(Simple retention of title)

A sells a machine to B. The contract contains the following clause: ‘Title to the machine is reserved until the seller has received full payment.’ Before the price has been paid, C, who is an unsecured creditor of B, executes against the machine. In the alternative, B goes bankrupt. In either case, the machine is on B's premises.

Questions

1. (a) What is A's legal position?

2. (b) Is the clause stated above sufficient to be effective? Is there a more suitable or common wording?

3. (c) Do the parties have to agree on the insertion of a retention of title clause? Or could the seller stipulate one unilaterally?

4. (d) Is the point in time at which the parties agree that title should be reserved relevant?

5. (e) Do A's rights in respect of the machine depend on anything other than the inclusion of a reservation of title clause in the agreement: for example, compliance with certain formalities (e.g. agreement in writing, agreement having a ‘certain date’) or registration? Are such clauses efficacious if they are simply contained in the seller's general conditions of sale?

Each of the fifteen cases has been concluded with comparative observations trying to take stock of the national solutions and to find reasons for at least some of the differences. The purpose of the present evaluation is neither to present a summary of these comparisons nor to give another overview of the law relating to security rights in the different jurisdictions under consideration. Rather, these final remarks aim at drawing a few more general conclusions in view of the need for some measure of European harmonisation that has been identified in the Introduction. Therefore, I will seek to identify common tendencies as well as subsisting differences both with respect to general principles and in relation to specific security devices. The evaluation will conclude with some suggestions as to possible ways for harmonisation.

General tendencies

Common developments

Evolution of secured transactions law outside the Civil Codes

A first, very general, but nonetheless significant common element lies in the fact that the development of secured transactions law on the Continent largely took place (and continues to take place) outside the national Civil Codes.

(Security right in revolving stock-in-trade – security ownership – enterprise charge – actio Pauliana)

A, a financial institution, intends to make a loan to B, who is starting a business as a wholesaler of motorcar accessories. To avoid personal liability, B sets up a private limited company (C). A wishes to take a security right over the stock that will be present on C's premises. The nature of the business is such that the stock will continuously be sold and replaced. A does not, therefore, wish its security right to be confined to present stock; rather it wishes it to include the stock that will be purchased by C in the future.

Questions

1. (a) Is such an arrangement possible? Describe its main features and prerequisites, including any requirements that may exist as to form, registration, separate storage, etc.

2. (b) What rights would such an arrangement confer on the secured party (A) in the event of C's insolvency? Or if another (unsecured) creditor tried to execute against the stock?

3. (c) How common are arrangements of this kind in business practice?

4. (d) Are there any limits in respect of the value the collateral may have in relation to the amount of the secured loan?

(Finance leasing – lessor's and lessee's rights in insolvency of the other partner – effects of purchase option)

S is a supplier of computers. B wants a computer. At the request of B, A (a financial institution) buys the computer from S. A then leases the computer to B. The length of the lease corresponds to the expected useful life of the computer. An unsecured creditor of B executes against the computer. Alternatively, B becomes bankrupt. A asserts ownership of, or a security right in, the computer, or at least to preferential payment out of the proceeds of the sale of the computer.

Questions

1. (a) Does A have any real rights in the computer? Do such rights depend on any further prerequisites?

2. (b) Is it relevant whether B has an option to buy the computer at the end of the contractual term?

3. (c) Is this or some other kind of leasing agreement used instead of other types of security, such as retention of title or security transfer of ownership? Is legislative policy or the approach of the courts more favourable to leasing (in respect of the interests of the supplier/the bank) than to security rights?

4. (d) What would B's legal position be in respect of the computer if not he but A became bankrupt?

Article 9 through the eyes of an English lawyer

To understand the character of English law in general, it is always helpful to compare it with United States law, which is both similar and different. English law and US law may both be common law systems, the latter developing out of the former, but the differences between them are highly significant. It is increasingly difficult for lawyers as practitioners or academics to migrate between the two systems.

If one descends to the particular and looks at the structure of the rules dealing with secured transactions, fundamental differences between English law and US law appear to surface. Yet a close examination of the two laws reveals that both are at root alike in the friendly response they give to secured credit. Furthermore, the differences between the two laws are, to a significant extent, differences of legislative style. If one were to take the existing body of English rules on personal property security and restate them in US legal terminology, the result would probably be not greatly different from US Article 9 UCC. The basic values of the two systems of law are very similar.

The dominant feature of US law in the area of secured transactions is its commitment to the guiding principles of the jurisprudential movement known as American realism. This philosophy manifests itself in an impatient attitude to conceptual differences that conceal an identity of function.

