory 249, 260 brokerage 293, 301–2, 304–8, 315 brokers 293–96, 306–10, 343, 715–23, 726–33, 735–37, 740–42, 749–50 bankrupt 729–30, 741 bulk assignments 476–77, 479–81, 483–85, 504–5, 519–20, 599–609, 613–18, 620–21 international 605, 616, 618 and lex mercatoria 617–18 bulk transfers 358, 436, 438, 508–9, 571–72, 580, 609, 620–21 business dealings 84, 143, 146, 168, 176, 179, 182, 191 buyers 216–17, 223–45, 280–84, 447–54, 456–64, 543–45, 668–75, 698–702 bona fide 389, 444, 461, 467, 584, 673 defaulting 234, 236, 392, 448, 455–56 first 394, 436, 456, 461 in possession 224, 236–37, 262, 409, 432, 451, 457, 459 second 435–36, 555 Canada 95, 490, 540, 590, 704 Canon law 45–46, 64, 66, 388 capacity 67–68, 152–53, 211–12, 388–89, 428–31, 442–44, 540–42, 591–94 capital goods 223, 229, 423, 546 capital markets 39, 44, 424, 740, 742, 744, 749, 759 care, duties of 23, 31, 33, 49–50, 188, 190, 219, 301 carriage 281, 284, 286, 664, 667–69, 675, 678–80, 703–5 carriers 157, 241–43, 282, 284–85, 291, 661–74, 678–80, 698–703 liability 678–79 case law 141, 161–62, 455–58, 480–81, 551–53, 608–11, 636, 747–49; see also Table of Cases France 11, 47, 159, 237, 451, 455 Germany 64, 114, 478, 508, 545, 653 good faith 74, 83, 85, 87–88, 91, 99, 110, 114 modern 3, 32, 64, 231, 553, 613 Netherlands 80, 88, 109, 306, 309, 561, 609–10 United Kingdom 94, 161, 480–81, 670 cash accounts 722, 727–28, 751 cash flows 356, 362, 365, 478, 502, 519, 602–3, 653 cash sales 189, 239, 433, 440, 457–58, 470
causa 45, 57, 64–67, 87, 119, 170, 188, 257–58 causal system of title transfer 443, 447–54, 456, 459, 510, 647, 650, 655 causality 426, 458, 630 caveat emptor 54, 122, 126, 228, 232–33 central counterparties 327, 338, 731, 733, 753, 755 central securities depository (CSD) 715 certainty 101, 109, 213, 654–56, 740, 744–45, 748–49, 759–60 certificates of deposit 612, 711 certified securities 724, 728 CESL (Common European Sales Law) 11–12, 14–16, 184–86, 188–93, 198–202, 204–5, 207–8, 644–45 chained systems 721–22 change of circumstances 87, 106–7, 112–14, 128–29, 131, 133–37, 139–43, 145 clauses 53, 144, 211 modern legislative approaches 141–43 characterisation issues 312–13, 501–2, 544, 550–51, 559–61, 563, 605–6, 608 characteristic obligations 40, 256, 275–76, 314, 609, 615, 623 charges 320–21, 326–27, 330–31, 349–50, 439–40, 472–73, 571–73, 756–57 equitable 397, 403, 438 fixed 494, 572 floating, see floating charges charitable collections 525–26, 536 charitable trusts 527, 532, 535, 537 chattel mortgages 398, 402, 438, 546–47, 565–67 chattels 343–45, 353–59, 376–77, 384–89, 397–99, 428–39, 475–83, 564–67 approximation of common and civil law systems 411–17 common and civil law approaches distinguished 410–11 equitable proprietary interests in 401–4 law of 353–59, 394–95, 397, 465–66, 612, 614, 618–19, 745 legal and equitable interests in 394–99 modern law 618–43 ownership and possession in common law 399–401 and private international law 574–97 transfers of 151, 428–73, 476–80, 486, 513, 518, 650, 655 legal requirements 428–31 uniform laws concerning proprietary aspects 595–96
766 INDEX
cheques 39, 687, 689–91, 696, 708, 751 cherry picking 518, 560 choice of law 255–56, 275–76, 278–80, 575–77, 593–95, 604, 623–24, 751 clauses 211, 217, 278, 420, 679–80 contractual, see contractual choice of law choses in action 344, 484, 490 choses in possession 344 church law, see Canon law CIF (cost insurance freight) 216, 219, 245, 280–85, 583, 661, 664–65, 669–74 contracts 283, 583, 661, 667 circumstances change of 87, 106–7, 112–14, 128–29, 131, 133–37, 139–45, 182–83 exceptional 37, 104, 139 personal 44, 128, 132, 134–35 unforeseen 133–42, 207 civil codes, see codification; Table of Legislation and Related Documents civil law 45–54, 58–68, 115–23, 143–50, 368–90, 392–418, 521–29, 624–34 approach 28, 59, 61–62, 75–77, 359–61, 404–5, 407–8, 642 codification 15–16, 32, 71, 83, 89, 91–92, 163, 180 countries 85–87, 385–88, 436, 443–44, 540–41, 558–59, 589–90, 691–92 judges 89–90, 95, 528, 541 law formation 67, 89–90 lawyers 98, 102, 396, 522, 525 modern 123, 129, 152, 354–55, 358, 370–71, 403, 407 possession in 341, 379, 386, 557 terminology 321, 340, 396, 398, 400, 430, 525, 545 thinking 2, 17, 58, 123, 127, 168, 172, 522–23 claims 130–31, 338–45, 350–51, 473–87, 490–97, 499–501, 503–18, 597–616 assigned 482–83, 487–88, 504–6, 604, 610–11 competing 329, 392, 518, 544 damage 117, 126, 143, 370, 392, 642 for damages 23, 107, 117, 123–27, 129, 143, 259, 370 future 493–97 intangible 334, 336, 343, 348, 354–56, 368, 377, 475–76 monetary 328, 339–40, 484–88, 492, 505–7, 509, 515, 601–2
obligatory 340, 390, 627–28 personal 305, 466, 504, 602, 718 proprietary 115, 234–35, 340, 382, 561, 614–15, 643, 730 restitution 68, 343, 345, 356, 368, 482 tort 475, 482, 484–85, 492, 512 transfers of 275, 476–78, 485, 495, 514, 615, 618, 635 underlying 221, 246, 364, 608–10, 615–16, 624, 691–92, 696 clausula rebus sic stantibus 137–38, 145 clearing 706, 721–22, 724, 727–29, 731–36, 738, 753–55, 757–60 systems 728, 734, 736, 738 Clearstream 716–17, 733, 735, 738, 740, 743–45, 747–50, 753 client accounts 306, 308–9, 524, 526, 531, 537–38, 728, 730 client assets 308, 405, 415, 533, 541, 719, 731 client money 309, 524, 722, 730 closed system of proprietary rights 365, 374, 378, 418–19, 446, 531, 636–37, 647 co-operation 25–26, 28, 35–36, 74–76, 84–85, 103, 136, 156–57 duties 18–19, 85, 103, 108, 111, 156, 187, 190 contractual 17, 62, 73, 77, 79, 81, 108, 170 co-ordination 40, 315, 420–21 co-ownership 670, 716–17, 729–31, 738–39 Coase, RH (Coase theorem) 347 codification 82–83, 88–93, 101–2, 163, 165–66, 194–95, 203–5, 334 approach 88, 91, 93, 101, 180, 256, 390, 453 civil law 15–16, 71, 83, 89, 91, 163, 264, 266 and common law 194 countries 8–9, 71, 83, 89 ethos 85, 92, 178, 180, 357, 656 France 88, 453 Germany 2, 390, 453 nineteenth-century 656 partial 163, 198, 203–4, 210, 250, 253, 257, 265 private 86, 89–91, 93, 163, 180, 194, 251, 644 private law 15–16, 86, 91, 93, 197–98, 251, 644 thinking 77, 82–83, 85, 91, 104, 165–66, 171, 180 unitary 168–71 collateral 324–25, 566, 570, 727, 729, 747–48, 751–52, 755–57 agreements 109, 160–61, 756–57
INDEX 767
collecting assignees 479, 481, 506, 509–11, 516, 519, 521, 604 collection agents 384, 501–2, 535, 538, 564, 651 collection arrangements 244, 247, 475, 501, 516, 606, 616, 663 collections 478–82, 501–3, 507, 511–13, 515–19, 562, 601–2, 618 charitable 525–26, 536 comity 213 commerciability 344, 347 commercial agents 64, 99, 315–16, 467 commercial and financial legal order 7, 9–10, 77, 171, 266–67, 269, 288, 424–25 commercial arbitration, see arbitration commercial contracts 3, 15–16, 33, 37, 41, 49–50, 67–68, 171 international 3, 15–16, 58, 70, 102, 163, 168, 171 commercial courts 6 commercial dealings 22, 49, 60, 95, 129, 163, 179, 462 commercial flows 331, 335, 424, 426, 620, 647, 649, 654 ordinary 331, 333, 335, 338, 585, 620, 658 commercial practice 5, 11, 13, 66, 97, 106, 163, 298–99 international 176, 224, 253 commercial transactions 3, 40, 97, 274, 402, 570, 709 commerciality 171, 220, 271 commitments 20, 49, 52, 55, 63, 66, 136, 275 commodities 137, 144, 200, 203–4, 224, 230–31, 631, 638 commoditised assets 251, 331, 333, 377, 381, 424, 458, 511 commoditised products 71, 399, 402, 575, 620–21, 624, 629, 631 common creditors 223, 234, 327–29, 347, 367, 404, 410, 641 Common European Sales Law, see CESL Common Framework of Reference (CFR) 163 common intention 101, 106, 170, 187 common law 45–67, 93–99, 115–29, 145–50, 299–305, 341–46, 394–419, 430–35 approach 1, 5, 17, 20, 228, 363, 365, 368 countries 67, 444–45, 530–31, 589–90, 621–22, 666–67, 691–92, 695–97 countries/jurisdictions 329–32, 334–37, 418–19, 525–33, 574–75, 589, 624, 632–35
courts 89–90, 116–17, 119, 220–21, 401, 528, 534, 536 and equity 190, 484 and interpretation 51, 59–60 judges 89, 95, 528, 541 jurisdictions 165, 348, 408, 418, 491, 529, 531, 535 law formation 89–90 old 59, 61, 96, 228, 396, 404–5, 431–32, 499 terminology 188, 257, 401, 618, 625 traditional 118, 122, 125, 133, 188–89, 194, 622, 666–67 trusts 521–27, 537, 590 common principles 10, 164, 287, 315, 698 common purpose 94 communications 39, 162, 419–20, 700, 704, 722, 737 company law 68, 165, 278, 622, 724–25 comparative law 10, 20, 103, 299, 354, 365, 414–15, 679–80 compartmentalisation 714–15, 717, 719, 729, 732, 737 competing assignments 508, 691–92 competing claims 329, 392, 518, 544 competition 93, 269, 324, 421, 425, 509, 645, 677 law 24, 27, 33, 131, 213 completeness 91–92, 264, 704 composite nature of assets 342–43, 352 conditional assignments 483, 497, 500–1, 566, 606 conditional owners 234, 507, 560 conditional ownership 545, 549–50, 558–59, 562, 587, 639, 647, 652 rights 557, 560, 563–64, 566, 627, 631, 634, 637 conditional sales 235–37, 502–4, 516–19, 543–49, 551–55, 557–61, 565–67, 637–38 conditional title 237, 545, 559 conditional transfers 412, 414, 501–3, 546, 550, 557, 562, 565 conditionality 124, 127, 216, 234, 236–37, 446, 470, 557 conditions market 144, 215, 249, 543 resolutive 516, 525, 558, 652 suspensive 525, 545, 549, 558, 565, 647 conduct 18–19, 47–48, 56–58, 74–76, 84, 101, 187–90, 297–99 and effect 11, 18, 172, 213–14, 254, 269, 275, 353 and reliance 34, 38–39, 56, 73, 183, 186, 188
768 INDEX
confidentiality 103, 301, 528, 702, 704, 727 conflict of laws 311–13, 315–16, 576–80, 597–98, 600–3, 613, 695–96, 752–53 conflict rules 209, 256, 273–75, 287–88, 591–92, 594, 617, 748–49 conflicts of interest 295–96, 300, 528, 542 conform delivery 126, 216, 224–25, 229, 231–32, 241, 249, 259–61 confusion 33–34, 195, 197, 340, 380, 598–99, 616–18, 748 conscience 397, 533 consensual liens 473, 565 consensus 17–20, 22–23, 45–49, 51–53, 57–59, 105–6, 118–23, 186–87 and intent 5, 11, 20, 22, 26, 58, 131, 146 consent 45, 47, 153–54, 321–22, 326–27, 477–78, 483–91, 497–99 debtors 477–78, 482, 487, 490, 492–93, 497–98, 505–6, 602 consequential damages 23, 130, 225, 260, 262 consideration 49–59, 62–64 common law 64–67 notion/doctrine 48–49, 53–58, 62–63, 65–66, 154, 160, 190 objective 51, 67, 257 requirement 22, 54, 57, 62–65, 67, 105, 109, 257–58 constitutive requirements 477–80, 483, 493–95, 508, 517–18, 591, 601, 605 constituto possessorio 375, 380, 434, 436, 439, 441, 466, 470 construction 1, 50, 52, 55, 59–61, 77–78, 82, 109 contracts 10, 56, 144 constructive delivery 238–39, 400–1, 434, 436, 439, 554, 558, 565–66 constructive knowledge 334–35, 371, 414, 463 constructive possession 380, 385, 399–401, 407–8, 466, 471, 564, 566 constructive trustees 294, 409, 533–36, 546 constructive trusts 362, 365, 400, 403, 405, 526–27, 532–40, 647 remedial 440, 592 consumer contracts 4, 13, 37, 46, 50–51, 58, 177–78, 276 consumer dealings 2–5, 17, 30–31, 76–77, 168–69, 177, 182–83, 646 consumer goods 14, 232, 248, 330, 395, 551, 554, 588 consumer law 16, 95, 163–66, 174–75, 204–5, 251–52, 254, 325–26
consumer mentality 176, 204 consumer protection 2–3, 13–14, 40, 75–76, 79, 104–5, 167–69, 200–1 consumer transactions 99, 102, 177, 187, 256, 634 consumers 1–7, 10–15, 26–27, 99, 164–68, 195–96, 199–201, 323–25 and professionals 84, 208, 656 continuation 114, 144, 164, 392, 494, 498, 646, 648 contract formation 4–5, 10–11, 16–24, 39–41, 43, 122, 186, 186–90 in civil and common law 45–70 contract interpretation 30–32, 48–53, 59–62, 71–78, 103–5, 170–71, 263–66, 269–71 contract law 14–18, 20–22, 30–33, 37–39, 53–55, 82–87, 94–95, 162–64 development 45–49 modern 16, 24, 27, 30, 35, 95, 194, 197 new model 26–31 unification 162 contract law: modern 30, 95 contract performance, see performance contract principles 3, 100, 102, 175, 181, 183, 185, 189 contract theory, modern 29–35, 39, 48, 81, 86, 210, 220, 227 contracts agency 7, 306, 316 assignment 507, 608, 611 bilateral 117, 128–29, 189, 257, 260, 488, 518 of carriage 157, 243, 293, 664, 676, 680, 703 CIF 283, 583, 661, 667 commercial, see commercial contracts construction 10, 56, 144 and remedies in civil and common law 59–62 consumer 4, 13, 37, 46, 50–51, 58, 177–78, 276 duration 25–26, 30, 60, 62, 136, 142, 144, 187–88 employment 98, 154, 276, 316 executory 46, 52, 55, 65, 343, 392, 518–19, 560 international sales 207–9, 215, 218, 221, 240, 270, 288 interpretation 52, 132, 137, 156, 254, 265, 270, 288 original 150, 155–56, 158, 491, 500, 504, 506, 691 pre-existing 153, 157
