Regulatory Property Rights : The Transforming Notion of Property in Transnational Business Regulation [1 ed.] 9789004313521, 9789004313514

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Regulatory Property Rights

Regulatory Property Rights The Transforming Notion of Property in Transnational Business Regulation

Edited by

Christine Godt

LEIDEN | BOSTON

Library of Congress Cataloging-in-Publication Data Names: Godt, Christine, 1964- editor. Title: Regulatory property rights : the transforming notion of property in transnational business regulation / edited by Christine Godt. Description: Leiden ; Boston : Brill/Nijhoff, [2017] | Includes bibliographical references and index. Identifiers: LCCN 2016046806 (print) | LCCN 2016047658 (ebook) | ISBN 9789004313514 (hardback : alk. paper) | ISBN 9789004313521 (E-book) Subjects: LCSH: Right of property. | Acquisition of property. | Property. Classification: LCC K721.5 .R44 2017 (print) | LCC K721.5 (ebook) | DDC 346.04--dc23 LC record available at https://lccn.loc.gov/2016046806

Typeface for the Latin, Greek, and Cyrillic scripts: “Brill”. See and download: brill.com/brill-typeface. isbn 978-90-04-31351-4 (hardback) isbn 978-90-04-31352-1 (e-book) Copyright 2017 by Koninklijke Brill nv, Leiden, The Netherlands. Koninklijke Brill nv incorporates the imprints Brill, Brill Hes & De Graaf, Brill Nijhoff, Brill Rodopi and Hotei Publishing. All rights reserved. No part of this publication may be reproduced, translated, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission from the publisher. Authorization to photocopy items for internal or personal use is granted by Koninklijke Brill nv provided that the appropriate fees are paid directly to The Copyright Clearance Center, 222 Rosewood Drive, Suite 910, Danvers, ma 01923, usa. Fees are subject to change. This book is printed on acid-free paper and produced in a sustainable manner.

Contents Acknowledgements vii Notes on Contributors viii Introduction: Property in Transformation 1 Christine Godt

part 1 Challenge to Property Theory: Regulation 1 “Regulatory Property Rights” – A Challenge to Property Theory 13 Christine Godt 2 Control of Global Business Transactions via Property? A Multi-disciplinary Approach 44 Margherita Colangelo

part 2 Internationalisation 3 Lex rei sitae: The Territorial Side of Classical Property Law 61 Sjef van Erp 4 The Major Innovations of the New European Regulation 2015/848 of 20 May 2015 on Insolvency Proceedings 82 Jean-Michel Jude 5 Multilevel Governance of Property Titles in Land: The Voluntary Guidelines on the Responsible Governance of Tenure of Land, Fisheries and Forests in the Context of National Food Security 98 Leon Verstappen

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part 3 The Paradigm of Individuality 6

The Role of Property in Water Regulation: Locating Communal and Regulatory Property Rights on the Property Rights Spectrum 121 Alison Clarke and Rosalind Malcolm

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Natural Resources as “Regulated Property”: The Challenges of Resource Stewardship in South Africa 141 Hanri Mostert and Cheri-Leigh Young

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Employing Property Rights for Nature Conservation 169 Colin T. Reid

part 4 Financialisation and Dematerialisation 9

Commodification and Financialization in the Energy Sector: Emission Allowances and Electricity 191 Rüdiger Wilhelmi

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In Rem Effects of Non-exclusive Sub-licences in Insolvency 207 Christine Godt and Jonas Simon

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Derivatives in Maritime Freight: Novel Property Rights with Prospects and Pitfalls 223 Viola Heutger



epilogue Regulatory Property Rights and Regulatory Private Law 235 Hans-W. Micklitz

Index 245

Acknowledgements This book is one outcome of a generous fellowship granted to the editor, Christine Godt, at the Center of Advanced Studies “Kulturwissenschaftliches Kolleg” at the University of Konstanz. Its production is supported by funds made available by the “Cultural Foundations of Social Integration” Center of Excellence of the University of Konstanz, established in the framework of the German Federal and State Initiative for Excellence. We owe special thanks to the speaker of the “Center of Excellence”, Prof. Dr. Rudolf Schlögl, for his support. The editor also wishes to express her gratitude to the Secretary of the “Kulturwissenschaftlichen Kolleg”, Fred Girod, for his hospitality in the “Bischofsvilla” and the “Seeburg” in Konstanz.

Notes on Contributors Margherita Colangelo Assistant Professor of Comparative Law in the Law Department of the University of Roma Tre. She graduated summa cum laude at the University of Roma Tre Law School (2003) and obtained her PhD in Comparative and European Private Law at the University of Macerata (2007). She received a ll.m. from the European University Institute (eui) of Florence (2006). Her main fields of research and topics of publications are in Comparative Law, European Union Law, Competition Law and Regulation. For further information see webpage http://www.giur.uniroma3.it/?q=node/1876 (margherita.colangelo@ uniroma3.it). Alison Clarke Emeritus Professor of Law in the School of Law at the University of Surrey. She is a property lawyer with a particular interest in the integration of communal and customary rights into property rights regimes regulating land and other natural resources, and in comparative analysis of property principles. Recent publications include Property Law, Cambridge University Press, 2005 (with P. Kohler); ‘Creating New Commons’ in: Current Legal Problems 2006, Oxford University Press; ‘Integrating Private and Collective Land Rights: Lessons from China’ 177 Journal of Comparative Law 2013; ‘Property, Human Rights and Communities’ in: T. Xu & J. Alain (eds), Property and Human Rights in a Global Context, Hart, 2015; and ‘Land Titling and Communal Property’ in: W. Barr (ed.), Modern Studies in Property Law Vol. 8, Hart, 2015. She is also joint editor (with J. Farrand) of Emmet & Farrand on Title (Thomson Reuter, looseleaf), a leading practitioners’ land law textbook ([email protected]) Christine Godt Professor of European and International Economic Law at the Carl von Ossietzky University Oldenburg (since 2010), Director Hanse Law School (2010– 2015), Fellow at the Center of Excellence of the University of Constance (2015), Lead Editor of the Group “Boundaries of Information Property” of the Common Core Project since 2001 (General Editors: U. Mattei/M. Bussani), Habilitation 2005 (“Eigentum an Information”, Mohr Siebeck, 2007), PhD 1995 („Haftung für Ökologische Schäden“, Dunker & Humblot 1997), both University of Bremen; Bar exams 1997 and 1991, both Berlin; Research interests: Comparative Property Law, Intellectual Property, Private & International Environmental

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Law. For further information see her webpage: http://www.uni-oldenburg.de/ eurowr ([email protected]). Viola Heutger Docent at the Turkish-German University, Istanbul, and affiliated with the kolt Center for Logistics and Transport Law at the University of Lucerne in Switzerland. She is one of the drafters of the Common Frame of Reference, a tool box on European Contract Law. This research compared common and civil law traditions in the aim of finding roots for pan-European legal Principles. Her main expertise is European Sales Law, Consumer Law and transport law. She published two books on European Sales Law and advised several national law commissions in Europe and the Caribbean. As Chair of the Board of Governors she is serving the German Seafarer’s Mission in Amsterdam. Jean-Michel Jude Maître de Conférences in Private Law at the University of LeHavre in Normandy since 2004. He is in charge of the Master Programme “International Law of the Affairs” (2014–2016), vice dean of the faculty of international affairs (2011–2016), director of law department in the faculty (2008–2012), initiator of the Hanse Law School Cooperation between the Universities LeHavre–­ Oldenburg. Since 2014, he is vice-president of national conference of the deans of all French law faculties. His main fields of research are international private law (insolvency, social security, transport, consumer), and commercial and civil contracts. He obtained his PhD in 2001 with a thesis about conflicts of laws problems related to over-indebtedness of individuals (Presses Universitaires d’Aix-Marseille, 2003). He organized two symposia in LeHavre: “Clemency and Law” (Paris/economica, 2011), and “Bike and Law: sport and transport” (Paris/ fondation Varennes, 2014). Rosalind Malcolm Professor of Law and Director of the Environmental Regulatory Research Group in the School of Law, University of Surrey and practises as a barrister from Guildford Chambers. llb (Hons). PhD, Barrister, Head of School: 2005– 2010. She is a member of the uk Economic and Social Research Council peer review college and is currently co-investigator of 2 FP7 eu multidisciplinary research projects. She is part of the research community at the University of Surrey which was awarded the Queen’s Anniversary Prize for Water and Sanitation in 2012 for its collection of research work in these fields. Publications include: ‘Organisations and environmental health – how environmental health

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is delivered’ in: Stephen Battersby (ed.), Clay’s Handbook of Environmental Health, 21st ed., Taylor & Francis Group, 2016; Ayalew/Chenoweth/Malcolm/ Okotto/Pedley, ‘Small Independent Water Providers: their position in the regulatory framework for the supply of water in Kenya and Ethiopia’ Vol. 26 (1) Journal of Environmental Law 2014. (Joint winner of Richard Macrory Prize for best article in the Journal of Environmental Law (2014)); Malcolm/Pointing, ‘Statutory Nuisance: Law and Practice’, 2nd ed., Oxford University Press, 2011. Her research interests: Environmental Law, Regulation and Governance; Natural Resources Law; Environmental Health Law; Food Law; Property Law. For further information see: http://www.surrey.ac.uk/law/people/rosalind_malcolm ([email protected]). Hans-W. Micklitz Professor of Economic Law at the European University Institute, Florence, since 2007. Jean Monnet Chair of Private Law and European Economic Law at the University of Bamberg, Germany (1995–2007); head of the Institute of European and Consumer Law (VIEW) in Bamberg. Studies of law and sociology in Mainz, Lausanne/Geneva (Switzerland), Giessen and Hamburg. Consultancies for oecd, the European Commission, unep, ministries in Germany, Austria and the uk, and non-governmental organisations. Study visits at the University of Michigan, Ann Arbor, Jean Monnet Fellow at the European University Institute Florence, Italy, visiting professor at the Somerville College at the University of Oxford, co-founder of the Centre of Excellence at the University of Helsinki. Holder of an erc Grant 2011–2016 on European Regulatory Private Law. Finnish Distinguised Professor of the Academy of Finland 2016–2020. For further information see: http://www.eui.eu/DepartmentsAndCentres/Law/ People/Professors/Micklitz.aspx. Hanri Mostert Professor of Law, University of Cape Town (since 2008), and dst/nrf South African Research Chair for Mineral Law in Africa (since 2015). Visiting Professor at the Rijksuniversiteit Groningen (since 2010). Alexander von Humboldt/ Georg Forster fellow at the Ruprecht-Karls University Freiburg i.B. (2007– 2009). daad doctoral fellow: Max Planck Institute for Public and International Law in Heidelberg (1997–2000). lld dissertation (Constitutional Protection and Regulation of Property, Springer, 2002). Editor-in-Chief: Juta’s Contemporary Studies in Legal and Applied Research (since 2013). Editor and contributor to Juta’s Mineral and Petroleum Law of South Africa, 2004 onwards, with P.J. Badenhorst; and lawsa vol. 18 on Minerals and Petroleum, 2007, with P.J. Badenhorst and M. Dendy. Recipient of meritorious book award for Mineral Law – Principles and Policies in Perspective (Juta, 2012). Research interests: property

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law, natural resources law, in particular mineral law; comparative law and progressive property theory ([email protected]). Colin T. Reid Professor of Environmental Law at the University of Dundee (since 1995), author of “The Privatisation of Biodiversity?” (2016, with W. Nsoh) and “Nature Conservation Law” (3rd ed. 2009), associate editor “Journal of Environmental Law”, editorial boards of “Scottish Planning and Environmental Law” and “Environmental Law and Management”, Convener for Scotland of the Society of Legal Scholars, ma (Oxford) llb (Cambridge), Fellow of the Royal Society of Arts, Fellow of the Higher Education Academy; Research interests: Biodiversity Law, Environmental Law and Regulation, Governance in Multi-level States. For further information see: http://www.dundee.ac.uk/law/staff/profile/pure/ colin-t-reid/b578f8df-9c72-4d4b-80ff-19d96971a185 ([email protected]). Jonas M. Simon ll.b. (2014) ll.m. (2015), (double degree, Hanse Law School: Tripartite Study Programme of the Universities of Bremen, Oldenburg, Groningen), currently, Student at the University of Bremen; Bachelor-thesis about licences in insolvency in Germany, the Netherlands and the usa at the University of Bremen (2014); Master-thesis about data processing in third countries at the University of Bremen (2015). Sjef van Erp Professor of Civil Law and European Private Law at Maastricht University since 1997. He holds a law degree from Tilburg University (1977), worked as junior lawyer at the Netherlands Royal Society of Notaries, initially an assistant, later associate professor at the Faculty of Law of Tilburg University. He was a visiting professor at Université Laval (Quebec, Canada), Cornell University (us), and Socrates visiting professor at Trento University (Italy). From Oct. 2004 until Oct. 2006 he was Marie Curie Fellow and visiting professor at the Center for European Law and Politics at Bremen University (Germany). In 2009 he was elected fellow at the South African Research Chair in Property law at the University of Stellenbosch. In 2011 he was elected titular member of the International Academy of Comparative Law and Member of the American Law Institute. He is Deputy Justice at the Court of Appeals of ‘s-Hertogenbosch (the Netherlands), past President and Honorary Member of the Netherlands Comparative Law Association, Vice-President of the World Society of Mixed Jurisdiction Jurists, Member of the Executive Committee of the European Law Institute (Vi­ enna), Member of the Executive Committee of the International Association of Legal Science, co-founder and Advisory Editor (until 2014: Editor-in-Chief) of

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the European Journal of Comparative Law and Governance (continuation of the Electronic Journal of Comparative Law), co-founder and Editor-in-Chief of the European Property law Journal, member of the Board of Directors of the American Association for Law, Property and Society and a member of the Board of Directors of the International Institute for Justice Excellence. Leon Verstappen Professor of Private and Notarial Law at the Department of Private Law and Notarial Law at the University of Groningen since 1998. He is legal advisor to Hekkelman Lawyers & Notaries in Arnhem and Nijmegen, deputy-judge Court of Appeal The Hague, member of the board of governors of the Foundation Grotius Academy and of the Foundation for Professional Training of Notaries (both in Nijmegen), member of the Supervision Board of the Foundation for the advancement of Notary Science in Amsterdam. He is editor/annotator of a number of periodicals (i.e. Weekblad voor Privaatrecht, Notariaat en Registratie [wpnr] and Nederlandse Jurisprudentie [nj]) and joint editor-in-chief of a series on civil (notary) law: Real Property Law, Family Law, Estate Settlement and Company Law. He is charing the Foundation ‘The Land Portal’ (www .landportal.info), is a board member of Landac II and is a member of the Expropriation Expert Group and the European Law Institute. Rüdiger Wilhelmi Professor, Chair of Private Law, Commercial Law, Company Law and Business Law as well as Comparative Law at University of Konstanz, Germany. After his legal education at the University of Tübingen (Germany), the University of Leiden (Netherlands) and the Court of Appeal in Berlin (Germany), he worked as Counsel in the legal department of bmw before returning to academia. His main areas of research comprise contract law, tort law, property law, company law, corporate finance and capital market law and comparative law. For further information see his webpage: http://www.jura.uni-konstanz.de/wilhelmi/, ([email protected]). Cheri-Leigh Young ll.b (2009), PhD (2014), both from University of Cape Town (uct). AW Mellon fellow, uct (2011–2012). Admitted Attorney, clerkship completed at ens (2013–2014). Postdoctoral fellow, uct (2014–2015). Reviewer: African Mining Legislation Atlas (2015). Lecturer, uct (2016). Fellow: uct Future Water Institute (from 2016). Research interests include: energy and natural resource law, property law and theory, and administrative law ([email protected]).

Introduction

Property in Transformation Christine Godt This present volume explores recent changes in contemporary property law. The analysis uses the term “Regulatory Property Rights” as a means of identifying these changes since the most prominent examples of these pursue a regulatory goal. The term aims to detect the function of modern property and the societal changes involved. It broadly follows the connotation of Richard Steward’s use of the term,1 and is not limited to privatized public utilities (cp. Kevin Gray2). Yet, colleagues have favoured other terms: Margherita Colangelo (2012) calls them “created property rights”, thus directing her focus to the fact that these rights are deliberately created for regulatory purposes, either by means of self-regulation or by public law.3 Francesco Parisi (2005/2007) used the broadly equivalent term “functional property”.4 Sabina Manea (2014) chose “instrumental property”,5 thus pointing to the fact that we see “regulation by property”. Overall, the term encompasses fragmented, commodified use rights of private origin (digital rights in virtual objects and personal data, body parts, airport slots, freight forwards, labels) and of public origin (emission rights, biodiversity rights, concessions and public services). Our research interest is focused on describing and understanding property in modern societies. The choice of the term “regulatory property rights” is not driven by the hypothesis that these rights can be distinguished from presumably “non-regulatory” property.6 In contrast, if we acknowledge the lessons of 1 R.B. Steward, “Privprop, Regprop, and Beyond”, 13 Harv. J.L & Pub. Pol’y, 1990, 91. 2 Kevin Gray assigned the term “regulatory property” to privatized utilities; see K. Gray, Regulatory Property and the Jurisprudence of Quasi-Public Trust, 32 Sydney Law Review 2010, 221–241. It is also distinct from “New Property” as coined by Charles Reich, Yale l.j. 1964, 733, who criticized us “government’s largess” of that time. 3 M. Colangelo, Creating Property Rights, Leiden/Boston: Nijhoff, 2012. 4 F. Parisi, “The Fall and Rise of Functional Property”, in: D. Porrini/G. Ramello (eds), Property Rights Dynamics: A Law and Economics Perspective, Routledge, 2007, 19–39 (also ssrn: http:// papers.ssrn.com/sol3/papers.cfm?abstract_id=85056 [2005]). 5 S. Manea, The Instrumentalization of Property – Legal Interests in the eu Emissions Trading System, Alphen aan den Rijn: Kluwer Law Int’l, 2014. 6 In particular, the term does not reiterate the distinction of property under public law versus private law; for this debate see T. Regenfus 2013, p. 30 and p. 648, Fn. 1643; M. Ruffert, Vorrang der Verfassung und Eigenständigkeit des Privatrechts, Mohr Siebeck: Tübingen 2001, p. 383.

© koninklijke brill nv, leiden, ���7 | doi 10.1163/9789004313521_002

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the social sciences since the mid-twentieth century, property has always been functional: It serves the effective distribution of goods and sets behavioural incentives to invest in conservation and capitalization.7 Therefore, the term “regulatory property” is not descriptive, but programmatic with an analytic intent. It is programmatic in that it aims at a description of the property deliberately created or employed by public and corporate entities. Modern regulatory property rights follow the technical model of specialized property regimes set up in the late nineteenth century for intellectual property,8 claims9 and company shares,10 which Christian von Bar labelled “pure normative things”.11 It thereby relocates modern property reflection back in the frame of contemporary private law theory.12 Analytically, the term shifts the focus onto how and why property is used. On the one hand, it directs attention to states substituting traditional command and control means with property while still pursuing the same public policy goals. Arguably universally recognized property allows for transborder policy coordination with other states, and because it is market-based, it is better suited to influence global production. On the other hand, attention is drawn to industry’s deployment of property rights as a novel way to control supply and distribution chains beyond contracts. Due to technologically driven dematerialization, digitalization and financialization, “rights to exclude” have emerged for all types of information and resources, combining transboundary regulation, measurable financial units and risk distribution. Regulatory property rights seem to be the result of the conversion of markets and nation states, responding to the pressures of the complex phenomenon known as “globalization”. While this phenomenon as such is not

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9 10 11 12

Pars pro toto: For the sociologists: B.G. Carruthers/L. Ariovich, the Sociology of Property Rights, 30 Annu. Rev. Sociol. 2004, 23–46; esp. the contributors to “New Institutional Economics”: S. Galiani/I. Sened (eds), Institutions, Property Rights, and Economic Growth – The Legacy of Douglas North, cup 2014; for the political sciences see only J.G.A. Pocock, Virtue, Commerce and History, Cambridge: Cambridge University Press, 1985. Born as a means of competition law and industrial policy, intellectual property is today a settled property right, see Art. 17 Sec. 2 European Charter of Fundamental Rights, for the historic development C. Godt, Eigentum an Information, Tübingen: Mohr Siebeck, 2007, pp. 505 et seq. Prime example: indorsement of the promise to pay, see M. Schmoeckel, Rechtsgeschichte der Wirtschaft, Tübingen: Mohr, 2008, p. 98. Technically ‘transferable membership rights’, see R. Wilhelmi in this volume. C. v. Bar, Gemeineuropäisches Sachenrecht, Vol. i, München: Beck, 2015, pp. 309 et seq. G. Comparato/H. Micklitz/Y. Svetiev (eds), European regulatory private law – autonomy, competition and regulation in European private law, eui-Working Papers – Law 2016/06, download: , last visited 18.4.2016.

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new, ­deepening internationalization and accelerated technological change have profoundly altered our contemporary lives well beyond former trade relations. Property schemes participate in these developments, thus changing the lines of the public–private dichotomy. These contributions were originally presented at a workshop at the Institute of Advanced Studies at the University of Konstanz, part of the university’s “Cultural Foundations of Social Integration” Center of Excellence, in May 2015, and subsequently further developed. All papers are driven by the search for a better description of the modern metamorphosis of property. Their common research interest is focused on a better understanding of the drivers and the functionality of these emerging rights. The volume is organized along the five most evident lines of change: regulation, internationalization, individualization, financialization and dematerialization, the discussion of which is grouped into four chapters. The contributions are exemplary and do not aspire to exhaustively cover all rights which have emerged. Even the conceptual overview provided by the editor (Chap. 2) is not complete in that it only touches on topics such as intellectual property and proprietary claims regarding body parts. Since these variants of property rights have earlier been explored,13 they were deliberately left out of the present volume. The first chapter seeks a conceptualization of “regulatory property”, and consists of two articles. Their common theme is the “regulatory turn”, but they approach their sujet from two different angles. Christine Godt aims at a broad overview. She departs from the observation that “Regulatory Property Rights” sit uncomfortably alongside traditional property principles. By the term “regulatory property rights” she does not only refer to those rights which have recently and deliberately become installed by state regulation substituting or complementing command and control. She also includes: property rights which are functionally instrumentalized by industry as a novel means of controlling supply and distribution chains beyond contracts, property rights juxtaposed to personality rights, intellectual property and proprietized contractual positions, like freight forwards, and in rem effects of licences. In contrast to the obvious assumption that novel regulatory property rights are distinct from traditional property, Godt submits that these rights shed light on the persistent functional core of property. She argues that property has always exerted a regulatory function in order to steer human behaviour. According to her argument, the essence of property is the assignment of the right to make decisions and not absolute control. The limits of this ­autonomy 13

C. Godt, Eigentum an Information, Tübingen: Mohr Siebeck, 2007; C. Godt/L. Guibault/G. v. Overwalle/D. Beyleveld (eds), Boundaries to Information Property, Cambridge: Cambridge University Press (forthcoming).

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have always been defined by regulation. She attributes the emergence of novel property rights to the conversion of markets and nation states under the pressures of what has been dubbed “globalization”, and accelerated digital technological change followed by novel business models. In conclusion, she reformulates property principles to adapt them to the functioning of modern economies, whilst acknowledging the contemporary14 public–private divide. In her paper, “Control of global business transactions via property?” Margherita Colangelo focuses on those most emblematic examples of regulatory property which are installed by states in the pursuit of public policies, such as milk quotas, emission rights, airport slots and spectrum usage rights. For her, the two central features characterizing regulatory property rights are multi-level regulation, which interweaves in complex ways actors acting on different stages and legal levels, and creation by public authorities. These rights are scarce, have a high economic value and are intangible. She assigns legitimacy to private law to determine a property qualification according to its purposes (contract and tort) and rationales. However, her central argument is that the emergence of new goods implies a metamorphosis of property law. Property regimes are variable, and the holder’s prerogatives are different from those established under the Civil Codes. These rights are in need of regulation for various reasons, from the conditions of allocation and operation to life­ span, revocation and the fine-tuning of design. This renders regulatory property rights instruments of a double public/private nature. Regulation, by way of “cherry-picking”, takes only those elements of property law on board which are strictly necessary to the pursuit of the public policy goal. Consequently, protection of these rights is not absolute, and must be balanced against the goals pursued; property theory must be adapted to secure the function of property as a valid tool. The scope of property, transparency, non-discriminatory allocation and market rules can neither be left to industrial self-regulation nor to jurisprudence. Sectorial multi-level regulation is required. By stressing the interconnection and complementarity of private and public law, Colangelo submits a most thoughtful and prudent analysis, which resists any simple cate­ gorization in terms of “either, or”. 14

H.-W. Micklitz/Y. Svetiev, The Transformation(s) of Private Law, in: H.-W. Micklitz/Y. Svetiev/G. Comparato (eds), European Regulatory Private Law – The Paradigms Tested, 69–96, p. 81: “The vanishing public/private divide triggers a process of re-establishing the public as against the private, of re-defining the responsibilities of the public and the forms of private ordering, which then lead again to an intermingling of the public/private. What we then get is an understanding of the public/private divide as no more than a snapshot of the times”.

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The second chapter focuses on the reflection of internationalization of property law. Sjef van Erp reiterates the formerly unquestionned lex rei sitae principle as the universal conflict-of-laws rule for property relations. Departing from a comparision of us conflict-of-law judication and recent eu legislative activity with regard to successions and matrimonial property, he reflects on the inner rationales of the rule with regard to both technological change, and modified nation states’ sovereignty. With regard to technology, he focuses on the digital revolution and discusses changes to registration schemes and digital property. The central theme of the article, however, is the question of the rationale of the situs rule under changing notions of state sovereignty. Here, he concentrates on the legal consequences which result from integrated systems which are similar, but not identical, such as those of the us and the eu: his chapter sheds light on the more fundamental question of identifying the legitimate reasons for submitting property relations to one or another legal order. Both streams of thought reconceptualize lex rei sitae and the lex registrationis as a tandem default rule which is open to modifications where technological change demands them, and where economic integration either requires or permits this. Jean-Michel Jude explores the subtlety of the lex rei sitae rule in insolvency law. Insolvency is a culminating point in time at which property rights crystallize, and various interests collide. Not only do they concern the obvious interests of creditors and debtor; states have installed infrastructures to administer the process of insolvency, reflecting their public choices which calibrate competition and industrial policies. At the core of insolvency is the idea of a collective and egalitarian payment of all creditors. The technical centrepieces of this are the immediate relinquishment of the debtor’s capacity to dispose of his/her properties, and the installation of an independent administrator for the sake of creditor’s rights. Whereas the first European Insolvency Reg. No. 1346/2000 of 2000 still adhered to the lex rei sitae principle as the default rule, the reformed insolvency Reg. 2015/848 inverted both rule and expection, installing the lex fori concursus as the default rule (‘the law of the State of the opening of proceedings’) and the lex rei sitae for cases of approved territorial secondary procedure upon request. The intentions of the reform of 2015 were threefold: to improve creditors’ protection by limiting forum shopping, to enhance the possibilities for restructuring, and to install a procedure for group insolvency. At first glance, the new rule seems to impair the primary goal of equality of all creditors and Member States’ sovereignty under Art. 345 tfeu. The second glance reveals that the static sitae rule gave debtors broad leeway to misuse. Jude describes the coordinating procedural approach and the possible multi-level combinations under the regulation, and reflects on the quietly

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ongoing process of convergence in member states’ insolvency laws, and most certainly in national property and securities laws. Leon Verstappen focuses on the first international attempt to formulate governance rules for property titles in land, the fao-Voluntary Guidelines on the Responsible Governance of Tenure 2012. While instigated as a response to current problems of land tenure in developing countries, ranging from landgrabbing to indigenous peoples’ rights, the Guidelines universally apply also to developed countries, and at the end of the chapter Verstappen explores three interesting examples of developed countries’ need to rework their own laws in the light of the Guidelines. Developed over a few years using a bottom-up approach and including a broad range of stakeholders, three formulated governance norms are of particular interest to “regulatory property”. First, the central concept is the “legitimate tenure right”. This approach adopts a constitutional way of thinking about the conflicting legitimate interests in land, and rejects the idea of a unitary (“absolute”) property right. Second, governance structures of land tenure are not restricted to a horizontal (private–private) and a vertical (citizen–state) relation. Where transnational corporations are involved, a diagonal transnational relationship emerges which requires their home states to “play a role”. Third, this role is not limited to the better protection of acquisition of land titles through the use of bilateral investment treaties, but to ensure that businesses meet their responsibilities, especially in cases of large-scale land acquisition. While these guidelines are non-binding soft law, funding institutions already require recipients to adhere to them. The third chapter looks into the transformation of individuality, and comprises three contributions. Alison Clarke and Rosalind Malcolm explore the conceptualization of modern property rights departing from the contentious issue of water use and management. They argue that, because of the nature and function of water, it is wholly inappropriate to treat it as a commodity: descriptively and normatively, it is more appropriately conceptualised as a “common treasury.” However, they challenge the assumption that, if water is to fulfil its role as a common treasury, property as an institution is inimical to its management and regulation. Such an assumption is, they argue, based on an untenably narrow conception of property, centred on traditional absolute dominion private ownership, failing to take into account the broader spectrum of private, communal, public and state property interests. This analysis is inspired by a learned common law thinking about property rights, and a profound reading of Elinor Ostrom. Taking this broader view, some forms of property do indeed undermine water’s function as a common treasury, but others can be used to uphold it.

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Hanri Mostert and Cheri-Leigh Young analyse the South African legal frameworks for three land-related resources: water, land use, and minerals. They focus on the modern South African conceptualizations of these resources as state stewardship (“national asset”, “public resource”), as opposed to private individual property on the one hand, and state ownership on the other. The principle was first devised for water, then adopted for minerals regulation and has recently been discussed for land. The article questions many settled beliefs of the common property discourse. Conceptually, it is firmly built on the idea that property has a behavioural function (i.e. “secure development finance”) and that state regulation is “constitutive” to property right holders’ ability to use the property. More important, though, are the reflections about the interface of private entitlement and public regulation: First, departing from a distinction of land redistribution and land restitution as two different methods of land reform, they dismantle the popular discontent with the pace of land reform as a path-dependent “narrative of failure” motivated by politics. They submit that privatization actually has occurred, partly successfully by restitution, partly without the state and without formal entitlements which are traditionally conceived as necessary conditions for a market. On the one hand, this observation shifts the spotlight onto severe difficulties in restructuring economic assets, and on the other hand it questions the weight of formal titles compared to collectively shared social practices. Second, Mostert and Young submit that “regulated property” is tenuous “where the state cannot be trusted to secure individual positions through administrative regulation”. Their criticism is not directed at the state failure to redistribute land, a question which they, together with other prominent property scholars, deem irrelevant. Their criticism focuses on the South African state’s failure to secure access to water. This latter goal would only be achievable if government expertise and a constitutionally sound balance of propriety rights were systematically combined, thus fostering and sustain initiatives in water-control measures. Colin T. Reid in his contribution “Employing Property Rights for Nature Conservation – Potential and Challenges” focuses on the interface of propertybased environmental instruments between commodification as the source of nature destruction and the potential to integrate environmental policies into market-based instruments. He explores liability for harming and reciprocal payments for providing ecosystem services, conservation covenants/ easements and biodiversity offsetting. He identifies the greatest challenge in this area to be the maintenance of overall eco-systematic coherence, which is made difficult by the ‘fragmented parcels’ approach to land property. The greatest potential lies in long-term arrangements, and broader participation

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and initiative in nature conservation. His point of departure is to distinguish property and the market system: Property rights may be necessary for a market, but inversely, property law can play a role without adopting market-based schemes. His central point is that nature as an object of property rights is not always substitutable, transferable or economically valuable. Therefore, the situations in which property rights are functional for nature conservation need careful delimitation. He identifies two functional areas in which property rights can be effective for nature conservation. As far as a market is to be installed (1), he argues that property rights might be functional as a global response to climate change. As far as long-lasting relationships are to be construed (2), independent of single owners, property law may help to regulate the relationship of inhabitants to the physical world. It is unclear whether C ­ olin Reid adheres to an ecocentric or anthropocentric approach to environmental law. Yet, he pursues a reasoning which inscribes environmental reasoning into economic institutions, and adopts a language close to Gregory Alexander’s formula of “human flourishing”. Reid substitutes the old “dominium” rationale with a reciprocal network dependency model. Considering these differences to classical property law, Colin Reid calls for a thoughtful interconnection of property and regulation to make innovative conservation law effective. The fourth chapter of the book turns to the societal changes of financialization and digitalization, and presents three concrete examples of modern proprietary positions. Rüdiger Wilhelmi looks into the energy sector and explores emission allowances and derivatives based thereupon. His point of departure for the analysis of “regulatory property” builds on the writings of Colangelo, who departs from the melange of limitations and creations of property embedded in the dual terms of giving and taking of property. He illustrates the process of commodification and financialization using the example of the development of securities and securities markets. At the centre of his argument, he reiterates the commodification and financialization of electricity to date through three energy law packages that try to create regulatory property in a broader sense by securing the factual and economic preconditions for the creation of electricity rights by private law. Against this backdrop, he submits carbon emissions trading to a discussion on dysfunctional market mechanisms in this area which he relates specifically to the initial allocation of emission allowances. Inversely, he argues that the legal problems connected with the trading of allowances and derivatives based on them can largely be solved by employing the regulation which concerns securities and similar rights that are traded on capital markets. While these rights do not constitute anything exceptionally new, they have expanded the rationales of capital markets.

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Christine Godt and Jonas Simon look into in rem effects of non-exclusive licences in insolvency. Licences grant use rights for immaterial property. Whereas exclusive licences are commonly qualified as proprietary in nature, simple licences have largely been conceived as contractual. Yet, their status in insolvency and bankruptcy, especially of the licensor, has remained contested and varies widely across jurisdictions. Recently, European jurisdictions like the Netherlands and Germany have recognized in rem effects of simple licences under specific conditions, following – on their own terms – the example of J­ apan and the us. The central rationale is that macro-economic effects outweigh the interests of creditors. Yet, the structures of the protection of (sub-)licensees in insolvency vary considerably and often camouflage the balancing exercise of the underlying policy decision between the protection of the creditors, market clearance and market protection. The article argues that these trends towards attributing proprietary positions which are justified by the digitalization of markets reflect a metamorphosis of property. The classical separation of in rem and in personam rights has evolved into a distinction of various groups and market stages, and a differentiation of their protective needs. Opposing economic interests become reconceptualized as positions demanding respect and which cannot simply be subject to an all-encompassing dominium. In this sense, the metamorphosis of property is in essence a constitutionalization of property and reflects the democratic change in a society to which a dynamic, fine-tuned case-law approach is better suited than a dogmatic one. Viola Heutger in her article explores derivatives in the freight-shipping market. She reiterates the historic development and the reasons for the emergence of these financial instruments in this time-honoured business, which has been since antiquity been notorious for its inherent risks. Based on a description of the modern seaborne freight transfer industry, which is composed of multiple actors engaging either in the provision of ships on one hand, or in the trade of goods on the other, she focuses on the evolution of the modern forms of financing trade by derivatives. She carefully reiterates the development from essentially bilateral freight-shipping contracts negotiated under pure private autonomy, into schemes of industrial self-regulation, which are now evolving into exchange platforms mimicking capital markets, with public interference from regulation. While the commodification of claims was originally instituted by endorsement (as described by R. Wilhelmi in this volume), the commodification of contractual risks became possible with the adoption of standardization processes inside the industry (trade in freight units substituting service contracts), and through anonymous trade, first carried out via clearing houses and later via public exchange. These forms emerged due to the increasing risks of this especially volatile market, embodied in foreign exchange rates, interest rates,

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fluctuating bunker prices and vessel value prices. The essence of modern financial instruments is risk-spreading, thus supplementing the traditional rationales of contract and property. However, with the shift in forms from contract to property, a shift in rationale occurred: While risk distribution is the economic heart of these novel instruments, the speculation of financial markets comes with it naturally. This brings the shipping industry closer to the disciplines of the financial market, which instigates further regulation. An epilogue by Hans Micklitz positions the present volume, which is limited to property, in the broader context of modern regulatory private law and private law theory, highlights some critical questions, and gives guidance to further research.

part 1 Challenge to Property Theory: Regulation

∵

chapter 1

“Regulatory Property Rights” – A Challenge to Property Theory Christine Godt C’est la proprieté qui fait le citoyen

diderot 17651

i

“Regulatory Property Rights” – An Oxymoron?

The term “Regulatory Property Rights” defines a heterogeneous group of newly emerging forms of property rights which sit uncomfortably with traditional property principles.2 While they share the central property characteristics of the in rem effect3 and, in most cases,4 transferablility,5 they are apparently not in line with general property principles: They do not only serve private autonomy and preferences,6 but are driven by regulatory purposes. They neither 1 Quoted according to J.G.A. Pocock, “The Mobility of Property and the Rise of EighteenthCentury Sociology”, in: A. Parel/T. Flanagan (eds), Theories of Property: Aristotle to the Present, Waterloo/Ontario Can. 1979, 141–166 (p. 141). 2 Such as the individual’s entitlement (individual property as base of private autonomy), numerus clausus, speciality, culturally embedded transfer rules (causal as opposed to abstract), and principles (civil law’s absoluteness versus common law’s fragmentation). 3 The in rem effect means that a right is enforceable against anyone (also “third party effect”), A. Clarke/P. Kohler, Property Law, Cambridge: Cambridge University Press, 2005, p. 18; C. von Bar, Gemeineuropäisches Sachenrecht, Munich: H.C. Beck, 2015, p. 31. 4 The discussion about transferability refers esp. to body parts. R.A. Posner, Economic Analysis of Law, New York: Wolters Kluwer, 2014 [9th edn], p. 42, argues that ownership does not imply transferability. However, S. Rose-Ackerman, Inalienability and the Theory of Property Rights, 85 Columbia L. Rev. 1985, 931, convincingly argues that property is respectively limited. 5 They are created to be bought and sold, thus becoming a “commodity”. This function was traditionally not regarded as central for the qualification of property, but became essential to market economies; see G. Alexander, Commodity and Property: Competing Visions of Property in American Legal Thought 1776–1970, Chicago, il: Chicago Univ Press, 2007. 6 Central to all property definitions, France: Art. 544 Code Civil: “droit de disposer de la manière la plus absolue” (commentated by A. Bürge, Das französische Privatrecht im 19. Jahrhundert,

© koninklijke brill nv, leiden, ���7 | doi 10.1163/9789004313521_003

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grant ­absolute power,7 nor revolve around material objects (“things”), nor are transfer rules stipulated in line with traditional conventions. Usually, the term “property” is juxtaposed with “regulation”,8 which in turn renders the term “regulatory property” an oxymoron. Yet, the research interest in regulatory property rights is in detecting the changes undergone by contemporary property. The question is: Are these rights different from those relating to conventional property, or do they highlight the functional core of property instead? While a related article explores the multifaceted public/­private nature of property,9 the present article focuses on the technical aspects of regulatory property. It first provides an overview of newly emerging property rights, submits a typology and describes the novel functions of these rights (ii.). It then explores the frictions which regulatory property rights cause to the fundamental principles of property law as settled in national property law s­ ystems (iii.). The next section identifies the drivers of change in the twenty-first c­ entury and juxtaposes the foundations of today’s property principles with the rationale of modern private law theory (iv.). The last section redeems some insights from systems theory in order to reformulate property principles for the twentyfirst century (v.).

Frankfurt a.M.: Klostermann, 1991, p. 6); Germany: § 903 bgb “mit der Sache nach Belieben verfahren und andere von jeder Einwirkung ausschließen” (commentated by T. Regenfus, Vorgaben des Grundgesetzes für die Lösung sachenrechtlicher Zuordnungs- und Nutzungskonflikte, Berlin: Duncker & Humblot 2013, p. 70). 7 Instead, they revolve around more narrow entitlements to use or to sell – a notion rejected by many property scholars on the continent, cp. C. von Bar, „Eigentum – Europäische Betrachtungen zu einem unverzichtbaren Sachenrecht“, in: H.-J. Ahrens/C. Armbrüster/C. von Bar (eds), Versicherungsrecht, Haftungs- und Schadensrecht: Festschrift für Egon Lorenz, Karlsruhe : Verl. Versicherungswirtschaft, 2014, 741, who recommends a thinking of „burdens“ instead of fragmentation (p. 758), and a conceptualization of use rights as “freedoms”, not as property (p. 761) thus reflecting a continental (German style) tradition (p. 765: freedom as something opposed to regulation). 8 In particular, the term does not reiterate the distinction of property under public law versus private law; for this debate see T. Regenfus (2013, supra n. 6), p. 30 and p. 648 at fn. 1643; M. Ruffert, Vorrang der Verfassung und Eigenständigkeit des Privatrechts, Tübingen: Mohr Siebeck, 2001, p. 383. 9 Two closely connected articles were written during the author’s time at the Center of ­Excellence at the University of Constance (2015). The present one focuses on structures and principles, the other one on the public–private interface of property, its historic d­ evelopment, and its implications for modern takings law: C. Godt, “‘Regulatory Property Rights’: New Insights from Private Property Theory for the Takings Doctrine”, 2016 (forthcoming).

“Regulatory Property Rights”

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15

Typology and Functions

Regulatory property rights have emerged in various fields of law from logistics to environmental law. They break up the juxtaposition of market and state as developed up to the mid-twentieth century,10 and sit uncomfortably with the conventional thing–person distinction. The public–private distinction has limited private actors to means under private law (private property) and state actors to public law, and legitimized the abolition of collectives in the late nineteenth century,11 and of public property until the mid-twentieth century.12 Behavioural regulation was assigned to public law. Private law came to be cate­ gorized in terms of bilateral claims or property in things, relegating all other types of immaterial rights from intellectual property through secured forms of payments to property in corporations to special areas of law. Modern regulatory property rights represent the complexity of the public– private realm. This breach with the simple binary code can best be understood as departing from the four-fields scheme of public–private axes. It goes beyond the simple two-field scheme and captures the modern mix of public-privategovernance arrangements, with private industry regulating itself and state regulation by privatization. In order to integrate all modern forms of proprietary assignment, the chart has to be expanded to collectives and collective decision-making as distinct from state regulation. The three categories on each axis consequently transform the four-fields scheme into a matrix of nine fields, combining the actors on the x-axis (private persons, collectives and the state) with the modus operandum on the y-axis (horizontal, collective, vertical).13 10 Ibid. 11 Historians and sociologists have recently unearthed a rich variety of collective arrangements which persisted until the early twentieth century; see S. Brakensiek, Agrarreform und ländliche Gesellschaft – Die Privatisierung der Marken in Nordwestdeutschland 1750– 1850, Paderborn: F. Schöningh, 1991; for the comparative collection for Germany and France see R. Prass/J. Schlumbohm, G. Béaur/C. Duhamelle (eds), Ländliche Gemeinschaften in Deutschland und Frankreich, 18.–19. Jahrhundert, Göttingen: Vandenhoeck&Ruprecht, 2003; focusing on the lower countries: R. van Weeren/M. De Moor, “Controlling the commoners – Methods to prevent, detect and sanction freeriding on the Dutch commons in the early modern period”, 62 Agricultural history review 2014, 256–277. 12 In Germany, the category was rejected as a reaction to the systems conflict of the Cold War after wwii; and in other countries it was dropped in the course of the liberalization of the 1980s. 13 The scheme integrates privatized public utilities, labelled “regulatory property” by K. Gray, Regulatory Property and the Jurisprudence of Quasi-Public Trust, 32 Sydney Law Review

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While not all quadrants can be discussed here, the following four conjunctions stick out: (1) The private actor/horizontal [private] modus operandum quadrant has enlarged and became differentiated. Three phenomena are particularly prominent. First, the pure exchange markets in products and services were supplemented by capital markets, adding a different rationale which is most notably represented by innovative “financial instruments”, like “derivatives”, “options” and “swaps”. In the form of commodity futures and freight forwards, they migrated to agricultural, energy and logistic markets.14 Second, proprietary effect is attributed to claims. A recent example is the attribution of an in rem effect to nonexclusive sub-licences serving as a means of protection. Third, property rights are claimed for interests intrinsically linked to the natural person, like body parts, bodily information, personal data and virtual property. (2) The private actor/public modus operandum quandrant expanded as well. Standardization, for example, has been well researched. Less research has been engaged in regulatory property rights which are employed by industry but which serve a public regulatory function, like airport slots or some novel forms of labelling as part of social responsibility policies. These rights serve different functions. They solve allocation problems between competitors or are employed to extend control beyond contracts. (3) In the quadrant of public actor/horizontal modus operandum two novel types of property rights have emerged. First, there are rights granted to firms like carbon or sulphur emission rights, fishing quota, or offsets for ecosystem services installed as land burdens (servitudes, easements15). Their models differ according to the purpose. Emission rights are modelled on publicly traded electricity, itself modelled on the trade in bonds. Their prerequisite is homogeneity, which comes with large assets and standardization. Fishing quotas may be transferred, but are not publicly

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2010, 221–241, p. 241: “A significant contribution to modern democratization of property”. [Responding to] “civic values which are elevated by the ancient quasi-public trust tradition, which still lie barely concealed in our modern regulatory schemes”. For a more in-depth discussion of freight forwards, see V. Heutger in this volume. See C. Reid in this volume for an in-depth discussion of these proprietary instruments of environmental law.

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traded. The second type is property claimed by states on genetic resources, cultural goods and minerals. These claims resemble sovereignty claims, and aim at control or revenues. (4) Novel types include cases of communities as actors raising proprietary claims, which are very different in nature. They can articulate an aggregate private interest, a public interest, or can absorb a public regulatory function in the form of contractual arrangements. Proprietary claims refer to water (irrigation, extraction, flood dams), traditional knowledge, collective genetic information or inner-city green spaces. They either build on the basic entitlement to exclude or, inversely, on proprietary access rights to property for a limited or unlimited group of people. What all rights have in common is their immaterial character. This is why M. Colangelo speaks of a „metamorphosis“ of property rights,16 referring to French theory which focuses on the immaterial and virtual properties of „new property rights“, as opposed to land and commodities.17 Some such rights exist only digitally, like emission rights or digital objects. In line with traditional property, novel regulatory property rights fulfil the following two functions: First, they transform objects into something which can be bought and sold (a commodity). Early precedents are claims and electricity (the former usually regulated in special laws,18 the latter qualified by courts as a “thing”19); new  rights refer to data, emission allowances, and financial instruments.20 Second, commodification is driven by remedies: Often an injunction is sought,

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M. Colangelo, Creating Property Rights, Leiden/Boston: Nijhoff, 2012, p. 181. With reference to J.L. Bergel, Rapport Géneral, in: La Propriété. Journées Vietnamiennes. Travaux de l’Association Henri Capitant des Amies de la Culture Juridique Française, Tome liii-2003, Paris: Société de législation comparée, 2006, 207, p. 215; E. Ramaekers, European Union Property Law, Cambridge: Intersentia, 2013, p. 250 observes that European law embraces all three categories (immovable, movables, intangibles) under the notion of property; similar to S. van Erp in this volume. 18 C. von Bar (2015, supra n. 3), p. 313 speaks of “normative objects” and deplores the difficulty to characterizing them for lack of language. 19 C-393/92, ecj of 27.4.1994; ecr 1994 I-1477; C-158/94 ecr 1997 i, 5699; Boek 7 Art. 5 Sec. 1 Dutch Civil Code; Art. 529 French Civil Code, for a recent contested discussion in Germany see C. Modest, “Neues Widerrufsrecht für Strom-, Gas-, Wasser- und Wärmelieferverträge ab dem 13. Juni 2014”, Energiepolitik 2014, 121–124. 20 Some ‘new’ objects are deliberately put extra commercium by regulation, like (some) body substances (e.g. blood and organs), cp. supra n. 4.

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sometimes damages, but not necessarily transfer.21 Sometimes the attribution is centre stage, as with virtual property, and body parts.22 In England, although rejected by courts, the rights to light, radio signals and wind are discussed. These rights absorb new functions: First, they institute the distribution of risk,23 and install a new rationale. “Financial instruments”, like “derivatives”, ”options”, ”swaps” and “freight forwards” more closely resemble a bet than an exchange. They decouple trade and payment,24 thus supplementing earlier forms of risk management like securitization (e.g. a bill of lading). They are modelled on earlier collective business models like company shares, bonds, and the “charter party”.25 Today, they have become standard transactions; “special purpose vehicles” are more recent business models.26 Second, property has come to serve as defence, both for individuals and communities. While firms already trade in “digital data” for processing “big data”, the status of the individual information provider and of the information user has remained weak. The rationale of claiming property is driven by the aspiration to enhance the individual’s autonomy and legitimate expectations with regard to virtual property, software users or bodily information. The defence function embodies autonomy protection and the respect of use interests. Thus, the rights of collectives in traditional knowledge and genetic resources enhance their autonomy. The protection of collective decision-making in water boards and commonholds secures multiple use interests. All respond to existing property and industrial policies, accumulation of value along transnational production chains and commodification processes, e.g. in medicine. They are modelled on intellectual property, and in the it sector mostly on copyright. The third 21 22

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For tracing the functional core of property to shed economic value, see Ramaekers (2013, supra n. 17), p. 250. Especially with regard to human regenerative material (ova, sperms, zygotes) and individualized genetic information embodied in dna, where concepts of property and person are intrinsically tied together. For a sensible comparative account from a common lawyer’s perspective see C. Bamford, Principles of International Financial Law, Oxford: Oxford University Press, 2nd ed. 2015, p. 98; for freight forwards, M. Stopford, Marine Economics, London/New York: Routledge, 3rd ed. 2009, pp. 193 et seq. For freight forwards: They separate the finance of transportation capacity from the ownership of the ship or cargo. U. Schüwer/S. Steffen, “Funktionen und Einsatz von Finanzderivaten (§ 1)”, in: J.-C. Zerey, Finanzderivate, Baden-Baden/Wien/Zürich: Nomos/facultas/Schulthess, 3rd ed. 2013, pp. 43 ff. In detail: U. Schüwer/S. Steffen (2013, ibid), p. 62.

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function is instrumental. Public use rights are made proprietary in order complement or substitute traditional command-and-control means. They aim to mimic a market and set transborder price signals (emission rights, fishing quotas). Inversely, industry instrumentalizes property for regulatory purposes. It aims to raise domestic public standards above the national mandatory level, and in this way “imports” standards, while at the same time controls supply and distribution chains. These rights are conceptualized as incentives for a specific behaviour (e.g. to invent, to invest, to engage as an entrepreneur, to reduce emissions, to adopt higher social standards than mandatory). The recognition of how different regulatory property rights are from conventional property begs the question of how common property principles are challenged. iii

Challenges to Property Principles

1 Lex rei sitae and the doctrine of “vested rights” The lex rei sitae rule (or lex loci) is the traditional general rule for determining the applicable law in property questions. While its conceptual foundations have changed over the last 500 years from “statute” to “seat”,27 the operative rule has remained the same.28 Its core is national sovereignty, thus it is bound to territoriality. It was adapted for intellectual property, and re-enforced for all registered rights. But also the case law on security rights in movables reveals that countries strictly adhere to the territoriality principle, even to the point of the elimination of a security right (effet de purge);29 the countervailing

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Respecting a mosaic of questions governed by several jurisdiction; providing international private law with this novel openness is the central and longest-lasting heritage of Savigny. B. Akkermans/E. Ramaekers, “Lex Rei Sitae in perspective: National Developments of a common rule?” Maastricht European Private Law Institute Working Paper 2012/14 (download www.ssrn.com); R. Michaels, “Globalizing Savigny? The State in Savigny’s Private International Law and the Challenge from Europeanization and Globalization”, in: M. Stolleis/W. Streeck (eds), Aktuelle Fragen zu politischer und rechtlicher Steuerung im Kontext der Globalisierung, Nomos: Baden-Baden, 2007, 119–144. The “internal harmony” is more important than international harmony, J. Basedow, The Law of Open Societies – Private Ordering and Public Regulation of International Relations, General Course on Private International Law, Académie de Droit International, Recueil des Cours 2012, Leiden/Boston: Brill/Nijhoff, 2013, at p. 477, he refers to Trevor Hartley,

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d­ octrine of vested rights remained limited in effect.30 Yet, some subtleties have sneaked in. The most famous example is Art. 4 of the eu Successions Regulation No.  650/2012.31 Whereas formerly all European jurisdictions ordered the deceased’s home country to rule on his/her succession, Art. 4 Succession Reg. No 650/2012 mandates the law of habitual residence to be the succession statute. Residuary national laws refer to this regulation.32 Interestingly, the “nature of rights in rem” is excluded from the regulation (Art. 1 Sec. 2 lit. k Reg. 650/2012).33 Its rationale is the protection of vested rights, especially for beneficiaries under English trust law. How the courts will implement these rules remains to be seen. The second example is the lex originis rule in cultural objects.34 This way, export prohibitions or limitations to good faith acquisition on the part of the home country are respected. For registered rights, questions related to the validity of the right are governed by the law governing the register. The shift towards registers has recently been strong. With the Eastern enlargement of the European Union, many countries adopted the French approach requiring non-possessory pledges to be registered. Since many regulatory property rights depend on registration, this shift was re-enforced, with a strong tendency towards European harmonization (though not uniformization). This means that, for example, all n ­ ational laws transposing the eu greenhouse gas emissions trade scheme refer to Art. 19

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who says 2006 about Savigny: „Legitimate policy considerations often ignored: This is the unwelcome legacy of Savigny“. Vested rights theory: R. Michaels, “eu Law as Private International Law? R ­ e-conceptualising the Country-of-Origin Principle as Vested Rights Theory”, zerp Discussion Paper 5/2006 (download: https://www.jura.uni-bremen.de/institute/zentrum-fuer-europaeische-rech ts­politik/publikationen/diskussionspapiere/?publ=2162&page=1), last visited 12.4.2016. Off. J. of 27.7.2012, L 201/107. Art. 25 German Law of Conflicts (egbgb) was changed 2015. Recital 15 and 16 Reg 612/2012 explain. Rec. 15 is about the respect of the national numerus clausus. Rec. 16 fine-tunes this: “However, in order to allow the beneficiaries to enjoy in another Member State the rights which have been created or transferred to them by succession, this Regulation should provide for the adaptation of an unknown right in rem to the closest equivalent right in rem under the law of that other Member State. […] [The] existing networks in the area of judicial cooperation in civil and commercial matters could be used, as well as any other available means facilitating the understanding of foreign law”. (Emphasis added by the author). J. Basedow (2013, supra n. 29), p. 456 and p. 465.

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Sec. 3 Dir. 2003/87/EC (the eu register) and eu implementing regulations (currently: Reg. No. 2216/2004). While member states deliberately renounced any legal qualification,35 the question of whether these rights are to be qualified as (monetarized) property rights or (unmonetarized) use licences re-emerges, for example in damage cases, for which the lex loci damni rule under Art. 4 Sec. 1 Reg. 864/2007 privileges the country where the damage occurred over the country in which the event happened that caused the damage. The competent courts then qualify the right along the lines of national preconceptions, disregarding the qualification of the register law.36 An English High Court judge, for instance, qualified emission rights, which were originally registered under a German register, as proprietary, disregarding the rejection of this qualification by the majority of German commentators.37 Likewise, English courts qualify fish quota as proprietary.38 These examples highlight the pragmatic approach of English law to systematic qualifications. Whether or not damages are finally attributed by a court depends on the facts of the case. The considerations may integrate reasonings essential to continental systematic thinking (like in the fish-quota case) or which are much more pragmatic (like in the Armstrong v Winnington case, a case revolving around a computer betrayal and the search for legal redress). These cases beg the question of whether a property right can to be qualified differently depending on the context, be it tax law, insolvency, environmental law (resp. sectoral areas of environmental law39) or 35 36

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S. Clò, European Emissions Trading in Practice: an economic analysis, Cheltenham: Edward Elgar, 2011, p. 61. Although the lex register was precisely the original intent of contracting states, M. Wemare/C. Streck/T. Chagas, “Legal Ownership and Nature of Kyoto Units and eu ­Allowances”, in: D. Freestone/C. Streck (eds), Legal Aspects of Carbon Trading : Kyoto, Copenhagen, and beyond, Oxford: Oxford University Press, 2009, 35–58 (p. 43). High Court, Dec. of 17 October 2011 [2012] ewhc 10 (Ch) – Armstrong v. Winnington. English High Court Judge Cranston on 10 July 2013 in uk Association of Fish Producer ­Organisation v Secretary of the State for Environment, Food and Rural Affairs, [2013] ewhc 19959 (Admin), para. 113. In this case, the damage claim was finally rejected. With regard to the “financial damage”, Cranston’s reasoning is similar to the arguments of the European Union Court of Justice in C-611/12 P, Giordano v European Commission (2005) ebl Rev 511, which is also revolving around fish quota; for a comment on the eucj-case see G. Brüggemeier, “Revocation of Fishing Quotas, ‘Positive Discrimination’, and Loss of a Chance – A Comment on ecj, Giordano v Commission 20 March 2014”, Journal of European Tort Law 2015, 304. Often, a distinction between emission rights and quotas is suggested (like Judge Cranston in uk Association of Fish Producer Organisation 2013, supra n. 38, para. 113) or between emission rights and land burdens for nature conservation (see C. Reid in this volume).

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­expropriation.40 While this question is not challenging at all in the English legal context,41 since English law acknowledges that the nature of a right is dependent on the contractual setting, it is certainly a challenge for continental lawyers. The fourth example is Art. 8 Sec. 1 Reg. 864/2007 (Rom ii), which stipulates the conflict rule for non-contractual obligations emerging from ip infringement. It installs “the country of protection”, rather than merely “the law of the country for which protection is claimed”. For rights based on eu law (design, plant varieties, trade marks) or for which a unitary eu-wide effect is mandated (future patent regulation), Art. 8 Sec. 2 Reg. 864/2007 (Rom ii) stipulates the applicability of the law of the state where the right was infringed. These formulations reflect the fact that practical managerial considerations have become more important than sovereignty. A last example of an attenuation of the lex rei sitae is Art. 4 Reg. 511/2014, which transposes the Nagoya Protocol to European law and installs a regime on so-called “Access and Benefit Sharing” (abs). It mandates that “users shall exercise due diligence to ascertain that genetic resources and traditional knowledge associated with genetic resources which they utilise have been accessed in accordance with applicable access and benefit-sharing legislation or regulatory requirements […]”. The duty as such is of public nature, and its violation gives rise to administrative sanctions. Yet, this (European) duty requires the respect, in the language of the Nagoya Protocol, of the so-called “provider state” law. This norm also applies to proprietary entitlements not acknowledged by Western states, like public state property and collective entitlements to genetic resources and traditional knowledge (infra iii. 2). If the lex rei sitae were applied to resources brought to the eu, those rights would only be acknowledged in countries which apply the inverse doctrine of mandatory law. This rule demands respect for a ­foreign regulation and requires the applicable statute to recede, like Art. 19 of the Swiss International Private Law Code. The due diligence-standard, however, is not a conflict of law rule, but only demands

40

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The quality of “property” depends on the legal surroundings as evidenced for the definition of “immobile” property by E. Ramaekers, “Classification of Objects by the European Court of Justice: Movable Immovables and Tangible Intangibles”, 39 European Law Review 2014, 447–468; for a context-dependent interpretation of emission rights, distinguishing torts and takings, see C. Godt (2016 forthcoming, supra n. 9). Bamford (2015, supra n. 23), pp. 107 et seq.; Fishing rights were first acknowledged as ­property rights in the uk under insolvency, Re Rae (1995) bcc 102.

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an investigation into the “provider state”’ s regulation.42 The “duty to comply” demands the respect of a vested right, unless it violates our ordre public. The legislative technique of Art. 4 Reg. 511/2014 goes beyond the current state of conflict of law rules. Its rationale is to strengthen the vested-rights principle. Its result is the importation of external law under certain conditions.43 It is based on an idea that property entitlements have become universal, following the conceptualization of modern human rights. 2 Individual Entitlement Most capitalist countries acknowledge private, individual property only. Even if held by the state, property is still an “individual entitlement”. The rationale is twofold: Property does not derive from state sovereignty, it is therefore “private”. Only individuals can be the assignees of a title, not groups. Some novel regulatory property titles, however, aspire to be recognized as group entitlement. Rights in genetic resources and traditional knowledge (“abs rights”) under the Biodiversity Convention and its Nagoya Protocol as implemented in Europe under Reg. 511/2004/EU, demand respect for the entitlements of “providers”. Depending on the domestic law of where the resource was accessed, this can be the state, a community or/and an individual. Although the implementation process has translated the abs claim into a duty with an administrative enforcement mechanism, the actual claim of the provider against the user is difficult to enforce in continental courts due to the collective concept of these rights.44 In Asian legislation, group rights like “farmer’s rights” may limit the claim to information rights, or be the legal foundation of access rights, such as stipulated in the Indian Plant Varieties Act.45 42

43

44 45

For an analysis prior to the transposition of the Nagoya-Protocol by the eu, see C. Godt, “Enforcement of Benefit Sharing Duties in User Countries Courts”, in: E. Kamau/G. Winter (eds), Genetic Resources, Traditional Knowledge & the Law – Solutions for Access & Benefit Sharing, London/Lifting v.a.: Earthcsan, 2009, pp. 419–438. Being part of a broader change, see L. Viellechner, „Responsive Legal Pluralism: The Emergence of Transnational Conflicts Law“, 6 Transnational Legal Theory 2015, 312–332; ibid, „Berücksichtigungspflicht als Kollisionsregel: Zu den innerstaatlichen Wirkungen von völkerrechtlichen Verträgen und Entscheidungen internationaler Gerichte, insbesondere bei der Auslegung und Anwendung von Grundrechten“, in: N. Matz-Lück/M. Hong (eds), Grundrechte und Grundfreiheiten im Mehrebenensystem: Konkurrenzen und Interferenzen, Heidelberg et al.: Springer, 2012, 109–159. In detail C. Godt (2009, supra n. 42), pp. 419–438. A. Ramanna, India’s Plant Variety and Farmers’ Rights Legislation: Potential Impacts on Stakeholder Access to Genetic Resources, International Food Policy Research Institute,

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While on the continent, prior existing collective rights (commons) and governance schemes were either abolished46 or transformed,47 they survived in England. Recent legislation on commonhold has brought to light the fact that collective use rights are still present in the legal sentiment in England.48 As much as these novel regulations challenge the idea of private property “only”, they unearth the collective embeddedness of property as an institution, esp. land. They shed light on the double foundation of property as both a control right (exclusion of others; contractual binding of others, reach through to others), and a right to [private] autonomy. In cases concerning local water boards, it is delegation of control to a body representing the property owners self-interests. In abs, the rationale of rights differs depending on genetic resources or traditional knowledge. With regard to genetic resources, the emphasis is on control, in contrast to traditional knowledge, where the emphasis is on autonomy. With regard to rights which are negotiated on the international level, nation states have become exposed to a mixture of ideas from various jurisdictional traditions. As with collective rights under the Nagoya Protocol (abs), it is not evident whether the transposition into an administrative concept fully captures the rationale of the convention. It guaranteed entitlements which should be enforceable transnationally. It remains to be seen how Western courts adjudicate the “mutually agreed terms” based on collective positions. German lawyers criticize their lack of distinction between the private and the public sphere. In England, the prevailing criticism against such rights rests on the proprietary argument that the distinction between the person and the thing (the information) is not clear enough.

46 47

48

eptd (Environment and Production Technology Devision), Discussion Paper No. 96, Washington, dc, 2003, p. 15. Esp. use rights to agricultural land and forests; see Godt (2016 forthcoming, supra n. 9) with special reference to works by S. Brakensiek und H.-J. Kühne. Collective water management schemes have been transformed into administrative collectives; see the works of the economist K. Grecksch for German Water Boards (German: “Wasserverbände”), “Adaptive capacity and regional water governance in north-western Germany”, 15 Water Policy 2013, 79. A very similar legal form survived in the Netherlands. A. Clarke, “Land Titling and Communal Property”, in: W. Barr (ed.), Modern Studies in Property Law, Bloomsbury: Hart, 2015, 215–231; A. Clarke/C. Godt, “Comparative Property Law: Collective Rights within Common law and Civil Law Systems”, in: C. Godt (ed.), Cross Border Teaching and Transnational Teaching under the Treaty of Lisbon, Hanse Law School Series, Vol. 1, 2013, pp. 61–82.

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3 Absoluteness versus Fragmentation On the surface, the most important difference between common law and civil law property is the set of principles of “unity”, “absoluteness” and “system” in civil law countries49 versus “fragmentation” and case evolution in common law countries.50 The principles seem to be opposites, yet, from a bird’s-eye perspective, they are complementary historic artefacts.51 Under the principle of absolute unity, “fragmented” rights are rejected. The underlying idea is that the free will of the enlightened individual is the expression of his/her absolute dominium over him-/herself and all his/her belongings.52 In cases where property rights are actually split, continental theory reconceptualizes them as contractual-like expectation rights (Anwartschaftsrechte),53 while their complementary security positions (non-possessory pledge; retention of property title) enjoy “full” property protection.54 Use rights like hunting and fishing rights are understood in continental law as exceptions to the rule, historic artefacts. The anchor norms in civil codes (e.g. §§ 903 und 905 German bgb) make strong statements on unity, but are prone to mislead the common law lawyer. While § 905 bgb essentially transposes the English cone doctrine into (German) black-letter law, this principle was never a legal reality 49 50

51

52

53 54

Defended by von Bar (2014, supra n. 7), pp. 757–763. On fragmentation: Clarke/Kohler (2005, supra n. 3), pp. 297 et seq.; comparatively: S. van Erp/B. Akkermans, Property Law, Oxford/Portland Or.: Hart Publ., 2012, p. 64; the modern prime example is the trust: G. Moffat, Trust Law, Cambridge: Cambridge University Press, 5th ed. 2009. M. Xifaras, “Propriété Sociale”, in: M. Cornu/F. Orsi/J. Rochfeld (eds), Dictionnaire des Communs, ruf 2016 (forthcoming): “L’ideologie d’une propriété absolue et exclusive n’ait jamais été qu’une idéologie.” In France driven by the Revolution 1789, in Germany by idealism going back to Kant, and as absorbed by F. C. v. Savigny, System des heutigen Römischen Rechts, Band 1, 1840 (Darmstadt: Wiss. Buchgesellschaft 1956), p. 338 f: “Eigentum ist Willensmacht ‘über ein begränz­ tes Stück der unfreyen Natur’”, opposed to an obligation, which is will over the single acts of another person. This is the difference between actio in rem and actio in personam: R. Michaels, ‘Introduction to § 241 (“Vor”)’, in: M. Schmoeckel/J. Rückert/R. Zimmermann (eds), Historisch-kritischer Kommentar zum bgb, Tübingen: Mohr Siebeck, 2007, No. 38. Retention of title of the seller; non-possessory pledges for the creditor, registered security for the land buyer. Although this is nuanced when it comes to protection. A standard example in German teaching is the distinct treatment of the non-possessory security right in seizure on the one hand (§ 771 zpo, the owner can ask for vindication), and in bankruptcy on the other hand (§§ 49–51 InsO, the owner cannot ask vindication, only the equivalent value sum after sale, up-front).