(Simple retention of title – entitlement to resell)

A produces men's clothing and sells it to retailers. B, who runs a chain of fashion shops, buys 1,000 winter jackets for the coming season. The contract grants to B a period of sixty days before payment has to be made. It also contains a clause whereby A reserves title to the jackets until payment in full, but also permits B to resell the jackets in the ordinary course of business.

Before B has paid for the jackets in full, he goes bankrupt. As the winter season has not yet started, no jacket has yet been sold.

Question

What are A's rights in respect of the jackets?

Discussions

GERMANY

The solution to case 4 is the same as the solution to case 3. A can vindicate the jackets as his property (§ 47 InsO). They do not form part of the insolvency estate. The entitlement to resell the jackets does not in any way affect the validity of the retention of title clause. On the contrary, such a right is usually provided for because it enables B to transfer ownership to his customers without having to rely upon the rules of bona fide acquisition.

This is the fourth book in the series The Common Core of European Private Law. The Common Core of European Private Law Project was launched in 1993 at the University of Trento under the auspices of the late Professor Rudolf B. Schlesinger. The methodology used in the Trento project is novel. By making use of case studies it goes beyond mere description to detailed inquiry into how most European Union legal systems resolve specific legal questions in practice, and to thorough comparison between those systems. It is our hope that these volumes will provide scholars with a valuable tool for research in comparative law and in their own national legal systems. The collection of materials that the Common Core Project is offering to the scholarly community is already quite extensive and will become even more so when more volumes are published. The availability of materials attempting a genuine analysis of how things are is, in our opinion, a prerequisite for an intelligent and critical discussion on how they should be. Perhaps in the future European private law will be authoritatively restated or even codified. The analytical work carried on today by the almost 200 scholars involved in the Common Core Project is a precious asset of knowledge and legitimization for any such normative enterprise.

We must thank the editors and contributors to these first published results. With a sense of deep gratitude we also wish to recall our late Honorary Editor, Professor Rudolf B. Schlesinger.

(Protection of bona fide purchaser – retention of title and resale – consignment – special legislation)

A is a producer (or importer) of cars. He sells five cars to B, a licensed distributor. The contract allows B a period of forty-five days before payment has to be made. It also contains the following clause: ‘The seller hereby retains title to the cars delivered under this contract. The buyer, however, is entitled to resell the cars in the ordinary course of business.’ Two weeks after delivery of the cars, B has managed to sell all of them to various customers (C1–C5) who have paid for them and taken them away immediately. Before paying A, B goes bankrupt.

Questions

1. (a) Can A still claim ownership of, or any other real right in, the cars? To what extent, if at all, does the answer depend on B's entitlement to resell the cars?

2. (b) Who is entitled to the monies that have been paid by the customers (C1–C5) to B? Is it A? Or is it B's insolvency administrator/insolvency creditors?

3. (c) Could A improve his position in some way? If so, on what further circumstances would such an improved position depend? Are such arrangements commonly used? Is there a typical arrangement (perhaps for specific goods, whether cars or otherwise), the use of which would grant to A a security that would survive resale?

The purpose of this chapter is to provide the reader with an opportunity to compare movables security law in Europe, particularly this volume's discussion of its common core, with the corresponding body of law in the United States. This chapter will describe the approach taken in the US, an approach that has already had significant influence beyond the borders, ranging from a substantially complete adoption in virtually all of the provinces of Canada, to visible impact in the formulation of the EBRD Model Law on Secured Transactions (1994), the United Nations Convention on Assignment of Receivables in International Trade (approved by the General Assembly in 2001), the UNIDROIT Convention on International Interests in Mobile Equipment (recently approved at the diplomatic conference in Cape Town), and the OAS Model Inter-American Law on Secured Transactions (recently approved at the sixth Inter-American Specialized Conference on Private International Law) and to direct or indirect influence on contemporary reform legislation in New Zealand, Eastern Europe, Mexico and elsewhere.

Article 9, part of the Uniform Commercial Code (“UCC”), is a substantial piece of legislation, first enacted in the early 1950s, that seeks to facilitate financing secured by “personal property” (i.e., movables, whether tangible or intangible, as distinct from “real property”, i.e., land and buildings) by making such financing more efficient, economical and widely available.