INDEX 769
privity of contract, see privity professional 1, 5–7, 18–19, 22, 25–26, 49, 51, 54 sales 69–70, 205–8, 222–23, 233–36, 238–39, 440–41, 447, 670–72 self-executing 707 service 3, 200, 297, 420, 486 smart 16, 35–36, 41–44, 49, 81, 708 standard 30, 37, 44, 81 types 2–4, 6, 15, 17, 61, 147, 158, 163 underlying 299, 447–48, 488, 490, 513–14, 602–4, 609–10, 693 valid 389, 393, 400, 452–53, 462, 464–65, 482–83, 510 contractual agency 15, 293, 295, 297, 299, 301, 303, 305 contractual arrangements 149, 153, 400, 403, 544–45, 561–62, 580, 584 contractual assignment prohibitions 149, 152, 476, 490, 513, 651 contractual assignment restrictions 341, 481, 484, 490–91, 521, 621, 630 contractual balance 134–36, 142–43, 175, 215, 553 contractual choice of law 255–56, 275–76, 278–80, 314, 316, 604, 623–24, 751 clauses 58, 275–76, 278, 420, 695 contractual claims 307, 326, 475, 482, 484, 493, 714, 716 assignment of 475, 482, 615 contractual co-operation duties 17, 62, 73, 77, 79, 81, 108, 170 contractual content 5, 27, 48, 105, 174, 197 contractual description 320, 342–43, 347, 349, 361 contractual duties 37–38, 119, 147, 152, 156, 243, 302, 322 contractual intent 59, 65, 269 contractual interpretation, see contracts, interpretation contractual liability 23, 36, 54–55, 62, 96, 107, 110, 127 contractual obligations 40, 42, 273, 275, 307–8, 364, 605, 614–15 contractual performance, see performance contractual purposes 28, 249 demonstrable 24 contractual remedies 59, 109, 241, 456 contractual rights 46–49, 55–56, 306–7, 329–32, 338–39, 409, 412–14, 420 and proprietary rights distinguished 327–32
contractual subrogation 499, 615 contractual terms 1–2, 77, 79, 94–96, 261, 270, 272, 286–87 contractual user rights 322–23, 329, 333, 336–37, 375–76, 380, 392, 642 contractual validity 59–60, 108, 278, 513, 605–6, 611, 616, 695 capacity and authority 67–68 definiteness 70–71 formalities 68–69 contractualisation 415, 418–19 control 136–37, 349–50, 373–75, 378–80, 387–89, 627–29, 639–41, 662–63 intent to 431, 442 physical 649, 662 Convention on the International Sale of Goods, see Vienna Convention convergence 91, 413 conversion 117, 221, 534, 539, 547, 551–53, 561, 588 convertibility, free 220 corporate information 711, 717, 720 corpus 373, 379–80, 382–83, 399, 628, 649 Corpus Iuris 45, 380, 454 corrections 1, 66, 72, 85, 92, 95, 729, 731 cost/benefit analysis 24, 79, 81, 84 cost insurance freight, see CIF costs 112, 115–17, 139, 208–9, 214–16, 280–81, 421, 556–57 extra 130, 151, 217, 541 frustration 420, 424 information 419–20, 424 verification 421, 424–25 counterclaims 307, 487–88, 492, 506, 602, 662 counterparties 160–61, 292–96, 326–27, 338, 340, 409–10, 497–99, 636–38 central 327, 338, 731, 733, 753, 755 identified 422, 636–37, 643 country of destination 206, 222–23, 580–82, 584, 588, 600, 676–77 country of origin 40, 222–23, 580–82, 587–89, 592, 600, 677, 695 courts, see case law; commercial courts; common law, courts; ecclesiastical courts; federal courts; international courts; national courts; ordinary courts; Staple Courts; United States, courts covenants 124, 127–28, 152–53, 157, 371, 412, 634 restrictive 152–53, 511
770 INDEX
creation of proprietary rights 323, 325, 330–31, 335, 337, 414, 425, 427 credibility 79, 89, 176–77, 182, 192, 194, 656, 658 credit 215–17, 239–45, 247, 291, 698–700, 702–3, 720–22, 750–53 credit risk 216–17, 303, 446, 485, 501–4, 516, 562, 685 credit transfers 13, 416, 721–22, 752 creditor substitution 478, 485–86, 497–99, 514, 599 creditors 390–91, 474, 478–79, 497–99, 529, 556–58, 568–72, 598–601 bona fide 234, 568, 599, 653 common 223, 234, 327–29, 347, 367, 404, 410, 641 new 155, 480, 497–98, 587 non-secured 534, 554, 565, 569, 572, 583 ordinary 556, 568, 588, 712 original 310, 478, 482–83, 489, 499 personal 539, 542, 594, 731 secured 328, 390, 438, 468, 553, 556, 569–70 creditworthiness 113, 127, 144, 234–35, 237, 245, 247, 260 cross-border dealings 164, 166, 169, 173, 178–81, 184–85, 644–45, 758–59 cross-border sales 7, 181, 199, 201, 208–9, 249, 289, 645 crowd funding 44 crystallisation 349, 446, 555, 572, 756 custodial systems 343, 424, 713 custodians 307, 461, 524, 526, 624, 730–31, 739, 741–42 third-party 728, 730 custody 399–400, 523, 531, 537, 541, 716–17, 735–36, 743 agreements 400, 717, 750 arrangements 384, 396, 524, 526, 565, 714, 727 domestic 753–54 custom 10, 77–78, 104–5, 171–74, 184–85, 264–68, 270–72, 287–88 industry 24, 177, 218, 284, 706 customary law 82, 90–91, 204, 287, 565, 698, 702, 706 damages 37–38, 56, 107–10, 115–18, 123–31, 147–48, 228–32, 259–62 claims for 23, 107, 117, 123–27, 129, 143, 259, 370 consequential 23, 130, 225, 260, 262
expectation 18–19, 23, 38, 54–56, 87, 108–10, 129, 146–47 punitive 150 DCFR, see Draft Common Frame of Reference De Iure Belli ac Pacis 2, 46, 297, 370, 385 dealings commercial 22, 49, 60, 95, 129, 163, 179, 462 consumer 2–5, 17, 30–31, 76–77, 168–69, 177, 182–83, 646 cross-border 164, 166, 169, 173, 178–81, 184–85, 644–45, 758–59 financial 6–7, 32, 169, 325, 360, 416, 634, 639 international 12, 28, 90, 168, 173, 176–77, 182, 209 professional, see professional dealings debt 482, 494–95, 499–500, 600–1, 605–6, 609, 611–14, 639–41 debtors 157–60, 476–83, 485–93, 495–521, 553–59, 564–70, 598–616, 618 bankrupt 235, 321, 391, 409 consent 477–78, 482, 487, 490, 492–93, 497–98, 505–6, 602 defaulting 409, 501, 516, 552, 565 defences 485, 500, 505, 513, 609 in possession 234, 567 professional 74, 106, 113, 135 substitution 485, 498, 500 ultimate 493, 682, 686 declarations 48, 50–52, 56, 75–76, 78, 120–22, 297–98, 311 default 114–17, 125–30, 229–40, 258–61, 448–51, 455–59, 543–47, 551–54 rules 37–38, 137, 203–4, 211–12, 432, 609, 611, 615 defaulting buyers 234, 236, 392, 448, 455–56 defaulting debtors 409, 501, 516, 552, 565 defects, hidden 225, 227, 229–33, 262 defences 3–6, 118–20, 146, 307–8, 487–89, 497–99, 602–4, 686–94 and continued validity of contract 190–92 contractual 473, 515 debtors 485, 500, 505, 513, 609 personal 688–89, 694 proprietary 54, 150, 404 definiteness 70–71, 170, 186, 189, 344 delays 116, 118, 208, 210, 236, 583, 665, 698 delegation 485–86, 489, 505, 664 delivery 203–10, 222–32, 241–45, 256–62, 428–45, 449–50, 454–55, 692–95 act of 243, 293, 388, 431, 435
INDEX 771
anticipated 445, 641 conform 126, 216, 224–25, 229, 231–32, 241, 249, 259–61 constructive 238–39, 400–1, 434, 436, 439, 554, 558, 565–66 duty 225, 242, 261, 291 as formal requirement 440–42 late 125–26 physical 226–29, 231, 394, 435–36, 442, 468–69, 584–85, 665 place and time of 70, 130, 189, 203, 251, 257, 693–94 of possession 375, 377, 380, 432, 434, 469–70, 477, 479 requirement 376, 380, 429, 431, 435, 441–42, 449–50, 456 right to 440, 488, 528 for title transfer 228, 235, 282, 432–38, 449, 460, 668, 671 dematerialisation 667, 698–709, 711, 713–17, 725, 730, 734–36, 759 democratic legitimacy, see legitimacy demonstrable contractual purpose 24 Denning, Lord 50, 60–61, 107, 160, 456, 665 dependency 31, 34, 59, 61–62, 76, 91, 94–96, 301 depositories 701–2, 714–20, 725–27, 731, 735–37, 745–46 central 715–16 depositors 340, 612, 714, 716, 718–19 depository receipts 734, 737 deposits 111, 354, 612, 711, 716 derivative proprietary rights 377, 401 derivatives 42, 68, 353, 425, 503, 548, 638, 755 description 319, 358–59, 361–62, 365–66, 368, 423, 426, 494–95 mere 319, 330, 349, 365, 426, 445 reasonable 352, 425, 439, 485, 520, 629 destination 206, 222–23, 577, 580–82, 587–88, 600, 662, 676–77 place of 244, 662, 745 detention 333–34, 372–74, 378–79, 385, 401 detentors 380, 384–85, 388, 412, 538 deterioration 126, 216, 224–26, 230, 262 detrimental reliance 18–20, 52–53, 56, 58–59, 63, 108–9, 111, 146 Digests 45, 85, 454, 549, 613 digital content 199–200 dingliche Anwartschaft 412, 545, 559, 637, 652 dingliche Einigung 389, 435, 443, 449–50, 455, 458, 460, 466
diplomatic conferences 248, 678–79 direct actions 151, 159–61, 193, 400 direct agencies 296–97, 307 direct liability 304, 314 direct rights 155, 308, 717, 719 Directives 13, 164, 167, 273, 275, 741, 744, 753–54 directory law/rules 70, 72, 84, 88, 185, 203, 278, 280 disclosed agencies 293, 301, 307–8, 310–11, 316, 535, 685 disclosure 25–26, 76–77, 187–90, 229–31, 293, 302–4, 306, 308 duties 3, 26, 28, 33, 76–77, 87, 105, 229 pre-contractual 17–18, 77, 79, 81, 104, 106, 108, 110 discounting 246–47, 683, 685, 688, 708 discretion 88–90, 116, 118, 137, 287–88, 295–97, 301, 532–33 judicial 82–83, 86, 88, 121, 137, 142, 580 discretionary accounts 294–95 dishonour 688–89, 693 disparity, gross 103, 105, 174–75, 191 disposition 347–49, 382–83, 429, 444–46, 460, 551–54, 599–600, 639–41 free 204, 211–14, 275, 278, 506, 514, 603–4, 607 rights 358–59, 388–89, 428–31, 442–44, 451–54, 460–63, 630–32, 650 testamentary 522–23, 526 dispute resolution 41, 72, 76, 90, 174, 209, 420, 422 distribution 31, 111, 329, 578–79, 592–93, 742, 751, 758 agreements 23, 182 chains 8, 195, 209, 320, 324–25, 352, 625 risk 22, 36, 74, 139, 141, 204, 317, 643 distributors 12, 294, 317, 573 diversity 16, 163, 198, 253, 256, 288, 312 dividends 42, 344, 349, 711, 714, 717–18, 720, 751 documentary letters of credit 241–42, 245, 297, 314, 698–99, 702–3 documents, role 661–80 documents of title 244, 246, 584–85, 661, 664–78, 680, 698, 700 negotiable 244, 663, 665, 667–71, 673–81, 683, 691–93, 697–99 status 667, 699, 702 domain names 347, 626, 640 Domat, J 2, 46, 441
772 INDEX
domestic custody 753–54 domestic laws 99–100, 213–14, 267–68, 311–13, 596–98, 705–6, 739–40, 747–49 applicable 213, 219, 222, 233, 262, 265, 313, 618 domestic public policy 149, 172, 177–78, 265, 360 domestic regulation 288 domestic sales 7, 14, 201, 208–9, 212, 218, 220, 289 double assignments 476, 479–80, 507, 510–11, 607, 612 double sales 394, 431, 434–35, 673 Draft Common Frame of Reference (DCFR) 3–4, 91–93, 100–1, 162–64, 169–71, 178–89, 191–93, 644–58; see also Table of Legislation drafters 92–93, 172–73, 176, 180, 186–87, 362, 645–46, 654–55 drawees 157, 159–60, 217, 247, 681–88, 690–95, 697, 700 drawers 217, 246–47, 459, 681–91, 693–94, 697 droit coutumier 22 duality of ownership 336, 365, 372, 525, 527–28, 537, 551, 557–59 due course, holders in 71, 506, 683–84, 686–89, 691–92, 694–96, 712, 721 duration contracts 25–26, 30, 60, 62, 136, 142, 144, 187–88 duress 119, 123, 192, 250, 456 economic 123, 136, 141 duties 103–5, 149–51, 155–58, 292–96, 321–23, 485–86, 488–89, 527–28 of care 23, 31, 33, 49–50, 188, 190, 219, 301 co-operation, see co-operation duties contractual 37–38, 152, 156, 243, 302, 322 extra-contractual 2, 61, 96 extra-intentional 17, 19, 23, 26 fiduciary, see fiduciary duties implied 111–12, 153 information 3, 87, 98, 108, 229 inspection 225, 229, 570, 663 investigation 262, 462, 464, 504, 507–8, 511, 569, 571 non-intentional 24, 26, 49, 56 performance 124, 204, 230, 238, 259, 302–3 pre-contractual 23, 70, 77, 85, 87, 97, 106, 108 renegotiation, see renegotiation, duties search 71, 323–24, 330, 333–34, 414, 426, 485, 490