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on the continent. Minerals and metals have always been separable from the surface and were never considered part of land ownership, but were bound to the feudal right to coinage. Formally assigned to emperors and kings, the right to mining is today element of the sovereign state power. The continental idea of unity was first modelled on the “dominance” of the early modern age.55 In the time of the Enlightenment, it became a topos for the rejection of feudal fragmentation, a means of protecting the emerging bourgeois (“Bürger”, citizen), encapsulated in the idea of a code.56 The idea of unitary control links hermetically one person, one right, one thing. It provides the individual with a right against anyone in the world, thus immunizes the owner against prior or conflicting rights. Later, industrialization carried on the notion.57 The principle of specificity is a consequence of this conceptual reasoning. It no longer secures full dominium over people, but over “things”. Inversely, without a revolutionary turnaround, the common law developed its own principles which limit the control of superior over inferior property. Considering that time limitations are central to common property law and are feudal in origin, two important limiting concepts are the rule against perpetuities58 and the appurtenant rule in servitudes.59 Thus, the ideas of unity and fragmentation emerge as default rules only. Modern regulatory property rights transcend the confines of civil law’s unity and common law’s fragmentation, and dismantle these principles as historic mirror images. Two issues deserve closer attention: power and thirdparty rights. First, we will examine the rule of power and its limitations. In the literature, it is argued that under common law principles, the appurtenant rule would limit the applicability of environmental offsets,60 as stipulated 55 56 57

58 59 60

Bartolus da Saxoferrato, Commentarius ad primam partes Digesti novi, Venedig 1570, ad D.41,2,17 no. 4: “dominium es ius de re corporali perfecte disponendi nisi lege prohibeatur”. See e.g. Ortfried Höffe arguing that codification is superior to case law evolution, „Die Alte Welt im Recht“, Frankfurter Allgemeine Zeitung (faz) of 18.5.2009. For example, on grid-dependent energy see P. Büsch, „Recht und leitungsgebundene Energie: Die langfristigen Auswirkungen des sachenrechtlichen Einflusses auf die Errichtung elektrischer Netze zu Beginn des 20. Jh.“, in: M. Maetschke/D. v. Mayenburg/M. Schmoeckel (eds), Das Recht der Industriellen Revolution, Tübingen: Mohr Siebeck, 2013, 161–174. Although today the rule against perpetuities has lost importance, and has been abolished in many us states, R.A. Posner (2014, supra n. 4), p. 84. K. Gray/S.F. Gray, Land Law, Oxford: Oxford University Press, 7th ed., 2011, pp. 236 et seq. The appurtenant rule as a hurdle to modern conservation easements and biobanking is discussed by C.T. Reid, “Conservation Burdens and Covenants”, Scottish Planning and

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e.g. under the eu framework water regulation.61 The regulatory eu framework , however, demands an autonomous interpretation in the light of the ‘European legislative will’. It cannot be re-interpreted by recourse to national principles which counter the legislative purpose. The recourse to historic principles has to be handled with caution. Likewise, the continental unity principle has shrunk to a residual principle. It did not stay the recognition of security rights. Neither did it hold back recent developments in the financial sector such as financial instruments, derivatives and freight forwards, nor the recognition of “emission certificates” and tradable quotas (use rights), nor the corporate models of overlapping control rights along the production chain (csr labels). Unity or fragmentation today do not accurately describe what is essential to exercise control. In contrast, limited rights, like csr labels, may reach far. They make possible a subtle control of the supply chain across borders by optic signals without owning the signal. Similar to the pooling of risks in “special purpose vehicle” in the banking sector, industry “pools” the ownership in the organization holding the csrlabel, and licenses signal the adherence to the standard. Freight forwards are another example of a powerful fragmented right. The shipping industry has early adopted to the fragmentation discourse It calls a service contract a sale of “sea transport”,62 or sale of “three-dimensional airspace in a ship”.63 Emission rights followed the existing trading schemes of electricity sector on the wholesale market (the triple structure of private and public exchange in forms of options and spot, and “over the counter” [otc]).64 Second, the purpose of absoluteness and unity is to immunize the owner against the rights of third parties. Coupled with the principles of traditio and the Numerus Clausus, they controlled against unexpectable claims. I submit

61 62 63 64

Environmental Law 2014, pp. 108–109. In Germany, project bound environmental offsets (eco-accounts) or environmental obligations as part of climate change programmes providing preferential credit are not implemented by servitudes between neighbouring lands under § 1018 bgb (which include the appurtenant rule in § 1019 bgb), but under § 1090 et seq German Civil Code (bgb) as burdens privileging a (legal) person, here the state. The discussions about problem of appurtenance has precedents, e.g. in France when Paris was rebuilt based on the Haussman-Plan, A. Bürge (1991, supra n. 6), p. 388. Art. 4 eu Dir. 2000/60/EU, oj L 327, 1 of 22 Dec. 2000. M. Stopford (2009, supra n. 23), p. 180. For a more detailed discussion of freight forwards, see V. Heutger in this volume. S. Konar, Wettbewerbskonforme Stromgroßhandelspreise, München: Beck, 2015, p. 6; pp. 267 et seq.

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that these functions can no longer be fulfilled by formal property principles. Propertization and acceleration will not and should not overrule other people´s freedoms and rights. Accelerated digital transfer comes with augmented risks vis-à-vis third-party claims. The situation is similar to that of genetic information. In both cases, the commercial value of the data is outweighed by personal interests of individuals. I argue that the proprietary model does not discard the individual rights of individual third parties. These rights will “travel with” the aggregated data unless the legislation changes its status. Regulatory property rights shed light on modern fragmentation as the contemporary standard. The propertization of something immaterial has become “normal”, be it information, a claim or an authorization. These proprietary forms absorb a different rationale other than exchange or dominance. They provide a basis for managerial strategies. The traditional preoccupations with alienation and perfect enjoyment have obscured the fact that property is in essence a behavioural institution. On the continent as much as in the common law world, property has always been a base from which to unfold an entrepreneurial activity. In the twenty-first century, these entrepreneurial activities have expanded towards information and finance. These new activities, on principle, depend on similar safety nets which have traditionally been provided by property law, namely security and stability. Yet today, these functions are provided directly by the design of the legal environment. Traders have to be accredited, rights are registered, and trading rules are supervised by specialized agencies. The actual fine-tuning takes place in adjacent areas of law such as insolvency65 and competition law.66 These laws sector-specifically balance flexibility on the one hand, and credibility, stability and security on the other.

65

66

It is in insolvency when a true conflict emerges between stability expectations and business models which are crafted around business failure. For a long time this model was reserved to insurance, but later moved to the banking sector with derivatives, culminating in “sub-prime securities”. This conceptual conflict seems to be at the heart of the contested issue of “netting” arrangements in insolvency, cp. Fried, “Insolvenzrechtliche Grenzen von Netting-Vereinbarungen (§ 18)”, in: Zerey (2013, supra n. 25), pp. 389 et seq; Bamford (2015, supra n. 23), 54 f (on a note of comparative law n. 3.17). The scope of information rights is not defined by the description of a claim to an invention or by the drawing of design and labels, but by a mixture of principles and limits defined and developing under competition law. Most important of these are the Block ­Exemptions Regulations under Art. 101 Sec.  3 tfeu; for an overview, see J. Hoffmann, “Chap. H (Competition)“, in: M.A. Dauses (ed.), Handbuch des eu Wirtschaftsrechts, Munich: H.C. Beck, Vol. 1, 2015 (37. edn).

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4 Publicity versus Claims, Rights and Immaterial Things Publicness (syn. “publicity principle”) is considered to be an essential property principle on the continent. It encompasses the numerus clausus principle, the traditio principle, the specificity principle and registers for property and security rights. Of all these, the numerus clausus is considered the central building block. It exempts the scope of property rights from private autonomy.67 As far as the numerus clausus68 and the specificity principle69 are concerned, English courts have judicially implemented the respective protection of legitimate expectations to shield the liberal individual from third-party claims. The traditio principle, as a means of providing evidence for a title transfer, is credited to Savigny, who considered possession a central institution of Roman law.70 In essence, it was instrumental to install a bifurcate scheme of claims and things. While on the continent, the evidence function of possession has evolved with different implications for the transfer of the property title71 and third-party protection with regard to security rights,72 the efficiency of registries has become acknowledged in England. Thus, there is European convergence around a transparency standard which matters today.73 The focal point of the debate is the proprietary or obligatory nature of claims and rights in immaterial things. From the continental perspective, it seems self-explanatory that claims cannot be proprietary since they are not

67

68 69 70 71

72 73

See B. Akkermans, The Principle of numerus clausus in European Property Law, Intersentia: Antwerp, 2008, p. 402, in which the author also discusses a “filter” to distinguish between those rights which qualify as property rights and those that do not; see also also E. Ramaekers (2014, supra n. 40), p. 449. Clarke/Kohler (2005, supra n. 3), p. 160; S. van Erp/B. Akkermans (2012, supra n. 50), pp. 65 et seq. The famous Goldcorp case is a prime example; see S. van Erp/B. Akkermans (2012, supra n. 50), pp. 75 et seq. Savigny conceptualizes the Roman res nec mancipi as the rule; see F.C. v. Savigny, Das Recht des Besitzes, Gießen: Heyer, 1803. Under the German traditio principle, it was criticized as fictitious; C. Godt/D. Susnjar, “Besitzkonstruktion im Finanzierungsdreieck”, Juristische Ausbildung (jura) 2008, ­ 542–548. Other than in Germany, non-possessory pledges have lost acceptance; see U. Drobnig/O. Böger, Proprietary security in movables assets, Munich: Sellier, 2015. For a brilliant technical reconstruction of four reformulated principles, see S. van Erp, “European and National Property Law: Osmosis or Growing Antagonism?” (2006) reprinted in: S. van Erp/B. Akkermans (2012, supra n. 50), p. 93.

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“public”.74 As a matter of principle, for information to be proprietary it needs to be registered, with copyrights (which do not require registration) as an exception to the rule. With data and information claimed as proprietary, the underlying issue grows in importance and the legal profession is struggling to catch up.75 In the interest of the party’s protection, the conveyance of a claim is in principle contractual, since the debtor keeps his/her defence rights. Commodified claims are therefore a matter of specialized legislation (involving certification, securitization or registration). This is the basis for the continental equation of property and things, and the distinction between property law and corporate law. In England, the situation is fundamentally different.76 The distinction between obligations and property exists, but the distinction is not a matter of principle; instead, it is for one of the parties to decide which legal arrangement suits best (personal versus property rights).77 Only in cases where the legislator identifies an overwhelming public policy interest does it intervene, e.g. by requiring charges to be registered.78 Therefore, whether a claim under a charge is proprietary or obligatory depends on the set-up. The same thinking is mirrored in choses in action.79 This flexibility also allows rights to change their nature depending on the remedy sought.80 The central point here is that all “regulatory property rights” considered under (ii.) are immaterial, thus not “things”. Sometimes legislation is in place, sometimes not. The fundamental change has been that we have become used to immaterial assets. This habituation has three sources. First, it has been brought about by Anglo-Saxon influence. We have become accustomed to the 74

75

76

77 78

79 80

The German § 903 is often cited as a basis for the argument that under German law, ­ roperty rights to non-corporeal objects “cannot exist”, E. Ramaekers (2014, supra n. 40), p p. 449. Discussed as “secrecy” protection under unfair competition law; data protection laws, medical, insurance and consumer laws, market dominance misuse regulation, banking laws etc. C. Bamford (2015, supra n. 23), p. 113, n. 4.83: “[…] in common law systems, in contrast to Roman law systems, the question of whether an interest or right is personal or proprietary depends on the nature of the remedy available for its enforcement”. This is well explained by C. Bramford (2015, supra n. 23), pp. 91 et seq. For reasons of transparency under Sec. 95 Companies Act 1948 (this registration requirement was discarded with the Companies Act 2006); book debts, however, have to be registered, Sec. 874 Companies Act 2006; illustrated by the bcci (No. 8) case as discussed by C. Bramford (2015, supra n. 23), p. 114. C. Bamford (2015, supra n. 23), pp. 122 et seq. English High Court judgment in Armstrong v. Winnington (supra n. 37).

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“re-bundling” of securities in “special purpose vehicles”, a means of risk distribution which was heavily criticized after the financial crisis for obscuring risks, for those who gave security and those who bought it. As a textbook on banking law rightfully states: “[…] the flexible approach of equity […] is one of the principle reasons for the dominance of common law systems as the governing regimes for International trade and finance”.81 Second, this habituation has come with the ubiquitous immaterial assets that now form part of our daily life. Fifty years ago, goods still dominated gnp. Today, life is strongly impacted by ip, especially non-registered copyright,82 and commodified (standardized) services. Thus, immaterial assets have become “real”, and a discourse in property terms has become “normal”. This can be attributed to the fact that broader phenomena such as social change, dematerialization and financialization (infra) brought us closer to accepting what English law calls “personal property”83 and “choses in action”,84 two concepts alien to the continental lawyer.85 Third, the use of the English language as a contemporary lingua franca might have contributed to this habituation. International negotiations are conducted in English, causing negotiators, who are not always lawyers, and the media to adopt terms (“property”) while obliterating their technical meaning. The rights which have emerged largely follow the regulatory schemes of immaterial assets with or without registration, with or without a close link to the financial market as such. The regime for these rights depends on a legislative decision.86 The fundamental idea driving the framing of proprietary interests is the possibility of r­eciprocal transfer and defence against third 81 82

83 84 85 86

C. Bamford (2015, supra n. 23), p. 118, para. 4.100. And with a much wider scope. ip rights do not only give rise to remedies as described in formulated claims and drawings. The “scope” as distinct from the claim of an ip right is usually much wider due to various doctrines, like “equivalence” and “product protection”. C. Bamford (2015, supra n. 23), Chap. 4 (“Personal and Property Rights”), a distinction which is different in common law, explained (again) using the Goldcorp case (p. 93). C. Bamford (2015, supra n. 23), Chap. 5. C. Bamford (2015, supra n. 23), Chaps. 4 and 5 aims to describe the difference from a common law’s perspective. An example is § 7 Sec. 5 German Greenhouse Gas Emission Trading Act (tehg). It defines emission rights as not being „financial instruments“ under two laws governing the finance sector: “(5) Berechtigungen sind keine Finanzinstrumente im Sinne des § 1 Absatz 11 des Kreditwesengesetzes oder des § 2 Absatz 2b des Wertpapierhandelsgesetzes“. That does not imply that emissions are not to be qualified as „financial instruments“, but that the supervision of the emission rights market is not governed by those which regulate all other financial instruments.

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parties, r­ egardless of the customary limits of legal traditions. The details of the creation, transfer and supervision are sector-specific. 5 Transfer Rules a) The Three Dividing Principles Transfer rules are conceived of as culturally embedded in each jurisdiction. Since they evolved differently in European nation states, they are perceived as a part of national heritage, often with a sense of superiority vis-à-vis the opposing principle of a neighbouring state. The three central dividing differences in transfer principles are: first, the distinction between consensual87 versus traditio regimes;88 second, abstract89 versus causal;90 and third, the nemo-dat rule91 versus the good faith principle.92 Regulatory property rights render these national property principles less fundamental as they are often portrayed to be. Legislators simply introduce sectorial laws which fit the regulatory goal, whilst courts adjust to the necessities of global collaboration. An excellent example of this is the transposition of the carbon trading scheme93 as negotiated under the un-Framework Convention on Climate Change of 1992 and its Kyoto Protocol 1997/2005.94 Member states and the  eu implemented the scheme in parallel, while most member state laws came into

87

88 89

90 91 92

93 94

F. Terré/Ph. Simler, Droit Civil – Les Biens, Paris: Dalloz, 6. ed. 2002, pp. 243; no. 384: „Le principe de l’instantanéité du transfert“, no. 387: “une grande innovation”, no. 388: “la puissance des volontés individuelles et la rapidité de leur actions conjointe”; ausführlich dazu: A. Bürge (1991, supra n. 6), pp. 4 and 77. For a comparative overview see S. van Erp/B. Akkermans (2012, supra n. 50), pp. 787 et seq. Discussed by T. Regenfus (2013, supra n. 6), pp. 313: „Das Abstraktionsprinzip dient in erster Linie dem Verkehrsschutz“; A. Stadler, Gestaltungsfreiheit und Verkehrsschutz durch Abstraktion, Mohr Siebeck, 1996. For a comparative overview see S. van Erp/B. Akkermans (2012, supra n. 50), pp. 823 et seq. For English law: Clarke/Kohler (2005, supra n. 3), ‘nemo dat’ as a rule (pp. 393 et seq) and ‘bona fide’ as exception (pp. 400 et seq.). Being a central principle of free trade protection under German law (“Verkehrsschutz”): Regenfus (2013, supra n. 6), pp. 647 ff; F. Peters, Der Entzug des Eigentums an beweglichen Sachen durch gutgläubigen Erwerb, Tübingen: Mohr Siebeck, 1991. To be more precise: this does not just refer to the trading of “carbon”, but also of five other greenhouse gases. A potentially global scheme with the two mechanisms “Clean Development Mechanism” (implemented with cer [certified emission reductions]) and ‘Joint Implementation’ (implemented with “eru” [emission reduction units]), P.-M. Dupuy, International Environmental Law, Cambridge: Cambridge University Press, 2015, pp. 151 et seq.; D. Freestone/ C. Streeck, Legal Aspects of Carbon Trading, Oxford: Oxford University Press, 2009.

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effect in 2004, and the eu Directive only in 2005.95 As a consequence, differences emerged. Germany and the uk passed separate laws,96 whilst the Netherlands and France introduced a special section into their Environmental Codes. France qualifies emission rights as bien meubles,97 Germany follows the model of land title registries98 and the Netherlands builds on the model of intangible objects.99 Significant controversy revolved around the judicial nature of these rights as being either public or private. In Germany, the qualification of these rights as public prevailed,100 while the characterizations as private101 or hybrid102 remained minority positions. In most other countries such as the Netherlands, Italy, France and the uk, emission rights were qualified as corporate property with differences as to a qualification as asset or financial ­instrument.103 Note however, that the Netherlands categorizes rights and 95

96 97 98 99 100

101

102

103

Dir. 2003/87, Off J. 2003 L 275/32; concisely described by M. Colangelo (2012, supra n. 16), pp. 130 et seq.; for a more normative focus on the function market conditions (“trust”) and the eu-process as a process of “second order”, see M. Hartmann, Europäisierung und Verbundvertrauen – Die Verwaltungspraxis des Emissionshandelssystems der eu, Tübingen: Mohr Siebeck, 2015; J. Jans/H. Vedder, European Environmental Law, Groningen: Europa Law Publ., 4. ed. 2012, pp. 385 et seq.; L. Krämer, eu Environmental Law, London: Sweet & Maxwell, 7. ed. 2011, pp. 317 et seq. Germany: Treibhausgas-Emissions-Handels-Gesetz 2004 (tehg); uk: Greenhouse Gas Emissions Trading Scheme Regulation 2005. Art. 229-15 Code de l’Environment. Stipulating public faith of the register, now § 7 Sec. 4 tehg. Art. 16.41 Wet Milieubeheer mirrors Titel 4 boek 3 Dutch Civil Code, E. Ramaekers (2014, supra n. 40), p. 450. For a qualification as public: J. Bauer, Der Emissionshandelsmarkt – Rechtsfragen des börslichen und außerbörslichen Handels mit Emissionsberechtigungen, Hamburg: Kovač 2008, p. 37 und A. Pardon, Die Rechtsinhaberschaft an Emissionsberechtigungen und ihre Übertragung, Berlin: Duncker & Humblot, 2012, p. 75; U. Mutschler, „Rechtsnatur und Funktionsweise von Berechtigungen nach § 7 tehg“, in: A. Klees (ed.), Energie, Wirtschaft, Recht – Festschrift für Peter Salje, Cologne: Heymanns, 2013, 317 (p. 324); W. Frenz, Emissionshandelsrecht : Kommentar zu tehg und ZuV 2020, Springer: Berlin, 2012. A. Büttner, Zivilrechtliche Aspekte des Handels mit Emissionsberechtigungen, Göttingen: Sierke Verlag, 2011, p. 45/p. 50, focusing on the question of whether the financial supervision law (kwg) applies. W.F. Spieth/Hamer speak of „civil elements“ in: F.-J. Säcker (ed.), Berliner Kommentar zum Energierecht, Vol. 2, Fachmedien Recht und Wirtschaft: Frankfurt, 3. ed. 2014, § 7, No. 15; G. Wagner called them „hybrids“: „Handel mit Emissionsrechten: Die privatrechtliche ­Dimension“, zbb 2003, 409, p. 412. In the uk the legal discussion departed of a text language of “licences” in Sec.  15 uk Greenhouse Gas Emissions Trading Scheme Regulation 2005, while the revised text of 2012 uses the term “permit”; for a discussion see uk Financial Market Law Committee

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claims as “patrimony”, as distinguished from pure contractual obligations (Art. 3:6 Nieuwe Burgerlijk Wetboek). German authors who have qualified emission rights as commodities focus on their commercial value, and distinguish emission rights from milk quotas and assigned quantities of nuclear energy. Since eu law has submitted emissions trading to financial market regulation,104 and all member states moved to a straightforward reference to the transfer rules of the eu register, the discussion has been shifted to courts discussing compensation.105 For the present context it is of interest how member states accommodated the novel transfer system for greenhouse gas emissions with their traditional principles. The Dutch and French legislators stipulated an abstract transfer for emissions,106 thus modifying their traditional principle of causal property transfer. Germany modified its leading principle of good faith acquisition, stipulating broad public trust for the register, with the consequence that bad faith does not impede property acquisition.107 Some argued that the essence of the good faith principle is thus undermined.108 Commentators of the law

104

105

106 107 108

(Working Group), Emission Allowances: Creating Legal Certainty, Issue Paper No. 116, London (2009), p. 11 (discussing the qualification as „property right“ versus „financial instrument“). For Italy: F.L. Gambaro, Il recepimento della direttiva Emissions Trading, Contratto e Impresa/Europa 1 (2007), 521–546 (discussing, in parallel to the different traditions of land registers, if the entry to the register is constitutive or declaratory, p. 545); For the Netherlands: R. Teuben, Verhandelbare Emissierechten: Juridische aspekten van emissiehandel voor CO2 in Nederland en de Europese Unie, Deventer: Kluwer, 2005, pp. 63 et seq.; For France: B. Le Bars, La nature juridique des quotas d’émission de gaz à effet de serre après l’ordonnance du 15 avril 2004. Reflexions sur l’adaptivité du droit des biens, jcp éd. G I (2004), p. 148; P. Devolvé, “La patrimonialité’des actes administratifs: raport de synthèse”, 25 Revue Française de Droit Administratif 2006, 44 (p. 47). The qualification as financial instrument has already been valid for derivates on emisson rights, and become valid with the eu Market Abuse Regulation No 596/2014; for the legislative background see European Commission, MEMO/13/774 of 10. Sept. 2013; also earlier MEMO/11/716 vom 21. Okt. 2011. Both under torts and expropriations, see C. Godt, “´Regulatory Property Rights´: New Insights from Private Property Theory for the Takings Doctrine” (2016, forthcoming, supra n. 9). Art. 16:42 sentence 1 of the Dutch Environmental Code; Art. L.229-15 French Code of the Environment, cp. S. van Erp/B. Akkermans (2012, supra n. 50), p. 1046. Art. 7 Sec. 3 and 4 Greenhouse Gas Emissions Trading Act (tehg) 2011 (formerly Art. 16 Sec. 2 tehg) 2004. A. Büttner (2011, supra n. 101), pp. 129–133 argued that the central idea of the principle was discarded and that therefore emisison rights can only be qualified as “sachenrechtliches Sonderrecht”; similar C. Stewing, “Gutglaubensschutz und andere zivilrechtliche Aspekte bei der Übertragung von CO2-Emissionszertifikaten”, Klees (2013, supra n. 100), p. 419.

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have settled on an interpretation that the rule only modified the principle for this limited sector.109 Beyond this question, the language of all member states law110 refers to the transfer rules of the eu register.111 From a property law standpoint, the legislative activity is interesting. While the allocation plans (with exceptions for energy-intensive industries112) and the public–private nature of rights raised a high level of public attention, these more subtle modifications to the foundations of European property schemes passed without public debate and met very little resistance from academia. Courts have equally modified property principles, such as the good faith principle.113 These developments reveal the fading importance of national traditions in property law. What was formerly considered a “national building block” turns out to be functional, historic thus changeable. b) Transfer: Bilateral, Public, Replicative The transfer of regulatory property rights takes three forms: bilateral transfer, public exchange and replicative exchange by licences. Emission certificates, freight forwards and derivatives follow the earlier structures of public trading in bonds and financial papers. While transfer rules for many regulatory property rights simply followed the existing corporate law rationales in order to reduce transaction costs, the fundamental change to property law went un­noticed for a long time. From a bird’s-eye perspective, “regulatory property rights” reveal that bilateral transfer is just one mode of title transfer which  has been supplemented by multilateral trading and licensing. Multilateral trade based on exchange platforms and auctions has become the standard for speedy and voluminous trade in standardized commodities, squeezing out bilateral transfers in number and in importance. Recent mergers of specialized stock exchanges114 do not signal a decline, but a shift to ever larger, standardized markets, in finance, commodities and services.

109 W.F. Spieth/Hamer in: F.-J. Säcker (2014, supra n. 102), § 7, No. 15. 110 Now § 17 tegh 2011; Art. L.229-16 French Code of the Environment. 111 They refer to Art. 19 Sec. 3 Dir. 2003/87/EC (the eu register) and eu implementing regulations (currently: Reg. No. 2216/2004, Off.J 386/1 v. 20.12.2007). 112 Pars to toto: C-127/04, ecj of 16.12.2008, Arcelor, ecr 2008 i, 9895. 113 Valuable cultural objects and used cars cannot be acquired simply by trusting that the seller holds the title. Instead, the buyer has to take safeguards (ask for papers, check the public lists). 114 The cotton exchange in London (the national exchange in Bremen closed in 2007); electricity exchange epex for the energy markets in France, Germany, Austria and Switzerland seated in Paris (merger of the French Powernext sa and the German eex exchange in 2008).

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Drivers of Change

Regulatory property rights have resulted from three sources, two of them socio-historic, and one technological. The “first wave” of novel property rights emerged with the economic liberalization of 1970s and 1980s. This change was partly driven by neo-liberal economic interests, partly by reform impulses for a “better” regulation which would integrate social policies into market mechanisms (“enforcement deficit in environmental law”; “intelligent instruments”115) and “more democracy” (criticism of “top-down” administration). Emission rights, airport slots and quotas for milk production and fish catch can be assigned to this development stream. Therefore, regulatory property rights cannot simply be cherished or discredited as “neo-liberal”. Their complex interest structure is reflected in the debate on the public or private nature of these rights, on complementary public regulation and ­market-conforme allocation. The “second wave” emerged during the 1990s, with rights as varied as abs rights and financial instruments. These reflect a conversion of both markets and nation states under the pressures of the process called “globalization”.116 Firms, which had already been acting internationally for some time in terms of trade and labour sourcing,117 started to “internationalize” their organization through the use of outsourcing, multinational assemblage and supply chains.118 115 Here, the author is aware of the insinuative nature of „better“ law, M. Reimann, “Better Law”, “Interest and Policy Analysis”, in: J. Basedow (ed.), European Encyclopedia of Private International Law (forthcoming). 116 Acknowledging that „internationalization“ is not a novel phenomenon, see J. ­Osterhammel, The Transformation of the World (German: Die Verwandlung der Welt. Eine Geschichte des 19. Jahrhunderts), München: Beck, 2009. 117 It is important to bear in mind that the incorporation of firms as ”organizations” (assembled capital recognized as “property”, acknowledged to be equivalent to natural persons) coincides with industrialization processes and that a novel acquired economic freedom was established as late as 1856 in England, 1867 in France, 1869 in Spain, 1870 in Germany and 1873 in Belgium. Prior to this liberalization process, companies were either prohibited altogether (as in France until 1791) or needed a parliamentary permit like in Great Britain (Bubble Act 1720), J.-P. Robé, “Conflicting Sovereignties in the World Wide Web of Contracts”, in: G.-C. Calliess/A. Fischer-Lescano/D. Wielsch (eds), Soziologische JurisprudenzFestschrift für G. Teubner, Berlin: de Gruyter, 2009, 857–873, p. 866. Economists first began to ponder over “the” international firm in the 1970s; e.g. K.P. Sauvant, Controlling multinational enterprises: problems, strategies, counterstrategies, Frankfurt: Campus, 1976. 118 J.-P. Robé (2009, ibid.); also K.-H. Ladeur, “The State in International Law”, C. Joerges/ J. Falke (eds), Karl Polanyi, Globalisation and the Potential of Law in Transnational Markets, Oxford: Hart, 2011, 397, p. 398.

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Nation states, after two centuries of sovereign separation, transformed into ­cooperative compounds,119 in response to the fact that modern policy goals can only effectively be pursued in cooperation. At first, states only collaborated to enhance economic freedoms, but since the 1980s at the latest, they have been cooperating on product and environmental safety regulation,120 thus ­giving rise to international administrative networks and so called “regime complexes”. For both firms and states, regulatory property rights absorb a transnational function due to their notion of being universal. Third, social practices have changed due to technological change, which can be described by the terms dematerialization,121 digitalization122 and financialization.123 While the rise of immaterial goods and digitalization are evident contemporary drivers of change, the importance of financialization is often thought of as being reduced to the growing importance of financial markets. Yet, the financial sector has profoundly changed our thought patterns. Financialization comes with the basic assumption that any market and non-market interest is to be quantified, modelled and publicly traded, its rationale being adapted to standardized mass production. Its business models are built on bets, either to spread risk124 or to set behavioural price incentives.125 Respective contract forms like factoring, leases, and asset backed s­ ecurities become 119 G.F. Schuppert, Verflochtene Staatlichkeit. Globalisierung als Governance-Geschichte. Frankfurt a. M.: Campus, 2014; for a concrete example discussed above (iii.1) only Rec. 16 Succession Reg. 650/2012. 120 H.-W. Micklitz, “On the intellectual history of freedom of contract and regulation”, eui Working Paper 2015/09, p. 18. 121 Usually referring to the growing importance of information and services for gross national product compared to goods. In the financial sector, the term “dematerialization” refers to the shift from paper securities certificates to the electronic book form; Bamford (2015, supra n. 23), p. 152. 122 Predominantly referred to as technological change based on information technology which enables and accelerates the process of internationalization. 123 G.R. Krippner, The finanzialisation of the American Economy, 3 (2) Socio-Economic Review 2005, 173–208, p. 174: [Financialization is a] “pattern of accumulation in which profit making occurs increasingly through financial channels rather than through trade and commodity production”. 124 This is the basis for the spread of financial instruments, see U. Schüwer/S. Steffen (2013, supra n. 25), p. 48. 125 Basedow (2013, supra n. 29), p. 149 describes the transformation of the normal sale’s risk to deliver and the risk to pay: The transformation of the risk to deliver into an object of the insurance industry is exemplified by the shipping industry. The transformation of the duty into a commodity based on banking business models („letter of credit“) by way of standardization (ucp 600) is described on pp. 150 et seq.

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adopted already the 1970s; more recently, the model of financial instruments has migrated to various sectors. All three broad social phenomena reinforce each other, and regulatory property rights reflect the effort to adapt. As system theory has stressed, systems are resistant to change since they exist in order to provide stability.126 Property law has been understood as a bulwark of stability; it served this function to the autonomous functioning of the economic sub-system. Yet, societies change and their sub-systems adjust by a complex interaction where signals from one system are translated into the other one, e.g. from the political system’s binary code of power/non-power into the legal system’s binary code of just/unjust.127 While the translation enables “understanding”, it still involves an “irritation”. For this reason, modern societies tend to develop more complexity and sector differentiation. As Marc Amstutz explained, national and public international law are equally to be understood as distinct sub-systems. Overlapping layers of law will not easily integrate, but create tension.128 These tensions, which he calls “legal irritants”,129 instigate a learning process130 by which law can evolve. 126 N. Luhmann, The Differentiation of Society, New York: Cambridge University Press, 1982; a concept he adapted from the biological concept of autopoiesis; see also G. Teubner (ed.), Autopoietic Law: A New Approach to Law and Society, Berlin: W. de Gruyter, 1988. 127 M. Renner, “The Dialectics of Transnational Economic Constitutionalism”, in: Joerges/ Falke (2011, supra n. 118), 419–433, p. 420: “Polany’s account seems nothing less than paradoxical: ‘Law is the medium which allows for an ever more comprehensive commodification of social spheres – and, at the same time, is the means with which the society reacts to the adverse effects of this commodification’”. 128 M. Amstutz/V. Karavas, Weltrecht: Ein Derridasches Monster, in: G.-C. Calliess/A. FischerLescano/D. Wielsch (2009, supra n. 117), 647 (p. 648); similar P.C. Zumbansen, The State as ‘Black Box’ and the Market as Regulator: A Comment on Anne Van Aaken’s ‘Effectuating Public International Law Through Market Mechanisms’, clpe Research Paper No. 35/2008, (revised 2014): This paper critically discusses the transposition of nation-state experiences with market ­regulation onto the global sphere. Zumbansen argues that the state–market and ­public–private distinctions in the transnational arena are different. 129 Following the semantic of Teubner, see G.T. Teubner, In the Blind Spot, The Hybridization of Contracts, in: Theoretical Inquires of Law, 2006, p. 10; G. Teubner, “Legal Irritants: Good Faith in British Law or How Unifying Law Produces New Divergences”, 61 Modern Law Review 1998, 11–32. 130 Building on G.T. Teubner, Global Bukowina: Legal Pluralism in the World Society, in: Teubner (ed.), Global Law Without a State, Aldershot: Ashgate, 1997, 3–28 (reprinted: rj 1996, 255–290), p. 273: „Denn globales Recht ist anders: Seine Aufgabe ist nicht (wie im Nationalstaat) normative Erwartungen zu stabilisieren, sondern dynamische Prozesse transparent zu machen: Beobachtungsmöglichkeiten zu schaffen“. Amstutz/Karavas (2009, supra n. 128), p. […] S. 668 „Um dieses Geflecht – Interlegalität! – herzustellen, muss Weltrecht

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For property law as an institution of the modern market economy, regulatory property rights serve this catalytic function.131 Thus, it is not surprising that they are not in line with common principles.132 Their function is to extend the system’s limits, and make the institution responsive to change. Under this perspective, the technical functions referred to under Section ii. (commodification, transferability, betting, defence, regulation) can be understood as responses to societal changes. The betting rationale reflects the rationale of modern financialization. Its premise is the commodification of immaterial property and claims, and it further accelerates this process. Yet, its function differs from the propertization of the eighteenth and nineteenth centuries in that it is not one-dimensional. The extension of commodified items is coupled with a counter-reaction of interests formulated as property. These interests take forms such as individuals’ defence of their own personal data and bodily information, and communities having an interest in their traditional knowledge and genetic resources. Thus a discourse unfolds in a property language about positions which were formerly conceptualized either as a personal interest or as state responsibility. The process can be described as a “constitutionalization of property”, by which human rights are translated into proprietary positions in opposition to the economic forces of digitalization and globalization.133 By means of regulatory instrumentation of property, states and companies respond to cross-border regulatory needs. They become vehicles for the import and export of legal rules, thus making national legal eine Transparenz ganz besonderer Art kreieren: eine Transparenz, die geeignet ist, in den Eigenstrukturen reflexive Schlaufen auszulösen“. For Teubner, global law is twofold: binary code and self-observation: „Globales Recht erkennt man daran, dass in einem Code Recht/Unrecht ausgerichteten System ein ‚globales Geltungssymbol‘ zirkuliert“. This process is very similar to what Polanyi described as “double movement”, although it remains an open question whether this double movement is instigated by the state or by social systems, M. Renner (2011, supra n. 127), p. 421. 131 Thus rendering the term „Regulatory Property“ a “dogmatic key word” (in German: „dogmatischer Schlüsselbegriff“) as coined by Dan Wielsch. He argues that it is a central task of legal science to develop such terms to enable the law to internally reflect its social effects, D. Wielsch, Lex mediatrix, in: Calliess/Fischer-Lescano/Wielsch (2009, supra n. 128), 395–414, p. 413. 132 Thus being „justitia mediatrix“ as „integrative medium of the world society“, D. Wielsch (2009, ibid), p. 407. 133 Providing a language to social countermovements which Bourdieu has coined “economic alphabetization”, in the words of M. Armstutz, “Globalising Speenhamland”, in: C. Joerges/J. Falke (2011, supra n. 118), 359–393, p. 364; „countermovement is, by nature, a matter of legal communication“.

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systems more susceptible to international influence,134 without destroying the democratic rule-building processes within nation states.135 Similar to hybrid public-private governance arrangements, regulatory property rights are typically contradictory.136 They instigate change, and at the same time stabilize the institutional function of horizontal coordination and have thereby an integrative effect on global society. Under these pressures, property as an institution changes. It is no longer solely characterized as dominium which makes autonomous, private control possible. It serves horizontal coordination which is not limited to other ­property holders, but includes other rights holders and extends to “networks”.137 The acquired novel function as defence right is central to this change:138 Thus, regulatory property rights are part of a fundamental restructuring of a “constitutionalization” of standing legal institutions in that they provide for democratic empowerment (“a voice”). v

Property [Principles] Redefined

If we now understand regulatory property rights as normal property in modern regulatory private law,139 the founding property principles embedded in the 134 On regulation by corporations: S. Sassen, 2008, who critizeses the „inverse states fixation“ („umgekehrte Staatsfixiertheit“) of public international law; M. Herberg 2005, 112: „Weltrecht bildet sich in einer Anschlussbewegung an das Recht der Nationalsstaaten aus“. 135 Standard examples are certification schemes, like the Kimberley Regime fighting “blood diamonds”, A. van Aaken, 2008, pp. 16–20; and standard-setting, see Basedow (2013, supra n. 29), p. 140 and H. Schepel, The Constitution of Private Governance – Product Standards in the Regulation of Integrating Markets. Oxford: Hart, 2005; For a theory driven description see P.F. Kjaer, Transnational Normative Orders: The Constitutionalism of Intra- and Trans-Normative Law, Indiana Journal of Global Legal Studies, Vol. 20 (2013) 777; P.F. Kjaer, The Concept of the Political in the Concept if Transnational Constitutionalism, in: C. Joerges/T. Ralli (eds): After Globalization – New Patterns of Conflict and their Sociological and Legal Reconstruction, pp. 285–321; P.F. Kjaer, “The Structural Transformation of Embeddedness”, in: C. Joerges/J. Falke (2011, supra n. 118), 85–104. 136 Robé 2009, p. 866: “[The network as modus operandi] is based on the constitutional structure of liberal States but led to a mode of operation of the global economy in total contradiction with it”. 137 Robé 2009; also Rajan/Zingales, The Firm as a Dedicated Hierarchy: A Theory of the Origin and Growth of Firms, nber Working Paper No. 7546, 2000. 138 On the importance of the capacity for systematic communication see Wielsch (2009, supra n. 131), at 412. 139 F. Caffaggi/H. Muir Watts (eds), The Regulatory Function of Private Law, Cheltenham/ Northampton: Elgar, 2009.

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eighteenth–nineteenth-century conception of property are to be redefined. When Hans Micklitz described the transformation of modern private law as one “from autonomy to functionalism”,140 he referred to the concept of autonomy of that time,141 and meant with functionalism the sectorial differentiation which has brought about hybrid forms of law.142 For property as a modern market institution, this implies that property is not a distinct order of private autonomy separate from public regulation. Property is instrumentalized by companies and states alike. Its functions are measured against its results for competition and regulation. The importance of the property regime as a nationally defined order embedded in different European legal cultures is fading. In its basic functions of assignment, in rem exclusivity and transferability, property has come to be understood as universal (Art.17 European Charter of Human Rights; Art. 17 un-Universal Declaration of Human Rights); the understanding of basic functions has converged,143 and the continental distinction between control rights and use rights has become less ­persuasive.144 Where public policy issues are at stake, property is regulated sector-wise. Therefore, the emerging rights will not be uniform and homogenous,145 but will be the object of contingent and overlapping state regulation at an international, European and national level. In conclusion, we will embark on an exercise to formulate modern European property principles beyond the “civil” and “common law”. I argue that the following five principles are better equipped to capture the essence of modern property. Since modern “regulatory property rights” are not politically 140 The term became the research agenda of the large scale eui-European Regulatory Private Law Project (2011–2016) under the leadership of H.-W. Micklitz, project description , last visited: 18.2.2016. 141 Even at the time, this was criticized by Otto von Gierke und Roesler; see T. Repken, Die soziale Aufgabe des Privatrechts, Tübingen: Mohr Siebeck, 2001, p. 13. 142 G.T. Teubner, “In the Blind Spot, The Hybridization of Contracts”, Theoretical Inquires of Law, 2006, p. 10. 143 Compare the historic European rationales in freedom of contract as reconstructed by H.-W. Micklitz, On the Intellectual History of Freedom of Contract and Regulation, eui Working Paper 2015/09, p. 8, download: , last visited 12.4.2016. 144 The proposition of von Bar (2014, supra n. 7) that limiting rights should be conceived as “burdens” to the primary property right, in opposition to fragmentation, points us in the opposite direction. 145 Requiring continental lawyers to engage in more flexible reasoning, something they are not trained in. For a critical analysis see M. Reimann, „The American Advantage in Global Lawyering“, 78 Rabels Zeitschrift für ausländisches und internationales Privatrecht 2014, pp. 1–36.

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conceived by the European legislator,146 it will not suffice to conceptualize a European amalgam, even if the European legislator pushes a reflection about the meaning and the importance of national property principles.147 Since many rights have their origin in either international organizations or multinational companies, we should look out for more general conceptualizations which depart from the given principles but aim to catch modern functionalities. First, the core of modern property is the right to decide (about control and use), which is defendable against the world (remedies). The former principles of full dominance and individual satisfaction have functionally receded. Yet, decision rights are not available to everyone (like emission rights, which are only tradable by registered dealers), are sometimes limited in scope (like thirdparty protection for licences in insolvency148) and are often limited by time.149 Time limitations are common in ip law, where these limitations are founded on the principle of free competition, conceptualizing ip as an exception to competition as the rule.150 However, in essence, this conceptualization reflects the regulatory set-up. Seen from this perspective, time limitations, e.g. for emission rights, are one possible expression of the foundational idea that contemporary property rights are, in principle, not absolute. They reflect the immanent time limitations of democratic regulation. Second, today’s property is responsive. That means that property is not only limited by equal property rights, but also by other constitutional guarantees which shape the scope of the right. This limitation reverses the traditional concept of property’s hierarchical structure, which renders property superior to any other entitlement. Instead, it integrates a constitutional reasoning into property protection in terms of Polanyi’s embeddedness, which in turn renders regulation a necessity, not an intrusion. The background model is the idea of 146 Thus we cannot derive principles from eu law in the same way that Micklitz could from consumer protection laws and regulated markets in order to characterize European contract freedom as “Enabling [to act on the European Market] and Restricting [by law]”, ibid, p. 16. 147 B. Akkermans, “The European Union Development of European Property Law”, in: C. Godt (ed.), Cross Border Research and Transnational Teaching under the Treaty of Lisbon, Hanse Law School Series, Vol 1, Oisterwijk: Wolf Legal Publ., 2011, 39–60; S. van Erp, “From ‘classical’ to modern European property law?” in: A. Sakkoulas/Bruylant (eds), Essays in Honour of K.D. Kerameus, Vol. i, A. Nt. Athens/Brussels, 2009, 1517–1533 (also: ). 148 See C. Godt/J. Simon in this volume. 149 As noted already by S. van Erp, “Fluidity of ownership and the tragedy of hierarchy”, European Property Law Journal (eplj) 2015; 56–80, p. 63. 150 C. Godt, Eigentum an Information, Tübingen: Mohr Siebeck, 2007, p. 505.

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a network which substitutes the older idea of a pyramid, and which allows a conceptual inclusion of the horizontal effects of human rights. Third, property is a universal institution. As a consequence, the lex rei sitae rule becomes a technical default rule, but deprived of the rationale of the former “internal legal harmony” of the nation state. In contrast, society accepts and welcomes “legal irritations” from the outside,151 which are reflected not at the conflicts of law level, but at the substantive law level. At the conflicts of law level, „connecting factors“ may take priority over the lex rei sitae ground rule, like “habitual residence” or the choice of law.152 Consequently, foreign law will apply much more often. However, this process will not be unidirectional. While sometimes foreign law will be imported, in other situations, domestic law will be exported. Fourth, transparency will substitute for the principle of publicity. In many countries, registers have been implemented. Yet, registration is not a constituent element, but a means to secure a third-party effect. In a similar way, possession has lost its importance as a means of publicity in securities. Possession has also lost its importance to documents and due diligence in transfer regimes. Transparency seems already to describe the status quo. The standard of transparency might vary. In settings of modern self-regulation, the limitation to “transparency for the concerned community” (e.g. for freight forwards: registered members of Baltic Exchange) might suffice. As far as “virtual property” is concerned, it is the whole public. As a matter of principle, determinability will suffice. Where public legitimate “recognition” is required, a legislative act or judicial authority will upgrade the transparency standard. Fifth, transfer rules will be differentiated by sector. Three forms have emerged: bilateral, multilateral or replicative. While “bilateral transfer” describes the traditional transfer of a fungible good from one person to another,153 “multilateral transfer” denotes a multilateral setting of an offer to several bidders where transfer solely depends on the price tag. The latter form depends on standardization, of which various means have been devised. Commodities are categorized, services standardized (e.g. transport by way of containers), and financial contracts commodified and standardized by way of “re-bundling” in “special purpose vehicles”. Replicative transfer refers to use rights; it often takes the form of licences which grant access to digital goods.

151 J. Basedow (2013, supra n. 29), p. 472 discusses the “open society”. 152 J. Basedow (2013, supra n. 29), p. 478. 153 Applicable to special goods and bulk ware.

chapter 2

Control of Global Business Transactions via Property? A Multi-disciplinary Approach Margherita Colangelo i

Introduction

Regulatory property pieces together two debated issues familiar to legal s­ cholars of all systems, i.e.: (i) the issue of what can constitute an object of property, which constantly raises new questions; (ii) the consequences of regulatory policies and the fundamental interconnection between private law and public policy objectives. Regulatory property is a wide and heterogeneous category, being very difficult to describe in an exhaustive and comprehensive way. This difficulty exists essentially because there is no homogeneity between the rights at issue, which lack explicit legislative recognition but are the subject of relevant social and legal interests and essentially have in common the fact that they have been created to satisfy specific public policy goals. The novel rights resulting from this public creation constitute an instrument with which to allocate and govern the scarcity of resources, either natural (that can occur when real technical or territorial features bar the simultaneous exploitation of the resource by all applicants, such as in the case of airport slots and radio spectrum) or artificial (when governments use administrative acts as barriers to entry into a market, e.g. for the purpose of an employment policy or to guarantee a minimum income to defined categories of people, such as in the case of milk quotas, or to pursue specific public objectives, such as in the case of emissions allowances). This contribution, on the basis of the consolidated theoretical debate on property law, is aimed at investigating the role of so-called regulatory property in the modern market economy shaped by multilevel regulation in the European context. ii

New Objects of Property: A Preliminary Multi-disciplinary Overview

The topic at issue has, under various terminologies, been the subject of study within different areas of law, including private law, public law, and law and economics. Nevertheless fundamental questions remain unresolved, in particular © koninklijke brill nv, leiden, ���7 | doi 10.1163/9789004313521_004

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with regard to the public property–private property dichotomy. The following paragraph provides a brief acknowledgement of the main outcomes of this scholarly debate. Even if the cogency of the traditional approaches in both private and public law is in question, there are aspects common to the different studies listed below, among which is, essentially, the transferability of rights resulting from regulatory policies. 1 Private Law From a private law point of view, that which can be the subject of property law is a perennial open issue. It is well-known that whereas in common law systems there are no obstacles to adding new elements to the category of things in action, in civil law systems the principle of the numerus clausus has traditionally foreclosed the widening of the subjects of property law.1 As a matter of fact, in civil law systems the debate over the emergence of new subjects for property law is strictly linked to the debate over the so-called new goods. An illustrative example is provided by Italian scholarly debate, where the expression “new properties” has been coined (recalling the new property theory of Charles Reich, but having a very distinct significance),2 referring to new resources and economic utilities being vested with property-like powers to preserve features of scarcity and exclusivity.3 This is a descriptive category intended to unite heterogeneous intangible issues (e.g. public services, information, airwaves, 1 The issue of the numerus clausus of property rights has been the subject of much literature. For a general overview, it will suffice to mention: B. Akkermans, “The Numerus Clausus of Property Rights”, in: M. Graziadei/L. Smith (eds), Comparative Property Law: Global Perspectives, Cheltenham: Edward Elgar, 2016; Maastricht Faculty of Law Working Paper No. 2015/10, available at http://ssrn.com/abstract=2693667; S. Van Erp, “Comparative Property Law”, in: M. Reimann/R. Zimmermann (eds), The Oxford Handbook of Comparative Law, Oxford: Oxford University Press, 2008, 1044, 1053–1062; H. Hansmann/R. Kraakman, “Property, Contract, and Verification: the Numerus Clausus Problem and the Divisibility of Rights”, 31 Journal of Legal Studies 2002, 373–420; U. Mattei, Basic Principles of Property Law, Westport: Greenwood Press, 2000, 91–92; T.W. Merrill/ H.E. Smith, “Optimal Standardization in the Law of Property: The Numerus Clausus Principle”, 110 Yale Law Journal 2000, 1–70. 2 C. Reich, “The New Property”, 73 Yale Law Journal 1964, 733–787. 3 A. Zoppini, “Le « nuove proprietà » nella trasmissione ereditaria della ricchezza (note a margine della teoria dei beni)”, 2-i Rivista di diritto civile 2000, 185–248. See also S. Rodotà, Il terribile diritto. Studi sulla proprietà privata, Bologna: Il Mulino, 1990; G. De Nova/ B. Inzitari/G. Tremonti/G. Visentini, (eds), Dalle res alle new properties, Milan: FrancoAngeli, 1991; G. Alpa/A. Fusaro/M. Bessone, Poteri dei privati e statuto della proprietà, Rome: Seam, 2001, vol. 1, 29–43. On the differences between new property and new properties, both in civil and in common law systems, see A. Gambaro, “Dalla new property alle new properties”, in: V. Scalisi (ed.), Scienza ed insegnamento del diritto civile in Italia, Milan: Giuffrè, 2004, 675.

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personality rights, etc.). A key outcome of this discussion is the assumption that the theory of goods has moved from the centrality of use value to that of market value.4 2 Public Law From a public law point of view, the attribution of economic value to administrative acts such as concessions, licences and permits has been the subject of study by civilian administrative doctrine, which has focused mainly on two types of analysis: on the one hand, there are those studies concerning the category to which the administrative acts in question belong and their legal nature, in particular questioning whether they should be treated as movables or as intangibles; on the other hand, there are studies related to their patrimonial value and the consistency of their trading practices with the categories of administrative law. In the latter case, an interesting perspective comes from French literature on the so-called patrimonialisation of administrative rights, meaning the process of assigning value to administrative acts such as concessions, licences and permits. As a matter of fact, regulatory property also represents a hybrid under the traditional categories of public law, as it does not fit perfectly into the definition of concession and authorization, which are generally distinguished between those attributed intuitu personae, which are in principle not transferable, and those assigned intuitu rei, which are linked to the thing regulated and not to the person entitled.5 Some key elements of the patrimonialisation of administrative acts are characteristic features of the activities or goods to which they are related: these features are rarity and utility, which create economic value.6 Some variables of patrimonialisation have been identified by scholars: firstly, the power of the public authority to oppose the transfer of administratively created rights is generally a common feature; secondly, the degree of patrimonialisation depends on the market (national, international, exchange) in which it develops; moreover, the duration of such rights, whether limited or unlimited, also matters; but what all of these 4 In general, see S. Rodotà, “Linee guida per un nuovo codice dei beni pubblici”, in: U. Mattei/E. Reviglio/S. Rodotà (eds), Invertire la rotta, Bologna: Il Mulino 2007, 357 (p. 362) (highlighting that in the current context the real conflicts concern the possibility of considering whether goods are disposable on the market or not). 5 M. Cormier, “Fondements de la patrimonialité des actes administratifs”, 25 Revue Française de Droit Administratif 2009, 1–7, 3. 6 P. Devolvé, “La patrimonialité des actes administratifs: rapport de synthèse”, 25 Revue Française de Droit Administratif 2009, 44–48, 47 (stressing that the most relevant aspects of the patrimonialisation of such administrative acts to be considered are two, i.e. the valeur appréciable en argent and the transmissibilité).

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different administrative acts have in common is their upstream allocation involving the distribution of resources which, by definition, are scarce. 3 Law and Economics The study of property rights belonging to the category of regulatory property is not disregarded by law and economics scholarship. Among the abundant literature devoted to property rights, reference to those rights can be found, on the one hand, in the works on “hybrid property-like rights” – as identified by Carol Rose in the case of rights to resources, such as air or water, which are creations of law difficult to define in any physical way –7 and also on de facto property rights, as rights resulting from regulatory policies that are not recognized by formal law, but are recognized in fact.8 On the other hand, the allocation by governments of rights to access, enjoyment and use of public resources to certain categories of private beneficiaries can be comprised in terms of “givings”, meaning the government distribution of property or property interests.9 The (scarce) literature on givings has highlighted the high risk of misallocation of resources connected to them, as they generally impose no fair charge on the recipient and often they are not even taxed, and has underlined the effects of administrative acts by the State (such as concessions) in terms of exclusion and deprivation of third parties. Reference to regulatory property can also be found in connection with alienability, to which law and economics literature has devoted crucial attention. Alienability and inalienability rules further goals which fall mainly into three categories: protecting public policy goals; facilitating private arrangements; and facilitating public regulation.10 7

8 9

10

C.M. Rose, “What Government Can Do for Property”, in: N. Mercuro/W.J. Samuels (eds), The Fundamental Interrelationships Between Government and Property, The Economics of Legal Relationships, vol. 4, Stanford: jaj Press Inc. – Routledge, 1999, 209, 216 (explaining that “such property-like rights are creatures of law – defined and defended largely by abstract law rather than by physical fences”). R.A. Posner, Economic Analysis of Law, New York: Aspen Law and Business, 1998, 5th ed. (instancing, at 51–53, the case of broadcast frequencies). Whereas there is a broad spread of literature on takings, little attention has been given to the opposite, i.e. to givings. The term “giving” does not refer to a precise category of law, but is used to provide a broad depiction of the ways that government power operates through the assignment of rights to access, enjoyment and use of public goods. See A. Bell/G. Parchomovsky, “Givings”, 111 Yale Law Journal 2001, 547–618; R. Dibadj, “Regulatory Givings and the Anticommons”, 64 Ohio State Law Journal 2003, 1041–1124. S.L. Hsu, “A Two-Dimensional Framework for Analyzing Property Rights Regimes”, 36 u.c. Davis Law Review 2003, 813–893, 868 (affirming that the first category serves to retard regime change, protecting resources by destroying their market value, and to prevent

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In  ­particular, alienability also allows public authorities to create new forms of property with the aim of regulation: the result is the creation of regulatory property, intended as the right to engage in a regulated activity where the activity would otherwise be prohibited.11 iii

Lessons from Secondary Trading Experiences in the eu

All the elements examined in the previous paragraph play a fundamental role in the elaboration of a sound and proper definition of the rights identified as regulatory property. This topic has attained crucial importance in jurisdictions where these rights are the subject of transactions between private actors: in such circumstances it is important to know exactly what is sold and transferred, particularly with regard to the property rights involved. The growing phenomenon of the creation of a market for rights that may be included in regulatory property is a form of secondary trading, meaning a second step after the primary allocation of the rights created by the State and referring to the horizontal exchanges between subjects allocated or entitled to hold such rights.12 Secondary trading has a transverse dimension and is undergoing rapid growth. This may seem paradoxical if one considers the legal uncertainty over the qualification of the rights, which are the subject of transactions. If we look at a number of cases, such as milk quotas, emission rights, airport slots, spectrum rights and more, the rights involved are all the subject of multi-level regulation (national and supra-national) and the allocation process may be intended as an instrument to distribute valuable economic assets to recipient undertakings, so that the alienability of these rights is a crucial issue. At eu level, European authorities in several sectors are currently looking at introducing market mechanisms such as secondary trading as a means of improving

11

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c­ ertain things from becoming property; the latter two serve to facilitate regime change and create new forms of property). B. Yandle/A.P. Morris, “The Technologies of Property Rights: Choice Among Alternative Solutions to Tragedies of the Commons”, 28 Ecology Law Quarterly 2001, 123. See also Hsu, supra n. 10, 879 (defining regulatory property as “that property which is governmentallycreated by unbundling an asset from a regulated right and simultaneously imposing some restrictions on the regulated right and assigning some sovereignty over that right, such as the right to alienate”). For a broad treatment of this phenomenon, see M. Colangelo, Creating Property Rights. Law and Regulation of Secondary Trading in the European Union, Leiden: Martinus Nijhoff Publishers, 2012.

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economic efficiency, irrespective of which mechanism has been used for primary assignment (which is typically made through the command-and-control model, which generally also implies the use of first-possession rules such as grandfathering).13 Thus, for instance, in the case of airport slots, the European Commission, having acknowledged that, in the absence of a clear definition of the rights relating to them, a secondary grey market between private actors had developed and having legitimated trading conducted in a transparent manner, is in the process of revising its rules, recommending that a secondary market should be formally developed.14 In the case of spectrum rights, the eu has referred to Member States the setting of rules on the transfer of usage rights on radio frequencies.15 Elsewhere, an artificial market has been created 13

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The command-and-control model gives full State responsibility and control to the assignment and utilization of the resource through the provisions of right of use to specific subjects. First-possession or grandfathering assigns ownership to existing users who generally obtained their claim on a “first-come, first-served” basis. In general, on the first possession rules, see R.A. Epstein, “Possession as the Root of Title”, 13 Ga. L. Rev. (1979), 1221–1243; C.M. Rose, “Possession as the Origin of Property”, 52 U. Chi. L. Rev. 1985, 73–88; D. Lueck, “First Possession”, in: P. Newman (ed.), The New Palgrave Dictionary of Economics and the Law, Basingstoke: Palgrave Macmillan, 1998, 2, 132–144. Slots are defined by Regulation (eec) No 95/93 on common rules for the allocation of slots at Community airports (as amended) as “the permission given by a coordinator (…) to use the full range of airport infrastructure necessary to operate an air service at a coordinate airport on a specific date and time for the purpose of landing or take off” (Article 4). Secondary trading for slots has been traditionally considered forbidden by Article 8a, which contains a list of cases in which slots may be transferred or exchanged, but does not make reference to monetary considerations. In the absence of a clear ban, a grey market has developed in the eu, the uk being the only country in which this trading has been explicitly admitted by a national court, in the Guernsey case (High Court of Justice, Queen’s Bench Division, 25 March 1999). Only in 2008 did the European Commission acknowledge the existence of such trading [European Commission, “On the application of Regulation (eec) No 95/93 on common rules for the allocation of slots at Community airports, as amended”, com(2008) 227 final, 30 April 2008] and in 2011 presented a proposal for a reform of slot Regulation that is still pending (European Commission, “Airport policy in the European Union – Addressing capacity and quality to promote growth, connectivity and sustainable mobility”, com (2011) 823, 1 December 2011). See Article 9b of the Framework Directive 2002/21/EC as amended, containing specific provision on the transfer or lease of individual rights to use radio frequencies. It is worth mentioning that the issues of property rights on radio spectrum and spectrum trading have long been debated, in particular in the us, starting from the seminal works of R. ­Coase, “The Federal Communications Commissions”, 2 J.L. & Econ. 1959, 1–40, and L. Herzel, “‘Public Interest’ and the Market in Color Television Regulation”, 18 University of Chicago Law Review 1951, 802–816. As for the more recent literature, it will suffice to

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by regulators in the case of cap systems such as milk quotas, in order to restrict production,16 and emissions allowances, with the object of reducing global greenhouse gas emissions.17 The legal nature of the rights at issue, which share aspects of both administrative grants and private property, is not a purely academic problem, as it is relevant in determining which law properly governs their creation, transfer and cancellation, their accounting and all the issues related to their existence in general, i.e. how they should be treated in case of a holder’s insolvency, whether security rights over them can be created and whether they should be treated as subject to regulation as investments. It is significant that, for the purposes of accounting, International Accounting Standard (ias) 38 “Intangible Assets” mentions airport landing rights, licences to operate radio or television stations, import licences or quotas, associating all these different types of entitlements. These problems are perceived in the case of emissions allowances in particular, which may be intended as an emblematic example of the variety of legal questions associated with the establishment of a secondary market of such rights. The legal nature of allowances is a very controversial issue, given both the lack of a specific indication by eu authorities and the wording of the Marrakesh Accord, which explicitly affirmed that the Kyoto Protocol did not

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mention H.A. Shelanski/P.W. Huber, “Administrative Creation of Property Rights to Radio Spectrum”, 41 J.L. & Econ. 1998, 581–609; T.W. Hazlett, “Spectrum Tragedies”, 22 Yale J. on Reg. 2005, 242–274; T.W. Hazlett, “A Law&Economics Approach to Spectrum Property Rights: A Response to Weiser and Hatfield”, 15 Geo. Mas. L. Rev. 2008, 975–1023; P.J. Weiser/ D.N. Hatfield, “Property Rights in Spectrum: A Reply to Hazlett”, 15 Geo. Mas. L. Rev. 2008, 1025–1030; T.W. Hazlett, “A Rejoinder to Weiser and Hatfield on Spectrum Rights”, 15 Geo. Mas. L. Rev 2008, 1031–1039. The system of milk quotas was established in 1984 with the aim of reducing the imbalance between the demand and the supply of diary products. Among the examples cited, milk quotas are an exceptional case, where a market had been implemented with the aim of imposing a limit on the quantity produced. Regulation (eu) No. 1308/2013 provided for the abolition of this system after 31 March 2015. Several legal questions had arisen under this system, as each Member State retained the choice between the adoption of a marketable system or an administrative-management system. See M. Cardwell, “Milk and Livestock Quotas as Property”, 4 Edinburgh Law Review 2000, 168–190. The basic theoretical idea of emissions trading was presented by J.H. Dales, Pollution, Property and Prices, Toronto: University of Toronto Press, 1968, which was republished in 2002 by the economist W.E. Oates. It is one of the mechanisms provided by the Kyoto Protocol and then adopted in the eu through the Directive 2003/87/CE on the Emissions Trading Scheme (ets). The huge amount of legislation developed up to now has established complex trading with the aim of reducing greenhouse gas emissions.

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create or bestow any right, title or entitlement to emissions of any kind.18 As a consequence, different positions have been taken at national level by Member States, as testified by the scholarly debates in Italy (where it is discussed whether emissions allowances may be defined as intangible goods instead of concessions), and in France (where scholars discuss whether allowances should be considered as goods under private law, as administrative authorizations, or as financial instruments).19 At international level, given the existence of derivatives created on the basis of quotas, their treatment under accounting standards, tax laws and financial service regulation in the context of eu legislation is widely debated.20 Whereas there are no problems in admitting the use of several contractual forms in transactions between parties concerned,21 the legal qualification and definition of the rights at issue remain the essential prerequisite for the effective and fair functioning of the market for them, also allowing control of the market itself and avoiding further developments of grey markets. Moreover, 18 19

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Decision 15/CP.7, “Principles, nature and scope of the mechanisms pursuant to Articles 6, 12 and 17 of the Kyoto Protocol”, FCCC/CP/2001/13/Add.2. For an overview, see V. Jacometti, Lo scambio di quote di emissione. Analisi di un nuovo strumento di tutela ambientale in prospettiva comparatistica, Milan: Giuffrè, 2010, 422 et seq. In particular, in France the new Article L. 229-15-i of the Code de l’environnement explicitly refers to quotas as biens meubles which materialize on the buyer’s account at the moment of registration on the national register. International Accounting Standards Board (iasb), Emissions Trading Schemes, February 2010; M. Collet, Les aspects comptables et fiscaux de la patrimonialité des actes administratifs, 25 rfda 2009, 8–16. For the purpose of financial regulation, the Directive 2004/39/ EC (MiFID) includes under Section C of Annex i concerning financial instruments “options, futures, swaps (…) and any other derivative contracts relating to (…) emission allowances”. With regard to the contractual forms typically used in transactions over such rights, they are numerous. Interesting examples come from the experience of transactions on spectrum usage rights. In addition to the simple sale, negotiations have been concluded through several forms including: buy-back (the usage right is sold to another party with an agreement that the seller will buy it back at a fixed point in the future); lease (the right to exploit the usage right traded is transferred to another party for a defined period of time but the ownership remains with the original holder, who may have the right to exercise control over the lessor); mortgage transfer (where the usage right is collateral for a loan, so that the ownership of the usage right moves to the new party if certain contractually defined situations occur); contracts containing options and futures, i.e. financial payments related to spectrum rights that can be used to reallocate risk between contracting parties (for example, the provision of a right to buy/sell spectrum under contractually defined conditions, as at a pre-agreed price on a future date).

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the absence of a uniform definition throughout the eu has led Member States to reach different conclusions as to the legal nature of these rights. In this sense, once again an important signal is given by the eu ets experience, where European private sector companies have shown their disapproval of a scheme established using the instrument of a Directive instead of a Regulation, which would have permitted the harmonization of the legal nature of allowances throughout the eu. However, if it can be agreed that a Regulation can be the appropriate instrument to ensure uniform interpretation, at present the European legislator does not tackle the problem, even in the sectors where Regulations have been implemented. In a more general way, this issue is also linked to another topic, i.e. the role of Article 345 tfeu in the contemporary European order. Lawyers may disregard the possibility of an intervention of eu authorities in this definition process by pointing to this Article, which precludes eu law from prejudicing Member State rules governing the system of property ownership. However there is an acquired consciousness of the actual role played in the European institutional architecture by the provision of Article 345 tfeu, whose meaning, specifically relating to the neutrality between private and public forms of industrial ownership, can no longer be interpreted as an inflexible bar limiting property law at national level.22 As a matter of fact, property remains a field where the “visible hand of European private law” has not put down roots,23 but it is widely agreed that eu law has an effect on property law.24 Yet, in the cases at issue, the eu plays a fundamental role in the multi-level regulation of the sectors concerned, in the design of the regime governing rights attributed to private actors and in the establishment of a market. So a crucial ­question is whether traditional ­(national) property law rules should be applied 22 23

24

See B. Akkermans/ E. Ramaekers, “Article 345 tfeu (Ex. Article 295 ec Treaty). Its meanings and interpretations”, European Law Journal 2011, 292–314. The reference is to H. Micklitz, “The Visible Hand of European Regulatory Private Law – The Transformation of European Private Law from Autonomy to Functionalism in Competition and Regulation”, 28 (1) Yearbook of European Law 2009, 3–59. See the survey undertaken by E. Ramaekers, European Union Property Law – From ­fragments to a system, Cambridge-Antwerp-Portland: Intersentia, 2013, 233–238. See also B. Akkermans, “The European Union development of European Property Law”, in: C. Godt (ed.), Cross Border Research and Transnational Teaching under the Treaty of Lisbon. Hanse Law School in Perspective, Nijmegen: Wolf Legal Publishers, 2013, 39–60; S. van Erp/A.  Salomons/B. Akkermans (eds), The Future of European Property Law, München: Sellier European Law Publishers, 2012; S. van Erp/B. Akkermans, “European Union Property Law”, in: C. Twigg-Flessner (ed.), The Cambridge Companion to European Union Property Law, Cambridge: Cambridge University Press, 2011, 173–186.