(Security ownership – sale and lease-back – other non-possessory security rights in individualised movables)

B owns a car fleet, which he wants to use as collateral for a bank loan without the need to transfer direct possession of the cars to the bank. B does not deal in cars and will not sell the cars in the fleet in the ordinary course of trade. He approaches A, a financial institution. A would like to have a real right in the cars in the event of B's insolvency. Moreover, A does not wish an unsecured creditor to be able to obtain priority over its own rights in situations other than insolvency.

Questions

1. (a) How could this be done? How is it usually done? Please state the precise prerequisites.

2. (b) Can such a security be achieved through a sale and lease-back arrangement? Is that common?

3. (c) Is your answer confined to cars, or does it apply to different kinds of collateral?

4. (d) The parties have adopted your proposals, either to create a security right in the cars, or to provide for sale and lease-back. A becomes bankrupt (though that may be unusual in practice). What would B's position be?

(All-monies/sums clause – effects of commingling on retention of title)

B is a wholesaler, dealing in electrical household items. He regularly buys large numbers of toasters and coffee machines from A, a manufacturer, and sells them to retailers. A and B have concluded a contract which serves as a framework agreement for all orders from B. This contract contains the following provision: ‘Each delivery has to be paid for within thirty days. In any event, the seller (A) retains title to the goods until the customer (B) has paid all sums that are due to the seller (A) under this contract.’ On 1 June, A delivers 500 toasters to B. They are stored on B's premises, together with 1,000 identical toasters previously delivered by A, of which only 500 have been paid for. B manages to sell 500 of the 1,500 toasters before he becomes bankrupt on 1 August. He has made no payments to A since 1 June. There are still 1,000 toasters on B's premises. It is impossible to discover to which delivery the toasters sold and the remaining toasters relate.

Introduction

It is noteworthy that the Project on the Common Core of European Private Law has chosen, among the many subjects it endeavours to cover, the question of security over movable property. Indeed, movable property may be a subject that is neglected during the years of studying law at university, especially it seems in the UK where it falls somewhere between the courses on land law and commercial law. However, in practice, movable property is of the utmost importance; this is particularly visible in the realm of credit where the diversity and versatility of movable property will make it of prime appeal to creditors as a means of guaranteeing their claims. Moreover, since transactions involving movables are far more numerous, this multiplies further the number of occasions when elaborate legal constructions over these assets can be imagined. The fifteen cases drawn as part of the questionnaire for this volume give a good, if small, sample.

In economies in transition such as the economies of Central and Eastern Europe and the former Soviet Union Republics – now the Commonwealth of Independent States – movable property as a tool to enhance credit facilities and conditions is a new concept. To some extent, secured credit is also a new concept. Until the 1990s, there was hardly any legal provision allowing movable property to be used to guarantee a loan without losing the ability to use the assets. Basically, the possessory pledge, often referred to as a pawn, was the only means available.

(Transfer of ownership – general effects of insolvency on property – statutory rights of unpaid seller – resolutive clause – goods in transit)

A is a producer of office furniture. B buys from A desks and chairs for his newly opened call centre. Since B cannot pay immediately, they agree that payment will be made in three monthly instalments. The contract does not contain any additional clauses of relevance. Without having paid a single Euro, B goes bankrupt two months after delivery of the furniture.

Questions

1. (a) Does A have any rights in respect of the furniture? In this context, describe also the general effects of insolvency on the property law aspects of the case.

2. (b) Would the answer change if the parties had agreed that the seller would be entitled to terminate the contract in the event of the buyer's failure to pay? What action would A have to take in that event?

3. (c) What would the position be if the furniture was not delivered to B, but was in transit, in the hands of a carrier, when B went bankrupt?

(Retention of title and resale – claim arising out of sub-sale still existing)

A is a producer (or importer) of cars. As in case 5, he sells five cars to B, a licensed distributor. The contract allows B a period of forty-five days before payment has to be made. It also contains the following clause: ‘The seller hereby retains title to the cars delivered under this contract. The buyer, however, is entitled to resell the cars in the ordinary course of business.’ Two weeks after delivery of the cars, B has already managed to sell them to various customers (C1–C5), who have taken them away immediately. Before anyone has paid anything, B goes bankrupt.

Questions

1. (a) Who can claim payment from C1–C5? Is it A or is it B's insolvency administrator?

2. (b) Could A get a better right in respect of the claims arising out of the sub-sales (for example, by adopting a differently worded clause, or by using a different type of retention of title clause)? What would be the precise prerequisites? Are such clauses commonly used?

Discussions

GERMANY

(a) Since the contract does not contain an anticipatory assignment of the claims arising out of the sub-sales (see infra, part (b)), it is the administrator who is entitled to claim payment from the customers.