special 2, 81, 94, 219, 292, 299, 527, 591 third-party 157–58 dynamic contract law 23, 30, 71–74 dynamic movable property law 353, 426, 596, 656–59 dynamism 86, 194, 363, 636, 749 e-commerce 39–41, 44, 170, 202 e-mail 39–40 easements 152, 321, 356, 363, 377, 387, 429 ECJ (European Court of Justice) 13, 93, 99, 165, 167, 194, 273 economic considerations 31, 74, 82, 88 economic duress 123, 136, 141 economic hardship 135–38 economic impossibility 134, 138–39, 207, 226 economic interests 163, 398, 403, 412–14, 417, 550, 632, 650 economic value 319, 326, 340–41, 344–47, 352, 635, 639, 641 economics, law and 334, 347, 417, 420, 526 effect and conduct 11, 18, 74, 149, 172, 213–14, 269, 275 effectiveness 16, 148, 215, 235, 240, 578–79, 583, 602–3 efficiency 16–17, 24–28, 30–31, 35–38, 73–74, 76–77, 81, 759 eighteenth century 10, 46, 54–55, 65, 281, 369, 465, 479 Einigung 305, 450, 460, 478–79 electronic bank transfers 708 electronic bills of lading 667, 701–3, 706–9 electronic identification 700 electronic payments 621, 634, 646, 690 electronic signatures 40 electronic systems 701–3, 707 electronic transfers 667, 698, 708–9, 735 empirical research 37, 78, 166, 180, 198, 656 employees 12, 98, 108, 276, 298, 301, 399, 407 employment contracts 98, 154, 276, 316 end-investors 306, 714–23, 736, 741–42, 744–46, 751, 754 endorsees 509, 573, 687–89, 691, 695 endorsement 246, 663, 672, 682–83, 686–88, 693–95, 700, 703 endorsers 246, 682–86, 689, 692–93 enforceability 41, 63, 605 enforcement 97–100, 421, 539–42, 578–79, 597–601, 604–9, 613–18, 755–56 of contracts 28, 82, 118 foreign 578–79
INDEX 773
international 254, 592, 597, 601, 606, 609, 616, 618 lex mercatoria 617 UCC 97–98, 130, 170 England, see United Kingdom enjoyment 321–23, 326–28, 335–37, 371–73, 375–76, 397–98, 422, 626–27 rights 319–24, 329–31, 337–39, 409–12, 414, 626–28, 632, 642 enrichment, unjust 56, 59, 163, 340, 392, 395, 532–33, 654–55 entitlement holders 715–16, 718, 720–21, 731, 733, 736–37, 748, 751 entitlements 713–16, 718–23, 726–28, 730–32, 735–39, 741–44, 748–51, 757–58 back-up 640, 715–16, 719, 722, 732, 741, 743–44, 753 entrusting notion 468–69, 511 equality 269, 390, 539 equilibrium 103, 113, 175, 179, 447 equipment 339, 346, 362–64, 547–48, 566–68, 571–72, 631, 634 professional 587–88 equitable assignments 481, 483–84, 494, 501, 511, 518, 611, 620 equitable charges 397, 403, 438 equitable interest holders 406, 408, 415 equitable interests 394, 397–98, 402–4, 409–11, 413, 511, 642–43, 650–51 equitable liens 397, 533–34, 620 equitable owners 404, 522, 533–34, 718 equitable proprietary interests 330, 335, 575, 619–20, 634, 639, 642, 647 equitable proprietary rights 334–35, 365, 402–3, 418, 500–1, 529, 585, 611 equitable remedies 5, 53, 118, 121, 533 equitable rights 359, 382, 398, 402–3, 411, 529, 577, 611 equitable title 401, 527 equity 52–53, 94–96, 116–23, 359–64, 396–99, 482–84, 619–22, 628–32 and common law 194, 336, 410 in common law countries 329, 331, 346, 348, 359, 361, 627, 629 courts of 475, 482, 521, 528 judges 88, 95, 146, 403, 541 law of 361, 371, 397, 415, 418, 620, 622, 632 of redemption 402, 483, 546, 548, 558, 566 equivalence 54, 63, 582, 587
error 107–8, 121–23, 190–91, 443 estates 356–57, 390–92, 396, 409, 517–20, 526–27, 556–57, 717–19 bankrupt 235–36, 327, 329, 391–92, 408–9, 411, 446, 590 in land 152, 345, 356, 369, 410 life 372, 550 estoppel 56, 85–86, 297, 467, 701 promissory 56 Ethereum 42, 44 EU law assignments 614–17 clearing and settlement 758–60 Commercial Agents Directive 315–17 Financial Collateral Directive 274, 555, 574, 738, 749, 753–54 Regulation on the Law Applicable to Contractual Obligations 275–79 and sale of goods 289 and Vienna Convention 273–75 eurobonds 364, 367, 424, 723–26, 733–35, 737, 739, 743–45 market 416, 424, 703, 706, 712, 725, 732, 734 modern 367, 584, 596 traditional 712, 733 Euroclear 701, 703, 705, 716, 732–35, 738, 740–45, 747–50 euromarkets 712, 723–24, 732–34, 736–38, 740, 742, 749 European Continent 45–46, 246, 355, 357, 369–70, 712, 723, 725 European Court of Justice, see ECJ ex works 12, 208, 210, 249, 258, 280, 283 exceptio doli 77, 85 exceptio non adimpleti contractus 145, 238, 260, 441, 470–72, 487 excess 34, 50, 68–69, 95, 97, 189, 237, 258 excessive burden 113, 134, 141–43 exchange 45–56, 63, 159–60, 246–47, 667–68, 680–98, 704, 708–9 exchange of promises 45, 48, 50, 52–53, 55, 57, 63, 65 exclusivity 91, 310 excuses 3–6, 18–20, 22–24, 36–37, 124–29, 131–37, 148, 190–93 of performance 28, 59, 112, 124–28, 132, 138 execution sales 235, 237, 464, 471–72, 546, 553, 586–87, 675 executors 301, 591
774 INDEX
executory contracts 46, 52, 55, 65, 343, 392, 518–19, 560 exemption clauses 1, 103, 127, 155, 175 expectancies 348, 350, 444, 642, 652, 726 expectancy 350, 444, 642, 652, 699, 726 proprietary 412, 545, 549, 559 expectation damages 18–19, 23, 38, 54–56, 87, 108–10, 129, 146–47 expectations, justified 27, 74, 76, 94, 613 Expert Group on European Contract Law 195–98 expropriation 408, 427, 610, 612 extended reservation of title 445, 493, 495, 571 external relationships 243, 293, 300, 306, 310 externalities 347, 420 extra-contractual duties 2, 61, 96 extra-contractual rights 16 extra-intentional duties 17, 19, 23, 26 extrapolation of past experiences 180 fact situations 18, 21, 27, 31, 50, 82–83, 89–90, 147 factoring 415–16, 500–2, 516–17, 546, 548, 552–53, 560–62, 587 of receivables 310, 446, 540, 545–46, 560, 562, 690 failed sales agreements 121, 236, 239, 409, 451, 454, 468 fair dealing 84, 88, 93–95, 97–98, 101–4, 113, 173, 178–79 fairness 60–61, 66–67, 81, 84, 86, 95–97, 140, 142 Fallgruppen 85 FAS (free alongside ship) 284 fault 19–20, 59–60, 95, 97, 122, 125–26, 142, 232 federal law 671 fees 98, 109, 127, 216, 289, 294, 301, 550 feudal system 332, 356, 395, 399, 404, 628 fideicommis 522–23, 539 fiducia 415, 522–23, 536–39, 565, 581 fiduciary duties 95–96, 292–93, 295–96, 299–302, 314–16, 525–28, 535–38, 540–41 fiduciary relationships 96, 302, 718 fiduciary transfers 478, 501, 554 fiducie 496, 532, 538 filing 484–85, 511–12, 554, 563, 568–72, 578, 583, 588 facilities 512, 571 requirements 333, 532, 568–70 systems 414, 564, 569–72, 631, 740
finality 337–38, 459–63, 620–21, 629–32, 654–56, 721–22, 729–30, 752–54 issues 222, 251, 269, 289, 429–30, 447, 639, 649 payment 71, 184, 186, 196, 365–66, 458–59, 647, 722 settlement 726, 729, 732, 744, 748, 750, 753, 757 transactional 204, 224, 331, 333, 429, 529, 654–56, 659 finance 164–67, 325–27, 361–62, 545–46, 548, 560–62, 620–22, 646–47 companies 160, 400, 545, 563 international 222, 364, 416, 596, 618, 637 leasing 207, 337, 415, 545–46, 551, 560, 562, 574 modern 156, 334, 336, 360, 364, 637, 646, 656 sales 543–48, 551–66, 576–77, 586, 619–20, 639, 652, 755 statements 223, 485, 495, 512, 554, 568, 570, 588 Financial Collateral Directive 274, 555, 574, 738, 749, 753–54 financial crisis 754, 760 financial dealings 6–7, 32, 169, 325, 360, 416, 634, 639 financial instruments 279, 337, 354, 361, 363, 413, 622, 639 financial law 165, 168–69, 183, 268, 337, 353, 367, 620–21 financial legal order, see commercial and financial legal order financial practice 194–95, 415, 417, 520, 623, 655 financial products 336, 347, 429, 453, 544, 622–23, 625, 642 financial regulation 40, 213, 288, 366, 623, 760 financial services 2, 7, 13–14, 40, 62, 309, 754, 757 financial structuring 353, 361, 367, 428, 548, 623, 625, 631 financial transactions 9, 166, 618, 621, 638, 646, 749, 755 financiers 446, 512, 517, 547, 553, 562–63, 565, 623–24 financing 369, 371, 502, 504, 506, 516, 543, 546 asset-backed, see asset-backed funding fines 24–25, 30, 115–17 finished products 137, 324–25, 352 fintech 44
INDEX 775
first assignees 479–81, 484, 508, 511 first buyers 394, 436, 456, 461 first notifying assignees 481, 483, 507–9, 511, 519 fitness for purpose 224–25, 232–33 fixed charges 494, 572 floating charges 335–37, 349–52, 553–55, 565–67, 571–73, 619–21, 637–39, 755–57 equitable 398, 547 flows, international 324, 330, 352, 355, 360, 425, 740, 745 FOB (free on board) 216, 258, 262, 280–81, 283–85, 661, 670–72, 674 force majeure 112–14, 123–28, 130–39, 141–43, 145, 192–95, 224–33, 260–62 foreign assets 590–91 foreign bankruptcy 576, 578–79, 589–90, 594, 599–600, 741 foreign bills of exchange 693–96 foreign enforcement 578–79 foreign interests 223, 579, 589, 597, 624 foreign law 91, 354, 576, 581, 583, 599, 611, 748 foreign proprietary rights 353, 587–88, 677 foreign trusts 415, 539–41, 576, 590, 592–95 foreseeable risk 19, 108, 144 forfeiture 546 forgery 688–89, 694 formal requirements 69, 358, 376, 442, 476–77, 486, 694 formal trusts 336, 409, 525–26, 531–32, 596, 648 formalism 30, 35, 54, 64, 91, 681, 752 formalities 68–69, 428–31, 472–76, 513–14, 551–55, 580–81, 583, 724–25 formality requirements 578, 580 formation of law, see law formation forum 213–14, 255, 274, 277–78, 312, 588, 591–94, 597 selection 679 state 277 fourteenth century 46, 66, 138, 680 France 10–11, 223, 233–39, 448–53, 463–67, 476–80, 496–99, 668–73 bankruptcy 223, 234–37, 451–52, 472–73, 544, 547, 556–57, 610 case law 11, 47, 159, 237, 451, 455 codification 88, 453 law 10–11, 65–68, 86–88, 205–6, 350–51, 388–90, 431–33, 471–72 Northern 453 Southern 28 franchises 23, 276, 317
fraud 119–22, 174, 179, 190–91, 230–31, 234–35, 449–50, 453–58 free alongside ship (FAS) 284 free convertibility 220 free disposition 275, 278, 514, 574, 603–4, 607, 623 free movement of goods 99, 167 free on board, see FOB freedom 72, 86, 88, 92, 295, 334, 337, 678–79 contractual 24, 279, 432, 607 Fremdbesitzer 380, 387, 717 frustration 131–32, 134–35, 138–39, 145, 148, 175, 207, 594 costs 420, 424 functional approaches 334, 417–18, 502, 551 functions 79, 85, 531–33, 573–74, 638–39, 670, 699, 703 safe harbour 240–42, 244, 661–62 fund management 524, 531, 533, 537 fundamental principles 9, 90–93, 170–74, 176, 180–82, 185–86, 253–54, 264–69 funding 8–9, 502, 504, 546, 552–54, 560, 562, 623 asset-backed 347, 352, 361, 363, 425, 428, 622, 626 ownership-based 553, 560, 563, 734, 738 purposes 218, 484, 566, 586, 601 schemes 560, 621–22 security-based 544, 738 fungibility 546, 714–15, 717, 730–31, 738 fungible assets 336, 728, 752 fungible securities 518, 714, 716, 720, 736 future assets 348–50, 358–59, 436–39, 444–47, 571–73, 620–21, 629–30, 650 future claims, assignability 493–97 futures 327, 338–39, 713 Gaius 342, 380, 428, 454, 474, 478, 523, 565 garnishment 513, 612–13 GATT 209 general good faith duty 106 general liens 472, 565 general principles 9–10, 81–82, 92–94, 100–1, 176–78, 251–53, 263–68, 286–88 generality of goods 438, 573, 632 Germany 223, 235–38, 383–90, 447–50, 536–40, 547–49, 554–57, 582–84 bankruptcy 236, 445, 555, 573, 582 case law 64, 114, 478, 508, 545, 653 Civil Code 2, 123, 158–59, 229, 236, 238, 351, 448
776 INDEX
codification 2, 390, 453 Historical School 2, 342, 370, 454, 478–79, 549 law 256, 461–62, 474–76, 490, 493–94, 582–84, 609–10, 716–17 gewere 355–56, 369, 379–80, 399, 404, 408, 646, 648–49 gifts 63–64, 149, 154, 158–59, 161, 456, 535, 592 globalisation 7–14, 213–15, 353, 360, 423–24, 426–27, 742–43, 745 Globalzession 609, 648, 653 good faith 20–24, 30–36, 60–67, 73–106, 108–14, 139–42, 173–76, 265–71 approaches 105, 114, 148 case law 83, 85, 87–88, 91, 99, 109, 114, 480–81 civil law 1–3, 61–62, 64–65, 71, 78–96, 406, 528, 634 and codification 90–93 common law 1, 48–49, 61–62, 78, 93–99, 132–33, 301–2, 406 EU notion 98–100 general duty 106 interpretation 2, 22, 27, 55, 74, 81, 136, 268 as mandatory concept 102–5 practical effects 105–14 and sources of contract law in the CISG, UNIDROIT and European Contract Principles 100–2 good value 389, 461, 510, 513, 529, 581, 666, 671 Goode R 401, 428, 456, 718, 745 goods 215–19, 221–53, 261–63, 279–87, 435–41, 467–73, 661–81, 698–707 consumer 14, 232, 248, 330, 395, 551, 554, 588 generality of 438, 573, 632 ordinary flow of 361, 389, 452–53, 460, 462 replacement 438–39, 534, 539, 553–54, 557, 560, 630, 635 specialty 151, 225, 229–31 in transit 210, 224, 262 underlying 241, 281–83, 665–68, 671, 675–76, 692 governmental interests 178, 213–14, 272, 277 governmental intervention, see intervention grantors 154, 370, 375, 383–84, 550 gross disparity 103, 105, 174–75, 191 Grotius, H 2, 45–46, 75, 158–59, 297, 342, 369–70, 385
