Introduction

The history of security interests in movables on the European continent begins with the ‘reception’ of Roman law in the guise of Justinian's Corpus Iuris Civilis in the Middle Ages. As with any code, Justinian's codification forms the conclusion of an era in the development of the law. Legal concepts not incorporated into the code, like the ancient fiducia cum creditore, were consequently concealed from the legal consciousness for ages, until some of them were drawn from the collective subconscious of the civil law in the course of the nineteenth century. An assessment of the Roman origins of the continental European system of security interests in movables is important, particularly since many aspects of the modern system have been consciously developed as a reaction to the Roman system. The current statutory provisions on the creation of a valid pledge, for example, are only comprehensible if it is appreciated that they were formulated as a response to the deviating provisions of Roman law. It will, therefore, be necessary to glimpse briefly the Roman system of security interests in movables as contained in Justinian's codification.

Justinian Roman law

After the demise of the concept of fiducia, Roman law recognised only two proprietary security interests, pignus and hypotheca.

(Security assignment of claims in respect of an identified debtor – distinction between present and future claims – dependence of the secured creditor–s rights on communication of the security right to the debitor cessus)

B, a software developer, has concluded a three-year contract with Happyplay Ltd (H) under which he is obliged to develop one new computer game every two months, against a regular monthly payment of 3,000 Euros. His bank (A) is prepared to grant him a loan amounting to 50,000 Euros but would like to take a security over B's monthly earnings. If necessary, B is prepared to accept that H be notified of the security right. Otherwise he would prefer that A's security right is not made known to H, so that he (B) would remain entitled to collect the money.

Questions

1. (a) Is it possible to conclude an agreement by which B gives A a security over the monthly claims against H? Are these claims regarded as present or future/conditional? Describe the main features and prerequisites of such an agreement, including any requirements as to form, registration, communication of the assignment to the debitor cessus (H), etc. How common are agreements of this kind in business practice?

2. (b) Suppose that A's right was not communicated to H before B became bankrupt. What rights would A have in B's insolvency in respect of (i) money already earned by B but not yet paid to him and (ii) money already earned and paid to B's bank account before insolvency?

3. […]

(Transfer of property – effect of fraud – effects of execution on property law questions)

B persuades A to sell him a painting. Although B knows that it is an early and unusual work of William Turner, he induces A to believe that the painting was by an unknown artist. The purchase price is fixed at 500 Euros. On 1 March, A delivers the painting to B. B immediately pays the purchase price. On 15 March, C, a creditor of B, executes against B's property, including the painting. On 20 March, A discovers the truth. He avoids the sale on the ground of fraud and demands the return of the painting.

Question

Can A claim the painting free of any rights of B or of the creditor of B?

Discussions

GERMANY

Ownership of the painting passed to B with the conclusion of the real agreement (Einigung) and delivery (§ 929 BGB). As stated supra, the transfer of ownership is independent of the contract of sale. Since in the present case only the contract of sale has been avoided, the transfer of ownership remains valid. A cannot vindicate the painting. He has only a claim against B based on unjust enrichment (§ 812 s. 1 sent. 1, alternative 1 BGB, condictio indebiti).

The topic of ‘Security Rights in Movable Property’ does not need a long introduction. Earlier comparative studies in this field have shown the divergencies with respect to both principle and the practical outcome of cases. Therefore, and because of the pressing need for some measure of harmonisation, it is not surprising that the Common Core Project has chosen the topic as one of its first sub-projects. The task of exploring in greater detail the similarities and differences between the European legal systems in the field of security over movables will be undertaken in Part II of this study. The purpose of the following short introduction is to summarise the economic reasons behind the creation of security interests, to give a short overview of the main divergencies and the problems that are created for international and more specifically for intracommunity trade through such divergencies combined with the present rules of private international law, and to outline the previous attempts at harmonisation and unification as well as the main arguments usually advanced against their feasibility (part A). Part B will explain the specific approach of the present study which not only differs from the usual type of comparative investigation but also deviates – albeit to a lesser extent – from other studies within the Common Core Project.

(Security right to a claim against a debtor whose identity is unknown at the time the security right is created – rights of the secured party in execution)

B, an engineer, is a sole trader. He wishes to expand his business. As security for a bank loan from A, he can offer only the claims that will arise against future customers who, at the present time, are unidentified.

Questions

1. (a) Is there an arrangement by which B can grant to A a security in his claims against future customers? If so, describe its main features and prerequisites. How common are agreements of this kind in business practice?