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to these rights or whether new (supranational or national) property law rules need to be developed. iv

The Role of Supranational Jurisprudence

The matter in question is not unfamiliar to supranational jurisprudence. In particular, it is well known that the European Court of Human Rights (echr) has shown itself to be in favour of recognizing under the First Protocol to the European Convention for the Protection of Human Rights and Fundamental Freedoms various forms of utility not directly included in the traditional theory of goods25 – such as subsidies, licences, legitimate expectations, etc. – the Court considering the economic value to be crucial and adopting the criterion of the espérance légitime.26 There can also be found within the jurisprudence of the European Court of Justice (ecj) a wide notion of goods which identifies directly with patrimonial interest: it follows that several legal situations, which provide the assignment of a benefit to a business operator and which under civil law systems would be better included in categories other than property (e.g. security), are included in property. Moreover, European judges acknowledge the problems which the creation of a market of such rights involves. Some relevant examples derive from the jurisprudence on milk quotas.27 Emblematic are the conclusions of Advocate General Colomer in the case 25

26

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On the “double level” protection of ownership in the European legal order, provided not only by the Treaty but also by the European Convention for the Protection of Human Rights and Fundamental Freedoms, see S. van Erp, “European and National Property Law: Osmosis or Growing Antagonism?”, Maastricht University Faculty of Law Working Paper, Sixth Walter van Gerven Lecture Leuven Centre for a Common Law of Europe Ius Commune Research School, 2006 (available at http://ssrn.com/abstract=995979), at 6. See also Id., “eu Charter of Fundamental Human Rights and Property Rights”, in: D. Wallis/S. Allanson (eds), European property rights and wrongs, Lahti: Wallis 2011, 44–49. The criterion of the espérance légitime has been used by the echr in several cases, among which, for instance, Beyeler v Italia (5 January 2000); Oneryildiz v Turquie (18 June 2002); Agrati and Others v Italia (7 June 2011). Another interesting case is C-5/88, ecj of 13.07.1989, Wachauf v Bundesamt für Ernhrung und Forstwirtschaft, ecr 1989, 02609. In this case – where the legitimacy of a farmer’s claim for compensation for the definitive discontinuance of milk production under German law was under scrutiny – the Court of Justice has affirmed that “Community rules which, upon the expiry of the lease, had the effect of depriving the lessee, without compensation, of the fruits of his labour and of his investments in the tenanted holding would be incompatible with the requirements of the protection of fundamental rights in the Community legal order” (at para. 19).

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Stefan Demand v. Hauptzollamt Trier, who stated that “(…) milk quotas must currently be regarded as authentic intangible assets. However, since they were introduced for the purpose of regulating the market in milk, their content should be defined according to that purpose, which continues to be their raison d’être. Put another way, although the fact that milk quotas are in the nature of property may enhance their role in transactions to the point of protecting the subjective rights of those holding them, that aspect must not prevail over the paramount objective of regulating the market. Traders who deal in quotas (by means of the various transactions permitted under national law) must never lose sight of the fact that in the final analysis quotas are, in their essence and by virtue of their purpose, instruments for regulating the market on a temporary basis and that this entails risks and uncertainty”.28 Advocate General Colomer also argued that: “we have come a long way since classical Roman times, when property signified a power over a thing that was so direct and complete as to be indistinguishable from the thing itself. Nowadays a large proportion of transactions relate to things which, strictly speaking, are not things at all. They have been created in order to satisfy a specific socio-economic function and, more than any other good, depend on the legislative framework within which they are created and sustained”.29 Similarly, in the case of spectrum rights, the European courts have also remarked upon the economic value of spectrum licences, in respect of the particular nature of the fees associated with the use of frequencies. According to the judgment of the ecj in the case Connect Austria Gesellschaft für Telekommunikation GmbH v. Telekom-Control-Kommission, which related to the fees charged to operators acting in different mobile telecommunications markets, the licences have an economic value.30 Other relevant statements come from the case Bouygues sa, Bouygues T.l.com v. Commission with regard to umts licences, where the Court of First Instance argued that: “umts licences, which authorise economic activities consisting in the provision of mobile telephony services in the wireless spectrum and are interpreted as conferring the right to occupy or use the corresponding public domain, have an economic value that the manager of that domain is bound to take into account when he determines the amount of fees to be paid by the operators involved”.31 Subsequently, in 28 C-186/96, ecj of 17.12.1998, Stefan Demand v Hauptzollamt Trier, ecr 1998, i-08529. See the Opinion of the Advocate General Ruiz-Jarabo Colomer delivered on 7 July 1998. 29 Ibid. at para. 36. 30 C-462/99, ecj of 22.05.2003, Connect Austria Gesellschaft für Telekommunikation GmbH v Telekom-Control-Kommission, and Mobilkom Austria ag, ecr 2003, i-05197 (see para. 93). 31 Case T-475/04, cfi of 4.7.2007, Bouygues sa and Bouygues Télécom sa v Commission, ecr 2007, ii-02097 (see para. 101).

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this case, the Court of Justice stressed that “the economic value of a licence derives, in particular, from the possibility for the licence holder to make use of the rights attached to the licence which, in the present case, means the possibility of occupying public wireless space in order to use umts technology”.32 v

Conclusions

The examples of regulatory property mentioned above are emblematic due to their common features: on the one hand, they all involve multi-level regulation and thus different levels of governance as they are characterized by a complex interweaving of actors operating at different stages and mirror interactions between global, European and national regulatory spheres; on the other hand, they are rights created by the public authorities with the aim of regulating access to a resource or an activity; furthermore these rights are scarce by definition, have a high economic value and share the feature of intangibility. In this context it is evident that the traditional concept of property cannot remain unaffected by these new forms of “belongings” which – even if not fully recognized as formal property rights by law – have at least become forms of de facto property rights. Referring to the elaboration of civil law doctrine, the emergence of new goods – whose recognition is left to doctrine and jurisprudence, such that they may benefit only indirectly from the legal protection provided by contract law and tort law – marks a metamorphosis of the notion of goods, which also implies a metamorphosis of property law.33 All these goods are susceptible to appropriation, even if their property regimes are variable and the holder’s prerogatives are not the same as those established for the owner under the Civil Codes, and their value of exchange on the market expresses their utility. Changes to the traditional categories of property, and the trend towards de-physicalization, have provided authoritative scholarship with strong arguments invoking the need for a rethink and a flexible approach to the traditional civilian concept of ownership and thus an alignment with common law, from the perspective of the opening of property to other goods, such as 32 33

Case C-431/07 P, ecj of 2.4.2009, Bouygues sa and Bouygues Télécom sa v Commission, ecr 2009, i-02665 (see para.119). J.L. Bergel, “Rapport Géneral”, in: Association Henri Capitant des Amis de la Culture Juridique Française, La Propriété. Journées Vietnamiennes, Tome liii, 2003 (Paris: Société de législation comparée, 2006), 203–220, at 207. See also C. Godt, “The functional comparative method in European Property Law”, 2(1) eplj 2013, 73–89 (arguing that the challenge for comparative property studies is elaborating a profound reflection on how property rights function under current societal turnover and on newly emerging rights).

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public law licences.34 According to scholars, this would also definitely accelerate the process of creating a European system of property law.35 Referring to the examples of regulatory property mentioned above, the flexible approach typical of common law can be confirmed if one considers that English courts recognized the nature of property rights to emissions allowances36 and that a market for airport slots was admitted in the uk long before the recent acknowledgement by the eu Commission.37 However, such an approach clashes with the resistance from traditional private law scholarship in civil law systems, which is tightly anchored to the unitary concept of ownership and to the doctrine of the numerus clausus.38 Finally, the legal qualification of the rights examined is also a matter of policy judgment. It is a fact that in none of the cases examined did government regulation begin with the aim of developing a full system of private property rights; nevertheless, in each case the regulatory approach is at one stage or another in the evolution of the option of a private property rights regime.39 To draw some conclusions on the issues raised; from the analysis of (recent) secondary trading experience there emerge some considerations that cannot be further superseded by regulators. Firstly, the clear definition of right involved is an essential prerequisite for the efficient and fair functioning of a market and to solve possible legal issues arising among transacting parties (for instance, in private transactions it must be asked what kind of protection must be granted to victims of theft, as demonstrated in Armstrong v. Winnington with regard to emissions allowances). Secondly, in order to ensure fairness of transaction between firms, the upstream allocation must also be adequately counterbalanced, as it is difficult to legitimize a right formerly allocated for free or through the payment of low administrative charges to a private person from public authorities to be traded by payment between operators (for instance, by designing a system imposing a charge on transactions, directed as a consideration to the state). Moreover, regulation must take properly into account the fact that the existence of these rights depends on public institutions 34

Among several works by this author, see recently S. van Erp, “Fluidity of ownership and the tragedy of hierarchy”, eplj 2015, 56–80. 35 S. Van Erp, “Security interests: A secure start for the development of European property law”, Maastricht Faculty of Law Working Paper No. 5/2008. 36 Armstrong dlw GmbH v Winnington Networks Ltd [2012] ewhc 10 (Ch) (11 January 2012). 37 See Guernsey case, supra n. 14. 38 On the consequences of the rigidity of this principle, see B. Akkermans, The Principle of Numerus Clausus in European Property Law, Antwerp: Intersentia, 2008. 39 R.H. Nelson, “Private Rights to Government Actions: How Modern Property Rights Evolve”, University of Illinois Law Review 1986, 361–386.

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which can modify and cancel them (typically this is the case with milk quotas, which were dismantled in 2015). All these considerations may suggest that strict application of the existing categories and principles of both private law and public law does not fit regulatory property perfectly. Instead, the concurring public and private interests typical of such rights must not be overlooked and in fact they represent their core features. The regulatory goals inherent to such rights and to whose pursuance they have been created compete with the aims typical of property, i.e. primarily the protection of the subject of the regulation and not the protection of the right-holders. In this sense, property can be seen as a tool, used primarily to achieve the regulatory goals of the specific regime under which the entitlements under scrutiny have been created. The retention of a certain degree of regulatory discretion to intervene in such sectors necessarily impacts significantly on the ability of market participants to conduct their private commercial arrangements, since, on the one hand, transacting parties entering into commercial relationships for the sale and purchase of such instruments are therefore faced with the need to articulate contractual provisions that can offer adequate protection against the risk of regulatory intervention, and; on the other hand, private arrangements must not come into conflict with but rather preserve the aims pursued by public regulation. Of course these consi­ derations increase the complexity of the issue. The consequence of these novel rights is that they can be seen as instruments of a double private/public nature. Within this framework, property shows its evolutionary nature, so that in these contexts, where entitlements have been created for the primary purpose of achieving regulatory objectives, such entitlements have retained some traditional property characteristics, “cherry-picking” only those elements of property which are strictly necessary for the pursuit of public policy goals.40 This would suggest that the protection granted by regulatory property to private holders may not be held as absolute and must be balanced against the interests pursued by the specific regulatory regime under scrutiny. Finally, it follows that for property to act as a valid tool of regulation its theoretical and practical construction needs to be adapted to the regulatory context in which it must operate, being clear that private property as a generic concept decontextua­ lized from the framework in which it fits is likely to be “an emotive phrase in search of a meaning”.41 40

41

S. Manea, The Instrumentalization of Property. Legal Interests in the eu Emissions Trading System, Alphen aan den Rijn: Kluwer Law International, 2014 (using the wording of “instrumental property”). K. Gray, “Property in Thin Air”, 50 Cambridge lj 1991, 252–307.

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There is no doubt that there is a pressing need for legislators to deal with the regulation of the novel rights examined in this contribution. Particularly in the context of existing markets and of business transactions between private undertakings, as an essential condition, regulatory policies should provide for an adequate framework which, presumably, will require continuing work on a wide range of tasks, such as achieving a new balance between the regulatory functions of public institutions and market forces and, above all, establishing detailed rules for established markets, providing clearly defined, enforceable rights and full information, and ensuring that negotiations are conducted in a transparent and non-discriminatory manner. These issues cannot be left either to the self-regulation of business operators on the one hand, or to jurisprudence and doctrine on the other. This also suggests that such new types of rights, involving different sectors and being characterized by different degrees of “property features”, require regulatory and legislative solutions involving a multi-dimensional approach, given the necessary complementarity between private law, public law and sector-specific legislation to be pursued at both European and national levels on a case-by-case basis.42 42

On the tension between the European and the Member State level, see also the proposal for an eu multi-level property law made by B. Akkermans, “European Union Constitutional Property Law”, Maastricht Faculty of Law Working Paper No. 2014/14, available at http://ssrn.com/abstract=2459926 (supporting a reconsideration of the allocation of regulatory competences and arguing that the eu can offer additional value by reducing transaction costs and other externalities by providing uniform transactional rules).

part 2 Internationalisation

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chapter 3

Lex rei sitae: The Territorial Side of Classical Property Law Sjef van Erp I

Introductory Remarks

In an earlier series of articles I have discussed (and developed) what I see as the underlying thought patterns of Western legal thinking with regard to property law. The aims of Western property systems were described by De Soto in his book The Mystery of Capital in the following way:1 What distinguishes a good legal property system is that it is ‘mind friendly’. It obtains and organizes knowledge about recorded assets we can control. It collects, integrates and coordinates not only data on assets and their potential, but our thoughts about them. In brief, capital results from the ability of the West to use property systems to represent their resources in a virtual context. Only there can minds meet to identify and realize assets’ meaning for humankind. But what does “mind friendly” mean? The Western legal tradition is, when it comes to property law, split between two different modes of thought: The civil law with its standardized (and hence, simplified) approach, which leaves little space for private freedom to organize property relations, and the commonlaw (fragmented) approach which allows parties more freedom than the civil law and enables courts to intervene through the mechanism of equity whenever the strict rules of the common law no longer fulfil their original purpose. Looking at these approaches from the surface, the differences, largely due to historical accidents from which, slowly but steadily, different legal mentalities developed, seem to show a deep rift. That impression, however, is erroneous. Of course there are huge differences between civil law and common law. The best example of this is the acceptance of the unitary concept of ownership in civil law (a direct consequence

1 H. De Soto, The Mystery of Capital. Why Capitalism Triumphs in the West and Fails Everywhere Else, London: Bantam Press/Black Swan, 2001, p. 231/2.

© koninklijke brill nv, leiden, ���7 | doi 10.1163/9789004313521_005

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of the abolition of the feudal system during the French Revolution) which is not accepted in common law. Following the common-law tradition, even in a legal system such as Ireland, which abolished the feudal system as such but not the feudal way of thinking about property rights in land, a distinction has to be made between land and personal property.2 With regard to land the most extensive right is the estate in fee simple (“freehold”) and regarding personal property the maximum right is “title”. From a functional viewpoint both are comparable with ownership in the civil-law tradition, but they are not the same. Taking this functional approach as a starting point, while looking closely at the historical development of Western property law systems and placing these systems against the socio-economic background of a market economy based on private ownership and private entrepreneurship, certain leading principles, policy choices and ground rules can be distinguished. I call this the “classical model” of property law. II

The “classical model” of Property Law

The theory of the “classical model”, which I first developed in my Van Gerven lecture, gradually developed over the years into a more detailed model.3 The analysis is, as a start, intra-systemic, meaning that it is aimed at creating insights by studying property law systems from within, which are then taken to a higher level of comparative (trans-systemic) and even supra-systemic (e.g. European autonomous) examination.4 This intra-systemic analysis has an external aspect (how different is property law from other legal areas, particularly contract law?) and an internal aspect (once a relationship is qualified as being of a proprietary nature, how is that relationship given shape and structure?). Concerning the external aspect I follow a rather pragmatic approach: 2 See the Irish Land and Conveyancing Law Reform Act 2009, Section 9 ff. 3 S. van Erp, European and National Property Law: Osmosis or Growing Antagonism?, Groningen: Europa Law Publishing, 2006. Cf; further S. van Erp, “European property law: A methodology for the future”, in: R. Schulze/H. Schulte-Nölke, European Private Law: Current Status and Perspectives, Munich: Sellier, 2011, pp. 227 et seq.; S. van Erp, “Can European property law be codified? Towards the development of property notions”, in: L. Chen/C.H. van Rhee (eds), Towards a Chinese Civil Code. Comparative and Historical Perspectives, Leiden/Boston: Martinus Nijhoff, 2012, pp. 153 et seq. 4 Cf. S. van Erp, “Teaching Law in Europe: From an Intra-Systemic, Via a Trans-Systemic to a Supra-Systemic Approach”, in: A.W. Heringa/B. Akkermans (eds), Educating European Lawyers, Cambridge/Antwerp: Intersentia, 2011, pp. 79 et seq.

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­ roperty rights give a subject as their holder a right regarding an object against P a substantial group of third parties. With regard to the internal aspect of this intra-systemic analysis my conclusion is that a triple-layered underlying matrix of thought patterns (or, one might say, stepping stones) can be found. The first layer (a) consists of policy choices, leading principles and ground rules. The second layer (b) concerns the types of property rights, and the third layer (c) is about how the world around us is fitted into this model by a process of delineating who can be a subject of property rights, what can be an object of property rights and which property relations are being recognized. This is the level of technical rules. Property systems often show a tension between three possible policy choices: protection of ownership (characteristic of the French Civil Code, enacted after the French Revolution with ownership as a “droit inviolable et sacré”), protection of trade (typical for the German Civil Code, enacted in the middle of the Industrial Revolution, with its principles of separating property law from contract law and abstraction of a performed transfer from any underlying, e.g. contractual, defects) and protection of economic interests as legal interests (in my view the principal function of equity in the common-law tradition, with its best known feature, the trust). These policy choices, guided by the underlying values of certainty and predictability to ensure the efficient functioning and flourishing of a market economy, are to a large degree of a socio-economic and political nature. Irrespective of the policy choices (which begin to affect property systems only at the second and third layer) three leading principles and seven ground rules can be identified. The leading principles are: (1) numerus clausus, (2) transparency and (3) hierarchy. The number and content (including creation, transfer and extinguishment) of property rights are limited by mandatory law. Property rights can only rest on a particular object and must be discoverable by the outside world (e.g. through a registration system in the case of immovables). Finally, property rights may be of a different relative weight (some are stronger than others due to the content of the right or the moment at which the right was created). Next to these three leading principles seven ground rules can be found, which can be summarized under the following headings: (1) the validity of property rights is decided ex ante, not ex post; (2) “nemo dat” (“nemo plus”): you cannot transfer more property rights than you have; (3) “prior tempore, potior iure”: an older property right has priority over a younger property right; (4) limited rights have priority over “fuller” rights; (5) property rights are given special protection; (6) third parties can only be bound by negative, not positive, burdens, and (7) no secured claim, no security right. The second layer consists of the various property rights.

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These are of three types. I distinguish between (a) primary rights (which give their holder the maximum of powers, privileges, rights and immunities – to use ­Hohfeldian terminology – regarding an object), (b) secondary rights (to be subdivided based upon their purpose: use, security or management) and tertiary rights, which are on the borderline of property and other legal areas, particularly contract.5 This is the point where the internal intra-systemic analysis touches upon the external intra-systemic analysis. An example is that of acquisition (or expectation) rights, under which, according to German law, the buyer of goods under retention of title may argue that his right to transfer of ownership is itself not just of a personal, but also of a proprietary nature and can therefore be invoked in situations of insolvency.6 III

Conflict of Property Laws: Which Law to Apply? Lex rei sitae

1 Introduction As long as a particular fact pattern remains connected with one and the same legal system it will be obvious that it will be this system that governs property relations. This changes when a fact pattern shows connections with more than one system. In such a situation two types of problem may arise. First of all, there may be a classical conflict-of-laws (or private international law) problem. It will have to be decided which of the connected legal systems applies, which does not have to be the same system for all aspects of the property relationship. Unlike in areas such as contract law, the mandatory nature of property law and its intricate system of policy choices, leading principles and ground rules forbids the parties from choosing the applicable law. However, I should add, exceptions exist.7 Traditionally, the leading and generally accepted conflicts rule which governs the decision of which law to apply is the lex rei sitae rule. The applicable law is the law that applies in the location where the property is situated. A second type of conflict of laws has come into existence in the European Union as a consequence of the ever growing influence and impact of European law. The various national legal systems function against the background of the 5 Cf. W.N. Hohfeld, Fundamental Legal Conceptions as Applied in Judicial Reasoning and Other Legal Essays, W.W. Cook (ed.), New Haven: Yale University Press, 1920. 6 Cf. S. van Erp/B. Akkermans, Cases, Materials and Text on Property Law, Oxford/Portland, Or., 2012, pp. 299 et seq. 7 See the contributions to R. Westrik/J. van der Weide (eds), Party Autonomy in International Property Law, Munich: Sellier, 2011.

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European treaties. This implies that the classical model presented above has become embedded in the multi-layered legal order of the European Union. Property law has thus become, as have other areas of law in the Member States of the European Union, a two-tier legal system and the question may arise of which legal order (national law or European law) has priority in a specific case.8 However, the boundaries between the eu legal order and the national legal order are not clear. This has an impact on the first-mentioned, more traditional, conflict-of-laws problem: Should the lex rei sitae rule be applied differently in the relations between the eu Member States? This is a question for which a comparison with us law can be fruitful. Although the European Union is not, like the United States of America, a federation, it has a multi-layered legal system and the European Union is an autonomous legal order.9 Within that autonomous legal order more and more parts of traditional conflict of laws rules are unified at a European level through a series of regulations. A very recent example is the Succession Regulation, which in the near future will be supplemented by a Matrimonial Property Regulation and a Registered Partnership Regulation.10 These regulations, however, are examples of explicit unification of the law (“positive integration”). The question remains whether European Union law as such and more particularly so-called “internal market law” (i.e. the impact of the freedom of goods, persons, services and capital) and 8

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Cf. on two-tier legal systems my contribution to the symposium amicorum “Roman Law: Connections and Perspectives”, held on 12 and 13 December 2013, to honour Olga TellegenCouperus. The contributions for this symposium will be published in the course of 2016. See the leading cases Van Gend en Loos, Case 26/62, ecj of 5 February 1963, ECLI:EU:C:1963:1 and Costa v. enel, Case 6/64, ecj 15 July 1964, ECLI:EU:C:1964:66. Regulation (eu) No. 650/2012 of the European Parliament and of the Council of 4 July 2012 on jurisdiction, applicable law, recognition and enforcement of decisions and acceptance and enforcement of authentic instruments in matters of succession and on the creation of a European Certificate of Succession, Off. J. 2012, L 201/107; Proposal for a Council Regulation on jurisdiction, applicable law and the recognition and enforcement of decisions in matters of matrimonial property regimes (Brussels, 2.3.2016 com(2016) 106 final); Proposal for a Council Regulation on jurisdiction, applicable law and the recognition and enforcement of decisions in matters of the property consequences of registered partnerships (Brussels, 2.3.2016 com(2016) 107 final); Proposal for a Council Decision authorising enhanced cooperation in the area of jurisdiction, applicable law and the recognition and enforcement of decisions on the property regimes of international couples, covering both matters of matrimonial property regimes and the property consequences of registered partnerships (Brussels, 2.3.2016 com(2016) 108 final) and the Item Note of the Secretariat of the Council of 29 April 2016 (Brussels, 29 April 2016 (Interinstitutional File: 2016/0061 (nle)).

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the prohibition of quantitative import and export restrictions, which include measures equivalent to such restrictions, may in themselves have an impact on the application of the lex rei sitae rule as applied by a Member State.11 Could that rule be discarded when it is seen as violating these four freedoms or when it ignores the prohibition of quantitative restrictions (“negative integration”)? The argument for such a view would be that the lex rei sitae rule, in combination with a Member State’s numerus clausus of property rights, violates European law by not enforcing property rights from a different European jurisdiction, because such rights should not be seen as foreign but “European”. In this view property relations have their situs not in a national legal system, but in the European Union and consequently should be treated as such and recognized by Member States.12 In the us, where the so-called “conflicts revolution” led to a rejection of a rule-based and (what was considered to be) mechanical application of conflict of laws, a critical reflection upon the lex rei sitae has also been called for. But both legal practice and legal scholarship (including more critical legal scholarship), however, still take the lex rei sitae rule as a starting point for their conflict-of-laws analysis. This does not mean that under us law the lex rei sitae rule does not undergo any influence of federal law, but it cannot be said that this is an Umwertung aller Werte. Before exploring the present-day relevance of the lex rei sitae rule, it may be good to start by describing the rule’s various aspects. It is (1) a rule used to decide which court is competent to decide a property case. The rule only applies in cases where a legal problem is characterized as being of a proprietary nature. Characterization is, generally speaking, a decision according to the lex fori. It relates to what I referred to above as the external aspect of property law systems.13 Lex rei sitae is, as well as a rule of civil procedure, a rule (2) used to 11 12

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See articles 26 and 32 ff. tfeu. This is the viewpoint of B. Akkermans/E. Ramaekers, “Free Movement of Goods and Property Law”, European Law Journal 2013, pp. 237 et seq.; Cf. also their contribution “Lex Rei Sitae in Perspective: National Developments of a Common Rule?” in: B. Akkermans/E. Ramaekers (eds), Property Law Perspectives, Cambridge/Antwerp/Portland: Intersentia, 2012, pp. 123 et seq. For a case in which according to the lex fori European Union law governs the characterization, cf. Webb v. Webb (Case C-294/92) decided by the European Court of Justice on 17 May 1994, ECLI:EU:C:1994:193. The court had to decide how to qualify a claim between a trustee and a beneficiary where the trust object concerned was an immovable located in France. The Court ruled as follows: “(14) Article 16 (of the Convention of 27 September 1968 on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters, Off. J. 1972 L 299/32, SvE) confers exclusive jurisdiction in the matter of rights in rem in immovable property on the courts of the Contracting State in which the property

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decide which substantive property law to apply; this can, as a matter of principle, only be the law of one and the same legal system, thus protecting that legal system’s internal coherence, particularly its numerus clausus of property rights. As such the lex rei sitae is connected with a Member State’s public policy.14 It is also a rule used to determine (3) the law that applies to registration of property rights regarding immovables (the lex registrationis) and their effect

14

is situated. In the light of the Court’s judgment in Case C-115/88 Reichert and Kockler [1990] ecr 1–27, ECLI:EU:C:1990:3, where the Court had to rule on the question whether the exclusive jurisdiction prescribed by that article applied in respect of an action by a creditor to have a disposition of immovable property declared ineffective as against him on the ground that it was made in fraud of his rights by his debtor, it follows that it is not sufficient, for Article 16(1) to apply, that a right in rem in immovable property be involved in the action or that the action have a link with immovable property: the action must be based on a right in rem and not on a right in personam, save in the case of the exception concerning tenancies of immovable property. (17) As the Court has held, the conferring of exclusive jurisdiction in the matter of rights in rem in immovable property on the courts of the State in which the property is situated is justified because actions concerning rights in rem in immovable property often involve disputes frequently necessitating checks, inquiries and expert assessments which must be carried out on the spot (see the judgment in Case 73/77 Sanders v Van der Putte [1977] ecr 2383, at paragraph 13)”. A European aspect is also evident here. In the text of the Succession Regulation and the proposed regulations on matrimonial property and registered partnership property, the impact of the lex rei sitae rule is explicitly laid down. This shows that the application of the lex rei sitae is no longer governed by national law, but by European law. The same development can be seen when looking at the application of the public policy exception, which allows states not to apply foreign law, where it otherwise would have been applicable, to avoid a violation of basic (national) conceptions of justice. Recently the Court of Justice of the European Union ruled that the public policy exception as laid down in article 34(1) of Council Regulation (ec) 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, Off. J. 2001, L 12/1 (Brussels i), should be interpreted very strictly in accordance with the foundations of the European legal order. This is already clear in the text itself, which allows the use of the public policy exception only if recognition of a judgment is “manifestly contrary to public policy”. See cjeu 16 July 2015, Case C-681/13, Diageo Brands bv v. Simiramida-04 eood, ECLI:EU:C:2015:471, deciding: “Article 34(1) (…) must be interpreted as meaning that the fact that a judgment given in a Member State is contrary to eu law does not justify that judgment’s not being recognised in another Member State on the grounds that it infringes public policy in that State where the error of law relied on does not constitute a manifest breach of a rule of law regarded as essential in the eu legal order and therefore in the legal order of the Member State in which recognition is sought or of a right recognised as being fundamental in those legal orders”. Cf. for an earlier decision ecj 28 March 2000, Case C-7/98, Dieter Krombach v André Bamberski, ECLI:EU:C:2000:164 (concerning

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vis-à-vis third parties. The rule can also influence (4) the law which applies to contracts regarding property. The lex rei sitae rule could, furthermore (5) have an impact on the applicable law as to the competence of conveyancing specialists (civil law notaries, solicitors, advocates, land registrars) and judicial enforcement officers.15 After a brief overview of the lex rei sitae rule as found in European Union legislation, I will focus on the first three aspects, but

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the interpretation of article 27, point 1, of the Convention of 27 September 1968 on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters). Because the lex rei sitae rule refers the decision of property law questions to one particular legal system, it also has a connection with a state’s sovereignty. States decide within the limits of their own territory about the type of economy, the system of property law and the involvement of public officials in acts affecting property (transfer, registration, seizure). For a recent study comparing ownership (“dominium”) with sovereignty (“Imperium”), see W.A.M. van der Linden, “The Acquisition of Africa (1870–1914): the Nature of Nineteenth-Century International Law”, Oisterwijk: Wolf Legal Publishers, 2014, pp. 17 et seq. From this perspective it is certainly understandable that the Treaty on the Functioning of the European Union in article 345 states: “The Treaties shall in no way prejudice the rules in Member States governing the system of property ownership”. However, on the limited impact of this article see B. Akkermans/E. Ramaekers, “Article 345 tfeu (ex Article 295 ec): Its meanings and interpretations”, European Law Journal 2010, pp. 292 et seq.; Cf. also Sparkes et al., in their report “Cross Border Acquisitions of Residential Property in the eu: Problems Encountered by Citizens”, Brussels: European Parliament, 2016, pp. 199 et seq. where they discuss article 345 as the “property shield”. In their report they seem to misunderstand Akkermans and Ramaeker’s argument that the negative impact of the article should be seen in light of its history. Akkermans’ and Ramaeker’s view on article 345, as being of a limited character, does not imply that a positive competence for European law-making no longer needs to be found. The limited effect of article 345 tfeu can be found in a recent decision by the Court of Justice in the Essent case (not mentioned in the report on cross-border acquisitions) regarding the freedom of the Netherlands, in light of article 345 tfeu, to not privatize part of its the electricity industry: Court of Justice of the European Union (Grand Chamber) 22 October 2013, Joined Cases C‑105/12 to C‑107/12, Staat der Nederlanden v. Essent, ECLI:EU:C:2013:677. The Court ruled: “29. Article 345 tfeu is an expression of the principle of the neutrality of the Treaties in relation to the rules in Member States governing the system of property ownership. 30. In that regard, it is apparent from the Court’s case-law that the Treaties do not preclude, as a general rule, either the nationalisation of undertakings (…) 31. It follows that Member States may legitimately pursue an objective of establishing  or maintaining a body of rules relating to the public ownership of certain under­ takings. (…) 36. However, article 345 tfeu does not mean that rules governing the system of property ownership current in the Member States are not subject to the fundamental rules of the feu Treaty, which rules include, inter alia, the prohibition of discrimination, freedom of establishment and the free movement of capital (…).

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the other aspects will also be briefly discussed. Also comparisons with us law will be made, not only to see how a multi-layered legal system with more than two centuries of history would approach these aspects, but also because of the less formal and more substantive analysis which American conflicts scholars follow. 2 Lex rei sitae in American Conflict of Laws When the Restatement (First) of Conflict of Laws (1934) was published it was fiercely criticized for being too mechanical. Walter W. Cook, David F. Cavers and Brainerd Currie were its leading critics. This led to a complete reversal of thinking on how to solve a conflict of laws problem. It was agreed that no longer should an abstract rule decide, but instead, that “governmental interests” or “state interests” should be weighed to see if the case at hand offered a “false conflict” (where it was obvious that only one state was really connected with that case), a “true conflict” (where various laws were connected and truly a choice had to be made) or “no conflict” (where no state had a direct interest in the case).16 To give but a brief summary of Currie’s theory, let me quote from an article by the leading American conflict-of-laws scholar, Symeon Symeonides:17 Currie postulated that whenever a case falls within a law’s spatial reach as delineated by the interpretative process, the state from which that law emanates has a “governmental interest” in applying it in order to effectuate the policy embodied in that law. In Currie’s words, an “interest…is the product of (a) a governmental policy and (b) the concurrent existence of an appropriate relationship between the state having the policy and the transaction, the parties, or the litigation”. In this way, Currie projected his

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37. Consequently, the fact that the Kingdom of the Netherlands has established, in the sector of electricity or gas distribution system operators active in its territory, a body of rules relating to public ownership covered by article 345 tfeu does not mean that that Member State is free to disregard, in that sector, the rules relating to the free movement of capital (…). 38. Accordingly, the prohibition of privatisation falls within the scope of article 63 tfeu (…) 39. In that regard, it should be noted that, according to settled case-law, article 63(1) tfeu generally prohibits restrictions on movements of capital between Member States (…).” For an overview of the conflicts revolution see S.C. Symeonides, “The choice-of-law revolution fifty years after Currie: An end and a beginning”, University of Illinois Law Review 2015, pp. 1847 et seq. Symeonides, “The choice-of-law revolution”, p. 1851.

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legal realist conception of law as “an instrument of social control” at the interstate level by postulating that states have an interest in the outcome of litigation between private parties. In Currie’s view this also applied to the lex rei sitae rule. His argument is based on article 4, Section 1 of the us Constitution, the Full Faith and Credit Clause: “Full Faith and Credit shall be given in each State to the public Acts, Records, and judicial Proceedings of every other State. And the Congress may by general Laws prescribe the Manner in which such Acts, Records and Proceedings shall be proved, and the Effect thereof”.18 In Currie’s view a declaratory judgment from a foreign state could, also with regard to immovable property, have res judicata in another state. In his own words:19 A form of procedure is thus provided which enables the plaintiff to proceed in complete consistency with the theory that the foreign decree, while not of its own force transferring title, should be regarded as conclusively establishing his claim to the land on principles of res judicata. Supplemental relief designed to conform the title of record to the interests declared may be obtained as well. The supposed absence of a remedy at the situs (…) is completely circumvented. It is, however, remarkable that even an author who goes this far in his thesis that the lex rei sitae rule should be abandoned, also writes that “we have the orderliness of the system established by our recording statutes to think about”.20 Currie’s plea for abandonment of the lex rei sitae rule was later repeated by Russell Weintraub.21 However, legal practice and more recent ­scholarship 18

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Cf. J.D. Sumner, “the Full-Faith-and-Credit Clause – Its history and purpose”, Oregon Law Review 1955, pp. 224 et seq. For European developments see: A. Frackowiak-Adamska, “Time for a European ‘full faith and credit clause’”, Common Market Law Review 2015, pp. 191 et seq. B. Currie, “Full faith and credit to foreign land decrees”, University of Chicago Law Review 1954, pp. 620 et seq., p. 675/6. Currie, “Full faith and credit”, p. 632. R.J. Weintraub, “An inquiry into the utility of ‘situs’ as a concept in conflicts analysis”, Cornell Law Quarterly 1966, pp. 1 et seq. His conclusion was: “There is no constitutional basis for reserving to the situs of realty exclusive judicial jurisdiction to affect the interests of persons in property. The situs will rarely, if ever, have such an interest qua situs in refusing to recognize a non-situs land decree that the situs’ interest should be permitted to override the great national interest in recognition of sister-state judgments. Once false

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show that the lex rei sitae rule has more inherent value than admitted by Currie (and Weintraub). In an article published in 2014, James Stern made this very clear: “By and large, the Conflicts Revolution never made it to property”.22 He points out that the lex rei sitae rule functions as a “conflict-of-conflict-oflaws” rule, because the situs also decides on the applicable conflict-of-laws rule, which, in turn, is the situs itself.23 The explanation for the resistance of the lex rei sitae rule against the attempt to replace it by a “state interests” test is that the nature of property law plays a dominant role here. Property law is, unlike contract and tort law, object-oriented and consequences for subjects flow from rights which are connected with that object. If there were more than one “operative system of property law, applicable to the same issue concerning the same resource”, such a possibility would “undermine[s] that basic idea”, as it would contradict a core characteristic of property law: that it is object (not subject) centred.24 This does not mean that in his view the situs rule is beyond criticism and can be applied to any form of property. It is not. He refers to the problems concerning intangibles and intellectual property, where no situs can be found. With regard to intellectual property, Stern, almost as an afterthought, makes a very interesting observation from the viewpoint of European Union law. He points out that, because under us law intellectual property is governed by federal law, the situs of intellectual property cannot be one of the states, but must be federal territory. This remark is interesting from a European point of view, as it can be argued that the European treaties function as a shell around the national laws of the Member States, and these national laws can only have effect if European law does not prohibit this. European law is then seen as an overall framework that either in the form of positive integration (e.g. through regulations) or negative integration (non-applicability of national law in as far as it violates, e.g. any of the freedoms of goods, persons, services or capital) sets the limits for the applicability of national law. This looks like the single-system

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constitutional dogmas concerning jurisdiction of the subject matter are swept aside, a functional analysis reveals that the situs qua situs, with rare exceptions, has an interest in applying its own law to affect the interests of persons in property only when choice of law will affect the use of the land. Even when land use is affected, as between states of the us, the situs rule should probably yield to the conflicting rule of another state which has a genuine interest in validating a transaction that the situs would invalidate”. J.Y. Stern, “Property, exclusivity, and jurisdiction”, Virginia Law Review 2014, pp. 111 et seq., p. 113. See also recently J.W. Singer, “Property law conflicts”, Washburn Law Journal 2014, pp. 129 et seq. Stern, “Property, exclusivity and jurisdiction”, p. 119. Stern, “Property, exclusivity and jurisdiction”, p. 145.

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a­ pproach that can be found under us law.25 However, the us constitutes a federal system and the European Union, although being an autonomous legal order, does not. I would, therefore, not follow the argument that the situs of property in the European Union is not a Member State, but the European Union as such. This would imply that the property law of all the Member States would have to be merged into one system, which would create unsurmountable problems regarding – to name but a few examples – how to deal with the differences between civil law and common law, how to make a single system out of the diverging systems of land registration, what would be the position of secured creditors with different national types of security rights, and the powers of tax authorities in case of insolvency proceedings. What certainly can be argued is that national law and European law are a single system at the level of the Member States. National courts are also European Union courts and judges will apply both national law and European Union law in such a way that the two systems of law are at least coordinated in their application. Certainly unification or harmonization of law can be reached in certain areas, but the history of the Succession Regulation, the draft Matrimonial Property Law Regulation and the draft Regulation regarding Registered Partnership Property shows that even at the level of conflicts of laws the target of unification is not easy to reach.26 3 Jurisdiction and Applicable Law In European private international law the lex rei sitae rule takes precedence as to competence of courts and the applicable substantive law. Article 24(1) of the Brussels i (recast) Regulation gives the courts of the Member State in which the property is situated jurisdiction, regardless of the domicile of the parties, in proceedings which have as their object rights in rem in immovable property or tenancies of immovable property.27 A person domiciled in a Member State 25

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Cf. H.M. Hart, Jr., “The relations between state and federal law”, Columbia Law Review 1954, pp. 489 et seq., p. 489: “The law which governs daily living in the United States is a single system of law: it speaks in relation to any particular question with only one ultimately authoritative voice, however difficult it may be on occasion to discern in advance which of two or more conflicting voices really carries authority”. The proposed regulations on matrimonial property and registered partnership property will be enacted within the framework of enhanced cooperation (see article 20 teu and articles 326–334 tfeu), because broad agreement within the Council could not be reached. Regulation (eu) No 1215/2012 of the European Parliament and of the council of December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (Brussels i, recast), Off. J. 2012, L 351/1.

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may, according to article 8(4) of the Brussels i Regulation (recast), also be sued in the court of the Member State in which the property is situated in matters relating to a contract, if the action may be combined with an action against the same defendant in matters relating to rights in rem in immovable property. Article 4(1)(c) of the Rome i Regulation is directly connected with these provisions in the Brussels i (recast) Regulation, by declaring that, to the extent that the law applicable to the contract has not been chosen, the law governing a contract relating to a right in rem in immovable property or to a tenancy of immovable property shall be governed by the law of the country where the property is situated.28 It should be noted that freedom to choose a different law is explicitly made possible. Thus a contract for the sale of immovable property does not have to be governed by the lex rei sitae.29 As the sales agreement and the ultimate transfer of ownership are, nevertheless, intimately connected, the drafter of the contract by which an immovable is, for example, sold should, notwithstanding the freedom to choose the applicable law, of course be well aware of the law of the situs. In that sense the lex rei sitae affects, either directly or indirectly, the answer to the question of which law will apply to the contract of sale. Article 11(5) of the Rome i Regulation makes this explicit by providing that, as regards the formal validity of a contract “the subject matter of which is a right in rem in immovable property or a tenancy of immovable property”, such a contract shall be subject to the requirements of form of the law of the country where the property is situated, if by that law those requirements are imposed irrespective of the country where the contract is concluded and irrespective of the law governing the contract, and those requirements cannot be derogated from by agreement. Although still a leading European Union rule of conflict, lex rei sitae plays, however, a problematic role in the recent Succession Regulation and the proposed regulations regarding matrimonial property and registered partnership property. All three regulations state, on the one hand, that the decedent’s estate or the property of the spouses/partners is governed by one legal system, thus excluding the lex rei sitae as the applicable law. However, on the other hand, all three then add that land registration systems are governed by the lex rei sitae (as lex registrationis) and that it is the lex rei sitae which governs the 28 29

Regulation (ec) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome i), Off. J. 2008, L 177/6. See for an analysis from the perspective of the applicable law to lease agreements regarding immovable property located in the Netherlands: B.J. van het Kaar and F. van Westrhenen, “Het Nederlandse huurrecht: bijzonder en dwingend, maar ook bijzonder dwingend?” wr, Tijdschrift voor Huurrecht 2016/42.

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question when property is acquired. This seems contradictory. Let me quote from the proposed Matrimonial Property Regulation. After having stated that it is the unity of the estate that should be safeguarded, and therefore that one single scheme should apply to the whole of the matrimonial property regime, the following further justification follows:30 Immoveable property has a special place in the property of couples, and one of the possible options would have been to make it subject to the law of the country in which it is located (lex situs), thus allowing the dismemberment of the law applicable to the matrimonial property regime. This solution is, however, fraught with difficulties, particularly when it comes to the liquidation of the matrimonial property, in that it would lead to an undesirable fragmentation of the unity of the matrimonial property (while the liabilities would remain in a single scheme), and to the application of different laws to different properties within the matrimonial property regime. The Regulation therefore provides that the law applicable to matrimonial property, whether chosen by the spouses or, in the absence of any such choice, determined under other provisions, will apply to all the couple’s property, moveable or immoveable, irrespective of its location. This seems clear enough language. However, how to understand the text under recital (28)?31 (28) The effects of the recording of a right in a register should also be excluded from the scope of this Regulation. It should therefore be the law of the Member State in which the register is kept which determines whether the recording is, for instance, declaratory or constitutive in effect. Thus, where, for example, the acquisition of a right in immoveable property requires a recording in a register under the law of the Member State in which the register is kept in order to ensure the erga omnes effect of registers or to protect legal transactions, the moment of such acquisition should be governed by the law of that Member State.

30 31

Proposed Matrimonial Property Regulation, p. 9. Cf. proposed Registered Partnerships regulation, p. 9 and recital (15) Succession Regulation. Cf. recital (28) of the proposed Registered Partnership Property Regulation and recital (19) Succession Regulation.

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It seems as if an attempt has been made to restore the lex rei sitae rule by renaming it lex registrationis, which is then given the same effect as the lex rei sitae would have had, if it had been applied from the beginning. This only demonstrates the enormous strength and vibrancy of the lex rei sitae rule, which had already been found out by American conflict-of-laws scholars. A difference with the situation in the us, however, is that in the European Union the lex rei sitae rule also buttresses the position of conveyancing specialists, particularly notaries and land registrars. Application of the law of the situs implies competence for notaries and land registrars. This is particularly important for notaries of the classical Latin type because of their hybrid status: on the one hand they are public officials, but on the other hand they have to be private entrepreneurs, because they are being paid by their clients. Applicability of local law, with its requirements of notarial assistance and that land registries only have to accept registration of an authentic deed (defined in such a way that it most of the time must be a document drawn up by a notary), therefore buttresses the position of notaries and land registrars.32 This is nothing new. What is changing, however, is the pressure which economic integration is exercising on, among other areas, conveyancing services and the hardly imaginable impact that the digital revolution may in future have on the law generally and land registration systems more particularly. Competence of Conveyancing Specialists and Judicial Enforcement Officers Not only does the lex rei sitae rule have a direct impact on the private and civil procedural law side of property disputes (competence of courts and applicable property law), it also has a very strong public law side. Given that it is the local law which decides about property relations, local conveyancing specialists will therefore be, generally speaking, the best qualified to give advice and fulfil any formalities, such as drawing up deeds of transfer. This is even more the case in the civil-law tradition with notaries who for a long time have played a pivotal role in, for example, land transactions. Notaries are seen as public officials who oversee the conveyancing process in the public interest and in the interest of both buyer and seller. Property transactions regarding land, which, it can be assumed, represent considerable economic value, should proceed according to set protocols, and be aimed at securing legal certainty, preventive justice and the avoidance of illegal activities such as money laundering.

4

32

On authentic deeds, see P. Beaumont et al., The evidentiary effects of authentic acts in the Member States of the European Union, in the context of successions (Brussels: European Parliament, 2016).

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These aims are all seen as essential to the core task of a notary. In most civil law countries the number of notaries is limited (numerus clausus) and strict admittance ­requirements have to be fulfilled before an appointment as notary is possible. Although, generally speaking, public officials who perform these tasks are civil servants and are paid by the state (other such examples are the judiciary, tax authorities, customs officials), in the case of the notarial profession of the classical Latin type this is not the case.33 Civil law notaries are, unless they are civil servants in the strict sense of the word, paid by their clients (in most countries the fees are still not negotiable) and in that sense notarial services have always been privatized. Still, their work has another dimension in that they also fulfil their function in the public interest and, therefore, are state-appointed. It is this public law side of the notarial profession which in the European Union is also linked to the applicability of the lex rei sitae rule. However, it is the privatized side of their work which provokes controversy about whether notarial services can also be rendered by notaries from ­outside 33

Cf. as to the power of tax authorities to seize property: ecj 7 March 1990, Case C-69/88, Krantz v. Ontvanger der Directe Belastingen, ECLI:EU:C:1990:97. In this case the European Court of Justice ruled that the power of the Dutch collector of direct taxes to seize property found on the premises of a tax debtor did not violate European law regarding the elimination of quantitative restrictions and measures having equivalent effect, although the tax authorities could ignore a retention of title clause in a sales agreement. The Court gave two arguments. The power of seizure applied to both domestic and imported goods and the impact of this power on cross-border trade would be “too uncertain and indirect” to make it relevant from the perspective of European law. It was, in my view, however the public law side of the lex rei sitae rule (i.e. seizure by tax authorities) that played a crucial role here in deciding the case. Although European law goes relatively far in demanding privatization (and hence marketability) of legal services and aims at making these services available cross border to create one internal market of such services, tasks which belong to the core of the public function are outside the reach of European law. Seizing property by tax authorities or a judicial enforcement officer can be seen as a legal service, but will be exempt from the effects of European law if such service can be qualified as exclusively performing a public function. This is why in the Krantz case the Dutch tax authorities could seize property located in the Netherlands and by doing so did not violate European law. According to the lex rei sitae rule it is not only private law, but also Dutch public law that governs property relationships in the Netherlands, and the power of tax authorities to seize property is shielded from European Union law because of its public law nature. A different question is whether such seizure can pass the test of article 1 of Protocol 1 of the European Convention on Human Rights or article 17 of the Charter of Human Rights of the European Union, both of which protect the right of private ownership.

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the jurisdiction destined by the lex rei sitae rule.34 This is an area of fierce ­debate between those in the notarial profession, who focus on their public law tasks, and those who, from a more economic viewpoint, look at the profession as already having been privatized in the sense that the services are being paid by their clients, and argue that others could also render these services. Advocates, in their view, could also give such advice, or – and this seems to be even more contested – so could notaries from other Member States of the European Union. The lex rei sitae rule has no impact on the services debate. Using the American conflict-of-laws method it could be argued that when it comes to notarial services there is a “false conflict” in terms of the applicability of situs law, as the lex rei sitae rule does not distribute legal services across the various Member States, unless these services are of a strictly public law nature, i.e. they are carried out in fulfilment of the public function and are paid by the state (and not by the clients).35 A complication here is that certain notarial services are performed as part of the fulfilment of judicial tasks or under court supervision (such as the issuing of certificates of succession in Germany). Although these notarial services are of a judicial nature, yet if they are paid by the clients personally and not through court fees paid to the government, there is still a distinct privatized aspect to them. Mutatis mutandis, so I would argue, the same applies to the work carried out by judicial enforcement officers and, when their services are privatized, as is now happening in England and Wales, the work done by land registrars.36 Although judicial enforcement officers and 34

35 36

Cf. Chr.U. Schmid et al., “Study on Conveyancing Services Market”, COMP/2006/D3/003 (published December 2007; “zerp report”); P. Sparkes et al., Cross Border Acquisitions of Residential Property in the eu: Problems Encountered by Citizens, Brussels: European Parliament, 2016. The report on cross-border acquisitions, referring back to the zerp report, describes the market in notarial services as being characterized by anti-competitive practices (pp. 155 et seq.). This conclusion seems to me to be one-sided, given the public function of notaries (particularly their role as to preventive justice). The report does seem to endorse this preventive justice role, e.g. in its description and implicit acceptance of criticism by Spanish and European notaries of the Cross Border Electronic Conveyancing approach, which under certain strict safeguards makes cross-border conveyancing by foreign conveyancers (notaries, solicitors) possible, and the report’s support for the Notaries of Europe initiative to create their own model of cross-border conveyancing (eu Fides). See Sparkes et al., loc. cit., p. 164 and 184. Cf. J. Singer, Property law conflicts, which discusses various situations of “true” and “false” conflicts in this area. On the privatization of the Land Registry for England and Wales see Department for Business and Innovation & Skills, Consultation on moving Land Registry operations to the private sector, Consultation document, London, 24 March 2016.

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land registrars, very much like ­notaries, carry out a public task in the respective areas of the enforcement of judicial decisions and of property transactions regarding land, it will be the privatized side of their work that will provoke the same debate as is now taking place with regard to the notarial profession.37 The formalities which will have to be met will still be governed by the lex rei sitae, but would it not be possible for land registration services also to be carried out by notaries, advocates or banking lawyers? Or, perhaps, with the use of modern technology, by interested parties themselves? This could be the consequence of the digitalization process, the growing number of electronic transactions and the ever widening use of the Internet. The recent phenomenon of block chain technology (in which data is stored in blocks, which can be transferred using a fully automated, self-governing system) is an expression of this development and would to a large degree put land transactions in the hands of buyers and sellers. In fact, this development towards taking away certain tasks from professionals who in some cases have fulfilled those tasks for several centuries has already begun in the us, where banks have set up their own mortgage registration system, parallel to the existing land recordation systems. The system is called the Mortgage Electronic Registration System (mers) and enables participating banks to trade in mortgages and loans by using a completely private computer system.38 These developments might even result in a change of required formalities and thus make the lex rei sitae rule redundant, to be replaced by new rules on the lex registrationis, the law applicable to the characteristics of a registration system and the applicable legal regime. Until now, generally the lex registrationis has been the lex rei sitae, but this does not have to be the case. A good example is the registry set up under the (unidroit) Cape Town Convention on International Interests in Mobile Equipment and the Protocol on Matters Specific to Aircraft Equipment. This is a worldwide computerized registry for security interests in aircraft, governed by an international treaty as lex registrationis, so not by the lex rei sitae. 5 The Virtual World A final problem that should be discussed is the influence of what has been described as “the digital revolution” on the lex rei sitae rule. Let me take land 37 38

Cf. J. Lhuillier et al., Enforcement of Court Decisions in Europe, Strasbourg: European Commission for the Efficiency of Justice (cepej), cepej Studies No. 8. Cf. S. van Erp, “Contract and property law: Distinct, but not separate”, European Review of Contract Law 2013, p. 307 et seq., pp. 322 et seq. See also the website of mers: https://www .mersinc.org/.

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registration systems as an example. As long as these systems were maintained manually and in writing, the connection with a particular situs was obvious. Physical documents had to be sent to the land registry to be processed. In order to consult the registry an interested party had to go to the counter of the land registration office and be given a physical copy of an entry in the land register. Digitalization has changed this process fundamentally. Data in land registries have been (or are being) digitalized to make the information available on computer screens by using particular software. Internet technology has made these (local) data accessible through an intranet and through external networks. Deeds of transfer and deeds of mortgage may now be sent to the land registry in electronic format and computer programmes can provide a prima facie check on whether the document can be registered. This implies that data can be delivered and accessed from anywhere in the world. The ­registry itself could also be anywhere in the world, as it is stored on servers with back-ups which could be inside, but sometimes are also outside of a country. The formalities regarding registration will then also change. The deed may still have to come from a notary, but he will have to sign with an electronic signature, which could also be done from anywhere in the world. In practice, digitalization has also made apparent that many land transfer and mortgage deeds can be standardized to such a degree that the notary is no longer the primary draftsperson of the document and that his/her main role is to assist and advise parties to the transaction and perform his/her tasks within the framework of preventive justice. It is also becoming apparent that land registrars will have to rethink their role in light of these developments. As to the lex rei sitae rule, it can be said that the location of a fully digitalized land registration system does not have to be physical anymore. It would, therefore, be better to focus on the lex registrationis and not equalize this lex registrationis with lex rei sitae. A different connecting factor will have to be found. This might be the physical head office of a registry, but – as can be seen in the case of the international registry for security rights in aircraft, established in Dublin – that does not have to be the case either.39

39

These questions also arise, of course, with regard to virtual assets or virtual content. For a proposal to create a “cosmopolitan property model”, see C. Sganga, “Cracking the citadel walls: A functional approach to cosmopolitan property models within and beyond national property regimes”, Cambridge Journal of International and Comparative Law 2014, pp. 770et seq. Sganga discusses the property model underlying the case law of the European Court of Human Rights, bilateral investment treaties and virtual property. See also J.G. Sprankling, The International Law of Property, Oxford: Oxford University Press, 2014.

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Concluding Remarks

Having given an overview of what the lex rei sitae rule contains, and its usefulness, but also its limits, it might be helpful to draw some conclusions. The lex rei sitae rule is an old conflict-of-laws rule. It can be found in the work of Roman-Dutch writers such as Huber’s De Conflictu Legum.40 In other words: it precedes the existence of the modern nation-state with its national legal systems. The reason that the rule has shown such resilience and that it even overcame the conflicts revolution in the us can only be that the interests which the rule aims to protect are very strong and are seen as self-evident. These interests are that of preserving the integrity of the local system of property law, the ­exclusive competence of local courts to rule on local property law and delineating the authority of local public officials to perform their function. Nonlocal courts and public officials respect these interests, as the lex rei sitae rule refers the solution of property disputes to courts which can apply their own law and assign the fulfilment of public tasks to local officials who best know their own legal system. They not only do this out of comity considerations, but also because of self-interest as they expect foreign courts and foreign public officials to reciprocate. Although the American conflicts revolution was unable to set aside the lex rei sitae rule, the analytic tools which were developed by the protagonists of replacing a rule-based approach by a case-by-case governmental interests analysis did have some influence on the application of the rule in the us. The result is a less mechanical and more conscious application or non-application of the lex rei sitae, depending upon the facts of each case. This latter approach, which takes the rule as a starting point but holds its application against the light of the interests involved, is a useful instrument to understand why lex rei sitae in certain situations no longer functions, such as with regard to virtual property where no “real” situs can be found or where holding on to the rule might result in contradictory indications regarding its application. Another area where a more critical approach to the lex rei sitae might also prove to be helpful is European conflict of laws. If the European Union decides that the whole of a person’s estate should be governed by one law of succession or that a person’s matrimonial or registered partnership property should be governed by one law, then it is difficult to understand that the lex rei sitae not only applies to registration formalities, but also to the substantive law consequences of such 40

See E.G. Lorenzen, “Hubers’s De Conflictu Legum”, Illinois Law Review 1918, pp. 375 et seq.

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registration under national law. This can only be explained by a strong desire to let the old interests which are protected by the lex rei sitae rule prevail. I would submit that the time has come to reconsider this approach.41 41

A more flexible approach can already be found in European insolvency law. The Insolvency Regulation (recast) 2015 shows, in comparison to its predecessor: the Insolvency Regulation 2000, clear signs of such a flexibilization tendency. I refer to the contribution by Jean-Michel Jude in this book. Compare, e.g., article 8 of the Insolvency Regulation 2000 (Council Regulation (ec) No 1346/2000 of 29 May 2000 on insolvency proceedings, Off. J. 2000, L 160/1) with article 11 of the Insolvency Regulation (recast) 2015 (Regulation (eu) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (recast), Off. J. 2015, L 141/19). Article 8 Insolvency Regulation 2000 reads: “The effects of insolvency proceedings on a contract conferring the right to acquire or make use of immoveable property shall be governed solely by the law of the Member State within the territory of which the immoveable property is situated”. Article 11 of the Insolvency Regulation (recast) 2015 adds to this provision: “2. The court which opened main insolvency proceedings shall have jurisdiction to approve the termination or modification of the contracts referred to in this Article where: (a) the law of the Member State applicable to those contracts requires that such a contract may only be terminated or modified with the approval of the court opening insolvency proceedings; and (b) no insolvency proceedings have been opened in that Member State”.

chapter 4

The Major Innovations of the New European Regulation 2015/848 of 20 May 2015 on Insolvency Proceedings Jean-Michel Jude When it comes to insolvency procedures, issues of property are naturally seen differently according to whether one takes the side of the debtor or that of the creditor, since their interests with regard to assets are contradictory. As far as the debtor is concerned, proceedings most often lead to the deprivation of assets that he/she owned. The true purpose of insolvency proceedings is to put in place a specific enforcement mechanism enabling the collective and egalitarian payment of creditors. This enforcement procedure was originally inspired by the venditio bonorum of Roman law, which allowed the sale of assets owned by the debtor at the initiative and for the benefit of creditors, under the supervision of the public authority. To do this, legislation such as the French Commercial Code of 1807 has imposed the immediate and total divestiture of the debtor’s assets in order to protect the creditor’s rights. The debtor is thus deprived of the administration of his assets until the conclusion of liquidation proceedings. This violates his rights to the assets that he/she owns and any claims and personal rights to which he/she may be entitled. But this violation is naturally justified by morality, the legal certainty of the credit and public order, since debts have to be honoured, if necessary by enforcement. With respect to creditors, beyond the question of their repayment, the law on insolvency proceedings favours the protection of assets that they own but which are in the possession of the debtor (rentals, loans, title retention clauses), allowing claims on movable and immovable assets in the possession of the debtor or otherwise favouring the implementation of securities. Turning to international aspects of insolvency, the European measures attempt to protect the interests of both debtors and creditors. The reform of insolvency regulations in May 2015 by Reg. 2015/848/EU (referred to hereafter as the regulation)1 aims to ensure the greater efficiency and effectiveness of 1 Off. J.L. 141 of 5 June 2015, 19–72. Regarding this text, see in particular P. Nabet, “Le champ d’application dans le temps du nouveau règlement relatif aux procédures d’insolvabilité”, Revue Bulletin Joly Entreprises en difficultés 2016, p. 72; J. Heymann, “Le nouveau règlement relatif aux procédures d’insolvabilité : le changement dans la continuité”, Revue Europe 2015, p. 4 ;

© koninklijke brill nv, leiden, ���7 | doi 10.1163/9789004313521_006

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cross-border insolvency proceedings, and corrects certain flaws; on the one hand, it favours the restructuring of debts in order to help defaulting debtors while, on the other hand, it facilitates the reimbursement of creditors. The eu Commissions object is ‘rescue and recovery’ approach to insolvency will give viable businesses a second chance when facing financial difficulties crossborder. The modernised rules will make it easier for businesses to restructure. According to the eu justice commissioner, “every year in the eu, 50,000 companies are faced with cross-border insolvency proceedings – ­equating to one in four of all insolvency proceedings in the eu. […] The new rules will give viable businesses a much-needed second chance and will improve the effectiveness of eu insolvency proceedings”.2 The new regulation follows a worldwide trend to favour the rescue of bankrupt undertakings over creditor protection,3 transposing the recommendation of the European Commission of 12 March 2014.4 It also broadens the material scope of the European legislation (“A broadened scope: The rules will cover a broader range of commercial and personal insolvency proceedings, such as the so-called Spanish scheme of arrangement, the Italian reorganisation plan procedure and the Finnish consumer insolvency procedures. Overall, the reform will allow 19 new national insolvency procedures to benefit from the Regulation”.5). The reform takes into consideration the question of preventing forum shopping and law shopping by debtors who look for national legislations that are less favourable to creditors (“Legal certainty and safeguards against bankruptcy tourism: If a debtor relocates shortly before filing for insolvency, the court will have to carefully look into all circumstances of the case to see that the relocation is genuine and not abusive”) and who may be tempted to transfer assets outside the competent forum.6 In addition, the new text creates interconnected insolvency registers J.-L. Vallens, “Le règlement (ue) numéro 2015/848 du 20 mai 2015: une avancée significative du droit européen de l’insolvabilité”, Revue Lamy Droit des Affaires 2015, p. 17; M. Menjucq, “Le nouveau règlement insolvabilité : quelles évolutions ?” revue Bulletin Joly 2015, p. 259; R. Dammann/ M. Menjucq/ P. Roussel Galle, “Le nouveau règlement européen insolvabilité”, Special issue Revue Procédures Collectives 2015. 2 . 3 Liquidation in favour of the creditors was still the goal of the preceding regulation Reg. 1346/2000, Off. J. 2000, L 160/1. 4 com (C) 2014, 1500. 5 . 6 According to recital 5 of the regulation, “It is necessary for the proper functioning of the internal market to avoid incentives for parties to transfer assets or judicial proceedings from one Member State to another, seeking to obtain a more favourable legal position to the detriment of the general body of creditors (forum shopping)”.

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(“Businesses, creditors and investors will have easy access to any national insolvency register on the European e-Justice Portal”) and also tries to solve complex questions relating to groups of companies with the objective of rescuing entire groups (“With increased efficiency for insolvency proceedings concerning different members of a group of companies, there will be greater chances of rescuing the group as a whole”.7) The 2015 reform does not change the overall approach regarding the relation between the main and secondary proceedings, but it specifies certain rules, notably the division of the debtor’s assets between primary and secondary insolvency procedures and the allocation of applicable laws: lex fori concursus and lex fori concursus secondarii, while leaving considerable scope for lex rei sitae. The principal innovations in the 2015 regulation are a better division of the estate (i.), along with a strengthening of creditors’ rights (ii.) and consideration of issues relating to a group of companies (iii.). i

The Division of the Debtor’s Estate

The question of determining the estate is central to creditors, who want to be paid out of the debtor’s liquid assets. Theoretically, and in line with the approach of the former insolvency regulation Reg 346/2000, there are as many estates as there are insolvency proceedings open in the various States, given that the regulation distinguishes the main proceedings from secondary proceedings. But this distinction suffered from an imprecise notion of the centre of main interests, a criterion of competence for the opening of main proceedings. The criterion for opening the main insolvency proceedings had to be made clear in order to strengthen the measures preventing forum and law shopping (1). Meanwhile, the regulation has retreated from the necessarily liquidationfocused nature of secondary proceedings and has improved cooperation between multiple simultaneous proceedings in order to facilitate better administration of the insolvency estate (2). 1 Competence of the Court According to recital 5 of the new insolvency regulation, “it is necessary for the proper functioning of the internal market to avoid incentives for parties to transfer assets or judicial proceedings from one Member State to another, seeking to obtain a more favourable legal position to the detriment of the general body of creditors (forum shopping)”. This is why the new text defines the 7 .

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notion of the centre of main interests more precisely (a) and presents an antiforum shopping mechanism to protect creditors against a debtor seeking a legislation more favourable to his interests (b). a)

Specification of the Criterion for Opening the Main Insolvency Proceedings According to Art. 3 Sec.  1, “the courts of the Member State within the territory of which the centre of the debtor’s main interests is situated shall have jurisdiction to open insolvency proceedings (‘main insolvency proceedings’). The centre of main interests shall be the place where the debtor conducts the administration of its interests on a regular basis and which is ascertainable by third parties”. The article continues by distinguishing the case of a company or legal person from that of an individual. “In the case of a company or legal person, the place of the registered office shall be presumed to be the centre of its main interests in the absence of proof to the contrary”. The simple presumption in favour of the registered office is maintained, but in line with the Interedil jurisprudence,8 it can be rebutted by a body of corroborating evidence if the company’s central administration is located in a Member State other than that of its registered office, and where a comprehensive assessment of all the relevant factors establishes, in a manner that is ascertainable by third parties, that the company’s actual centre of management and supervision and of the management of its interests is located in that other Member State.9 Turning to the second category, “in the case of an individual exercising an independent business or professional activity, the centre of main interests shall be presumed to be that individual’s principal place of business in the absence of proof to the contrary. That presumption shall only apply if the individual’s principal place of business has not been moved to another Member State within the 3-month period prior to the request for the opening of insolvency proceedings”. This presumption can be rebutted under the same conditions as for companies.

8 C-396/09, ecj of 20. Oct. 2011, ecr i, 9915. 9 According to Recital 30 of the Regulation: “Accordingly, the presumptions that the registered office, the principal place of business and the habitual residence are the centre of main interests should be rebuttable, and the relevant court of a Member State should carefully assess whether the centre of the debtor’s main interests is genuinely located in that Member State. In the case of a company, it should be possible to rebut this presumption where the company’s central administration is located in a Member State other than that of its registered office, and where a comprehensive assessment of all the relevant factors establishes, in a manner that is ascertainable by third parties, that the company’s actual centre of management and supervision and of the management of its interests is located in that other Member State”.