guarantees 125–26, 129, 131, 133, 224–25, 229, 232–33, 685–86 bank 155, 216, 240, 314, 459 implied 129, 133, 225, 229, 262 guarantors 153, 157, 339, 651, 682–83, 685–86, 695, 697 habitual residence 199, 249, 256, 275–76, 594 Hague Conference 93, 313, 590 Hague Convention on the Law Applicable to Trusts and Their Recognition 589–95; see also Table of Legislation hardship 25–26, 77, 79, 113–14, 134–38, 140–41, 143–45, 175 clauses 5, 124, 128, 139, 143, 145, 171, 182 economic 135–38 harmonisation 12, 14, 165, 169, 639, 644, 742, 749 private law 167, 644 health and safety 209–10 heirs 153, 356, 478, 522, 532, 539, 542 hermeneutics 32 hidden defects 225, 227, 229–33, 262 hidden interests 365, 568 hierarchy 183, 185, 212, 265–66, 271, 288, 657–58, 707 of norms 208, 214, 266–67, 269, 274, 280, 287, 753 hire-purchase 160, 545–46, 548, 551–52, 560–61, 637, 647, 652 holders 375–76, 378–80, 383–89, 463–66, 663–71, 682–83, 685–89, 691–94 bona fide 666–67, 669–71, 674, 676, 692, 697, 700, 707 in due course 71, 506, 683–84, 686–89, 691–92, 694–96, 712, 721 interest, see interest holders new 664, 667, 669, 705, 714 physical 228, 239, 261, 378, 386, 457, 463, 465 security interest 328, 390, 421, 552, 555–56, 565, 567–68, 570 subsequent 159, 669, 671, 681, 688–89, 693 holdership 372–75, 378–80, 384–86, 413, 435, 441–42, 642, 667–68 physical 379, 407–8 holdings 715, 720, 727, 752–53 securities 713, 722, 731, 751 honesty 55, 84, 87, 95–97, 101–2, 112, 752 Hong Kong 419, 540, 590 horizontal effect 9, 92, 180, 645 human relationships 84
INDEX 777
human rights 9, 24, 77, 92, 101, 171, 180, 269 hypothec 438, 564–66 ICC, see International Chamber of Commerce identification 320, 348–52, 428–29, 436–40, 602–3, 629–30, 634–36, 707–8 electronic 700 physical 629, 641 and specificity 70, 356, 413, 477, 565 sufficient 349, 428, 437–38, 493, 573, 640, 730 identity 303, 305, 344, 347, 456, 492, 496 illegality 65–67, 70, 119, 123, 191, 448, 455–58, 688 illness 125, 128, 134 immanent law 10, 183, 646 immediate repossession 115, 392, 400, 405–7, 466, 635 right of 115, 392, 400, 405–7, 466, 635 immobilisation 714–15, 734–36, 738, 740, 745 immovable assets/property 4, 344–46, 353–54, 356, 365, 388, 430, 442 impediments 14, 112–13, 133–34, 145, 198, 261, 492–93, 586 practical 235, 489 implementation 13–14, 40–42, 110, 251, 254, 287–88, 308, 311 legislation 14, 317 implied conditions/terms 59–62, 93–97, 100–1, 124, 137–39, 170–72, 178–79, 181 implied duties 111–12, 153 implied guarantees 129, 133, 225, 229, 262 impossibility 123, 125, 129, 131–35, 138–39, 225–26, 544, 547 absolute 132–34 economic 134, 138–39, 207, 226 initial 174, 191 practical 556, 603, 627 unforeseeable 125 impracticability 131, 135, 138, 145, 226 incapacity 70, 134, 389, 443, 455, 458 incentives 37–38 income 319, 321–22, 324, 375–76, 384, 496, 558–59, 626–27 rights 319–24, 329–31, 335–39, 375–76, 410–12, 414, 417, 626–28 streams 327, 529, 620, 625, 630 incorporation 173, 639, 666, 679, 684, 691, 696, 746 Incoterms 283–86, 288, 674 indemnities 145, 348, 698–700
independence 27–28, 292, 298–302, 311–12, 504–7, 630, 666–67, 686–87 notion/principle 17, 243, 298, 300–1, 311–12, 506, 686–87, 697 independent sources 60–61, 63, 67, 73, 77–78, 80, 82, 171 indirect agency 293, 299, 301–2, 304–9, 313–14, 523–24, 526, 528 indirect agents 294, 307–8, 526 individualisation 319–20, 324, 334, 346, 352, 358, 366, 423 induction 617 industrial property rights 343, 422, 640 industry custom 24, 177, 218, 284, 706 industry practices 77–78, 177, 181, 184, 218, 367, 416, 747 information 8, 136–37, 229–31, 320, 352–53, 703, 707–8, 715 asymmetric 137 corporate 711, 717, 720 costs 419–20, 424 duties 3, 87, 98, 108, 229 infrastructure 204, 251, 347, 603, 678, 701, 705, 759 initial impossibility 191 initiative 17–18, 20, 24, 26, 29, 57, 246, 556–57 injunctions 13, 528, 541 innocent misrepresentation 119–21, 175, 191, 227, 232 innovation 15, 38, 169, 342, 347, 422, 452 insiders 323–24, 326, 330–31, 334–36, 423, 425, 525, 527 professional 323–24, 330, 352, 365–66, 374, 421, 575, 625 insolvency 235–36, 407, 409, 562–63, 594, 718–19, 741–42, 760; see also bankruptcy insolvent intermediaries 729, 744 inspection 225, 231–32, 249, 663 duties 225, 229, 570, 663 instructions 39, 41, 681–82, 721–22, 729, 731, 756, 759 clear 113, 208 payment 39, 42, 224, 246, 509, 722 insurance 4, 6–7, 208–9, 218–19, 273, 275, 280–81, 284 companies 155, 161, 215, 485, 741 policies 275, 282, 284, 348, 664, 667 intangible assets 331–33, 339–45, 353–59, 375–77, 413–15, 473–83, 617–29, 639–43 asset status 474–76 assignment 69, 429, 576
778 INDEX
modern law 618–43 proprietary rights in 376, 474–521 intangible claims 334, 336, 343, 348, 354–56, 368, 377, 475–76 intangible rights 339, 347, 363, 482, 491, 626 intangibles, see intangible assets intellectual property rights 332, 347, 626 intent 5, 16–29, 34–37, 48–53, 57–63, 186–90, 194–97, 269–72 and consensus 5, 11, 20, 26, 58, 131 contractual 59, 65, 269 to control 431, 442 letters of 23, 111 original 24–25, 27–28, 73, 86, 142, 283 presumed 75, 96, 535 psychological 19, 73, 81, 85, 176 subjective 186, 289 intention 37, 46, 207–8, 456–57, 535, 583, 670, 673–74 common 101, 106, 170, 187 interest holders 327–28, 377–78, 381, 403, 565, 567, 585–86, 654 equitable 406, 408, 415 secured 556, 568 interests adverse 71, 335, 421, 570, 618, 624, 647 in chattels 355, 397, 399, 550, 620 competing 329, 426 economic 163, 398, 403, 412–14, 417, 550, 632, 650 foreign 223, 579, 589, 597, 624 governmental 178, 213–14, 272, 277 hidden 365, 568 justified 302, 371, 489 legal 357, 359, 381, 397–98, 402–3, 409, 547, 550 life 321, 338, 356, 397–98, 550 limited 321, 398, 400, 483, 581, 604, 758 non-possessory 335, 377, 401, 554–55, 566 ownership 328, 462, 717 possessory 409, 555, 565–67, 570 proprietary, see proprietary interests secured 328, 346, 351, 468, 475, 477, 547, 553 security 326–29, 371–78, 468–70, 550–57, 560–71, 578–80, 586–90, 652–53 shifting 412, 620, 635, 757 special 84, 113, 144, 277, 305, 453, 501, 514 suspended 522, 525–26 temporary 359, 381, 599, 635, 726
intermediaries 242–45, 291, 661–62, 715–22, 729–33, 736–40, 746–53, 756–58 immediate 715, 719, 721 insolvent 729, 744 securities 716–18, 747–48 intermediary banks 241, 244, 662, 673, 722 intermediated securities 715, 757–58 internal market 13–14, 40–41, 165–67, 169, 178, 181, 185, 644–45 internal relationships 292–93, 295–98, 300, 302, 304, 306, 312, 314 internalisation 347, 727 international arbitrations 11, 18, 32, 209, 212–13, 274, 278–80, 288 international arbitrators 32, 89, 214, 274, 279, 353, 425, 597 international assignments 518–19, 600, 609, 611, 746 bulk 605, 616, 618 international book-entry systems 740–41, 743–44, 753 international cases 67, 91, 174, 206, 220, 274–75, 280, 575 International Chamber of Commerce (ICC) 240, 283, 286, 704 international commerce 6, 10–11, 140, 194, 203, 212, 242, 247 international commercial and financial legal order 266, 269, 288, 657 international commercial contracts 3, 15–16, 58, 70, 102, 163, 168, 171 international commercial practice 176, 224, 253 international contracts 11, 278 international convergence, see convergence international dealings 12, 28, 90, 148, 168, 173, 176–77, 182 professional 9, 164, 166, 178, 180–81, 185, 216, 288 international finance 331, 336, 363–64, 416, 419, 425, 604, 618 international flows 8, 324–26, 352–53, 355, 360–61, 425, 664, 667 international harmonisation, see harmonisation international law merchant 267, 287, 416, 676, 694, 709, 739 international markets 194–95, 279, 281, 424–25, 656–57, 725–26, 738, 740 international minimum standards 32, 148–49, 211, 269, 288 international normativity 754
INDEX 779
international practices 169, 194, 285, 733, 737, 744, 747, 749 international professional dealings 9, 178, 181, 216, 288, 336, 360 international promissory notes 697 international recognition 579, 589, 595, 617 international sale of goods 4, 6, 11–12, 191–92, 203–89, 291, 585–86, 661–62 ancillary arrangements 240–47 contracts 208–9, 215, 218, 221, 240, 270, 288 contracts between professionals 217–20 currency and payments 220–22 legal risk 211–15 main aspects 203–40 special arranements to cover risks 215–17 special features and risks 207–11 transfer of title 222–24 International Securities Market Association, see ISMA international trade 172–73, 248–49, 252–55, 270–72, 586, 617–18, 690, 697 international transactions 8–9, 58, 148–49, 209, 211–15, 217, 268–69, 574–75 internationalisation 732, 737, 740, 753 internationalism 264, 266, 679 internationality 12, 171, 210, 218–20, 267, 271 interpretation 30–34, 48–53, 59–62, 71–78, 100–1, 180–84, 250–54, 263–71 analogical 522 and civil law 52 and common law 28, 49, 194 contracts 30–32, 48–53, 59–62, 71–78, 103–5, 170–71, 263–66, 269–71 good faith 2, 22, 27, 55, 74, 81, 136, 268 and good faith notion in civil law 78–82 liberal, see liberal interpretation literal 18–19, 22, 24, 27–28, 30–34, 49–50, 74–75, 77–78 logical 48, 83 normative 27–28, 31–35, 60–62, 65–66, 71, 74–77, 85, 105 normative interpretation technique 31–35, 71, 74, 77, 83, 85, 108–9, 267–68 purposive 32, 73, 269 restrictive 80, 94 strict 36, 60 techniques 20, 26, 85, 89, 266 teleological 25, 28, 32, 73–74, 268 uniform 100, 264, 287, 617 interpretational freedom 72
intervening bankruptcy 236, 350, 430, 438, 445–46, 494–95, 729, 732 invalidity 118–19, 190–91, 388–89, 442–44, 449, 451, 455–58, 630–31 inventory 218, 349–50, 354, 363, 502, 547, 567–68, 571–73 investigation, duties 262, 462, 464, 504, 507–8, 511, 569, 571 investment securities 294–95, 307–8, 342–44, 353–54, 543–46, 560–61, 620–22, 711–60 law applicable to book-entry transactions 744–51 and lex mercatoria 751–54 transnationalisation of custodial and settlement systems 737–60 types of shares and bonds 711–37 underlying 39, 715, 718, 731, 737, 739, 745, 748 uniform law 754–58 investments 26, 28, 55–58, 716, 718, 727, 729–30, 753 investors 2, 713–21, 723, 726–33, 735–37, 741–42, 744–45, 757–59 private 105, 314, 757 ISMA (International Securities Market Association) 738 issuers 279, 713–15, 719–20, 723–24, 726, 735–36, 738–40, 744–46 Italy 375, 377, 386, 389, 453, 538–41, 590, 696 iura in re aliena 370, 372, 376–77, 382, 387, 392, 636, 648–49 ius cogens 173, 288 ius commune 45–47, 75, 369–70, 452–54, 477–79, 547–49, 564–66, 636–38 ius tertii 393, 407 iusta causa 454, 466 Japan 166, 474, 696 Jhering, R von 20, 66, 106, 379, 383, 648 judicial discretion 82–83, 86, 88, 121, 137, 142, 580 judicial intervention 28, 83, 95, 138, 235, 259–60, 528, 578 judicial liens 390, 570 judiciary 53, 68, 76–77, 89–90, 105, 528, 579, 636 juridical acts 20, 435, 443, 650, 655, 668 jurisdiction 13–14, 99–100, 164–65, 212–14, 539–41, 578–79, 612–13, 741–42 adjudicatory 212 bankruptcy 579, 600, 741–42 legislative 644–45, 658
780 INDEX
justice 17–19, 27–28, 34–36, 72–74, 76, 90, 92, 348 natural 34, 147, 168 justifiable reliance 56, 68, 77 justified expectations 27, 74, 76, 94, 613 justified interests 302, 371, 489 justified reliance 3, 10, 33, 109, 663 Justinian 45, 64, 158, 342, 380, 452–53, 557, 565 knowledge 230, 323–24, 333, 337–39, 371, 478–80, 507–9, 631–34 actual 333, 365, 436, 508, 632 constructive 334–35, 371, 414, 463 prior 322–23, 330–33, 338, 359, 366, 627, 631–32, 642 land 152–53, 329–33, 345, 353–57, 368–73, 376–77, 395–97, 402–4 estates in 152, 345, 356–57, 369, 410 law 115, 345, 353–57, 396–97, 405, 408, 635, 637 registers 152, 334, 371, 376, 452, 463, 475, 571 law and economics analysis 35–37, 39, 332, 334, 417 law formation 9, 16, 89–90, 92–93, 164–65, 169, 424, 645 law merchant 7, 9, 166, 266–67, 269, 287–88, 666–68, 723–25 international 267, 287, 416, 676, 694, 709, 739 law of chattels and intangibles 353–57, 381, 395, 618, 622, 625 leasing 156, 270, 415, 560–61, 574, 595 finance 207, 337, 415, 545–46, 551, 560, 562, 574 ledger 42–44 legal acts 243, 291–94, 310–11, 434–35, 442–43, 449–50, 455, 476–77 legal assignments 445, 484, 501, 511 legal capacity, see capacity legal dynamism, see dynamism legal formalism, see formalism legal interests 357, 359, 381, 397–98, 402–3, 409, 547, 550 legal orders 8, 28, 77, 177, 269, 272, 287–88, 360–61 domestic 77, 215, 269 independent 77 international commercial and financial legal 269 legal owners 261, 402, 409, 522, 526–27, 533–34, 536, 717–18