2. (b) After concluding the security agreement with A, B acquires a claim against customer D worth 3,000 Euros. A bailiff wishes to execute against that claim on behalf of an unsecured creditor of B. Who has priority, A or the unsecured creditor? On what further circumstances does A's right depend (e.g. communication of the assignment to D, revocation of B's entitlement to collect the claims against his customers)?

3. (c) B becomes bankrupt, having outstanding claims worth 10,000 Euros against customers C1–C5. Does A have any rights in respect of these claims? On what further circumstances do any rights of A depend (e.g. communication of the assignment to C1–C5, revocation of B's entitlement to collect the claims against his customers)?

4. (d) If B grants to A a security right in all his claims against his customers, are there any limits as to the value of the collateral in relation to the amount of the secured loan?

(Retention of title – sale of manufactured products – combined products and proceeds clause)

As in case 7, B has manufactured curtains from cloth supplied by A under retention of title. This time however, B has sold all the curtains produced to two customers, D and E. By the time a bailiff, acting on behalf of an unsecured creditor, C, tries to execute against B's property, D has paid the purchase price in full by transferring the monies to B's bank account. Neither E nor B has paid anything.

Questions

1. (a) Who is entitled to the monies paid to B by D? Can the bailiff execute against those monies (that is to say, B's bank account as a whole)?

2. (b) Who can claim payment from E? Can the bailiff execute against the claim arising out of the sub-sale?

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

4. (d) Instead of an unsecured creditor trying to execute against B's property, B becomes bankrupt. What are the answers to parts (a), (b) and (c) in that situation?

(Liability of purchaser of a business for pre-existing debts – actio Pauliana)

A operates a business as a sole trader. Bank B lends money to A. The loan is unsecured. On 1 July, A defaults on his loan payments. On 1 September, B executes against the business assets. It transpires that these assets were, in early July, sold to A's brother, C. A continued, however, to run the business. The purchase price was in fact paid and was a fair market price.

Questions

1. (a) Can B still execute against the business assets?

2. (b) Can B have the sale between A and C set aside?

3. (c) Would the answers to parts (a) and (b) change if the price paid was well below a fair market price?

Discussions

GERMANY

(a) According to § 25 HGB, the purchaser of a business is liable for previous debts of that business if the business is continued under the same name. This liability can be excluded by means of an agreement between the parties to the contract of sale. Such an exclusion will be valid as against third parties (i.e. former creditors), provided that either it is entered on the commercial register and published, or the creditors are notified individually of it (§ 25 s. 2 HGB).

(Retention of title and products clause – property effects of manufacturing)

B is a producer of curtains and other decorative items. A sells 500 rolls of cloth to him. The contract contains the following clause: ‘The seller reserves title to the goods sold under this contract until he has received full payment.’ In the two weeks following delivery, B transforms the cloth into curtains. Of the final value of the curtains, 60 per cent can be attributed to the cloth, the remaining 40 per cent to the manufacturing process. Before the curtains are sold and delivered to B's customers, a bailiff, acting on behalf of an unsecured creditor, C, attempts to execute against B's property, including the curtains.

Questions

1. (a) Who owns the curtains? Does the ratio of the value of the material supplied and the value added by the manufacturing process matter? Does it matter who bears the risk of the manufacturing process, A or B?

2. (b) May the newly produced items be subjected to execution on behalf of C?

3. (c) Could A obtain a better right to the products (for example, by adopting a differently worded clause, or by using a different type of retention of title clause, or through a legal transaction other than pure sale)? What would be the precise prerequisites? Are such arrangements commonly used?

4. (d) Instead of an unsecured creditor attempting to execute against B's property, B goes bankrupt. What are the answers to parts (b) and (c) in that situation?

The law relating to security rights in movable property is one of the areas where the diversity of national laws is of special practical importance. As a consequence of the universally accepted rule of private international law, the lex rei sitae, two or more different laws have to be applied consecutively to a single transaction, if collateral is moved across borders. Because such movement is at the heart of the idea of a Common Market it comes as no surprise that the first project which emerged from the property law group of the Common Core was dedicated to security rights in movables.

Like all volumes in this series, this book is truly a collective scholarly enterprise. I am grateful to all contributors who prepared their reports and essays and discussed them at various annual meetings in Trento. Three of them, Michele Graziadei, George Gretton and Cornelius van der Merwe, were of special assistance in compiling the reports, drafting the comparative observations and finding a common terminology. Special thanks are due to Matthias Storme, who drafted the first version of the questionnaire and acted as editor in the beginning.

The editor and those contributors who are not native English speakers owe a great debt of gratitude to Alec Brown of the English Bar, who corrected the style of the texts. Without his dedication and diligence, the book might not have seen the light of day. All remaining errors are, however, the respective authors’ responsibility.