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It should be noted that the regulation takes account of private individuals: “In the case of any other individual, the centre of main interests shall be presumed to be the place of the individual’s habitual residence in the absence of proof to the contrary”. The regulation already envisages potential fraud and forum shopping at this stage.10 Recital 30 provides examples in this respect, where the presumption can be rebutted by proof to the contrary: “In the case of an individual not exercising an independent business or professional activity, it should be possible to rebut this presumption, for example where the major part of the debtor’s assets is located outside the Member State of the debtor’s habitual residence, or where it can be established that the principal reason for moving was to file for insolvency proceedings in the new jurisdiction and where such filing would materially impair the interests of creditors whose dealings with the debtor took place prior to the relocation”. b) The Fight against Forum Shopping and Law Shopping The article continues with more ammunition for the fight against forum shopping: “This presumption shall only apply if the habitual residence has not been moved to another Member State within the 6-month period prior to the request for the opening of insolvency proceedings”. The rule is identical for a company or legal person and for an individual exercising an independent business or professional activity, but curiously the time limit is not the same: “That presumption shall only apply if the registered office has not been moved to another Member State within the 3-month period prior to the request for the opening of insolvency proceedings”. Under these hypotheses, the plaintiff will therefore not benefit from the support of presumptions and will have to demonstrate the reality of the transfer of the centre of main interests as well as the ascertainability of the move by third parties if he/she wants such a move to have an immediate effect on the competence of the court. In the same way, in order to prevent forum shopping,11 the new regulation strengthens the obligation of a court seised of a request to open insolvency proceedings to verify its own competence, with the introduction of a new Art. 4 “Examination as to jurisdiction”. According to the text, it is compulsory for the court to examine whether the centre of main interests is actually 10

11

J.-M. Jude, “Forum and law shopping because of the divergence between the French and German insolvency procedures for physical persons”, in: E.-W. Luthe/U. Meyerholt/R. Wolf (eds), Der Rechtsstaat zwischen Ökonomie und Ökologie, Tübingen: Mohr Siebeck 2014, 245–257. Recital 29 : “This Regulation should contain a number of safeguards aimed at preventing fraudulent or abusive forum shopping”.

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located within its jurisdiction.12 If the court judges that it is, it must specify the grounds for its territorial jurisdiction, i.e. whether Art. 3(1) or Art. 3(2) applies. According to recital 28, “this may require, in the event of a shift of centre of main interests, informing creditors of the new location from which the debtor is carrying out its activities in due course, for example by drawing attention to the change of address in commercial correspondence, or by making the new location public through other appropriate means”. In the event of a doubt with regard to the actual location of the centre of main interests, the court seised may request further elements from the debtor and may possibly hear the creditors on this point, if allowed by its national legislation. Otherwise, the court seised may not open insolvency proceedings. According to Art. 5 of the regulation, which reflects the Eurofood jurisprudence,13 the debtor or any creditor may appeal against the decision to open main insolvency proceedings on the grounds of international jurisdiction. This decision can also be challenged on such other grounds as may be specified by the national law that is applicable.14 Beyond the division of the competence of courts and the fight against attempts by the parties to choose a more favourable jurisdiction and law, the new regulation also seeks to improve the coordination between proceedings in order to improve the recovery of debts and to unify the debtor’s estate in order to favour the universality of the main proceedings. 2 Better Coordination of Proceedings a) A Return to Universal Scope, to the Detriment of the lex rei sitae The former Art. 16 Reg. 1346/2000 posited the main bankruptcy proceeding with universal scope by way of mandatory procedural recognition in all Member States, but it conceded to Member States the protection of “local” creditors by allowing secondary proceedings to be opened, for the purpose of liquidation and with strictly territorial scope in Member States where the debtor possesses secondary establishments. In addition, exceptions were provided for, protecting the rights of third parties by stipulating the exclusion of the lex fori concursus,15 even though this is theoretically applicable on the territory of all 12

Moreover, the same applies to an examination of the establishment in the event of a request to open secondary proceedings. 13 C-341/04, ecj of 2. May 2006, ecr i, 3854. 14 Contrary to the position of the Paris Court of Appeal, 26 June 2012, Revue des procédures collectives 2012, 186, note M. Menjucq. 15 L.C. Henry, “L’approche des sûretés réelles dans le droit communautaire des entreprises en difficulté”, 30 Special Issue Les Petites Affiches Feb. 11, 2011, Suretés réelles et droit des

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Member States because of the universal nature of the main proceedings. The same applies to Art. 5 to 7 Reg. 1346/2000. Art. 5 specifies that the insolvency proceedings do not affect the right in rem of a creditor or a third party in respect of the debtor’s assets when they are not situated within the territory of the State in which proceedings are opened; Art. 6 relates to set-off, the opening of insolvency proceedings not affecting the right of creditors to demand the set-off of their claims against those of the debtor when this is authorized by the law applicable to their claims; and Art. 7 deals with the question of the reservation of title. These provisions offer a considerable advantage to creditors holding these securities because they are outside the control of the insolvency proceedings, encumbered assets escaping the real impact of the main insolvency proceedings and hence of the principal liquidator. To realise their claim, creditors benefiting from real rights often depended on the law of location of assets under the respective territorial law. But if the beneficiary of a right in rem does not act, the liquidator could still realise the assets, in application of the lex rei sitae, as stated in Art. 18 Sec.3 Reg. 1346/2000. Under these hypotheses, the main proceedings got dismembered, even though they were intended to have universal scope (via procedural recognition). While retaining these provisions in articles 8 to 10, as newly numbered, the 2015 regulation attempts to correct this difficulty when the debtor possesses an establishment in the Member State concerned and secondary proceedings have been opened, by stipulating a connection with the main proceedings. When the secondary proceedings are opened, rights in rem no longer apply to assets situated within the territory of a Member State other than the State of the opening of proceedings. Consequently, the lex fori secondarii comes into play16 and creditors holding such securities prior to the opening judgment are subject to its requirements, hence the necessary declaration of their claims in

16

entreprises en difficultés; L.C. Henry, “L’articulation entre la procédure principale et les procédures secondaires”, in: F. Jault-Seseke/D. Robine (eds), Le droit européen des procédures d’insolvabilité à la croisée des chemins, Paris: Montchrestien 2012, 35. Art. 6 of the new regulation transposes the European Union Court of Justice ruling in the Deko Marty case, 12. Feb. 2009, case C-339/07, Revue des procédures collectives 2009, 152, note T. Mastrullo; jcp Entreprise 2009, 1482, F. Mélin; Recueil Dalloz 2009, p. 1311, J.-L. Vallens and p. 2384, obs. L. d’Avout and S. Bollée; Revue trimestrielle de droit commercial, 2010, p. 211, J.-L. Vallens: “The courts of the Member State within the territory of which insolvency proceedings have been opened in accordance with Art. 3 shall have jurisdiction for any recourse which derives directly from the insolvency proceedings and is closely linked with them” and recital 44 adds that “the jurisdiction having opened the secondary proceeding is competent to sanction a debtor’s directors for violation of their duties, provided that those courts have jurisdiction to address such disputes under their national

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the collective proceedings. This therefore allows for greater coherence in the treatment of insolvency, especially since the secondary proceedings now no longer necessarily lead to liquidation. Judges at the centre of main interests who intend to implement a procedure for restructuring assets by opting for receivership or the sale of the company in difficulty will no longer be confronted by this obstacle, which led to a rigid separation of the estate, preventing the main proceedings from operating with full efficiency. b) Better Connection of Main and Secondary Proceedings A court seised of a request to open secondary insolvency proceedings can open any type of insolvency proceedings listed in Annex A, as long as the conditions for opening such proceedings under national law are met (Art. 38 Sec. 4). The regulation even provides for the possibility of the insolvency practitioner17 in the main proceedings requesting that the secondary proceedings be converted into a different type of proceedings that would be more appropriate as regards the interests of local creditors and would result in greater coherence between the main and secondary insolvency proceedings (Art. 51). Because the secondary insolvency proceedings no longer necessarily have the purpose of liquidation, which could tend to favour the inappropriate opening of “parasite” secondary insolvency proceedings, the new regulation is careful to incorporate some safeguards into its structure.18 The new regulation ratifies these advances in case law by stipulating, in Art. 36, that, in the perspective of liquidation, the insolvency practitioner of the main proceedings may give a unilateral undertaking benefiting local creditors in return for secondary

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law”. The court hearing the secondary proceedings has jurisdiction in all actions relating to the proceedings. The « insolvency practitioner » is a new organ introduced by the 2015 regulation and replaces the term « liquidator » as used by the old Reg. 1346/2000. « Insolvency practitioner » means any person or body whose function, including on an interim basis, is to verify and admit claims submitted in insolvency proceedings. He/she represents the collective interest of the creditors, administers, either in full or in part, assets of which the debtor has been divested, liquidates the assets or supervises the administration of the debtor’s affairs (Art 2). On this point, see Cour d’appel de Versailles, 13th Ch., 15 December 2005, sas Rover France contre Ministère public, n° 05/04273, Recueil Dalloz 2006, p. 379, note R. Damman, and English High Court of Justice, 9 June 2006, [2006] ewhc 1343 (Ch) Collins & Aikman case, Amrei Schröder, « Procédures secondaires d’insolvabilité », in : Schultze & Braun/F.A.Z. F.A.Z.-Institut für Management-, Markt- und Medieninformationen (eds), Insolvabilité et restructuration en Allemagne, annuaire 2008, Frankfurt : Boschen Offsetdruck. p. 26, (http://www.schubra.de/altdaten/fr/veroeffentlichungen/Fanzinso2008.pdf).

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insolvency proceedings not being opened. Such an undertaking has to be approved by local creditors according to the rules of qualified majorities applying under the legislation of the Member State in which secondary insolvency proceedings could have been opened, and will enable the local court, at the request of the insolvency practitioner of the main insolvency proceedings, and following confirmation that the general interests of creditors are protected, not to open secondary insolvency proceedings.19 The opening of a secondary procedure could prove to be problematic if the insolvency practitioner in main insolvency proceedings wishes to negotiate a debt restructuring agreement with all the creditors. Indeed, the application of several laws makes reaching an agreement over restructuring impossible in practice.20 In Art. 38 Sec.3, the new regulation introduces the possibility for the insolvency practitioner in the main insolvency proceedings to request a stay in the opening of secondary insolvency proceedings for a maximum period of three months. The new regulation specifies that such a stay will only be possible on condition that measures are put in place to protect local creditors. In a similar way, the stay will be revoked if it becomes obvious that the negotiations are unlikely to be successful or if the debtor has infringed the prohibition on disposing of his assets or removing them from the territory of the Member State in which the establishment is located. In the event of subsequent opening of safeguard-type secondary insolvency proceedings, the insolvency practitioner in the main insolvency proceedings will be unable to impose his restructuring plan. The autonomy of the secondary insolvency proceedings is preserved, and everything has to be negotiated, which could prove very complex. This provision is also intended to improve the situation of creditors. 19

20

On this point, see Versailles Appeal Court, Rover cases, op. cit. in which the judges refused to open secondary insolvency proceedings because a commitment had been given by the British liquidator to treat local creditors as if such a procedure had been opened. On this point, see the comments of the Advocate General in favour of a reform of the regulation in the Christianapol case, 22. Nov. 2012, case C-116/11, ECLI:EU:C:2012:308, § 62 and 63, Revue des procédures Collectives 2013, comm. 29, T. Mastrullo ; Recueil Dalloz 2013, p. 468, note R. Dammann and H. Leclair de Bellevue, in which the eucj dealt with the problem of the opportunity of opening secondary insolvency proceedings under Polish law, the aim of which was contrary to the safeguarding procedure under French law. The Court ruled that there was no provision in the regulation to refuse the opening of secondary insolvency proceedings on the grounds of opportunity. Once the secondary insolvency proceedings were open, the Court of Justice required the court opening insolvency proceedings to “have regard to the objectives of the main and to take account of the scheme of the regulation [according to] the principle of sincere cooperation”.

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Improvement of Creditors’ Rights

The situation of creditors will most probably improve, whether indirectly or directly. Indirectly, this is the case for the obligation for an insolvency practitioner who delays or refuses the opening of secondary insolvency proceedings to give local creditors of the secondary procedure an undertaking that they will be treated as if secondary insolvency proceedings had been opened, and goes as far as to envisage the creation of a sub-category of the insolvency estate in the creditors’ favour. This also applies to the tools for fighting against forum shopping and law shopping already discussed. Similarly, recital 5 of the regulation states that parties must not be encouraged to transfer assets or judicial proceedings from one Member State to another in order to improve their situation “to the detriment of the general body of creditors”. More directly, creditors’ situation is tending to improve with regard to the lodgement of their claims (2) and the information they are given (1). These innovations illustrate the importance of procedural aspects in the enforcement of rights. The Right to Information of Creditors Domiciled in another Member State As discussed, the insolvency practitioner must immediately inform all known creditors whose habitual residence, domicile or head office is situated in Member States other than the State where insolvency proceedings have been opened (Art. 54). This communication takes the form of an individual notice indicating the time limits to be observed, the penalties arising if these time limits are not respected, and whether creditors whose claims are preferential or secured in rem are required to declare their claims. This note is an innovation because it must include a copy of a standardized form for the lodgement of claims common to all Member States. With regard to language, the European Union naturally maintains the standard model of the form, which uses all the official languages of Member States, to inform creditors receiving the note of its purpose. It must also be indicated whether the Member State where insolvency proceedings have been opened accepts a language other than the official language “if it can be assumed that that language is easier to understand for the foreign creditors”. The standardization of this form certainly is an improvement of creditors’ rights because it will ensure that all foreign creditors receive the same form with the same content. However, the standardized form is not necessary for creditors whose rights are taken into account without lodgement of claims: in France, this would concern e­ mployees 1

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and creditors entitled to maintenance claims, who are dispensed from any ­lodgement of claims.21 Creditors will now also be aware of the essential characteristics of collective insolvency proceedings opened in Member States, since Art. 86 of the regulation introduces a requirement for European States to provide a short description of their national legislation and procedures relating to insolvency. In the absence of substantive European insolvency law, knowledge of the different collective insolvency proceedings in different legislations is indispensable. To facilitate the enforcement of creditors’ rights in other Member States, Member States are obliged to establish electronic public insolvency registers incorporating a minimum level of information which must be published at the opening of collective insolvency proceedings: date on which proceedings were opened, competent jurisdiction, type of insolvency proceedings (whether main or secondary), a detailed identification of the debtor and the designated insolvency practitioner, rules relating to the lodgement of claims and, if applicable, the date of closure and legal remedies. The information must be fully accessible free of charge, or at a reduced cost for certain data, in the interest of unrestricted access to public data. In parallel, the Commission has undertaken to establish an interconnecting mechanism of national registers, through a decentralized system, by way of the e-justice network. The publication of decisions taken in a Member State to open insolvency proceedings could be carried out by the insolvency practitioner in the Member State in which the debtor operates an establishment. The same is true for entries in public registers such as land registers and local trade and companies registers. 2 Submission of Claims The revised regulation also contains several significant developments leading towards an improvement in the conditions for declaring claims in insolvency proceedings opened in another Member State: the new European regulation takes its inspiration from French law by removing the requirement for representation by a lawyer or a professional for the registration of claims. This can therefore be carried out by the creditor him/herself, thereby enabling the creditor to reduce the cost of the insolvency proceedings. In pursing this goal, a standard procedure has been laid down, to facilitate both the formalization of claims and their treatment by professionals. The standard claims form is titled 21

Art. L. 622–624 Commercial Code.

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“Lodgement of Claims” in all the official languages of the European Union. It must include a number of indications and must be accompanied by copies of supporting documents, including the complete contact details of the creditor, the amount of the claim specifying the principal and interest, the dates on which the claim arose and on which it became due, the method applied for calculating interest, the costs incurred by the creditor prior to the opening of insolvency proceedings, the nature of the claim (civil, commercial, tort, contractual, legal, personal, salary-related, unsecured, privileged, etc.) and the guarantees (preference, security in rem or reservation of title, set-off). A lodgement of credit failing to reproduce all the information required would not be compliant and would be liable to rejection by the receiver on these grounds. However, the practice is more favourable to creditors, case law allowing them to continue updating missing data and information during the process of verification of claims, until the judge makes a ruling. By imposing a standard form with specific content for lodging claims, the new text standardizes and approximates the laws of Member States with regard to the content of submissions of claims. Ultimately, legislations should gradually converge to demand the same content, and will probably adopt the same claims form in their internal legislation. As one author emphasizes,22 the content of the form can ultimately have an effect on the substantive law of Member States. When the retention of title clause had been qualified as claims secured in re by the French Civil Code, for instance, the question was asked of whether this clause had to be declared in order to be effective. Among the affirmative arguments raised, Art. 41 of the 2000 regulation could be cited, which stipulates that a creditor who invokes such a clause must indicate this clause in the lodgement of his claim. The new text requires the creditor claiming set-off to indicate the amounts of the mutual claims, the date of the opening of insolvency proceedings, the date on which they arose and the amount claimed, following deduction of the set-off claimed. Similarly, questions could be asked with regard to the effects tomorrow of a declaration or the lack of a declaration of a claim with a view to set-off. And, of course, these questions are likely to be asked in all Member States. To complete this review of the main innovations in the regulation, we turn now to the considerable progress that has been made with regard to the insolvency of groups of companies.

22

P. Roussel Galle, “Le nouveau règlement européen sur les procédures d’insolvabilité”, Special Issue Revue Procédures Collectives 2015, p. 48.

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Consideration of Problems Relating to Groups of Companies

This regulation should ensure the efficient administration of insolvency proceedings relating to different companies forming part of a group of companies. Hitherto, the courts had filled the gap in the previous regulations with regard to groups of companies by adopting an extensive approach to the notion of the centre of main interests (comi) in order to deal with bankruptcies of groups of companies as a whole. Of particular interest on this point are the Rover,23 Collins & Aikman,24 emtec25 and Nortel26 cases, where courts have opted for a global approach. The new regulation retains a conventional analysis of the autonomy of legal persons. The judges have to respect each group member’s separate legal personality. The text rejects any ranking of main insolvency proceedings of companies belonging to the same group. However, it would perhaps be preferable to allow a single set of insolvency proceedings (the principal proceedings) to apply to the whole group. Nonetheless, this solution would present the difficulty of having to establish the criteria that determine the principal proceedings. The use of a single court assumes that the centres of main interests of the companies are situated in the same Member State. This is outlined by recital 53: “The introduction of rules on the insolvency proceedings of groups of companies should not limit the possibility for a court to open insolvency ­proceedings for several companies belonging to the same group in a single jurisdiction if the court finds that the centre of main interests of those companies is located in a single Member State. In such cases, the court should also be able to appoint, if appropriate, the same insolvency practitioner in all proceedings concerned, provided that this is not incompatible with the rules applicable to them”. An alternative solution would have consisted in imposing solutions on subsidiaries or extending insolvency proceedings to an entire group by invoking substantive consolidation.27 This was not the choice of the new regulation, 23 24 25

Op. cit. Op. cit. T.cce. 15 fév. 2006, Recueil Dalloz, 2006, p. 783, note J.-L. Vallens; International business law journal, 2006, p. 547, note Y. Lahelou et M. Matousekova, p. 547 ; Banque et droit 2006, n°106, p. 56, obs. Q. Urban. 26 C-649-13, cjeu 11 juin 2015, Revue des procédures collectives, 2015, n°4, p. 737 note M. Menjucq, Bulletin Joly, 2015 p. 209, note L.-C. Henry, Recueil Dalloz, 2015, p. 1718 note C. Dupoirier, Recueil Dalloz, 2015, p. 1514, note R. Dammann et M. Boché-Robinet. 27 R. Dammann/F. Müller, “Coup d’arrêt de la cjue au mécanisme de l’extension de procédure en cas de confusion des patrimoines”: Recueil Dalloz 2012, p. 406.

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however, which preferred to confirm the approach taken by the Community courts in the Rastelli case.28 The European Court of Justice was asked to give a preliminary ruling on the possibility of extending French insolvency proceedings to an Italian company. The court refused to consolidate the insolvency proceedings according to the regulation and ruled that extending the insolvency proceedings was equivalent to opening insolvency proceedings. Consequently, a court wishing to extend insolvency proceedings must establish beforehand that the centre of main interest of the company in question is situated on its territory. Subsequently, extending insolvency proceedings by invoking substantive consolidation is a matter of domestic law. The new text strengthens cooperation between the proceedings (1) and introduces new group coordination proceedings (2). 1 Stronger Cooperation We have already noted the improvement of relations between main proceedings and secondary proceedings (supra). The regulation also lays down a requirement for stronger cooperation in the case of a group of companies. It enables the insolvency of a group of companies to be handled by the contractual appointment of a lead insolvency practitioner with additional powers for implementing a global restructuring plan. According to recitals 49 and 50: “in light of such cooperation, insolvency practitioners and courts should be able to enter into agreements and protocols for the purpose of facilitating crossborder cooperation of multiple insolvency proceedings in different Member States concerning the same debtor or members of the same group of companies, where this is compatible with the rules applicable to each of the proceedings. Such agreements and protocols may vary in form, in that they may be written or oral, and in scope, in that they may range from generic to specific, and may be entered into by different parties. Simple generic agreements may emphasise the need for close cooperation between the parties, without addressing specific issues, while more detailed, specific agreements may establish a framework of principles to govern multiple insolvency proceedings and may be approved by the courts involved, where the national law so requires. They may reflect an agreement between the parties to take, or to refrain from taking, certain steps or actions. Similarly, the courts of different Member States may cooperate by coordinating the appointment of insolvency practitioners. 28

Case C-191/10, cjeu of 15. Dec. 2011, Revue des procédures collectives, 2012, comm. 185, T.  Mastrullo; jcp Entreprise 2012, 1088; Recueil Dalloz 2012, p. 406, note R. Dammann/ F. Müller; Revue Sociétés 2012, p. 189, obs. P. Roussel Galle, p. 315, note N. Morelli, Revue des procédures collectives 2012, study 2, note M. Menjucq.

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In that context, they may appoint a single insolvency practitioner for several insolvency proceedings concerning the same debtor or for different members of a group of companies, provided that this is compatible with the rules applicable to each of the proceedings, in particular with any requirements concerning the qualification and licensing of the insolvency practitioner”. The regulation demands cooperation between insolvency practitioners (Art. 41), between courts (Art. 42) and between insolvency practitioners and courts (Art. 43). Insolvency practitioners can thus be heard by the courts and exchanges of information must take place in order to envisage the opportunity for a global restructuring plan. According to Art. 60, “an insolvency practitioner appointed in insolvency proceedings opened in respect of a member of a group of companies may, to the extent appropriate to facilitate the effective administration of the proceedings, be heard in any of the proceedings opened in respect of any other member of the same group [and] request a stay of any measure related to the realisation of the assets in the proceedings opened with respect to any other member of the same group provided that a restructuring plan for all or some members of the group for which insolvency proceedings have been opened has been proposed”. This approach is intended to be voluntary and consensual. Finally, it is worth emphasizing the influence of German government with regard to the creation of a new procedure for group coordination in addressing the insolvency of groups of companies. 2 The Introduction of Group Coordination Proceedings Art. 61 of the new regulation stipulates that any insolvency practitioner designated in insolvency proceedings opened against a member of the group can request the opening of group coordination proceedings: “Group coordination proceedings may be requested before any court having jurisdiction over the insolvency proceedings of a member of the group, by an insolvency practitioner appointed in insolvency proceedings opened in relation to a member of the group”. The tribunal first seised will open proceedings by appointing a coordinator if it considers that this will facilitate the efficiency of the insolvency proceeding and that no creditor of a company in the group whose participation is expected is likely to be financially disadvantaged. A subsequent change in the court responsible for coordination is possible, however, if two thirds of the insolvency practitioners agree that a court in another Member State is more appropriate. The insolvency practitioner proposed as coordinator, and designated by the court which opened the group coordination proceedings, will have the task of outlining recommendations for the coordinated conduct of the insolvency

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proceedings. He/she could opt for a programme of group coordination proceedings, indicating the measures to be taken to rescue the group or a part of it. The new regulation gives him the right to be heard and to take part in any open proceedings concerning a member of the group. He/she can also settle any disputes that could arise between insolvency practitioners and ask them for any information that would be useful for determining a global strategy. Finally, the coordinator can request a stay of proceedings for a maximum period of six months if such a measure is necessary to ensure the application of the coordination programme and if it is to the benefit of the creditors concerned in the proceedings for which the stay is requested. The coordinator’s appointment may be revoked at the request of an insolvency practitioner taking part in the coordination if he/she fails to comply with his obligations or acts to the detriment of the creditors of a participating group member. The insolvency proceedings put in place are not binding in the sense that an insolvency practitioner designated for one of the companies in the group can choose not to participate in the group coordination proceedings, thereby freeing the insolvency proceedings for which he/she has been designated from all the provisions discussed above. Meanwhile, an insolvency practitioner not involved in the group coordination can request the inclusion of the insolvency proceedings for which he/she has been designated. Finally, the non-binding nature of group collective proceedings is also seen by the fact that no insolvency practitioner is obliged to follow the coordinator’s recommendations. This is why the authors29 are justified in wondering whether this procedure does not duplicate the provisions relating to cooperation. It remains to be seen whether this instrument will be used in practice to improve the restructuring of groups of companies.

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Revue Procédures Collectives, special issue, 2015.

chapter 5

Multilevel Governance of Property Titles in Land: The Voluntary Guidelines on the Responsible Governance of Tenure of Land, Fisheries and Forests in the Context of National Food Security Leon Verstappen I Introduction The societal issues surrounding property rights in general and land in particular, are much broader than a lawyer with a typical private law background could possibly think. Land is a scarce commodity for which the demand is steadily growing due to population growth and the increasing demand for food and transportation. Property law is a means to achieve various societal goals, such as the efficient and effective functioning of markets, sustainable development, environmental protection, food security, but also the protection of legitimate land rights of people and their livelihood. In this contribution, I focus on an important global effort to improve property rights as tenure: The Voluntary Guidelines on the Responsible Governance of Tenure of Land, Fisheries and Forests in the Context of National Food Security (hereinafter also referred to as: Voluntary Guidelines), endorsed in 2012 by the Committee on World Food Security.1 These guidelines are a means to promote security of tenure and the equitable access to land, fisheries and forests, thereby eradicating hunger and poverty, supporting sustainable development and promoting environmental protection. Although these guidelines would have considerable consequences in legal systems if fully implemented, it seems that they have not arrived yet in the academic legal debate. I only counted two articles on ssrn when searching for ‘Voluntary Guidelines on the Responsible Governance of Tenure of Land, Fisheries and Forests’. I first explore the legal context of the Voluntary Guidelines, their nature compared to the nature of other legal and non-legal instruments regarding 1 See for further information on the Voluntary Guidelines: Thematic issue on the Voluntary Guidelines on the Responsible Governance of Tenure, Land Tenure Journal, no. 1 (2012). The text can be retrieved on: http://www.fao.org/nr/tenure/voluntary-guidelines/en/.

© koninklijke brill nv, leiden, ���7 | doi 10.1163/9789004313521_007

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tenure and how they were drafted and adopted. Then, I deal with the content, focusing on some key elements of the Voluntary Guidelines, as well as issues around promotion, implementation, monitoring and evaluation. I conclude my paper with some remarks on the (potential) significance and impact of the Voluntary Guidelines. II

Balancing Public and Private Interests in Land

Private law in the Western world is based upon two basic principles of legal freedom: legal capacity of every person to perform legal acts and the private ownership of property. Limiting those basic rights affects freedom and thus the pursuit of individual self-fulfilment and prosperity. Throughout history, there has been a very clear movement towards more individualisation of land rights and more public law regulation of land. The tragedy of the commons has led to more individualisation of land rights, by means of vesting formal title. According to Hernando de Soto, some $9 trillion of ‘dead capital’ was locked up in land, homes, and businesses belonging to poor people who did not technically ‘own’ them. In his study ‘The Mystery of Capital’,2 in which he dealt with the relationship between property rights and poverty, he advocated giving people formal legal title so that poor people all over the world would be able to leverage their property for profit. His work has been very influential; many titling programs and projects have been started in developing countries.3 It has catalysed the process of individualisation of land rights, but not everybody benefited from it.4 2 New York: Basic Books, 2000. 3 Just a few examples of papers written on this topic: R. Dyal-Chand, Exporting the Ownership Society: A Case Study on the Economic Impact of Property Rights, Northeastern University School of Law Research Paper No. 15–2007, ssrn: http://ssrn.com/abstract=968689; E. Meidinger, Property Law for Development Policy and Institutional Theory: Problems of Structure, Choice, and Change, Buffalo Legal Studies Research Paper No. 2006–01, ssrn: http://ssrn.com/abstract=876467; T.J. Besley, http://sticerd.lse.ac.uk/research/eopp. M. Ghatak, The De Soto Effect, lse sticerd Research Paper No. EOPP008. 4 J. Ubink, D. Rahmato, K.S. Amanor (eds), Legalizing land rights, Law, Governance, and Development series, Leiden University Press 2009; T. Hanstad, R.L. Prosterman, R. Mitchell, et al., One billion rising: law, land and the alleviation of global poverty, Law, Governance, and Development series, Leiden: Leiden University Press 2007; J.M. Otto, A. Hoekema, J.W. Bruce, et al., Fair land governance: how to legalise land rights for rural development, Law, Governance, and Development series, Leiden: Leiden University Press 2012.

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To allocate land rights to people and legal entities individually is just one aspect. Whether and how those land rights can be exercised, and whether and how they are protected is another thing. Facilitating entrepreneurship by providing such a legal instrument on a large scale, also raises questions about how to influence how people and businesses use land individually and dispose of it. If a system creates new opportunities to acquire property, this also means that people can lose property. Tradeability also entails that property can be accumulated in the hands of just a few. People hold land rights primarily for their own benefit. But there is also a kind of social responsibility to use those land rights in an appropriate way. Public law sets limits to the freedom of individuals to use and dispose of the land as they please, thereby affecting the value of land. Public law limits the owner’s freedom for a good reason: a public purpose that is considered to be more important than the private interests of a property owner. The State, subject to the principle of legality, appropriately exercises the power to regulate land ownership and land use. The action of any State authority must thus be based upon a statutory duty or provision. The legality principle is a fundamental part of the protection of rights because it limits the authority of the State to act. In developed countries, private property is to a large extent protected by law and in reality. Society has found a balance between private ownership and the owner’s responsibility towards the public, although they may differ from country to country. In developing countries, however, land is hardly registered properly, governmental institutions tasked with the administration of land are weak, and laws are unclear, especially if – as is the case in many countries – a layered mixture of customary law, transplanted colonial law, as well as more modern statutory law applies. The result is that powerful people and businesses are given free rein, land grabbing and rent-seeking are widely spread, there is a lot of corruption, abuse of power and property is not sufficiently protected by the judiciary.5 5 There is a lot of literature on land grabbing. To name but a few: C. Oguamanam, Sustainable development in the era of bioenergy and agricultural land grab, International environmental law and the Global South (Cambridge: Cambridge University Press, 2015), pp. 237–255; S. Galiani and E. Schargrodosky, Land property rights, in: Institutions, property rights, and economic growth (Cambridge: Cambridge University Press, 2014), pp. 107–120; C. Häberli, Foreign direct investment in agriculture: land grab food security improvement? (January 1, 2014). Thomas Eger, Stefan Oeter and Stefan Voigt (Eds), Economic Analysis of International Law (Tübingen: Mohr Siebeck, 2014) pp. 283–303. Available at SSRN: http:// ssrn.com/abstract=2556244; A. Reid Ross, Grabbing back: essays against the global land grab, Edinburgh [u.a.]: AK Press, 2014; E. Hey, Virtual water, ‘land grab’ and international law, International law and freshwater (Cheltenham – Northampton: Edward Elgar

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The ones that suffer the most are often the most vulnerable and marginalised groups in society that depend upon land for their livelihoods, such as small farmers, indigenous people, pastoralists, woman, and children. But there are also other interests at stake of a more general nature, such as environmental protection, food security, economy and urban planning. Tenure6 plays a key role in all these important and sometimes competing interests. It is a term that reflects a certain position as a holder or user of land on the basis of a title. Because tenure roots mainly in the law, the law plays an important role in this. Governance of tenure implies that the law must provide not only for institutions and concepts, but also the procedures and mechanisms within which one can exercise one’s tenure rights and the government can duly fulfil its public tasks. A sustainable society requires that laws and legal procedures meet good governance standards. This is necessary for economic growth, democratic development, and the prevention of social conflict in general. One may argue that the best governance of an institution is where a maximum of efficiency is combined with a maximum of democracy, transparency, accountability, sustainability, and respect for human rights and the rule of law. This also applies to tenure rights. Tenure rights cannot only be considered from a property law perspective. Taking into account the various and diverse interests that people, businesses, institutions and governments have in land, as well as the general interests that are at stake, a more holistic approach to land rights is needed. Publishing, 2013), pp. 298–318; D. von Kress, Investitionen in den Hunger?: Land Grabbing und Ernährungssicherheit in Subsahara-Afrika, Wiesbaden: Springer, 2012; P. D’Odorico; M. Cristina Rulli, International Land Grabbing, Environmental Science, 11/2014; S.M. Borras Jr; J.C. Franco; S. Gómez; Land grabbing in Latin America and the Caribbean, The Journal of Peasant Studies, 05/2012, Volume 39, Edition 3–4; E. von Grant, O. Das, Land Grabbing, Sustainable Development and Human Rights, Transnational Environmental Law, 03/2015, Volume 4, Edition 2; A. von Puyana, A. Costantino, Chinese Land Grabbing in Argentina and Colombia, Latin American Perspectives, 11/2015, Volume 42, Edition 6; J. von Lee, Contemporary land grabbing: research sources and bibliography, Law Library Journal, 03/2015, Volume 107, Edition 2; O. von Visser, N. Mamonova, M. Spoor, Oligarchs, megafarms and land reserves: understanding land grabbing in Russia, The Journal of Peasant Studies, 07/2012, Volume 39, Edition 3; S. von Mollett, Sharlene, The Power to Plunder: Rethinking Land Grabbing in Latin America, Antipode, 03/2016, Volume 48, Edition 2; J.D. von van der Ploeg, J.C. Franco; S.M. Borras, Land concentration and land grabbing in Europe: a preliminary analysis, Canadian Journal of Development Studies / Revue canadienne d’études du développement, 04/2015, Volume 36, Edition 2. See also for more data and information on land grabbing: www.landmatrix.org and www.landportal.info. 6 When I use the word tenure in the context of the Voluntary Guidelines, it means not only tenure of land, but also of fisheries and forests, although the focus is on land.

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The first initiative of this kind are the Voluntary Guidelines.7 They represent a remarkable undertaking since they provide for the first international instrument on tenure, established after an inclusive process of negotiations with all stakeholders worldwide, aiming to improve worldwide the position of the most vulnerable and marginalised groups in society by providing and promoting good governance standards on tenure. These guidelines are the first global effort to establish good governance standards on tenure.8 Although the document to a very large extent takes a holistic, all-inclusive approach towards tenure rights, water rights are not included. There is only a minor reference to water in the preface,9 stating that responsible governance of tenure of land, fisheries and forests is inextricably linked with access to and management of other natural resources, such as water and mineral resources, and that States may wish to take the governance of these natural resources into account in their implementation of these Guidelines, as appropriate. Although water rights were initially considered for possible inclusion, they were omitted because of the highly political nature and complex legal situations of transboundary water.10 This is a pity because the water is as much as important to food security as land. 1 Holistic Approach, but Limited in Scope A number of international instruments deal with land, property and related rights.11 There are, of course, Article 17 of the Universal Declaration of Human Rights (udhr),12 and Article 1, Protocol 1 of the European Convention on Human Rights. A number of later established international instruments make general reference to property and some of them are more specific by making explicit a right to inherit. Some of them introduce a requirement for compensation to be paid 7

8 9

10 11 12

D. Palmer/ A. Arial/ R. Metzner/ R. Willmann/ E. Müller/ F. Kafeero/ E. Crowley, Improving the governance of tenure of land, fisheries and forests, Land Tenure Journal 2012, no. 1, 39–61, p. 41 et seq. (download: fao online catalogue). P. Munro-Faure, D. Palmer, An overview of the Voluntary Guidelines on the governance of tenure, Land Tenure Journal, 2012/1. Preface Voluntary Guidelines, p. iv. See also about the linkages between land, fisheries and forests: D. Palmer/ A. Arial/ R. Metzner/ R. Willmann/ E. Müller/ F. Kafeero/ E. Crowley (2012, supra n. 7), p. 41ff. D. Palmer, M. Törhönen, P. Munro-Faure, A. Arial, Fostering a new global consensus, Land Tenure Journal 2012, no. 1, p. 22. This overview is based upon: D. Palmer/ M. Törhönen/ P. Munro-Faure/ A. Arial (2012, supra n. 10), pp. 23–24. General Assembly of the United Nations in 1948.

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when someone is deprived of property13 and some of them make more specific reference to property rights on land.14 The most detailed guidelines on tenure are based upon instruments that focus on the rights of specified groups, i.e. the International Labour Organisation Convention (No. 169) concerning Indigenous and Tribal Peoples in Independent Countries, and the United Nations Declaration on the Rights of Indigenous Peoples. But all these legal instruments were not sufficient. The need for action on tenure was stressed by member states of the fao in several international instruments.15 The global community desperately needed specific rules and

13

14

15

Article 5 of the International Convention on the Elimination of All Forms of Racial Discrimination; Article 15 of the International Convention on the Protection of the Rights of All Migrant Workers and Members of Their Families; Article 21 of the American Convention on Human Rights; Articles 14 and 21 of the African Charter on Human and Peoples’ Rights; Article 17 of the Charter of Fundamental Rights of the European Union; Article 31 of the Arab Charter on Human Rights. Article 13 of the Convention relating to the Status of Refugees identifies immovable property as well as moveable property; Article 13 of the Convention relating to the Status of Stateless Persons identifies immovable and moveable property; Article 13 of the Convention on the Elimination of All Forms of Discrimination against Women identifies the right to mortgages; Article 14 of this convention requires State Parties to ensure that women have the right to equal treatment in land and agrarian reform as well as in land resettlement schemes; beyond that, Articles 15 and 16 of this convention make general references to “property”; Article 12 of the Convention on the Rights of Persons with Disabilities includes equal access to mortgages along with other references to “property”; Article 6 of the un Declaration on Social Progress and Development identifies “forms of ownership of land” along with general references to property. The Universal Declaration on the Eradication of Hunger and Malnutrition, 1974, which calls for States to remove obstacles to food production, including through measures of agrarian policy reform and the reform of conditions of ownership; the Declaration of Principles and Programme of Action of the World Conference on Agrarian Reform and Rural Development, 1979, which calls for the reorganization of land tenure and tenancy reform; regulation of changes in customary tenure; land consolidation; promotion of group farming cooperatives and collective and state farms; community control over natural resources; settlement of unoccupied public lands; and the reduction of inter-regional and inter-community inequalities; the Declarations of the World Food Summit, 1996, Articles 15, 16, 17 and 19; of its follow-up in 2002, Article 4; and of the World Summit on Food Security, 2009, Section 25, which call for improved access, by men and women, to land and other natural resources; the Declaration of the International Conference on Agrarian Reform and Rural Development (icarrd), 2006, which calls for more equitable distribution of land through agrarian reform and an emphasis on national dialogue.

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guidelines on tenure. The Voluntary Guidelines provide these rules and guidelines. This is the significance of the Voluntary Guidelines. To explain the added value of the Voluntary Guidelines in more detail, one can take the example of expropriation (or compulsory acquisition). There have been rules to protect property from expropriation for centuries. Grotius,16 who laid the foundations of international law, was probably the first scholar to provide us with the basic elements of protection against unlawful expropriation: “…The property of subjects is under the eminent domain of the State, so that the State or he who acts for it may use and even alienate and destroy such property, not only in the case of extreme necessity, in which even private persons have a right over the property of others, but for ends of public utility, to which ends those who founded civil society must be supposed to have intended that private ends should give way. But it is to be added that when this is done the state is bound to make good the loss to those who lose their property”. Protection of property also can be found in Constitutions, for instance the Fifth Amendment to the United States Constitution: “No person shall be […] deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation”. Or Article 14 of the Dutch Constitution: “Expropriation can only take place in the common interest and against a compensation guaranteed in advance, according to statutory regulations. In case of emergency calling for immediate action, the compensation doesn’t need to be guaranteed beforehand”. [Emphasises added by author] If you look closely at these constitutional clauses, one can notice that they only reflect what Grotius already wrote in 1625. One may get the false impression that nothing has happened ever since. Expropriation law, however, has developed over the years, but there has apparently not been a translation into Constitutional clauses as mentioned before. Nowadays, it takes more than only a public purpose and compensation to expropriate, but the state also needs to comply with other requirements and follow procedures. But until the adoption of the Voluntary Guidelines in 2012, there was no international instrument that dealt with expropriation specifically and with land and land-related problems in general. Now, we have paragraph 16 and 18 of the Voluntary Guidelines, which describe in more detail what is needed for expropriation procedures to meet good governance standards. .

2 Inclusiveness as Procedural Principle The Voluntary Guidelines were developed through negotiations within a broad global partnership of international, regional and national organisations of 16

Hugo de Groot (Grotius), De jure belli ac pacis, Paris 1625.

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different types that worked together in the United Nations system to achieve global changes in the governance of tenure.17 According to the preface of the Voluntary Guidelines, this initiative is built on and supports the Voluntary Guidelines to Support the Progressive Realization of the Right to Adequate Food in the Context of National Food Security (Voluntary Guidelines on the Right to Food), which were adopted by the fao Council at its 127th Session in November 2004, and the 2006 International Conference on Agrarian Reform and Rural Development (icarrd). The development followed an inclusive process involving a series of consultations and negotiation.18 Ten regional, one private sector and four civil society consultation meetings were organised between September 2009 and November 2010. Regional consultations were held in Brasil, Burkina Faso, Ethiopia, Jordan, Namibia, Panama, Romania, the Russian Federation, Samoa, and Vietnam. These meetings brought together almost 700 people from over 133 countries. The participants represented government institutions, civil society, the private sector, academia, and un agencies. According to the aforementioned preface, four consultations, held specifically for civil society of Africa (in Mali); of Asia (in Malaysia); of Europe and Central and West Asia (in Italy); and of Latin America (in Brasil), were attended by almost 200 people from 70 countries, and an additional private sector consultation attracted over 70 people from 21 countries.19 Each consultation meeting resulted in an assessment identifying issues and actions to be included in the Guidelines on the governance of tenure. The Zero Draft was prepared following the conclusion of the consultation process, and an electronic consultation was organized in April/May 2011. Proposals to improve the zero draft were received from the public and private sectors, civil society and academia, and from around the world. The working title of the document initially was: ‘Voluntary Guidelines on the responsible governance of tenure of land and other natural resources’. Later on, the phrase ‘and other natural resources’ was replaced by: ‘, fisheries and forests’. This excluded water and genetic resources. The First Draft incorporated proposals received from the public and private sectors, civil society, and academia. The final version of the Guidelines was prepared through intergovernmental negotiations led by the Committee on World Food Security (cfs) in July and October 2011 and March 2012. The final text includes ideas and text put forward by civil society and private sector

17 18 19

D. Palmer/ M. Törhönen/ P. Munro-Faure/ A. Arial (2012, supra, n. 10), p. 28 et seq. D. Palmer/ M. Törhönen/ P. Munro-Faure/ A. Arial (2012, supra n. 10), p. 30 et seq. Numbers from the Preface of the Voluntary Guidelines.

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organizations as a result of the inclusive nature of the CFS-led negotiations.20 The Voluntary Guidelines were endorsed by the cfs at its 38th (Special) Session on 11 May 2012. The Voluntary Guidelines are in the form of a global instrument without a single identifiable author or authors. Instead, the author is ‘no one and everyone’.21 The way the Voluntary Guidelines are developed is unique. They represent the greatest extent of ‘common ground’ on tenure that has been found to date in a global forum.22 Besides the Voluntary Guidelines, there is another instrument, the Land Governance Assessment Framework (lgaf), developed by the World Bank. The lgaf is a diagnostic instrument to assess the status of land governance at the country or sub-national level using a highly participatory and country-driven process that draws systematically on local expertise and existing evidence. As the lgaf is an evidence-based assessment of the current status of land governance and entry points, it is a mechanism on which the Voluntary Guidelines (vg) can build. The Voluntary Guidelines have not been adopted by a formal legislative organ, hence it is not binding upon anyone. Nonetheless, it is the inclusive process in which they were developed and the willingness of all participating organisations to accept them as guidelines that give it actual authoritative power.23 Whether these guidelines are successful can only be measured by future changes to the law, procedures, processes, and the behaviour of stakeholders. 3 Soft Law: Objectives and Nature of the Voluntary Guidelines The purpose of the Voluntary Guidelines is to serve as a frame of reference and to provide guidance on how to improve the governance of tenure of land, fisheries and forests with the overarching goal of achieving food security for all and to support the progressive realization of the right to adequate food in the context of national food security.24 The Voluntary Guidelines are in line with the format that has been used in other fao voluntary instruments that set out principles and internationally

20 21 22

23 24

Preface of the Voluntary Guidelines. D. Palmer/ M. Törhönen/ P. Munro-Faure/ A. Arial (2012, supra n. 10), p. 36. D. Palmer/ M. Törhönen/ P. Munro-Faure/ A. Arial (2012, supra n. 10), p. 22 and A. Arial/ Palmer/ M. Vidar/ J.C. Garcia Cebello/ F. Romano/ L. Shamsaifar, Governance of Tenure, Making it happen, Land Tenure Journal, 2012, no. 1, p. 67. A. Arial/ D. Palmer/ M. Vidar/ J.C. Garcia Cebello/ F. Romano/ L. Shamsaifar (2012, supra n. 22), p. 67. First two sentences of the Preface of the Voluntary Guidelines.

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accepted standards for responsible practices.25 The format is that there is always a basic document containing the framework that can be used by both governmental and non-governmental organisations when developing strategies, policies, laws, programmes and activities. In a way, the Voluntary Guidelines are vague and not very concrete. This answers to the need for a flexible instrument with broad principles that can be adapted to and implemented at various levels and contexts.26 A framework is always accompanied by a range of additional documents, in which supplementary guidelines are provided on technical details with regard to specific aspects and on implementation in general, as well as training and advocacy materials.27 Its preliminary part lists four of the objectives of the Voluntary Guidelines, which are: 1. 2. 3. 4.

improve tenure governance by providing guidance and information on internationally accepted practices for systems that deal with the rights to use, manage and control land, fisheries and forests. contribute to the improvement and development of the policy, legal and organizational frameworks regulating the range of tenure rights that exist over these resources. enhance the transparency and improve the functioning of tenure systems. strengthen the capacities and operations of implementing agencies; judicial authorities; local governments; organizations of farmers and smallscale producers, of fishers, and of forest users; pastoralists; indigenous peoples and other communities; civil society; private sector; academia; and all persons concerned with tenure governance as well as to promote the cooperation between the actors mentioned.28

Although the Voluntary Guidelines emphasise what State and non-State actors should do, Part 2 makes clear that they are voluntary and should be interpreted and applied consistently with existing obligations under national 25

26 27 28

For instance: Voluntary Guidelines to support the Progressive Realization of the Right to Adequate Food in the Context of National Food Security (fao Rome 2004); Responsible management of planted forests: voluntary guidelines. (fao Rome 2006); International Code of Conduct on the Distribution and Use of Pesticides (fao Rome, 2003); Fire management: voluntary guidelines. Principles and strategic actions. (fao Rome 2006). A. Arial/ D. Palmer/ M. Vidar/ J.C. Garcia Cebello/ F. Romano/ L. Shamsaifar (2012, supra n. 22), p. 75. Preface Voluntary Guidelines, page v. Preliminary Voluntary Guidelines, paragraph 1.2.

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and international law, and with due regard to voluntary commitments under applicable regional and international instruments. In other words: the Voluntary Guidelines do not replace international instruments and they regard tenure rights neither as a human right nor as a substitute for human rights.29 Although the right to own property is generally considered as a human right, it proved to be too difficult to consider property rights in general as a human right, especially with regard to the limitations of property rights that apply in different countries;30 the concept of property is perceived very differently in capitalist and communist countries.31 Two contradictions require a discussion. First, the Voluntary Guidelines should be interpreted and applied in accordance with national legal systems and their institutions on the one hand, but are promoted as an assessment framework to change national law on the other hand if national law does not comply with the Voluntary Guidelines.32 In other words: How can you both respect the actual national law and promote changes of that law? This ambiguity is rooted in the negotiations on the Voluntary Guidelines: the sovereignty of the states was at stake. Nonetheless, this ambiguity might stand in the way of a full implementation because the guidelines themselves leave an escape route for governments.33 The second contradiction is that the Voluntary Guidelines apparently have as many interpretations as there are jurisdictions where they apply, although the assessment criteria will be defined in a uniform way as I understand it. There is no World Court of Tenure. Nonetheless, the cfs is the organisation that acts as the global forum where all relevant actors learn from each other’s experiences, and assess the progress towards the implementation of these Guidelines and their relevance, effectiveness, and impact.

29 30 31

32 33

D. Palmer/ M. Törhönen/ P. Munro-Faure/ A. Arial (2012, supra n. 10), pp. 23 and 26. D. Palmer/ M. Törhönen/ P. Munro-Faure/ A. Arial (2012, supra n. 10), p. 28. Article 5 of the International Convention on the Elimination of All Forms of Racial Discrimination; Article 15 of the International Convention on the Protection of the Rights of All Migrant Workers and Members of Their Families; Article 21 of the American Convention on Human Rights; Articles 14 and 21 of the African Charter on Human and Peoples’ Rights; Article 17 of the Charter of Fundamental Rights of the European Union; Article 31 of the Arab Charter on Human Rights. See, for instance, A. Arial/ D. Palmer/ M. Vidar/ J.C. Garcia Cebello/ F. Romano/ L. Shamsaifar (2012, supra n. 22), p. 75. D. Palmer/ M. Törhönen/ P. Munro-Faure/ A. Arial (2012, supra n. 10), p. 27.

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The Content of the Voluntary Guidelines

The Voluntary Guidelines contain 7 parts: Part 1: Preliminary: on the objectives of the Voluntary Guidelines and explain nature and scope. Part 2: General matters: dealing with the guiding principles of responsible tenure governance (general principles and principles of implementation), the rights and responsibilities related to tenure, policy, legal and organizational frameworks related to tenure and delivery of service. Part 3: Legal recognition and allocation of tenure rights and duties: on safeguards, public land, fisheries and forests, indigenous peoples and other communities with customary tenure systems and informal tenure. Part 4: Transfers and other changes to tenure rights and duties: markets, investments, land consolidation and other readjustment approaches, restitution, redistributive reforms and expropriation and compensation. Part 5: Administration of tenure: on records of tenure rights; valuation, taxation, regulated spatial planning, resolution of disputes over tenure rights and transboundary matters. Part 6: Responses to climate change and emergencies: climate change and natural disasters, as well as conflicts in respect to tenure of land, fisheries and forests. Part. 7: Promotion, implementation, monitoring and evaluation. 1 General Characteristic The intention was not to focus on rights and obligations regarding tenure alone, but on the governance of tenure, recognizing that governance is often a crucial element in determining if and how people, communities, and others are able to acquire tenure rights to use and control land, fisheries and forests.34 The Voluntary Guidelines read as a well written documentation of everything that possibly can go wrong with regard to tenure, especially in developing countries. In this respect, it can also be read as a global empirical study on the main legal and governance shortages of tenure systems. The word ‘should’ is probably the most frequently used verb in the document (more than 400 times on 48 pages). Despite the voluntary nature of the guidelines, the text is rather commanding, thereby describing more or less an ideal situation for which we should strive. 34

D. Palmer/ M. Törhönen/ P. Munro-Faure/ A. Arial (2012, supra n. 10), p. 22.

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2 The Addressees of the Voluntary Guidelines In Part 2, paragraph 3.1, there is an enumeration of what the State should do: recognize and respect all legitimate tenure right holders and their rights (1); safeguard legitimate tenure rights against threats and infringements (2); promote and facilitate the enjoyment of legitimate tenure rights (3); provide access to justice to deal with infringements of legitimate tenure rights (4); and prevent tenure disputes, violent conflicts and corruption (5). Paragraph 3.2 focusses on non-state actors, in particular business enterprises: “3.2 Non-state actors including business enterprises have a responsibility to respect human rights and legitimate tenure rights. Business enterprises should act with due diligence to avoid infringing on the human rights and legitimate tenure rights of others. They should include appropriate risk management systems to prevent and address adverse impacts on human rights and legitimate tenure rights. Business enterprises should provide for and cooperate in non-judicial mechanisms to provide remedy, including effective operational-level grievance mechanisms, where appropriate, where they have caused or contributed to adverse impacts on human rights and legitimate tenure rights. Business enterprises should identify and assess any actual or potential impacts on human rights and legitimate tenure rights in which they may be involved. States, in accordance with their international obligations, should provide access to effective judicial remedies for negative impacts on human rights and legitimate tenure rights by business enterprises. Where transnational corporations are involved, their home States have roles to play in assisting both those corporations and host States to ensure that businesses are not involved in abuse of human rights and legitimate tenure rights. States should take additional steps to protect against abuses of human rights and legitimate tenure rights by business enterprises that are owned or controlled by the State, or that receive substantial support and service from State agencies”. [emphasis added by author] In paragraph 4, there is a list of more concrete and detailed rights and respons­ ibilities related to tenure for both State and non-State actors, like businesses. The fact that almost all of them are directed to the State, reveals the main addressee of the Voluntary Guidelines. But who or what is the State: Local municipalities, regional governments or only the central State? Is it the legislator or the executive branch? Are these also institutions that work on arms’ length of the State? This is not explained in the Voluntary Guidelines, so I suppose that the State stands for all types of governments or governmental institutions.

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One can think of courts and government agencies as well as national human rights institutions, people and communities.35 The second addressees are the non-state actors, especially businesses. For instance: civil society organizations (non-governmental organizations), investors, professionals, and academics.36 The subsidiary emphasis on the responsibility of businesses reveals that the Guidelines reflect the perspective of the land owner being threatened by entrepreneurs. And indeed, land grabbing by companies is a widespread abuse. However, businesses themselves can sometimes be victims of governmental abuse of power. It is interesting to note that foreign businesses themselves already have protection mechanisms in place through the bilateral investment treaties and investment chapters of free trade agreements. Both mechanisms point to the State as key holder to their protection. Sometimes, the Voluntary Guidelines are addressed to ‘all parties’, for instance in paragraph 4.3. In the preliminary part, the document states that the Voluntary Guidelines are meant to be used by all kinds of organisations: States; implementing agencies; judicial authorities; local governments; organizations of farmers and small scale producers, of fishers, and of forest users; pastoralists; indigenous peoples and other communities; civil society; private sector; academia; and all persons concerned to assess tenure governance and identify improvements and apply them (paragraph 2.3). The conclusion might be that the document addresses all people, governments, and organisations involved in tenure, thereby reflecting the holistic approach, but it is rather ambitious. 3 Legitimate Tenure Rights A central concept in the Voluntary Guidelines is ‘legitimate tenure rights’. In paragraph 3.1 Section  1 it says that States should: “Recognize and respect all legitimate tenure right holders and their rights. They should take reasonable measures to identify, record and respect legitimate tenure right holders and their rights, whether formally recorded or not”. Under what conditions is a claim a legitimate tenure right? Does this also include adverse possession? Or also unlawful occupation of land out of need? In paragraph 4.4, it becomes clear what is meant by ‘legitimate tenure rights’: “Consistent with the principles of consultation and participation of these Guidelines, States should define through widely publicized rules the categories of rights that are considered legitimate. All forms of tenure should provide all persons with 35 36

A. Arial/ D. Palmer/ M. Vidar/ J.C. Garcia Cebello/ F. Romano/ L. Shamsaifar (2012, supra n. 22), p. 68. A. Arial/ D. Palmer/ M. Vidar/ J.C. Garcia Cebello/ F. Romano/ L. Shamsaifar (2012, n. 22), p. 69.

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a degree of tenure security which guarantees legal protection against forced evictions that are inconsistent with States’ existing obligations under national and international law, and against harassment and other threats”. By using this term, the document expresses the intention that legitimate tenure rights encompass not only ownership, but also all other forms of tenure: public, private, communal, indigenous, customary, and informal.37 By introducing this concept of ‘legitimate tenure rights’, the Voluntary Guidelines leave it up to the States (‘s legislator) what rights can be categorised as ‘legitimate tenure rights’. It is safe to say that unlawful occupation, i.e. when people use land without any legally recognised right to use it, falls outside the scope of the Voluntary Guidelines. Occupation is only mentioned twice in the Voluntary Guidelines (paragraph 17.2 and 25.1) and there are some provisions on forced evictions in case of a lack of legal recognition of tenure rights (paragraph 3.2, 7.6, 10.6 and 16.7). But unlawful occupation as such is clearly not the focus of the Voluntary Guidelines. In paragraph 4.8, the legitimate tenure rights are linked to adjacent rights, such as all civil, political, economic, social and cultural rights, so that the defenders of human rights, especially the human rights of peasants, indigenous peoples, fishers, pastoralists and rural workers, are also protected. So, the activists created for themselves a kind of protection mechanism through the Voluntary Guidelines. In paragraph 4.3 it says that all ‘parties’ should recognize that no tenure right, including private ownership, is absolute; it emphasizes duties and responsibilities tenure rights bring along: “All tenure rights are limited by the rights of others and by the measures taken by States necessary for public purposes. Such measures should be determined by law, solely for the purpose of promoting general welfare including environmental protection and consistent with States’ human rights obligations. Tenure rights are also balanced by duties. All should respect the long-term protection and sustainable use of land, fisheries and forests”. 4 Institutional Framework The governance dimension of land tenure is in particular addressed in paragraph 5: States should provide and maintain policy, legal and organizational frameworks that promote responsible governance of tenure of land, fisheries and forests and that are consistent with their existing obligations under 37

P. Munro-Faure/ D. Palmer, “An Overview of the Voluntary Guidelines on the Governance of Tenure”, Land Tenure Journal 2012, no. 1, p. 7, and D. Palmer/ M. Törhönen/ P. MunroFaure/A. Arial (2012, supra n. 10), p. 22.

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national and international law. These should recognize and respect, in accordance with national laws, legitimate tenure rights including legitimate customary tenure rights that are currently not protected by law; and facilitate, promote and protect the exercise of tenure rights. States should develop relevant policies, laws and procedures through participatory processes involving all affected parties, ensuring that both men and women are included from the outset. Policies, laws and procedures should take into account the capacity to implement. They should incorporate gender-sensitive approaches, be clearly expressed in applicable languages, and widely publicized. In paragraph 6, the last one in this part, one can read general statements regarding the need to have sufficient capacity to provide all these services fulfil all these obligations of the State. These two paragraphs demonstrate that the Voluntary Guidelines not only deal with the legal framework of legitimate tenure rights, but also with how this works out in practice, the processes and procedures along which the legitimate tenure rights are protected. The vision is to overcome the difference between the law in the books and the law in practice. 5 Implementation a) General Principles The Voluntary Guidelines refer to international law. While it is not deemed necessary to specify what international law they refer to, there is a section on principles of implementation (Part 3B) related to the provisions in international legal instruments. These 10 general principles of good governance principles include: 1. human dignity; 2. non-discrimination; 3. equity and justice; 4. gender equality; 5. holistic and sustainable approach; 6. consultation and participation; 7. rule of law; 8. transparency; 9. accountability; 10. continuous improvement. Several of these principles (2, 3, 4, 7 and 8) deal with legal aspects of land tenure, while others (5, 6, 9 and 10) rather relate to governance aspects of land tenure, which needs to include a holistic, sustainable and transparent approach, involving holders of land tenure rights in decision making processes. This clear governance approach is particularly interesting because it shows that a good law in itself does not necessarily bring justice in the end. Efficient and effective procedures and institutions also need to be in place. b) Technical Tenure Issues (Part 3–6) Part 3 addresses the governance of tenure of land, fisheries and forests with regard to the legal recognition of tenure rights of indigenous peoples and other communities with customary tenure systems, as well as of informal tenure rights; and the initial allocation of tenure rights to land, fisheries and forests

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that are owned or controlled by the public sector. In Part 4 the Voluntary Guidelines address the governance of land tenure when existing rights and associated duties are transferred or reallocated voluntarily and involuntarily through markets, transactions in tenure rights as a result of investments, land consolidation and other readjustment approaches, restitution, redistributive reforms or expropriation. Part 5 deals with the governance of the administration of tenure of land with regard to records of tenure rights, valuation, taxation, regulated spatial planning, resolution of disputes over tenure, and transboundary matters. In Part 6 there are guidelines regarding the governance of tenure of land, fisheries and forests in the context of climate change, natural disasters and conflicts. c) Promotion, Implementation, Monitoring and Evaluation (Part 7) The Voluntary Guidelines are not only promoted all over the world by fao and the cfs, but also by funding organizations. usaid is promoting the implementation of the Voluntary Guidelines in 32 programmes in Africa, South America and Asia, in 25 countries and with an amount of 300 million usd. The private sector is moving forward – in consultation with civil society, host country governments, and donor organizations – to develop better practices for acquiring land for commercial agriculture, extractives, and biofuels. In 2013, for example, the Coca-Cola Company negotiated an agreement with Oxfam to respect local property rights along its supply chain, and PepsiCo agreed in 2014 to do the same. Donors and development agencies, including usaid, are beginning to align their land and resource governance programs more closely with the principles and practices outlined in the Voluntary Guidelines. In 2013, more than 25 donors and development organizations came together to form the Global Donor Working Group on Land. They identified 445 programmes, funded by 16 donors and development agencies, being implemented in 119 countries, with a total value of over 2 billion usd.38 We are now at the implementation stage. Guides have been and are being prepared as reference tools that provide administrators, technicians, and professionals working in the land sector with guidance and examples of good practice – what has worked, where, why and how – for achieving land tenure governance according to the Voluntary Guidelines. They are published in the Land Tenure Journal, the Land Tenure Working Papers and fao Governance of Tenure Technical Guides. Important to the implementation of the Voluntary Guidelines are the technical guides that address the governance of forest 38 See: www.usaidlandtenure.net/commentary/2014/04/status-of-voluntary-guidelines-con gressional-briefing.

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tenure, governance of fisheries, gender issues and Free Prior and Informed Consent (fpic). Interesting is the guide for companies, ‘Respecting Land and Forest Rights’ in support of aligning operations of companies with the Voluntary Guidelines, developed by the Interlaken Group and the Rights and Resources Initiative (rri), published in 2015. This Interlaken group is a multi-stakeholder forum composed of representatives from companies, investors, international organizations, and civil society groups. They all elaborate extensively on how to implement the Voluntary Guidelines in practice. Section 26 shows the way how to implement the Voluntary Guidelines: States are encouraged to set up multi-stakeholder platforms and frameworks at local, national and regional levels or use such existing platforms and frameworks to collaborate on the implementation of these Guidelines; to monitor and evaluate the implementation in their jurisdictions; and to evaluate the impact on improved governance of tenure of land, fisheries and forests, and on improving food security and the progressive realization of the right to adequate food in the context of national food security, and sustainable development. This process should be inclusive, participatory, gender sensitive, implementable, cost effective and sustainable.39 In the Netherlands, this process of multi-stakeholder platforms on land issues is already on-going. The Ministry of Foreign Affairs initiated the Dutch Land Governance Multi-Stakeholder Dialogue (lg msd). The objective is to invest time and energy to contribute from the Netherlands to the improvements of land governance in countries in which the Netherlands are active. The stakeholders want to promote explicit practical application and monitoring of improvement measures by the Dutch private sector, government, know­ ledge institutes and ngos in line with the principles adopted in the Voluntary Guidelines. The main focus is on financial institutions and businesses with regard to land investments, for instance, the Dutch Rabobank, the abn Amro Bank and apg Asset Management. These multi-stakeholder platforms on land are also established in other countries, for instance in the Philippines, Ghana, Colombia and Malawi. A second example is the project to develop a protocol on fair and equitable compensation, focusing on valuation of land. The cfs is the global forum where all relevant actors learn from each other’s experiences, and assess progress towards the implementation of these Guidelines and their relevance, effectiveness and impact. The Secretariat of the cfs reports to the cfs on the progress of the implementation of these Guidelines, as well as evaluates their impact and their contribution to the improvement 39

A. Arial/ D. Palmer/ M. Vidar/ J.C. Garcia Cebello/ F. Romano/ L. Shamsaifar (2012, supra n. 22), p. 71.

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of tenure governance. Such reports should be universal and include, inter alia, regional experiences, best practices and lessons learned. IV

Short Analysis of the Voluntary Guidelines

What makes these Voluntary Guidelines so unique, is that they were made bottom-up. It appears that they reflect the most apparent problems, bottlenecks, lack of capacity, lack of transparency, malpractices, corruption, etc. with regard to tenure. We should also keep in mind that these Voluntary Guidelines reflect the situation in developing countries. But all the more they give us insight into the problems that developing countries face, not only from a legal perspective, but also from a broad governance perspective. As the Voluntary Guidelines have been adopted after such a broad, inclusive and holistic consultation, negotiation and decision-making process, they are an authoritative source on land tenure and land governance. They enjoy a certain kind of democratic legitimacy as an authentic source of guiding principles on land tenure and land governance. The whole land community is adopting them, in particular the un organisations and funding partners. The Voluntary Guidelines are not only meant for developing countries; they are global in scope and also apply to developed countries. They may be used by all countries and regions at all stages of economic development and for the governance of all forms of tenure, including public, private, communal, collective, indigenous and customary.40 It is interesting also to assess land law and land governance in developed countries as to whether they comply with the Voluntary Guidelines. Let me give some examples with regard to expropriation. In paragraph 16.5 it says: “Where the land, fisheries and forests are not needed due to changes of plans, States should give the original right holders the first opportunity to re-acquire these resources. In such a case the re-acquisition should take into consideration the amount of compensation received in return for the expropriation”. Some States in the us might need to change their law, as their legislation does not allow original land owners to reclaim the land.41 In paragraph 16.2, it is stated: “States should ensure that the planning and process for expropriation are transparent and participatory. Anyone likely to be affected should be identified, and properly informed and consulted at all stages”. I argue that the Netherlands have to change their law, since the administration only needs to involve land right holders that are registered. But we all know 40 41

Preliminary Voluntary Guidelines, paragraph 2.4. For example: § 406 Eminent Domain Procedure Law New York State.