legal personality 426, 523–24, 527, 535, 537, 539 legal positivism, see positivism legal possession 283, 305, 343, 378–79, 383–84, 386–88, 455, 462 bona fide 387, 462 legal possessors 375, 379, 384–88, 405, 464, 628 legal pragmatism, see pragmatism legal principles 62, 77, 83, 88, 138, 208, 287–88, 298 common 287, 678, 698 general, see general principles legal realism, see realism legal rights 108, 529, 534, 626, 745 legal risk 209, 211–12, 215, 344, 364, 719, 734, 759 legal scholarship 65, 85, 308, 330, 345, 643 modern 643 legal sources, see sources of law legal systems 137–38, 277–78, 351–52, 444–45, 469–71, 575–77, 598–600, 604 legal transnationalisation, see transnationalisation legal universalism, see universalism legislative jurisdiction 644–45, 658 legitimacy 40, 73, 88–90, 167, 172, 177, 269, 277 lenders 128, 333, 337, 491, 558, 565–67, 569, 631 secured 567–68, 570 lessees 153, 156, 159–60, 336, 364, 545, 551, 561–62 lessors 153, 156, 159–60, 336, 545, 551, 561–62, 568 letters of credit 215–17, 240–44, 247, 291, 674–75, 690, 698–700, 702–3 documentary 241–42, 245, 297, 314, 698–99, 702–3 letters of intent 23, 111 lex commissoria 125, 234, 236–37, 448, 450–52, 456, 549, 557 lex contractus 354 lex fori 118, 130, 193, 255–56, 259, 274, 279, 317 lex mercatoria 9–12, 171–73, 176–78, 211–15, 251–54, 265–67, 269–72, 286–88 and agency 315 approach 93, 172–73, 266–67, 288, 642, 745, 747, 749 and bills of exchange 697–98
INDEX 781
and bulk assignments 617–18 and investment securities 751–54 old 632 operation 8–9, 164, 266, 271, 287, 623, 657 transnational 7–8, 10, 209, 211, 367, 416, 596, 697 lex rei sitae, see lex situs lex situs 576–81, 583–84, 588–91, 593–94, 611–13, 676–77, 745–46, 748 lex societatis 725, 738, 740, 745–46, 748 lex specialis 435 liability 13–14, 96, 109–10, 292–94, 296–99, 302–4, 314, 678–79 carrier 678–79 contractual 23, 36, 54–55, 62, 96, 107, 110, 127 direct 304, 314 non-contractual 537 product 5, 13–14, 229 tort 23, 96, 155 vicarious 297–98 liberal interpretation 21, 28, 71, 102, 104, 264, 266, 332 technique 3, 26–27, 73, 81–82, 92, 94, 269, 271 liberalisation 221 liberating payments 478, 513, 519, 606, 609, 616, 682 liens 390–91, 458, 470–73, 557, 565, 567, 569–70, 596–97 attachment 390–91 consensual 473, 565 equitable 397, 533–34, 620 general 472, 565 judicial 390, 570 maritime 596 shifting 365, 631 statutory 238, 470, 557, 565, 589, 674 life estates 372, 550 life interests 321, 338, 356, 397–98, 550 limitation, statutes of 230, 389, 407–8, 430, 460, 550 limitation of proprietary rights 418, 421–22 limited interests 321, 398, 400, 483, 581, 604, 758 limited proprietary rights 342, 376–77, 382–83, 387–88, 397–98, 475, 522–23, 636 liquidation 321, 344, 426, 556–57, 712, 717, 730 surpluses 711–12
liquidity 152–53, 320–23, 325, 338–40, 352–53, 638–41, 664, 725–27 management 633, 635, 638, 643, 646–47, 656, 658 requirements 338, 417, 732 risk 210, 215, 217, 242 literal interpretation 18–19, 22, 24, 27–28, 30–34, 49–50, 74–75, 77–78 litigation 68, 72, 74, 76, 108, 256, 260, 268 loading 241, 280–81, 283–84, 286, 669, 671, 674, 677–78 port of 284, 678–80 time of 671, 678 loans 43, 321, 348–49, 502, 516, 518, 543, 551–52 secured 543–44, 548 location 577–78, 598, 600–1, 676, 739, 742, 745–46, 748–49 longa manu 343, 375, 380, 434, 439, 461, 466, 558 Louisiana 357 loyalty 28, 74, 87, 296, 301, 528 Luxembourg 273, 432, 450, 540, 561, 733–34, 748–50, 757 management fund 524, 531, 533, 537 liquidity 633, 635, 638, 643, 646–47, 656, 658 risk, see risk management structure 524–26, 532, 537 mandatory custom 185, 254, 288 mandatory rules 93, 170–74, 178, 220–21, 275–78, 280, 513–15, 594 mandatory uniform treaty law 753 manifest unreasonableness 36, 77, 147, 174 manipulation 241–42, 269 Mansfield, Lord 55, 57, 65, 401, 681 maritime liens 596 market conditions 144, 215, 249, 543 market forces 198, 337, 366, 428, 445, 646 market practices 3, 5, 194, 196, 732–34, 738–39, 754, 756 market prices 130, 143–44, 242, 306, 721, 727, 753 markets 366–67, 706–7, 711–12, 725–28, 738–40, 742–44, 753–55, 759–60 capital 39, 44, 424, 740, 742, 744, 749, 759 eurobonds 416, 424, 703, 706, 712, 725, 732, 734 international 194–95, 279, 281, 424–25, 656–57, 725–26, 738, 740
782 INDEX
maturity 42–43, 493–94, 504, 563, 682, 711 merchantability 224, 229, 232–33 mere description 319, 330, 349, 365, 426, 445 mere possession 379, 567 methodology 14, 16, 91, 163, 194–95, 198–99, 644, 707 minimum standards, international 32, 148–49, 211, 269, 288 minors 67, 443, 523, 526, 530–31, 594 misbehaviour 85, 107, 119 misrepresentation 59, 105, 107, 119–23, 175, 227, 232, 262 innocent 119–21, 175, 191, 227, 232 negligent 107, 112, 120, 146 mistake 105–8, 119, 121–23, 179, 191, 227, 229–32, 262 mutual 123, 125, 146 models 31, 83, 415 modern contract law 16–22, 24, 27, 35, 95, 105, 194, 197 modern lex mercatoria, see new lex mercatoria monetary claims 328, 339–40, 484–88, 492, 505–7, 509, 515, 601–2 money laundering 80, 213, 269 morality 45, 55, 102, 427 mortgagees 483, 546, 555–56 mortgages 321, 333, 356, 377–78, 483, 546–47, 557–58, 596 chattel 398, 402, 438, 546–47, 565–67 mortgagors 402, 546 movable property/assets 16–18, 339–42, 344–46, 351–54, 360–63, 368–69, 441–42, 651 mutual mistake 123, 125, 146 named bills of lading 674 national laws 212, 214, 217, 219, 284–86, 678–79, 686, 703–4 nationalisation 610, 612 natural law 2, 9, 45–46, 75, 158, 369–70, 432, 441 concept 190, 296 school 2, 45–46, 75, 158, 369–70, 432, 441, 479 secular 45 natural persons 12–13, 20, 48, 67, 200, 235, 372, 626–27 negligence 52, 87, 96, 109–10, 130, 135, 147, 404 negligent misrepresentation 107, 112, 120, 146 negotiability 585, 663–65, 668, 670, 675–77, 706–9, 712–14, 723–24
negotiable documents 663, 665, 667, 669, 671, 673–75, 677, 679 of title 244–45, 663, 665, 667–71, 673–81, 683, 691–93, 697–99 negotiable instruments 584–85, 618–21, 665–67, 679–701, 705–9, 711–13, 721–24, 745 and uniform treaty law 696–97 negotiation 76–77, 104, 108–11, 170–71, 668–69, 671, 677, 688–90 duties 3, 17–19, 76–77, 79, 81, 85, 104, 108–11 pre-contractual 57, 106, 108–10, 170–71, 182 negotiations 26, 108–10, 144, 668–69, 677, 688–90, 701–2, 706–8 in bad faith 170, 175 nemo dat 460–61, 463–64, 467, 469, 509–12, 514–15, 666, 670 Netherlands 66, 68–69, 114–16, 539–41, 547–49, 587–90, 594, 609–10 bankruptcy 443, 445, 448, 450, 452, 563, 573, 588 case law 80, 88, 109, 306, 309, 561, 609–10 courts 277, 541, 595 law 234, 342, 462, 465–66, 490, 495, 503–4, 610 Supreme Court 66, 297, 480, 610, 728 netting 367, 424–26, 557, 560, 562–63, 622, 755–57, 759 new law merchant, see new lex mercatoria new lex mercatoria 214 nineteenth century 2, 45–46, 75, 345–46, 348–49, 547–48, 566–67, 696–97 early 2, 46, 548 late 296 nominal values 500–1 non-intentional duties 24, 26, 49, 56 non-owners 68, 385, 408, 461, 466 non-performance 5, 36, 103, 124–26, 128–29, 134, 190, 192 non-possessory interests 335, 377, 401, 554–55, 566 non-possessory pledges 557, 588 non-possessory securities 371, 417, 438, 547, 554, 556, 654 non-possessory security interests 367, 374, 377, 554–55, 566–67, 619, 633–34, 637 non-professionals 634 non-secured creditors 534, 554, 565, 569, 572, 583
INDEX 783
normative approach 28, 32, 34, 60–62, 71–72, 74–77, 81–82, 298 normative interpretation 27, 31–35, 71, 74, 77, 108–9, 131, 267–68 in practice 71–114 normativity 10, 32, 80–81, 93, 366 norms 74, 76, 81–83, 214, 266–69, 280, 286–88, 753–54 notification 376–77, 476–81, 483–84, 486–87, 491–96, 507–9, 517–19, 601–3 requirements 351, 477–78, 480, 493, 495, 497, 499, 508 novation 478, 482, 491, 497–500, 513–14, 602–3, 682, 687 nullity 227, 250, 492, 655, 666, 688 numerus clausus 322–23, 329–32, 334, 374, 414–15, 417–23, 636–37, 643 objective approach 21, 73, 75–76, 81, 133, 190, 197, 271 objective law 20, 137, 142, 204–6, 215, 271–72, 532, 535 objective standards 24, 30, 65, 102–3, 178, 187 objectivity 17, 28–29, 48, 75, 88, 187 obligations 46–48, 115, 149–53, 157–59, 338–39, 358, 471–74, 614–16; see also duties characteristic 40, 256, 275–76, 314, 609, 615, 623 contractual 40, 42, 273, 275, 307–8, 364, 605, 614–15 law of 157–58, 230, 311, 345, 363–64, 473–74, 624, 644–46 payment 125, 131, 134, 241, 243–44, 291, 683, 689 secondary 505, 683 obligatory claims 340, 390, 627–28 obligatory rights 149, 329–30, 345, 369, 371–72, 392, 395–96, 636–37 and proprietary rights distinguished 369–72 offer 20, 46–49, 51–53, 56–58, 75–76, 187–89, 250–51, 257 offer and acceptance language 21, 34, 47, 52, 57–58, 183, 196–97 offerees 40, 47, 53, 57, 63, 103, 188–89 offerors 40, 47, 57, 188–89 offshore trusts 589–90 omission 226, 266 on-board bills of lading 282, 662, 671 open agency 305, 309–10 open system of proprietary rights 377, 410–11, 414, 417, 428, 469
openness 3, 74, 84, 101, 410, 418, 422, 557 optimal standardisation 419–20, 425, 636 ordinary assets 326, 474, 482, 493, 497, 505 ordinary commercial flows 331, 333, 335, 338, 585, 620, 658 ordinary creditors 556, 568, 588, 712 ordinary flow of goods 361, 389, 452–53, 460, 462 original intent 24–25, 27–28, 73, 86, 142, 283 original owners 319, 387, 408, 461, 465–67, 469, 510, 757 ostensible ownership 568 outsiders 20, 150–51, 156, 158, 457, 464, 569, 575 overvalue 223, 238, 502–4, 543, 546, 551–53, 556–57, 565 return of 512, 546–47, 553–55, 558 owners 152–54, 374–80, 382–87, 389–401, 404–13, 441, 463–67, 712–19 conditional 234, 507, 560 equitable 404, 522, 533–34, 718 legal 261, 402, 409, 522, 526–27, 533–34, 536, 717–18 new 151–53, 205, 321–22, 327–28, 330, 461, 465, 713–14 original 387, 408, 461, 465–67, 469, 510, 757 real/true 385, 393, 396, 406–7, 460, 466, 533–34, 536 succeeding 152–53, 370–71, 410, 412 ownership 354–59, 372–87, 397–410, 427–34, 520–29, 557–60, 562–69, 631–37 appearance of 268, 510, 568, 641 concepts 374, 380, 397, 401, 559, 563, 633, 636 duality of 336, 365, 372, 525, 527–28, 537, 551, 557–59 interests 328, 462, 717 ostensible 568 protection 359, 372–77, 380–81, 385–87, 393–95, 402–4, 462–63, 628–29 reputed 235, 237, 438–39, 456, 458, 566, 568 rights 332–36, 371–78, 380–83, 391–94, 397–404, 522–25, 636–37, 717–18 conditional 377–78, 381, 402, 522–25, 557–60, 563–64, 631–32, 637 temporary 359, 381, 397–98, 500, 522–23, 548, 631–32, 637 split 365, 415, 522, 525, 536, 549–50, 576, 638
784 INDEX
temporary 409, 500, 522, 537, 549, 600 transfers of 205, 354–58, 376–77, 386, 428–34, 443–44, 447, 558–60 ownership-based funding 553, 560, 563, 734, 738 pacta sunt servanda 46, 173, 268 Pandectists 2, 342, 370, 454, 478–79, 549 paper bills of lading 705 Papinianus 85 parol evidence rule 50, 59, 61, 78, 96, 189, 271, 279 partial codification 163, 198, 203–4, 210, 250, 253, 257, 265 partnership 30, 96, 136, 144, 299, 301, 524, 532 party autonomy 10–11, 16–19, 28–30, 335–38, 363–66, 574–76, 607–11, 623–25 degree of 17, 206, 335, 607, 651 in proprietary matters 10, 398, 617, 645, 747 passing of risk 135, 224–33, 250–51, 261–62, 265, 280, 283, 285–86 of title 205, 228, 258, 262, 306, 431, 466 past experiences, extrapolation of 180 payees 71, 224, 246–47, 361, 681–85, 687–91, 693–97, 721–22 original 684, 686–87 third-party 247, 689, 691 paying banks 216–17, 245, 247, 291, 668 payment finality 71, 204–5, 323–25, 352–53, 360–61, 365–66, 458–59, 647 payment instructions 39, 224, 246, 509, 722 payment obligations 125, 131, 134, 241, 243–44, 291, 683, 689 payment risk 216, 243, 289, 294 payment systems 620, 702, 707, 722, 732 payments 219–21, 262, 489–90, 620–21, 700–1, 714–15, 721–22, 751–53 electronic 621, 634, 646, 690 immediate 216, 477, 682–83 liberating 478, 513, 519, 606, 609, 616, 682 payors 124, 497, 499, 630, 691, 721–22 PECL (Principles of European Contract Law) 3, 100–4, 113, 163, 168–71, 177–79, 181–93, 308; see also Table of Legislation penalties 115–18, 129, 138, 193, 492, 581 perfection 354, 485, 511, 519, 569, 571, 751, 755 automatic 512 performance 21–25, 52–53, 55–57, 95–98, 111–51, 155–58, 192–93, 259–62 defective 23, 129