Constitutional courts: Germany

At first sight, the main difference between the systems of judicial review of legislation in the United States and in Germany is that the latter country has specialized constitutional courts, exclusively competent to assess the compatibility of legislation with constitutional provisions. The Federal Constitutional Court (Bundesverfassungsgericht) performs this task with regard to compatibility with the federal constitution, the ‘Basic Law’. The difference from the American situation is not as great as it appears, however, since the certiorari system in the United States allowed the US Supreme Court to develop informally into a specialized court for constitutional matters. However, as the Bundesverfassungsgericht (or BVerfG, in the strange German abbreviation) is not an appeal court, special remedies have been created to provide access to it.

The Basic Law itself establishes seven of these remedies. Details are governed by federal statute; there is a Federal Constitutional Court Act or Bundesverfassungsgerichtsgesetz (BVerfGG). Two of these remedies are of particular importance for our subject. First, other courts faced with the argument that a federal or state statute is incompatible with the Basic Law will refer that problem to the Federal Constitutional Court, which will then decide the issue by way of a preliminary ruling. Secondly, anyone who alleges that one of his or her basic rights, as enumerated in the Basic Law, has been violated by any public authority can bring a ‘constitutional complaint’ before the Federal Constitutional Court.

Freedom of expression

The American Bill of Rights starts, in the First Amendment, with the protection of ‘the freedom of speech, and of the press’, as well as the freedom of religion and of peaceful assembly. Freedom of expression is indeed traditionally considered as an element of democratic decision-making, and also as one of the most important bulwarks against undemocratic tendencies in government.

One of the charms of American case law is that the US Supreme Court often identifies the rationale of constitutional provisions before trying to define their meaning. Decisions on the First Amendment are frequently based on a philosophy of freedom, which is explicitly expounded in some of the Court's judgments. A famous example can be found in the concurring opinion of Justice Brandeis in a 1927 case concerning the constitutionality of a state statute banning communist trade unions. The opinion sets out to explain ‘why a state is, ordinarily, denied the power to prohibit dissemination of social, economic and political doctrine which a vast majority of its citizens believe to be false and fraught with evil consequence’. The men who won American independence, Justice Brandeis states, believed ‘that freedom to think as you will and to speak as you think are means indispensable to the discovery and spread of political truth; that without free speech and assembly discussion would be futile; that with them, discussion affords adequate protection against the dissemination of noxious doctrine’.

The emergence of new problems

The main charm of the future is probably that we know so little about it. Consequently, we can speculate more freely than about the past and the present, without being hindered by inconvenient data that don't fit with our preconceived ideas. However, we shall also be treading on slippery ground: there are no accepted methods or techniques for drafting the world of the future. Extrapolating existing trends and developments is the most obvious way of arriving at some kind of certainty; but it is a poor method, as experience has taught us that one or more of these trends and developments will certainly be disrupted, or change their course, with the result that the ensuing image of a future situation may be completely mistaken. Predicting where changes will occur is more difficult still, as hundreds if not thousands of elements may influence future developments, some of which will be more stable than others. Winston Churchill must have been right when he said, in answer to a parliamentary question: ‘It is always wise to look ahead, but difficult to look further than you can see.’

However, since our research has shown us that the relationships between courts and political institutions are at present in a state of flux, it is tempting not to put a full stop to our inquiry at this point; it may be preferable to express the continuous movement of constitutional developments by a rapid glance at the near future.

The model of separation

From the viewpoint of comparative law, the existence, or absence of judicial review of legislation is certainly an important aspect of the position of the courts vis-à-vis the political institutions. Other elements of the constitutional system, however, may have a comparable impact on the politico-judicial relationship. It is to these other elements that we shall now turn.

I shall first examine judicial review of administrative action. In general, problems of administrative law are less spectacular than those that occasionally emerge in constitutional jurisprudence, but their influence should not be underestimated. First, judicial activities in this field raise some of the same questions as we encountered when looking at judicial control of constitutionality. Here also, a modest and hesitant beginning has progressively led to a more comprehensive review and to a more assertive tone of judgment. The theory and practice of the supervision of discretionary powers has already provided us with some examples. Secondly, administrative decisions are produced on a scale, and in a quantity, which have no parallel in legislation. Most people are more directly affected by the powers of government and its bureaucracy than by formal enactments. Frequently these powers have a direct bearing on the life and happiness of large numbers of citizens, for example administrative decisions concerning social security benefits, or the admission and expulsion of aliens, or granting or refusal of building permission.