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that there are unregistered land right holders too. like the ones that acquired property through prescription. Actually, the newly in The Netherlands adapted system of Basic registrations, which designated the Dutch Land registry as a positive registration system (‘Basisregistratie kadaster’), is contrary to this provision, since according to this new law, the government only needs to consult the Basic land registry. Apart from consulting the Basic land registry, there is no other specific explicit obligation for the State to investigate who might be affected by expropriation. Paragraph 16.2 reads further: “Consultations, consistent with the principles of these Guidelines, should provide information regarding possible alternative approaches to achieve the public purpose, and should have regard to strategies to minimize disruption of livelihoods”. Does this sound like a necessity and proportionality test in the consultations? It is at least debatable to what extent developed countries apply this test in practice. A disadvantage of the Voluntary Guidelines is – as I mentioned before – that they do not explicitly take water and other natural resources into account, which are at least as important as fisheries and forests. Water and other natural resources are inextricably linked to land, fisheries and forests and, therefore, important to include in the guidelines. So, the Voluntary Guidelines are not as broad and all inclusive as it seems. As a response to this criticism and to promote the inclusion of water, the Voluntary Guidelines entails a remark42 that states may want to take the responsible governance of natural resources into account when addressing the guidelines. Another disadvantage of the guidelines is that they do not specifically take the interests of indigenous people into account. V Conclusion The Voluntary Guidelines are an international soft law instrument that takes as a starting point a holistic, all-inclusive approach. The philosophy is that to achieve societal goals, one needs to involve all the stakeholders, both State and non-State, approaching land tenure problems from a down-to-earth perspective and focusing not only on the legal aspects of land tenure, but also on governance issues. In this respect, the Voluntary Guidelines are a unique and indispensable instrument that provides guidance for legislative reform and improved due diligence by the private sector. 42

Preface, p. iv and Principles of implementation, paragraph 3B, no. 5.

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Effective implementation of the Voluntary Guidelines requires reviewing and revising the existing legal frameworks that countries have to govern the tenure of land in the context of large scale land acquisitions, and the application of the Voluntary Guidelines where national laws provide insufficient protection. Lawyers are called upon to advise their diverse clients (government, private sector, communities, land holders) on upholding the standards contained in the Voluntary Guidelines, supported by their own codes of ethics and their client’s best interests. I wonder whether and how this call will be answered all around the world. The success of the Voluntary Guidelines lies in the hands of the practitioners: will they be used and implemented in practice?

part 3 The Paradigm of Individuality

∵

chapter 6

The Role of Property in Water Regulation: Locating Communal and Regulatory Property Rights on the Property Rights Spectrum Alison Clarke and Rosalind Malcolm i Introduction If we were to take the traditional common law view of property as confined to Blackstonian absolute dominion private ownership,1 the role of property in the management and regulation of water resources in a modern state is peripheral. Few, if any, common law or civil law jurisdictions recognise private ownership of water itself except where it is captured and contained, and private property rights to abstract and use it (or interact with it in any other way) are rarely absolute or exclusive and are in any event increasingly overtaken by administrative permits and controls. For those who associate property with commodification, and regard commodification of water as inappropriate, this is as it should be. On this view, as Lange and Shepheard put it, property is simply “a conceptual category mistake” when applied to natural resources such as water,2 and if water – essential for the survival and flourishing of humans and for the preservation and health of our physical environment – is to fulfil its proper function, proprietary rights have no role to play in its management and regulation. In this Chapter we approach the question of the proper role of property in water on the basis that it is indeed inappropriate to treat water as a commodity, and that it is better regarded as a ‘common treasury’. However, our main concern in the Chapter is to challenge both the conclusion that, as a matter of fact, property plays a minimal role in the management and regulation of water in a modern state, and the assumption that property as an institution 1 See William Blackstone’s classic definition of property in the common law: “that sole and despotic dominion which one man claims and exercises over the external things of the world, in total exclusion of the right of any other individual in the universe” in: Commentaries on the Laws of England, Vol. ii, Of the Rights of Things, first published 1766, London: Routledge, 2001, Chapter 12. 2 B. Lange/M. Shepheard, “Changing Conceptions of the Right to Water: an Eco-Socio-Legal Perspective”, Journal of Environmental Law, 2014, 215, p. 216.

© koninklijke brill nv, leiden, ���7 | doi 10.1163/9789004313521_008

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is inimical to the management and regulation of water if we want water to function as a common treasury rather than as a commodity. We argue that these established descriptive and normative accounts of the role of property in water are both based on an untenably narrow conception of property, centred on traditional private ownership and failing to take into account the broader spectrum of private, communal, public and state property interests. We aim to show that property rights in water, far from being confined to absolute exclusionary private property rights, exemplify the complexity of modern real-life property rights systems. Traditional property analyses, which fail to look beyond absolute exclusionary rights in tangible things held by autonomous selfinterested individuals, are inadequate to describe the full range of relationships that we do in fact have between ourselves, and between ourselves and the state, in relation to water. In particular, they fail to distinguish the different forms that private property in water can take and they ignore the pervasiveness of communal property structures in the management and regulation of water. We argue that if this full range of property rights in water is taken into account, property plays a key role in managing and regulating water resources in England and Wales, in some respects upholding its function as a common treasury but in others, threatening to undermine it. The scheme of this Chapter is as follows. In Parts ii and iii we explain more fully the notion of water as a common treasury, and what it is about water that makes it appropriate to regard it as a common treasury. In Part iv, v and vi we examine the spectrum of property rights relating to water in England and Wales. Part iv gives an overview of the water industry in England and Wales and the range of property rights in water. In Part v we disaggregate the notion of private property in water so as to distinguish absolute exclusionary private property interests from other property rights and interests held by private individuals. In Part vi we then consider the extent and significance of communal property in water, and the various forms it takes. Our conclusion in Part vii is that a proper understanding of the full spectrum of property rights in water is essential if we are to develop systems for the regulation and management of water which uphold rather than undermine the essential nature of water as a common treasury. ii

Water as a ‘common treasury’

‘A common treasury’ is the term used by Gerrard Winstanley in seventeenthcentury England to describe the earth. Winstanley was part of a radical group of political activists, the True Levellers or Diggers, who, during the Commonwealth

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which followed the English Civil War and execution of Charles i, King of England, in 1649, campaigned for universal (male) suffrage and a return of the land to the people. The view of the Diggers was that the earth (which can be taken to include land and other natural resources) was not made “to preserve a few proud covetous men to live at ease…[but] to preserve all her children…a common treasury for all”. Exclusive property rights allowed the “few proud covetous men” to take what was meant to be a “common store-house for all”.3 We consider the notion of water as a common treasury in detail elsewhere,4 but for present purposes the important point is that ‘common treasury’ is a normative description of a resource. When we describe a resource as a ‘common treasury’ we mean that, because of the particular characteristics of that resource, whether its physical characteristics or its importance to all, it ought to be available to all (‘all’ to be understood here in its broadest possible sense, encompassing future generations, non-human animals and the environment as a whole). In this normative respect a common treasury resembles what continental European and us scholars sometimes refer to as ‘a commons’.5 However, in that context ‘a commons’ is used indiscriminatingly to refer to both a resource which is (and ought to be) open to all, such as the digital commons, and a limited access resource such as a grazing meadow, open to a local community but not to the rest of the world. A ‘common treasury’, on the other hand, is unequivocally a resource which should be available to ‘all’ in that special sense just mentioned, encompassing future generations, non-human animals and the environment as a whole. It is also important to emphasise that ‘common treasury’ describes the nature of the resource, not the nature of property holdings in it. Once we accept that a resource is a common treasury, we need to go on to consider the separate question of the kind of property regime required for it to function as a common treasury in any given social, economic and geographic context. The answer to that question might be ‘no-property’ or ‘open-access’, in other words a regime where the resource is open to all, so that, in Hohfeld’s terminology,6 3 G. Winstanley et al., ‘The True Levellers Standard Advanced’, 1649, in C. Hill (ed.) Winstanley: The Law of Freedom and Other Writings, London: Penguin Books, 1973. 4 R. Malcolm/A. Clarke, ‘Water: A Common Treasury’, in: T. Xu/A. Clarke (eds) Legal Strategies for the Development and Protection of Communal Property Proceedings of the British Academy, Oxford: Oxford University Press, 2017 (forthcoming). 5 E.g. in D. Bollier/S. Helfrich (eds), The Wealth of the Commons: A World Beyond Market & State, Amherst ma: Levellers Press, 2012. 6 W.N. Hohfeld, ‘Some Fundamental Legal Conceptions as Applied in Judicial Reasoning’, 23 Yale Law Journal 1913, p. 16. See further text to n 57 infra.

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everyone is at liberty to use it but has no enforceable rights to the use of it enforceable against others or against the state. However, there are other possibilities. It might function best as a common treasury if it is publicly owned, so that everyone in the world has a Hohfeldian claim-right (i.e. enforceable right) to use it in common with everyone else in the world. Equally it might best be owned by the state, on the theory that the state is the only legitimate repository of the power to regulate a resource in the interests of all. Alternatively, because of the interconnectedness and multiple functions of water, it might best serve as a common treasury when water resources are owned or managed by the kind of community we consider in Part vi below. It might even be argued that it can function best as a common treasury if it is privately owned by a commercial enterprise but state regulated, on the basis that the function of the state can be limited to ensuring that the resource is used as a common treasury, whilst allowing the market to determine the most efficient way of doing so. We argue elsewhere that this last argument is fundamentally flawed,7 but here our objective is to examine how our present complex mix of types of property rights in water serves to preserve and promote its common treasury role. Finally, to describe a resource as a ‘common treasury’ is not the same as to describe it as a ‘common pool resource’ or a ‘public good’.8 Common pool resources and public goods differ from common treasuries in two respects. First, both ‘common pool resource’ and ‘public good’ are purely descriptive of a resource, not normative. Secondly, designation as a ‘common pool resource’ or as a ‘public good’ depends solely on the physical characteristics of the resource, without taking into account the importance of the resource to humans or to the environment. A public good is classically defined as a resource which is non-excludable (it is too difficult or too expensive to exclude outsiders from it). A common pool resource is both non-excludable and rivalrous (limited in quantity, with the total quantity available for use reduced by each use). Common treasuries such as water are common pool resources in some guises, public goods in others, and neither common pool resources nor public goods in yet others. For example, because of the nature of the hydrological cycle, the total quantity of water on the earth, viewed as whole, is a public good. It is ­non-­excludable but it is also not-rivalrous: the same water constantly passes 7 Malcolm/Clarke (2017, supra n. 4). 8 E. Ostrom, “Rudiments of a Theory of Common-Property Institutions”, in: D.W. Bromley (ed.), Making the Commons Work: Theory, Practice and Policy, San Francisco: ics Press: 1992, pp. 295–297. Also C. Hess/E. Ostrom, “Ideas, Artifacts, and Facilities: Information as a CommonPool Resource”, 66 Law and Contemporary Problems 2003, 111, 118–121 and R.J. Oakerson, “Analyzing the Commons: A Framework”, in: Bromley (1992, ibid), 41–46.

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through cycles of precipitation, evaporation and condensation, undiminished in quantity by use. On the other hand, most watercourses and water ­resources (rivers, for example) are common pool resources: they are rivalrous (overabstraction may result in the watercourse or resource drying out, never to be replenished) and non-excludable. A few, however, would classically be categorised as neither public goods nor common pool resources but ‘private goods’, because it is easy to exclude outsiders from them (small reservoirs and swimming pools, for example). The point of distinguishing public goods from private goods in classic economic theory is to distinguish those resources which, so it is argued, cannot appropriately be privately owned (public goods) and those that can and, so the argument goes, should (private goods).9 As far as common pool resources are concerned, however, the general consensus is that, depending on the circumstances, any property rights system may be a­ ppropriate, depending on the circumstances.10 iii

What Makes Water a Common Treasury?

1 The Water Cycle The first argument in relation to water relates to its physical characteristics and behaviour. Water is a molecule and a compound (H2O) which is essential to life. It is plentiful and, it is estimated that about 75% of earth is covered with it. However, less than 3% of the water supply is freshwater. Of that, nearly 70% is in ice caps, glaciers, and permanent snow, and 30% sits in groundwater whereas rivers, lakes, and clouds carry less than 1% of the world’s freshwater. Water is everywhere – it makes up anywhere from 70 to 90+% of the body weight of living things. At most temperatures on the surface of the earth water is a liquid. In this state water is an excellent solvent and because there is so much 9

10

Lighthouses were traditionally put forward as a classic example of public goods. Ronald Coase argued this was wrong and gave historical examples of what he said were privately owned and financed lighthouses in England: R. Coase, “The Lighthouse in Economics”, 17 Journal of Law and Economics 1974, p. 357. However, it is argued that he overlooked significant elements of government financing : E. Bertrand, “The Coasean Analysis of Lighthouse Financing: Myths and Realities”, 30 Cambridge Journal of Economics 2006, p. 389 and W. Barnett/W. Block, “Coase and Van Zandt on Lighthouses”, 35 Public Finance Review 2007, p. 710. E. Ostrom, “Beyond Markets and States: Polycentric Governance of Complex Economic Systems”, 100 American Economic Review 2010, 641, p. 658; E. Ostrom/C. Hess, “Private and Common Property Rights” Workshop in Political Theory and Policy Analysis, Bloomington: Indiana University 2007, available at http://ssrn.com/abstract=1304699.

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of it available on the earth’s surface, water is home (oceans, lakes and rivers) to much of life. The water (or hydrological) cycle is one of the most important biogeochemical processes. A biogeochemical cycle is a pathway by which a chemical substance moves through the different spheres of Earth and represents a series of changes which always come back to their starting point and which are repeatable. Water is an example of such a process as it is a natural recycleable system undergoing evaporation, condensation and p ­ recipitation when it falls back to Earth.11 The element is recycled, although during the cycle water may be stored in lakes, oceans and groundwater reservoirs, sometimes for thousands of years. The central concept of the water cycle is that the different phases of water are interdependent and continuous.12 Thus, it follows that water is indestructible; that is, the total quantity of water cannot be diminished as it passes through the cycle in its different forms. Conversely, it cannot be increased except through exceptional processes such as the possibility of additions from comets or the release of fossil groundwater – a term borrowed from palaeontology. Fossil groundwater is water which has been contained without release for millennia in underground aquifers and which is not recharged. Where such water is abstracted and used then it is viewed as a nonrenewable water resource and sits outside the water cycle.13 Other chemicals such as carbon, oxygen, nitrogen, phosphorus, calcium, sulphur and rock also pass through such biogeochemical cycles and all are critical for life and ecosystems. Although the understanding of the operation of the water cycle is well established, its details and refinements are still the subject of much scientific study.14 The understanding of the nature of the water cycle and its recyclability is an essential element of the way in which it should be managed and should underpin the governance frameworks for its supply and distribution. The nature of the water cycle is an underlying reason for its normative treatment as a 11

12 13

14

See S. Sitch/F. Drake, “The changing water cycle”, in: J. Holden (ed.), Water Resources: an Integrated Approach, London: Routledge, 2014, pp. 19–48, for a scientific account of the water cycle and discussion as to potential changes forecast as a result of climate change. R.C. Ward/M. Robinson, Principles of Hydrology, 4th edn, Maidenhead: McGraw Hill Higher Education, 2000. S. Foster/D.P. Loucks (eds), “Non-Renewable Groundwater Resources: A guidebook on socially sustainable management for water-policy makers”, IHP-VI, Series on Groundwater No 10, Saint-Denis: unesco, 2006. E.g. J. Evaristo/S. Jasechko/J.J. McDonnell, “Global separation of plant transpiration from groundwater and streamflow”, 525 Nature 2015, pp. 91–94; W.H. Schlesinger/S. Jasechko, “Transpiration in the global water cycle”, 189 Agric. For. Meteorol 2014, pp. 115–117; S. Jasechko et al., “Terrestrial water fluxes dominated by transpiration”, 496 Nature 2013, pp. 347–350.

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common treasury; that is, a resource which is essential as part of the ecosystem in its broadest meaning both presently and for the future. Water is a Human Right Which the State Has a Duty to Respect, Protect and Fulfil The second argument regarding the classification of water as a common treasury rests on its treatment by the international community as a human right in respect of its availability as drinking water for human beings. Once such classification has taken place then duties fall upon the state: specifically, the state will have a duty to respect the human right and to protect and fulfil it.15 The legal basis for the right to water as a human right is based on three instruments which together constitute the International Bill of Human Rights: the Universal Declaration of Human Rights;16 the International Covenant on Civil and Political Rights;17 and the International Covenant on Economic, Social and Cultural Rights.18 None of these contained any specific and explicit reference to the right to water although it would not appear that it was deliberately omitted. The effect though of not expressly including it was that it subsequently proved necessary to imply it into other rights. The right to water did appear on a number of agendas and in November 2002, the Committee on Economic, Social and Cultural Rights adopted General Comment No. 15 on the right to water, Article I.1 of which states that “The human right to water is indispensable for leading a life in human dignity. It is a prerequisite for the realization of other human rights”.19 But it was not until 2010 that the need to establish a formal right to water had become a matter of political importance. With the drive to improving the quality of lives of billions of people by providing them with the most basic right – to water – expressed as a goal in the Millennium Development Goals,20 the impetus to move faster in satisfying basic water needs had become acute. On 28 July 2010,

2

15 16 17 18 19 20

Art. 20 of General Comment No 15, The right to water un Committee on Economic, Social and Cultural Rights, (2002) E/C.12/2002/11 (“General Comment No 15”). United Nations, Universal Declaration of Human Rights, un General Assembly Resolution 217 A (iii) of 10 December 1948. United Nations, International Covenant on Civil and Political Rights, un General Assembly resolution 2200 A(xxi) of 16 December 1966. United Nations, International Covenant on Economic, Social and Cultural Rights, un General Assembly resolution 2200 A(xxi) of 16 December 1966. General Comment No. 15, supra n.15. Millennium Development Goals, see accessed 29 May 2016. Target 7(c) contained the goal of halving, by 2015, the proportion of the population without sustainable access to safe drinking water and basic sanitation. See

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the un General Assembly adopted Resolution 64/292 recognizing “that safe, clean drinking water and sanitation were integral to the realization of all human rights”.21 The resolution was accompanied by a call to the world to provide financial resources, build capacity and transfer technology, particularly to developing countries, in scaling up efforts to provide safe, clean, accessible and affordable drinking water and sanitation for all. At its 15th session in September 2010, the un Human Rights Council, in its Resolution A/HRC/ RES/15/9, affirmed that “the right to water and sanitation is derived from the right to an adequate standard of living and inextricably related to the right to the highest attainable standard of physical and mental health, and the right to life and human dignity”. This Resolution was re-affirmed with further details in March 2011.22 Thus, the right to water is now implied into the International Covenant on Economic, Social and Cultural Rights in Article 6 (right to life) and Article 12 (right to heath); and Article 11 (right to adequate standard of living) of the International Covenant on Civil and Political Rights. Most recently, the right has been confirmed by the United Nations in a Third Committee resolution in 2015.23 The normative content of the human right to water is set out in General Comment No 15, which specifies the obligations imposed on states by the ­human right to water.24 General Comment No 15 obliges states to respect the human right to water (by refraining from interfering with individuals’ rights or access to adequate water) and also to protect it (by protecting individuals against interference by others). However, it also goes further by obliging states to fulfil the right by providing access to water to all, where no adequate access exists. This involves, amongst other actions, “adopting a national water strategy and plan of action to realize this right; ensuring that water is affordable for everyone; and facilitating improved and sustainable access to water, ­particularly in rural and deprived urban areas”25 and also requires that “States parties

21 22

23 24 25

now Goal 6 of the Sustainable Development Goals, 2030 Agenda for Sustainable Development, Resolution 70/1, annex. Resolution A/RES/64/292. United Nations General Assembly, July 2010. United Nations General Assembly resolution 68/157 of 18 December 2013. See also ­Human Rights Council regarding the human right to safe drinking water and sanitation 24/18 of 27 September 2013 (Official Records of the General Assembly, Sixty-eighth Session, Supplement No 53A, A/68/53/Add.1) Chap iii) and 24 September 2014 (ibid, Sixty-ninth ­Session, Supplement No 53A and corrigenda (A/69/53/Add.1 and Corr.1 and 2). United Nations Seventieth session, Third Committee, Agenda Item 72(b) A/C.3/70/L.55/ Rev.1 of 18 November 2015. General Comment No 15 Arts 20–29. Ibid Art. 26.

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should adopt comprehensive and integrated strategies and programmes to ensure that there is sufficient and safe water for present and future generations.”26 There are two significant implications of this. The first is that the state is no longer at liberty to leave it to privatised industry to ensure that its citizens have an adequate supply of water. It must positively adopt “comprehensive and ­integrated strategies and programmes” and take responsibility for their ­implementation. This means that, if the state chooses to privatise water services, it must nevertheless remain closely involved in directing and regulating the industry. The second implication is that by conferring on citizens an ­enforceable right against the state to be provided with access to water, the human right to water provides rights to natural resources for the propertyhave-nots. This is something very different from the rights to protection of pre-existing property rights conferred by, for example Article 1 Protocol 1 of the European Convention on Human Rights (human rights for the propertyhaves), and it opens up the obvious possibility of conflict between one person’s human right to protection of their pre-existing property rights to water and another person’s human right to be provided with water.27 Translated into practical terms, it means states must ensure that private property rights to water (such as the rights to trade bulk water we consider below) do not prejudice the human rights of others to obtain and retain adequate water supplies. iv

Spectrum of Property Rights and Interests in Water

1 The Water Industry in England and Wales Property rights and interests in water in England and Wales exist within the framework of a privatised water industry, which is itself highly regulated by a complex web of regulation by state institutions.28 The water supply ­infrastructure in England and Wales was built up in the eighteenth and nineteenth century by entrepreneurial private water companies established by private Acts of Parliament, augmented from about 1870 by municipal water 26 27 28

Ibid Art. 28. A. Clarke, “Property, Human Rights and Communities”, in: T. Xu/J. Alain (eds), Property and Human Rights in a Global Context, Oxford: Hart Publishing, 2015, pp. 19–39. K.J. Bakker, An Uncooperative Commodity: Privatising Water in England and Wales, Oxford: Oxford University Press, 2003; Ofwat and defra Report, The Development of the Water Industry in England and Wales, 2006, available at http://www.ofwat.gov.uk/wp-content/ uploads/2015/11/rpt_com_devwatindust270106.pdf and S. Hendry, Frameworks for Water Law Reform, Cambridge: Cambridge University Press, 2015.

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authorities. By 1946 there were over 1,000 water undertakers in England and Wales, of which 80% were owned by a range of municipal authority and other public institutions of various kinds and 20% by private statutory companies.29 By this stage, then, the water industry was already 80% publicly owned, and the main function of the Water Act 1945, passed at a time when most other utilities in England and Wales were being fully nationalised, was to reorganise and rationalise the constituent parts.30 Full nationalisation and rationalisation did not take place until 1974, when England and Wales was divided into ten river catchment areas, and the pre-existing 200 statutory water undertakings, 29 river authorities and 1,400 local authority sewerage services were consolidated into ten Regional Water Authorities, each responsible for “source-to-mouth” management in its area.31 Just 15 years later, however, these ten Regional ­Water Authorities were privatised by the Water Act 1989, which transferred their ­assets (including their property rights in water resources) to ten combined ­water and sewerage public limited companies. Water supply is now the monopoly of these ten privatised water and sewerage supply companies and 15 other private companies licenced for the supply of water only, most of which are the successors of nineteenth and twentieth century private water supply companies which escaped nationalisation. These modern privately owned water companies are basically local monopolies, but the government is seeking to introduce competition into the system by incentivising the industry to increase trade in bulk water and in abstraction licenses and by requiring water companies to allow competitors to provide or contribute towards services and capital projects which the water company is providing for its own customers.32 We look more closely below at the first of these two. The political story behind this evolution of the post-industrial revolution water industry, from private to mixed private/municipal, then to centralised nationalisation followed by privatisation, is well told elsewhere.33 Here it need 29 30 31 32

33

Bakker (2003, supra n. 28), p. 54. Ibid pp. 54–58. Ibid pp. 58–67. defra White Paper, Water for Life: Market reform proposals, 2011. For the latest proposals see Ofwat, Water 2020: Our regulatory approach for water and wastewater services in England and Wales, May 2016 available at http://www.ofwat.gov.uk/water-2020 -regulatory-approach-water-wastewater-services. Bakker (2003, supra n. 28) and also K. Bakker, Privatising Water: Governance Failure and the World’s Urban Water Crisis, Ithaca: Cornell University Press, 2010, pp. 83–107. See also the 19th century case-studies in B. Rudden, The New River: a Legal History, Oxford: Clarendon Press, 1985, and M. Taggart, Private Property and Abuse of Rights in Victorian E­ ngland:

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only be noted that from the nineteenth century onwards the industry has been heavily regulated, but probably never more so than it is at present. The p ­ resent position in England34 is that regulation is provided not only by detailed pri­ mary and secondary legislation and soft law in the form of guidance and Codes of Practice, but also by at least five governmental institutions: the Water Services Regulation Authority (“Ofwat”), which is the economic regulator, the Environment Agency which provides environmental regulation, including licencing water abstractions, the Drinking Water Inspectorate responsible for drinking water quality, and the Competition and Markets Authority, which promotes and regulates competition within the industry. The government department responsible for the law and policy which these regulators are required to implement is the Department of the Environment, Food and Rural Affairs (“defra”), and another governmental organisation, the Consumer Council for Water, is responsible for providing representation for water and sewerage consumers in England and Wales. Modern water regulation in England and Wales is heavily influenced by, and largely designed to implement, the eu Water Framework Directive 2000/60,35 which establishes the framework for a system of water management that is based on river basins. In other words, in much the same way as in the England and Wales system, the Directive requires the management of water resources to be undertaken by reference to the natural flow of rivers rather than political boundaries. The duties in the Directive include the requirement for Member States to aim to achieve “good status” (by reference to chemical and ecological status for surface water, chemical status and quantity for groundwater) and also require fixed environmental objectives to be achieved. Such an approach does not necessarily militate against the commodification of water in that it sets out objectives to be achieved which could be delegated to private ­owners and enforced by the Member State. But what it does recognise is the critical importance of setting and then achieving and maintaining environmental standards at state level.36

34 35 36

the Story of Edward Pickles and the Bradford Water Supply, Oxford: Oxford University Press, 2002. Wales has similar institutions with similar functions. Directive 2000/60/EC of the European Parliament and of the Council establishing a framework for the Community action in the field of water policy [2000] oj 2 327/01. The argument about the commodification of water has been the subject of a European Citizens’ Initiative led by the efpsu which campaigned for water to be treated as a public good: accessed on 29 May 2016 and see alsoaccessed on 29 May 2016.

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2 Property in Water in England and Wales It is now widely (although by no means universally) recognised amongst common law property theorists that it is neither helpful nor accurate to regard ‘property’ as limited to absolute exclusionary private ownership and private use rights.37 On this view the scope of property is broader than that, in three respects relevant here. First, property is a necessarily fluid concept. There is a continuous process by which societal and technological changes alter our relationships with things, or bring new things into existence, making it n ­ ecessary to recognise ‘new’ forms of property right which do not involve a private individual having either exclusive control of a resource or an exclusive right to make direct use of the resource. We can see how this process has worked over an extended period by comparing, say, the range of property interests recognised by aboriginal groups in Australia and Canada with those recognised by their European colonisers.38 The new regulatory property interests noted here and discussed elsewhere in this book provide more recent examples.39 Secondly, ownership and both traditional and ‘new’ forms of property rights and interests may be held not only by private individuals, but also by communities, by the public or by the state, and the nature and attributes of the property right in question vary depending on the identity of the rights holder. Finally, whilst an owner or holder of these other kinds of property right or interest may own or hold the right or interest for its own benefit, free to use 37

For analysis of the literature see F. von Benda-Beckmann et al., ‘The Properties of Property’ in: F. von Benda-Beckmann/K. von Benda-Beckmann/M.G. Wiber (eds), Changing Properties of Property, New York: Berghahn Books, 2006, Ch. 1 and J.W. Hamilton/N. Bankes, ‘Different Views of the Cathedral: The Literature on Property Law Theory’ in: A. McHarg et al., (eds), Property and the Law in Energy and Natural Resources, Oxford: Oxford University Press, 2000, Ch. 2 ; also (from a law and economics perspective) B. Yandle/A.P. Moriss, ‘The Technologies of Property Rights: Choice among Alternative Solutions to Tragedies of the Commons’ (2001) 28 Ecology Law Quarterly 123 at 129 and (in the context of common pool resources) E. Schlager/E. Ostrom, ‘Property-Rights Regimes and Natural Resources: A Conceptual Analysis’, 68 Land Economics 1992, pp. 249–262. 38 From the vast literature see for example P.G. McHugh, Aboriginal Title: the Modern Jurisprudence of Tribal Land Rights, Oxford: Oxford University Press, 2011 and the recent Supreme Court of Canada decision in Tsilhqot’in v British Columbia [2014] 2 scr 256. 39 E.g. uk Association of Fish Producer Organisations v ssefra [2013] ewhc 1959 and Centro Europa 7 Srl v Italy (2012) 32 bhrc 417 (English fixed fishing quota allocation units and Italian television broadcast licences and broadcast frequencies respectively held to be ‘possessions’ within Art. 1, Prot. 1 of the European Convention on Human Rights; Re Celtic Extraction Ltd [2001] Ch. 475 (waste management licences under s.33 Environmental Protection Act 1990 authorising the treatment, keeping or disposal of waste in or on land or by means of a mobile plant held to be ‘property’ within s.436 of the Insolvency Act 1986).

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for whatever purpose it sees fit, it may alternatively be required to use it cooperatively with others, or wholly or partly for the benefit for others and/or only for strictly limited purposes.40 All three factors are relevant to a consideration of the spectrum of property rights applicable to water in England today. In this chapter we focus on the first two. v

Private Property in Water

Private property in water is by definition confined to property rights held by individuals, but it extends beyond absolute exclusive private ownership and private rights to make direct use of water resources. 1 Private Ownership As already noted, in modern common law and civilian jurisdictions private ownership of water itself is generally impossible except in respect of water which has been brought under the control of a private individual (and then only for so long as that individual retains control). This is established by nineteenth century judicial decisions in England and Wales: the principle that ­water in its natural state cannot be the subject of private property has never been enacted in legislation and nor do we have any formal provision vesting ownership in the state. Instead, water in its natural state is variously described in the cases as a res publicae (public thing) or a res communes (communal thing) or a res nullius (an unpropertised thing).41 The same principle applies to natural watercourses – they too cannot be the subject of private ownership unless put under private control.42 The fact that appropriated water can be (and in English law is) privately owned assumes significance throughout the world because of the tantalising prospect of transporting water from areas where there is too much to areas where there is too little. Transfer of ‘bulk water’ between regions has been 40

41

42

E.g. Welsh Water, the private company supplying water in Wales, which is a non-­profit making single purpose company with no shareholders run solely for the benefit of customers. The terms are discussed in the context of water in J.J. Robbie, Private Water Rights in Scots Law (PhD thesis), University of Edinburgh 2012, available at https://www.era.lib.ed.ac.uk/ handle/1842/1901/browse?value=Robbie%2C+Jill+Jean&type=author, Chap. 2 Section B. Lord Kames in The Magistrates of Linlithgow v Elphinstone, 3 Karnes’ Decisions, p. 331; Embrey v Owen (1851) 6 Exch 353; 155 E.R. 579 (Ex).

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actively pursued in other countries, most notably Australia43 and was much discussed in the uk throughout the twentieth century as a means of satisfying industrial, agricultural and domestic demand. It has come back into ­prominence in the last few decades, partly in response to water shortages44 but also because of the opportunities it provides for promoting markets in ­water, which it is hoped will fix the ‘value’ of water as a commodity, encouraging competition between the private monopoly supply companies.45 Current government policy is to encourage water transfer within and between regions by facilitating trading in ‘bulk water’ between water companies, as well as by increasing the scope for trading in the water abstraction permits we consider in the next section. Significantly, the government has aspirations to extend the market to third parties,46 threatening to export into the water industry the problems arising out of the trade in carbon emission rights.47 Whether these policies are likely to result, in the foreseeable future, in significant increases in bulk trading in England and Wales is a different matter: the cost of transporting bulk water, by any means, remains extremely high.48 2 Private Appropriation Rights Leaving aside private ownership of bulk water, the primary private property right in water has traditionally been the right to appropriate it by abstracting

43

Hendry /2015 supra n. 28), pp. 48–49; J. Bennett, the Evolution of Markets for Water: Theory and Practice in Australia, Cheltenham: Edward Elgar, 2005. 44 defra White Paper Water for Life December 2011 available at https://www.gov.uk/ government/publications/water-for-life, paras 2.22–2.24. 45 J. Stern, Water Rights and Water Trading in England and Wales, Policy paper for fljs in association with the Centre for Socio-Legal Studies and Wolfson College, Oxford, 2012. Stern reports that bulk water trading accounts for only about 4% to 5% of ‘delivered’ water in England and Wales and that these figures have been “stable for many years”. 46 Ofwat Water 2020 (2016, supra n.32), pp. 5–6: “In relation to water resources, trading is below its optimal level, and taking steps to reduce identified barriers to this could result in significant benefits for customers. Again, looking further ahead, there is also scope for participation from third parties, both in terms of selling water into the public water supply, and in negotiating directly with water retailers as the retail business market develops in line with the Water Act 2014…”. 47 Hendry (2015, supra n.28), pp. 48–56; M. Colangelo, Creating Property Rights: Law and Regulation of Secondary Trading in the European Union, Leiden: Martinus Nijhoff, 2012, Chaps v and vi; K.F. Low/J. Lin, ‘Carbon Credits As eu Like It: Property, Immunity, TragiCO2medy?’ University of Hong Kong Faculty of Law Research Paper No 2015/022, also R. Wilhelmi in this volume. 48 defra Water for Life (2011 supra n. 44), para 2.22. For the feasibility of current proposals see Deloitte, Water Trading – Scope, Benefits and Options: Final Report to Ofwat, 2015.

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it from surface or subterranean sources. In England (as in Scotland) these rights have always been associated with land ownership. Interestingly for present purposes, they were established in a series of nineteenth century cases in which it was taken as read that water is a common treasury and that the task of the courts was to establish rules that allowed for appropriation by ­private ­individuals that did not prejudice water’s capacity to act as a common treasury.49 The right to abstract flowing surface water was established in 1851 by the decision in Embrey v Owen50 and affirmed by the Privy Council in Miner v G ­ ilmour.51 The rule adopted was what is generally called the “reasonable use” rule, namely that every owner of land adjoining flowing water has a right, in common with all the others using the same watercourse, to the reasonable use of the water for domestic and livestock needs, regardless of the effect on others, together with a right to use it for other purposes that do not cause material injury to other riparian owners.52 It was confirmed by the House of Lords in Chasemore v Richards53 that the same principle applies to subterranean water flowing in defined channels, but not to “water percolating through underground strata, which has no certain course, no defined limits, but which oozes through the soil in every direction in which the rain penetrates”.54 In the case of this percolating subterranean water – what we would now call groundwater – the ownership rule is the same (no-one owns the water itself until abstracted) but the abstraction rule is d­ ifferent. In Chasemore v Richards, and also subsequently in Bradford v Pickles55 where the rule was re-affirmed by the House of Lords, the groundwater rule was misleadingly put as a right for a landowner to abstract as much groundwater from under its land as it pleases, even if by so doing it depletes the water supply of neighbours, or even causes neighbouring land to collapse.56 However, the reality is that a landowner has a Hohfeldian liberty to abstract the groundwater under its land: a right (or what Hohfeld calls a claim-right)57 for all landowners drawing on the same subterranean water source to abstract 49

See e.g. Embrey v Owen (1851) 6 Exch 353; 155 er 579 (Ex) noted infra. A notable exception is Bradford v Pickles [1895] ac 587, noted below, where water was treated as a commodity. 50 (1851) 6 Exch 353. 51 Miner v Gilmour (1858) 12 Moo. pc 131; 14 er 861 (pc). 52 J. Getzler, A History of Water Rights at Common Law, Oxford: Oxford University Press, 2004, pp. 282–296. 53 (1859) 7 h.l.c. 349; 11 e.r. 140 (hl). 54 Ibid at 375. 55 [1895] ac 587. 56 Stephens v Anglian Water v Authority [1987] 1 w.l.r. 1381. 57 W.N. Hohfeld (1913, supra n. 6), p. 16.

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as much percolating water as they want from under their land is a logical impossibility. Broadly, in Hohfeld’s terms, a liberty is a freedom to do something, in the sense that no-one is entitled to stop you from doing it, but nor do you have a legal right to complain if someone interferes with the exercise of your liberty. If I as a landowner and my neighbouring landowners each has a liberty to abstract as much groundwater as we want from under our respective lands, none of my neighbours can complain if I take all the available water, but neither can I complain if one of my neighbours gets there first and there is none left for me. A claim-right, on the other hand, is legally enforceable, so that if I and my neighbouring landowners each have a claim-right to abstract groundwater from under our respective lands, we each have a legally enforceable right to prevent the others from interfering with the supply of water currently under our own land. Equally, however, we also each have a duty owed to each of our neighbours not to interfere with the supply of water under their respective lands. Unless there is unlimited supply, any significant abstraction from one piece of land is likely to affect the quantity and possibly the quality of water capable of abstraction from a neighbouring piece of land. In this respect, groundwater is no different from surface flowing water: because of the ­physical nature of water, one person’s use impinges on everyone else’s opportunities for use, making it impossible for all potential users to have absolute rights. The most they can have is either rights to share the use with each other (essentially the English surface water rule) or liberties to grab as much as they can before their neighbours exhaust the resource (the groundwater rule). These two basic rules governing private property rights to appropriate ­surface water and groundwater (a right for riparian owners to make r­ easonable use of surface water, and a liberty, but no right, for landowners to abstract groundwater from under their land) continue to apply to the abstraction of water in England and Wales today. These appropriation rights are capable of being exploited for commercial purposes not connected with the landowner’s own land, provided that the user is licensed by the riparian owner.58 However, commodification of these private property abstraction rights has always been limited to some extent by the requirement that they must remain a­ ppurtenant to the riparian or surface landowner’s land: they cannot be sold separately from the land.59 This is less of a restriction than might appear at first sight. The rights attach to “each and every part” of the landowner’s land, so a landowner who wants to transfer her abstraction rights to someone else can do so by selling or leasing to the transferee a small area of land from which abstraction can 58 59

Getzler (2004, supra n. 52), p. 324. Ibid, pp. 316–324.

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take place, or by granting the transferee a licence to enter the land to abstract water on her behalf. 3 Abstraction Licences However, these land-associated private abstraction rights are dwarfed in importance by the statutory requirement, introduced by the Water Resources Act 1963, that no water in excess of 20 cubic metres a day can be abstracted without a statutory licence issued by the Environment Agency. The first licences were perpetual in duration and were issued as of right to existing users (i.e. those with private property or statutory abstraction rights), generally for abstraction of fixed amounts of water. Later, fixed period licences were introduced and the Water Act 2003 loosened the connection between abstraction licences and land ownership by providing that applicants for a licence have to prove only a right of access to land containing the point of abstraction rather than occupation of it. The 2003 Act also introduced procedures by which the Environment Agency could begin the process of c­ ancelling unused ­(“sleeper”) licences, and subsequent legislation has made some limited provision for the modification or revocation of the large number of perpetual licences still in existence. However, sleeper licences remain a s­ ignificant problem. In 2013 defra, consulting on proposals for a major overhaul of the abstraction licence system, estimated that 55% of all licensed abstractions are unused.60 It also detailed fundamental problems of inflexibility in the ­system which make it difficult for regulators to change allocations and moderate abstractions to deal with droughts, over-abstractions and threats to the ­environment. defra published the government’s response to the consultation in January 2016,61 proposing radical changes, including measures to encourage trading in abstraction licenses (to be renamed abstraction permits). Informal trading in licences between users is fairly common, but formal trading (permitted under the Water Resources Act 2003) is expensive and cumbersome and has remained rare.62 Under the new proposals, in areas of water scarcity the transfer procedure will be simplified and an abstraction permit will allocate to the permit holder a percentage share of available water rather than a 60

61 62

defra, Making the Most of Every Drop: Consultation on Reforming the Water Abstraction Management System 2013 available at https://consult.defra.gov.uk/water/abstraction -reform/supporting_documents/abstractionreformconsultcondoc20131217.pdf. defra, uk Government Response to Consultation on Reforming the Water Abstraction Management System 2016 available at www.gov.uk/government/publications. Stern (2012, supra n. 45); adas, Cranfield University, Water Trading 2014 available at www .adas.co.uk/cranfield/Documents/water%20trading.

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fixed amount, on the basis that this will be more attractive to traders, and so facilitate the commodification of water.63 However, commodification may come at a price. It is noted in the defra proposals that “concerns from smaller abstractors such as farmers around market dominance by larger abstractors” will have to be addressed before requirements for trading in abstraction permits can be relaxed.64 Also, it is clear that there are real dangers of stimulating over-abstractions if trading becomes more frequent when there are still substantial numbers of unused abstraction allocations in existence. vi

Communal Property in Water

Because of the physical and environmental interconnectedness of water, communal property structures are pervasive throughout our systems for managing and regulating water. For present purposes they can be categorised into three different types. 1 Shared Water Use The first is the communal water use that arises whenever we have water rules limiting access rights of multiple users of the same water resource. This is, in effect, communal property imposed by law. The most obvious example is of riparian landowners whose private property abstraction rights are limited by the reasonable use rule applicable to flowing water in England and Wales, ­noted in Part V.2. above. As others have pointed out before,65 since this involves each landowner having a right to use the resource as a whole in common with others having a like right, it amounts to a common property regime. The proposed new water abstraction licences noted in Part V.3. above, where the right is to abstract a percentage share of the available water, would provide another example. In both cases the community of users is not self-regulating. Rather, their shared use is regulated by rules formulated and imposed by outsiders. For present purposes, the important point is that the outsiders in question (the state, in the form of law makers) have a duty to regulate the shared use in

63 64 65

Stern (2012, supra n. 45), pp. 4–5. defra (2016 supra n. 61), p. 7. C.M. Rose, ‘Energy and Efficiency in the Realignment of Common-Law Water Rights’, 19 Journal of Legal Studies 1990, p. 261 and H.E. Smith ‘Governing Water: The Semicommons of Fluid Property Rights Symposium: Property Rights in Environmental Assets: Economic and Legal Perspectives,” 50 Arizona Law Review 2008, 445, p. 454.

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the interests of all, not just in the interests of the community of users, for the ­reasons given in Part III. 2. and IV. 1. above. 2 Communities of Users This category is of communities of users of a specific local water resource who co-operate in formalised arrangements for collective self-management of their shared water resource in their collective self-interest. Traditional communal irrigation systems provide an obvious example. Another is modern farmers’ Water Abstractor Groups, who pool their water abstraction rights, or use them co-operatively in other ways. There are several examples in the United Kingdom, and extensive literature analysing their success in other parts of the world.66 Water courts in Colorado evolved to settle disputes in a prior appropriation water rights system might also come within this category.67 The distinctive feature of the communities in this category is that they have chosen to collectivise their individual private property rights to a greater or lesser extent. However, unlike the communities in the first category, not only are they selfregulating but the regulation is in their communal self-interest. They are under no obligation to treat their shared resource as a common treasury, taking into account the interests of all, although they may of course choose to do so. 3 Communities of Stakeholders Communities of stakeholders, i.e. individuals with diverse interests in the same water resource, who co-operate formally to form management boards for the shared resource, are similarly self-interested. However, because their interests are diverse, they can be expected to take broader interests into a­ ccount to a greater extent than communities of users. There are many traditional and modern examples of communities of stakeholders in water resources: ­management boards of all those with different interests in or responsibilities towards different aspects of flood control or water management in a particular area;68 river basins management boards, the subject of Elinor Ostrom’s own PhD research;69 management groups for trans-border rivers or aquifers.70 66 67 68

69 70

uk Irrigation Association Working Together to Protect Water Rights available from www. ukia.org.. E. Schlager (2006, supra n. 28), Ch 13 at pp. 299–301. Water Boards in the Netherlands, described at http://www.wdodelta.nl/wdodelta/fusiew dod; drainage boards and water councils in Oldenburg: K. Greksch, Adaptive capacity and regional water governance in north-western Germany’, 15 Water Policy 2013, 794–815. A. Clarke, ‘How Property Works: the Complex World View’, 22 Nottingham Law Journal 2013, p. 143. E.g. the River Tweed Forum, www.tweedforum.org/about-tweed-forum.

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Conclusion: Property Rights in Water and the Common Treasury

A relatively small number of privately owned companies has a monopoly over the supply of water to others in England and Wales. These few companies also hold a significant proportion of the private property rights and government licenses required to abstract water from its natural state. However, it would be wrong to regard them as absolute owners of any of their assets, including the physical water they hold and their access rights to water. Their ­proprietary rights must necessarily be qualified by the fact that the water resources they draw upon are shared with others, and by the limitations, directions and ­control that the state must impose on them, and constantly monitor, in order to fulfil its own overriding obligations to provide a universal supply, comply with human rights and with eu and international environmental obligations, and maintain an adequate supply for industry and agriculture. These state obligations in effect require the state to make, implement and monitor ­detailed policy rules to ensure that water functions as a common treasury, even if the policy is actually carried out by a privatised water industry. The holders of private property rights in relation to water (whether ­common law abstraction rights, rights in abstraction licenses, or rights of stakeholders in water resources ranging from river basins to local catchment areas) are also constrained by the physical and environmental connectedness of water to act co-operatively and in their communal self-interest, in the ways we noted in Part vi. This kind of community self-regulation does not of itself ensure that water fulfils its function as a common treasury – the interests of the closed community are not necessarily the same as the interests of the common treasury ‘all’. Nevertheless, again because of the interconnectedness of water, community self-regulation is very likely to be an integral part of any set of polycentric institutions which successfully manages water as a common treasury. Viewed from this perspective, current attempts to increase the extent of commodification in the system by creating markets, for example for bulk ­water trading by third parties, or by widening the scope of trading in abstraction licenses, are problematic. They may or may not be successful in creating viable markets, but if they are, it is likely to be only at the expense of freeing the rights holders from the constraints which currently oblige the privately owned/state regulated industry to allow water to function as a common t­ reasury. This will ­involve introducing new elements of absolute private ownership into the ­system, and we perhaps need to remind ourselves that, out of the range of property interests in water recognised in this jurisdiction, absolute private ownership has historically been regarded as the least appropriate form of property for a common treasury resource which must fulfil a number of roles whilst remaining available to all.

chapter 7

Natural Resources as “Regulated Property”: The Challenges of Resource Stewardship in South Africa Hanri Mostert and Cheri-Leigh Young i Introduction The problem with natural resources – land, minerals and water – is that they are finite, but must be shared by an ever-increasing number of users.1 The main challenge is to find equitable ways to share such resources, so that the interests of all users are served more-or-less acceptably. This challenge befalls the state: it is the institution that must manage natural resources, on behalf of all its people, determining ways of socially acceptable use. Therefore, natural resources epitomise the idea of regulated property, and the state often finds itself in the role of a steward – a custodian or public trustee – thereof. The government determines how (and how much) money is spent on the improvement of infrastructure and services, the distribution of resources, and ultimately the nature and content of water and land use and mineral exploitation.2 In South Africa, pressure to balance the use of natural resources equitably is exacerbated by the country’s mired political past, which intentionally excluded vast swathes of the population from land, minerals and water,3 rendering ownership distribution and access patterns grossly unjust.4 Since that 1 See P. Andrews-Speed et al., “Want, Waste or War?: The Global Resource Nexus and the Struggle for Land, Energy, Food, Water and Minerals”, Oxon: Routledge, 2014. 2 M.W. Anderson/V.C. Plaut, “Implicit Bias and the Resilience of Spatial Colourlines” in: J.D. Levinson/R.J. Smith (eds), Implicit Racial Bias Across the Law, Cambridge: Cambridge University Press, 2012, pp. 30–31. 3 Agri South Africa v Minister for Minerals and Energy 2013 (4) sa 1 (cc) (hereafter “Agri sa cc”) para 70; Bengwenyama-ya-Maswazi Community v Minister for Mineral Resources [2014] 4 All sa 539 (sca) (hereafter “Bengwenyama”) para 58; Alexkor Ltd v Richtersveld Community 2003 (12) bclr 1301 (cc) para 98. Also M. Bavinck et al., “Conflicts over Natural Resources in the Global South: Conceptual Approaches”, Oxon: Routledge, 2014, p. 6. 4 Agri sa cc (supra n. 3) para 1; Zulu v Ethekwini Municipality (Abahlali Basemjondolo Movement South Africa as amicus curiae) 2014 (8) bclr 971 (cc) para 43; Azanian Peoples Organisation (azapo) v President of the Republic of South Africa 1996 (8) bclr 1015 (cc) para 43; Residents of Joe Slovo Community, Western Cape v Thubelisha Homes [2009] jol 23711 (cc) para 191–197.

© koninklijke brill nv, leiden, ���7 | doi 10.1163/9789004313521_009

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watershed moment in 1994, when democracy dawned on South Africa, the legal landscape has changed significantly and radically.5 In the preceding negotiations for drafting the Constitution,6 including a right to property in the chapter on fundamental rights – a “property clause” – was fiercely debated.7 The compromise that eventually emerged from negotiations entrenches the right of ownership, provides constitutional justification for the expropriation of property, and renders land and other natural resource reform imperative.8 Subsequently the Constitutional Court emphasised that the right to private property is not constitutionally entrenched only to protect wealth;9 it must balance private and public interests in property, in the context of the redistribution of resources.10 Property law may involve the rules regulating individual holdings, but as a system it is crucial to the collective too.11 The legal system attempts to balance the rights of ownership against the needs of society through constitutional reforms. Other clauses in the Bill of Rights, such as the right to dignity (Section 10), the right to equality (Section 9), and the right of access to sufficient food and water (Section 27), provide further justification for a reimagining of the system of property rights. An intensive overhaul of the legislative terrain followed. Sentiments echoing the 1955 Freedom Charter’s statement that “The People Shall Share in the Country’s Wealth” are evident in new laws governing natural resources.12

5 6 7

8 9 10

11 12

Further: H. Corder/V. Federico, The Quest for Constitutionalism: South Africa Since 1994, Farnham: Routledge, 2016, p. 230. Constitution of the Republic of South Africa, 1996. A.J. van der Walt, Constitutional Property Law 3 ed, Cape Town: Juta, 2011, p. 3; H. Mostert, “South African Constitutional Property Protection between Libertarianism and Liberationism: Challenges for the Judiciary” 60/2 Zeitschrift für ausländisches öffentliches Recht und Völkerrecht (ZaöRV) 2000, 295–330. Constititution, s 25. Agri sa cc (supra n. 3); Shoprite Checkers (Pty) Ltd v mec for Economic Development, Eastern Cape 2015 (6) sa 125 (cc) para 50. First National Bank of sa Ltd t/a Wesbank v Commissioner, South African Revenue Service and Another; First National Bank of sa Ltd t/a Wesbank v Minister of Finance 2002 (4) sa 768 (cc) para 49–50; Agri sa cc (supra n. 3) para 91; Mkontwana v Nelson Mandela Metropolitan Municipality; Bissett v Buffalo City Municipality; Transfer Rights Action Campaign v mec for Local Government & Housing in the Province of Gauteng 2005 (2) bclr 150 (cc) para 81. P.M. Gerhart, Property, Law and Social Morality, New York: Cambridge University Press, 2014, ix. anc v cope (Association Inc under Section 21) [2009] jol 22935 (T) para 5; H. Deegan, Politics South Africa 2ed, Oxon: Routledge, 2014, p. 27.

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Minerals, petroleum13 and water resources14 are now treated as public ­resources, held and administered by the state. Large-scale changes to land holding are also anticipated in the wake of policy changes of 2011. Legislation is already being drafted to give effect to those envisaged policy reforms.15 Public disgruntlement with the poor performance of the state in achieving land reform goals16 and ensuring proper service delivery17 over the past twenty years is now placing the ANC-led government under mounting pressure to undertake drastic measures to retain relevance.18 It has opted to do so by converting land, too, into a public resource.19 The changes – undertaken and anticipated – to the regulatory frameworks that govern water, minerals and land, call us to scrutiny. The transition from autonomy to regulation, and from property to regulated space brings into question the correlation between the government’s motivations, and its ability to action such intentions. Here we highlight concerns with the model of natural resources (water, minerals and land specifically) as regulated property that has emerged from the South African state’s policy choices of the past twenty years. By doing so we review concerns emerging from the trend towards stewardship of natural resources. Our analysis below finds that changes in the regulatory frameworks have not managed to facilitate the social changes expected. We argue that where the state cannot be trusted to secure individual positions through administrative regulation, the notion of “regulated property” is tenuous. We posit that the greatest single obstacle in the achievement of objectives of regulation and reform, is the issue of implementation: the state is not doing what it should. 13 14 15

16

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19

S 3, Mineral and Petroleum Resources Development Act 28 of 2002 (hereafter “mprda”). S 3, National Water Act 36 of 1998 (hereafter nwa). Green Paper on Land Reform 2011, Notice 639 of 2011, Government Gazette 34607 (hereafter “Green Paper, 2011”). See e.g. the Draft Preservation and Development of Agricultural Land Framework Bill and Policy 2015, Notice 210 of 2015, Government Gazette 38545. L. Ntsebeza, “Land Redistribution in South Africa: The Property Clause Revisited”, in: L. Ntsebeza/R. Hall (eds), The Land Question in South Africa: The Challenge of Transformation and Redistribution, Cape Town: hsrc Press, 2007, p. 107. J. Froestad/C. Shearing, Security Governance, Policing, and Local Capacity, Boca Raton: crc Press, 2013, p. 165; J. Dugard, “Urban Basic Services: Rights, Reality and Resistance”, in: M. Langford et al., (eds) Socio-Economic Rights in South Africa: Symbols or Substance? New York: Cambridge University Press, 2013, p. 287. M. Mataboge et al., “anc’s 2016 Headache – Retaining the Big 5” Mail & Guardian 4 September 2015 (download: ) last visited: 20.04.2016. The Green Paper, 2011 (supra n. 15), p. 1, states: “land is a national asset”. Also: V. Wilhelm/ P. Krause (eds), Minding the Gaps: Integrating Poverty Reduction Strategies and Budgets for Domestic Accountability, Washington: World Bank, 2008, p. 154.

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With change itself being the purpose of reform, the government’s agenda for reform has become clouded in circulatory attempts at achieving change. And instead of rising to the challenge of enabling the creation of a more justly balanced property regime, the government remains stuck in attempts to extend the state’s regulatory scope over a creeping spread of natural resources. The government has become unable to move beyond its intentions to transition. What is more, the government itself seems to be perpetuating a narrative of failure to achieve some of the deliverables of reform. ii Water Water is a finite resource, yet boundless.20 It is foundational – even critical – to humanity’s physical, social and economic survival. Government’s management of water resources is essential, even more so in South Africa, because of its socio-political history.21 The stressors on our water resources, and the social context within which water resources are managed, are many and varied:22 First, water shortages are an omnipresent, overriding concern, given South Africa’s low rainfall patterns and high evaporation rates.23 Moreover South Africa’s water resources are being depleted and destroyed at an untenable and unsustainable rate. Many factors are to blame: use by the mining, agricultural and industrial sectors; human settlements close to water resources; even water management institutions themselves.24 This renders the regulatory environment for water resources highly complex.25 1 From Private to Public Rights Prior to the constitutionally mandated revision of the legislative framework for water management, South African law distinguished between private and 20

World Water Assessment Programme The United Nations World Water Development Report 4: Managing Water under Uncertainty and Risk, Paris: unesco, 2012, p. 37; G. Alaerts/N. Dickinson (eds), Water for a Changing World – Developing Local Knowledge and Capacity, Boca Raton: crc Press, 2008; A. Chaturvedi, Water: A Source for Future Conflicts, New Delhi: Vij Books India, 2013, p. 56. 21 See s 2, nwa. Also In re: Certification of the Constitution of the Republic of South Africa 1996 (10) bclr 1253 (cc) para 10. 22 National Water Resource Strategy (hereafter “nwrs”), Notice 845 of 2013, Government Gazette 36736 pp. 40–41. R. Grafton/K. Hussey, Water Resources Planning and Management, Cambridge: University Press, 2011, p. 168. 23 Mazibuko v City of Johannesburg 2010 (3) bclr 239 (cc) (hereafter “Mazibuko”) para 3. 24 nwrs, p. 19, 39–41. 25 See Mostert v The State [2009] zasca 171 para 22.

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public water. Private parties could own water:26 landowners had exclusive use and control over water that naturally arose or fell on their land.27 As for agricultural land, the riparian principle permitted owners of land adjacent to water resources to irrigate their land with public water.28 Apartheid’s discriminatory, exclusionary practises in relation to land holding29 and its infrastructural development and governance biases30 meant that access to water resources was heavily skewed in favour of white landowners,31 especially in agriculture. The result was devastating inequality in terms of access to water in rural areas,32 which has proven very difficult to eradicate. 26

27 28 29

30

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There were a number of shifts in the approach to management of water resources, closely linked to the political occurrences at various points in history. The period of interest here commenced with the introduction of the Water Act 54 of 1956 (hereafter “Water Act”). S 5, Water Act. S 9, Water Act. Black Land Act 27 of 1913, Urban Areas Act 21 of 1923, Native (Urban Areas) Consolidation Act 25 of 1945, Native Laws Amendment Act 54 of 1952, Group Areas Act 41 of 1950, Group Areas Act 36 of 1956 and Group Areas Act 77 of 1957. Bengwenyama (supra n. 3) para 32. Further: B. van Koppen et al., “The Political, Social and Economic Context of Changing Water Policy in South Africa post-1994”, in: B. Schreiner/R. Hassan (eds), Transforming Water Management in South Africa: Designing and Implementing a New Policy Framework, New York: Springer Science & Business Media, 2011, pp. 3–6; A.R. Turton, “Water Demand Management: A Case Study from South Africa” mewrew Occasional Paper No. 4, 1999, p. 6; B. van Koppen, “Water Management, Agricultural Development and Poverty Eradication in the Former Homelands of South Africa”, in: E. Pound (ed.), Managing Natural Resources for Sustainable Livelihoods, 2003, p. 226; D. Reed, “Historical Overview of Institutional and Political Arrangements”, in: D. Reed/M. de Wit (eds), Towards a Just South Africa: The Political Economy of Natural Resource Wealth, Washington, DC/Pretoria: WWF/CSIR-Environmentek, 2003, p. 23; B. van Koppen/N. Jha/D.J. Merrey, “Redressing Racial Inequities through Water Law in South Africa: Revisiting Old Contradictions?” Comprehensive Assessment Research Paper 3, 2002 (available online: http://publica tions.iwmi.org/pdf/H030391.pdf); P. Mukheibir/D. Sparks, “Water Resource Management and Climate Change in South Africa: Visions, Driving Factors and Sustainable Development Indicators”, Report for Phase i of the Sustainable Development and Climate Change Project, uct Energy and Development Reseach Centre, 2003, (download: ) last visited 29. 4.2016. E. Karar et al., “Catchment Management Agencies: A Case Study of Institutional Reform in South Africa”, in: B. Schreiner/R. Hassan (eds), (2011, supra n. 30), p. 146; B. van Koppen et al., (2011, supra n. 30), p. 4; A. Kok/M. Langford, “The Right to Water”, in: D. Brand/C. Heyns (eds), Socio-economic Rights in South Africa, Pretoria: pulp, 2005, p. 191. T.W. Bennett, “African Land – A History of Dispossession”, in: R. Zimmermann/D.P. Visser (eds), Southern Cross: Civil Law and Common Law in South Africa, Cape Town: Juta and Company Ltd, 1996, p. 81; D. Reed (2003, supra n. 30), p. 19; R. Francis, “Water Justice in South

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The transition to a democratic state required careful planning to redress the lasting structural inequality caused by the Apartheid regime.33 A right of access to water was constitutionally enshrined as an express human right in the Bill of Rights contained in the Constitution.34 All water is treated as part of a unitary cycle and incapable of private ownership,35 in an attempt to recognise and ameliorate the exclusionary practices of the previous regime, and subject to regulation by the state.36 The National Water Act 36 of 1998 gives effect to the constitutional right of access to water. It recognises the important role of the law in terms of rectifying the impacts of past discrimination, both in terms of social and economic discrimination of water use. Significant strides have been made to ensure that access to water is extended to the majority of the population. In 1994, approximately 25% of the population had no access to safe, running water resources.37 Progress has been significant in this regard, with the latest national census estimating that 89.9% of the population now has access to water.38 Even so, recent sources indicate that there still is racial bias prevalent in respect of water management for agricultural land.39 2 The State’s Shortcomings as Public Trustee There are also still concerning shortcomings in the government’s management of water resources, particularly at local government level.40 Extreme inequality persists in relation to access to water and sanitation. To add to the management and governance woes of the government, many parts of South Africa’s Africa: Natural Resources Policy at the Intersection of Human Rights, Economics and Political Power”, 18 Georgetown International Environmental Law Review 2005–2006, p. 7. 33 Mazibuko (supra n. 23) para 2; E. Karar et al., (2011, supra n. 31) p. 146. 34 Agri sa cc (note 3) para 7. 35 S 3, nwa. 36 See preamble, nwa. Also C. Moseki et al., “National Water Security: Planning and Implementation”, in: B. Schreiner/R. Hassan (eds) (2011 supra n. 30), p. 167. 37 Mazibuko (supra n. 23) para 2; B. van Koppen et al., (2011, supra n. 30), p. 2. 38 Stas sa P0318 – General Household Survey (ghs) (27 May 2015) p. 13. In the Eastern Cape, the percentage of those with access to water declined. The same progress has not been made in terms of access to sanitation, which is not a constitutionally enshrined human right – see B. Schreiner/R. Hassan (eds) (2011, supra n. 30) p. 80. 39 B. Schreiner, “Viewpoint – Why has the South African National Water Act been so difficult to implement?” 6(2) Water Alternatives 2013, p. 242. 40 Government acknowledges many shortcomings in the nwrs, 2013. See also: S. Farolfi, Water Governance for Sustainable Development: Approaches and Lessons from Developing and Transitional Countries, Abingdon: Routledge, 2013, p. xxiii.

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most critical food producing regions are in the throes of a crippling and devastating drought. The drought has pushed 50 000 more people into poverty.41 The indigent are most vulnerable and susceptible to insufficient water resources. This is particularly so in rural areas, in terms of both water quantity and quality.42 While greater numbers of people now can access water, for more than half of the population this does not involve accessing piped water in their households.43 The Free Basic Water Policy provides for the delivery of 6000 litres of free water per household per month: roughly 25 litres per person per day.44 This amount is inadequate to satisfy the basic needs that would translate into endorsement of the constitutional right to dignity.45 Despite the government’s vision of ensuring equitable access to – and facilitating redistribution of – water resources, many challenges still exist.46 They range from institutional to procedural in nature. First, the state’s organisational structure of water governance and management is criticised for its complexity.47 To complicate matters, there seems to be a lack of information and data regarding how and where water is used.48 A grave concern is the government’s inability to address the lack of qualified personnel to manage water properly: too many openings for accounting and engineering specialists remain vacant.49 Political deficiencies, particularly at a municipal level, also hamper efforts to manage water effectively. Corruption, maladministration and fraud within state departments are of major concern.50 Moreover, the government’s monitoring and reporting mechanisms are insufficient to ensure compliance with licensing conditions.51 41

World Bank, Macro Poverty Outlook for South Africa, Washington d.c.: World Bank Group, 2016 (download: ) last visited: 22.04.2016; M. Merten, “Report: Fighting the Great South African Drought”, Daily Maverick 23 February 2016 (download: ) last visited: 19.04.2016. 42 Stas sa P0318 (2015, supra n. 38), p. 13. 43 Ibid. 44 Portfolio Committee on Water Affairs & Forestry “Report of the Hearings on Implementation of the Free Basic Water Policy” (2003) 2. 45 S 10, Constitution; Portfolio Committee on Water Affairs & Forestry (2003, supra n. 44). 46 nwrs, i. 47 nwrs, 59. 48 nwrs, 39, 54, 70. 49 nwrs, 96–99. 50 nwrs, 86. 51 nwrs.

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Of the mentioned challenges, insufficient human capacity arguably presents the greatest barrier to the successful implementation of the ambitious legal framework.52 A 2014 review of all South African municipalities “revealed that 31% were dysfunctional, with endemic corruption, dysfunctional councils, no structured community engagement and poor financial management, leading to poor service delivery”.53 For example, approximately 7 billion Rand in ‘non-revenue water’54 is ‘lost’ per annum due to skills shortages or improper collection data gathering practices,55 particularly at local government level.56 3 Remedying the Gaps in the State’s Regulatory Capacity South Africa’s water laws are ambitious, necessarily so. The legislative framework aims to: give rights to a wide variety of users, including domestic and commercial; address the legacy of inequitable access to water resources; and balance demands to protect and conserve the resource. Domestic users are entitled to reasonable use in accordance with Schedule 1 of the National Water Act. Commercial users are authorised to use water, either in terms of water uses that existed prior to the introduction of the Act, or rights granted via general authorisations or licences.57 The state is responsible for authorising such uses and licences, within the greater context of its duty as trustee.58 The state’s role, as trustee, is to be responsible for the protection, use, development, conservation, management and control of water resources.59 The matrix of considerations that the state must take into account includes (i) sustainability, (ii) environmental protection, (iii) constitutionality, (iv) equity and (v) the public interest.60 When the state does not discharge this duty satisfactorily, the loss is not only felt by the end user alone. Where a lack of data, capacity and monitoring technology e.g. results in pollution of a specific water resource like a river, the impacts will be 52

53 54 55 56 57 58 59 60

H. Pienaar et al., “Transforming Legal Access to Water to Redress Social Inequity and Economic Inefficiency”, in: B. Schreiner/R. Hassan (eds) (2011, supra n. 30), p. 142; Portfolio Committee on Water Affairs & Forestry (2003, supra n. 44), p. 8; S. Farolfi, (2013 supra n. 40), p. 60. Department of Water Affairs, Strategic Overview of the Water Sector in South Africa, 2015, p. 63. I.e. the volume of water accounted for, but for which no income is received. R. Mckenzie et al., The State of Non-Revenue Water in South Africa: wrc Report No. TT 522/12, South Africa: Water Research Commission, 2012, p. xii. Department of Water Affairs, Strategic Overview (2015, supra n. 53), 45. S 4 read with s 34 and Sched 1, nwa. S 3, nwa. S 3(1), nwa. S 3(1)–(2), nwa.