duties 124, 204, 230, 238, 259, 302–3 excuses of 28, 59, 112, 124–28, 132, 138 in kind 114–18, 129, 148 securing 147 specific 114–18, 121–22, 129–30, 170–71, 193, 259–60, 457, 642 substitute 161–62 perpetuities 522, 530, 550, 593 personal actions 191, 345, 370, 454–55, 459, 463–64, 515, 562 personal circumstances 44, 128, 132, 134–35 personal claims 305, 466, 504, 602, 718 personal creditors 539, 542, 594, 731 personal defences 688–89, 694 personal property 344–46, 353–54, 394–95, 401, 404–6, 410–11, 482, 567 security interests in 457, 469, 485, 569, 571 personal rights 346, 370–71, 378, 392, 394, 529, 539, 640 personality, legal 426, 523–24, 527, 535, 537, 539 in personam rights 158, 260, 264, 340, 345, 370, 396, 492 philosophy 95, 137, 656 physical assets 307, 342–43, 350, 385, 387, 402, 430, 648 physical control 649, 662 physical delivery 226–29, 231, 394, 435–36, 442, 468–69, 584–85, 665 physical existence 366, 629 physical holders 228, 239, 261, 378, 386, 457, 463, 465 physical holdership 379, 407–8 physical identification 629, 641 physical movable assets 203, 319, 350, 373, 430, 648 physical possession 224–29, 355–59, 379–80, 412–15, 461–67, 469–71, 564–68, 648–49 physical possessors 359, 379, 406, 409, 415, 422, 463, 471 physical transfer 440–41, 455–56, 474, 477 physicality 348–49, 358–59, 361, 363, 435, 629, 649, 651 place and time of delivery 70, 130, 189, 203, 251, 257, 693–94 place of destination 244, 662, 745 place of enforcement 581, 613 place of payment 70, 222, 257, 694–95, 697 pledges 377–78, 398–99, 401, 442, 473, 564–66, 738, 755–57 of chattels 566–67
INDEX 785
non-possessory 557, 588 possessory 346, 472, 566 pledgors 464, 480, 756 Poland 432, 696 policies, insurance 275, 282, 284, 348, 664, 667 political risk 134, 209, 211, 215, 217, 241–42, 690 pools 43, 414, 714–15, 719, 723, 733, 736, 752 underlying 716–18, 745 port of loading 284, 678–80 Portugal 11, 87, 163, 197, 210, 251, 312, 315–16 positive law 10, 351, 385, 416, 418–19 positivism 90–91 possession 234–39, 377–89, 391–402, 404–15, 438–42, 461–71, 563–71, 627–30 actual 235, 407–8, 431, 467–68, 471 bona fide 382, 387–88, 462, 465, 627 buyers in 224, 236–37, 262, 409, 432, 451, 457, 459 in civil law 341, 379, 386, 557 constructive 380, 385, 399–401, 407–8, 466, 471, 564, 566 debtors in 234, 567 delivery of 375, 377, 380, 432, 434, 469–70, 477, 479 legal, see legal possession mere 379 physical 355–59, 379–83, 397–402, 406–8, 412–15, 461–67, 564–69, 648–50 sellers in 227, 230, 242, 470, 673 transfers of 207, 358, 386, 428, 431, 441–42, 470, 476 possessors 375–76, 379–80, 383–86, 389, 400–2, 404–8, 412, 558 bona fide 389, 465, 667, 752 legal 375, 379, 384–88, 405, 464, 628 physical 359, 379, 406, 409, 415, 422, 463, 471 possessory actions 341–42, 378, 381, 383–85, 389, 393, 627, 629 possessory interests 409, 555, 565–67, 570 possessory pledges 346, 472, 566 possessory rights 157, 383, 401, 407, 573 possessory security interests 346, 566, 619, 690 post-contractual duties 17, 88, 104, 170, 182, 211, 251 post-contractual renegotiation duties 3, 17–18, 62, 73, 77, 79, 129, 147 post-contractual rights 85 Pothier, R-J 2, 46, 48, 51–53, 66, 115, 441, 477
powers 53–54, 88–90, 238–39, 294–300, 527–28, 541–42, 579–80, 591–93 sufficient 454, 464, 601, 757 tracing 295, 315, 593 powers of attorney 293, 298, 482 practicability 133, 138, 624 practical impossibility 556, 603, 627 practitioners 195, 204, 210, 252, 735, 738, 740, 742 praetor 45, 85 pragmatism 75 pre-contractual disclosure 17–18, 26, 73, 77, 79, 81, 175, 179 duties 104, 108, 110, 179, 182, 302 pre-contractual duties 23, 70, 77, 85, 87, 97, 106, 108 pre-contractual negotiation duties 57, 106, 108–10, 170–71, 182 precedence 155, 177, 185, 277–78, 494 precedent 55, 90, 124, 127, 236, 285 predictability 36, 92, 184, 186, 643, 654–56, 758 preferential rights 412, 557 preferential transfers 438, 757 prescription 250, 278, 389, 452, 465–66, 599 acquisitive 382–83, 385–89, 393, 407–8, 429–30, 462, 464–66, 642 presumed intent 75, 96, 535 presumptions 455, 568, 617, 640, 668–69, 671–73 of fraud 568 rebuttable 276, 679 prices 64, 70, 189, 207–8, 230–31, 249–51, 256–60, 727–28 agreed 123, 130, 203 concessions 146, 148 market 130, 143–44, 242, 306, 721, 727, 753 purchase 154, 217, 336, 451, 465, 687, 722 reduction 58, 120, 193, 195, 230–31, 262 repurchase 446, 543–45, 562–63 sales, see sales prices prima facie evidence 663, 680 principals 159, 301, 303, 307–9, 535 principles common 10, 164, 287, 315, 698 fundamental 9, 90–93, 170–74, 176, 180–82, 185–86, 253–54, 264–69 general 9–10, 81–82, 92–94, 100–1, 176–78, 251–53, 263–68, 286–88 Principles of European Contract Law, see PECL
786 INDEX
prior knowledge 322–23, 330–33, 338, 359, 366, 627, 631–32, 642 priority 390–93, 473, 494–95, 511–12, 547, 553–55, 564–66, 569–70 private international law and bills of exchange 693–96 and bills of lading 675–78 and chattels 574–97 modern 267, 269, 369, 520, 596, 618, 678, 734 rules 40, 171, 173, 177–78, 262–64, 266–67, 273, 617 and trusts 190, 539–43 private investors 105, 314, 757 private law 9–10, 12–14, 89–94, 163–69, 180–81, 197–99, 263–64, 644–46 codification 15–16, 86, 91, 93, 197–98, 251, 644 and common law 194 domestic 77, 100, 644 formation 9, 16, 89–90, 164–66, 169, 197, 199, 657 harmonisation 165, 644 intervention 94, 163, 211 nature 10, 16, 70, 77, 91, 194, 380, 646 sources of 71, 77, 86, 91, 93, 100, 180, 185 transnationalisation of 77, 93, 361 unification 99, 165, 167–68, 248 uniform 12, 100, 248, 755 private parties 9, 30, 185, 268, 399, 574, 623 private property 348, 356, 426–27 privity 1, 4, 149–62, 193, 303, 317, 320, 322 pro rata shares 423, 723, 730 product liability 5, 13–14, 229 products 5–6, 364, 366, 621, 623–25, 638–40, 643, 646 commoditised 71, 399, 402, 575, 620–21, 624, 629, 631 modern financial 167, 347, 429, 453, 525, 544, 557, 625 professional activities 13, 634, 752 professional contracts 1, 5–7, 18–19, 22–26, 32, 49, 51, 54 professional dealings 16–33, 35–38, 48–52, 76–77, 79–82, 164–69, 173–75, 190–97 international 9, 164, 166, 178, 180–81, 185, 216, 288 professional debtors 25, 74, 106, 113, 135 professional insiders 323–24, 330, 352, 365–66, 374, 421, 575, 625 professional parties 6–8, 17–19, 21–33, 77–80, 102–5, 107–14, 174–77, 192–96
professional sales 7, 15, 195, 205, 230 professional sphere 16, 18, 80, 96–98, 110–11, 322–25, 416–17, 657–58 professionalism 106, 109, 113, 703, 754 professionality 144, 191, 220, 271 professionals, see professional parties promisees 52, 55, 128, 136, 159, 161–62, 193 promises 10, 20, 22–23, 45–48, 50–57, 62–63, 65–66, 124 exchange of 45, 48, 50, 52–53, 55, 57, 63, 65 mutual 51, 63 promisors 51–52, 55, 124–26, 128, 137, 161, 261, 486 promissory estoppel 56 promissory notes 246, 339, 344, 506, 618–19, 695, 697–98, 711–12 property, see also Introductory Note immovable 344–45, 365, 442, 745 law, see also Introductory Note modern 357, 360–63, 626, 633, 639, 643, 647, 656 notion 319–26 personal 344–46, 353–54, 394–95, 401, 404–6, 410–11, 482, 567 real 344–45, 354–55, 555, 657 rights, see proprietary rights trust 534, 537, 539, 592–94 proportionality 197, 212, 277 proprietary actions 150–51, 345, 370, 382–85, 392, 403, 411, 627 proprietary aspects of assignments 364, 513, 607, 609, 611, 624 proprietary claims 115, 234–35, 340, 382, 561, 614–15, 643, 730 proprietary defences 54, 150 common law 404–7 proprietary effect 152–53, 157–58, 234, 311, 448–49, 548–49, 607–8, 669–70 proprietary expectancy 412, 545, 549, 559 proprietary interests 327–28, 390–91, 401–3, 520–21, 579–83, 600, 625, 641–42 equitable 334–35, 394, 398, 401, 403, 469, 619–20, 642 foreign 579, 604 limited 398, 604 senior 328, 391 proprietary protection 235, 374–75, 383, 385–86, 405–6, 410, 474, 476 proprietary regimes 341, 343, 356, 368, 599, 609, 632, 640
INDEX 787
proprietary remedies 107, 130, 261, 336, 348, 528, 562 proprietary rights 327–39, 345–50, 376–84, 390–403, 413–23, 425–29, 623–29, 631–44 in civil law 369–94, 610, 637 closed system of 365, 374, 378, 418–19, 446, 531, 636–37, 647 in common law 394–428 and contractual rights distinguished 327–32 creation 323, 325, 330–31, 335, 337, 414, 425, 427 equitable 334–35, 365, 402–3, 418, 500–1, 529, 585, 611 foreign 353, 587–88, 677 in intangible assets 376, 474–521 limitation 418, 421–22 limited 342, 376–77, 382–83, 387–88, 397–98, 475, 522–23, 636 modern structure 625–33 nature and structure 372–77 and obligatory rights distinguished 369–72 open system of 377, 410–11, 414, 417, 428, 469 paucity of modern property theory 634–43 protection in civil law 382–87 and publicity 332 as risk management tools 337–39 traditional 331, 334, 377, 377–82 traditional approach 357–60 transfer 151, 428–73, 518 types 369–428, 610, 637 proprietary status 320, 322–23, 331, 348–49, 351, 394, 396, 577–79 proprietary structures 29, 329, 344, 355, 417, 424, 620–21, 658 proprietary systems 323, 368–69, 409–12, 415, 418–19, 557, 559, 630 proprietary usufruct 338, 564 psychological intent 19, 73, 81, 85, 176 public interest 33, 72, 80, 93, 337, 353, 362, 423–26 public international law 9, 134, 263, 707 public order 64–65, 91–92, 172–74, 176–77, 268–69, 272, 350, 366 concepts 65, 102, 277 considerations 18–19, 27, 67, 173, 175, 213–14, 268, 272 requirements 67, 172, 254, 268, 288, 366, 416, 599
public policy 17–19, 26–30, 32–33, 73–74, 79–82, 174–77, 424–25, 578–80 bar 314, 597 domestic 149, 172, 177–78, 211, 265, 272, 360, 585 publicity 332–34, 371, 376, 476–78, 480, 585, 588, 632 and proprietary rights 332 punitive damages 150 purchase prices 154, 217, 336, 451, 465, 687, 722 purchasers 121, 335–36, 559, 568–70, 585–86, 620–21, 624, 631–32 bona fide, see bona fide purchasers quality 12–14, 16, 199–200, 216–17, 231–32, 241–42, 244–46, 262 certificates 216, 242, 663 quality risk 209, 216, 486 quasi-negotiable documents 664, 666 Rabel, E 142, 248, 312, 597, 613 rationality 9, 30–31, 45, 209, 448 re-characterisation 504, 548, 550–51, 563, 611, 613, 637, 652–53 issues 503, 622, 637 risk 548, 734, 738 re-hypothecation 723, 744, 757 real estate 69, 354, 357–58, 390, 399–400, 452–53, 546, 565–66 real property 344–45, 354–55, 555, 657 reasonable commercial standards 94, 97–98, 191, 491 observance of 97–98 reasonable description 352, 425, 439, 485, 520, 629 reasonable person 29, 101, 103, 126, 191, 259 reasonable reliance 56–57, 84, 188–89, 292 reasonableness 60–61, 94, 96–98, 100, 102–4, 140, 178–79, 272 rebalancing 107, 140, 212, 363, 594 rebuttable presumptions 276, 679 receipt 187–88, 243–44, 661, 669, 672–77, 680, 699–700, 703–4 receivables 348–52, 483–88, 490–96, 499–504, 515–18, 559–62, 597–602, 612–14 financing 152, 477, 500–2, 511–12, 516–18, 520–21, 545–46, 560–61 trade 152, 438, 524, 600, 755 transfers of 160, 218, 495, 612, 691
788 INDEX
reclaiming 234, 239, 336, 458, 544–45, 547, 663, 665 rights 120, 240, 407, 432, 463, 565, 662 recognition 219–22, 477–79, 576–83, 587–91, 593–97, 600–1, 615–18, 741–42 international 579, 589, 595, 617 state 591, 760 recourse 42, 44, 151, 153, 490–91, 684–86, 689–91, 693–95 financing 516–18, 653 recovery 155, 389, 392, 404, 407, 473–74, 479, 609–10 rights 421, 428, 478, 496, 529, 557, 591 redemption 402, 483, 546, 548, 558, 566, 751 equity of 402, 483, 546, 548, 558, 566 redistribution 6, 21, 26, 33, 104, 146 registered securities 713–14, 717, 738, 744 registered shares 713–14, 716, 725, 735 registration 480, 566–68, 580–81, 586–88, 599–601, 713–15, 733, 756 requirements 351, 503, 508, 555 regulation 40, 273–79, 312–14, 421–22, 539–40, 607–8, 615, 623–24 financial 40, 213, 288, 366, 623, 760 reimbursement 109, 153, 216, 245, 282, 314, 587, 674 relationship thinking 1–7, 16–18, 24–29, 31–37, 60–62, 72–74, 79–80, 86–88 relationships external 243, 293, 300, 306, 310 fiduciary 96, 302, 526, 718 underlying 513–14, 520, 608, 613, 630, 681, 684, 687–88 relativity 392–94, 555 relevant facts 84 reliance 21–23, 47–50, 53–63, 75–77, 106–9, 183, 186–90, 296–300 and conduct 34, 38–39, 41, 73, 77, 183, 186, 188 detrimental 18–20, 52–53, 56, 58–59, 63, 108–9, 111, 188–89 justifiable 56, 68, 77 justified 3, 10, 33, 109, 663 reasonable 56–57, 84, 188–89, 292 religion 45 remainders 356, 397–98, 472, 500, 510, 550 remedial constructive trusts 440, 592 remedies 3, 59, 109, 118–19, 129–30, 190–93, 258–62, 396 contractual 59, 109, 241, 456 equitable 5, 53, 118, 121, 533