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felt by: (i) the community that relies on the river for survival, (ii) farmers who draw from the river to water their produce, and (iii) the economy more generally. The latter is impacted by the costs of the necessary operations to clean up the pollution. Despite the many shortcomings in respect of the governance of water resources, privatisation of water for the sake of market efficiency is no solution.61 Given the significant shortcomings of the government, the private sector cannot afford but to invest the necessary money and capacity. The motivation lies in the inevitable economic risk should the country experience severe and endemic water shortages, a risk factor which is increasingly taken into account in corporate strategies.62 Instead, collaboration between the private and public sector is required, and to be sought by the state.63 Corporate users have the largest footprint in terms of water use in the South African economy.64 As the state re-evaluates the targets for water use for each sector, there will be increasing pressure to implement systems that use water more efficiently.65 The matter is greater, however, than simply getting the private sector to reduce its water footprint: the state has made it clear that the private sector will have to play a pivotal role in the future development of the water sector.66 The question is whether the private sector would willingly invest money and capacity into the development of the infrastructural and institutional framework, without a legal imperative to do so. The investment of capital and expertise under the guise of corporate social investment (csi) is one way of encouraging private sector participation, which the state has already highlighted.67 For example, one of the leading banks in South Africa devoted R5 million to a project aimed at the clearing of alien vegetation.68 An 61

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63 64 65 66 67 68

Details about the debate regarding privatisation of water resources in K. Bekker, Privatizing Water: Governance Failure and the World’s Urban Water Crisis, Ithaca: Cornell University Press, 2010; V. Shiva, Water Wars: Privatization, Pollution and Profit, India Research Press, 2002; M. Schiffler, Water, Politics and Money: A Reality Check on Privatization, London: Springer, 2015. Also W. Sarni/T. Pechet, Water Tech: A Guide to Investment, Innovation and Business Opportunities in the Water Sector, Abingdon: Routledge, 2013; W. Sarni, Corporate Water Strategies, Abingdon: Routledge, 2012. nwrs, p. 51, 86. nwrs, pp. 9–10. nwrs, p. 58. nwrs, p. 15. s. nwrs, p. 86. wwf Water Balance programme, sponsored by Old Mutual (download: ) last visited 20.4.2016.

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alternative source of funding is through the allocation of private sector loans or bonds to the state.69 Private sector involvement is but one part of the solution, however. To create stability in the water sector, the state – as the controlling regulator – will need to dedicate serious funding: an estimated R60 billion more per annum than it is currently allocating to water. Moreover, it needs to increase its efforts towards the creation of human capital and physical infrastructure, whilst eliminating inefficient and corrupt practices. If the state does not undertake these measures, it falls foul of its core responsibility in terms of the crucial category of regulated property rights in water created by the new water laws. iii Minerals Since the discovery of its mineral wealth, especially from the mid-19th century onwards,70 South Africa has grown one of the world’s largest mining sectors, with rich reserves of platinum, gold, chrome and manganese ore, and other minerals.71 The right to mine was decoupled from the right to own land not long after South Africa’s mineral wealth became apparent;72 a significant stride towards ensuring that the mining sector could become more competitive. The laws or practices of the time did not, however, do much to ensure representivity and diversity.73 Competition for accessing mineral wealth was the catalyst for many of the abominable racial laws of the early 19th century,74 69 70

71

72 73 74

nwrs, p. 86. Department of Government Communications and Information Systems, South Africa Yearbook, (2013/2014, Department of Government Communications and Information Systems), (download: last visited: 24.04.2016, p. 302; Department of Government Communications and Information Systems South Africa Yearbook, (2012/2013), (download: last visited: 24.04.2016, p. 442. Department of Communications and Information Systems Pocket Guide to South A ­ frica, (2014/2015), (download: ) last visited: 24.04.2016, p. 126. H. Mostert, Mineral Law: Principles & Policies in Perspective, Cape Town: Juta and Company Ltd, 2012, p. 10. Ibid, p. 69. C.H. Feinstein, An Economic History of South Africa: Conquest, Discrimination, and Development, Cambridge: Cambridge University Press, 2005, p. 66; M. Meredith, Fortunes of Africa: A 5,000 Year History of Wealth, Greed and Endeavour, London: Simon & Schuster, 2014, p. ix.

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while cheap,75 politically repressed, black labour allowed the mining sector to flourish.76 The constitutional property clause mandates changes to the law to permit reform of land and natural resources.77 The enactment of the Mineral and Petroleum Resources Development Act 28 of 2002 (“mprda”) attempted to rectify some of the prejudicial ills caused by the Apartheid policies and laws.78 1 Developing New Proprietary Positions79 The preamble to the mprda recognises the need for equitable access to the mining sector, security of tenure and for “redress[ing] the results of past discrimination”.80 One of the mechanisms employed to realise this vision was to place the control of mineral rights allocation firmly within the domain of the state, through a custodianship model: the mprda provides that mineral and petroleum resources belong to the nation, with the state – as custodian – responsible for ensuring that these resources are exploited for the benefit of the nation as a whole.81 The mprda thus represents the pinnacle in the development of the right of the state to intervene in matters pertaining to the subsurface, without outright nationalisation of mineral resources.82 This was an important move, because previously mining rights allocation had been linked to private ownership of the surface and subsurface of the land.83 In terms of this principle, everything above and below the land belonged to the landowner.84 Where white 75

76

77 78 79 80 81 82 83 84

C.H. Feinstein (2005, supra n. 75), p. 249 argues that this labour was not, in fact, cheap, when factoring in the impacts on the economy, society and the inflated costs of white labour. Minister of Mineral Resources v Sishen Iron Ore Company (Pty) Ltd 2014 (2) bclr 212 (cc) (hereafter “Sishen”) para 8; C.H. Feinstein (2005, supra n. 75) 249; H Deegan (2014, supra n. 12) p. 6. S 25(4), (8). Agri sa cc (supra n. 3) para 1. We acknowledge our indebtedness to Heleen van Niekerk for ideas and research that informed this part of the study. Agri sa cc (supra n. 3) para 26. S 3(1), mprda. H. Mostert (2012, supra n. 72), p. 154 et seq. Through the maxim cuius est solum eius est usque ad coelum et ad inferos. Agri sa cc (supra n. 3) para 37. H. Mostert (2012, supra n. 72), p. 7. Agri sa cc (supra n. 3), para 32; P.J. Badenhorst/H. Mostert, Mineral and Petroleum Law of South Africa, Cape Town: Juta Company and Ltd, 2004, Ch 1; H. Mostert (2012, supra n. 72), p. 7.

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landowners controlled the surface of the land, i.e. in large parts of the country, they accordingly also controlled access to the subsurface.85 The mprda effectively terminated previous frameworks for mineral rights, and in fact did away with the concept “mineral right” altogether.86 In its stead, Section 3(2)(a) allows the state to grant, issue, refuse, control, administer and manage any right to minerals.87 Obtaining the rights to minerals supported by the mprda (which include mining rights, prospecting rights and prospecting permits,88 as well as equivalents thereof in relation to petroleum) requires an application and an administrative grant. The mprda regulates prospecting rights, mining rights and mining permits extensively and rigorously.89

85

Agri sa cc (supra n. 3), para 65, 70; H. Wiig/H. Oien, “Would Small be More Beautiful in the South African Land Reform?” in: S. Holden et al., (eds), Land Tenure Reform in Asia and Africa, London: Palgrave Macmillan uk, 2013, p. 80. 86 See Agri South Africa v Minister of Minerals and Energy 2012 (1) sa 171 (gnp) (hereafter “Agri sa (gnp)”) para 57; Sishen (supra n. 76), para 10, 11; De Beers Consolidated Mines Ltd v Regional Manager, Mineral Regulation Free State Region: Department of Minerals and Energy, Case 1590/2007 (opd) Unreported (15.05.2008) para 2.5; P.J. Badenhorst, “Exodus of Mineral Rights from South African Law” 22 (2) Journal of Energy & Natural Resources Law (jenrl) 2004, p. 235; P.J. Badenhorst/H. Mostert (2004, supra n. 84), Ch 13, p. 6; P.J. Badenhorst, “Mineral Rights: ‘Year Zero’ Cometh?” Obiter, 2001, p. 130; P.J. Badenhorst, “The Make-Up of Transitional Rights to Minerals”, 128 South African Law Journal (salj) 2011, p. 764; H. Mostert (2012, supra n. 72), p. 161 indicates, though, that common-law mineral rights have “limited significance” in the current regulatory system, in that they form the basis upon which rights from the previous regime could be lodged for conversion. 87 S 3(2)(a), mprda. 88 These are the rights to minerals relevant for our argument. We exclude petroleum from the following discussion. 89 M.O. Dale, “Comparative International and African Mineral Law as Applied in the Formation of the New South African Mineral Development Legislation” in E.I. Bastida et al., (eds), International and Comparative Mineral Law and Policy: Trends and Prospects, Amsterdam: Kluwer Law, 2005, p. 849 described the system as one of “administrative decision-making” and H. Mostert (2012, supra n. 72), p. 82 as “administratively driven”. H. Mostert/H.M. van den Berg, “Roman-Dutch Law, Custodianship, and the African Subsurface: The South African and Namibian Experience”, in: D.N. Zillman et al., (eds), The Law of Underground Energy Underground Understanding New Developments in Subsurface Production, Transmission, and Storage, Oxford: oup, 2014, p. 80, indicates that the mprda “represents the zenith of the state’s right to intervene in subsurface matters”. There are, however, some aspects of prospecting and mining that the mprda do not regulate. See H. van Niekerk, Towards A New Understanding of Mineral Tenure Security: The Demise of the Property Law Paradigm, PhD, uct, 2016, Chap 4.2.2.

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It determines the period of the grant,90 and circumstances leading to suspension, cancellation91 or lapsing.92 It regulates holders’ ability to enter land and extract the minerals.93 It even prescribes under which circumstances holders may exercise their entitlement not to exploit the mineral.94 It also determines if and how prospecting rights, mining rights and mining permits can be transferred and encumbered.95 The notion of state custodianship of mineral resources have been the cause of much academic and judicial speculation; and has been prone to criticism over the past decade.96 Scholars agree that the mprda did not intend to confer private-law type ownership of South Africa’s mineral and petroleum resources onto the ‘nation’, as a literal reading of the provision would suggest.97 At this point, however, agreement ceases. There are different opinions as to whether the mprda nationalises mineral resources or vests property in the state.98 In our view, the correct stance is that the mprda created the space within which the state may interfere in proprietary positions as regard mineral resources. 90

91 92 93 94

95 96

97 98

Prospecting rights are valid for up to 5 years (s 17(6), mprda) and can be renewed once for up to 3 years (s 18(4)) Mining rights can be granted for up to 30 years (s 23(6)) and renewed for “further periods” each of which may not exceed 30 years (s 24(4)). Mining permits can be granted for up to 2 years (s 27(8)(a) and (b)) and renewed thrice, for not more than 1 year. S 47, mprda. S 56, mprda. Ss 5(2)(a) and (b), mprda for prospecting rights and mining rights and s 27(7)(a) and (d) for mining permits. E.g., mining must commence within one year from the date on which the grant becomes effective (s 25(b), mprda); prospecting within 120 days from the date on which the grant becomes effective (s 19(2)(b)). S 11, mprda. H. Mostert (2012, supra n. 72), p. 133; P.J. Badenhorst/H. Mostert (2004, supra n. 84), Ch 13; M.O. Dale et al., South African Mineral and Petroleum Law, Durban: LexisNexis Butterworths, 2005, at MPRDA-121/122; P.J. Badenhorst/H. Mostert, “Artikel 3(1) en (2) van die Mineral and Petroleum Resources Development Act 28 van 2002: ‘n Herbeskouing” Tydskrif van die Suid-Afrikaanse Reg (tsar) 2007, p. 469; M.O. Dale, “Mining Law” Annual Survey of South African Law, 2002, p. 573; H.M van den Berg, “Ownership of Minerals under the New Legislative Framework for Mineral Resources”, Stellenbosch Law Review (Stell lr) 2009, p. 139; E. van der Schyff, “The Constitutionality of the Mineral and Petroleum Resources Development Act 28 of 2002” lld, nwu, 2006, pp. 149–151; E. van der Schyff, “Who ‘Owns’ the Country’s Mineral Resources? The Possible Incorporation of the Public Trust Doctrine through the Mineral and Petroleum Resources Development Act” Tydskrif van die Suid-Afrikaanse Reg (tsar) 2008, p. 757. Agri sa cc (supra n. 3) para 68–71. See sources mentioned supra n. 96.

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It established a mechanism for regulating these resources to hold the state responsible for administering them so that it would benefit all the people of South Africa. Even so, the notion of state custodianship is vague, and can be manipulated. A state wishing to nationalise a resource could do so under its supposed authority as custodian. Private parties wishing to contest state action could do so by arguing that the custodial state is not acting in the interest of its people. Curiously, however, the courts so far had been unwilling to engage with this crucial aspect of the mprda.99 A major problem with trying to conceptualise state custodianship is (judicial and scholarly) negation of the fact that mineral rights always had a distinct public-law dimension: over the past four generations of South African mineral law, regardless of whether a private-rights model was followed or not, state regulation has always been constitutive of a right holder’s ability to prospect or mine at all.100 Adopting a public-law based approach to explaining South African mineral law has its own challenges. There seem to be different views of how exactly the state’s regulatory involvement in mineral rights determines the nature of those rights. The transformative purpose and nature of our Constitution provide some guidance. In Minister of Minerals and Energy v Agri South Africa it really was the transformative purposes of the mprda that justified the regulatory framework imposed by the state.101 The matter attacked the core provisions of the mprda, those creating the model of state custodianship. It was argued that these provisions resulted in an unconstitutional expropriation of property.102 The concern was that the enactment of the mprda, which provides only for rights that are actively used, brought about a direct expropriation of certain mining interests that existed previously, but remained unexercised.103 A challenge of this nature had the potential of ruining attempts at transforming the mining industry and redistributing the benefits it may bring. 99 Agri sa cc (supra n. 3), para 71 is at pains not to provide any conclusive guidance. 100 H. Mostert (2012, supra n. 73), p. 157 et seq. Minister of Minerals and Energy v Agri South Africa 2012 (5) sa 1 (sca) para 61. 101 Agri sa cc (supra n. 3), para 73–74. 102 Agri sa cc (supra n. 3), para 16, 46, 56. 103 Agri sa cc (supra n. 3), para 14, 24. Because of the operation of the mprda’s transitional provisions, these interests expired within one year after the mprda came into force, unless they could be converted. The mprda’s ingrained support for a use-it-or-lose-it policy would be crucial in determining whether a conversion would make sense. Item 8 of Schedule ii to the mprda.

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A majority of the court found that no expropriation took place.104 Instead, according to the judgment, the mprda tried to achieve a generous regulatory space for the state. Accordingly, it could be argued, the ends justified the means and severity: the mprda aimed to give black people access to a resource of which they were excluded in the past. 2 Conceptualising Custodianship In Agri South Africa, the court specifically refrained from commenting on the parameters of state custodianship.105 This leaves the concept vulnerable for misinterpretation, as is evident from statements in the latest draft of the revisions to the Mining Charter.106 In the latter document, it is stated that the mineral resources had been “transferred to the people of South Africa”: a statement which is deliberately misinterpretative of the judgment in Agri South Africa, where the court explicitly stated that “whatever ‘custodian’ means, it does not mean that the state has acquired and thus has become owner of the mineral rights concerned”.107 The difference in meaning attached to the notion by the Constitutional Court and the Department of Minerals and Mining is the difference between a compensable expropriation of previous positions or no expropriation at all. To assist in the formulation of the Constitutional Court’s notion of state custodianship, we venture the following considerations: First, state custodianship is both empowering and constraining. State custodianship empowers the state to regulate the exploitation of mineral resources within confined parameters. It also requires of the state to act in the best interests of the people served by the exploitation of the particular mineral. The state must seek guidance from the Constitution and the mprda in its determination of what constitutes the best interests of the people. Second, state custodianship is aimed at promoting and realising the goals of transformative constitutionalism – at its core, the mprda is a piece of transformative legislation, which aims to control access to the mining industry in a manner that previous generations of mineral law had not envisaged, because of their fundamental reliance on the notion of the private-law mineral right. Through this notion, the state is expected to fulfil its constitutional duty to 104 Agri sa cc (supra n. 3), para 76. 105 Agri sa cc (supra n. 3), para 71. 106 Reviewed Broad-Based-Black-Economic-Empowerment Charter for the South African Mining And Minerals Industry, 2016 Government Notice No. 450/39933, published 15.04.2016. 107 Agri sa cc (supra n. 3), para 71.

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reform property relations and promote the interests of those who were excluded from benefitting from the system in the past, due to the racialised policies of the apartheid government. The purpose of the mprda, which the state as custodian must realise, is to promote equitable access to the mining industry, “substantially and meaningfully expand opportunities for historically disadvantaged persons, including women and communities”, not only to engage in the industry, but also benefit therefrom, and contribute towards the socio-­ economic development of the country.108 Finally, state custodianship requires of the state to act not as private owner, but with an even higher responsibility and duty of care – that of a custodian – in managing existing and accommodating new interests. The exact content of custodianship may not be clear, but the distinction here between the functions of administrative law and property law is. As a legal concept, private ownership of in situ minerals in South Africa has become (almost) irrelevant. Before the minerals are removed from the earth, the mprda simply treats the resource as being owned by all.109 This suggests public ownership of the resource.110 The extraction of the mineral from the earth, under licence, allows it to become susceptible to private ownership by the extracting mining company.111 Administrative law regulates events surrounding the removal of the minerals from the earth, and through this regulation created proprietary positions previously unbeknown in our property system. The rules of property law still entrench the rights thus created.112 3 Being a Resource Custodian in Hard Times Many considerations influence the context in which new proprietary positions are created and must be enforced. Radical transformation of the mining sector and socio-economic development inform the creation of new proprietary positions in terms of the mprda. Simultaneously, environmental obligations are more strictly imposed. The results are precariously balanced, competing interests vying for relevance within newly created rights, such as community interests, sustainability, profit, investment risks and transformation.

108 S 2, mprda. 109 H.M. van den Berg (2009, supra n. 96), p. 149. 110 S 3, mprda. Agri sa cc (supra, n. 3), para 68–69 unequivocally held that the state is not the owner of these mineral entitlements. 111 Agri sa cc (supra, n. 3), para 68–69. 112 H. van Niekerk (2016, supra n. 89), pp. 48–49.

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The context within which these new rights are held are challenging: labour force issues create deadly pressures within the mining sector;113 the global economic downturn caused the sector to recede dramatically over 5 years. Transparency and accountability are becoming requisite in company dealings with shareholders, and other stakeholders such as local communities. The difficulty in gaining “social license to operate” for some miners demonstrate the powerful hold that a community may have over the mining company, to be employed to ensure benefits from the mines are shared with the communities. Herein lies the quandary: as the obligations placed on the mining sector become more onerous, prospective investors lose interest in the feasibility of potential projects, and eventually in making the investment. It is crucial for the state to facilitate the balance between the interests of the mining sector – the heartthrob of our society – and the needs for transformation and equity within the sector. The state’s duty here goes beyond monitoring and reporting. It needs to foster ways to promote investment into the sector. At present, the models chosen to redress the effects of past discrimination may only be benefitting a few, rather than many. Moreover, the government’s methods of monitoring compliance present challenges to the industry, and clarification has been sought in public forums such as compliance reporting workshops and conferences. iv Land Property interests in land114 need reliable protection against arbitrary or involuntary deprivations, because land is a crucial means of production and source of shelter.115 South Africa’s Constitution obliges the state to “foster conditions which enable citizens to gain access to land on an equitable basis”, to promote tenure security and restitution of property,116 particularly for those who had 113 At the Lonmin mines in Marikana, 34 striking miners were killed in 2012; N. Davies, ‘The Savage Truth Behind the Marikana Massacre’, (22 May 2015, Mail & Guardian), (download: ) last visited: 24.04.2016. 114 We acknowledge our indebtedness to Jacques Jacobs and Samantha Copeman for ideas and research that informed this part of the study. 115 L. Cotula et al., Better Land Access for the Rural Poor: Lessons from Experience and Challenges Ahead, Hertfordshire: fao (un), iied, 2006, p. 7; T. Marcus, “National, Class and Gender Issues in Land Reform”, in: M. de Klerk (ed.), A Harvest of Discontent: The Land Question in South Africa, New York: Robert Schalkenbach Foundation, 1991, p. 25. 116 S 25(5)-(7), Constitution.

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suffered property violations as a consequence of Apartheid laws, and to promote access to housing and prevent arbitrary evictions.117 The Constitution thus already gives the state all that is necessary to justify its role as steward in respect of land. In a system supporting private ownership, land is a key point of access to other natural resources, such as water and minerals. Where discrimination, displacement and dispossession characterise a system of land holding, such as was South Africa’s under Apartheid,118 reversal of iniquitous positions must necessarily involve reform of land relations.119 The land reform programme was purposed to reduce poverty and contribute to economic growth,120 through a tripartite system implemented to achieve equitable access to land, tenure security and restitution of land that was dispossessed under apartheid.121 Importantly, though, the land reform programme originally conceptualised in 1997 was based on the idea of spreading private ownership more equitably. It did not attempt to interfere with the dominant position supporting private holding of such resources in the law. In some respects, reform attempted to extend the tenets of a model of individualised title to areas in which previously it was not prevalent, with disastrous consequences. 1 What Reform Meant for Existing Land Holdings, and the Rest Under the land reform programme, significant attempts have been made to achieve social transformation through land reform; yet, for many, the rate of change is too slow.122 One bone of contention is the redistribution aspect of the programme. It proved far more difficult to implement than originally 117 S 26, Constitution. 118 R. Hall, ‘Land grabbing in Southern Africa: the many faces of the investor rush’, 37(125) Review of African Political Economy 2011, p. 217. 119 A. van der Walt, “Dancing with Codes – Protecting, Developing and Deconstructing Property Rights in a Constitutional State”, 118 South African Law Journal (salj) 2001, p. 258. 120 Department of Land Affairs, White Paper on South African Land Policy, 1997 (hereafter “White Paper”), http://www.ruraldevelopment.gov.za/phocadownload/White-Papers/ whitepaperlandreform.pdf last visited: 24 April 2016, para 2.1. 121 The 1997 White Paper (supra, n. 122) based the land reform programme three tier: (i) ­restitution of land dispossessed as a result of racial discrimination; (ii) redistribution to ensure more equitable land-holding patters and (iii) access to land through enhancing tenure security of previously insecure land rights. 122 E. Schweitzer, The Making of Griqua, Inc.: Indigenous Struggles for Land and Autonomy in South Africa, Netherlands: lit Verlag Münster, 2015, p. 191; L. Ntsebeza (2007, supra n. 16), p. 107; M. Riad El-Ghonemy, Anti-Poverty Land Reform Issues Never Die: Collected Essays on Development Economics in Practice, Abingdon: Routledge, 2009, p. 90.

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expected. Focused mainly on rural land, this programme envisaged the development of land for various agricultural purposes, ranging from commercial farming through to subsistence farming.123 The Government’s White Paper on Reconstruction and Development124 committed to transfering 30% of agricultural land back to black South Africans by 2014. By the Government’s own admission,125 this target date was unrealistic. The narrative that has arisen from such admissions, and many scholarly pieces, is that land redistribution has failed.126 An even more challenging part of the land reform programme is said to be the provision of tenure security to informal land rights holders, i.e. bringing certainty – through the rules, procedures, and systems127 – to the legal, administrative, and social frameworks governing protection of individual or group rights to land.128 Political views diverge about how to achieve such tenure security, and whether it should involve individualisation of rights into a private ownership model. 123 R. Hall/L. Cliffe “Introduction” in Another Countryside? Cape Town: Institute for Poverty, Land and Agrarian Studies, 2009, pp. 1–3. 124 gn 1954 in gg 16085, 23.11.1994. 125 Green Paper, 2011 (supra n. 15), p. 5. 126 2014 has come and gone and the Government indicates it is still nowhere near meeting the target of 30% redistribution of land. Green Paper, 2011 (supra n. 15), p. 3. The statistics are contested, though. (The Free Market Foundation’s submission on the Expropriation Bill (2013, Free Market Foundation) (download: ) last visited: 24 April 2016. Comment paras 9, 11). Actual redistribution figures are skewed by the fact that many victims of land dispossession chose financial compensation over alternative land. The South African Institute of Race Relations, South Africa Survey, 2012, (download: ) last visited: 24 April 2016, pp. 600–603 concludes that Government could have increased land reform transfers by “at least 1.3-million hectares”, had all land dispossessions victims settled for alternative land, rather than financial compensation”. H. Wiig/H. Oien (2013, supra n. 85), p. 80. 127 P.J. Jacobs, “Tenure Security under the Communal Property Associations Act 28 of 1996: An Analysis of Establishment and Management Procedures with Comparative Reference to the Sectional Titles Act 95 of 1986”, llm, Stellenbosch, p. 27; T. Cousins/D. Hornby, “Communal Property Institutions: Adrift in the Sea of Land Reform” 2 (4) Development Update. 128 A. Durand-Lasserve/L. Royston “International Trends and Country Context – From Tenure Regularization to Tenure Security”, in: A. Durand-Lasserve/L. Royston (eds), Holding Their Ground: Secure Land Tenure for the Urban Poor in Developing Countries, London: Earthscan Publications, 2002, pp. 8–9.

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Ownership (title) is a means to secure development finance.129 Some use this fact to argue that the informal property market – where registered title is not readily accessible – contributes to creating a “poverty trap”130 and that the remedy lies in formalising rights which would allow them to be registered.131 However, other arguments militate against the formal recognition of title: the value of land may be too low to leverage as security for loans, and financial burdens caused by municipal rating and taxing of formalised rights may render these holdings too burdensome.132 Formalised title may undermine tenure security where vulnerable users (mostly women and children) do not appear as holders on the title deed.133 Government’s first challenge was to decide on which of these options to pursue in its tenure reform strategies of communal land, which was the biggest source of concern in terms of tenure insecurity.134 It opted for the route of formalising title and corporatising land management135 in enacting the 129 E. Sjaastad/B. Cousins, “Formalisation of Land Use Rights”, 26 Land Use Policy 2008, p. 2. 130 C. London, “Poverty Traps: Do Poor Countries Really Get Richer?” The Economist 19.09.2014 (download: ) last visited: 20.04.2016; A. Kraay/D. McKenzie, “Do Poverty Traps Exist? Assessing the Evidence”, 28 (3) Journal of Economic Perspectives, 2014, p. 127; M. Adato et al., “Exploring Poverty Traps and Social Exclusion in South Africa using Qualitative and Quantitative Data”, in: C. Barrett et al., Understanding and Reducing Persistent Poverty in Africa, London: Routledge, 2013, p. 60 et seq. 131 E. Sjaastad/B. Cousins (supra n. 129), p. 8. 132 B. Cousins et al., ‘Will Formalising Property Rights Reduce Poverty in South Africa’s “Second Economy”?’ Policy Brief 2005, pp. 2–3. 133 B. Cousins (supra n. 129), p. 3. 134 Earliest attempts to formulate a coherent communal land rights framework started in 1998 and culminated in the Land Rights Bill. Further attempts were made between 2001 and 2003 and resulted in the Communal Land Rights Bill and subsequently the Communal Land Righs Act 11 of 2004 (hereafter CLaRA). See B. Cousins, “Contextualizing the Controversies: Dilemmas of Communal Tenure Reform on Post-Apartheid South Africa”, in: A. Claassens/B. Cousins (eds), Land, Power & Custom: Controversies Generated by South Africa’s Communal Land Rights Act, Cape Town: uct Press, 2008, p. 9; E. Johnson, Communal Land and Tenure Security: Analysis of the South African Communal Land Rights Act 11 of 2004, llm, University of Stellenbosch, 2009. 135 Memorandum on the Objects of the Communal Land Rights Bill 2003, Notice 2520 of 2013, Government Gazette 25492, par 1, 2(d), (g), (f); confirmed in ss 5, 6, 8 and 19(5), CLaRA. See further H. Mostert/J.M. Pienaar, “Communal Land Title: An Assessment of the Efficacy of Legislative Intervention for Tenure Security and Access to Land”, in: E. Cooke (ed.), Modern Studies in Property Law Vol iii, Oxford: Hart, 2005, p. 317 et seq.; S. Smith, “An Overview of the Communal Land Rights Act 11 of 2004”, in: A. Claassens/B. Cousins (eds), (2008, supra n. 134), pp. 39–40.

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constitutionally mandated,136 Communal Land Rights Act (CLaRA) 11 of 2004. CLaRA was supposed to be an extensive,137 ‘omnibus tenure law’138 designed to secure the tenuous land rights139 of the poorest one-third140 of South Africans, rural dwellers of what used to be the old Apartheid-era homelands.141 In view of the many objections142 against it, however, the constitutionality of CLaRA was challenged143 by four of the indigenous communities it was supposed to serve.144 The Constitutional Court eventually struck down the Act in its entirety145 on procedural grounds.146 The lesson here is that society’s and government’s support of land rights, rather than the form they take, are constitutive of the kind of security that begets economic prosperity and human flourishing.147 Not the form of the property right, but the level of protection it offers and the kind of social trust it engenders, is important. 136 S 25(6) and (9), Constitution. 137 S 2, CLaRA. 138 This term is taken from personal communication with the late Kobus Pienaar of the Legal Resources Centre, South Africa. The point is that the scope of CLaRA was extensive. It would have affected all communally occupied state land, private communal land and “other land” as determined by the Minister. It would further have applied to the beneficiaries of communal land or land tenure rights under land reform laws. S. Smith, “An Overview of the Communal Land Rights Act 11 of 2004”, in: A. Claassens/B. Cousins (eds) (2008, supra n. 134), p. 40. 139 S 4(1), CLaRA. 140 H. Mostert/J.M. Pienaar (2005, supra n. 135), p. 317, 319; J. Love, “Foreword”, in: A. Claassens/ B. Cousins (eds) (2008, supra n. 148), p. xii. 141 In these parts, land is frequently held on behalf of a community by the state directly or by designated (traditional) community leaders; G. Pienaar, “Security of Communal Land Tenure by Registration of Individualised Title – Is the Communal Land Rights Bill of 2003 the Final Solution?” (67) Tydskrif vir die Hedendaagse Romeins-Hollandse Reg 2004, 244–245. 142 Overviews are provided in A. Claassens/D. Gilfillan, “The Kalkfontein Land Purchases: Eighty Years On and Still Struggling for Ownership”, in A. Claassens/B. Cousins (eds) (2008, supra n. 148), pp. 295–314; A. Claassens/M. Hathorn (2008, supra n.135), pp. 315–352. 143 Tongoane v National Minister for Agriculture and Land Affairs 2010 (8) bclr 838 (gnp) (hereafter “Tongoane gnp”); Tongoane v National Minister for Agriculture and Land Affairs 2010 (6) sa 214 (cc) (hereafter “Tongoane cc”). 144 The court a quo (Tongoane gnp, supra n. 143) para 42 struck down significant parts of CLaRA on substantive grounds. Tongoane cc (supra n. 143) subsequently confirmed that CLaRA was unconstitutional for being incorrectly tagged, but also obiter confirmed some of the substantive objections. 145 Tongoane cc (supra n. 143), paras 6, 36–37, 72–97, 111. 146 Tongoane cc (supra n. 143), paras 111–112. 147 L. Underkuffler, The Idea of Property: Its Meaning and Power, New York: Oxford University Press, 2003, p. 14; G. Alexander, “Ownership and Obligations: The Human Flourishing

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2 The Real Challenge of Land Reform Of late, economists148 and new voices in law scholarship149 have pointed out the fallacies of what we could call the “failure narrative” in land reform. Schussler, for instance, draws attention to statistics indicating that “between 38% and 46% of [the 15.6 million] households [currently accounted for in South Africa] live in homes that have been built since 1994”.150 He challenges the government’s counting of total houses built, pointing out that apart from the 4 million houses constructed under the Reconstruction and Development Plan, more than one-and-a-half times as much had been built in the private sector, or without the requisite building plans.151 According to this economist, the government’s approach is to ignore these projects in official counts, and thus under-represent the changes to the social fabric impacted by home ownership that occurred already.152 Fact is: over twenty years, ownership patters have changed more often because of private sector interventions than the various policy shifts in the redistribution programme. Government claims that the land distribution patterns have not shifted as much as it would have wanted. Its figures, however, seem to be contested.153 Still, it seems content in abiding by the narrative of failure, as this allows for a simplistic revision of reform goals for political expediency. The reasons attributed to the purported failure of the redistribution programme abound.154 Some argue that redistributive efforts are hampered because land cannot be subdivided into smallholdings,155 and hence cannot Theory of Property”, 43 Hong Kong L.J. 2013, 451; E. Freyfogle, “Private Ownership And Human Flourishing: An Exploratory Overview”, 24 Stellenbosch lr 2013, p. 430. 148 C. Smith, “Kill Dangerous Property Nationalisation Slogans with Facts”, Fin24, 22 February 2016 (download: ) last visited: 20.04.2016. 149 S. Copeman, Perceptions of failure and success of land redistribution in South Africa: A Case Study on a Redistribution Pilot Project in the Cradock Area, unpublished llb thesis, uct, 2013. 150 C. Smith, ‘Home Ownership in sa: Facts Tell Different Story’, (22 February 2016, Fin24), (download: ) last visited: 24.04.2016. 151 Ibid. 152 Ibid. 153 Ibid. 154 R. Hall, “Transforming Rural South Africa: Taking Stock of Land Reform”, in: The Land Question in South Africa: The Challenge of Transformation and Redistribution, Cape Town: hsrc Press, 2007, pp. 87–88. 155 H. Wiig/H. Oien (2013, supra n. 86), pp. 83–85; Institute for Poverty, Land and Agrarian Studies (plaas) ‘Submission to the Department of Agriculture, Forestry and Fisheries

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assist in creating micro-economies that may remedy labour and capital shortages.156 Inefficiencies in law-making are partially to blame here. The Subdivision of Agricultural Land Act 70 of 1970 was repealed in 1998 and has been signed by the President.157 Curiously,158 it remains in force as the President has yet to provide a date for the repeal legislation159 to come into effect. Others – such as the Institute for Poverty Land and Agrarian Studies – attack the state’s current policy of leasing land to the beneficiaries of redistribution, rather than transferring ownership. Such a policy, scholars say,160 suggests that “black people cannot be trusted with land”. It thus adds insult to the injuries of those whose psychological and economic connection to the land previously were violated by a repugnantly racist legal system.161 Moreover, this policy could exacerbate the divide between rich and poor,162 and as such is counterintuitive to the goals distributive justice, whilst imposing an ongoing economic and moral cost upon our already fragmented society. Interestingly, it is the state’s policy choices about how redistribution is to be managed that come under fire. The legal construct of ownership, fraught as it is with connotations of exclusion due to the Apartheid experience, is here still held up by

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on Draft Preservation and Development of Agricultural Land Framework Bill and Policy’, 29 May 2015, plaas, (download: ) last visited: 24.04.2016, p. 4. plaas Submission (2015, supra n. 155), p. 4. The Draft Sustainable Utilisation of Agricultural Resources Bill, 2003, download: last visited: 24 April 2016, replicates the wording used in the Subdivision of Agricultural Land Act 70 of 1970. The Constitutional Court has suggested a number of possible reasons – see Wary Holdings (Pty) Ltd v Stalwo (Pty) Ltd 2008 (11) bclr 1123 (cc) para 91. See also F. Gino, Repealing the Subdivision of Agricultural Land Act: A Constitutional Analysis llm, Stellenbosch University, 2010. Subdivision of Agricultural Land Act Repeal Act 64 of 1998. B. Cousins, “plaas Position Paper for National Land Tenure Summit” (2014, plaas) (download: ) last visited: 24.04.2016. Institute for Poverty, Land and Agrarian Studies (plaas), ‘What’s wrong with government’s state land lease & disposal policy, and how can it be remedied?’ (8 September 2014, plaas) (download: ) last visited: 24.04.2016. Because the option to purchase the leased land will only be made available to farmers who have achieved an operation of “medium to large-scale commercial” size, and who have operated on the land for more than 50 years. plaas (2014, supra note 161).

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the critics of the redistribution programme as the most viable mechanism for future, more equitable relations around land. What is more, where a government’s choices of the mechanisms through which to pursue tenure security do not align with the views of its constituencies, or are not informed by thorough consultation, problems arise. Government’s choices in respect of CLaRA were criticised severely163 for the discrepancy between the aims regarding tenure security, and the consequences of the enacted law.164 The state’s choices about management of communal land came under particular fire: CLaRA centralised control and decision-making about communal land, undermining flexibility in the choice of tenure, while devolving the cost of land administration to the local government level, where lack of skills and capacity is debilitating.165 Moreover, formal legal protection, although protecting tenure significantly, is not always essential for achieving tenure security.166 Instead, strong social processes between beneficiaries of land inter se and as regards outsiders can sometimes be as effective, even preferable.167 The drafters of CLaRA did not recognise this. The real challenge for a land reform agenda seems not to be reaching seemingly insurmountable targets by impossible deadlines. The real challenge lies in building an insight within the state about what interventions are needed to allow the correction of unjust land-holding patterns in ways that would support capacity building and skills development. Moreover, implementation of land reform initiatives should contribute to the legitimacy of the state, and not the opposite. The failure to meet land reform targets can, furthermore, not be exploited for the sake of political expediency

163 See e.g. B. Cousins et al., “Will formalising property rights reduce poverty in South Africa’s ‘second economy’?” 18 Plaas Policy Brief 2005, p. 1; B. Cousins, “ ‘Embeddedness’ versus Titling: African Land Tenure Systems and the Potential Impacts of the Communal Land Rights Act 11 of 2004”, 16 Stellenbosch Law Review (Stell lr) 2005, p. 488. 164 S. Smith (2008, supra n. 138), p. 45; Tongoane gnp (supra n. 158), para 31–34. 165 S. Hofstatter, “Unjust Land Law Must Go the Way of Apartheid” Business Day 4 March 2010, p. 11. Also S. Smith, “An Overview of the Communal Land Rights Act 11 of 2004” in: A. Claassens/B. Cousins (eds) (2008, supra n. 138), p. 67. 166 P.J. Jacobs (2011 supra n. 141), p. 27; D. Bromley/M. Cernea ‘The Management of Common Property Natural Resources: Some Conceptual and Operational Fallacies’, World Bank Discussion Papers No. 57, 1989, p. 5, (download: ) last visited: 24.04.2016. 167 D. Fitzpatrick, ‘Best Practice’ Options for the Legal Recognition of Customary Tenure’, 36 Development and Change 2005, p. 453.

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3 Renewed Attempts at Reform Land restitution, as most contained part of the original land reform programme, ultimately showed most tangible results.168 Successes in respect of land restitution do not match well with the purported failures in respect of the other two aspects of the reform programme discussed above. This may explain the government’s recent decision to reopen the restitution process, and consider claims for dispossessions before 1913, and all the way back to 1800.169 It is particularly interesting that the restitution initiative is hailed as the most successful aspect of the overall reform programme, in view thereof that economically, claimaints are seldom better off after their possession of land had been restored.170 An explanation might be that the narrow land restitution initiative is simpler to “sell” as a success, because of the way in which it appeals to the electorate’s sentimental claims to land. Claims for restoration of dispossessed family lands are motivated differently than claims motivated by profitable use. The latter have been the business, rather, of the redistribution programme, and is more difficult to achieve. Scholarship is divided on whether poor success rates in the redistribution context is owing to existing landowners’ perceived attempts to inflate land prices, thereby frustrating the state’s efforts to purchase land to redistribute; or whether “inexperience and understaffing” in the government departments responsible for land reform are to blame.171 168 Department of Rural Development and Land Reform “Commission on Restitution of Land Rights on its 2014/15 Annual Report”, 5.8.2015, (download: ) last visited: 20.04.2016. According to the Department’s figures, between 1994 and 2014, over 3 million hectares of land have been redistributed to more than 1.8 million beneficiaries. See data at (download: ) last visited: 20.04.2016; Also M. Thamm, “Land claims: Some of the Good News and the Lay of the Land”, Daily Maverick 24 August 2015 (download: ) last visited: 20.04.2016. 169 M. Merten, “Parliament: Zuma Seeks to Move the Goalposts on Land Reform”, Daily Maverick 20 April 2016, (download: ) last visited: 20.04.2016. 170 C. Walker, Landmarked: Land Claims and Land Restitution in South Africa, Johannesburg: Ohio University Press, 2008, p. 198; B. Derman et al., “Strategic Questions about Strategic Partners”, in: C. Walker, Land, Memory, Reconstruction, and Justice: Perspectives on Land Claims in South Africa, Johannesburg: Ohio University Press, 2008, p. 320. 171 Centre for Development and Enterprise ‘Land Reform in South Africa’, 2008, Centre for Development and Enterprise, p. 4, (download: ) last visited: 24.04.2016.

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Nevertheless, there are seemingly insurmountable challenges:172 Redistributed land is said to be less productive,173 which is concerning, because decreased productivity poses serious threats to food security174 and the agricultural economy.175 Beneficiaries of the land reform programme often do not have farming backgrounds and hence no well-developed technical knowledge of agriculture.176 In the absence of ongoing support, such beneficiaries would essentially be set up to fail.177 The redistribution programme apparently lacks capital to provide financial support to those involved, and is criticised for lacking a working strategy for the distribution of benefits.178 Abuse of power by those in management and administration and internal management conflicts have been identified as a key challenge to the success of the programme.179 Criticism of the government’s policy choices in relation to land reform resulted in a grand reconsideration of the land reform agenda and programmes. The ANC-led government stated its intent in the Department of Rural Development and Land Reform’s Green Paper on Land Reform of 2011,180 which rings in an era of much more radical reform than that of the past two decades. According to this Green Paper, the premise on which any proposal for land reform, agrarian change and rural development should be based is that “land is a national asset” which “defines national sovereignty”.181 The Preservation and Development of Agricultural Land Framework Bill of 2014 gives a first impression of what the Government imagines a policy of land as a national asset will look like. It reproduces wording from the mprda: all agricultural land is to be taken into the custodianship of the state “for the benefit of all South Africans”. 172 R. Hall, (2011 supra n. 118), p. 217. 173 E. Lahiff et al., Joint Ventures in Agriculture, London: International Institute for Environment and Development, 2012, p. 10. 174 Ibid, pp. 8–10. 175 To make matters worse, the number of commercial farmers in South Africa has plummeted and continues to decrease, apparently at least partly due to the effects of the government’s land reform agenda. M. Gosling/Y. Moolla, “South Africa’s Ever-shrinking Farmers”, (31.10.2011, The Mercury) (download ) last visited: 21.10.2016. 176 E. Lahiff (2012 supra n. 175), p. 61. 177 H. van der Elst, “Post-settlement Support as Key Contributor to the Success of the South African Land Reform Programme (1994–2007)” 26 (3) Politeia 2007, p. 291. 178 E. Lahiff (2012 supra n. 175), p. 61; F. Zimmerman, “Barriers to Participation of the Poor in South Africa’s Land Redistribution”, World Development 2000, p. 1444. 179 E. Lahiff (2012 supra n. 175), p. 10. 180 R. Grafton/K. Hussey (2011, supra n. 22). 181 Green Paper, 2011 (supra n. 15), p. 1.

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To follow through, Government is now in the process of enacting a new expropriation law, which will have to drive further reform purposes. Criticism of the new law is widespread, with particular concern expressed over the potential for poor communities living under communal tenure arrangements to be expropriated and displaced as a result of the new, enlarged category of rights that can be expropriated.182 Government’s persistent failures in managing the transition to a more equitable system of land rights have now increased the urgency for change. The rate of change will not, however, be accelerated by moving away from recognised systems of ownership. Instead, fostering a political environment that is transparent and accountable will do more for ensuring justice. Government’s poor track record in relation to managing the land reform process seems to suggest an inability to implement a stewardship model here. v

Concluding Evaluation

Given the extreme inequality prevalent in South African society, there can be no doubt that certain types of property – those that entail natural resources – should not be treated as privately owned. They are called to be regulated by the state, in a role as steward, custodian or trustee. The constitutional compromise, which entrenched private property rights only in so far as they can be balanced against the needs of society, was a good one. It partnered corrective and distributive justice. By eroding ownership entitlements in many respects, this compromise anchored the interests of the individual within the broader interests of society. It served to stabilise the economy amidst the political volatility of the 1990s. The context in which it could create a most far-reaching change was in relation to ownership of and access to water, minerals and land. The nature of the rights associated with these resources has undergone a metamorphosis; the social outcomes of such reforms remain to be seen. Contrary to the indications emanating from Government’s latest choices regarding regulating access to natural resource, the core reason for the failure to redistribute resources does not lie with the institution of private ownership or the right to private property. In fact, the core notion of ownership insofar as redistribution of resources is concerned is irrelevant in itself. Dagan states: “creating a constitutional right to property does not entail any specific doctrinal or

182 N. Braude, “A ‘Uniform Procedure’ for All Expropriations? Customary Property Rights and the 2015 Expropriation Bill”, unpublished llb paper, 2015, uct.

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policy outcomes”.183 The scope and impact of a constitutional property clause is determined by the institutions it must serve and the context within which the legal framework is situated.184 The difficulty lies not with the nature of the institutions governing property; these are varied, ranging from common, communal, private to public, or any combination of the aforegoing.185 Instead, the difficulty lies with the availability of capacity and commited state resources and the perceived rate of change this can achieve. Criticism in respect of the the water regime, the minerals and petroleum regime, and now also the government’s intended overhaul of land holding seem to chorus this one point: it is the state’s inability to manage resources, to meet its obligations of governance, that poses the real problem.186 The current state cannot be the steward of natural resources it is expected to be. It does not have the capacity. There are many people, divisions and departments within government that continue to make noteworthy contributions towards changing the status quo. However, the economic and social well-being of the South African state is enmeshed in the proper regulatory management of water, minerals and land which requires systemic overhauls of government’s functioning before it can hope to break a debilitating cycle of attempted reform that remains unable to achieve real change. Financial well-being, in particular, is critical for the continued development of the country’s infrastructure. There are further pressing concerns as well: Without reliable access to sufficient and acceptable water, the price will be more than just monetary. Without a functioning mining sector, South Africa will have lost one of its largest revenue streams. Without properly managed land security of tenure is undermined and social tension exacerbated further. Proper regulatory functioning is key to achieving stability in South Africa. The further South Africa progresses into the era of democracy, the more its people must interrogate this regulatory function of the state. It is no longer enough to find comfort in the rhetoric of policies and politics. 183 H. Dagan, “The Social Responsibility of Ownership” 92 Cornell Law Review 2007, p. 1256; G. Alexander, The Global Debate Over Constitutional Property: Lessons For American Takings Jurisprudence, Chicago: The University of Chicago Press, 2006, p. 26. 184 H. Dagan (2007 supra n. 183); G. Alexander (supra n. 183), p. 26. See also H. Mostert/ A. Pope (eds), The Principles of the Law of Property in South Africa, Cape Town: Oxford University Press, 2010, p. 338; A.J van der Walt, Property in the Margins, Oxford: Hart Publishing, 2009, p. 211. 185 H. Dagan, “Doctrinal Categories, Legal Realism and the Rule of Law”, 163 University of Pennsylvania Law Review, 2015, 1889–1917, p. 1915. 186 See in this respect H. Dagan (2015 supra n. 185), p. 1913.

chapter 8

Employing Property Rights for Nature Conservation Colin T. Reid From some perspectives, to speak about property in the context of the conservation of nature is to succumb to a fundamentally flawed view of the world and humans’ place in it. The natural world is not to be viewed as “property” at all: “We abuse land because we regard it as a commodity belonging to us” rather than as “a community to which we belong”.1 Yet the reality is that the modern world and its legal systems do recognise property rights in land and in many elements of biodiversity. The deference paid by the law to such rights, giving them priority over other interests, can be an obstacle to initiatives seeking to enhance conservation. Yet there is also growing interest in exploring how property rights might be used as a means of securing change which will benefit biodiversity. This paper explores how property rights relate to the natural environment and how they obstruct or might facilitate effective conservation measures. The biodiversity on which our survival depends has been degraded by centuries of human activities. Property rights might be part of the problem, but may also be part of the solution. After critically exploring some of the views that would reject any role for property at all, the potential for property to pay more heed to nature is assessed. The extent of traditional property rights in nature is examined, drawing out both the difficulties this can pose for conservation and the ways in which such rights can be used to support this goal. The potential for property to be used as the basis for new mechanisms supporting and enhancing conservation is then analysed. Such new mechanisms offer potential but also challenges, not only at the technical level but also in terms of the overall coherence and governance of the enterprise of reversing the destruction of biodiversity which has marked human development for centuries. i

No Place for Property?

Before exploring the role and potential of property, it is important to recognise the fundamental challenge that can be offered to any analysis on this 1 A. Leopold, A Sand County Almanac and Sketches Here and There, Oxford: Oxford University Press, 1949, p. viii.

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basis. In terms of Aldo Leopold’s Land Ethic, any property-based approach can be viewed as reflecting “man the conqueror” as opposed to “man the biotic citizen”,2 whereas respect for nature calls for a shift in perspective from “conqueror of the land-community to plain member and citizen of it”.3 It can be argued that in the same way as slaves moved from being viewed as property to being part of our ethical community, the wider biotic community must come within our ethical compass.4 Respecting and preserving the integrity of the biodiversity that exists is what is demanded, not treating it as something to be owned or traded. The Deep Ecology movement also calls for a reconceptualization of the relationship between humans and nature, very different from one which views the natural world through the lens of property rights. Key ideas are stated in the first elements of the “platform for the deep ecology movement”’ set out by Arne Naess: (1) The flourishing of human and non-human life on Earth has intrinsic value. The value of non-human life forms is independent of the usefulness these may have for narrow human purposes. (2) Richness and diversity of life forms are values in themselves and contri­ bute to the flourishing of human and non-human life on Earth.5 Regardless of how far one may accept further aspects of Deep Ecology,6 any sympathy with this view would again reject dividing up the natural world on the basis of standard property rights and shaping the environment purely to meet human desires. Wild Law and Earth Jurisprudence present further analyses which embrace an ecocentric view,7 again asserting that all elements of the Earth Community, not just humans, have rights which must be respected:

2 3 4 5

Ibid, p. 223. Ibid, p. 204. Ibid, pp. 201–204. A. Naess (trans. D Rothenberg), Ecology, community and lifestyle, Cambridge: Cambridge University Press, 1989, p. 29. 6 Further elements of the platform set out by Naess support a decrease in the human population to allow non-human life to flourish and proclaim an obligation on supporters to participate in attempting to implement the necessary changes to implement all the elements identified; ibid. 7 C. Cullinan, Wild Law: A Manifesto for Earth Justice (2nd edn), Totnes: Green Books, 2011.

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The natural world on the planet Earth has rights, which come with existence. These rights come from the same source from which humans receive their rights, from the universe that brought them into being.8 Accordingly, “nature deserves to be valued for itself, because it is and exists, not because of the value we place on it as a resource”.9 This requires that our dealings with biodiversity should be on a more equal footing, respecting nature rather than seeing it something which is subject to human control and having value only as property. The Wild Law approach seems to accept a more gradualist approach to the transformation of our thinking, laws and governance, but shows scepticism about the value of property- and market-based approaches10 to conservation: “I do not have faith in ecological modernisation, markets and sustainabi­ lity assessments as the means to achieve a viable future because they are all based on what I regard as fundamentally flawed premises and a philosophy of exploitation”.11 In particular, new developments in conservation law would be rejected when they appear to continue a commodification of nature, rather than contributing to the change in mind-set needed to reflect the place of humans as members of the Earth community.12 From this perspective again, therefore, it is a more radical transformation of the laws governing our dealings with nature which is required, not an extension of legal devices such as property still based on a flawed relationship. ii

Property: Past, Present and Future

Despite such views calling for a fresh start, the reality is that since ancient times western civilisations have recognised property rights over the natural 8

9 10 11 12

T. Berry, “Rights of the Earth: We Need a New Legal Framework Which Recognises the Rights of All Living Beings” in P. Burdon (ed.), Exploring Wild Law: The Philosophy of Earth Jurisprudence, Kent Town: Wakefield Press, 2011, p. 229. B. Filgueira and I. Mason, “Wild Law: Is There Any Evidence of Earth Jurisprudence in Existing Law?” in Burdon (supra n. 8), p. 195. The two are linked but distinguishing them is important as discussed in the final section of this paper. C. Cullinan, “Finding out way to a viable future: A response to Professors Warren and Lee” 18 Environmental Law and Management (elm) 2006, 18–32, p. 23. E.g. criticisms of biodiversity offsetting as “foster[ing] the illusion that we can buy and sell that which we do not truly own: the wild”.; N. Rogers, “Where the Wild Things Are: Finding the Wild in Law” in Burdon (supra n. 8), p. 185.

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world. Areas of land, plants and even some wild animals are owned and the owners have wide powers to determine how their land is managed. This even extends to dealing with it in a way that extinguishes virtually all of the current biodiversity that is present, such as by quarrying or major construction pro­ jects.13 There seems no prospect of a significant shift from that position in the immediate future and conservation policies will have to work within legal systems dominated by the recognition of property rights over the natural world. Not only is this the political reality, but experience in the Soviet bloc has shown that the alternative of state ownership and control of land does not guarantee any better treatment of the environment. State ownership of particular areas of land has proved valuable in protecting these from the pressure to exploit their resource at the expense of their natural qualities,14 but wholesale nationalisation of land is neither likely to occur nor a guarantee of more environmentally sound management. The domination enjoyed by property owners can be limited by favouring a form of property rights which restricts their absolute control. Most notably, ideas of stewardship15 present a limited view of ownership, imposing qualifications on the extent to which the current owner is free to act in ways which bring about major changes in the property while showing no regard for others. Stewardship has a strong religious and cultural background, with connotations of looking beyond the selfish interests of the present owner to take heed of others in this and future generations, but has tended to be overridden by the growth of individualism in the modern world.16 Nevertheless the underlying approach to property changes over time,17 and it may now be appropriate to reverse that trend, with our increasing understanding of ecosystem services18 and thus the anthropocentric reasons for conserving nature. Even if one d­ ismisses all talk of 13 14 15

16

17 18

Similarly, the rights of the owner of a work of art include the entitlement to destroy it, however much it may be treasured by others. E.g. National Parks in the usa. W. Lucy and C. Mitchell, “Replacing Private Property: The Case for Stewardship” 55 Cambridge Law Journal, 1996, 566–600; E. Barritt, “Conceptualising Stewardship in Environmental Law”, 26 Journal of Environmental Law ( jel) 2014, 1–23. Coyle and Morrow present an account of the evolution of ideas of property rights towards a more absolutist view based on human “dominion” rather than respecting the natural environment; S. Coyle and K. Morrow, The Philosophical Foundations of Environmental Law: Property, Rights and Nature, Oxford: Hart Publishing, 2004. D. Grinlinton and P. Taylor (eds), Property Rights and Sustainability: The Evolution of Property Rights to Meet Ecological Challenges, Leiden: Martinus Nijhoff, 2011. For example the uk National Ecosystem Assessment; , last visit: 5.4.2016.

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the “intrinsic value” of nature, there are selfish human reasons for looking after nature since a totally degraded ecosystem will not be able to support human life into the future.19 There is thus scope for property rights to evolve to incorporate greater regard for nature, but even without this it is worth considering how far conservation can work with property rights rather than against them. The latter approach has tended to be the dominant one for governments intent on supporting conservation, favouring regulatory intervention and making use of the standard range of “command-and-control” mechanisms at their disposal. These include prohibitions and permit requirements to control activities harmful to species and to sites of particular concern. Such regulation varies in detail and in effectiveness and in its vulnerability to the various criticisms directed at regulation in recent decades, not least those arising from the tension between public intervention and private rights.20 Moreover, the focus on particular sites and species does not fit with growing appreciation of the need to care for the health of the whole ecosystem, not just specific plots of land (see later). Against this background, and with property- and market-based approaches being used in other areas of environmental law,21 the option of using property-based mechanisms for nature conservation is attracting increasing attention. iii

Problems with Property

The existence of property rights creates a number of practical difficulties for the conservation of biodiversity, quite apart from the more philosophical issues just mentioned. Individual jurisdictions vary in their specific rules but a common pattern, in many respects derived from Roman Law (even in the common law world), is widespread. Land is divided into distinct parcels of vastly varying size which can be owned by private individuals, legal persons or the state, and further divided and transferred between them. Plants growing on the land are treated as “accretions to the soil” and belong to the owner of the land. Non-domestic animals which are not in captivity are not normally anybody’s property. Property rights short of ownership can be created, limited in 19 20

21

A. Gillespie, International Environmental Law, Policy and Ethics (2nd edn), Oxford: Oxford University Press, 2014, Chap. 3. See, for example the text and works extracted in E. Fisher, B. Lange and E. Scotford, Environmental Law: Text, Cases, and Materials, Oxford: Oxford University Press, 2013, Chaps 6 and 12. Such as emissions trading schemes to tackle greenhouse gases.

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time (e.g. leases) or nature (e.g. mineral rights), and not necessarily entailing possession (e.g. rights in security). Other individuals or the public can also enjoy certain rights over land which the owner must respect. A limited number of these rights and obligations can “run with the land”, binding all future owners. In the absence of regulatory intervention, this pattern creates obstacles for conservation in several ways. Firstly, the fundamental nature of ownership, allowing owners to favour their selfish wishes over all other interests (except when those have in turn become embodied in legal rights), entitles owners to do what they like with their property. Regardless of how destructive it is to nature, unless another person’s legally recognised rights are interfered with no legal wrong is done. Equally, because nobody has property rights in wild animals, birds and fish, they are essentially outwith the regard of the law; no legally recognised harm is done if they are killed or injured and no one has standing to represent their interests. It is therefore no surprise that biodiversity has been grossly damaged, both by deliberate (over-)exploitation and as a result of the consequences for nature of its being ignored as other goals are pursued. Two further consequences deserve to be highlighted. A practical one is that property rights fragment the natural environment. Conservation policy nowadays recognises the importance of the ecosystem approach. The Convention on Biological Diversity defines an “ecosystem” as “a dynamic complex of plant, animal and micro-organism communities and their non-living environment interacting as a functional unit”22 and the ecosystem approach calls for “adaptive management to deal with the complex and dynamic nature of ecosystems”,23 noting that this requires attention to ecosystems at all scales, “a grain of soil, a pond, a forest, a biome or the entire biosphere”.24 A world divided up by property rights does not match this holistic view at all. Instead, the natural world has been fragmented into different elements which are treated quite separately, ignoring their role as part of an integrated ecosystem. Land is divided into units on the basis of boundaries which usually have no link to natural features and even where natural features are used they are as likely to split ecosystems as to reflect them.25 Each unit can be managed individually with no regard for the consequences for the natural world beyond its boundaries. Conservation often requires co-ordinated activity over substantial areas 22

Convention on Biological Diversity (adopted 5 June 1992, entered into force 29 December 1993) 1760 unts 79, art. 2. 23 Convention on Biological Diversity cop 5 Decision V/6 (2000) para. 3. 24 Ibid. 25 For example where a river is used as a boundary, dividing a catchment, rather than the boundaries respecting watersheds.

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and even one recalcitrant owner can thwart the effectiveness of schemes, in the absence of coercive powers to ensure co-operation.26 This highlights a second, legal consequence of respect for property rights, namely that the legal status of such rights means that any regulatory intervention must pass certain tests before it is viewed as legitimate. Any diminution of land-owners’ entitlement to do as they wish with their land is an interference with their rights, rights protected in law and often by constitutional provisions. It is therefore prima facie a breach of their rights to require land to be managed in particular ways in order to further conservation (whether preventing certain actions, such as felling woodland or ploughing meadows, or requiring positive steps, such as maintaining or blocking drainage systems). Such intervention can be legally valid but it must show that it passes the tests which legally and constitutionally justify interference with the rights of individuals. In the context of the European Convention on Human Rights, this means showing that any restriction affecting the “peaceful enjoyment of possessions” is proportionate and imposed “in the public interest” and through procedures which are “provided by law”27 and offer dispute procedures that satisfy the right to a fair trial.28 All of these have been subject to litigation,29 where it has been shown that substantial intervention on environmental grounds can be justified. Even powers of compulsory purchase can be legitimate, so long as appropriate compensation is provided, although questions may arise as to the point at which extensive regulation amounts to appropriation.30 This latter point is a particular issue in the usa where property rights enjoy greater protection and the issue of “regulatory takings” is one of continuing controversy and debate. All these features suggest that the recognition of property rights as they stand is an obstacle to effective conservation, prioritising the individual interests of property owners over those of the wider public, let alone those of the environment itself. There are, however, ways in which the framework of property laws can be used to benefit biodiversity. First it is appropriate to consider 26

27 28 29 30

For example in Scotland agreements with all relevant owners and occupiers are used to secure effective management of deer over large areas, but if an agreement is not possible or is not being observed, a control scheme requiring action by owners and occupiers can be imposed; Deer (Scotland) Act 1996, ss 7–8. European Convention on Human Rights, art.1 of Protocol 1. Ibid, art. 6. In the British context see C.T. Reid, Nature Conservation Law (3rd edn), Edinburgh: W. Green, 2009, pp. 34–38. Scottish Law Commission, Discussion Paper on Compulsory Purchase (No.159), 2015, Chap. 3.

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ways in which traditional property rights can be utilised to this end before exploring more innovative approaches and some of the challenges they present. iv

Using Property Rights for Conservation

The extensive power which the law grants to the owner of property can, of course, be used in ways that enhance rather than degrade the natural environment. The owner of land determines how it is managed and thus how far biodiversity will flourish or suffer on the site, so that where broad tracts of land are in the hands of owners who are keen to support conservation, major gains can be achieved. This is especially the case where land is held by a body which is legally bound to further this objective, whether through legislation (e.g. a statutory conservation authority) or other obligations (e.g. a non-governmental organisation created with conservation as its legal purpose). Powers of compulsory purchase, with compensation, can be provided to overcome the obstacle of acquiring the property in the first place.31 Rights less than full ownership may also give the degree of control necessary to pursue conservation goals. A lease will give the tenant many of the rights of the owner for its duration. The acquisition of lesser rights, such as for mining or hunting, may also be worthwhile since they give control over how certain major activities are carried out, or perhaps brought to an end if rights are acquired but then not exercised. In any event the holder of such rights will have legal interests over the land which give them standing to intervene if the owners are acting in ways which damage those interests. Nobody has a legal interest in fish swimming free in a river, therefore (in the absence of statutory provisions) nobody has the right to intervene if activities on the bank poison or disturb them, but the owner of fishing rights will be able to take action to protect the value of these rights.32 Even a right of way might provide a basis for intervention in the face of major developments such as quarrying that as well as having serious impacts for biodiversity threaten to impair that right. The property rights of neighbours may also offer a means of having some say over how land owned by others is dealt with. The law of nuisance provides 31

32

In Great Britain there are powers of compulsory purchase where it is not possible to reach agreement with land-owners on the satisfactory management of a National Nature Reserve; National Parks and Access to the Countryside Act 1949, s. 17. See, for example, the work of Fish Legal in the uk which acts on behalf of fishery owners to protect their rights and secure compensation when harm is caused; , last visit: 6.4.2016.

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a constraint on activities which have effects that spill over the boundaries of one particular piece of land, but everything depends on the specific facts. A factory producing toxic fumes that poison the vegetation may give rise to a cause of action if it is located so that effects are felt over the boundary into land owned by someone else,33 but not if it is situated in the middle of a large holding whose owners are happy to allow the damage to their own property to take place. Water rights may give downstream proprietors some say in what happens upstream. As noted in the next section, there may be ways of expanding the impact of the neighbours’ interests, but this will remain relevant only in limited circumstances and is likely to have only a marginal effect as a restraint on the overwhelming power of the land-owners to do as they wish without regard for biodiversity and only limited regard for neighbours. A more radical way of using traditional property rights is the revival of the public trust doctrine that is being seen in the usa.34 This approach takes seriously the assertion that wildlife is owned by the state35 and, by accepting that wildlife has a place within rather than outside the legal framework, it allows rights and obligations to be recognised, able to compete against those of other property owners. The exact extent and consequences of wildlife being subject to a public trust may be open to argument in specific circumstances,36 but the overall effect has been summarised as requiring the state to act as follows: Based on existing public trust doctrine case law, the state must: (1) consider the potential adverse impacts of any proposed activity over which it has administrative authority; (2) allow only those activities that do not substantially impair the state’s wildlife resources; (3) continually monitor the impacts of an approved activity on the wildlife to ensure preservation of the corpus of the trust; and (4) bring suit to enjoin harmful activities

33 34

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36

As in St Helens Smelting Co v Tipping (1865) 11 hl Cas 642. M.C. Blumm and A. Paulsen, “The Public Trust in Wildlife” 6 Utah Law Review 2013, 1437– 1504; R. Watson, “Public Wildlife on Private Land: Unifying the Split Estate to Enhance Trust Resources”, 23 Duke Environmental Law and Policy Forum 2012–13, 291–321. O. Houck, “Why Do We Protect Endangered Species, and What Does That Say about Whether Restrictions on Private Property to Protect Them Constitute Takings”, 80 Iowa Law Review, 1994–95, 297–332. D. Musiker, T. France and L. Hallenbeck, “The Public Trust and Parens Patriae Doctrines: Protecting Wildlife in Uncertain Political Times” 16 Public Land Law Review 1995, 87–116; P. Redmond, “The Public Trust in Wildlife: Two Steps Forward, Two Steps Back” 49 Natural Resources Journal 2009, 249–311.

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and/or to recover for damages to its wildlife under the parens patriae doctrine.37 The effectiveness of this approach in securing any protection depends heavily on the willingness of the state to act in its capacity as trustee, but the basis of its role is transformed, relying on its entitlements as trustee or property holder, rooted in private law, not its regulatory power in public law. v

Innovations Based on Property Rights

More, though, could be done to make use of property to further conservation. A range of innovations are possible which would enable property mechanisms to be used to create and regulate relationships in a way which will deliver conservation gains. Some of these build on our growing appreciation of the ways in which society benefits from ecosystem services flowing from land but not currently granted legal recognition. Other mechanisms follow the lead in other areas of environmental law, such as controlling greenhouse gases, and convert the task of conservation from a state-led regulatory enterprise into one where individuals and the market have a much bigger role. These may be linked in various ways and include:38 Payment for ecosystem services: land managers receive payments to reflect the benefits that their land is providing to the wider community, e.g. habitat for pollinating insects or water management, thereby creating an incentive for them to maintain or enhance these services whilst those who benefit contribute to the cost. Conservation covenants/easements: land-owners make long term agreements which control the future use and management of the land, by them and by their successors in title, either as a conservation tool in its own right or as the legal basis for delivering an offset or payment scheme. Biodiversity offsetting: development causing a loss to biodiversity in one place is allowed to proceed so long as ecological gains are achieved elsewhere, thereby ensuring no net loss to biodiversity.

37 38

Musiker, France and Hallenbeck (supra n. 36), p. 115. C.T. Reid, “The Privatisation of Biodiversity? Possible New Approaches to Nature Conservation Law in the United Kingdom”, 23 jel, 2011, 203–231; C.T. Reid and W. Nsoh, The Privatisation of Biodiversity? Cheltenham: Edward Elgar, 2016.