proprietary 107, 130, 261, 336, 348, 528, 562 rescission, see rescission self-help 552, 555–56, 756 renegotiation 26, 28, 74, 76, 112–14, 136–38, 140–43, 145 duties 77, 79, 129, 131, 135, 137, 141–42, 179 post-contractual 3, 17–18, 62, 73, 77, 79, 129, 147 rights 136–37 rental agreements 3–4, 45, 144, 149, 152–54, 338, 380, 386 reorganisation 321, 391, 556–57, 570, 578 repayment 43, 216, 328, 546–47, 552–53, 612, 717, 720 replacement assets 349–52, 445, 534, 539–40, 552–54, 619–21, 629–30, 632 replacement goods 438–39, 534, 539, 553–54, 557, 560, 630, 635 repos 544–48, 551–52, 560–63, 622–23, 652–53, 738–40, 742, 758 of investment securities 545, 553, 560–61, 622 repossession 107, 115, 384, 390–91, 400, 544, 552, 555–57 representations 70, 72, 120–22, 124, 127–28, 306, 309, 423–24 repudiation 125, 129, 391–92, 519 repurchase 483, 543–47, 563 agreements 354, 518, 540, 544–45, 561, 637, 755 prices 446, 543–45, 562–63 reputed ownership 235, 237, 438–39, 456, 458, 566, 568 resale 238, 244, 286, 371, 409, 457, 493, 581 rescission 118–23, 230–37, 239–40, 259–60, 448–52, 456–59, 473, 515 clauses 207, 217, 235, 457 reservation of title 223, 234–37, 449–51, 545–49, 551–55, 557–61, 587–88, 646–49 residence 217–18, 249, 256, 275–76, 593–94, 604, 609–10, 613–14 habitual 199, 249, 256, 275–76, 594 residual rules 100, 213–14, 267, 745, 749–50, 754 resolutive conditions 516, 525, 558, 652 restitution 59, 191, 340, 343, 345, 368, 456, 482–84 claims 68, 343, 345, 356, 368, 482 restraint of trade 36, 77, 116, 150 restrictive covenants 152–53, 511 restrictive interpretation 80, 94
INDEX 789
resulting trusts 398, 402, 521, 526, 528, 531–32, 535, 537 retention 238–39, 241, 440–41, 469–73, 553, 589, 652, 675 rights 238–39, 301, 307, 311, 313, 469–73, 577, 587–89 retentors 153, 238, 393, 440, 470–73, 589 retransfer 234–36, 430, 448, 452, 517, 546–47, 655 retrieval 380, 386, 391–92, 400–1, 406, 409, 461, 463 rights 386, 414, 451 retroactivity 212, 233–34, 443, 449, 467, 496, 549, 729 return 234–37, 239–40, 260–62, 448–51, 516, 518–19, 533, 551–53 automatic 121, 207, 234, 236–38, 447–49, 455, 458, 516 of overvalue 512, 546–47, 553–55, 558 of title 59, 207, 234–35, 237, 239–40, 450, 452, 456–59 revindicatio 382–83, 385, 387, 389, 391–93, 408, 648–49 revindication 234–37, 239, 405, 409, 443, 447, 451, 627–28 rights 239, 341, 400, 409 reward 54, 64, 117, 155, 504, 516, 546, 553 structure 503–4, 543, 551, 553 rights absolute 392–94, 404, 407, 411 conditional ownership 557, 560, 563–64, 566, 627, 631, 634, 637 contractual 46–49, 55–56, 306–7, 329–32, 338–39, 409, 412–14, 420 contractual user 322–23, 329, 333, 336–37, 375–76, 380, 392, 642 direct 155, 308, 717, 719 disposition 358–59, 388–89, 428–31, 442–44, 451–54, 460–63, 630–32, 650 enjoyment 319–24, 326–27, 329–32, 337–39, 373–77, 383–84, 409–12, 626–28 equitable 359, 382, 398, 402–3, 411, 529, 577, 611 extra-contractual 16 human 9, 24, 77, 92, 101, 171, 180, 269 of immediate repossession 115, 392, 400, 405–7, 466, 635 income 319–24, 326–27, 329–33, 335–39, 373–77, 409–12, 626–28, 642 industrial property 343, 422, 640 intangible 339, 347, 363, 482, 491, 626
legal 108, 529, 534, 626, 745 obligatory 149, 329–30, 345, 369, 371–72, 392, 395–96, 636–37 ownership, see ownership, rights personal 346, 370–71, 378, 392, 394, 529, 539, 640 in personam 158, 260, 264, 340, 345, 370, 396, 492 possessory 157, 383, 401, 407, 573 preferential 412, 557 proprietary, see proprietary rights reclaiming 120, 240, 407, 432, 463, 565, 662 recovery 421, 428, 478, 496, 529, 557, 591 renegotiation 136–37 retention 238–39, 301, 307, 311, 313, 469–73, 577, 587–89 retrieval 386, 414, 451 revindication 239, 341, 400, 409 security 581, 587, 615, 653, 668, 674 set-off 390, 425, 487–88, 504–6, 695, 731 third-party 149, 153–54, 157, 162, 306, 567 tracing 392, 534, 566, 594, 620 user 4, 350, 378, 385, 521, 543, 558, 649 voting 234, 711, 720, 751, 758 rigidity 367, 740 risk 125–28, 131–45, 207–11, 214–19, 224–33, 258–62, 283–86, 726–29 acceptance 25, 73–74, 76–77, 105–7, 110–14, 141–43, 187–88, 191 allocation 29, 98, 131, 134, 227, 232, 256, 679 credit 216–17, 303, 446, 485, 501–4, 516, 562, 685 distribution 22, 74, 139, 141, 317, 643 foreseeable 19, 108, 144 legal 209, 211–12, 215, 344, 364, 719, 734, 759 liquidity 210, 215, 217, 242 management 56–57, 59–60, 320–21, 323–25, 337–38, 352–53, 418–21, 634–36 better 335–36, 360, 365–66, 414, 418, 427 tools 5–6, 18–19, 29–30, 32, 144–47, 192, 323–25, 419 passing of 135, 224–30, 232–33, 250–51, 261–62, 265, 283, 285–86 payment 216, 243, 289, 294 political 134, 209, 211, 215, 217, 241–42, 690 quality 209, 216, 486 re-characterisation 548, 734, 738 transfer of 230–31, 251, 258–59, 284, 586, 674 unforeseeable 108 unforeseen 22, 29, 145
790 INDEX
roadmaps 5–6, 18–19, 28–29, 31–32, 139–40, 144–45, 147, 325 Roman Dutch Law 66, 342, 370, 385, 465 Roman law 45–46, 158, 345–46, 369–70, 432–36, 440–42, 464–66, 564–65 classical 454–56 influence 4, 45, 395, 441, 453 ius commune 2, 45, 75, 158, 452–54, 547–48, 557, 564 revival 75 safe arrival 216–17, 241, 244–45, 662 safe harbour function 240–42, 244, 661–62 safety 209–11, 246, 278, 759 saisine 355, 357, 404, 441, 463–66 sale of goods 3–4, 14–15, 203, 227–29, 434–37, 440, 467–71, 619 EU efforts 289 international, see international sale of goods sales agreements 133–35, 203, 205–7, 229–40, 441–43, 448–51, 454–58, 582–84 failed 121, 236, 239, 409, 451, 454, 468 minimum requirements 207–11 cash 189, 239, 433, 440, 457–58, 470 conditional 235–37, 502–4, 516–19, 543–49, 551–55, 557–61, 565–67, 637–38 contracts 69–70, 205–8, 222–23, 233–36, 238–39, 440–41, 447, 670–72 cross-border 7, 181, 199, 201, 208–9, 249, 289, 645 domestic 7, 14, 201, 208–9, 212, 218, 220, 289 double 394, 431, 434–35, 673 execution 235, 237, 327–28, 464, 471–72, 546, 586–87, 675 finance 329–31, 546–48, 551–53, 560, 562–66, 586, 619–20, 755 prices 118, 207, 216, 241, 262, 282, 409, 516 protection 207, 233–38, 365, 412, 560, 586–87, 623 professional 7, 15, 195, 205, 230 temporary 218, 439, 442, 444, 548–50, 646, 750, 758 Savigny, FC von 2, 20, 46, 53, 66, 379, 435, 454 scale 291, 352, 708 scholarship, see legal scholarship Scotland 14, 95, 219, 369, 409, 440, 531, 539–40 sea waybills 669, 674–75, 679–80, 699, 702 search duties 71, 323–24, 330, 333–34, 414, 426, 485, 490
second buyers 435–36, 555 secular natural law 45 secured creditors 328, 390, 438, 468, 553, 556, 569–70 secured interests 328, 346, 351, 468, 475, 477, 547, 553 secured lenders 567–68, 570 secured loans 543–44, 548 secured transactions 502–3, 516, 543, 551–52, 554–56, 621–22, 646–47, 652 securities 326–28, 497–500, 563–67, 570–73, 712–20, 727–36, 745–52, 755–60 accounts 344, 714–17, 723, 727, 731–32, 750–52, 758 bearer 712, 721, 723, 725, 738, 745, 757 certified 724, 728 dematerialised 714, 717, 725, 730, 759 entitlements 720, 722–23, 725–26, 736, 738, 740, 752–53, 756 fungible 518, 714, 716, 720, 736 holdings 713, 722, 731, 751 intermediaries 716–18, 747–48 intermediated 715, 757–58 non-possessory 371, 417, 438, 547, 554, 556, 654 registered 713–14, 717, 738, 744 transferable 711, 713 transfers 538, 714, 719, 728, 752 underlying 715–16, 720, 725–26, 737–39, 743, 745–46, 753, 756 securitisations 42–43, 349, 351, 496, 501, 622, 648, 653 security accounts 343, 624, 716, 721–22, 755 security assignments 480, 483–84, 486–87, 491, 495, 599, 604, 607 security entitlements 362, 364, 638–40, 713–18, 724–25, 727, 732, 739 security interest holders 328, 390, 421, 552, 555–56, 565, 567–68, 570 security interests 326–29, 371–78, 468–70, 550–57, 560–71, 578–80, 586–90, 652–53 non-possessory 367, 374, 377, 554–55, 566–67, 619, 633–34, 637 in personal property 457, 469, 485, 569, 571 possessory 346, 566, 619, 690 security rights 581, 587, 615, 653, 668, 674 security substitutes 473, 551, 652 security transfers 487, 495, 503, 510, 512, 514, 651, 653 segregation 524–27, 531, 537–38, 589–90, 641, 647, 717–19, 731
INDEX 791
seisin 355–57, 359, 368–69, 396, 398–99, 404, 440–41, 466 self-executing contracts 707 self-help 328, 379–80, 390, 470, 556–57 remedies 552, 555–56, 756 sellers 223–47, 258–62, 280–83, 443–47, 456–63, 467–71, 557–63, 668–73 original 241, 371, 452, 544, 555, 559, 669, 673 in possession 227, 230, 242, 470, 673 unpaid 223, 235, 238–39, 409, 470–71 separation 396, 485, 488, 492, 522–23, 526–27, 537, 539 service contracts 3, 200, 297, 420, 486 service providers 13, 40, 276, 291, 472 servitudes 152–53, 321–22, 335, 368, 370–71, 374, 377–79, 475 set-off 307–8, 311, 313–14, 425–26, 487–88, 503–6, 562–63, 695 rights 390, 425, 487–88, 504–6, 695, 731 settlement 714, 727–29, 731–33, 735–36, 743–44, 748, 754–55, 757–60 finality 726, 729, 732, 744, 748, 750, 753, 757 systems 303, 732, 737, 743, 748, 759 settlors 521, 527, 529–30, 532, 538–43, 582, 590, 592–93 seventeenth century 46, 370, 389, 441, 453–54, 637 severability 11, 481, 485 shareholders 4, 486, 491, 711–12, 715, 718, 724, 735–36 shares 700–1, 711–15, 717–18, 723–25, 734–36, 740–41, 743–45, 751–53 registered 713–14, 716, 725, 735 shifting interests 412, 620, 635, 757 shifting liens 365, 631 shippers 663, 669, 671, 673, 678, 699, 703, 705–6 ships 248, 250, 279, 281, 283–84, 585–86, 596, 698–99 ship’s rail 244, 258, 282–83, 433, 661, 671–72 Sicherungsübereignung 412, 537, 547–48, 552, 554–57, 561, 566–67, 637–38 sight drafts 682, 687, 689, 691, 694 signatures 39, 682–83, 685–86, 688, 693, 695, 697, 700–1 electronic 40 simultaneity 242, 244, 662, 732 singularity 707 situs 355, 576–84, 586–90, 592–93, 599–600, 607, 611–13, 676–77
smart contracts 16, 35–36, 41–44, 49, 81, 708 SMEs 6–7, 198–201, 205, 254 social costs 347 social peace 17–19, 27–28, 31, 33, 35–36, 73–74, 76, 79 social values 30, 33, 81, 84, 89–90, 175, 347, 424 society 24, 30, 33–34, 90–92, 252, 354, 357, 657 modern 16, 30, 90, 114, 252, 395, 640, 657 software 203, 319–20, 704 solvabilité apparente 235–36, 451–52, 456, 544, 547, 557 sources of law 8–12, 77–78, 82–84, 90–93, 100–1, 171–73, 184–87, 194–98 autonomous 24, 61, 78, 91–92, 172–73, 181, 623, 658 custom and practices 172, 623 fundamental principle 92 general principle 623 party autonomy 78, 172, 623 dynamic 62, 83 hierarchy 12, 172, 185, 266, 288, 623, 657 independent 67, 77–78, 101, 657 private law 9, 71, 77, 86, 91, 93, 263–64, 266 in professional sphere 657 public international law 9 traditional 3, 7, 63, 73, 76, 82–83, 102, 105 transnational 67, 77, 83, 173, 657 South Africa 369, 415, 433, 453, 531 sovereigns 10, 78, 214 Spain 87, 431, 448, 452, 465 special duties 2, 81, 94, 219, 292, 299, 527, 591 special interests 84, 113, 144, 277, 305, 453, 501, 514 specialty goods 151, 225, 229–31 specific performance 114–18, 121–22, 129–30, 170–71, 193, 259–60, 457, 642 specificity 70, 186, 344–51, 413, 602–3, 629, 634–35, 638 and identification 70, 356, 413, 477, 565 requirements 70, 348, 438, 603, 646 split ownership 365, 415, 522, 525, 536, 549–50, 576, 638 spot sales 12, 188 stability 346, 365–66, 655, 702, 744 standard contracts 30, 37, 44, 81 standard terms 28, 36, 38, 41, 43, 49, 62, 70 standardisation 42–43, 332–34, 418–20, 423, 425, 428, 632, 636 optimal 419–20, 425, 636
792 INDEX