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The objectives of such mechanisms could be achieved largely through contractual means but both the longevity of the arrangements required in many cases and the desire for long-term security in the relationship point towards using property as a more appropriate vehicle for encapsulating the rights and obligations involved. Likewise, since the focus is on how land is used and managed, a legal framework that focuses on the land, rather than on land-owners who may come and go, makes sense. Each of these mechanisms and the ways of taking account of ecosystem services do, however, pose challenges to standard property analyses. 1 Ecosystem Services and Land One comparatively minor development which does not require adjustment to existing legal relationships is to build on the obligations that land-owners owe to neighbours, giving greater recognition to nature. The growing mass of research and literature on ecosystem services and the economic value of the environment39 shows that there are significant, but previously overlooked, ways in which harm to the environment causes harm to human well-being and to property. In the same way as the range of effects that are legally acknowledged as amounting to personal injury have been expanded by the recognition of nervous shock or psychiatric harm in addition to physical injury, damage to land could be recognised as arising from impacts which are not currently viewed as causing legally relevant harm. In particular, damage could be acknowledged when there are adverse impacts on the ecosystem services that land benefits from or can provide to others.40 This does not require any reworking of the fundamental rules of property, delict or tort, just an extension of the range of consequences recognised by the law, moving the point at which it is accepted that someone’s interests have been harmed and thus imposing additional constraints on what a property owner can do without causing relevant harm to neighbours. The impact of such an evolution, though, is limited by the need for there still to be a neighbour who has suffered relevant harm (even on this extended definition) and who is willing and able to sue. Even then, further steps will be required so that an appropriate remedy is provided to ensure that biodiversity benefits in the event of a successful action, not just the bank balances of successful claimants receiving compensation. 39 40

E.g. The Economics of Ecosystems and Biodiversity programme; see , last visit: 6.4.2016. C.T. Reid, “Taking Account of Environmental Damage – a brief overview” 26 elm 2014, 164, pp. 164–166.

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2 Payment for Ecosystem Services In relation to payment for ecosystem services, it must be determined who is entitled to payment for what.41 Impressive amounts of work have been done to identify the ecosystem services which are provided by the various elements in our environment (many of which are seen as “unproductive” in commercial terms),42 but attributing these to individual providers is difficult. Even if the scientific challenge of disaggregation and attribution can be met, there is the difficulty created by the fact that the boundaries of individual property holdings will not match those of the functioning units in the ecosystem (units which will operate at very different scales for different services, from an individual hedge to a whole river catchment). Moreover, many areas of land are subject to many layers of property rights,43 giving rise to the question of which is the party whose actions can be credited with providing the services arising from the land. On a tenanted farm, the land-owner has made the land available on the basis of an agricultural lease, thereby dedicating it to a form of use which is likely to offer some ecosystem services (and more significantly precluding more intensive and environmentally harmful uses) but it is the tenant who undertakes the day-to-day management which determines how far biodiversity is nurtured and the level of ecosystem services generated. The existence and (non-) exercise of other rights, such as to minerals or game, and especially the widely distributed rights where there are common grazings or common land in any form, will also mean that responsibility for the current state of the land, and hence the rewards for any ecosystem services being provided, must be shared. Yet with this possible source of value only now emerging as an issue, this is not something addressed by the general law nor explicitly addressed in individual agreements, although the experience of handling agricultural subsidies, which increasingly have an environmental aspect,44 may provide some pointers. Both the relationships between those holding interests in the same land and their relationship with those paying for the services will need to be developed.

41 42 43 44

W. Nsoh and C.T. Reid, “Privatisation of Biodiversity: Who can sell ecosystem services?” 25 elm 2013, 12–20. For example the uk National Ecosystem Assessment (supra n. 18). Nsoh and Reid (supra n.41), pp. 17–20. For an introduction to these at eu level, see , last visit 5.4.2016.

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3 Conservation Covenants/Easements The challenges in conservation are increased by the fact that long-term arrangements are needed to deliver most ecosystem benefits; any new planting or regeneration of woodland will take decades to mature and produce any sizeable biodiversity benefits. This draws attention to the potential of property law in providing enduring controls on the use of land and has led to the development of conservation easements in the usa and interest in the same idea elsewhere. Such an arrangement (whatever the terminology)45 is “an agreement made between a land-owner and a conservation body which ensures the conservation of natural or heritage features on the land. It is a private and voluntary arrangement made in the public interest, which continues to be effective even after the land changes hands”.46 These may be simply offered by land-owners keen to ensure the protection of features on their land or be the outcome of negotiation entailing payment on the part of the covenant-holder in exchange for the restrictions accepted by the land-owner. Traditionally the common law has been opposed to enduring restrictions on the use and management of land, except where these are for the benefit of neighbouring land. This has been both to avoid encumbrances on land as an asset which can be freely used and sold by the present generation and because of concerns over keeping track of such obligations (a bigger issue before widespread land registration schemes).47 In the uk exceptions were made so that certain obligations made to public bodies could “run with the land” so as to bind future owners (e.g. planning authorities48 and the F­ orestry ­Commission49), but these were for limited purposes only. It is in the usa where this mechanism has developed with wider application, influenced by the comparative absence of direct regulatory controls over privately-owned land and the tax breaks which provide an incentive for restricting land in this way (­ accepting such restrictions is treated as a charitable donation to the body benefitting from the easement, so long as the relevant requirements are met, 45

46 47 48 49

The equivalent arrangement in Scotland is known as a “conservation burden” (Title Conditions (Scotland) Act 2003, ss. 38–48) whilst the proposals in England and Wales are for “conservation covenants” (Law Commission, Conservation Covenants (Law Com No. 349, 2014)). Law Commission (supra n 45), para. 1.1. Law Commission, Making Land Work: Easements, Covenants and Profits à Prendre (Law Com No. 327, 2011), para. 2.24. Town and Country Planning Act 1990, s. 106; Town and Country Planning (Scotland) Act 1997, s. 75. Forestry Act 1967, s. 5.

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which in turn shapes the sort of agreement made, most notably by requiring them to be in perpetuity).50 Conservation covenants are a private law, property device but one that has to be created by statute to overcome the common law’s antipathy to such arrangements.51 This creates a number of design challenges which will have a major impact on the ways in which they can be used.52 Among the issues to be considered are the purposes for which this exception to the rules against covenants “in gross” (i.e. not linked to neighbouring land) will be allowed and whether there are to be limits to the parties who can enter them (in itself providing a form of control against the proliferation of encumbrances of land). Any covenants must reflect the long-term nature of the task of providing conservation gains, and whilst all must be carefully drafted to remain meaningful in a dynamic environment,53 there is scope for argument over whether they should be in perpetuity or for a fixed term. The latter may have attractions54 for owners wishing to leave future generations some room to manoeuvre and in order to limit any financial obligations borne by covenant-holders. Covenants are a private law mechanisms and therefore the parties themselves should be free to amend or extinguish them, but given that there is a public interest in the conservation purposes they are serving, there may be justification for some public monitoring and scope for intervention where the parties’ (in)action is harming conservation. Appropriate monitoring requirements and enforcement mechanisms may also need to be provided to ensure that the covenant continues to serve its purpose as the years go by. There are various ways of responding to these challenges, depending on the role to be played by conservation covenants and the detailed legal background within which they must fit. Some of these responses are essentially matters 50 The us experience in contrast with the uk is discussed in C.T. Reid, “Conservation Covenants” 77 The Conveyancer and Property Lawyer, 2013, 176–185. 51 For example, the Uniform Conservation Easements Act produced by the National Conference of Commissioners on Uniform State Laws has been widely adopted across the usa; available at , last visit: 6.4.2016. 52 Reid (supra n. 50); Law Commission (supra n. 45). 53 For example, specific steps required in a covenant may become pointless or impossible in the face of future changes affecting the land, whilst measures designed to conserve a particular species are futile if disease, climate change or the impact of invasive alien species means that the desired species is no longer present in the area. 54 T. Kabii and P. Horwitz, “A review of landholder motivations and determinants for participation in conservation covenanting programmes” 33 Environmental Conservation 2006, 11–20.

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of property law, others of public law and regulation. In developing proposals for England and Wales, the Law Commission indicates possible solutions, but within a vision that has covenants playing a supporting role alongside strong regulatory measures to protect species and habitat.55 The responses, and especially some of the safeguards for the public interest, might be different if covenants were intended to play a more significant role in delivering biodiversity conservation. 4 Biodiversity Offsetting A final innovation is biodiversity offsetting, allowing there to be a trade-off between biodiversity losses in one place and biodiversity gains in another, provided that overall there is no net loss of biodiversity.56 The concept of such trade-offs is accepted in other areas of environmental law, notably for greenhouse gas emissions, but poses particular challenges for nature conservation because of the non-fungible nature of the assets being traded.57 Apart from the fundamental issue of how far any habitat creation or restoration scheme can truly make up for what is being lost,58 there are many challenges in designing an offsetting scheme, including: whether only like-for-like offsets will be accepted or there can be a degree of conversion between different forms of biodiversity; how the equivalence of biodiversity value is to be assessed; how time-lags between losses and gains are to be dealt with; the extent of any limitations or supervision to prevent the offsets resulting in an unacceptable imbalance in the nature or location of the biodiversity elements lost and gained; and the identification of features which are deemed to be so valuable that they must be protected, and therefore fall outwith the scope of any offsetting scheme. An extension of offsetting is “biobanking”, where those managing land to create biodiversity gains can build up credits in advance which can then be sold on to those seeking to offset their harmful activities. Around the world there are 55 56 57 58

Law Commission (supra n 45). Business and Biodiversity Offsets Programme, Biodiversity Offset Design Handbook, Washington: bbop, 2009. J. Salzman and J.B. Ruhl, “Currencies and Commodification of Environmental Law” 53 Stanford Law Review, 2000–01, 607–694. For some insight into what projects can and cannot achieve and debates on the issue, see: K.A. Keenleyside and others, Ecological Restoration for Protected Areas: Principles, Guidelines and Best Practices, Gland: iucn, 2012, p. 70; M. Maron and others, “Faustian bargains? Restoration realities in the context of biodiversity offset policies” 155 Biological Conservation 2012, 141–148; B.A. Woodcock, A.W. McDonald and R.F. Pywell, “Can long-term floodplain meadow recreation replicate species composition and functional characteristics of target grasslands?” 48 Journal of Applied Ecology 2011, 1070–1078.

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several schemes that adopt these mechanisms, notably the Wetland Mitigation scheme in the usa59 and the BioBanking scheme in New South Wales.60 From a property perspective, what is important is that there is a clearly designed asset or commodity that can be traded. There must be a currency of biodiversity credits established so that those on both sides of the offsetting deal can quantify the biodiversity losses or gains involved. Moreover, they must have confidence that any biodiversity gains, and any associated payments, will be delivered over what can be a prolonged period, whilst to the extent that offsets are accepted as part of any regulatory regime, e.g. as a requirement for development consent, the regulatory body and the wider public must also be assured that the losses will indeed be compensated. Providing the frameworks to achieve such results has been a major challenge in the development of carbon trading61 and in that context the characteristics required for a “freely tradable property right” have been identified as: – a clearly identifiable and definable right, which exists within a clear legal or policy framework; – clear ownership over the right, to the exclusion of all other potential claimants; – irrevocability of transfer of title, or revocability only subject to certain preestablished criteria; and – transferability of the carbon credit itself (including an agreed process by which such credit is deemed to be transferred).62 The same will apply for biodiversity credits, where the challenges are compounded by the difficulty of quantifying credits, the long-term nature of the commitment required to deliver the biodiversity gains and the dynamic nature of the natural environment (especially in an age of climate change). A complication is that the degree of success in achieving biodiversity gains may become apparent only decades after the offset deal is required and the development projects started, although the uncertainty can be addressed by discount rates 59

60 61 62

For links to factsheets, rules and guidance from the us Environmental Protection Agency, see , last visit: 6.4.2016. For links to detailed information, see , last visit: 6.4.2016. See generally: P.Q. Watchman (ed.), Climate Change: A Guide to Carbon Law and Practice, London: Globe Law and Business, 2008. M. Wilder, “Nature of an Allowance” in Watchman (supra n. 61), p.103.

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reflecting the varying risks of failure in different types of project.63 Conservation covenants can be an important vehicle for establishing and defining the rights and obligations which make up a biodiversity credit which has the characteristics to be tradable. There are thus several ways of looking at biodiversity conservation which see this not as a task for the state exercising its regulatory powers, but as a shared enterprise where individual initiative and market forces can achieve a more flexible, adaptable and efficient result. Property plays a central role in such approaches but the final section of this paper must now turn to examine the ways in which a property-based approach is well- or ill-equipped for this purpose. vi

Property: Potential and Problems

Continuing with “business as usual” is not a viable way forward if we are to reverse the degradation of biodiversity which threatens the ecological sustainability of the planet and all who live on it.64 It seems unlikely that in the near future there will be a radical restructuring of the relationship between humans and nature such as called for by the Land Ethic and Wild Law. So long as we are operating in a system where land can be owned, then the rights of the landowner and how they are exercised will be an essential element of conservation. Whether they are being utilised, restricted or consciously left unexercised, property rights cannot be ignored. There are ways in which property seems to offer great potential for conservation, yet also ways in which property is illsuited to the task. There is scope for property law to evolve to pay greater heed to the needs of the natural environment. At the analytical level, a reconceptualisation of property along stewardship lines would call for a significant readjustment of the balance between interests in many property relationships. There are, though, more practical adjustments which could be made and more readily accommodated within existing frameworks. The acceptance of a deterioration of ecosystem services as a legally recognised form of harm would be one way of bringing home to land-owners, albeit in limited circumstances, responsibility for the state of the natural environment. Recognition of the existence and value of 63 64

This is the approach adopted in the scheme that was proposed for England: defra, Biodiversity Offsetting in England: Green Paper, 2013. This applies whether one adopts an anthropocentric or an eco-centric view of our global ecosystem and how we should interact with it.

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ecosystem services would further call for clarification of how these fit within the various layers of rights and obligations which determine how property can be controlled. Doing this would open the door wider to mechanisms for rewarding the providers of such services, creating incentives for their maintenance and enhancement. Existing concepts such as covenants and easements can be extended to serve conservation purposes, taking advantage of property law’s suitability for long-term relationships and its range of mechanisms for the transfer, recording and enforcement of enduring obligations. On the other hand, the fragmentation of nature inherent in a property approach is a major drawback for its role in conservation. Aside from ethical objections to the ownership of nature, the recognition of distinct property rights inevitably breaks up the integrity of the natural world, limiting the ability to take a holistic, ecosystem approach. Whereas the response to problems created by greenhouse gas emissions can focus largely on the overall concentration of gases in the atmosphere,65 for nature conservation locational issues and coherence are essential. The right conditions to thrive must be provided for ecological communities, which are not defined by the boundaries between plots of land. Moreover, for some species it is conditions in widely separated locations that matter in view of the extent to which they travel throughout their life-cycle or in annual migrations. Protecting the nesting grounds of migratory birds is of little value unless their wintering grounds and the feeding stops on their journeys are also protected. The requirement for such coherence places a limit on how far an element of central co-ordination can be abandoned. In this context it is important to separate the role of property from the role of markets. The two are closely connected and clear recognition of property rights is an essential pre-requisite for a market-based approach to any issue,66 but using property mechanisms does not necessarily lead one to a strongly market-based system. The nature of a market-based system, made up of lots on individual transactions, is successful where the issue is one of allocating ­private goods and also has the potential to make an effective and efficient contribution where there are broad public objectives to be achieved and strong fungibility exists. Thus trading schemes may have a significant role to play in the global response to climate change, since it is not the specific nature of greenhouse gas emissions nor their specific location that matters but rather their contribution to the overall state of our atmosphere, whilst there are many different ways of meeting any targets and allocating the burden of doing so. But nature conservation is different. Although there are private goods involved, the 65 66

Although local air pollution issues cannot be ignored. J McMillan, Reinventing the Bazaar, London: Norton, 2002, p. ix.

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real benefits of biodiversity are public, and the details of every location and the specific mix of flora and fauna involved do matter. The risk of irreparable harm is a further consideration, with the danger of irreversible consequences arising from the cumulative effect of individual deals, each soundly based when looked at separately but together representing an unacceptable shift in the state of biodiversity. The inappropriateness, though, lies not with using property, but with using an unrestricted market which is inherently unsuited to sole responsibility for the task of nature conservation where coherence and non-substitutionability are significant factors. All markets operate within regulated frameworks to some extent, even if only the existence of a legal or other system which respects ownership and the binding nature of relevant promises,67 but the balance between market freedom and regulation can vary. For biodiversity, if the market is to have a role at all, it may need to be constrained within a tightly regulated framework. In offsetting, for example, this may mean excluding certain features from the scheme and restricting the location and nature of the compensatory steps that are acceptable so that the overall balance of biodiversity is not unduly affected. Such constraints may end up being so tight that they leave no room for markets to produce the benefits that they can deliver, and that may be the appropriate result; markets are not the answer in every situation.68 Such assessments, though, are not truly a question for property law. Property may provide some of the building blocks without which it is impossible to build a market-based system, but it has a role in a much wider range of relationships. In particular, there are virtues to be exploited in the ability of property to provide long-term settlements and to focus on relationships with the physical world, accommodating over time an ever-changing cast of individual parties who fulfil the various roles established and carry the enduring responsibilities and burdens or enjoy the continuing benefits. The task, then is to identify what property can do well, to explore how it can evolve to fit better the needs of conservation and to see how it can serve as a tool within a wider public policy and legal framework. In this way the benefits of a property-based approach can be gained whilst avoiding the practical and ethical risks of relying on property mechanisms alone. The choice is not between property and regulation, but in devising the right balance, using direct regulation and property mechanisms where appropriate, separately and in combination, to deliver the policy goals being sought. A greater willingness to 67 68

McMillan (supra n. 66). See, for example, M. Sandel, What Money Can’t Buy: The Moral Limits of Markets, London: Allen Lane, 2012.

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consider property- (and market-) based mechanisms rather than relying wholly on state intervention may have the potential to engage more people in, and add greater flexibility to, the enterprise of nature conservation, but requires very careful consideration to ensure that potential adverse consequences are avoided. Whatever innovations can be introduced, their role seems likely to be only be as a supplement to direct regulation, not as the predominant means of achieving progress.

part 4 Financialisation and Dematerialisation

⸪

chapter 9

Commodification and Financialization in the Energy Sector: Emission Allowances and Electricity Rüdiger Wilhelmi i Introduction This paper examines the process of “commodification and financialization” in the energy sector. As regard to the scope of “regulatory property” special attention will be given to the trading in electricity contracts and emission allowances. Before doing that, however, it is necessary to elucidate the term “regulatory property” as well as the concepts of commodification and financialization. Property or property rights can be subject to public regulation in two different ways. On the one hand, regulation can restrict private legal positions by means of physical, regulatory or derivative takings:1 Physical takings seize property in order to put it to public use. Regulatory takings restrict the use of a property interest in a way that unduly diminishes its value. Derivative takings diminish the value of surrounding property by means of physical or regulatory givings or takings. On the other hand, “regulatory property” can relate to the creation of property rights by regulation.2 Corresponding to the takings, the so-called givings can also be grouped into physical, regulatory and derivative givings. Physical givings grant property to a private actor. Regulatory givings enhance the value of certain private property interests. Derivative givings increase the value of property interests through physical or regulatory givings or takings. Givings themselves can again be restricted by regulation and therefore be subject to takings. Although property rights granted by regulation do not reach as far as the concept of tangible property in the civil law systems, as it is laid down inter alia in § 903 in conjunction with § 90 bgb (German Civil Code). However, regulatory property is internationally protected as a basic right, e.g. under Art. 17 of the European Union Charter of Fundamental Rights. It also

1 Cf A. Bell/G. Parchomovsky, “Givings”, 111 Yale Law Journal (ylj) 2001, 547–618, pp. 547, 550, 559. 2 Cf A. Bell/G. Parchomovsky (2001, ibid), (pp. 547, 550f., 563f.); see also M. Colangelo, Creating Property Rights. Law and Regulation of Secondary Trading in the European Union, Leiden: Martinus Nijhoff Publishers, 2012, 1–202, p. 23.

© koninklijke brill nv, leiden, ���7 | doi 10.1163/9789004313521_011

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falls within the scope of “property rights” as understood in Anglo-American law and the economic analysis of law.3 The terms “commodification” and “financialization” are likewise opaque. Commodification means the commercialization of objects or rights, i.e. the process of “becoming a commodity”; the concept of commodification was first established by Karl Polanyi, who used it to describe the transformation of societies from being based on barter economies into societies dominated by the supply and demand principle in which production factors such as ground and labour become tradable goods.4 Thus, commodification usually results in (higher) tradability of a certain good. Financialization describes – on the one hand – the commodification process on the financial markets, in particular on the stock market.5 On the other hand, financialization is understood as the social phenomenon in which financial markets, their participants, institutes, motives, motivations and specific ways of operating play an increasingly important role in national and international economic life. Processes of commodification and financialization of regulatory property can be observed inter alia in the energy sector, especially in the trade segments for electricity contracts and emission allowances. The aim of this paper is to demonstrate the interactions between regulatory law and what is traditionally understood as “property”, by using examples from the developments taking place in Germany and the European Union. In this context this paper concentrates on the development of securities as a classic example of commodification and financialization through creating explicit property rights. Against this background, it will explain the development of trade in electricity contracts and emission allowances. Afterwards, it will briefly address the applicable regulatory capital market law and close by drawing a conclusion. ii

Securities and Securities Markets as Examples of Commodification and Financialization

1 Initial Situation The processes of commodification and financialization can best be illustrated by considering the development of securities and securities markets, which 3 Cf. R. Dijabj, “Regulatory Givings and the Anticommons”, 64 Ohio State Law Journal (oslj) 2003, 1041–1124, pp. 1041, 1052f. 4 K. Polanyi, The Great Transformation: Politische und ökonomische Ursprünge von Gesellschaften und Wirtschaftssystemen, Boston: Beacon Press, 1944/2001. 5 Cf M. Heires./A. Nölke, „Finanzkrise und Finanzialisierung“, in: O. Kessler (ed.), Die internationale politische Ökonomie der Weltfinanzkrise, Wiesbaden: Springer, 2011, 37, p. 38 et seq.

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make civil obligations not only tradable, but also marketable at exchanges. The process described in the following is based on German law, but comparable developments can be found in other jurisdictions as well. Civil obligations or claims can be transferred by assignment, which in principle makes them tradable. However, trading claims by assignment encounters some legal obstacles.6 The buyer (assignee) only acquires the claim with legal effect if the seller (assignor) was the rightful owner of the assigned claim. Also, the debtor can still fulfil the claim with a discharging effect by providing performance to the seller (assignor), provided that he had no knowledge of the cession (§ 407 (1) bgb). Furthermore, he can raise all objections against the assigned claim which he could have raised to the assignor before the ­cession (§ 404 bgb). The cessionary is thus exposed to substantial risks, which increase exponentially with each assignment of the claim. 2 Commodification through Securitization These obstacles can partly be overcome by securitizing the claims. Unlike obligational claims securities can be transferred according to tangible property rights law. This (in combination with the liability of the seller for indorsement) makes the transfer of securitized claims easier and safer. The improved tradability is achieved by connecting the civil claim with the ownership of the physical representation of the security: The right in personam becomes equivalent to a right in rem. The basic form of a security under German law is the bearer bond, §§ 793 et seq. bgb.7 This bond entitles its holder to claim the securitized debt from the issuer (legitimizing function); accordingly the fulfilment of the securitized debt towards the holder discharges the debt even if the holder is not the creditor (discharging function). The issuer can only refuse performance if the bond itself grants applicable objections or defences (§ 796 bgb). Finally, the transfer of the security according to property law makes it possible to acquire the bond in good faith, i.e. free from encumbrances even if the legal entitlement of the seller suffers from defects. Even lost or stolen bonds can be validly conveyed (§§ 932 et seq., 935 (2) bgb). Therefore, the buyer can rely on the existence and validity of the securitized claim, which enhances its tradability. Parallel to this, the promissory note, which is the archetype of securities, provides the possibility of adding an indorsement on the claim, making not only the issuer and the payee, but also the transferor liable.

6 For an overview, H. Brox/M. Henssler, Handelsrecht mit Grundzügen des Wertpapierrechts, München: C.H. Beck, 2011 (first published 1978), p. 265 et seq. 7 For an overview, H. Brox/M. Henssler (2011, ibid), p. 267 et seq.

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The indorsement makes the promissory note tradable.8 The connection of the civil claim with the physical representation of the security commoditizes the claim. Claims that are being securitized as bearer bonds can also be standardized, meaning that there is a multitude of similar bonds that are issued by the same issuer and provide a similar claim that is subject to similar conditions. This means that these securities are interchangeable and can therefore be subject to a generic debt. The combination of easy transferability and interchangeability makes the securities fungible, thus making them marketable, particularly at exchanges. The creation of fungible bearer bonds results in the financialization of civil claims. Securities, whether these be bearer bonds or stocks, enable the transfer of membership rights and civil claims as property rights, making them commodities. Their creation has led to the commodification of civil claims and membership rights. Their standardization in the sense of issuance as a multitude of ­interchangeable parts has facilitated their trade at stock exchanges and therefore their financialization. iii

Commodification and Financialization of Electricity

1 Initial Situation Before the revision of the German Energy Act (Energiewirtschaftsgesetz) in 1998, the electricity supply was monopolized. The reform led to a paradigm shift towards market competition with state-regulated network management in Germany and Europe.9 Since the first regulation of the electricity supply market by the German Energy Act (EnWG – Energiewirtschaftsgesetz) of 1935, the German legislation on this sector had been determined by concession and demarcation contracts. If the municipalities had not been running the municipal utilities themselves, they granted contractual concessions to energy providers that provided them with the exclusive right to establish and run the electricity network. Through concentration processes, the German electricity sector became a system with three levels. The first level was that of the local providers, who distribute the energy to local consumers. The second level was that of the regional providers, 8 M. Schmoeckel, Rechtsgeschichte der Wirtschaft. Seit dem 19. Jahrhundert, Tübingen: Mohr Siebeck, 2008, p. 98 et seq. 9 W. Danner, „Entwicklung des Energiewirtschaftsgesetzes“, in: W. Danner/C. Theobald (eds), Energierecht – Kommentar, München: C.H. Beck, 2014 (81. edn), Einführung, para. 27.

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which provide the distribution to local providers. The third level consisted of the transmission companies (Verbundunternehmen), which produced electricity and operated the transregional transmission networks. In this system the transmission companies protected the segmentation of the markets by entering into so-called demarcation contracts. These contracts allocated a specific amount of regional providers to each transmission company, which – often backed up by cross-shareholdings – created regional monopolies. The typical contract concluded with the final consumer obliged him or her to cover all energy needs with electricity provided by the local provider, lacking specific details on the extent and timing of their consumption.10 The EnWG of 1935 did not initially change the characteristics of this market structure, but imposed state supervision over the network management and granted extensive governmental intervention rights. The objective was to ensure and improve energy efficiency as well as to secure public influence over energy supply and to prevent macroeconomically detrimental competition (see the preamble of the Energy Act of 1935). Concession and demarcation contracts were excluded from anti-trust regulation, while energy providers were made subject to market abuse control. The supervisory authorities were entrusted inter alia with the surveillance of energy prices to compensate for the absence of natural competition on the market. The authorities were especially empowered to implement binding rules for tariff and price setting, e.g. price ceilings (cf. § 7 Subs. 2 EnWG 1935).11 The German electricity market was therefore dominated by regional monopolies. It was structured along three lines: (1) production, (2) regional, national and international transport, as well as (3) local distribution to the consumer. The transmission companies at the first level owned and ran the major production plants and operated the transregional transmission networks. These networks allowed them to trade electricity inside and outside the country, but also to provide electricity to the end users.12 Due to this structure, electricity was merely traded bilaterally between transmission companies and only if need be.

10

11 12

P. Lintzel/M. Diem, „§ 13 Entwicklung der deutschen Energiemärkte“, in: I. Zenke/R. Schäfer (eds), Energiehandel in Europa: Öl, Gas Strom, Derivate, Zertifikate, München: C.H. Beck, 2012 (first published in 2005), pp. 313, 315. S. Frenzel, Stromhandel und staatliche Ordnungspolitik, Berlin: Dunker & Humblot, 2007, p. 58. S. Frenzel, Stromhandel und staatliche Ordnungspolitik, Berlin: Dunker & Humblot, 2007, pp. 56, 57.

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2 Energy Law Reform As a remedy against the monopolistic energy market structure the first energy law package, which was initiated by Directive 96/92/EC, was enacted in order to establish a Europe-wide competitive electricity market (recital 2). This goal was supposed to be met by the regulation of network access as well as by unbundling system operation. In Germany the directive was implemented in 1998 by the new EnWG which replaced the (frequently amended) EnWG of 1935. Negotiated network access was meant to open networks for transmission, thus allowing electricity trading, by enabling customers or suppliers at the lowest level to obtain electricity not only from the respective supplier at the higher level, but also from any supplier with network access. Therefore this negotiated network access, as well as the efforts to unbundle the transmission companies in order to prevent market distortions, facilitated not only the transportation of electricity but also its commodification. Despite all of the above efforts, competition at the lowest level – and the desired price decrease which was meant to come with it – did not get off the ground. Reasons for the failure could be attributed to the long-term contracts negotiated and concluded under the old system. However, another factor was that the existing electricity market participants exploited their market power and caused high transaction costs for negotiated network access that was not necessarily granted on a discrimination-free basis.13 In the context of the second energy law package in 2005, enacting Directive 2003/54/EC, the EnWG was amended again, especially the regulation of network access. Conditions for access could no longer be negotiated individually among market participants, but were standardized by the competent authorities. They were enabled inter alia to grant access to networks when applicants met the necessary requirements. In addition a monitoring system of network operators was installed by the competent authorities. Since effective trade had not been achieved so far, further regulatory unbundling measures were introduced, obliging larger operators to vertically disintegrate. Transmission and distribution networks had to be operated by legally distinct entities. The second energy law package therefore tried to increase the commodification of electricity. Despite these measures the concentration of market power in the energy market remained. In reaction to this the third energy law package – initiated by Directive 2009/72/EC, concerning the internal market in electricity and the Regulation No. 714/2009 on electricity trading – was enacted. It aimed 13

P. Lintzel/M. Diem (2012, supra n. 10), pp. 313, 317.

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at “a more effective separation of networks from activities of generation and supply” (cf. recital 9 et seq.). The Directive was implemented in Germany by amendment of the EnWG in 2011. It contained further unbundling measures, giving the choice to opt for ownership, unbundling of the transmission and distribution system, or network operation by independent operators. The directive provided three legal regimes for unbundling: (1) ownership unbundling, (2) the establishment of independent system operators (ios) and (3) the establishment of independent transmission operators (ito). Under the favoured option of ownership unbundling, the same person or persons should no longer be entitled to exercise control over a generation or supply undertaking and over a transmission system operator or a transmission system at the same time (recital 11). Conversely, control over a transmission system or transmission system operator should preclude the possibility of exercising control or any right over a generation or supply undertaking. Under an iso arrangement, a vertically integrated entity can be owner of the network, but the transmission system has to be entirely separated. Under an ito arrangement, the network can be owned by vertically integrated companies, but the network has to be operated and maintained by an independent and solely responsible transmission operator.14 Thus electricity was not only commodified by separating production, supply and transmission (system operation); through the introduction of exchange trading it was also financialized. This included the establishment of corresponding energy exchanges and standardized contracts. The electricity market is divided into a futures market for trading future supplies and a spot market for trading on a short-term basis, normally for the next day, but also on the same day (intraday). Besides the organized stock exchange electricity can also be traded “over the counter” (so-called otc trade). Balancing energy is only traded on the over-the-counter markets. This energy is necessary to continuously maintain a permanent balance between the actual generation of and demand for electricity. The otc trade is based on a joint tender of the energy suppliers. Apart from this, electricity contracts are also being used as basis for a wide range of derivatives. The financialization of electricity by means of standardized electricity contracts and their tradability, especially on the energy exchanges, offers the possibility of meeting the end consumer demand and of balancing the daily

14

Cf A. Johnston/G. Block, “eu Energy Law”, Oxford: Oxford University Press (oup), 2012, para 3.13.

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electricity fluctuation. As a consequence the classic long-term supply contracts have become unprofitable and the supplier market has become more flexible.15 The conditions of electricity trade on energy exchanges are laid down in the three energy law packages of the European Union and their implementation in German law, mainly the German Energy Law. As electricity trade is a segment of the capital markets it is also subject to capital market regulation, for example the MiFID. After the financial crisis not only was the MiFID amended by MiFID ii and MiFIR but also a special REMIT-Regulation of the energy market and the general EMIR-Regulation on derivatives were enacted. 3 Qualification of Traded Electricity The commodification and financialization of electricity is – as demonstrated – based upon numerous regulative measures. Although electricity contracts can be classified as property rights, they have not been created directly by regulation. The aforementioned measures rather established their economic preconditions by breaking up regional monopolies. Using the terminology introduced above, the commodification and financialization of electricity can be described as derivative givings – mainly by regulatory takings and partly by physical givings. Regulated network access and unbundling measures mainly interfere with the existing property of the suppliers and therefore constitute regulatory takings. Besides that the granted network access also constitutes a physical giving that can result in the creation of property rights. The electricity trade is therefore based upon regulatory property in a broader sense. The development of electricity trading by the three regulatory packages of the European Union in the last twelve years has demonstrated how difficult it is to create the premises for commodification and financialization, even if based upon regulatory property in a broader sense. Moreover, these processes occur simultaneously with the transition of the energy systems towards renewable energies.16 Considering the triad of aims in energy law, (1) supply security, (2) inexpensiveness and (3) environmental sustainability (§ 1 (1) EnWG), there is an ongoing discussion on the security of supply and how the necessary generation and transmission capacities could be secured.17 This debate has not only been triggered by the expansion of renewable energies but also by changing

15 16 17

P. Lintzel/M. Diem (2012, supra n. 10), pp. 313, 319. Cf. with further references: W. Kahl/J. Bews, „Das Recht der Energiewende – Rechtspolitische Alternativen für mehr Effektivität und Kohärenz“, JuristenZeitung (jz) 2005, 232. Cf. with further references: W. Kahl/J. Bews (2005, ibid), p. 234 et seq.

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incentives due to the effects of the commodification and financialization process in the electricity sector. iv

Emissions Trading

1 Initial Situation Prior to the introduction of emissions trading, CO2 emissions were only subject to public regulatory legislation, especially the German Federal Emission Control Act (Bundesimmissionsschutzgesetz – BImSchG). Pursuant to § 4 et seq., BImSchG admission and operation of CO2 emitting facilities require a special licence. In the course of the licensing procedure the operator has to prove that reasonable measures are taken to limit emissions and that the facility complies with state-of-the-art environmental technology. Thus, CO2 emissions were mainly regulated in the sphere of the single polluter. This was done either by directly setting statutory emission limits or indirectly by imposing technical requirements in order to (further) reduce emissions.18 However, the level of approved emissions for a single facility could be exceeded if the transgression was counterbalanced by a corresponding emission shortfall at a different facility run by the same or even another operator. Provisions that enabled the setting of binding limits for the total amount of emissions generated in Germany did not exist. 2 Introduction of Emissions Trading Nowadays trading with emission rights is conducted on two different levels: between states and between companies within associated states. Emissions trading between states – which was agreed upon in the Kyoto Protocol of 199719 – will not be examined in more detail. The focus is on the trade between companies which was introduced by the Emissions Trading Directive 2003/87/EC in 2003 and implemented in Germany by the Greenhouse Gas Emission Trading Law (Treibhausemissionshandelsgesetz – tehg) of 2004 (revised in 2011 and 2013). It works on the principle of “cap and trade”. Every emission has to be backed by a specific level of emission rights. Hence, the total level of emissions is limited by the corresponding level of emission rights that have been released (§ 7 (1) tehg). The number of released emission rights is capped. The level and allocation method of emission rights were initially 18 19

H. Jarass, Bundes-Immissionsschutzgesetz – Kommentar, München: C.H. Beck, 2015 (first published 1983), § 12, para. 10. M. Colangelo (2012, supra n. 2), p. 125 et seq.

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determined by the member states themselves whereas now the Commission takes the allocation decision.20 Emission rights are principally granted for one trading period and are typically replaced by emission rights for the subsequent trading period (§ 7 (2) tehg / Art. 13 (2) 2003/87/EC). The tradability of emission rights was supposed to reduce emissions where it was most efficient to do so. Thus, the allocative function of the market is used for regulatory purposes. The traded emission rights are securitized as emission certificates which are recorded in a register (§ 17 tehg). Emission certificates are freely transferable (§ 7 (3) tehg) and can be acquired in good faith (§ 7 (4) tehg). These measures have led to the commodification of emissions by creating regulatory property. The emission certificates are fungible. They can be and are traded on energy exchanges, e.g. on the eex in Leipzig. Here as well, derivatives on emission certificates were developed. It can be noted that there is not only a commodification, but also a financialization in respect to emissions trade. 3 Discussion on Emission Rights Emissions trading gives rise to legal debate on several issues: First of all, it is necessary to establish a mechanism for the release and the allocation of the certificates. This includes a decision both on the distribution to the emitters and on the total amount of certificates. Initially the allocation of the certificates was (mostly) free of charge, whereas the quota was oriented on the need in the past (so-called grandfathering). In this context it became evident that the potential for savings was not adequately taken into account. In combination with market failure this resulted in windfall profits in many cases.21 As a consequence the allocation is nowadays linked to the benchmark of the best available technology. In addition, it is possible to allocate emission certificates via auction. This option was hardly exercised at first, but the ratio on the total emission trade volume will be increased from 20 per cent in 2013 (all energy producers have had to pay for certificates since 2013) to 70 per cent in 2020 and 100 per cent in 2025.22 The matter of how the revenues from the allocation in return for payment may be justified is a controversial one.23 In any case, allocation via auction results in the financialization of the allocation of emission rights. 20 21 22 23

M. Colangelo (2012, supra, n. 2), p. 139 et seq, 155 et seq. Cf M. Colangelo (2012, supra n. 2), p. 146 et seq. Cf European Commission, „The eu Emissions Trading System (eu ets)” (download: ), last visited: 16.3.2016. Cf. M. Colangelo (2012, supra n. 2), p. 189.

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In retrospect, the total quantity of the distributed certificates has proven to be too large. This caused an over-supply and subsequently a significant price decrease. The result was that the trade on emission certificates could not provide adequate incentives for further savings. The reason for this development is still unclear. The increasing use of renewable energy sources and the economic crisis as a result of the financial crisis may be an explanation to some extent, but both incidents do not explain the development completely.24 As a remedy, the authorities are now able to withhold certificates that have not yet been released until the subsequent trading period (backloading). Evidently, this is only a temporary solution.25 In order to stabilize market pricing it is planned that a market stability reserve should be established. Emission allowances shall be placed in this reserve or released into the market respectively in case of a predefined surplus or deficit in supply.26 It remains as yet unclear why the market does not determine the price itself. The reduction target will be reached by determining the cap anyway and, as there is principally a market-clearing equilibrium price for emission certificates,27 the total quantity of emissions will only stay below the reduction target if the demand for emission certificates is permanently lower than the target. This could be problematic if the incentive to invest in emission-­ preventing technology disappears due to the low prices.28 Moreover, the transferability of unused certificates to the subsequent trading period disturbs the appropriate allocation in the next period; there are no binding trading limits per period. Backloading and the market stability reserve have a particular impact on the incentive to invest. The temporal inconsistency between the potential holding period and the window for the use of emission rights are only affected very indirectly.

24

25

26 27 28

N. Koch/S. Fuss/G. Grosjean/O. Edenhofer, “Causes of the eu ets price drop: Recession, cdm, renewable policies or a bit of everything? – New evidence”, 73 Energy Policy, 2014, 676–685. Commission Regulation (eu) 1210/2011 amending Regulation (eu) 1031/2010 in particular to determine the volume of greenhouse gas emission allowances to be auctioned prior to 2013. Text with eea relevance [2011] oj L308/2. Cf. European Commission, “Structural Reform of the eu Carbon Market” (download: ), last visited: 16.03.2016. Cf. G. Winter, “The climate is no commodity: taking stock of the emissions trading system”, 22 Journal of Environmental Law 2010, 1–25, p. 17. Cf I. Zenke/M. Vollmer „Emissionshandel“ in: W. Danner / C. Theobald (eds), Energierecht – Kommentar, München: C.H. Beck, 2014 (82. edn), § 118, para 322.

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Finally, the intervention in the price-setting process by regulating the market supply is incompatible with the overall goal of market-driven emission control (marketization). Further obstacles can arise due to the fact that market processes may foil regulatory interventions or support measures. For instance, public funding of renewable energy sources in Germany has led to an increased supply of emission-free energy and subsequently to a price decrease for emission certificates.29 The unused certificates have often been sold to foreign emitters. As the foreign emitters were now able to meet the demand on emission certificates at distortedly low prices their incentive to reduce emissions in fact reversed into its opposite.30 Conversely, market processes are also affected by the exemption of certain emitting facilities from the obligation to participate in emission trading, especially for reasons of fostering competitiveness. The same applies to publicly granted discounts on the emission prices in order to boost the economy or market competition.31 The allocation and further distribution of emission certificates follow primarily market-orientated processes that take place mainly at the financial market, especially at stock exchanges. In that regard, a significant financialization can be noted. However, it is not conclusive that financialization necessarily leads to excessive speculation and thus overpricing. As demonstrated, there are also considerable exceptions from these market processes, especially due to non-inclusion of some emitters or the assignment of gratuitous derivatives. In these cases, the regime of the market or financial market is deviated, whereas feedback effects can still be noted. Opinions on whether emission trading is a success story or fails to meet its purpose vary widely.32 As a matter of fact, the system allows for setting an exact cap on the amount of emissions allowed each year, albeit the emissions can be shifted between the years. Beyond that, it was hoped that emissions could be further reduced by using the price of allowances as a general market 29

H.-W. Sinn, „Abgesang auf das eeg“, Ifo Standpunkt 2012/Nr. 131 (download: ), last visited: 8.4.2016. 30 K. Neuhoff/A. Schopp, “Europäischer Emissionshandel: Durch Backloading Zeit für Strukturreform gewinnen”, Deutsches Institut für Wirtschaftsforschung Wochenbericht 2013/ Nr. 11 (download: ), last visited: 8.4.2016, 1–11 (p. 6); H.-W. Sinn (2012, supra n. 29). 31 In 2013 European electricity producers stopped to obtain emission rights for free, leading to an increasing demand, K. Neuhoff / A. Schopp, (2013 supra n. 30), p. 6. 32 Affirmative cf M. Colangelo (2012, supra n. 2) p. 187; discerning G. Winter (2010, supra n. 27), p. 1.

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principle to decrease demand for emission rights. So far this goal has not been reached and it remains unclear whether it will be. The question is, whether a greater emission reduction could have been reached by using a different system. Within this context emission trading is criticized for artificially creating a commodity that can not only be deployed but also exploited.33 Commodification and financialization are seen rather as drivers for emissions than an incentive for their reduction. Concerning this issue, however, trading schemes have been adapted, allowing authorities to hold back new allowances and postpone their auctioning to the following period. Whether this practice is compatible with the general principle of the protection of legitimate expectation can be questioned.34 The German jurisdiction so far takes the stance that no legitimate expectation in the continuity of allocation rules exists and thus will not be protected by legal authorities,35 but this does not seem to affect allowances already allocated. The question also remains unanswered whether the aim of reducing red tape by using commodification and financialization has been reached.36 Installations covered by the cap-and-trade system are required to obtain special permits to emit from the competent authority (§ 4 tehg / Art. 4 Directive 2003/87/EC) and are obliged to adhere to a number of monitoring and reporting rules (Art. 14 et seqq. Directive 2003/87/EC). For the purpose of application, installations are obliged to submit monitoring and reporting plans (§ 6 tehg / Art. 6 Directive 2003/87/EC). Installations must calculate their expected amount of emissions which are included in yearly emission reports that have to be authorized by the competent authority (§ 5 tehg). Furthermore, the free allocation of allowances requires enormous effort on the part of the European and national authorities, and is highly vulnerable to forecasting risks (cf. §§ 7 et seq. tehg). In addition to that, continuous monitoring and surveillance is required in order to prevent market abuse and maintain effective competition. 4 Qualification of Emission Allowances Following the terminology given above, emission allowances are regulatory property in the sense of property rights created by regulation – that is, physical givings. In this regard commodification and financialization come along with a convergence with capital market law. 33 34 35 36

Discerning G. Winter, (2010, supra n. 27), pp. 1, 17. W. Frenz, “Vertrauensbruch im Emmissionshandel”, Europäische Zeitschrift für Wirtschaftsrecht (EuZW), 2012, 81–82, p. 81. BVerwG, NVwZ 2013, 576 et seq. Discerning G. Winter (2010, supra n. 27), (pp. 1, 20 et seq.).

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Emission rights enjoy fundamental rights protection and in special cases fall within the scope of Art. 17 of the Charter of Fundamental Rights of the European Union, but only if they are based on performance.37 This requirement is met if a property right granted for free is transformed for a consideration.38 Due to the intended fungibility of emission rights it does not, however, seem convincing to make the protection of an allocated emission certificate by fundamental rights conditional on how its owner has acquired it. In fact, it seems appropriate to treat them like other commodities and securities traded on exchanges or otc. Allocating emission allowances on the market subject to their revocation by authorities at any time is not compatible with this. If the emission allowances are allocated without that limitation, authorities revocating them would infringe the principle of non-retroactivity. The status of already allocated emission certificate has to be distinguished from the expectation to participate in future allocation of certificates on which the discussion has focused so far. On this the general principles apply, so that it is solely protected by the principle of non-retroactivity. v

Capital Market

Capital market law is relevant to trading with energy contracts and emission allowances. Energy contracts and emission allowances are non-financial instruments, meaning that general regulations for financial markets, notably the MAD-Directive concerning market abuse (2003/6/EG) and the MiFID-­ Directive concerning financial instruments (2004/39/EC), are not applicable, although the new MAR-Regulation (eu) No. 596/2014 concerning market abuse that applies from 3 July 2016 will be applicable to certain transactions regarding emission allowances traded on regulated markets. The MAD-Directive and the MiFID-Directive as well as the MAR-Regulation are, however, applicable to the relevant derivatives. Furthermore, specifically in order to regulate transactions on energy trading markets, to which the general regulations for financial markets are not applicable, Regulation (eu) No. 1227/2011 on Energy Market 37 C-416/01, ecj of 20.11.2003, Sociedad Cooperativa General Agropecuaria (acor) v Administración General del Estado, ecr i, 14083, para 50; H. Jarass, “Der grundrechtliche Eigentumsschutz im EU-Recht”, Neue Zeitschrift für Verwaltungsrecht (NVwZ) 2006, 1089–1095 (p. 1091); C. Calliess, “Art. 17 EU-GRCharta”, in: C. Calliess / M. Ruffert (eds), euv/aeuv Das Verfassungsrecht der Europäischen Union mit Europäischer Grundrechtecharta – Kommentar, München: C.H. Beck, 2011, para. 7. 38 C-416/01, ecj of 20.11.2003, Sociedad Cooperativa General Agropecuaria (acor) v Administración General del Estado, ecr i, 14083, para 50; C. Calliess (2011, ibid), para. 7 with fn 31.

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Integrity and Transparency (remit) was adopted. This regulation particularly prohibits insider trading and market abuse. It aims „to ensure that consumers and other market participants can have confidence in the integrity of electricity and gas markets, that prices set on wholesale energy markets reflect a fair and competitive interplay between supply and demand, and that no profits can be drawn from market abuse“ (recital 1 remit). Additionally, the European Market Infrastructure Regulation (eu) No. 648/2012 (emir) intends to regulate the market for OTC-derivatives and mitigate systemic risk (recital 1 emir). Here, too, substantial administration expenses are necessary to guarantee a functioning market for energy. Furthermore, there is the substantial effort that is needed to develop and maintain not only exchanges, but also the underlying standardized contracts. The utilization of capital market law shows that, even though energy contracts and emission certificates are not financial instruments, the underlying legal problems can primarily be solved by applying laws, rules and regulations that govern assets and rights, in particular those traded at exchanges but also to those traded otc. Accordingly, the relations of the involved parties under private law are governed by regulations concerning financial instruments in general and derivatives in particular. Consequently, it may be doubted whether there is a need for the development of a specific legal doctrine concerning regulatory property in regard to trading it. The discussion seems rather to focus on questions concerning the relationship between the state and regulatory property, especially the assignment of it. vi

Summary and Some Tentative Conclusions

Commodification and financialization of electricity and emission rights entail a considerable regulatory effort. This raises the question of whether their benefits can justify such an effort. Electricity contracts can be qualified as property rights. Although they do not come into existence through regulation, but because of private agreements, the relevant regulation creates the factual and economic preconditions for the creation and trading of these property rights, particularly through ownership unbundling. Therefore, commodification and financialization of electricity contracts generate regulatory property in a wider sense, by creating a regulatory giving derived from regulatory taking. Emission certificates are regulatory property in the sense of physical givings, as regulation creates rights similar to ownership. Problems arise primarily with regard to their creation and initial allocation.

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Commodification and financialization aim to ensure economic efficiency in pricing and allocation. Whether or not they can also be used to other ends remains an open question. At any rate, the goal of emissions trading is to avoid negative externalities.39 This however is not achieved by creating artificial markets and thus internalizing the costs resulting from shortage, but eventually by determining the shortage through the limit of allocated allowances set by state regulation. The markets themselves only provide efficient allocation within these regulatory boundaries. As far as electricity and emission rights are regulatory property, the resulting legal problems can largely be solved by employing the regulation concerning securities and similar rights that are traded on capital markets. Here, claims to the delivery of electricity and emission certificates are traded, while otherwise claims to other assets or rights are traded. Thus, electricity and emission rights replace other assets – including commodities – or rights. This constitutes further evidence for the benefits of commodification and financialization of electricity and emission rights. 39

M. Colangelo (2012, supra n. 2), p. 188.

chapter 10

In Rem Effects of Non-exclusive Sub-licences in Insolvency Christine Godt and Jonas Simon I

“Insolvency-Proof” Non-exclusive Licences: The Issue

The in rem effects of simple licences in the insolvency of the licensor have become a major issue of political controversy in Europe. Failed legislative reforms1 and diverging legal solutions across Europe,2 and cautiously evolving case law in those countries, stand in sharp contrast to the clear statutory provisions in the us and in Japan. 11 U.S.C. (US Bankruptcy Code) § 365 (n)3 gives the licensee the right to choose and uphold the contract in case that the trustee had chosen to cancel the contract. Art. 56 Japanese Bankruptcy Code4 excempts certain non-exclusive licence contracts from the trustee’s right to 1 Only Germany has seen two attempts to reform the law in 2007 (Off. J. [BT-Drucks.] 16/7416) and in 2012 (Draft [RefE] v. 18.1.2012), discussed in comparison to Swiss and us law by M.  ­Reutter, “Intellectual Property Licensing Agreements and Bancruptcy”, in: J. de Werra (ed.), Research Handbook on Intellectual Property Licensing, Cheltenham/Northampton: ­Edward Elgar Publ., 2013, 281–311. 2 uncitral, http://www.uncitral.org/pdf/english/texts/insolven/05-80722_Ebook.pdf (2005); aippi, https://www.aippi.org/download/commitees/190/RS190German.pdf (2006). 3 Sec. 365 (n) US-Bankruptcy Code reads: “(n)(1) If the trustee rejects an executory contract under which the debtor is a licensor of a right to intellectual property, the licensee under such contract may elect – (A) to treat such contract as terminated by such rejection […] or (B) to retain its rights (including a right to enforce any exclusivity […]), […] as such rights existed immediately before the case commenced, for – (i) the duration of such contract; and (ii) any period for which such contract may be extended by the licensee as of right under applicable nonbankruptcy law. (2) If the licensee elects to retain its rights, as described in paragraph (1) (B) of this subsection, under such contract – (A) the trustee shall allow the licensee to exercise such rights; (B) the licensee shall make all royalty payments […]. (3) […]. (4) […]”. This was introduced by the Intellectual Property Bankruptcy Protection Act, Public Law 100–506, 102 Stat. 2538 (1988). 4 Art. 56 of the Japanese Bankruptcy Code reads “Article 56(1) The provisions of Article 53(1) and (2) [the right to cancel non-fulfilled continuing obligations by the trustee – author’s note] shall not apply where the counter party of the bankrupt under a contract for the establishment of a leasehold or any other right of use or making profit has a registration or meets any other requirement for duly asserting such right against any third party. (2) In the case

© koninklijke brill nv, leiden, ���7 | doi 10.1163/9789004313521_012

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cancel continuing contracts. Yet, the courts in Europe have started to acknow­ ledge that in certain situations the need to protect the market from the effects of a single instance of bankruptcy may outweigh the immediate interests of creditors. However, the dogmatic structures differ considerably and more often camouflage rather than explain the balancing exercise of the underlying policy decision. The Dutch Hoge Raad decided in its Nebula-Ruling5 in 2006, that a creditor may not simply execute his/her rights, and refined the reason recently in abn Amro v Berzona (2014).6 Also, the German Supreme Court Bundesgerichtshof (bgh) took the perspective of the licensee and granted “insolvency-proof” status to sub-licenses in Reifen Progressiv7 and Take Five.8 The regional instance court in Munich,9 and recently the bgh,10 have decided that some sorts of cross-licences and licences granted for single payment are to be qualified as fulfilled, and are therefore no longer affected by the trustee’s right to cancel a non-fulfilled contract. Consequently, these licences can also be qualified as “insolvency-proof”. While juxtapositions between ip law and insolvency law, of property and contract and the nature of the licence (sale or lease) and “privacy of contract” dominate the discussion, little progress has so far been made towards a transparent balance of opposing interests in insolvency which calibrates the protection of creditors, the interest in market clearance and robust undertakings, and the protection of third parties downstream. The following article pursues this goal and argues that a case-law-oriented solution, rather than a systemoriented one, is best able to hammer out preconditions so that a licensee is appropriately protected by an in rem effect of his license. A stratigraphy of different levels of licences opens up a market-oriented reflection of who might deserve insolvency protection, and who does not, and for which reasons and to what extent this protection should apply.

5 6 7 8 9 10

prescribed in the preceding paragraph, a claim held by the counter party shall be a claim on the estate”. Hoge Raad, 3 Nov. 2006, RvdW 2006, 1033 – Nebula. Hoge Raad, 11 Juli 2014, nj 2014, 407 – abn/Berzona. bgh, judgment of 26 March 2009, grur 2009, 946, 948 – Reifen Progressiv, confirmed by bgh, judgment of 29 April 2010, njw 2010, 2731, 2734 – Vorschaubilder i. bgh, judgment of 19 July 2012, njw 2012, 3301 – M2Trade; bgh, judgment of 19 July 2012, njw-rr 2012, 1127 – Take Five. lg Munich i, judgment of 21 August 2014; olg Munich, judgment of 25 July 2013. bgh, judgment of 21 October 2015 ECOSoil, nzi 2016, 97.

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Comparing Licenses under Dutch, us, Japanese and German Insolvency Rules

1 The Netherlands In the Netherlands, the treatment of licences in insolvency is based on two Hoge Raad judgments which do not explicitly deal with licences, Nebula (2006)11 and abn/Berzona (2014).12 Nebula owned a building including a business premises and two private flats on the upper floor. The “economic ownership” of the property was transferred to Donkelaar bv on 24 December 1997. “Economic ownership” under Dutch law means that the “economic owner” has a general right to use the property, but only based on a contract and not on a property right. The new “economic owner” is not formally registered and therefore is not the owner as seen by Dutch property law. With approval of Nebula, Donkelaar transferred the economic ownership of this premise on to Walton bv on 27 December 1997. On 24 March 1999, Nebula went bankrupt. During insolvency, Walton rented the upper flats to a third party on 1 July 2000. When the trustees realized what had happened, they made a claim against Walton for the rental income since the date of insolvency and demanded the eviction of the tenants arguing that Walton did not hold a legal title to rent these flats with regard to the insolvency estate. The Hoge Raad decided that transfer of “economic ownership” is only a continuing obligation and this title grants no right to segregate the property in insolvency. Generally, continuing obligations are not influenced by bankruptcy, but the creditors cannot perform their rights as if there were no insolvency. This is not only the case when the creditor can claim actions from the insolvent party, but also when the insolvent party has to tolerate the use of his property. If the creditor could continue to use the property of the insolvent party, it would break the principle of equality of creditors. The trustee has a right to breach of contract (recht op wanprestatie), which in fact gives him/her the opportunity to choose if he/she wants to continue the contract or not. The prevailing view in Dutch law13 goes along with that of the Advocaat-General who made this decision, J.L.R.A. Huydecoper, that this judgment applies by analogy to licence contracts.

11 12 13

Hoge Raad, judgment of 3 November 2006, RvdW 2006, 1033 – Nebula, supra n. 5. Hoge Raad, judgment of 11 July 2014, nj 2014, 407 – abn/Berzona, supra n. 6. P.R.W. Schaink, “Enkele IE-bespiegelingen door de bril van een faillissementscurator”, Intellectuele Eigendom en Reclamerecht (ier) 2009, 294–298, p. 297; R.D. Vriesendorp, Nebula (Van den Bos q.q./Mulders & Welleman), Ars Aequi (aa) 2007, 233–240, p. 240.

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Eight years later, the Hoge Raad distinguished abn/Berzona14 from Nebula. The former case revolved around a creditor (abn Amro Bank) which had applied for the insolvency of its debtor (Berzona) because Berzona’s tenants had claimed the use of the rented property. The Hoge Raad decided that such a claim cannot lead to insolvency. The fact that a continuing obligation is not influenced by bankruptcy in any case still does not stand in the way of the trustee’s right to breach the contract. But this right is limited to the omission of active actions at the expense of the insolvency estate such as for example transferring property, giving rights or paying money. The trustee cannot actively prohibit the use of a right granted preliminary to bankruptcy; the trustee can only claim in order to stop the use of a rented property, if it was rented after the date of insolvency (as in Nebula). The Hoge Raad does not mention licences in this case either, but the principle can, again, be analogically transferred to licences:15 if a licence is granted by a licensor prior to his/her insolvency, the right to use the license does not stop, when the licensor goes bankrupt. The same is true for sub-licences granted before insolvency. However, sub-licences granted by the non-insolvent licensee after the date of insolvency of the main licensor can be stopped by the trustee.16 Nonetheless, the licensee is not wholly protected. When a trustee sells the intellectual property right to a third party, the licence-holder only enjoys protection when the licence is registered. Vice versa: When a trustee sells the underlying ip in cases where the licence is not registered, the new owner of the ip can force the licensee to stop using the licence.17 Additionally, it is not possible to register every kind of license: Protection of succession is recognized for patents (Art. 56 Sec. 2S. 3 Rijksoctrooiwet), trademarks (Art. 2.33 Beneluxverdrag inzake de intellectuele eigendom) and plant varieties (Art. 63 Section 3 Zaaizaad- en Plantgoedwet 2005), but not for copyright licences. Hence these licensees remain unprotected when the ip is sold to a third party. Moreover, the protection of licences can be restricted by contract. The licence automatically expires in case of insolvency when the contract includes a clause to this effect (an ipso facto clause). These clauses can be void by violating good faith, 14 15

Supra n. 6. M. Kingma, “abn/Berzona: einde aan de Nebula-leer voor licenties in faillissement?”, 14080 ie-forum (ief) 2014, , last visited 7.4.2016. 16 Ibid. 17 Th.C.J.A. van Engelen/J.P. Hustinx, “De licentienemer en de failliete IE-licentiegever”, 11 Tijdschrift voor Insolventierecht (TvI) 2015, 62–66, p. 66.

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when their underlying aim is to gain an advantage over other creditors in case of insolvency.18 But in cases where the clauses do not only relate to insolvency but also to a general lapse of consideration, such as non-performance within a certain period of time or termination of contract, there is a presumption of good faith.19 This makes it possible for parties to terminate licences automatically in cases of insolvency. This development in Dutch law reflects the two opposing views on the topic: insolvency lawyers prefer the Nebula judgment because of its emphasis on the equality of creditors,20 and ip lawyers prefer the abn/Berzona judgment because it brings to an end the ruinous economic effects on licensees of bankruptcy (especially on users of custom-built software).21 Although a licence as a right to use is not abstracted from the underlying contract, it can be distinguished from the licence contract. The rationale is that the licence as a simple right to use does not burden the insolvency estate, in contrast to the licence contract which includes duties such as that of upholding the underlying intellectual property rights, updating the software, etc. These duties of the licence contract can be cancelled by the trustee, but not the licence itself as a right to use.22 The outcome of abn Amro/Berzona is likely to grant a protected position to licensees by excluding them from the right to breach of contract of the trustee in insolvency. This position makes licences insolvency-proof to a certain extent. The refinement of the Nebula doctrine by the Hoge Raad was understood as a response to the economic arguments of software-holders and ip lawyers who strived for more protection of the licensee. Economically the outcome of abn/Berzona was to stop the potential ruinous effect of the licensor’s bankruptcy and gives an incentive to potential licensees to carefully draw up their contracts with licensors. Furthermore, its differentiation between registered and non-registered licences regarding succession protection is sensible and is adjusted to the Dutch concept of creditor protection. It provides for a transparent position for both third parties and the licensee. 18 Hoge Raad, judgment of 12 April 2013, Megapool/Laser, nj 2013, 224. 19 Ibid. 20 F.M.J. Verstijlen, Note under Hoge Raad, judgment of 11 July 2014, abn/Berzona, nj 2014, 407. 21 Th.C.J.A. van Engelen/J.P. Hustinx (2015, supra n. 17), p. 62. 22 M. Jansen, “Zijn licenties nu opeens toch faillissementsbestendig?”, 2014, last visited: 7.4.2016.

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2 Germany Compared to the Dutch situation, in Germany a sharp distinction has evolved between unprotected “mother licences” and protected “daughter and granddaughter licences”. Creditor-licensees of non-exclusive licences are not protected in insolvency in Germany. The right of the trustee to cancel a non-fulfilled bilateral contract in insolvency (§ 103 Insolvenzordnung [InsO]) remains untouched in case of licence agreements and can generally not be excluded or modified by contract (§ 119 InsO).23 Since the reform of Germany Insolvency Law the exception of the trustee’s right to cancel a non-fulfilled contract is now limited to rental agreements regarding immovable property (§ 108 InsO).24 As a matter of principle, there is no in rem effect of these licences and no statutory provision which protects them in case of the licensor’s bankruptcy. The fate of the licence on the first level in bankruptcy is therefore determined by the trustee. The bgh, however, decided in the cases of Reifen Progressiv25 and Take Five26 that the succession protection for patent and copyright licencees leads to a protection of any sub- or sub-sub-licence when the main licence contract is revoked, rescinded or cancelled. The termination of the main licence does not automatically lead to a termination of the sub-licence. Thus, this leads to succession protection (Bestandsschutz or “grandfathering”) of the licence chain when the trustee of the licensor cancels the license contract with his/ her licensee at an earlier stage. This protection of the sub-licensee also applies in cases where the sub-licensor goes bankrupt and rescinds the contract with the main licensor and upholds the contract with the sub-licensee. In this case the main licensor has a legal right against the sub-licensee to claim royalties.27 Following the recent decisions by the Regional Court of Munich28 and of the bgh,29 the character of the non-exclusive licence may further be substantiated. The judgments adjudicate cross-licences and an unrestricted and irrevocable licence (“freedom-to-operate” licence) with an obligation to pay 23 24 25 26 27 28 29

See for (not) possible legal constructions, C. Berger, “Lizenzen in der Insolvenz des Lizenzgebers”, Gewerblicher Rechtschutz und Urheberrecht (grur) 2013, 321–336. A.-A. Wandtke/W. Bullinger, Praxiskommentar zum Urheberrecht, München: C.H. Beck, 2009, § 108 InsO, Rn. 4. bgh, judgment of 26 March 2009, grur 2009, 946, 948 – Reifen Progressiv, confirmed by bgh, judgment of 29 April 2010, njw 2010, 2731, 2734 – Vorschaubilder i. bgh, judgment of 19 July 2012, njw 2012, 3301 – M2Trade; bgh, judgment of 19 July 2012, njw-rr 2012, 1127 – Take Five. bgh, judgment of 19 July 2012, njw-rr 2012, 1127 – Take Five. lg Munich i, judgment of 21 August 2014; olg München, judgment of 25 July 2013. bgh, judgment of 21 October 2015, nzi 2016, 97 – ECOSoil.

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all royalties at once, thereby qualifying as “fulfilled obligation” in the sense of insolvency law (§ 103 InsO). According to the bgh these licences are rights which can be transferred at once and are not long-term relations of the licence contract. This renders these specific licences insolvency-proof.30 It is possible that we will now see a new contract language develop in order to protect the licensee against the insolvency of the licensor. While it avoids the option of the trustee to cancel the contract, the principle of freedom of contract is strengthened.31 Parties will choose which risks they are ready to take in turn for higher (or lower) royalties. Companies which depend on a stable right to use will opt for security and accept high royalties up front. Others might risk to losing the license in turn for lower royalties and periodic payments. Possible moral hazards downstream have to be scrutinized in the future. All in all, these developments are having a positive effect on the economic market. 3 usa Compared to Germany, the situation in the usa seems to be the reverse: licences at the first stage are protected explicitly by statute whereas sub-licences are not protected. In the us, licensees were not protected in bankruptcy until 1988, promoted by the Lubrizol decision in 1985.32 Facing the disastrous effects of licensors’ bankruptcy on licensees, the us Senate decided to protect the licensee in such cases.33 The trustee still has a right to elect whether he/she wants to continue the licence contract or not according to Section 11 u.s.c. § 365 (a). If the trustee chooses to cancel the licence contract, the licensee has the right to choose whether he/she wants to accept this decision and claim damages from the bankruptcy estate or whether he/she wants to carry on using the licence. In the second case he/she keeps the right to make use of the licence but cannot claim further affirmative duties, except the licensors’ duty to make available the technologies necessary to use that licence, and has to pay the full sum of royalties. Only trademark licences are not protected by 11 u.s.c. § 365 (n). This 30

31 32 33

A doubting view is expressed in C. Pleister/S. “Wündisch, Lizenzen in der Insolvenz – eine unendliche Geschichte?”, Zeitschrift für Wirtschaftsrecht (zip) 2012, 1792–1797; M. Dahl/ D. Schmitz, Die Insolvenzfestigkeit von Lizenzen in der Insolvenz des Lizenzgebers, Neue Zeitschrift für Insolvenz- und Sanierungsrecht (mzi) 2013, 878–881. D. Kluth, “Anwendbarkeit des § 103 InsO auf Nutzungsrechte bei Insolvenz des Lizenzgebers”, Neue Zeitschrift für Insolvenz- und Sanierungsrecht (nzi) 2014, 887–888, p. 888. U.S. Court of Appeals, Fourth Circuit, judgment of 15 March 1985, 759F.2d, 1043 – Lubrizol Enterprises, Inc. V. Richmond Metal Finishers, Inc. Senate Report, 14 September 1988, No. 100–505, 1988 wl 169875, 1988 U.S.C.C.A.N. 3200, 3202f.