standards 22, 25, 30, 80, 97, 102, 104, 208 objective 24, 30, 65, 102–3, 178, 187 reasonable commercial 94, 97–98, 191, 491 transnational minimum 29, 213, 215, 268, 272, 353, 361, 366 state intervention, see intervention state of mind 358, 379, 628, 707 status quo 153, 155, 359, 373, 379, 447, 450, 459 statutes of limitation 230, 389, 407–8, 430, 460, 550 statutory assignments 307, 483, 518, 610, 729 statutory authorisation 8, 305, 472 statutory exceptions 433, 461, 467–68 statutory interpretation, see interpretation statutory law 118, 405, 407, 558, 560, 566, 589, 620–21 statutory liens 238, 470, 557, 565, 589, 674 statutory trusts 532, 592 stock exchanges 712, 721, 724–25, 740, 758 storage 662, 674, 704 straight bills of lading 674 strict interpretation 36, 60 sub-custodians 715–17, 720, 733, 736, 745–46 sub-holders 375, 379, 384–85, 387, 407 sub-usufruct 375, 384 subcontracting 497, 500 subcontractors 117, 144, 155, 159–61, 189, 257 subjective approach 75, 97, 135–36, 188, 190, 196, 198, 271–72 subjective intent 186, 289 subjective rights 66 subjectivity 21, 53, 127, 131, 190, 192, 195–96, 204 subrogation 497, 499, 615 contractual 499, 615 subsequent holders 159, 669, 671, 681, 688–89, 693 substantive law 286, 345, 596 substitutes, security 473, 551, 652 substitution 116, 162, 366, 438, 497–500, 738 assets 319, 571–73 creditor 478, 485–86, 497–99, 514, 599 debtor 485, 498, 500 succeeding owners 152–53, 370–71, 410, 412 successors 45, 154, 321–22, 327–28, 397–98, 542–43, 684, 686 supplementation 85, 100–1, 170–71, 183–84, 252–53, 263–71, 286–88, 617 suppliers 156, 160–61, 330, 333–34, 339, 425, 525, 527
surpluses, liquidation 711–12 suspended interests 522, 525–26 suspension 145, 248–49, 470 suspensive conditions 525, 545, 549, 558, 565, 647 swaps 12, 68, 156, 327, 338–39, 416, 424, 638 Switzerland 80, 89, 305, 450, 452, 539, 687, 695–96 system building 84–85, 89 system thinking 31, 77–78, 81, 83, 85, 89–91, 165, 180–81 tangible movable assets 203, 218, 238, 339, 342, 344, 354, 651 tangibles 372, 388, 442 tariffs 209, 211 tax authorities 464, 538, 557, 565 taxes 198, 348, 483, 531–32, 553, 733, 750 teleological interpretation 25, 32, 73–74 temporary interests 359, 381, 599, 635, 726 temporary ownership 335–36, 355, 357, 359, 361, 412, 522–23, 548–49 forms 8, 336, 414, 537, 634 rights 357, 359, 361, 397–98, 523, 525, 635, 647 temporary sales 218, 439, 442, 444, 548–50, 646, 750, 758 temporary transfers 4, 364, 416, 548, 550, 651–52, 738, 742 tenure 356, 369, 399, 404, 410, 635 termination 114–15, 128–29, 136, 138–39, 141, 143–44, 153, 456 clauses 137, 212, 622 terminology 139, 141, 340, 370, 372, 400–2, 430–31, 605 civil law 321, 340, 396, 398, 400, 430, 525, 545 common law 145, 188, 257, 401, 618, 625 terms 19–25, 27–33, 36–43, 99–103, 284–89, 372–81, 599–606, 635–43 contractual, see contractual terms standard 28, 36, 38, 41, 43, 49, 62, 70 testamentary trusts 522, 532, 537 theft 134, 382–83, 385–86, 388, 666, 671, 689, 694 thieves 379, 385–87, 393, 400, 405–6, 463–64, 466, 533 third parties 149–62, 292–93, 295–301, 303–15, 400–3, 528–30, 596–98, 631–32 bona fide 121, 238, 246, 381, 441, 529, 593, 669 third-party beneficiaries 149–51, 154–55, 157–60, 162, 170, 193, 491, 498
INDEX 793
third-party custodians 728, 730 third-party duties 157–58 third-party effect 149–53, 158, 321, 323–24, 476, 569, 585, 602–3 third-party payees 247, 689, 691 third-party rights 149, 153–54, 157, 162, 306, 567 thirteenth century 356, 435, 441, 465 tiered system 715, 717, 719, 722, 729, 732, 736 time drafts 682–85, 687, 690–91, 694, 697 time of loading 671, 678 title 222–26, 233–40, 430–37, 439–45, 447–61, 557–61, 661–83, 697–707 appropriation of 473, 558, 588 conditional 237, 545, 559 documents of 244, 246, 584–85, 661, 664–78, 680, 698, 700 equitable 401, 527 passing of 205, 228, 258, 262, 306, 431, 466 reservation of 223, 234–37, 449–51, 545–49, 551–55, 557–61, 587–88, 646–49 extended 445, 493, 495, 571 return of 59, 207, 234–35, 237, 239–40, 450, 452, 456–59 voidable 120–21, 440, 456–58, 468, 533, 568, 570 title transfer 203–8, 235–39, 281–83, 430–44, 446–50, 452–60, 582–86, 668–72 causal system 443, 447–54, 456, 459, 510, 647, 650, 655 chattels 151, 376–77, 408, 431–33, 435, 450, 455, 480 delivery as formal requirement of 440–42 delivery for 228, 235, 282, 432–38, 449, 460, 668, 671 origin of abstract and causal views 453–59 tort 23, 54, 108–11, 150–53, 340–43, 383–86, 403–7, 482–85 actions 151, 154, 156, 343, 345, 383, 386, 404–5 claims 475, 482, 484–85, 492, 512 liability 23, 96, 155 tracing 315, 365, 518–19, 534, 538–40, 571–73, 593–94, 632 powers 295, 315, 593 rights 392, 534, 566, 594, 620 tracking 398, 415, 521, 532, 534, 536 trade receivables 152, 438, 524, 600, 755 traders 41, 103, 199–201, 680–81, 733, 739 traditio 342, 435, 441, 454, 474, 479–80
traditional sources of law 3, 7, 63, 73, 76, 82–83, 102, 105 transaction costs 36, 38, 165–66, 197, 199, 252–53, 426, 428 transactional finality 204, 224, 331, 333, 353, 429, 654–56, 659 transactions 213–14, 220, 292–95, 306–10, 551–52, 621–23, 731–34, 749–52 commercial 3, 40, 97, 274, 402, 570, 709 consumer 99, 102, 177, 187, 256, 634 cross-border 709, 755 financial 9, 166, 618, 621, 638, 646, 749, 755 international 8–9, 58, 148–49, 209, 211–15, 217, 268–69, 574–75 secured 502–3, 516, 543, 551–52, 554–56, 621–22, 646–47, 652 transfer agreements 161, 377, 444, 447–53, 476, 479, 500, 630 transfer instructions 703, 713, 721, 752–53 transferability 337–38, 346–47, 482–83, 485, 638, 640, 723–25, 733 transferees 322–23, 326–27, 330–31, 338–39, 627–28, 641, 663, 702–3 subsequent 371, 429 transferors 338–39, 349–51, 475–76, 486, 499–500, 505–6, 641–42, 650–51 transfers bulk 358, 436, 438, 508–9, 571–72, 580, 609, 620–21 of chattels 151, 428–73, 476–80, 486, 513, 518, 650, 655 of claims 275, 476–78, 485, 495, 514, 615, 618, 635 conditional 412, 414, 501–3, 546, 550, 557, 562, 565 credit 13, 416, 721–22, 752 electronic 667, 698, 708–9, 735 fiduciary 478, 501, 554 of ownership 205, 354–57, 376–77, 386, 428–34, 443–44, 447, 558–60 physical 440–41, 455–56, 474, 477 of possession 207, 358, 386, 428, 431, 441–42, 470, 476 preferential 438, 757 of proprietary rights 151, 428–73, 518 of receivables 160, 218, 495, 612, 691 of risk 230–31, 258–59, 284, 586, 674 securities 538, 714, 719, 728, 752 security 487, 495, 503, 510, 512, 514, 651, 653 temporary 4, 364, 416, 548, 550, 651–52, 738, 742
794 INDEX
transformation 8, 319–20, 324–25, 332, 349–50, 352, 423–24, 629–30 transit, goods in 210, 224, 262 transnational commercial and financial legal order, see international commercial and financial legal order transnational minimum standards 29, 213, 215, 268, 272, 353, 361, 366 transnationalisation 7–14, 77–78, 93, 360–61, 603–4, 705–7, 725–26, 742–43 concept 416, 614, 740 formal efforts 14–16 process 90, 100, 324, 353, 360, 416 transparency 350, 702, 758 enhanced 707 transportation 6–7, 215–16, 240–42, 280–81, 662–64, 671–72, 675–76, 678–80 agreements 242, 291, 297, 705 treaty law 7–8, 10–12, 263, 287–88, 312–13, 678, 696–98, 707 and agency 312–15 and assignments 519–21 uniform 7, 12, 15, 247, 253, 274, 287, 574 Treu und Glauben 81, 114 tripartite arrangements 154–55, 312 trust assets 364, 521, 527, 529, 538–40, 542, 589–91, 593–95 trust construction 304, 309, 593 trust law 397, 418, 522, 528, 531, 540–42, 590, 620 trust property 534, 537, 539, 592–94 trust structures 326, 330, 357, 525, 531, 540–41, 634, 637–39 trustees 304–5, 517–19, 521–22, 525–32, 534–42, 555–57, 589–91, 593–94 bankruptcy 390–92, 404–5, 409, 450, 457–58, 556–57, 569, 573 constructive 294, 409, 533–36, 546 trusts 301–4, 381, 397–400, 402, 415–16, 521–43, 589–95, 718–19 charitable 527, 532, 535, 537 common law 521–27, 537, 590 constructive 362, 400, 402–3, 405, 526–28, 531–40, 592, 647 foreign 415, 539–41, 576, 590, 592–95 formal 336, 409, 525–26, 531–32, 596, 648 Hague Convention on the Law Applicable to Trusts and Their Recognition 589–95 law of 397, 399, 528, 589, 591–92, 620, 695, 718–19 offshore 589–90
practical significance in common law countries 530–32 and private international treaty law 190, 539–43 related civil law structures 536–39 resulting 398, 402, 521, 526, 528, 531–32, 535, 537 statutory 532, 592 testamentary 522, 532, 537 twelfth century 355, 369 UCP 13, 703 ultimate debtors 493, 682, 686 UNCITRAL (United Nations Commission on International Trade Law) 40, 248, 250–51, 265, 270, 560–61, 617–18, 704–6 underlying assets 319–23, 326–29, 335–39, 372–76, 410–14, 626–27, 664–70, 676–77 underlying claims 221, 246, 364, 608–10, 615–16, 624, 691–92, 696 underlying goods 241, 281–83, 665–68, 671, 675–76, 692 underlying investment securities 39, 715, 718, 731, 737, 739, 745, 748 underlying relationships 513–14, 520, 608, 613, 630, 681, 684, 687–88 underlying securities 715–16, 720, 725–26, 737–39, 743, 745–46, 753, 756 undervalue 546, 548, 552–53, 558 undisclosed agency 292–93, 295–97, 299–300, 302–5, 307–9, 314–15, 526, 531 unfair contract terms 3, 62, 95, 127, 170–71, 179, 201 unforeseeable risks 108 unforeseen circumstances 133–42, 207 unforeseen risks 22, 29, 145 UNIDROIT 15–17, 100–3, 171–72, 175–79, 187–93, 248, 270, 272–73 Principles 100–3, 113, 127, 169–79, 184–85, 187–91, 258–59, 272–73; see also Table of Legislation unification of private law 99, 165, 167–68, 248 uniform international sales laws 11, 247–89 uniform law 166–67, 248–49, 264, 267, 520, 614, 617–18, 754 uniform security law 574 uniform treaty law 7, 12, 15, 247, 253, 678, 753, 758 mandatory 253, 753 and negotiable instruments 696–97
INDEX 795
uniqueness 707–8 unitary approach 3, 164–65, 168–69, 177, 180, 182, 361–62, 429 unitary codification 168–71 unitary system 168, 325, 355, 626, 631, 634, 638–39, 643 United Kingdom 160–62, 235–38, 356–57, 400–6, 546–50, 581–83, 670–74, 689–93 case law 94, 161, 480–81, 670 law 58, 94, 96–97, 109, 278–79, 456–57, 500–2, 582–84 United States 235–39, 467–74, 483–92, 529–34, 545–48, 566–72, 611–13, 735–36 unity 93, 165, 220, 602–3, 607, 609, 614, 617 universal natural law, see natural law unjust enrichment 56, 59, 163, 340, 392, 395, 532–33, 654–55 unpaid sellers 223, 235, 238–39, 409, 470–71 in possession 238–39, 470 unreasonableness 103, 141, 385 manifest 36, 77, 147, 174 unwilling defendants 116 updating 32, 35, 365, 625 USA, see United States usage 61, 88, 184, 265, 271–72, 285, 288, 396 user rights 4, 350, 378, 385, 521, 543, 558, 649 usufruct 326–27, 339–40, 372–80, 382–84, 390–92, 522–24, 549–50, 626–27 proprietary 338, 564 utility 9, 531 valid assignments 486, 508, 518 valid contracts 389, 393, 400, 452–53, 462, 464–65, 482–83, 510 validity 59–61, 70, 478–81, 483–84, 512–14, 601–3, 605–6, 610–11 contractual, see contractual validity value(s) 79–81, 324–25, 344–47, 352–54, 423–25, 465–66, 543, 665–67 good 389, 461, 510, 513, 529, 581, 666, 671
nominal 500–1 social 33, 81, 84, 89–90, 175, 347, 424 verification costs 421, 424–25 vicarious liability 297–98 Vienna Convention 57–58, 183–84, 186–89, 200, 203–8, 210–12, 218–19, 247–89; see also Table of Legislation applicability 255–56 coverage 250–53 and EU law 273–75 meaning of conduct and custom 270–72 origin and scope 248–50 sales law 257–62 supplementation and interpretation 263–69 system 253–55 and trade terms in international sales 280–83 Voet, J 454, 478–79, 549 voidability 119, 121–23, 190–91 voidable title 120–21, 440, 456–58, 468, 533, 568, 570 voidness 59, 119, 123, 227, 230–31, 448–49, 451, 458 Volksgeist 180 von Jhering, R, see Jhering, R von von Savigny, FC, see Savigny, FC von 46, 66, 379, 435, 454, 613 voting rights 234, 711, 720, 751, 758 warehouse receipts 241–44, 291, 344, 573, 661–62, 664, 666, 669 warehouses/warehousing 215, 242–44, 258, 291, 384, 434, 437, 661 warranties 70, 124–25, 127–28, 130, 232–33, 257, 260–61, 515–16 waybills, sea 669, 674–75, 679–80, 699, 702 weaker parties 26–27, 44, 76, 79, 87, 92, 95, 97 protection 76, 92 Windscheid, B 455 WTO (World Trade Organisation) 40, 585
796