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provision only applies to intellectual property as defined in 11 u.s.c. § 101 (35a) as for example patents (sub B), know-how (sub A) or copyrights (sub E). In cases where the sub-licensor goes bankrupt, a sub-licensee seems not to be protected by 11 u.s.c. § 365 (n). There has been no court decision as yet, but generally such a situation would be governed by the legal relationship between the main licensor and the sub-licensee, because the licence falls back to the licensor and is not part of the insolvency estate of the bankrupt licensee. Therefore, this relationship is not governed by insolvency rules and 11 u.s.c. § 365 (n) is not applicable.34 Hence, also license chains consisting of several “daughter” and “granddaughter” rights are not protected when the main licensor goes bankrupt and the main-licensee chooses not to use its right to uphold the license. The outcome is comparable to the current situation in the Netherlands – except for sub-licences. But the us protection is also statutory and explicitly states an exception of the equality of creditors for licencees. The aim of the statute providing protection for the licensee is to foster the dynamic market while compensating the insolvency estate with the full royalty sum and the possibility of terminating affirmative duties.35 Furthermore, the option for the licensee to hold up the licence contract in case of insolvency of the licensor extends the notion of privacy of contract in the event of bankruptcy. 4 Japan Next to the us, Japan is the only high-technology state which recognizes a clear statutory provision protecting licences in the event of bankruptcy of the licensor.36 There is no separate provision for licences, but they are treated in the same way as rental agreements, and not as they are treated in Germany.37 The Japanese Bankruptcy Code provides in art. 56 Sec. 1 that the trustee’s right to cancel or continue non-fulfilled bilateral obligations in bankruptcy (art. 53 Japanese Bankruptcy Code) does not apply “where the counter party of the bankrupt under a contract for the establishment of a leasehold or 34

35 36 37

M.M. Harner/D. Beck, “Sublicensing from a Distressed Company: Are You Placing Your Future in the Debtor’s Hands?”, American Bankruptcy Institute Journal (abij) 2006, 42–44, pp. 42 et seq. U.S. Senate Report (1988, supra n. 34), pp. 3302 et seq. aippi, Working Guidelines Q241, p. 3, last visited: 23.05.2015. C. Dengler/S. Gruson/R. Spielberger, “Insolvenzfestigkeit von Lizenzen? Forschungsstandort Deutschland – so wohl kaum!”, Neue Zeitschrift für Insolvenz- und Sanierungsrecht (nzi) 2006, 677–685, p. 682.

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any other right of use and profit has a registration of the right or any other requirement for duly asserting the right against third parties”. Art. 99 Japanese Patent Law38 grants a succession protection for patent licences. This is also applicable for trademark licences (Art. 31 sec. 4 Japanese Trademark Law39). In Japanese law this is a requirement duly asserting a right against third parties. Hence, further registration of these licences is not needed. Copyright licences have no third-party effect by statute and cannot be registered. Only for publication rights exists a system of registration.40 Therefore non-exclusive patent and trademark licences and registered publication licences have an in rem effect protecting the licensee and also the sub-licensee in insolvency. Japanese law ties the insolvency-proof effect to other third-party effects of contractual rights as registration or succession protection. The Japanese solution is also a reaction to possible ruinous effects on the economy when licensees remain unprotected in bankruptcy.41 Furthermore, the differentiation between registered and non-registered licences regarding succession protection is sensible. As in the Netherlands it provides for a transparent position for both third parties and the licensee. III

Comparing “insolvency proof” and “proprietary in rem effect”

The institution of “insolvency proof” covers a set of various situations in case of insolvency. For creditors, the term means that his/her securities will not fall into the insolvency estate. The prime example is “property”. Property of third parties may not be sold as an asset of the insolvent. Thus, property could be safely transferred as security for a granted credit. For contractors, the term means that none of the contract partners may change the contract unilaterally,

38 39

40

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Art. 99 sec. 1 Japanese Patent Law reads “A non-exclusive licence shall have effect on any person who acquires the patent after generation of the non-exclusive licence”. Art. 31 sec.  4 Japanese Trademark Law reads “(4) Articles 73(1) (co-ownership), 94(2) (establishment of pledge), 97(3) (waiver), and 99(1) and 99(3) (effects of registration) of the Patent Act shall apply mutatis mutandis to a non-exclusive right to use”. T. Calame and others, “aippi Summary Report Q241 ip Licensing and Insolvency”, last visited: 29.3.2016, p. 8. Intellectual Property Policy Headquarters, “Strategic Program for the Creation, Protection and Exploitation of Intellectual Property”, 2003, last visited: 29.3.2016,

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or that the trustee may not sell personal items the insolvent needs for personal subsistence. Beyond these various categories, neither the rationale nor the dogmatic structure of “insolvency proof” is actually clear:42 Does “insolvency proof” simply provide a bilateral right of defence against the trustee only or is the right of defence an in rem effect which is in the situation of insolvency only actionable against the trustee? What exactly happens to a claim or a right when the insolvent declares bankruptcy and claims are announced on the creditors list? The in rem effect is certainly no fully fledged subjective right. The licensee of a non-exclusive licence will not become entitled to defend that licence against any other third party. However, because under Japanese law the licence has an effect on a third party, it grants the licensee a protective right against the trustee when the licence is registered or provides for succession protection by statute. Under us law, the right is fixed to the contractual licence and creates a right of the licensee against the trustee by statute, giving him/her preference over other creditors. Dutch law strikes a balance; a right to use cannot be denied in bankruptcy by the trustee because of the remaining licence contract and once the licence is registered, the licence grants the licensee defensive rights protecting him/her against the novel owner of the underlying ip right after the trustee has sold the ip. In Germany, sub-licensees enjoy succession protection when a licensor at a higher stage in the licence chain goes bankrupt, whereas direct licensees are not protected. But they can gain protection when one party wholly fulfills the licence contracts before insolvency, for example by paying the whole royalty sum or granting an irrevocable licence without further affirmative duties. This description of the metamorphoses of rights and claims in specific situations (either by regulation or by dogmatics), imposes a parallel reflection about precedents in English and German law. English law has since long ­acknowledged the in rem effects of contractual obligations. The most famous cases are restrictive covenants, dating back to Tulk v. Moxay,43 1848. In the Netherlands “economic ownership” (economisch eigendom) gives the 42

43

As bemoaned by P. von Wilmowsky, “Gegen einen § 108a InsO für Lizenzverträge – Die Pflichten des Lizenzgebers (Vermieters, Verpächters) nach Überlassung des Gegenstands zur Nutzung”, Neue Zeitschrift für das Recht der Insolvenz und der Sanierung (nzi) 2013, 377–384, p. 377. Lord Chancellor’s Court, 22 December 1848, 2 Ph 774; 41 er 1143; for the prerequisites of enforcement see K. Gray & S. Gray, Land Law, 7th ed. oup, pp. 135 et seq.; A. Clarke & P. Kohler, Property Law, cup 2005, pp. 250 et seq.; on a comparative account S. Van Erp & B. Akkermans, Property Law, Hart Publ. 2012, pp. 331 et seq.; F. Rieländer, Sachenrechtliche Erwerbsrechte, Sellier 2014, pp. 16 et seq.

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economic owner a contractual right to use land or a building which comes into effect once the partied have agreed a transfer of economic ownership. There is no formal registration and it is not recognized as a property right. Thus, in general it only forms a right against the legal owner.44 But it still has a negative third-party effect on the trustee in cases of insolvency, similar to that experienced by licence-holders.45 Though dogmatically rejecting the notion of in rem effects of obligational rights, German law has supported, as mentioned above, several examples with the same effect.46 Licence contracts, in particular, raise intricate problems. Depending on which feature of distinction is valued more highly (incidential performance-long term obligations, and the qualification of the object of the contract-partial transfer of the right or the provision of a use right), the qualification changes. For German law, the famous “Anwartschaftsrecht” and the rights of the tenant when a house is sold have to be taken into account. The “Anwartschaftsrecht” in German dogmatics is the equivalent to the security right of the retention of title (§ 449 bgb) and the uncodified non-possessory pledge (German: Sicherungsübereignung). It is conceived, similar to a licence, as a hybrid between property and contract rights. The difference is the following: In the case of the “Anwartschaftsrecht” its hybrid character crystallizes in the moment when either a sequestration or bankruptcy is declared. In sequestration, the right is transformed into a property right, in bankruptcy the right transforms into a privileged contractual claim.47 The hybrid nature of licences becomes apparent by the autonomous decisions of the parties. An exclusive licence is conceived of as a licence of a proprietary nature, a non-exclusive licence as a pure contractual one. The major discussions on the nature of “the” licence revolve around which contract rules are to be applied as default rules, sale or lease. The focus has been on contractual performance. Until Reifen Progressiv, the fate of licences in insolvency was determined according to their prior qualification as either exclusive (being of property nature) or non-exclusive 44 45 46 47

F.H.J. Mijnssen, in: C. Asser and F.H.J. Mijnssen, Van Veltens & Bartels, Burgerlijk Wetboek, Art. 5:1; Hoge Raad judgment of 5 March 2004, Vagobel/Geldnet, nj 2004, 316. Hoge Raad (2014, supra n. 6). Cp. the Dutch situation according licences in insolvency under 2. (a) in this article. F. Rieländer (2014, supra n. 43), p. 16. The buyer under retention of title can claim performance of the contract – payment of the full sum for transfer of property – even when the contract would normally fall under the power of the trustee to cancel the contract (§ 107 Sec. 1 InsO); the creditor of a nonpossessory pledge cannot claim restitution based on his/her property title, but can only privileged payment from the estate (bgh, judgement of 28 Juni 1978, njw 1978, 1859, today codified by §§ 51, 50 InsO).

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(then being contractual). In both situations, the focus is on the nature of the right or claim at the very moment the insolvency is declared. The insolvency process is conceived of as “freezing”. Neither the insolvent nor the claimant can change any claim or right. Only the trustee is entitled to act. However, the possibility that the process as such might instigate a metamorphosis of the legal items in the estate is out of the picture. The second parallel refers to statutory contractual concepts with extended rights to third parties. The most famous of these is the old rule of “sale does not break contract” (Koop breekt geen huur). At the moment of sale, the renter is granted a right against any person who acquires the asset. German law chose the contractual narrative, arguing that the novel owner “steps into the contract”, § 566 bgb.48 In other word, the contract “shifts” to the novel owner. With regard to the contractual position, the old owner is substituted by the new owner by law. The contractual narrative is also followed by § 883 bgb (registered reservation of a title to land). They grant, in a specific situation, a bilateral claim against a specific third party. The third person remains unspecified as “the potential future buyer”, who becomes concrete once the contract is effectuated. The German Civil Code thereby left the ideal of the deep divide between property and contract intact. As a consequence, property as a subjective, absolute right against the world remained unchallenged. However, one could equally convincingly argue that the contractual partner is granted a direct right against the world.49 This inverse narrative has as its consequence a fragmentation of “property rights”. In addition, against the clear divide of property and contract, this narrative assigns in rem effects to a contract holder for his/her defense. The rationale is that the licence contract is more than just a bilateral relation to the contract partner. This is undisputed for exclusive licences. But also for non-exclusive licences, the licensee is delivered a use right which goes beyond the obligation to provide the use right. For the lease, this addition was embodied in providing physical possession;50 for licences it is the right to use as an economic asset. If the right to use is coupled with a duty to use (and royalties are relational to the profit), this economic function becomes even more transparent. The contract provides an economic asset which has a different value from the contractual equivalent given to the contract partner. 48

49 50

T. Regenfus, Vorgaben des Grundgesetzes für die Lösung sachenrechtlicher Zuordnungsund Nutzungskonflikte, Berlin: Duncker & Humblot, 2013, qualifies as „transfer of the contract (Überleitung des Mietvertrags)“, p. 588. Acknowledged by J.D. Harke, “Dingliche Rechtsverschaffung und schuldrechtliche Überlassung”, Zeitschrift für die gesamte Privatrechtswissenschaft (ZfPW), 2015, 85–101, p. 89. Ibid., p. 99.

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This fact has become acknowledged for network contracts and franchising. Non-exclusive software licences evidently become the very basis of operating businesses. This additional value is the topic of numerous academic works on the dogmatic nature of the licence (including the ongoing debate about the distinction between exclusive and non-exclusive licences),51 and its conception in insolvency.52 It is the isolated, additional value of the licence which helps to understand the specific conflicting interests which arise if a licensor goes bankrupt. The assignment of defensive “proprietary rights” (in rem rights) to a contract holder will not ruin dogmatics. On the contrary, it facilitates reflection about when a licensee deserves the power to defend the contract in bankruptcy situations. Insolvency rules used to be confined to a balance between the clearance of inefficient, non-performing firms from the market and the interests of creditors. The ideal was the well-ordered, static market. Since economic theory has shifted the economic ideal from a static to a dynamic market model, various areas of laws have been redirected towards the novel model. Competition law started to scrutinize the effects of intellectual property rights more closely with the ecj’s landmark decision Magill in 1995.53 Insolvency laws were reoriented away from creditor protection towards the possible restructuring of a firm. The background to this is the understanding that the salvage of a single firm may outweigh the detrimental effects on frustrated creditors. Equally, the recent developments in insolvency law which provide for a better protection of licensees are a response to this shift. Network effects on numerous downstream firms are potentially more harmful to the economy at large in the long term than unsatisfied claims of creditors of a single firm in the short term. This has become especially evident for bankrupt software houses holding various 51

52

53

On the lines of a distinction between sale or lease or both, For a “sale” qualification, M. Haedicke, Rechtskauf und Rechtsmängelhaftung, 2003, pp. 103 et seq.; for a lease qualification: L. Pahlow, Lizenz und Lizenzvertrag im Recht des Geistigen Eigentums, 2006, pp. 261 et seq; Groß, Der Lizenzvertrag, 10th ed. 2011, pp. 311 et seq.; sui generis: M.-R. McGuire, Die Lizenz, 2012, pp. 656 et seq. Rejecting the in rem effect: R. Hauck, “Die Verdinglichung obligatorischer Rechte am Beispiel einfacher immaterialgüterrechtlicher Lizenzen”, Archiv für die civilistische Praxis (AcP) 2011, 626–664; M.-R. McGuire, “Insolvenzfestigkeit einfacher Nutzungsrechte”, Gewerblicher Rechtsschutz und Urheberrecht (grur) 2013, 1125–1134; P. Chrocziel, Insolvenz des Lizenzgebers – Dinglichkeit der Lizenz, Berlin, 2004.; applauding the in rem effect: K. Wimmer, Neue Reformüberlegungen zur Insolvenzfestigkeit von Lizenzverträgen, Zeitschrift für Wirtschaftsrecht (zip) 2012, 545–557, p. 548. Joined Cases C-241/91 P and C-242/91 P, decision of 6 April 1995, „Magill“ – C-241/91P und C-242/91P, Off. J. I 1995, 743.

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downstream licences which have themselves been sublicensed. All the analysed jurisdictions aim at responding to this situation. It is not only a logical legal step to protect the licensee against the lapse of the licence in insolvency. It is also economically sensible, because it fosters the dynamic market by setting incentives for both contract parties: Licensors can claim higher prices,54 and the licensee does not lose all investment in the use of the licence55 and would not have to fear his/her own insolvency if the licence could not be substituted.56 It also leads to more productive efficiency.57 And in contrast to the other solutions discussed, the bgh’s differentiation between mother and daughter licences promotes due diligence in contracting licences. It gives an incentive to licensees to take the potential of insolvencies into consideration when designing the licence contract. It is especially important to find an arrangement for when the licence cannot be substituted. The price may reflect the arrangement. Moreover, these rules protect third parties with sub-licences, the market can still be cleared and reorganized, and the bankruptcy estate receives royalties from sub-licensees without having to provide all the affirmative duties in the contract to the direct contract partner. IV

Modern Thinking: Broad Contractual Effects and Limited Property Effects

The fate of non-exclusive licences in insolvency sheds a spotlight on the modern distinction of contract and property as a continuum rather than two mutually exclusive concepts. As Sjef van Erp already stated in 1990, contract and property have profoundly changed in the twentieth century. Whereas the old notion of freedom of contract was based on the classical presumption of equality of partners, nowadays a “consumer” contracts with a “business enterprise”, all regulated by laws.58 We have become used to obligational rights

54

55 56 57 58

O. Scherenberg, Lizenzverträge in der Insolvenz des Lizenzgebers unter besonderer Berücksichtigung des Wahlrechts des Insolvenzverwalters nach § 103 Abs. 1 InsO, Berlin: Berliner Wiss.-Verl., 2005, p. 121. C. Berger (2013, supra n. 23), p. 322. K. Wimmer (2012 supra fn. 38), p. 548. P.S. Menell, “Bankruptcy Treatment of Intellectual Property Asses: An Economic Analysis”, Berkeley Technology Law Journal (btlj) 2007, 733–822, p. 739. S. van Erp, Contract als rechtsbetrekking, Zwolle: W.E.J. Tjeenk Willink, 1990, pp. 275 et seq., 283, 288 et seq.

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with impact on third parties (Vertrag mit Schutzwirkung zugunsten Dritter) in several jurisdictions in continental Europe.59 This reopens the perspective for codified contract conceptions, which have always cushioned in rem effects.60 In cases where contracts are attributed in rem effects more overtly, we no longer conceive that as a systematic break. The reasons for the distinction of in rem and in person; as opposites are embedded in history. There is no cogent reason for the normative distinction – beyond a few practical reasons. In English law, the in rem/in person distinction originally determined the place of jurisdiction (forum), developed later into a profound separation between proprietary positions “against the world” and bilateral personal claims, and only in the eighteenth century into the divide between “things” as objects of property and “the” person (the “no-property” rule). In contrast, the property/contract distinction in continental law is preoccupied with the in rem-versus-bilateral effect (including lex specialis codified exceptions, supra). In the continental system, there are only limited overlapping property interests, conceptualized as exceptions, in contrast to personal and proprietary interests which may well overlap. The underlying rationale is that the property institution may absorb the personal interests of his/her self-determination. One recent consequence of this is the common law monistic and the continental dualistic conception of copyright. The more recent German case law reflects a modern economic thinking which gives credit to broader economic macro effects which may outweigh the detriments to creditor’s protection. However, from a purely economic standpoint, the bgh’s distinction between non-protected licences of the direct licensee and protected sub-licensees seems to be arbitrary. From a structural market point of view, the position of immediate and mediate licensees is identical. All licensees equally depend on the licence. Yet, the legal reflection turns the spotlight towards the single contractual relation. Contractors have to exert due diligence when choosing their partners. It would amounts to a moral hazard if the law were to ease this pressure on the licensee. It is the licensee who has to bear the consequences if he/she contracts with insufficiently robust or trustworthy partners. If that responsibility is eased by an in rem protection for the direct licensee in case of insolvency of the licensor, an incentive is set to underinvest in thorough scrutiny. This diligence, however, is needed for the market to function and to properly allocate risks. Thus, the legal perspective

59 60

See for further examples, B. Akkermans, The Principle of Numerus Clausus in European Property Law, Intersentia, Maastricht 2008, pp. 3, 148ff., 235ff., 298ff. See F. Rieländer (2014, supra n. 43), p. 16.

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labelled “privacy of contract” enshrines a structural micro-mechanism for markets to function. From a distance, the distinction made between direct licensees and the sub-licensees is prudent since it balances macro insolvency effects and micro contractual effects. The effect of the ruling on the first market stage upholds the due diligence requirement for licensees entering a contract with a licensor. However, when use rights are only passed through a chain of contracts, the diligence factor fades away and the network effects gain more importance. Following this rationale, the assignment of in rem rights only to sub-licensees, though logically inconsequent from a dogmatic standpoint, turns out to be a truly wise decision which balances economic macro and micro effects. V Conclusion As property law changes along with the economy, so too does our reflection about property. This contribution provides evidence that a style of reflection has already developed across jurisdictions which takes economic market structures on board and takes a far more subtle approach to concepts which were conceived as opposites. The classical separation of in rem and in personam rights has evolved into a set of distinctions between various groups and market stages, and a differentiation of their protective needs. Projected behavioural incentives can be translated into legal constructions such as granting in rem effects only for specific groups. The distinction between licences and sublicences gives evidence of a legal construction which is based on fostering market dynamics and the efficiency of resource allocation. The advantage of the proposed concept is that the legal reflection sensibly cushions the economics rationale and opens legal constructions for an open debate about incentives, moral hazards, legitimacy and market effects. With this type of reflection, the property institution has the potential to transform itself from an undifferentiated stronghold of bourgeois freedom to a dynamic market institution which does not just facilitate the exercise of indiscriminate power, but secures the self-determination of all market subjects alike.

chapter 11

Derivatives in Maritime Freight: Novel Property Rights with Prospects and Pitfalls Viola Heutger1 i Introduction Maritime trade is not only about vessels, seafarers and cargo, but also about speculation, insurances, world markets and investments. Contractual freedom and innovative financial instruments can, therefore, also be found in the shipping industry. Contract types change and new concepts arise. In this paper I would like to show how the trade in derivatives in the maritime industry has moved from private ordering to public ordering over the last 25 years. This process began in the 1980s and was initially triggered by private actors. From 2002 onwards, clearing houses began to enter the market and the practice of using individually negotiated papers was dropped in favour of the adoption of standard form contracts. The next step towards more public ordering was taken in 2008 with a request for greater transparency by actors such as the Financial Stability Forum, the European Commission and the European Central Bank. In 2012, a legal framework for the trade in derivatives in the European Union (eu) was established. Nevertheless, the market continues to develop, and the introduction of new trade schemes brings with it new challenges. ii

Derivatives in the Maritime Transport Industry

Freight derivatives have become very popular over the last 25 years.2 In earlier contracts the parties would agree on a Contract for Difference in the form of an over-the-counter (otc) paper. At that time the parties usually knew each other and the market was still quite transparent. Being part of the global market, the shipping market is subject to constant change. New vessel types enter the market, flags change, petrol prices go up 1 Senior researcher, University of Lucerne, Kompetenzstelle für Logistik- und Transportrecht (kolt). 2 M. Kavussanos/I. Visvikis, Shipping freight derivatives, 33 Marit. Pol. mgmt, July 2006, 233–255.

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and down, and seasonal changes influence the costs of sea transport. There has been growth in Eastern markets.3 Also, the market reacts immediately to natural disasters or political events around the world. Because of these parameters it is interesting to invest in seaborne trade for speculation and for reasons of risk management, as the risks, and thus the rewards of such investment are high. The evolution of derivatives has also revealed new insights during the recent financial crisis and, therefore, new measures for dealing with transparency and risk allocation need to be discussed. The financial crisis has led us to rethink the substantial risks of such instruments. To understand the maritime market, let us imagine the following scenario: The owner of a vessel, of the bulk carrier type, supplies possession and control to a charterer. The charterer as a counterparty to further sub-contractors may use the freight rate for a specific physical trade route, for example from Shanghai to Rotterdam, as an underlying asset in an otc transaction or as an exchange-traded derivative at a futures market. Such a transaction involves several parties, who could be located all over the world. Why should people have an interest in more than chartering a vessel and the carriage of goods? The benefit of trading in derivatives at a futures market is twofold; firstly, in the long run the risk of seaborne trade may be spread and this offers possibilities for speculation. Secondly, short-term interests can be combined with long-term interests. The value of different currencies can be used, and additionally, different time zones are also an influence on an unstable market. Due to high market volatility, carriage of goods by sea is risky and cyclical. The global market is huge; the majority of global trade today depends on seaborne transport. Freight rates are influenced by the world economy, especially the fuel oil market, as well as by foreign exchange and interest rate risks. Political events such as wars or natural crises such as tsunamis or hurricanes immediately influence the market. As a result of these parameters the market has developed very quickly and continues to change rapidly.

3 See for example the data provided by the World Bank, www.worldbank.org/en/country/ china (last visited on 8 April 2016). However, this growth has not been as great as expected. There has even been some decline in trade with China. See G. Meyn, Ebbe an der Elbe, Deutsche Seeschifffahrt, 03–04.2016, pp. 40 et seq. Interestingly, the port of Piräus, Greece, is 67% Chinese-owned. Cosco is the main chairholder. See www.cosco.com and www.olp.gr (last visited on 8 April 2016).

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A Market Full of Risks

1 Cyclicality and Technical Development The shipping industry shows how globalization works and how strong the international market is. It is a market which depends on cyclicality and which is, therefore, very volatile. It is an especially competitive global market. Investing in that market has been the making and the undoing of millionaires. Data from the International Maritime Organization shows that 90% of world trade today depends on seaborne transport.4 Vessels are increasing in size. Today, the largest dry-bulk vessels5 carry goods of 300,000 to 400,000 dead weight tons.6 New ports have had to be built in order to host these mass carriers. Some of these vessels can only dock at deep-water ports like the Jade Weser Port in Germany.7 2 Volatile Bunker Prices The shipping sector, especially seaborne transport, is one of the world’s riskiest and most cyclical industries.8 Freight rates are influenced by the global economy and especially by the fuel oil market, as bunker prices can contribute to more than 50% of the costs of a voyage.9 3 Currencies and Time Zones The shipping sector is, more than other sectors, exposed to the volatility of foreign exchange and interest rates, since the industry is by its nature global and intrinsically linked to the capital market. The value of different currencies can be used and different time zones also influence this unstable market. The contracting parties are located in different parts of the world and a vessel moves from one country to another around the world. 4 Interference of Political Events The risks involved in the shipping industry are very high. Political events, such as wars, e.g. the closure of the Suez Chanel because of a war between Israel 4 See (last visited on 8 April 2016). For more detailed figures see the unctad Review of Maritime Transport 2015. 5 For detailed information on the carriers, see (last visited on 8 April 2016). 6 See www.marin.nl (last visited on 8 April 2016) and with more technical information see (last visited on 8 April 2016). 7 See (last visited on 8 April 2016). 8 An interesting overview is offered in E. Speck, Seehandel und Seemacht: Eine handelsgeschichtliche Skizze, reprint of the 1900 edition, Bremen: Maritime press, reprinted 2013. 9 M. Stopford, Maritime Economics, London: Routledge, 2008, p 160 and unctad Review of Maritime Transport 2015, p. xi.

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and Egypt,10 trade barriers or natural crises such as tsunamis or hurricanes, are added risks for a highly volatile global industry. 5 Insolvencies and New Markets At the time it writing, in the year 2016, freight rates are still historically low and the market is still falling.11 Cross-border insolvencies in the freight sector are frequent. These insolvencies are seen as a persistent and inherent problem in the maritime sector.12 Demand is lower than supply. At the moment it is an uncertain market. In order to adapt, the market is moving towards variable contracts and hedging. However, markets such as China are coming to the fore13 and the Asian market is growing. So whilst in the short term we have strong volatility, in the long run the market is growing. 6 Other Influences: Vessel Size and Different Charter Options New vessels are on the market and here we see that the size of a vessel is also important. Freight rates14 for larger vessels seem to show higher volatility than those for smaller ones.15 In general, voyage rates are more volatile than period-time charter rates16 – owners are prepared to offer a discount for the relative security of period time charter rates. Furthermore, container trade has increased and new charter types have begun to be offered. iv

Development of Governance Structures

1 Self-regulation at the Beginning For the last 30 years the shipping industry has been developing financial instruments to spread the risk. The freight rate for a specific physical trade route is used as an underlying asset at a futures market. 10 11 12 13 14 15 16

J. Feyrer, “Distance, Trade, and Income – The 1967 to 1975 Closing of the Suez Canal as a Natural Experiment”, nber Working Papers, 2009, 15557, 1–31. For an introduction to the market, see the blog: https://www.flexport.com/blog/why-are -ocean-freight-rates-so-low/ (last visited on 8 April 2016). See 3. Bremer Konferenz zum Maritimen Recht, Maritime cross-border insolvency, 26 and 27 November 2015. See (last visited on 8 April 2016). On the calculation of freight rates, see Y.H. Lun, K.H. Lai, T. Cheng, Shipping and Logistics Management, London: Springer, 2010, pp. 17 et seq. A. Roncoroni/G. Fusai/M. Cummins (eds), Handbook of Multi-Commodity Markets and Products, Cornwall: Wiley, 2015, pp. 365 et seq. A. Roncoroni/G. Fusai/M. Cummins, Cornwall (2015, ibid.), p. 359.

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The introduction of freight futures17 in 198518 and otc forward freight contracts in 1992 have made freight risk management cheaper and more flexible. In the eighties and nineties, the parties of the contract bilaterally negotiated the terms and price of the voyage. The contract was concluded prior to the actual voyage. At the time of the voyage the parties would calculate the actual voyage price and one of the parties would pay the difference between the contractual agreed price and the actual voyage costs. The price for a ship charter varies from region to region and from season to season. On the one hand the industry depends on global market activity, whilst on the other hand, there is demand from financial institutions for growing diversification of their investment portfolios. These two different interests met, resulting in the creation of new types of contract. a) Forward Freight Agreements (Bulk, Tanker, Container) The first of these types of contract, which are still of interest today, are forward freight agreements, often abbreviated to ffas. How should these be defined? One online business dictionary provides the following definition for a forward freight agreement: Option contract on freight rates traded on Baltic Exchange,19 through which shippers and ship owners hedge against the volatility of the ocean freight market. It is a principal-to-principal contract used by two parties to bet on the price of a particular freight-route on a particular date.20 An ffa could be described as a futures market with contracts on the underlying physical transportation cost. Derivatives are tools for risk management. There are two categories of freight derivatives. One is the privately negotiated derivative, known as an otc derivative or swap. The other is a standardized, exchange-traded derivative; these are known as futures or cleared contracts. The assumption of counterparty risk is the biggest difference between swaps and futures. In swaps or otc derivatives, the risk of default by either party to 17 18 19

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For an introduction to freight futures see G. Malliaris/T. Ziemba (eds), The World Scientific Handbook of Futures Markets, Singapore: World Scientific Publishing, 2015, pp. 487 et seq. biffex. See . The Baltic Exchange offers maritime market information for trading and settling physical and derivative contracts. It offers underlying indices for Imarex’s futures contracts. Furthermore, the Baltic Exchange focuses on providing freight market information, dispute resolution and a light regulatory framework for the shipping market. From (last visited on 8 April 2016).

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the ffa is assumed by the other party to the agreement. In exchange-traded derivatives the risk of default by either of the parties is assumed by a clearing house. The value of derivatives is derived from the value of an underlying asset, in our case the transport of goods by sea. The underlying asset in ffas is the freight rate for a specific physical trade route. This asset is provided by a standardized contract. b) Indices The freight rate for a specific physical trade route can be calculated and varies from day to day. The prices are influenced by different parameters, like bunker prices, natural events, currency exchanges and other factors. These features receive a daily valuation on one of the Baltic Exchange Indices.21 The Baltic Exchange is, in its own words, an independent association of shipbrokers, shipowners, charterers, financial institutions, maritime lawyers, educators, insurers and related associations involved in the shipping industry. It offers indices for different cargo and routes, which are offered to members on a daily basis.22 c) The Index Parameters The indices refer to the freight rate (the “contract rate”); that is, a fee for the cargo on a vessel along a named voyage route (the “contract route”), for example, a voyage from Rotterdam to Panama, over a specified period of time (the “contract period”), for example the first week of March 2016. On the date agreed for settlement, which in this case might be 1 March 2016, the compensation for the contract concluded in 2015 is calculated. If the contract rate is less than the average rate for the contract route over the contract period (the “settlement rate”), as determined by reference to the applicable index, the seller of the ffa is required to pay the buyer a sum equal to the difference between the contract rate and the settlement rate multiplied by the number of days specified in the contract (the “settlement sum”). Equally, if the contract rate is higher than the settlement rate the buyer is required to pay the seller the settlement sum.23 21

Accessible to Baltic Exchange members on http://www.balticexchange.com/market -information/indices/ (last visited on 8 April 2016). The Baltic Dry Index fell for a number of weeks during the first three months of 2016. See e.g. H.S. Grosch, Vertrackte Lage, Schifffahrtskrise, Deutsche Seeschifffahrt, 3 April 2016, pp. 45 et seq. 22 See http://www.balticexchange.com (last visited on 8 April 2016). 23 An excellent description of this, by Donald J. Kennedy and Richard T. Califano (17 May 2006), can be found on the internet: (last visited 14 April 2016).

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These indices refer to different types of cargo. There are indices for calculating the cost of bulk (dry cargo), tanker (oil and other liquids) and container24 Forward Freight Agreements. To put this in layman’s terms, this division is needed as each type of cargo requires a different kind of vessel, and other types of charter could be applied. Let me explain this as it applies to tankers. There are two common tanker types, one for crude oil and one for refined oil. So for the purposes of our calculation there are two standardized types of index: the Baltic Dirty Tanker Index (bdti) and the Baltic Clean Tanker Index (bcti). These indices will also vary for different vessel types and cargo. The exact amount of money to be paid can only be calculated once the index has shown the rate. The specific amount of money to be paid is, therefore, dependent on the time at which the index showed the date and freight-specific rate. 2 The Situation before and during the Financial Crisis The market in derivatives, such as Forward Freight Agreements, was steadily growing before the start of the financial crisis in 2007. The market as such was left to self-regulation. The subject of derivatives had been put on the agenda of international regulatory bodies several times, but no real limiting action had been taken. Formal, direct regulation was unknown. In 2008, the insolvency of several market participants caused difficulties in the market and led to litigation. This triggered major movements in cargo rates, particularly for dry bulk. As a consequence, clearing houses were established which are today the standard. One could say that this marked the entrance of communities into the market. The market moved away from self-regulation. a) Communities Enter the Market The paper market was initially corrected by self-regulation and market disciplines. In order to spread the risk, clearing houses entered the market. Standard contracts were required for compliance and indices determined the voyage costs. These communities, like clearing houses, agents offering standard form contracts and institutions like Balticexchange offering indices paved the way to further regulation.

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For those who would like to know more about the different vessel types, see: (last visited 14 April 2016).

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b) New Possibilities in Containers: Container Box Rate Not only have new regulatory features emerged, but also new charter contracts have developed, both during and since the crisis. The market has shifted from time charter to container or box charter.25 Instead of a whole vessel or a part of a vessel, these contracts deal with boxes or units. A container swap is an agreement between two parties to ship a specific volume of containers on a particular trade route at a specified future date, at a box rate agreed at the moment of the contract’s conclusion. The settlement price at the expiry of the contract is calculated as the average index-measured box rate over the contract period. These contracts have necessitated the development of new indices. Shanghai Shipping Exchange publishes the China Containerized Freight Index and the China Coastal Bulk Freight Index.26 Traders can utilize container swaps to manage volatility in the container ship market and hedge the risk of increasing or decreasing box-rate costs or revenues, in a rising or falling market.27 3 Towards Public Ordering The market developed quickly over the period discussed.28 Another way to ensure that risk management was in place was that of clearing. Communities in the form of clearing houses entered the market. This was an important step. By October 2008 the Financial Stability Forum was strongly emphasizing the need

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For one of the first reports see: For example, the costs of the route Shanghai–Hamburg is accessible for members of these indices every Friday and for everyone else on the following Monday, see (last visited on 8 April 2016). Container Freight Derivatives Association, www.cf-da.com (last visited on 8 April 2016). At the moment the market is under stress. See H.S. Grosch, Vertrackte Lage, Schifffahrtskrise, Deutsche Seeschifffahrt, 3 April 2016, pp. 45 et seq. I would like to provide a short overview of the most important player on the market in order to demonstrate this fast chronological growth. biffex, Baltic International Freight Futures Exchange, was the start, followed by Forward Freight Agreements (ffas). imarex, International Maritime Exchange, traded dry-bulk and tanker freight futures from spring 2000 onwards and five years later traded tanker (June 2005) and dry-bulk (March 2006) freight options, whilst Baltic Driy Index, traded futures (June 2008), options (July 2008) and cleared tanker freight futures (October 2008). cme group, traded tanker (May 2005) and dry-bulk (2010) freight futures. lch Clearnet clears hybrid ffas (September 2005) and dry-bulk freight options (Feb 2008). sgx Asia Clear clears dry-bulk and tanker hybrid ffas (May 2006), whilst Container Freight Swap Agreement settled against the Shanghai Containerized Freight Index of the Shanghai Shipping Exchange (January 2010).

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for clearing by a central counterparty. Such a central counterparty acts as an intermediary between the seller and buyer of a contract.29 Standard form contracts have become the norm, and indices provide relevant data at an exact point in time. Charter contracts have changed and new practices developed. The method of trading is also changing. In June 2011 the first trading screens were introduced.30 Screen trade has the advantage that all live prices can be seen by screen members. The trader’s identity is, however, kept anonymous to all except the designated broker. Screen trade enables traders to nominate brokers on individual trades only, or set up a default broker. Screen trade also allows new possibilities in the area of pricing. The market has become faster and more flexible. In the eighties and nineties, the market relied on market discipline and selfregulatory measures taken by the financial industry.31 In the maritime sector the dominant financial powers were based in the us and Great Britain. Most derivative dealers have their place of business in one of these two countries. The us and Great Britain refrained from legislative actions in the derivative market. Britain even defended its financial industry from regulation proposals from Brussels or other eu member states.32 Both markets feared that taking regulatory measures would weaken their position on the market and could result in business fleeing to others markets.33 Periodic episodes of instability brought the regulation of derivatives onto the political agenda again and again, but at least for a time, industry groups offering derivatives were always able to dismiss the proposed official regulatory measures through their own self-regulatory efforts. When derivatives also responded to the financial crisis, however, this market was quickly also brought under the public international regulatory umbrella.

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E. Helleiner/S. Pagliari, “The end of self-regulation? Hedge funds and derivatives in the global financial governance”, in: E. Helleiner/S. Pagliari/ H. Zimmermann (eds), Global Finance in Crisis, London/New York: Routledge, 2010, p. 82. This began in June 2011. Cleartrade Exchange launched a multi-commodity trading screen on 2 June 2011, The Baltic Exchange launched the Baltex trading screen on 8 June 2011, Shanghai Shipping Freight Exchange Co. launched a container trading screen on 28 June 2011, the first renminbi-denominated ffa was on Philippine Transmarine Carriers on 10 December 2012 and Shanghai Clearing House introduced renminbi-denominated ffas on 16 April 2013. See E. Helleiner and S. Pagliari (2010, supra n. 29), pp. 74–90. E. Helleiner/S. Pagliari (2010, supra n. 29), p. 75. See with further arguments toward the position of the us and gb E. Helleiner/S. Pagliari (2010, supra n. 29), p. 76.

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a) The View on Derivatives during the Crisis During the crisis the policy on derivatives changed. It was agreed that to master the crisis, not only national law but also international coordination was needed. There was much unease amongst the general public, and politicians in leading states felt a pressing need to come up with regulatory measures.34 b) Infrastructure for otc Derivatives At the G20 leaders’ meeting in November 2008, the final communiqué laid down important requests. The G20 demanded the following: that the transparency of the otc derivatives market be extended; that the infrastructure for otc derivatives should ensure support for growing volume; that counterparty services for credit default swaps be built up; and, that measures be taken to reduce the inherent risks of credit default swaps and otc derivatives transactions. Also, supervisors and regulators insisted that market participants support exchange-traded or electronic trading platforms for credit default swaps contracts.35 This was the starting point for many other measures which would later be implemented by the eu. The eu dealt in particular with otc derivatives. In 2009 the G20 requested in a working communiqué that national authorities enhance incentives as needed for the use of central counterparties in order to clear otc credit derivatives.36 The approach of encouraging the use of standard term contracts was particularly interesting. With greater standardization, it was hoped that increasing numbers of market participants would turn to central counterparties. This path had already been taken by the eu in 2008. The European Commission and European Central Bank were encouraging industry to build a central counterparty in Europe for credit default swaps.37 c) Measures Taken after the Crisis After the crisis, derivatives featured regularly on the European agenda. Finally, in 2012, the eu came up with a regulation.38 Around the time of the financial crisis, new financial instruments saw the light. The optimization of financial results and speculation had both been part of day-to-day business at that time. After the experience of the crisis, however, derivatives became the subject of 34 35 36 37 38

E. Helleiner/S. Pagliari (2010, supra n. 29), pp. 74 et seq. Final Communique G20, 2008, p. 4. G20 Working Group 1: xvi. E. Helleiner/ S. Pagliari (2010, supra n. 29), p. 87. REGULATION (eu) No 648/2012 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 4 July 2012 on otc derivatives, central counterparties and trade repositories, Off. J. L 201/1 of 27 July 2012.

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control and transparency prerequisites. The crisis changed the situation. New paperwork requirements and more registration duties were put in place; for example, it was decided that acting agents must also be registered. Certain standards on the allocation of risk were developed; the calculation of interest must now be transparent. Property is no longer subject to the will of its owner. It is no longer free. As standardized property titles, these assets became the objects of a regulated market. v

Findings and Recommendations

In the eighties self-regulation and market discipline were features of the market. The market was new; the contracting parties decided what to do and used their autonomy. In those times the parties involved in transactions usually knew each other, and trust was often built upon long-standing relationships. However, like in most speculative transactions, the parties wished for more invisibility and even anonymity. Years later, the first speculation risks became visible, new contract types developed and the market evolved. Standard contracts have taken over the role of individually agreed contracts. The seller and buyer of the traded papers are no longer the ship-owner and charterer, or charterer and sub-charterer. Anonymity in the market is desired. The sector is no longer exclusively in the hands of maritime traders. The market has opened up to those outside of maritime trade. Indices have offered a clear price referencing system. After only 25 years, derivatives have now become an integral part of the modern shipping industry. They hedge the risks of volatile foreign exchange rates, interest rates, bunker prices and vessel value prices. These complex transactions can no longer be handled by the involved parties alone. As time is of the essence in this industry, new ways to optimize trade have been developed. Since 2011 screen trade has gained in importance in the growing derivatives market. The financial crisis and new insights on the functioning of the market led from 2008 onwards to public attention and regulation. Since 2012 the market has been subject to increasing public regulation. The ffa market is still very much a work in progress. More and more players have entered the market over the years. We can no longer speak of selfregulation, as it is now a regulatory market. In order to comply with European standards39 we need public authorities that provide a political foundation 39

E. Helleiner/S. Pagliari (2010, supra n. 29), p. 118. Some actions have been taken by the European Securities and Markets Authority (esma). The esma has developed some control mechanisms; these consist of pre-contractual information and the compulsory

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for global financial markets.40 However, this regulated market is constantly changing, as trade on screen will influence the market in the future. New risks lie ahead and will need to be monitored and evaluated. What will be the next step?

40

authorization of commodity market participants, together with strict registration duties. Additionally, a new regime of Organized Trading Facilities has been established. Why not an international financial architecture under European leadership? This question has been posed by E. Helleiner/S. Pagliari (2010, supra n. 29), p. 89.

Epilogue

Regulatory Property Rights and Regulatory Private Law Hans-W. Micklitz*

A Disclaimer

The request to contribute an epilogue is at the same time an honour and a burden: it is an honour because the editor believes in the added value of connecting the present volume and the underlying understanding of ‘regulatory property rights’ to my research on ‘regulatory private law’. It is also a burden as it raises expectations against which my considerations will have to be tested. The following considerations are meant to enhance and to trigger a debate on private law theory, of which property law is an integral part. Necessarily, they are tentative and at best appropriate for re-thinking private law theory. The current volume contributes to this endeavor as it reveals that property law has been neglected as an object of contemporary private law theory, which has instead focused on contractual arrangements. This book helps to unwrap property law from its traditional national confines, and contributes a much needed re-thinking of property law as part of the broader project of contemporary private law theory.

The Premises

In my attempts to establish a new understanding of private law, which brings together autonomy, regulation through private parties and statutory entities, and competition, I use European Union law and therefore European regulatory private law as the laboratory in which the transformative forces of globalisation, technology, and of civil society can be studied. Therefore, my theory is built on the following strong premises:1 * The research leading to these results has received funding from the European Research Council under the European Union’s Seventh Framework Programme (FP/2007–2013) / ERC Grant Agreement n. [269722]. 1 As developed in earlier papers: The general idea is laid down in H.-W. Micklitz, “The Visible Hand of European Private Law”, 28 Yearbook of European Law 2009, 3. The various elements were developed subsequently: on the state – H.-W. Micklitz/D. Patterson, “From the Nation © koninklijke brill nv, leiden, ���7 | doi 10.1163/9789004313521_014

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regulatory private law is not an oxymoron, the nation state is transforming, the European Union is the blueprint for the ‘post-modern’ nation state, the process of transformation is driven through globalisation (financialisation), through technology (the internet), and through societal changes (transnational civil society), functionalism is linked to Internal Market building, but turns into the establishment of self-sufficient regulatory silos, autonomy is not self-standing but regulated (or embedded), regulation is no longer bound to statutory or international actors, but also operates through private regulation and hybrid forms of public-private co-operation, the new space for regulatory private law beyond the nation state opens up new forms of competition through and between regulatory regimes. The Premises Enlarged

When reading the contributions collected in the present volume, I find many parallels with, and ample evidence for, many of my premises in the concept of ‘regulatory property rights’. While my research on regulatory private law is very much focused on the eu, this book takes a transnational perspective, and deliberately neglects the eu multi-level discourse. The difference in focus, however, does not make the two concepts – regulatory property rights and regulatory private law – incompatible. Both projects share the overall idea that ‘regulation’ is not to be equated with statutory regulation. Understanding the European Union as a laboratory has allowed for testing of the transformation processes beyond the state under contained conditions. It is only one further step to stretch the concept/theory/understanding of regulatory State to the Market State: The Evolution of eu Private Law”, in: B. van Vooren/St. Blockmans/J. Wouters (eds), The eu’s Role in Global Governance: The Legal Dimension, Oxford: Oxford University Press, 2013, 59–78; the eu as a laboratory – H.-W. Micklitz, “The European Union Project”, in: J. Dickson/P. Eleftheriadis (eds), The Philosophical Foundations of European Union Law, Yearbook of European Law, Oxford: Oxford University Press, 2013, 1–17; on the drivers of transformation – H.-W. Micklitz with Y. Svetiev, “The Transformation of Private Law”, in: H.-W. Micklitz/Y. Svetiev/G. Comparato (eds), European Regulatory Private Law – The Paradigm Tested, eui-erc Law 2014/04, 69–97; − and on autonomy, regulation and competition – G. Comparato/H.-W. Micklitz/Y. Svetiev (eds), European regulatory private law: autonomy, competition and regulation in European private law, eui-erc 2016/06; European Regulatory Private Law Project (erpl-18).

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private law beyond territorial and intellectual boundaries and to understand it as a transnational phenomenon.2

The Premises Focused

In order to focus the debate on transformation from autonomy to regulation and competition, I would like to draw attention to what is happening within ‘regulatory property rights’ to the three pillars of private law: the ‘person’, the ‘contract’, and ‘property’. All three are to be regarded as the foundational elements of a legal order that builds on a market economy and an open democratic society,3 grounded in the economic, social and political developments since the 17th century.4 The book focuses on ‘property’ as one of the three pillars. Yet, the theory of regulatory property rights entails a particular perspective:5 the other two pillars show up through the lens of property. The relationship between the pillars is observed, but the book does not analyse how the claimed ‘metamorphosis of property’ is connected to the transformation of contract and person. The authors do not speak about ‘transformation’, but prefer ‘metamorphosis of property’ as ‘the’ common theme of the book. One might speculate on the differences between transformation and metamorphosis.6 Yet, being aware of the 2 For an overview and an attempt to structure the debate see: Cahier à Thème, Les Grandes Théories du Droit Transnational, avec contibutions du K. Tuori, B. Kingsbury/N. Krisch/R.B. Stewart, H. Muir Watt, C. Joerges/F. Roedel, F. Cafaggi, R. Zimmermann, G.-P. Calliess/M. Renner, A. Fischer-Lescano/G. Teubner, P. Schiff Berman, Revue Internationale de Droit Economique 2013, Numéro 1–2, 1–256. 3 Under the angle of constitutionalisation, but setting aside technology, H.-W. Micklitz, “The Constitutional Transformation of the Private Law Pillars through the ecj”, in: H. Collins (ed.), European Contract Law and the EU Charter of Fundamental Rights, forthcoming 2016; E. Schmidt/G. Brüggemeier, Grundkurs Zivilrecht, 7. ed. 2006. 4 F. Wieacker, Privatrechtsgeschichte der Neuzeit, Göttingen: Vandenhoeck & Ruprecht, 2. Auflage, 1967, with a focus on the interplay between autonomy and regulation H.-W. Micklitz, “On the Intellectual History of Freedom of Contract and Regulation”, 4 Penn State Journal of Law & International Affairs, 2015, 100–131. 5 See on the importance of perspective and perspectivism, K. Tuori, “Transnational law: on legal hybrids and legal perspectivism”, in: M. Maduro/K. Tuori/Suvi Sankari (eds), Transnational Law, Rethinking European Law and Legal Thinking, Cambridge: Cambridge University Press, 2014, 11–58. 6 ‘Metamorphosis’ alludes to the adaption of the notion of property to the changing environment, and seems therefore inward looking. ‘Transformation’ invites to think about the drivers

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contemporary drivers of societal change (cp. C. Godt), their common point of departure is the joint scientific exercise to focus on property as a transforming institution central to market economies.

The Premises Translated

I will link the major phenomena – loosely – to the claimed premises. This not only enables demonstration of the deep links between regulatory property rights and regulatory private law, but also shows how regulatory property law is impacting the notion of the person and the notion of contract.

Transformation of the State

Property has become disembedded from the nation state environment. Research on property rights and even on regulatory property rights can no longer be seriously undertaken from a nation state perspective. It is one of the major assets of the book that the different contributions do not discuss national legal orders but transnational phenomena grouped around internationalisation, individualisation, digitalisation, and financialisation. The running theme of the contributions, uniting them all, is the more implicit than explicit assumption of the transformation of the nation state. The nation state is no longer the only rule-setter. Instead, quite the contrary is true. Even where the nation state is setting the rules it is much more playing the role of an enabling state which is keen to open new avenues for business opportunities. This is what Ph. Bobbitt7 and D. Patterson/A. Afilalo8 call the market state. Just for the sake of argument, I would like to refer to S. v. Erp and J.-M. Jude who demonstrate how regulatory property rights de-territorialise the res sitae, and yield a lex registrationis and lex fori concursus.

behind the transformation, which are for me globalization, technology and society. Yet, these drivers are presupposed as Godt’s article reveals. 7 Ph. Bobbitt, The Shield of Achilles: War, Peace and the Course of History, New York: Knopf, 2002, 69–347. 8 D. Patterson/A. Afilalo, The New Global Trading Order, Cambridge: Cambridge University Press, 2008.

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Drivers of Transformation

There is not much to be found on ‘what’ is driving the transformation of the state. C. Godt briefly mentions globalisation, financialisation, and dematerialisation. She seems to presuppose the literature of the Collaborative Research Center 597 “Transformations of the State” of the University of Bremen,9 of which she was a member for a long time. Several authors (C. Godt, M. Colangelo, V. Heutger) shed light on the self-regulatory perspective of property rights, which can neither be equated with regulation nor with the neo-liberal move.10 I wished they were even more explicit about the increase in private autonomy and private responsibility. It is this understanding that might legitimise and justify why private parties may be held liable for integrating the ‘social’ into the exercise of property rights.11 The key role of technology is all the more obvious in property rights, and might help to understand why ‘regulatory property rights’ are about to turn into the new ‘general law’ that cuts across the ever more fragmented special regimes. 50 years ago property rights, and in particular intellectual property rights, were a remote discipline for specialists, but today intellectual property rights take centre-stage. Financialisation, which unites globalisation and digitalization, commodifies risks via schemes of industrial self-regulation, thereby breaking up the closed shop of the law governing sea transport (V. Heutger). The similarities between the commodification of mortgages which triggered the subprime crisis and the commodification of the freight shipping market are striking. Societal change as a driving force could be brought more to the forefront. I would refer to the internet community but also to migration. In (intellectual) property rights, it might suffice to refer to the civil resistance against acta which started in Poland and consequently spread around the world.12

9 10 11

12

Which published numerous analyses, see . Setting aside that there is no common understanding, C. Crouch, The Strange Non-Death of Neoliberalism, Cambridge: Polity Press, 2011. In the very end it is only a variation of the Kiobel debate, the potential liability of multinationals for business activities and the respect for human rights outside their home country, mostly in the third world. See the brilliant reconstruction within an ambitious theoretical approach Katarzyna Gracz, ‘You wouldn’t steal a car’ vs. ‘Information wants to be free’ – Regulatory failure of copyright law through the prism of System Theory, PhD thesis at eui 2016, available through Cadmus.

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Functionalism In the European integration process, private law turned into a tool for promoting and building the Internal Market. European private law is not built around autonomy as a self-standing concept, but around overall political purposes. These aim not only to achieve economic purposes, but also social purposes such as anti-discrimination policy, consumer policy and environmental policy, or even more narrowly energy policy or communication policy. Regulatory property rights seem to follow the same logic, or at least this is what C. Godt suggests. The similarities are striking, and become clear in the very fragmented way in which property rights develop through regulation. There is no clear structure, no system, no coherence, there is no ‘law on the regulation of property rights’ or the like. Regulatory property law develops from the borders of property rights, from the innovative ends, from concrete policy driven objectives often arising in reaction to political problems. This is what regulatory private law and regulatory property rights definitely have in common. However, where does this functionalism lead to? C. Godt writes that ‘the essence of property is the right to make decisions, not absolute control’. This sentence insinuates that regulation indicates scope. The statement provokes deep questions about what remains for ‘autonomy’ and ‘free will’ in the new world of regulatory private law and regulatory property rights. The decision ‘to do this and that’ and the decision ‘to buy or sell, contractualise, enable or limit this and that’ depersonalises the right holder, not least in their capacity as the person or the individual (the legal subject). The behavioral turn enables the instrumentalisation of the individual for the achievement of exactly the purposes that individual rights have seemingly been established for. Regulatory property rights might end up in self-standing regulatory regimes, just like self-standing regulatory silos. This would turn functionalism into structural functionalism.13 C. Godt seems to understand the move towards the contractualisation of identity as a variant of functionalism. I invite further research to discuss more deeply the differences between functionalism and structural functionalism, and the degree to which these differences affect the person or the individual.

Regulated Property Rights

Property rights are no longer stand alone monolithic rights within the nation; instead they have turned into regulatory property rights. They are no longer 13

In line with T. Parsons and N. Luhmann.

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static and clearly defined via a given understanding rooted in liberal political philosophy or in legal definitions bound to the nation state. Instead they have turned into a dynamic concept, shifting the focus from ‘possession’ to ‘exercise’ (C. Godt in this volume). The ecj was a forerunner in its famous judgment rte and itp v. Commission.14 Here the ecj ‘invented’ the distinction between the ‘core’ of property rights and their ‘use’. Only the ‘core’ of the rights remains in the hands of the Member States competences, whereas their use is submitted to a compatibility test with the market freedoms. The ecj uses economic law, here competition law and the abuse of a dominant position, to broaden the freedoms of incoming competitors. This does not mean, however, that the newly gained freedoms remain unrestricted. Quite the contrary is true, as is shown throughout the contributions. The restrictions may derive from different legal sources but they all show that the extension of property rights through the shift from possession to exercise creates regulatory space for both the ‘good’ and for the ‘bad’. The restrictions may help to preserve public goods (A. Clarke/R. Malcom, H. Mostert/Ch.-L. Young, C.T. Reid), or they may limit usage of the property rights and restrict access (C. Godt/J.M. Simon). The contributions suggest that public regulation is needed to control private regulation of exercise for the benefit of the rights holder (M. Colangelo). However, much research has been undertaken, albeit perhaps not with regard to property rights, on how and why private parties are ready to accept responsibility for the public good.15 Regulation Property is embedded into regulation. This regulation can have various natures: it can be national statutory, standing alone or merely implementing international conventions, or it can be private regulation by the parties or the result of public/private co-operation nationally or transnationally (M. Colangelo in her contribution is stressing multi-governance). The question of ‘who’ regulates is closely connected to the transformation of the nation state and the move from possession (status) to exercise (contract). The uncoupling of exercise from status, first initiated by statutory regulation, paved the way for the rise of private regulation, be it through (standard) contracts (proprietised contractual positions C. Godt), or through standardisation via industry self-regulation 14 15

ecj Cases C-241/91P, C-242/91P (1995), ecr I-743 at 51–57. In the field of private regulation, see in particular F. Cafaggi who coined the term of transnational private regulation.

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(e.g. in the freight shipping market, V. Heutger). This uncoupling yields and promotes a contractualisation of property. The separation of possession and exercise suggests a functionalisation of property rights (functional core of property, C. Godt). This appears to be a one dimensional process ‘from’ one thing ‘to’ another. But is this correct? Could it not be that the core of property becomes itself subject to and the target of contractualisation? A similar issue is already discussed today with regard to the contractualisation of family law,16 and even more deeply with the contractualisation of the person and his or her ‘identity’. Competition The transformation of private law through European integration has yielded five forms of competition: (1) the deepest one is the development of competitive contract law, (2) the most visible is the competition between the incumbents and the newcomers who seek market access in regulated markets, (3) the third is the competition between legal orders, (4) the fourth is regulatory arbitrage, the competition over enforcement standards, (5) the fifth is pressure resulting from the efficiency doctrine of European regulatory private law.17 Is there a comparable development in regulatory property rights? It seems as if the development is more advanced in regulatory private law. However, there are important developments to be reported, mainly with regard to the first and the third form. They result from the de-territorialisation of regulated property rights. When the lex sitae is going to fade away, there will be competition over jurisdiction and over the national legal enforcement structure that best suits the parties to a conflict. As a result the implicit ranking of national legal orders will be promoted (S. v. Erp and J.-M. Jude).

16

17

F. Swennen, xixth International Congress of Comparative Law, Vienna 2014, II.A.4. “Contractualisation of Family Law – La Contractualisation du Droit de la Famille”, on file with author, see also. R. Metz, “Credit Scoring: Will Our Digital Identity Replace the Real Person?” in: K. Purnhagen/P. Rott (eds), Varieties of European Economic Law and Regulation, Liber Amicorum for Hans Micklitz, Heidelberg et al: Springer 2015, 635. H.-W. Micklitz, “The Economic Efficiency Rationale in European Private Law”, in: G. Comparato/H.-W. Micklitz/Y. Svetiev (eds), European regulatory private law : autonomy, competition and regulation in European private law, eui-erc 2016/06, European Regulatory Private Law Project (erpl-18) 41–62.

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Instead of a Conclusion

Where to go? What kind of research needs to be undertaken? I submit that much can be learnt from linking regulatory property rights and regulatory private law together. I restrict myself to two remarks: first, the crucial developments that affect the three pillars of private law – property, contract, and person – are taking place at the borders of the respective legal fields. This book provides evidence that these developments are revealed through research focusing on phenomena, not from doctrinal analysis. Further inquiries might want to question whether these developments enshrine elements of a new general law, or whether we are approaching an ever more fragmented legal world, where legal silos dominate and where the general law, if any, shows up only when there is deeper conflict within the silo that needs to be solved with the help of national judiciaries. Secondly, the developments described and analysed in this collection underline how deep the changes are that affect our basic understanding of what property, contract and person means. The changing meaning of the separation of ius in rem and ius in personam is certainly the most striking feature of regulatory property rights.

Index administratively-created rights 46 airport slots 1, 4, 16, 36, 44, 48, 49, 56 bankruptcy 9, 25n54, 83, 87, 208–217, 219, 220, 220n57 biodiversity 1, 23, 169–177, 171n12, 178n38, 179–183, 180n41, 185n63, 187 biodiversity offsetting 7, 171n12, 178, 183–185, 185n63 capital market 8, 9, 16, 192, 198, 203–206, 225 civil law 13, 24n48, 25, 45, 53, 55, 56, 61, 62, 68, 72, 75, 76, 121, 145n32, 191 Committee on World Food Security (cfs) 98, 105 commodification 6–9, 18, 19, 38n127, 39, 121, 131, 131n36, 136, 138, 140, 171, 183n57, 191–206, 239 common law 6, 13, 24n48, 25, 26, 28, 30n76, 31, 31n83, 41, 45, 45n3, 53n25, 55, 56, 61– 63, 72, 121, 121n1, 122, 133, 135n52, 138n65, 140, 145n32, 152n86, 173, 181, 182, 221 common treasury 6, 121–129, 135, 140 communal property 8, 24n48, 122, 123n4, 138–139, 159n127 complementarity 4, 58 conflict of laws 5, 64–66, 69–72, 75, 77, 80 conservation covenants/easements 7, 178, 181–183, 181n45, 182n50, 185 constitutional property clause 151, 168 Containerized Freight Index 230, 230n28 container swaps 230 continuing obligation 207, 209, 210 conveyancing services 75, 77n34 de facto property rights 47, 55 derivatives 8, 9, 16, 18, 27, 28n65, 35, 51, 197, 198, 200, 202, 204, 205, 223–234, 232n38 due diligence 22, 43, 110, 117, 220–222 economic effects 9, 211 economic property 7, 45, 218 ecosystem services 7, 16, 172, 178–180, 180n41, 185, 186

electricity trading 196, 198 emission allowances 8, 18, 34n103, 191–206 emission trading 202, 203 energy law reform 196–198 European Union (eu) 8, 17n17, 20, 21n38, 42n147, 48n12, 49n14, 52, 52n24, 58n42, 64–66, 66n13, 67n14, 68, 68n15, 71–73, 75, 75n32, 76, 76n33, 77, 80, 88n16, 91, 93, 103n13, 108n31, 134n47, 191, 191n2, 192, 198, 204, 223, 235, 236 fao (un-Food and Agricultural Organisation) 6, 103, 105, 106, 107n25, 114, 157n115 financialisation 236, 238, 239 fisheries 98, 101n6, 102n7, 102n9, 118, 162n155 food security 98–118, 100n5, 103n15, 107n25 forests 24n46, 98–118, 101n6, 102n7, 102n9, 107n25, 174 forum shopping 5, 83–87, 83n6, 86n11, 91 Forward freight agreements (ffas) 227– 229, 230n28 freight futures 227, 227n17, 230n28 freight rate 224–228, 226n11, 226n14 givings 47, 47n9, 191, 191n1, 192n3, 198, 203, 205 governance 6, 15, 24, 24n47, 37n119, 40, 55, 98–118, 125n10, 126, 130n33, 139n68, 143n17, 145–147, 146n40, 149, 149n61, 168, 169, 171, 231n29, 235n1, 241 governmental interests analysis 69, 80 group of companies 84, 94–96 human right to water 127–129 in rem-effect 221, 222 insolvency 5, 9, 21, 22n41, 28n65, 42, 50, 64, 72, 81n41, 82–97, 90n19, 132n39, 207–222, 215n40, 226n12, 229 insolvency-proof 207–208, 211, 213, 215 Insolvency Regulation 2015/848 81n41, 82, 84 instrumentalisation 240

246 intellectual property 2, 2n8, 3, 15, 19, 71, 207n1, 207n3, 210, 211, 214, 215n41, 219, 220n57, 239 interconnectedness 124, 138, 140 International insolvency 82 land administration 164 law 26n59, 116, 164n165, 177n36, 216n43 and natural resource reform 151 registries 75, 79 right 98, 99, 99n4, 100, 101, 116, 117, 132n38, 158n121, 159, 160n134, 160n135, 161, 161n138, 165n168, 167 Land Ethic 170, 185 law shopping 83, 84, 86–87, 86n10, 91 legal comparison 65, 69 Levellers 122, 123n3, 123n5 lex forci concursus 5, 84, 87, 238 lex rei sitae 5, 19–23, 43, 61–81, 84, 87, 88 licence 3, 9, 16, 21, 27, 33n103, 35, 42, 43, 46, 50, 53–56, 130, 132n39, 137–138, 148, 156, 199, 207–222 lodgement of claims 91–93 Luhmann, N. 38n126, 240n13 metamorphosis 3, 4, 9, 17, 55, 167, 218, 237, 237n6 mineral law 150n72, 152n89, 154, 155 multi-layered legal systems 65, 69 multi-level regulation 4, 48, 52, 55 nature conservation 7, 8, 21n39, 169–188 numerus clausus 13n2, 20n33, 28, 29, 29n67, 45, 45n1, 56, 56n38, 63, 66, 67, 76, 221n59 obligational rights 217, 220 Parsons, T. 240n13 payment of ecosystem services 7, 178, 180 Polanyi, K. 36n118, 39n130, 42, 192, 192n4 property law 1, 4, 5, 8, 13n3, 14, 17n17, 24n48, 25n50, 26, 28, 29n67, 29n73, 30, 35, 38, 42n147, 42n149, 44, 45, 45n1, 52, 52n24, 53, 53n25, 55, 55n33, 56, 56n35, 56n38, 58n45, 61–81, 71n22, 77n35, 78n38, 98, 99n3, 101, 132n37, 142, 142n7, 142n11, 152n89, 156, 160n135, 175, 181, 182n50, 183,

Index 185–187, 193, 209, 216n43, 221n59, 222, 235, 238, 240 public trusteeship 141, 146–148 quota (milk, fish) 4, 21, 21n38, 34, 36, 44, 48, 50, 50n16, 53, 54, 57 regulation 1, 2n12, 4, 6–8, 14, 15, 20, 23, 34, 36, 37, 37n120, 39, 40n134, 42, 44, 48, 49n14, 52, 56, 57, 65, 65n10, 72, 73, 74, 82–97, 85n9, 89n17, 99, 121–140, 143, 146, 154, 156, 173, 175, 183, 187, 191, 196, 198, 204, 205, 216, 229, 231, 233, 235, 236, 237n4, 239–242, 242n17 regulatory property 1–4, 1n2, 6, 8, 13–44, 14n9, 16n13, 34n105, 39n131, 46–48, 48n11, 55–57, 121–140, 191, 192, 198, 200, 203, 205, 206, 235–243 resource stewardship 141–168 risk management 18, 110, 224, 227, 230 screen trade 231, 233 secondary trading 48–53, 48n12, 49n14, 56, 134n47, 191n2 securitizations 18, 30, 193–194 soft law 6, 106–108, 117, 131 spectrum (usage) rights 4, 48, 49, 49n15, 51n21, 54, 121–140 speculation 10, 153, 202, 223, 224, 232, 233 state custodianship 153–156 stewardship 7, 141–168, 172, 172n15, 185 sub-licence 16, 207–222 takings 14n9, 22n40, 34n105, 47n9, 168n183, 175, 177, 191, 198, 208 tenure 6, 98–118, 98n1, 101n6, 102n7, 102n8, 103n15, 106n22, 112n37, 151, 152n85, 157–160, 158n121, 159n127–128, 160n134, 160n135, 161, 161n138, 161n141, 163n160, 164, 164n167, 167, 168 trustee ship 66n13, 141, 146–148, 178, 207–214, 207n3, 207n4, 216–218, 217n47 umts technology 55 voluntary guidelines 6, 98–118, 98n1, 101n6, 102n9, 105n19, 107n25, 107n27, 107n28, 112n37, 114n38, 116n40

Index water 6, 7, 17, 24, 24n47, 47, 100n5, 102, 105, 117, 121–150, 126n14, 128n22, 129n27, 134n45, 139n68, 145n26, 148n53, 158, 168, 177, 177 water abstraction licences 138

247 water cycle 125–127, 126n14 water law 129n28, 145n30, 148–150 water trading 134n45, 134n48, 137n62, 140 Wild Law 170, 170n7, 171, 171n8, 171n9, 185